A fight over whether farmers can continue their long-standing practice of deferring taxable income from the sale of crops to future years has erupted in Eastern Washington.
With the Internal Revenue Service watching closely - and the U.S. Tax Court reviewing a case involving a Lind, Wash., farmer - many farmers for the first time are waiting until next year to sell the wheat, potatoes, apples and corn they harvested months ago.
Dozens more are locked in IRS appeals, contesting allegations that they avoided tax payments ranging from $100,000 to $1 million.
“It’s a selective pursuit of one industry,” said Rep. George Nethercutt, R-Spokane, who is leading a congressional call for a moratorium on IRS audits of farmers who defer their income. “It affects all commodities across the country.”
Since Congress reformed the U.S. Tax Code a decade ago, farmers believed they had the option to deliver their crops to food processors and grain elevators in one year, but receive the money in another. The practice is particularly valuable in years such as this one when crop prices and therefore tax rates are high. Farmers use the deferral to reduce their tax bill by shifting the income to a future year when prices are lower.
But in a memorandum issued in October, the IRS said that practice is not allowed. Farmers, the agency said, are subject to the requirements of the Alternative Minimum Tax, which was created in 1986 to collect taxes from high-income taxpayers who used multiple tax shelters.
A U.S. District Court in Iowa earlier this year sided with the IRS.
In addition, the tax court conducted a trial in Spokane in June concerning allegations that Lind wheat farmer Bill Loomis avoided $24,000 in taxes in the early 1990s by deferring income from crop sales. That case is not expected to be decided until next year.
Accountants and attorneys representing Loomis say the IRS and the federal court are wrong.
Gary Randall, tax professor at Gonzaga Law School and co-counsel for Loomis, said that, technically, the IRS can argue its point with some confidence. But Congress never intended to apply the alternative minimum tax to farmers.
“The IRS is going after the wheat farmers, potato farmers and everyone else in sight,” said Randall, a former IRS lawyer. “There’s well over 2,000 cases out there.”
Nethercutt, who introduced an unsuccessful bill in September to clarify the tax issue, said congressional support has increased sharply since the IRS’ October ruling. Both the House and Senate are expected to take up the debate next year.
Meanwhile, “farmers have to use their best judgment” about deferring the sale of crops to 1997, Nethercutt said.