pastureland income and expense

[tracyb]

I'm hoping someone can help me with what approach would be best with this client.

Prior tax preparers filed Sch E for PASTURE lease and did not file Form 8582. The schedule E shows a loss of (12,976) which flowed to the 1040.
The IRS is now examining the Sch E and asking for 8582 to be filed. Taxpayer AGI is 257,443 so if it is considered passive income, the expenses
would be phased out?

The taxpayer insists that they actively participate and that is how the returns have been filed for years.

If they materially participated they would still be subject to the phase out?

Thoughts on how to proceed with this response to IRS? Am I missing something?

Tracy

[FEDUKE404]

More info needed

Question worth asking: How do you lose that much money on mere land rental? Other than property taxes, there cannot be too many other expenses.

It sounds as if you may have active participation in a passive activity. If so, then Form 8582 and its limitations will likely come into play.

Good luck!

FE

[Roland Slugg]

In addition to agreeing with FE's comments above, I would add that it's possible that the pasture rental should have been reported on F-4835, not on Schedule E. Regardless of the form used, though, if this activity is really just a lease arrangement, then it is a passive activity and should have flowed to F-8582.

In the OP you wrote, twice, that the expenses may be "phased out." The passive loss rules do not result in the "phasing out" of expenses. Rather, PALs are only "suspended" until there is sufficient income from the same passive activity or other passive activities to "release" all or some PALs, or until a specific passive activity with suspended losses is completely disposed of in a taxable transaction.

Your comment about the T/P insisting that he "actively participates" in this activity suggests to me that perhaps this isn't a lease situation at all but is instead an actively operated farming activity. Based on my reading of the OP as a whole, I would say that's probably not the case, but you should inquire about what's really taking place.

[Snaggletooth]

How can it not happen?

I'll tailor this response as if this really is a rental. Sch E or 4835 makes no difference to the subject at hand.
And yes, you really can report a loss this large if the lease includes use of barns, structures, equipment, etc.
And trust me, there are good economic reasons to rent out a farm for a deceptively low rental, reasons outside the
scope of this discussion.

Let's go back to the previous preparer. Have you seen the return? Did he use software? If so, "how can it not happen" refers to how could the software NOT create an 8582 and disallow the loss? Even with "active participation" his AGI is much too high to allow a loss on rental property.

Ask to see last year's return. The only way the software should have allowed such a loss is if he reported this on Schedule F as a farm operation. This is improper for a rental situation.

I can almost promise the IRS is going to nail this guy. You might start asking yourself why he left his old preparer -- some clients put incredible pressure on preparers to do things wrong so their taxes will be minimized. I would be candid with the guy and tell him he's got a loser.

Does anyone else have knowledge of a rare exception to the postponement of passive losses for such a rental?

[Jiggers]

I would want more information as to what is the income for and the services provided.

IRS Pub 225 on Farming says that this might be farm income and reported on Schedule F. See Page 9 of that pub.

[FEDUKE404]

My perspective

All of the comments here are valid, to include the possible use of Form 4835 and "building expenses."

Most tax software should have at least suggested some Form 8582 issues, as they are likely applicable here.

But my prior post was only related to the facts stated in the original post: "...filed Sch E for PASTURE lease..." At least to me, that sounded seriously like a flatout land rental, which is common.

It is not overly productive to speculate as to what else might or might not have been applicable, until/unless the original poster lets us know. For my 2¢ worth, it sounds as if the IRS has identified a problem return and it would well be worth the time of tracyb to review the filed returns of the past few years. And, as noted, there could well be some valid reasons the prior tax person has now exited stage left. Or, more on point, why are the prior preparers not handling this IRS problem. (Insert possible "Circular 230 mantra" here??)

Side comment of note: I personally feel with the new IRS regs for preparers and RTRP issues beginning to take bite, that we all will soon encounter returns that "were previously done by someone else." Even though this is only early December, I already have received several inquiries from potential clients whose previous preparer "is not doing taxes this year." Go figure!! I welcome new clients, but I do not necessarily welcome new clients with "baggage" that I might have to resolve. Also, don't forget our legal role should we note problem issues with earlier returns, even though we had nothing to do with the preparation of them.

FE

[tracyb]

more info regarding pasture lease

I found this info regarding land leases:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG----Chapter-3,-Passive-Income

There is a section RE: leased land At the bottom it says losses would generally considered passive even though income is non-passive.

"Leased Land

Income from leased land (ground rents) is non-passive and should not be on Form 8582 line 1a. Reg. § 1.469-2T(f)(3) recharacterizes income from leased property where less than 30 percent of the unadjusted basis is depreciable as non-passive.

Examples: fields leased to a farmer, mobile home parks, land leased for billboards, lots leased to sell Christmas tree, land leased for cell towers and campgrounds.

The character of an activity is not changed. Even though income is recharacterized as non-passive, the activity remains a passive activity and, in fact, if it produced losses, they would generally be passive. See Reg. § 1.469-2T(f)(1)."

Based on what the taxpayer is describing to me, I would have included the income and expenses in the Sch F. But since the IRS is examining she SchE, would it be appropriate to amend the return to reflect the income/exp on the Sch F?

[FEDUKE404]

Schedule F - really??

Unless you can change the facts as you go, I see no way you could call "pasture lease" anything that would, in and of itself, now go onto a Schedule F.

If there was in fact an operating farm (production/sale of crops/cattle), but the owner had someone else do the work, then perhaps a Form 4835. About all that accomplishes is evading any potential self-employment tax.

Quite frankly, I just don't see your client as a "farmer" and (from what you've presented) I also don't see "pasture lease" as indicative of any farm operation.

Should you have pertinent facts (including historical tax returns for this operation) that indicate otherwise, then there always can be some wiggle room.

If not, I still see a Sch E land rental (to include, perhaps, rental of those "buildings") with any loss limited by the passive activity rules. Even if the guy did, along the way, build some barns or storage sheds or whatever (and thus is now depreciating them), that does not significantly change anything re the underlying/substantiating facts. A mere building or two would never justify it being called "a farm."

Not to repeat myself, but have you gotten a good answer as to why the original preparer is not getting into resolving this issue??

Keep us updated!

FE

[tracyb]

sch e vs sch f

Client states that the other preparer called her the night before her return was due and told her she needed to file an extension but looked like she owed $15,000.
I did make contact with the prior CPA and her response was to refer me to : http://www.irs.gov/Businesses/Small-...Passive-Income

The way I read that is the income is non-passive and does go on sch E but the losses are considered passive.

My thinking on the sch F and the way the client has represented to me, she uses this (land listed on sch E)and other property in which she moves her own cattle back and forth between to the properties. All other expenses for the other properties are included in the Sch F. The only difference I can see is the other properties she does not lease to anyone else.

Thanks for your thoughts. I appreciate it.

Tracy

Unless you can change the facts as you go, I see no way you could call "pasture lease" anything that would, in and of itself, now go onto a Schedule F.

If there was in fact an operating farm (production/sale of crops/cattle), but the owner had someone else do the work, then perhaps a Form 4835. About all that accomplishes is evading any potential self-employment tax.

Quite frankly, I just don't see your client as a "farmer" and (from what you've presented) I also don't see "pasture lease" as indicative of any farm operation.

Should you have pertinent facts (including historical tax returns for this operation) that indicate otherwise, then there always can be some wiggle room.

If not, I still see a Sch E land rental (to include, perhaps, rental of those "buildings") with any loss limited by the passive activity rules. Even if the guy did, along the way, build some barns or storage sheds or whatever (and thus is now depreciating them), that does not significantly change anything re the underlying/substantiating facts. A mere building or two would never justify it being called "a farm."

Not to repeat myself, but have you gotten a good answer as to why the original preparer is not getting into resolving this issue??

Keep us updated!

FE

[Snaggletooth]

Three Cheers

Income from leased land (ground rents) is non-passive and should not be on Form 8582 line 1a. Reg. § 1.469-2T(f)(3) recharacterizes income from leased property where less than 30 percent of the unadjusted basis is depreciable as non-passive.

I actually took the trouble to go to the regs on this one and read §1.469-2T(f)(3).

Three cheers for the IRS on this one. They actually go to the trouble to give us an example. I kept looking for anything that resembled tracyb's situation. First of all, the taxpayer is a limited partner in a partnership (ruling out any option to report on a Sch F). Then they create depreciable basis during the year. Then they NEVER mention any rental proceeds were received and rent never plays any part in their example. Then they SELL the property, removing any suspension from what would have been disallowed losses. And finally they tell you that the proceeds of the sale should not be considered passive income.

I don't know who in the IRS wrote this example, but next year when I want a seminar speaker to make things clear, I sure want to seek out this guy.

[Ken]

Pastureland income

My gosh snaggletooth,......are you still on here ? That's great. It has been a couple of years since I got on this site,but I just got curious today to see if it was even still here, and you were the first person I saw. I don't know if you remember me or not, I live in sierra vista arizona, we talked a couple of times.

[Corduroy Frog]

Sierra Vista

I didn't know what happened to you Ken, but I'm not the only one who missed you. Black Bart is still around,
Bees Knees of course, and a few others who came off Noah's ark with us. Gary from Phoenix occasionally, and
Beth from somewhere in AZ also. There is Roland Slugg from Reno, Dany from Georgia, and Matt Sova from Michigan. Lots of new folks and missing some others who have not posted in quite a while.