Tobacco Settlement

[Golden Rocket]

Facing double reporting of income. Can anyone tell me what I'm missing?

Situation: For over 80 years the USDA kept tobacco farmers from overflooding the market by using "quotas." A farmer could not exceed his quota for acreage, and no new quotas were issued. These quotas were called "allotments." An allotment could be used, rented, or sold, but not created. This kept the supply of tobacco DOWN and prices UP.

In 2004, the allotment structure was terminated, and tobacco was allowed to be grown with no restrictions. For farmers who had the allotments in 2004, a settlement was politicized by the USDA. Each allotment holder was to be paid (based on allotment volume) over a ten-year period. Sorry for the long explanation - most of you practice in areas which do NOT grow tobacco.

Here's the problem. Imagine a farmer receiving a $15,000 settlement. He will be paid $1500 annually beginning in 2005. In 2005, he receives a 1099-S for $15,000. When he files his 2005 taxes, he has the choice of reporting $15,000 as a capital gain item for 2005 or reporting it under the installment method. So far, so good.

According the USDA, this $15,000 has $1800 "interest" imbedded in the settlement, and this $1800 is amortized over the period in mostly declining amounts until year 2014. Furthermore, USDA issues 1099-INT to the farmer in 2006 and succeeding years.

The problem? Tobacco farmer is not receiving $1800 in addition to the $15,000. There is only $15,000. And the $15,000 has already been reported -- even if under the installment method, the sale amount must be disclosed in the first year. The original 1099-S was for the full $15,000.

If there was $1800 interest included in the settlement, the present value of the settlement should have been only $13,200. We are "locked in" to reporting the full amount to comply with the 1099-S, and additional reporting for the 1099-INT each year.

Does anyone have a workable solution? Obviously, the USDA didn't do their homework, or so it appears.

[Gene V]

If there was $1800 interest included in the settlement, the present value of the settlement should have been only $13,200. We are "locked in" to reporting the full amount to comply with the 1099-S, and additional reporting for the 1099-INT each year.

Does anyone have a workable solution? Obviously, the USDA didn't do their homework, or so it appears.

You probably read the web links below, --Basically there telling you to reduce your buyout payment by the amount treated as interest. Alternatively, you may be required to reduce your total quota buyout program payment before you calculate your gain.

http://www.fsa.usda.gov/Internet/FSA_File/ttpp1099execsumary.pdf

http://www.irs.gov/irb/2005-32_IRB/ar13.html

http://www.irs.gov/publications/p225/ch03.html#d0e2628
when you link to Pub. 225 to go Tobacco Quota Buyout Program Payments

http://www.fsa.usda.gov/Internet/FSA_Notice/fi_2742.pdf

[Golden Rocket]

The Problem Is...

Thanks for your usual knowledgeable response, Gene.

The practitioners do understand what the structure is, but the problem is that the government has overstated its information returns.

To make matters worse, they issued the 1099S in 2005 to induce reporting of the gross amount, (whether the TP reports in whole or by installments), and then did not issue any of the 1099-INT until 2006 after the taxpayer has already locked in to reporting the gross amount.

[DixieEA]

tobacco sale

Golden Rocket, I live in a tobacco producing area and have handled many tobacco allotment sales. In the situation where the taxpayer elects to be taxed on the whole
installment in the year of I would have done it this way. First on schedule D I would report
the $15000 sale and $15000 cost to zero out the 1099s for information purposes. Next
on schedule D I would report the $13200 capital gain which is the resent value of the buyout contract. Then, all you do is report the interest each year from the installment.


DixieEA

[JAinNC]

Golden Rocket

I do know my TTPP. I agree with Dixie's advice.
I am afraid we will continue to see some inconsistent reporting with 1099S. And I also have clients who started the installment sale method in 2005 and then sold their remaining TTPP to a financial Instution for a lump sum in 2006.

Jeannie

[Golden Rocket]

Thanks

Good suggestions, all. One of the big problems is I didn't know in 2005 that a portion was interest. No way to claim anything other than the entire amount as a capital proceed.
Even counting the interest portion as a basis would have been better (although inaccurate).

Finance companies are banging down the door of farmers to "buy out" their receivable. All fair and square but quite a healthy discount. If reporting on installments, taking a buy out just completes the installment, but not at the full proceeds.

Is an additional capital loss available if a receivable such as this is settled in this fashion?

[JAinNC]

If it is a sizable Tobacco Transition

Program Payment, This is for owners (if grower only, there are different rules). I would probably amend the 2005 return to reduce the actual selling price to exclude the interest. The IRS laws were not even written on how to handle this prior to 2005 ... I believe IRS requested help from Land Grant Universities - I took several classes on this at NC State prior to 2005 filing season an again in fall 2006. (Note: total TTPP of 3000 or less have NO interest included)

If the original ATX message board were still available I would direct you there because I saved many of my sources and instructions there knowing that I could pull them up from archieve. Of course, I was wrong - ATX made my infor unaccessible.

I did have a new client for the 2006 filing year. CPA set up on installment sale in 2005 with incorrect selling price (included Iinterest). They sold the TTPP in 2006 after receiving their second year payment in January 2006. Therefore, I continued the installment with CPA figures for the 2006 payment plus the buyout of the contract- which was reported on a 1099-B from the financial instution. Let's say the 2006 1099-B buy out was $60,000.
I still had to include the 60,000 1099-B on the 4797 so IRS could find it. I made a detailed work sheet and instead of stating 60,000 as cost basis to zero out, I put the basis as 60,000 plus the calulated interest included in the computation for the selling price overstated. Therefore then did recover their loss. If they had not sold their contract, I would have amended the 2005 return. But because I had to report the 1099-B and give it a basis - that is how I handled it. I consulted with a former instructor who had cases like this and with my client.

The few TTPPs to owners that were setup with a overstated high selling amount were amended.

Jeannie