tobacco quota buyout payments

[Unregistered]

Publication 225 states that previously deducted amts. of amortization for tobacco quota
have to be recaptured as ordinay income. If this is correct, where on form 4797 do I
report this recapture?(sec.1245,1250,etc.) Also, since these payments are being paid
over a 10 yr period it is an installment sale and it sounds like I have to recapture the
entire amortization amt. in the year of sale(2005), OUCH! Is this correct?

The IRS has ruled that tobacco quota is an interest in land. This ruling has made the
possibililty of doing a sec. 1031 nontaxable excahange. I understand the capital gain
portion on the sale of the quota will be nontaxable if the quota owner properly executes
the 1031 exchange and reduces the basis of the property received in the exchange. If
there has been amortization claimed(same as above), is the recapture of the amortization
taxable in the year of exchange? Form 8824 like-kind exchanges line 21 seems to indicate it is taxable. I would appreciate any help with these questions,Thanks

[Snaggletooth]

Defined Interest

Good question. The tobacco was properly considered an interest in land, but now after the Great Tobacco Settlement of 2004, quotas no longer exist.

Before 2004, a farm would have a certain quota of tonnage. Example, my father's Tennessee farm had 1500 lbs. or thereabouts. He could grow this much tobacco, and no more. So this quota was indeed an interest in land. The quota was establish years ago in the early 1900s as a price support -- otherwise farmers would grow as much as they could and due to supply/demand, would receive very low prices for their product.

But as a result of the settlement, we are receiving $11,000 over the course of 10 years, and we can no longer assign the former allottment to a farmer. There is no more allotment, and no regulation whatsoever on growing tobacco acreage. Those who farm tobacco can grow as much as they like.

So there are no more quotas. The settlement itself, I would think, would become a taxable event for those who used to have a quota. I don't think any of the categories on the 4797 apply. Our family is reporting the settlement as a current income on Schedule 4835 since our farm is rented. However, if there were any portion that had to be recaptured, I would use a Form 6252 - Installment Sales, as that form has an accommodation for both recapture and basis. Basis would hardly exist in our family, who had the quota handed down for several generations, but if a recent buyer of land was able to assign any of his purchase price to such a quota, I suppose that dollar value would become the basis to apply against the 10-year settlement.

Regards, Ron Jordan, Manchester, TN

[Unregistered]

Snaggletooth, Thanks for your response. Form 6252 line 12 says"income recapture
from form 4797",line 31 part III of 4797. Thus, I still think I need to complete Part
III of 4797 and the only place the recapture makes since to me is section 1245.

Also, in your reply you indicated that your payments go on form 4835 and are thus
taxed as ordinary income. This is correct for payments you are receiving from the
National Tobacco Growers' Settlement Trust Fund. The payments I am speaking of
now are from the termination of the federal tobacco program and are eligible for capital
gains treatment. These type began in August 2005 and go thru 2014. 2005 will be
the last yr you receive the National Tobacco Growers' Settlement Trust Fund.

Getting back to the 2nd part of my question from the original post, Is there anyone
out there with experience on if I have recapture of this amortization in a section 1031
exchange?

[dmj4]

4797 Part 1 *quota only*

At this time, we are reporting our tobacco settlements on form 4797 Part 1 instead of running it through the 6252 first. The only problem with using the 6252 is that in the future years some of the payment will be reported as interest, so the 6252 will have to have an adjustment made for it to show zero at the end of the 10 years. This would be a similar adjustment to what we do when "imputed interest" is involved. At this point, I find it easier to use the 4797 because of the future interest issue and the fact that the rate on that interest will probably change yearly. The payment received in 2005 will not show any interest, but this should begin in 2006 or 2007. The interest will be a portion of the original contract amount not added interest. The TP should receive payment number 2 in mid January 2006 (that is why I am not sure if that payment will have some designated as interest) . The 6252 would be the best choice if not for the issues I have discussed. As long as the correct amount of tax is paid it will all be the same. Technically, it is an installment sale.

The depreciation does have to be recaptured. We treated the purchase of quotas as addition to basis when purchased, so I did not depreciate any of my clients' purchase price.

*****I do want to say for those not aware of the tobacco buyout that these messages only apply to the quota holder. The grower of the tobacco is treated differently, especially if you are somewhat conservative.*****

The deadline to do a 1031 exchange was Sept. 16, of 2005, so if a client has not already done one, that option is not open to them now.

You will also have people that took a lump sum buyout. There are at least two different choices on those. In one lump sum option they received the money up front and will pay tax on that in one year. This option acutally worked out better for some lower income quota holders who's contract amount was not very high. It was also a better choice for some of the growers that wanted to purchase farm equipment with some of the money.

Another option was where the owner or grower received a lump sum payment but for practical purposes it was considered a loan. These people will still claim this income over the ten years even though they received the money already.

If you have a client that will be adversely affected by adding this income to their return each year instead of all at one time; they can still do a lump sum on the ramining 8 years. For instance, it may make their social security taxable for the entire 10 years or it may cause some people to need to file a return for 10 years that would not normally have to. Of course, as with anything there are tax planning issues.

For those of us in farming areas, we will see people that have not filed a return in many years come out of the woodwork this year, due to this payment.

[Snaggletooth]

Just Like Oil Rights

I think??

The problem as I read all of the posts above (including my own), is that Form 4797, Part III, is the only place to report that has ordinary income recapture.

I would think this would be treated the same as Oil or Mineral Rights, where the landowner has to recapture. Does anyone have a textbook example of this?