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Generation Skipping—Planning Principles, Neil E. Harl

Neil E. Harl

For may farm and ranch families, generation skipping is not part of their estate plans. However, for those wishing to limit the right of one or more succeeding generations to manage the property or the right to dispose of the property, generation skipping may figure into the estate planning effort. For the latter group, several additional guidelines or planning principles should be considered.

Eligibility For Medicaid Benefits, The "Assets" Test, Neil E. Harl

Neil E. Harl

Few topics merit the attention now being focused on health care. While there is major concern about the cost of health insurance and health care costs, many older individuals are deeply concerned about nursing home costs and have seen the estates of friends or relatives reduced sharply by such expenses.

Some are tempted to attempt to plan their estates deliberately to qualify for Title XIX Medicaid benefits for health care. This article discusses briefly the rules governing Title XIX eligibility.

Generation Skipping—Transfers Subject To Tax, Neil E. Harl

Neil E. Harl

For centuries, generation skipping has been utilized by wealthy property owners and those lacking confidence in succeeding generations to manage and conserve family wealth, at least to the extent allowed by the rule against perpetuities. Until 1976, the U.S. federal estate and gift tax system did not take particular note of generation skipping as property owners were free to establish generation skipping arrangements with the usual federal estate or gift tax consequences as to the transferor, but with no further transfer tax consequence until gift by or death of the holders of the remainder interest. The Tax Reform Act of …

Generation Skipping—The $1 Million Exemption, Neil E. Harl

Neil E. Harl

For most farm and ranch families, the most significant feature of the generation skipping transfer tax (GSTT) is the $1 million exemption per transferor. An exemption of $2 million was available through 1989 for transfers to grandchildren.

Capitalizing Preproductive Period Expenditures, Neil Harl

Neil E. Harl

Few have forgotten the provision in the Tax Reform Act of 1986 requiring the capitalization of preproductive period expenditures for animals or crops having a preproductive period of more than two years. The provision was repealed as to animals in the Technical and Miscellaneous Revenue Act of 1988. However, problems may now be encountered by those who elected out of the provision before 1989.

Divisive Corporate Reorganizations, Neil E. Harl

Neil E. Harl

Repeal of the more favorable corporate liquidation options in 1986 and the expiration of the phase-out for small corporations at the end of 1988 have narrowed the range of workable choices for dealing with corporations that have outlived their usefulness. One possibility, for those motivated by a desire to separate shareholders who prefer not to be associated together any longer in the same corporation, is a divisive, type D, corporate reorganization.

Cash Accounting For Farm And Ranch Corporations, Neil E. Harl

Neil E. Harl

As a new taxpayer, a farm or ranch corporation may elect the cash or accrual methods of accounting if the corporate books are so kept and the method clearly reflects income. Indeed, IRS has ruled that a corporation may report on the cash method of accounting even though books are kept on the accrual method if the corporation maintains work papers reconciling accrual method book income to cash method taxable income. The method of accounting should be elected clearly on the initial corporate income tax return.

Cautionary Note On Scin's, Neil Harl

Neil E. Harl

The concept of self-cancelling installment notes or SCIN's grew out of a 1980 Tax Court decision holding that an arrangement involving the cancellation at the death of the seller of the remaining payments due on an installment obligation would not be treated as a transfer with a retained life estate. The publication in 1986 of Rev. Rul. 86-723 essentially validated the concept and provided guidelines for classifying arrangements as private annuities, SCIN's or conventional installment sales. Since 1986, SCIN's have come to be viewed as a useful planning device in some settings. In particular, many view SCIN's as superior to …

Funding Revocable Living Trusts, Neil E. Harl

Neil E. Harl

Without much doubt, the transfer of assets to the trust is the most critical part of the formation of a revocable living trust. Inasmuch as all of the grantor's property should be conveyed to the trust, the obvious question is whether the transfer triggers adverse consequences to the grantor. In general, conveyance of property to a revocable inter vivos trust can be accomplished without negative consequences but the property inventory should be subjected to an itemby- item review before the actual transfer occurs. Here are the major points to consider.

Forgiving Principal In A Purchase Price Reduction, Neil E. Harl

Neil E. Harl

For purchasers of property unable to make payments as required by the obligation, a purchase price reduction may be a possible solution. If the debt of an original purchaser of property is reduced by the original seller of the property, the adjustment is treated as a purchase price adjustment and not as a discharge of indebtedness if the debtor is solvent.

Avoiding Self-Employment Tax, Neil Harl

Neil E. Harl

Two recent private letter rulings issued about a month apart in late 1991 have provided additional guidance on the IRS national office position on two of the strategies used to avoid self-employment tax. In both rulings, the IRS position was adverse to the taxpayers.

Claiming Motor Vehicle Deductions, Neil Harl

Neil E. Harl

A taxpayer may, on a yearly basis, deduct an amount equal to either (1) the business standard mileage rate (at 28 cents per mile for all business miles for 1992) times the number of business miles traveled or (2) the actual costs (both operating and fixed) paid or incurred by the taxpayer allocable to business miles.

Revenue Reconciliation Act Of 1990, Neil E. Harl

Neil E. Harl

The legislation imposes a 31 percent marginal tax rate above the 15 and 28 percent marginal tax rate brackets. The phase-outs of the benefits from the 15 percent rate and the personal exemption amounts (creating the so-called "bubble") are repealed. The new 31 percent rate begins at the same level of taxable income as the phase-out range of prior law.

Turn Over Of Assets To Creditors, Neil E. Harl

Neil E. Harl

From 1983 to 1989, US agricultural debt dropped by about $60 billion as debts were discharged in bankruptcy, obligations were restructured with debt written off and property was deeded back to creditors. The resulting tax consequences created highly significant income tax burdens for debtors and contributed to various proposals for debtor relief from tax liability. However, except for relief from alternative minimum tax liability stemming from capital gains and a new solvent farm debtor rule for discharge of indebtedness, farm and ranch debtors were consigned to working through their debt problems within existing tax law.

Type Of Lease For An S Corporation, Neil E. Harl

Neil E. Harl

Since enactment of the S corporation concept in 1958, it has been important to give careful thought to the kind of lease entered into by S corporations as landowners. In the years since the major amendments to Subchapter S of the Internal Revenue Code in 1982, The type of lease has been less important for some S corporations but it is still a major checklist item for S corporation planning.

Tax-Free Incorporation, Neil E. Harl

Neil E. Harl

For several years, relatively little change had been made in the rules governing the tax-free exchange of property to a corporation. The questions raised in the 1970s about how to handle basis allocation between stock and debt securities had been answered. The problems of distinguishing debt and equity securities had not been resolved but that issue seemed to be less of a burning concern with IRS than it was until the proposed regulations issued in 1980 were revoked in 1983 before becoming final.

Soil Expenditures, Neil E. Harl

Neil E. Harl

Historically, expenditures to improve the productivity of soil have been viewed as capital in nature and not deductible. Over the past four decades Congress has acted to make some expenditures deductible if specified conditions are met.

Tax Free Incorporation–Ii, Neil E. Harl

Neil E. Harl

In the June 8, 1990, issue of Agricultural Law Digest, we discussed a 1989 amendment specifying that, with some exceptions, for transfers after October 2, 1989, debt securities issued as part of a tax free exchange are treated as boot. Gain is recognized to the extent of boot received by the transferor.

Taxing Agricultural Program Payments, Neil E. Harl

Neil E. Harl

As a general rule agricultural program payments received in cash or in materials or services are includible in income. The time at which the amounts are received or made available under constructive receipt principles is ordinarily the time the payments are to be included in income. Amounts are "made available" in the year in which farm program payment requirements have been met, regardless of whether an application had been signed to receive final payment. Thus, if federal farm program payments are made available in one year with an option to accept payment in the following year, the amount made available …

Self-Cancelling Installment Notes, Neil E. Harl

Neil E. Harl

Until 1980, it was generally believed that an installment contract set up with remaining payments cancelled after the death of the contract seller would be treated as a transfer with a retained life estate. That was sufficient to discourage use of such a concept.

The Gross Income Test For Chapter 12 Bankruptcy Eligibility, Neil E. Harl

Neil E. Harl

Chapter 12, added to the Bankruptcy Code in 1986 may be initiated only voluntarily and is available only to a "family farmer" whose debts do not exceed $1,500,000. At least 80 percent of the debts (other than debts on the principal residence unless the debt arose out of a farming operation) must have arisen out of a farming operation owned or operated by the debtor or debtor and spouse. Moreover, an individual debtor or debtor and spouse must have earned more than 50 percent of their gross income from farming for the preceding taxable year. Closely held corporations and partnerships …

Proposed Regulations Issued For Estate "Freezes", Neil E. Harl

Neil E. Harl

The repeal of I.R.C. § 2036(c) in 1990 as part of the Revenue Reconciliation Act of 1990 was accompanied by enactment of rules shifting estate freezes away from federal estate tax and toward the federal gift tax arena. Proposed regulations have now been issued for the statute, I.R.C. § 2701-2704.

The 2002 Senate Farm Bill: The Ban On Packer Ownership Of Livestock, Roger A. Mceowen, Peter C. Carstensen, Neil E. Harl

Neil E. Harl

On December 13, 2001, the United States Senate approved an amendment to the Senate Farm Bill making it unlawful for a packer to own, feed, or control livestock intended for slaughter more than fourteen days prior to slaughter. 1 The amendment includes exemptions for packing houses owned by farmer cooperatives, and packers with less than two percent of national slaughter. The amendment was approved 51-46, and became part of the Senate Farm Bill.2 In early 2002, the amendment language was clarified to prohibit arrangements that give packers ―operational, managerial, or supervisory control over the livestock, or over the farming operation …

Expense Method Depreciation, Neil E. Harl

Neil E. Harl

Recently published proposed regulations to the expense method depreciation rules have provided firm guidance on the position of the Department of the Treasury on several key issues involving the 1986 amendments to the expense method depreciation statute.

Eligibility For Expense Method Depreciation, Neil E. Harl

Neil E. Harl

The Revenue Reconciliation Act of 1990, Pub. L. No. 101-508, 104 Stat. 1388 (1990), has amended the eligibility requirements for expense method depreciation for property placed in service after 1990. Id., Sec. 11801. Before the amendment, expense method depreciation was limited to "Section 38 property," I.R.C. § 48(a), which was originally enacted for purposes of investment tax credit eligibility and which excluded horses from eligibility for investment tax credit and thus from expense method depreciation. I.R.C. § 48(a)(6).

Farm Leases And Passive Activity Losses, Neil E. Harl

Neil E. Harl

Enactment of the passive activity loss rules in 1986 was motivated by a desire to curb tax shelter abuses and to correct the misallocation of resources caused by tax-induced investment in agriculture and elsewhere in the economy. Thus, it is not surprising that the provisions have caused economic pain. One provision, involving the deduction of up to $25,000 for losses attributable to "rental real estate activities," has led to taxpayer confusion and uncertainty for their tax advisors.

Income In Respect Of Decedent, Neil E. Harl

Neil E. Harl

In general, property held until death receives a new income tax basis equal to fair market value at death, the value of property as of the alternate valuation date or special use value in the case of land where that election is made. This is particularly advantageous in farm estates because raised animals and grain with a zero income tax basis receive a higher basis and consequent elimination of gain and the basis of machinery and equipment and farmland often is adjusted upward at death. However, for some assets the basis adjustment rule has a negative effect as a potential …

Failure Of Grain Elevators, Neil E. Harl

Neil E. Harl

Grain elevator failures have become all too common in a number of rural communities. Whether failure is attributable to improper or unauthorized activity in futures markets, reduced levels of income from grain storage, employee defalcations or other reasons, the impact on grain depositors and on the community generally is usually decidedly adverse. Upon learning that failure has occurred or that failure is imminent, individuals affected by the failure are usually interested in knowing the probable amount and timing of any recovery.

Priority Rules: Landlord's Lien Versus Security Interests, Neil E. Harl

Neil E. Harl

Over the past decade, the relative standing of liens and UCC security interests has been a matter of far greater importance than had been the case at any time since the development of the Uniform Commercial Code. Of particular concern has been the question of priority of liens versus UCC security interests when both apply to the same collateral. In addition, the standing of liens in bankruptcy has assumed a position of importance. Further, the rights of lien holders as against the purchasers of farm products have posed important issues.

Private Annuity: Useful Concept Or Troublemaker?, Neil E. Harl

Neil E. Harl

As an estate planning concept, the private annuity is seldom included in formal estate plans but more frequently employed by families acting without professional assistance who are seeking to assure income for so long as the parents live. The private annuity is best known for the problems inherent in its use; however, there are situations where the private annuity can be a useful part of an overall estate plan.