Grassley Introduces Cure to Relieve Farmers
Senator Says IRS Ruling Treats Farm Landlords Unfairly
Washington ? Responding to complaints from Iowa farmers, Sen. Chuck Grassley today will introduce a legislative remedy to cure another instance of the Internal Revenue Service (IRS) overstepping the line in its decision to apply the 15.3 percent self-employment (SE) tax to many traditional cash-rent farm landlords.
Basing its ruling on an Arkansas tax court victory in 1995, the IRS asserts that a farm landlord's cash rental receipts may be subject to the SE tax. According to Grassley, the new IRS interpretation ignores a long-held farm management practice. Farmers traditionally have been allowed to set up a family farm partnership or corporation and lease farmland to the family business entity without being liable to the SE tax on the cash rents, he said.
Since 1957, farm landlords were required to meet three criteria for the IRS to assess SE tax liability, including the tenant must lease and farm the land; the rental "arrangement" provides that the owner "materially" participates with the tenant in the management or production of agricultural commodities; and, the owner actually "materially" participates in farm activity.
"For 40 years, farm landlords have operated under the understanding that the SE tax does not apply to the cash-rent lease contract," said Grassley, "Now the IRS has decided it should look beyond the lease contract to any agreement between the tenant and owner, including partnership or employment agreements. It's not fair to farm landowners. Their urban real estate counterparts and Main Street small business owners ordinarily aren't slapped with the SE tax for their cash rental receipts."
Grassley's legislation seeks to clear up the uncertainty faced by thousands of farm landlords across the country. The "Farm Independence Act" would make the farm landlord subject to the SE tax based only on the cash-rent lease agreement between the owner and the tenant.
"This goes to show, if you give the IRS an inch, it will take a mile," said Grassley. "That's why I am working to seal the crack before it widens and unfairly taxes farm landowners. We need to strike a fair balance between compliance and taxpayers' rights."
Grassley will push for the legislation from his senior position on the tax-writing Senate Finance Committee. A member of the tax-writing House Ways and Means Committee, Rep. Jim Nussle, of Iowa, today will introduce a companion bill in the U.S. House of Representatives.