Of all the farm bill titles, Neil Harl has been following the tax title the closest. That's because for the last five years he's been pushing for a resolution of a Conservation Reserve Program tax issue. As of mid-May, a fix for the “problem” was in the new farm bill.
A few years ago, “the IRS somehow got the rather novel idea that all payments would be subject to a self-employment tax,” says Harl, Iowa State University professor and frequent consultant to Congress. “I've been crusading against that and it appears to have changed.”
The CRP first showed up in the 1985 farm bill. The first bidding of acreage occurred in April of 1986.
“Right away, we began getting questions from people who had bid in land and wondered if the CRP payments were subject to the 15.3 percent self-employment tax. The relevant tax provision kicks in if the taxpayer is carrying on a trade or business.”
In March 1988, IRS ruled if retired, you're not materially participating and aren't subject to self-employment tax. That ruling was fortified by several court cases indicating mere investors in a farming business weren't subject to the self-employment tax either.
“There was a very strong line-up of authorities indicating those who are retired, disabled or mere investors didn't have to pay the tax. However, during the summer of 2003, the IRS published a CCA (Chief Councils Advice) letter ruling” saying otherwise.
That ruling said everyone had self-employment income if signed up for CRP.
“That was big news — a significant segment of CRP is held by people who bid it in anticipating retirement.”
In March 2004, North Dakota Rep. Earl Pomeroy scheduled a meeting to address the IRS position. Held in Bismarck, Pomeroy invited the IRS and had the national office involved by teleconference.
Harl, who also participated by telephone, claims, “The IRS wouldn't say anything. That wasn't unusual. In open meetings that are being televised and/or recorded, they have little to gain and lots to lose by talking.”
Unsatisfied, in June, Pomeroy facilitated another meeting in Washington, D.C., with the IRS commissioner.
“It turned out, there were four others from the IRS staff as well as Pomeroy, one of his staff members and myself. I laid out the background for these concerns.”
At first, the IRS employees “wanted to argue. They said, ‘If you want to know what the law is, ask us and we'll issue a ruling.’ I said, ‘It isn't our responsibility to straighten out your inconsistencies. You've got inconsistent rulings floating around.’”
According to Harl, the IRS commissioner, who was in command of the meeting, said, “Okay, we'll do our best to harmonize the rulings.”
In the fall of 2005, Harl received a call from Pomeroy's office “saying they'd been checking on the status of (the harmonizing) and the IRS admitted they'd lost the file!”
Nothing further happened until early December 2006. Then, the IRS “issued notice they'd put out a revenue ruling stating that anyone who signs up for CRP has self-employment income. So there!”
During an open comment period, “I submitted detailed comments as to why this determination was so wrong. Later, it came to light that there were 31 comments submitted nationally and every one of them opposed the IRS position.”
However, in February, prior to the comment period closing, the IRS commissioner sent a letter to 19 senators. It said the IRS wouldn't change its position unless forced to by a change of law. Having seen the gauntlet thrown, Harl and others have been pushing back ever since. Politicians were listening. To address the issues, Montana Sen. Max Baucus put together a tax bill that was folded into the new farm bill.
Harl says others were on board, as well. “I met with Iowa Sen. Charles Grassley about it about a month ago. He understands how important it is because he has a farm.”
The planned change of tax law “is a culmination of about five years of concerted effort to get the IRS to do the right thing. The supreme irony of this is agriculture had to come up with the savings to pay for (the change) — and the cost was due to the IRS arbitrarily changing the rules in 2003!”