February 01, 2008
On December 14, 2007, the Senate passed its version of the Farm, Nutrition and Bioenergy Act of 2007. Included in the bill are a variety of provisions that could affect all taxpayers involved in energy and land conservation efforts. As with most legislation, however, there are continuing debates over how to pay for the tax benefits granted under the bill.
The Farm Bill was originally passed by the House, in July 2007, and has languished in the Senate since that time. In addition to providing agriculture and farm-related provisions, the bill includes a variety of tax provisions related to energy and land conservation. Specifically, the bill makes permanent increased tax benefits to taxpayers granting conservation easements over their property that were enacted in 2006 and set to expire on December 31, 2007. Taxpayers will continue to be able to deduct up to 50 percent of their adjusted gross income for donations of conservation easements, and will be permitted to carry forward the deduction for up to 15 years. This is a substantial benefit over the 30 percent limit with five-year carry forward that is otherwise available for contributions of property. The bill also includes a provision permitting farmers and ranchers to deduct up to 100 percent of their adjusted gross income for conservation easements under certain circumstances. The bill also contains important changes to the Conservation Reserve Program, the Wetlands Reserve Program and the Working Grasslands Protection Program, all of which are administered by the Department of Agriculture. These programs are available to farmers who are willing to remove their property from production for conservation purposes. In the past, the farmers would have received a cash payment which would have been includable in their taxable income. Under the bill, however, the farmers would be permitted to elect to either receive the taxable cash payment, or receive a tax credit which would be excluded from both income and self-employment taxes, thereby substantially increasing the benefit to many participants in these programs.
The Farm Bill as passed also includes a variety of energy-focused tax incentives and tax credits, with particular emphasis on the creation of alternative energy sources. Specifically, the bill extends for one year a tax credit available to commercial users of wind property, and creates for one year a tax credit for residential users of wind property. The bill provides for a tax credit of 30 percent of the costs, up to a maximum of a $4,000 credit, through 2008. In addition, the bill includes an extension of the tax credit for the production of biodiesel fuels, ethanol production, and other renewable and alternative fuel sources.
The Senate bill needs to be reconciled with the House bill passed earlier this year, although sponsors anticipate that the bill will go directly to a House-Senate conference committee and believe that the final bill will be passed in January 2008, which would likely be retroactive until January 1, 2008.
A potential stumbling block will be in reconciling certain of the revenue-raising provisions that are included in the bills. There are two revenue-raising provisions of particular note:
- The Senate bill includes a modification to the like-kind exchange rules under Section 1031 of the Code. The bill modifies Section 1031 to disallow like-kind exchange treatment of subsidized agricultural real estate with non-agricultural real estate. This could have an effect on farmers who desire to sell their land to developers by exchanging it for other property through a like-kind exchange in order to defer the tax liability. This provision would prevent that strategy for farmers who are receiving federal agricultural subsidies.
- The House bill also included a provision raising additional revenue through modifications to IRC Section 864 dealing with distributions by U.S. corporations to foreign-owned parent entities. The House bill provided that if a U.S. subsidiary of a foreign corporation distributed monies to its owners, it would be required to pay a withholding tax to the United States equal to the greater of (i) the amount that would be paid if the distribution were directly to the ultimate parent; or (ii) the amount that would be paid if the distribution were to the direct owner of the U.S. corporation. The United States is a party to many tax treaties that incorporate a reduction in the withholding amount. Consequently, it is not uncommon for foreign corporations in countries that lack a tax treaty with the United States to establish an intermediary subsidiary in a country that does have a preferential tax treaty with the United States. The Senate did not include this provision in their version of the bill.
Depending on how the House and Senate bills are reconciled, there is a veto possibility from the White House, which announced in July that it was opposed to the amendment to Section 864 and would likely veto a bill if it included the provision. The White House and Senate argue that such a provision would undermine the relationship between the United States and its treaty partners. The White House has also objected to continued growth in certain of the farm subsidy programs included in the bill.
Although the 2007 Farm Bill is not yet law, it does appear that there is substantial legislative momentum to pass the bill and to extend many of the important conservation and energy tax incentives that were otherwise set to expire at the end of 2007.
If you have any questions about these issues or any other developments in the area of conservation easements and tax planning, please call Edward H. Brown at (404) 869-5342 or [email protected]; or William Poole at (404) 923-9035 or [email protected]; both in the firm’s Atlanta office.