Federal Tobacco Buyout Too Complicated for Farmers

Source from:  By Frank Norton, The News & Observer, Raleigh, N.C. Feb. 14 02/15/2006

Last fall, it was a windfall. This year, the federal tobacco buyout is a tax headache for thousands of former growers and quota-holders. "Folks are confused out there," said Jake Parker of N.C. Farm Bureau. "This is a lot of money, so it's critical that they get the right advice." The buyout was set up in 2005 to reimburse farmers and others after the federal government decided to eliminate the system of tobacco price supports that had protected the industry from foreign competition. About 78,000 North Carolinians are in line to receive $3.8 billion of the $9.6 billion total. The checks are distributed in equal installments over 10 years. The payments are subject to as many as three separate federal taxes, depending on whether the recipient grew tobacco, simply held quotas or farmed tobacco with quotas he or she owned. The buyout was designed to reimburse growers for lost income, so the payments to farmers who did not own quotas are taxed as ordinary income. Former quota owners who did not farm are being reimbursed for the loss of value tied to the quotas they surrendered. So their checks are treated as capital gains, and as such, are taxed on the difference between the value of the quotas when they were acquired and the amount the government agreed to pay for them. Capital gains taxes are assessed on a scale depending on total income. For most married couples who earn more than $57,000 a year, the federal rate is 15 percent, but it can be as little as zero. For many people, figuring the capital gain can be difficult, especially if the quota was obtained decades ago, or was obtained as a gift or inheritance. "There are 78,000 quota holders in North Carolina alone," said Guido van der Hoeven, a buyout expert and agricultural economist at N.C. State University. "That means potentially 78,000 unique calculations on capital gains." In addition to capital gains, former quota owners also must pay a tax on the interest earnings that have been calculated into their 10-year payment stream. Former growers who owned their quotas could be subject to capital gains on the value of their quotas, as well as income taxes on the reimbursement of lost revenue and interest earned. To further confuse matters, tax experts say IRS Form 1099-S for capital gains makes it appear as though former quota holders must pay the full 10-year schedule of those taxes this year. Former quota owners can pay the entire tax liability this year, but also may choose to pay taxes only on the amount of payments received in any given tax year. Enditem