Tobacco Buyout Creates Confusion Over Federal Taxes for Farmers, Quota Holders

Source from:  THE ASSOCIATED PRESS RALEIGH 02/16/2006

Former tobacco farmers and quota-holders across North Carolina are struggling with the tax implications of last year's $9.6 billion federal tobacco buyout. "Folks are confused," said Jake Parker of the N.C. Farm Bureau. "This is a lot of money, so it's critical that they get the right advice." The buyout is expected to bring $3.8 billion into the rural North Carolina economy over the next 10 years. What makes it complicated for growers and quota-holders is that the payments are subject to up to three separate federal taxes. The buyout was supposed to reimburse growers for lost income, so payments to growers who did not own quotas are being taxed as regular income. Former quota owners who did not farm are reimbursed for the loss of value tied to the quotas they gave up. The payments they received under the buyout are considered capital gains. Along with the taxes on capital gains, former quota owners also must pay taxes on the interest earnings over the buyout's 10-year period. Former growers who owned their quotas also could be liable for capital gains on the value of their quotas, as well as income taxes on the reimbursement of lost revenue and interest earned. The tax form for capital gains makes it appear as if former quota holders must pay the full 10-year schedule of taxes this year, some experts say. Former quota owners can pay their entire tax liability this year, but can also pay taxes for the payments they received in a tax year. Enditem