IRS Targets Popular Estate Tax Saver

By Marcia Zarley Taylor
DTN Executive Editor t

Haddonfield, N.J. (DTN) – A proposed IRS regulation could make it much more difficult for family-owned businesses to avoid federal estate taxes when assets exceed the current per-person limit of $5.45 million. That could prove especially painful to farm estates where a modest 600 acres of Midwest farmland owned free and clear can easily hit that ceiling, not counting mineral rights, equipment, livestock, grain bins or inventory accumulated over a lifetime.
“It would not be unusual for an 80-year-old farmer from around New Ulm, Minnesota, to hit that limit,” said Andy Biebl, a Minnesota-based CPA with CliftonLarsonAllen LLP. “And that doesn’t count some state thresholds that trigger on estates as small as $675,000 to $2 million.”
The IRS proposal published Aug. 4 in the Federal Register takes aim at the common practice of discounting stock of minority shareholders in family-owned operations, whether they be organized as partnerships, corporations or limited liability companies. The agency has long said it would try to block the practice of discounting minority shares when transferred, such as at an owner’s death or when a parent gifts or sells their stock to children as part of their estate or business plan. Since 1990, farm estate planners have typically discounted minority shares 30% to 40% or sometimes 50%, a practice that courts have largely blessed when handled properly.
“The thrust is if these rules become effective as written, IRS will pretty much kill discounts for transferring ownership in family business,” said Biebl. “If dad owned 25% of an LLC with $20 million in farmland, it will be valued at $5 million at his death, without the 40% haircut from discounting it could have received in the past.”
Many tax practitioners had expected IRS to ban the technique of wrapping marketable securities like stocks and bonds inside a family business entity, allowing wealthy nonbusiness owners to claim a large discount on their investment portfolios. Most ag CPAs and tax attorneys agreed that was a practice that needed to end, but said the abuses were among city slickers, not in country estate planning offices.
However, if these broad regulations are finalized in their current form, “the writing is on the wall” for an end to family business discounting as well, said Doug Mitchell, a Denver-based estate tax attorney for KCOE-Isom. He considers it one of the biggest shifts in small business estate tax planning since Congress ended the widow’s tax and enacted other landmark tax rules in 1981.
CPAs and tax attorneys have long justified 30% to 50% discounts for business owners because minority shareholders lack company control and marketability. Often owners of private businesses can only sell to other family members, and buy-sell agreements allow payments only over 10-year terms when exiting. Sometimes only one partner can be bought out at a time, so as not to create a cash crisis for the business. Contrast that long-term waiting period with something like Apple stock, which can be sold instantly on a public stock exchange with the click of a mouse.
“For decades, legal documents for nearly all family businesses and farming entities incorporated restrictions on withdrawing capital or forcing liquidation of the entity, so that one family member cannot force the rest of the family into a fire-sale situation,” said Mitchell. “It is these restrictions that make minority interests in a corporation, partnership, or LLC worth only 50% to 70% of their prorated share of the value of the assets owned by the entity.”
On the other hand, IRS believes these arrangements are abusive when used to minimize gift and estate taxes on gifts and other transfers to family members. It has waged battles since the 1990s to block what the agency considers an end run around estate tax thresholds. Courts have largely ruled in favor of the practices, however, and against IRS’ position.
Under current law, married couples are allowed $10.9 million in a lifetime exclusion for federal estate and gift taxes. Assets above $10.9 million per couple are taxed at a 40% federal rate. “But for many small business owners and farmers, the new IRS proposal would mean paying much higher gift and estate taxes when they transfer ownership of their business or farm to their heirs,” Mitchell said.
In effect, IRS believes that while families may have fractional business ownership, they likely act as one in business decisions, Biebl said. In reality, many parents establish limited liability companies because they want to keep their business intact after their deaths. They may need to protect the on-farm heirs in the event off-farm heirs would rather own cash than own shares in a cyclical business.
IRS has scheduled a hearing on the proposed rules on Dec. 1 and could technically finalize their decision as quickly as 30 days afterward. However, both Biebl and Mitchell expect nothing to take effect until early 2017.
If your estate or succession plan relies on sale or gifting of discounted stock, owners may have a small window to transfer shares before year-end, the tax advisers said.
“The proposed rules are very complex, and we don’t know how the final regulations will sort out,” said Biebl. “But if you have a taxable estate and want to make larger gifts or discounted sales to your heirs, it might make sense to do it before year-end.”
To read or comment on the IRS proposed regulation go to https://goo.gl/yJL7jt.

A Recap Of The FCS Verizon Loan

By Danny Klinefelter
DTN Farm Business Adviser

Commercial bankers and Congress were all over the news a few months ago criticizing the Farm Credit System for making a $725 million loan to Verizon. In their view, FCS has strayed from its mission of serving farmers and ranchers. The Verizon loan symbolized that “mission creep.”
At a particularly harsh House Agriculture Committee hearing last December, Rep. Austin Scott of Georgia said at the time, “While technically legal, it is certainly in my opinion and in the opinion of the majority of members of this committee who are your greatest advocates, that it [the Verizon loan] is outside the scope and intent of the Farm Credit System. I’ll be honest with you, I don’t think CoBank will stop until someone stops them.”
This article is not intended to criticize anyone but rather to look at what oocurred.
The joint lead originators on the loan were J.P. Morgan Securities, Morgan Stanley, Bank of America and Barclays. CoBank was the Farm Credit System lead and was only in the group because they were invited to participate by the commercial bank originators.
There were two loans, each for $6 billion. One was a three-year maturity and one was a five-year maturity for a total of $12 billion. In total, there were 48 lenders involved. The Farm Credit System held $725 million between the two loans ($362.5 million each), or about 6% of the total outstanding. By regulation, no Farm Credit entity can have more than 15% of their portfolio in similar entity loans, and most of those they do hold an interest in were either originated by or involve commercial bank participants.
Farm Credit made the loan under their similar entity authorities as a rural infrastructure loan. Unfortunately, Verizon’s loan request did not spell out the percent of their business/service that is for rural infrastructure. As a result of the negative image resulting from the comments, the Farm Credit System has decided and is in the process of selling their remaining portion of the five-year loan. The three-year loan was paid in full on June 12, 2014.
In its defense, CoBank points out that commercial banks invited them to syndicate the loan and banks partner with them to share their risk, too. As DTN reported at the time, better broadband and wireless service is critical to rural communities. Giants like Verizon and Frontier Communications have the wherewithal to bring remote farm communities up to speed. Without better telecom connections, it will be hard to attract youngsters to rural areas or even master the data revolution already spewing from yield monitors, smartphones and in-field weather stations.
After stumbling in the 1980s, Farm Credit institutions now hold about 40% of the nation’s credit to farmers and ranchers, including almost half of all the farmland mortgage debt. Banks are losing market share but also hold about 40% of total farm debt. Because of stricter Dodd-Frank regulations, small country lenders complain it is increasingly difficult to provide mortgage credit in rural areas. They want the Farm Credit System on equal footing tax-wise for real estate lending, or held to a much narrower customer base than what current regulations allow.
But rural America and particularly rebuilding the rural infrastructure are going to need both commercial bankers and the Farm Credit System. Hopefully, the political wrangling for competitive advantages doesn’t prevent rural America from getting funds to the extent needed.
Editor’s note: Danny Klinefelter is an agricultural finance professor and economist with Texas AgriLIFE Extension and Texas A&M University. He also is the founder of the mid-career Texas A&M management course for executive farmers called TEPAP. Access information TEPAP as well as DTN scholarships http://tepap.tamu.edu/.
For a recap how the gap in broadband service handicaps rural communities, see https:// www.dtnpf.com/agriculture/web/ag/news/equipment-tech/article/2016/04/18/weak-rural-internet-connectivity-ag.
For DTN’s original coverage on the Farm Credit Feud see https://www.dtnpf.com/agriculture/ web/ag/news/farm-life/article/2016/04/18/banke rs-renew-farm-credit-feud.

Oklahoma Cattlemen Elect New Officers At Convention

Oklahoma City, Okla. – Each year during their annual convention the Oklahoma Cattlemen’s Association elects new officers.
“The offices are rotated so that only a few open up each year,” said Charlie Swanson, OCA President.
Swanson just started the second year of his two-year term as president. According to Swanson, “The early leaders of the OCA used much forethought in designing the volunteer leadership rotation and election system.”
The newly elected volunteer leaders on the OCA Executive Committee are: Southeast District Vice President, Russell Boles; South Central District Vice President, Troy Shelby; Past President’s Council, Randy Ward; and Past President’s Council, Jim Birdwell.
Each year a new director is elected for each district. The directors elected this year to serve a three-year term are: Northwest, Blake Sizelove; North Central, Rodney Timm; Northeast, Clayton Williams; Southwest, Darrell Kane; South Central, William Payne; Southeast, Scott Story. Hayden Cooper was elected to finish a vacant director position in North Central.
“The OCA is membership owned and driven. We appreciate the willingness of the above individuals to serve as volunteer leaders,” Swanson said. “A complete list of OCA Officers and District Directors can be found at www.okcattlemen.org.”

Direct Receipts

Direct Receipts: 40,200

Texas 14,500. 92 pct over 600 lbs. 23 pct heifers. Steers: Medium and Large 1 FOB Current 550 lbs 168.65; 600 lbs 161.00; 650-675 lbs 156.01; 700-735 lbs 151.50; 750-775 lbs 146.93; 800 lbs 141.79; Sept 650 lbs 152.25; Oct 680 lbs 151.85; 750 lbs 142.14; Nov 650-665 lbs 148.44; 750 lbs 139.85; Del Current 700-725 lbs 154.00; 800 lbs 142.00; 875-890 lbs 143.15; Sept 735 lbs 152.00; Oct 600 lbs 147.00; 650 lbs 150.00; 700 lbs 150.00; 750-775 lbs 144.48; 850 lbs 142.00; Nov 650 lbs 150.25; 750 lbs 139.57. Medium and Large 1-2 FOB Current 670-675 lbs 149.31; 750-775 lbs 143.00; 815 lbs 138.35; 860 lbs 137.40; Sept 700 lbs 148.60; 750 lbs 139.05; 850 lbs 137.45; Oct 650 lbs 143.00; Del Current 725 lbs 151.50; 750 lbs 153.20; 800 lbs 148.48; 850-875 lbs 141.06; Sept 675 lbs 156.00; 735 lbs 152.00; Sept-Oct 800 lbs 148.00; Oct 600 lbs 147.00; 650 lbs 151.40; 725 lbs 147.00; 750 lbs 150.00; 850 lbs 142.00. Heifers: Medium and Large 1 FOB Current 625 lbs 144.65; 700-725 lbs 140.30; Sept 600-625 lbs 146.23; Oct 650 lbs 140.30; Nov 665 lbs 141.00; 725 lbs 132.05; Dec 725 lbs 132.05; Del Current 725 lbs 139.80; Sept 725 lbs 137.70; Oct 600 lbs 144.00; 700-725 lbs 135.70; Nov 675 lbs 137.35; 725 lbs 133.63. Medium and Large 1-2 FOB Current 605-610 lbs 147.92; 750 lbs 137.35; Sept 675 lbs 142.60; Oct 650 lbs 131.00; Del Current 750 lbs 142.00; Oct 650 lbs 141.15; Nov 650 lbs 140.00.

Oklahoma 2900. 100 pct over 600 lbs. 12 pct heifers. Steers: Medium and Large 1 Current 700-725 lbs 149.25; 825-845 lbs 140.96; 890 lbs 138.00; Sept 750 lbs 139.31; Oct 700 lbs 147.00; 750-775 lbs 142.56; Nov 750 lbs 137.50. Heifers: Medium and Large 1 Oct 700 lbs 134.25; Nov 725 lbs 131.35.

New Mexico 4300. 92 pct over 600 lbs. 2 pct heifers. Steers: Medium and Large 1 FOB Current 665 lbs 159.00; 800 lbs 144.26; 850-875 lbs 142.24; Sept 735 lbs 150.10; Oct 650 148.50; 800 lbs 146.45. Medium and Large 1-2 FOB Current 750 lbs 149.94; 800 lbs 146.79; 850-875 lbs 139.86; Oct 600 lbs 146.22; 725 lbs 145.50; 750 lbs 148.45; 800 lbs 146.45; 850 lbs 140.10. Heifers: Medium and Large 1 Current 750 lbs 139.75; 600 lbs 142.50.

Kansas 3000. 100 pct over 600 lbs. 15 pct heifers. Steers: Medium and Large 1 FOB Current 690 lbs 158.00; 730-735 lbs 154.53; 785 lbs 147.50; 825-840 lbs 144.64; 850-885 lbs 142.69. Medium and Large 1-2 FOB Current 925 lbs 130.00; Del Current 750-775 lbs 147.01; 830 lbs 140.00; Sept 750 lbs 141.98. Heifers: Medium and Large 1 FOB Current 660 lbs 151.00; 750-775 lbs 140.10.

National Feeder Cattle Summary

St. Joseph, MO — August 19
National feeder cattle receipts: 151,600

Calves and yearlings started out the week on a steady to $3 higher trend, however mid to late week auctions trended steady to weak, with some instances marked up to $3 lower. The cattle complex appears to have taken a breath this week as a slight correction seemed to be in store after a couple weeks worth of higher markets. Grazers have taken on quite a bit of inventory recently and they want to get the calves in their pens straightened up before moving on to the next group. This week’s lower fed cattle trade came as a surprise to cattle feeders after recent weekly gains in the market. However, packers are always cautious this time of year as beef demand typically wanes after the Labor Day holiday. Boxed beef values have become stagnant this week as Choice was a little over $1 lower and Select cutout steady with last Friday’s close at $200.07 and $193.60 respectively. In the South Plains this week, all the market could muster was $1 lower trading at $118, while the North Plains dressed trade was steady to weak at $186-187. Feedlots appear to be current at this time coupled with this week’s estimated slaughter of 599,000 head is a good thing for the cattle industry at this time. On Monday at Sioux Falls Regional Stockyards in Worthing, SD a load of 717 lb thin steers coming off grass sold for a whopping $166.75. Also on Monday at Tri-State Livestock in McCook, NE, 6 loads of 907 lb steers sold from $152.00-152.10 while on Thursday in Valentine, NE 2 loads of 837 lb steers sold at $156.25. Optimism abounds for those feedyards willing to take on the inventory at those levels, however there have been many strings of yearlings coming off grass in the North Central region that will gain like a house-a-fire when a high protein and concentrate diet is put on in front of them. Last week’s record corn production estimate of 15.2 bb has assured friendly cost of gains in the near future.Cattle on Feed Report was released Friday afternoon with August 1st reported at 102 percent; Placements at 102 percent and Marketings at 99 percent with placements being above estimates and others coming in near the industry analyst estimates.

Texas 4700. 69 pct over 600 lbs. 30 pct heifers. Steers: Medium and Large 1 400-450 lbs (420) 175.33; 500-550 lbs (519) 157.00; 550-600 lbs (569) 155.85; 600-650 lbs (633) 147.68; 650-700 lbs (681) 145.36; 700-750 lbs (726) 145.99; 750-800 lbs (788) 140.83; 800-850 lbs (820) 131.82; 850-900 lbs (892) 128.90; 1000-1050 lbs (1014) 126.95. Medium and Large 1-2 450-500 lbs (481) 157.72; 550-600 lbs (577) 146.36; 600-650 lbs (627) 139.37; 650-700 lbs (680) 139.56; 700-750 lbs (723) 133.97; 750-800 lbs (768) 131.35; 800-850 lbs (829) 128.52. Heifers: Medium and Large 1 400-450 lbs (432) 155.93; 500-550 lbs (526) 143.24; 550-600 lbs (584) 139.94; 600-650 lbs (628) 133.19; 650-700 lbs (660) 136.49; 700-750 lbs (723) 126.40; 750-800 lbs (770) 127.40. Medium and Large 1-2 350-400 lbs (383) 157.65; 450-500 lbs (477) 141.93; 500-550 lbs (522) 136.73; 550-600 lbs (579) 131.85; 600-650 lbs (626) 128.35; 650-700 lbs (673) 130.77.

Oklahoma 31,300. 71 pct over 600 lbs. 39 pct heifers. Steers: Medium and Large 1 300-350 lbs (325) 203.84; 350-400 lbs (380) 192.40; 400-450 lbs (429) 176.33; 450-500 lbs (477) 169.00; 500-550 lbs (524) 160.49; 550-600 lbs (581) 157.47; 600-650 lbs (621) 156.96; 650-700 lbs (674) 155.24; 700-750 lbs (721) 152.23; 750-800 lbs (774) 147.24; 800-850 lbs (821) 143.33; 850-900 lbs (873) 142.58; 900-950 lbs (921) 139.44; 950-1000 lbs (958) 138.61; 1000-1050 lbs (1021) 130.51; 1050-1100 lbs (1075) 127.68. Medium and Large 1-2 300-350 lbs (329) 185.78; 350-400 lbs (375) 177.54; 400-450 lbs (431) 173.49; 450-500 lbs (479) 158.55; 500-550 lbs (528) 149.31; 550-600 lbs (573) 154.29; 600-650 lbs (626) 151.47; 650-700 lbs (678) 147.62; 700-750 lbs (732) 147.95; 750-800 lbs (778) 145.55; 800-850 lbs (840) 139.91; 850-900 lbs (870) 138.68; 900-950 lbs (928) 132.25; 950-1000 lbs (976) 128.82. Holsteins: Large 3 pkg 590 lbs 88.50; part load 795 lbs 104.25; pkg 800 lbs 81.00. Heifers: Medium and Large 1 300350 lbs (330) 158.49; 350-400 lbs (371) 160.46; 400-450 lbs (424) 151.07; 450-500 lbs (473) 145.40; 500-550 lbs (521) 146.67; 550-600 lbs (578) 148.69; 600-650 lbs (620) 147.73; 650-700 lbs (673) 143.60; 700-750 lbs (717) 141.01; 750-800 lbs (777) 136.94; 800-850 lbs (824) 129.02; 850-900 lbs (878) 129.88. Medium and Large 1-2 300-350 lbs (329) 138.35; 350-400 lbs (387) 147.52; 400-450 lbs (430) 139.45; 450-500 lbs (483) 137.34; 500-550 lbs (525) 137.01; 550-600 lbs (568) 139.66; 600-650 lbs (627) 141.98; 650-700 lbs (679) 137.98; 700-750 lbs (722) 135.81; 750-800 lbs (778) 131.92; 800-850 lbs (823) 132.00.

New Mexico 3200. 34 pct over 600 lbs. 37 pct heifers. Steers: Medium and Large 1 300-350 lbs (328) 188.35; 350-400 lbs (374) 186.68; 400-450 lbs (417) 179.50; 450-500 lbs (453) 182.27; 500-550 lbs (518) 156.58; 600-650 lbs (612) 146.08; 650-700 lbs (657) 146.25; 700-750 lbs (730) 142.12. Medium and Large 12 300-350 lbs (329) 186.58; 400-450 lbs (433) 167.31; 450-500 lbs (484) 167.86; 500-550 lbs (533) 146.44; 550-600 lbs (586) 146.04; 600-650 lbs (625) 140.40; 650-700 lbs (651) 141.62; 700-750 lbs (726) 135.50. Heifers: Medium and Large 1 300-350 lbs (316) 172.72; 400-450 lbs (413) 157.68; 450-500 lbs (452) 154.03; 500-550 lbs (524) 139.25; 600-650 lbs (615) 134.71. Medium and Large 1-2 350-400 lbs (384) 159.75; 450-500 lbs (466) 148.13.

Kansas 9600. 93 over 600 lbs. 45 pct heifers. Steers: Medium and Large 1 400-450 lbs (434) 188.20; 450-500 lbs (472) 174.33; 500-550 lbs (507) 172.77; 550-600 lbs (571) 167.81; 600-650 lbs (629) 160.41; 650-700 lbs (665) 160.13; 700-750 lbs (729) 151.99; 750-800 lbs (778) 148.07; 800-850 lbs (832) 143.74; 850-900 lbs (873) 142.56; 900-950 lbs (917) 140.55; 950-1000 lbs (964) 136.26; 1000-1050 lbs (1025) 131.90; 1050-1100 lbs (1067) 132.05. Medium and Large 1-2 500-550 lbs (535) 166.01; 550-600 lbs (574) 164.06; 700-750 lbs (730) 144.94; 750-800 lbs (779) 141.74; 800-850 lbs (840) 139.76; 850-900 lbs (881) 137.34; 900-950 lbs (931) 133.89; 950-1000 lbs (970) 130.57; 1000-1050 lbs (1015) 126.99; load 1055 lbs 126.75. Heifers: Medium and Large 1 500-550 lbs (512) 156.75; 550-600 lbs (588) 155.51; 600-650 lbs (624) 147.47; 650-700 lbs (675) 145.20; 700-750 lbs (711) 143.90; 750-800 lbs (769) 140.33; 800-850 lbs (816) 136.57; pkg 870 lbs 133.25; 900-950 lbs (906) 132.59; 950-1000 lbs (954) 129.01; load 1000 lbs 127.00. Medium and Large 1-2 550-600 lbs (579) 143.84; 600-650 lbs (628) 141.66; 650-700 lbs (681) 142.47; 700-750 lbs (726) 140.13; 750-800 lbs (782) 135.40; 800-850 lbs (820) 133.59.

Missouri 21,500. 56 pct over 600 lbs. 38 pct heifers. Steers: Medium and Large 1 300-350 lbs (328) 188.53; 350-400 lbs (374) 183.56; 400-450 lbs (424) 179.65; 450-500 lbs (476) 172.87; 500-550 lbs (525) 166.75; 550-600 lbs (574) 163.36; 600-650 lbs (622) 157.74; 650-700 lbs (677) 157.12; 700-750 lbs (725) 151.69; 750-800 lbs (777) 147.17; 800-850 lbs (829) 144.02; 850-900 lbs (861) 148.19; 900-950 lbs (909) 136.14; load 975 lbs 133.60. Medium and Large 1-2 350-400 lbs (372) 176.23; 400-450 lbs (421) 169.05; 450-500 lbs (473) 162.86; 500-550 lbs (529) 159.91; 550-600 lbs (574) 157.32; 600-650 lbs (626) 150.67; 650-700 lbs (678) 150.90; 700-750 lbs (725) 149.22; 750-800 lbs (776) 141.79; 800-850 lbs (825) 140.36; 850-900 lbs (885) 134.79; 900-950 lbs (924) 132.37; 1000-1050 lbs (1009) 134.66. Holsteins: Large 3 500-550 lbs (527) 103.14; 650-700 lbs (689) 93.14. Heifers: Medium and Large 1 300-350 lbs (336) 162.35; 350-400 lbs (380) 162.21; 400-450 lbs (428) 155.71; 450-500 lbs (481) 152.32; 500-550 lbs (520) 150.78; 550-600 lbs (580) 148.83; 600-650 lbs (623) 146.60; 650-700 lbs (673) 140.72; 700-750 lbs (719) 141.37; 750-800 lbs (764) 135.72; pkg 890 lbs 130.00; 900-950 lbs (919) 129.25. Medium and Large 1-2 300-350 lbs (333) 159.51; 350-400 lbs (370) 157.02; 400-450 lbs (429) 146.08; 450-500 lbs (475) 147.58; 500-550 lbs (527) 144.60; 550-600 lbs (577) 144.97; 600-650 lbs (626) 140.07; 650-700 lbs (670) 142.15; 700-750 lbs (735) 130.86; 800-850 lbs (816) 130.13; 850-900 lbs (884) 130.13.

Arkansas 3900. 23 pct over 600 lbs. 37 pct heifers. Steers: Medium and Large 1 300-350 lbs (324) 191.26; 350-400 lbs (375) 176.44; 400-450 lbs (420) 172.17; 450-500 lbs (472) 160.54; 500-550 lbs (523) 151.72; 550-600 lbs (571) 150.43; 600-650 lbs (622) 143.71; 650-700 lbs (672) 139.08. Heifers: Medium and Large 1 300-350 lbs (326) 163.67; 350-400 lbs (375) 153.09; 400-450 lbs (421) 147.60; 450-500 lbs (474) 143.94; 500-550 lbs (523) 136.55; 550-600 lbs (570) 133.89; 600-650 lbs (621) 130.29.

 

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Monday, August 29, 2016 10:40 AM