Tomato Farmer Receives Payment A Year Late

[GeneInAlabama]

I have a cash basis tomato farmer that received a payment of about $45,000 for her 2010 crop in 2011. She had an NOL for 2010 but had a large profit in 2011 as a result of the past due payment. If she had received the payment in 2010, she would have about broken even for both years. The NOL for 2010 wiped out income tax for 2011 but she owes SE tax for 2011. Is there any way that an amended return can be filed for 2010 to include the income that SHOULD have been received in 2010. She is a cash basis farmer. I know it is a long shot, but I'm hoping that someone knows an angle that I don't know about. I don't do a lot of farm returns.

[kcjenkins]

Not unless [and it seldom works] the special Farm Income Averaging Sch J works out for them. Frankly, it's one of the worst changes ever in the tax code, for farmers, that this happens fairly often. The only [very small] bright side is that they are getting a possible potential bump in their eventual SS payments, down the road.

[DANRVAN]

Unfortunately, schedule J does not apply to SE tax.

[DANRVAN]

Getting back to your original question, when was the income constructively received?

Also consider what the IRS says about using a combination method of accounting: “Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently.”

[GeneInAlabama]

Thanks Danrvan. Can I file an amended return to change the method of accounting for 2010? Or does the change have to be made during the current year? If this will work, it will be great.

[DANRVAN]

I think constructive receipt might be your best route for amending if you can make it fit. This case is unique in that the taxpayer wishes to claim income instead of deferring it to the following year. So you probably won’t find any applicable case law.

How overdue was the payment? Was there an enforceable contract that payment could have been demanded at anytime? What percent of her farm income did it represent?

On the other hand, how much tax will your client owe if reported in 2011? As KC pointed out there will be some future benefit in SS income. Is that important to her?

I don’t have a clear answer on this. My guess is that if you come up with a reasonable explanation in the text of the amended return it will be accepted and you can move on to 2011. (suject to audit of course)

In regards to a retro accounting method change, it might be too late.

Section 1.451-2, Income Tax Regs., entitled “Constructive

receipts of income”, provides in pertinent part:

(a) General rule. Income although not actually reduced

to a taxpayer’s possession is constructively received by

him in the taxable year during which it is credited to

his account, set apart for him, or otherwise made available

so that he may draw upon it at any time, or so that

he could have drawn upon it during the taxable year if

notice of intention to withdraw had been given.

[Gail in Virginia]

It seems to me that I remember reading that in the event of a federally declared disaster area, such as due to drought, income can be moved from one year to another in some circumstances. Was there a drought or any other circumstance that might have resulted in a disaster declaration?

[GeneInAlabama]

Thanks Danrvan. I'll ask the taxpayer more questions concerning the constructive receipt. I'll let you know the outcome. 2011 would have been a very bad year if it hadn't been for the 2010 income she received in 2011. The amount received late was about 15% of her total income. About harvest time, Alabama's tough immigration law chased a lot of the workers out of the state. She took all the steps to hire legal workers, but even at that a lot of her workers left. I was surprised that tomato pickers are somewhat skilled. The workers she hired to take their place did a lot of damage to the crops and equipment.

Gail, there was no disaster declaration for the area at the time. I appreciate your help.

[jainen]

>>income that SHOULD have been received in 2010<<

Talk tax reform all you want but you'll never untie the Gordian Knot. It would be so fine to only pay taxes on what might have been under other circumstances, instead of what actually is.

[per Wikipedia, Gordian Knot is "a metaphor for an intractable problem solved easily by cheating."]

[JohnH]

Federal Immigration enforcement should be declared the disaster that it already is, but I dont think that will help your client.

[kcjenkins]

>>income that SHOULD have been received in 2010<<

Talk tax reform all you want but you'll never untie the Gordian Knot. It would be so fine to only pay taxes on what might have been under other circumstances, instead of what actually is.

[per Wikipedia, Gordian Knot is "a metaphor for an intractable problem solved easily by cheating."]

The reason being that the Gordian Knot was an intricate knot tied by King Gordius of Phrygia, claimed to be impossible to untie, and cut by Alexander the Great with his sword after hearing an oracle promise that whoever could undo it would be the next ruler of Asia.

[GeneInAlabama]

Thanks everyone. I guess I was hoping for a mircle, but it didn't happen. I sometimes get too envolved with my clients. Her husband died in 2009 and she is now operating the farm by herself. She collected some insurance money, but had to spend it paying bills for the farm. She farmed all of her life and seems to be very capable, but when people you deal with don't pay you, being capable is not enough.