harvested wheat basis

[Ranger]

Client died leaving harvested wheat in storage. He was disabled and leased the farm out on a crop share basis. His wife inherited the wheat. The land was entirely in his name. This is not a community property state.

Lawyer calls up and wants me to confirm if wife gets full stepped up basis on DOD. My research says yes. Does anybody on this board have other thoughts?

Thanks

[kcjenkins]

Clearly, the land gets the stepup. But consider the possibility of the special-use valuation method for real property used in farming or other closely held business, if elected by the personal representative. She is a "qualified heir" so that has to be considered.

The harvest, though, is not so simple.

Rent paid in the form of crop shares is included in self-employment earnings for the year you sell, exchange, give away, or use the crop shares if you meet one of the four material participation tests at the time the crop shares are produced. Gross income for self-employment earnings includes the fair market value of the crop shares when they are used. So the first question is whether he met any of the material participation tests? May need to be treated as IRD, or on the decedent's final return.

[Guest Taxed]

KC is right with the crop share issue. I have an old farmer as a client and he leases more than half of his land because he can't handle it all alone in return for crop share. Each year we have to go over this valuation business using wholesale values.

[OldJack]

>>Client died leaving harvested wheat in storage.<<

It would appear to me that this might not be an IRD as he had a right to the stored asset rather than to income. Without further details I would think it is just another asset of the estate subject to a Step-Up-Basis.

>>Rent paid in the form of crop shares is included in self-employment earnings for the year you sell<<

The decedent did not sell the wheat and the crop share issue is irrelevant.

[kcjenkins]

Ranger did say the decedent was disabled, but given the broadness of the IRS definitions of 'material participation', it has to at least be considered, and I'd keep my notes on it either way

[DANRVAN]

Neil Harl has addressed this topic in the Agricultural Law Digest as well as his FARM ESTATE AND BUSINESS PLANNING manual.

The key words here are "non-material participating" landlord, meaning the crop share has not been subject to self-employment tax. If it had been, basis would be determined at FMV on DOD.

If decedent was a non-material participating landlord, then proration is made during the rental period before and after death. The portion of income allocable before death is IRD. The balance is taxable as ordinary income to the estate. There is no stepped up basis in this situation.

-Here is a quote from page 175 of the FARM ESTATE AND BUSINESS PLANNING manual:

“SHARE RENTS. Crop share and livestock share rents held by

the decedent at death are income in respect of decedent and are

taxable on later sale by the estate or heirs. This is the treatment

if the landlord was a non-materially participating landlord. And

many are, for social security reasons.

If the landlord was participating materially in the production

of income under the lease, the share rents are treated as selfemployment

income with the usual adjustments to income tax

basis at death as the stored crops and growing crops (and livestock)

receive a new basis at death based on fair market value.

For death of a non-materially participating farm landlord

during a rent period, with crops and livestock sold after death,

the portion of the proceeds allocable to the period before death

is income in respect of decedent. That portion is also includible

in the gross estate for federal estate tax purposes. The remaining

amount represents ordinary income earned by the estate after the

landlord’s death. The proceeds of sale are apportioned according

to the number of days in the rental period before death (ending

with the date of death) and after death, commencing the day after

the decedent’s death, using a 365 day rental period.”

-Neil Harl makes the same conclusion in the following article in paragraph six (with citations):

http://www.econ.iastate.edu/~harl/ald/HarlAgLaw20110128.pdf

-Another author has the same opinion in this article:

http://www.calt.iastate.edu/briefs/CALT%20Legal%20Brief%20-%20Tax%20Issues%20Associated%20with%20Unharvested%20Crops.pdf

-Also, the Eight Circuit reached the same conclusion in the ESTATE OF Verdon GAVIN, Appellant,v..UNITED STATES of America, Appellee, (as pointed out by Checkpoint RIA).

Hope this clears up the issue for you,

Dan

[Guest Taxed]

Thanks Danrvan. I only have a few farmers as clients so I was not familiar with this fine distinction.

[OldJack]

>> Crop share and livestock share rents held by the decedent at death are income in respect of decedent and are taxable on later sale by the estate or heirs.<<

But was the decedent holding a crop share or holding a stored asset?

[Guest Taxed]

Is it the difference between unharvested and harvested?

A grain on the stalk or inside a silo determines a different tax treatment?

[Ranger]

Thank you for your responses and bringing to my attention the special rules for crop shares.

Rev. Rul. 64-289

Crop shares or livestock received as rent by a decedent, who had employed the cash method of accounting, prior to his death, and owned by him at the time of his death, as well as crop shares or livestock which he had a right to receive as rent at the time of his death for economic activities occurring before his death, constitute income in respect of a decedent which is reportable in the year in which the crop shares or livestock are sold, or otherwise disposed of.

Where the decedent dies during a rent period, only the net proceeds attributable to the portion of the rent period ending with his death are income in respect of a decedent. The proceeds attributable to the portion of the rent period which runs from the day after death to the end of the rent period are ordinary income to the estate.