B. Increase in Holding Period for Livestock

HR. 13270 provides that, in order to qualify for capital gains treatment, the holding period required for livestock held for draft, breeding and sporting or dairy purposes will be at least 365 days after such animal normally would have been used for any of such purposes.

The Tax Committee feels that, although some modifications are called for, this proposal in the main is fair and equitable and will help prevent tax profiteering.

Such modifications would include a clarifying provision that the use of animals for breeding, dairy or racing purposes from which the 365-day holding period is measured, shall be based on the time in each taxpayer's own operation that such I normally commences. This will assure equitable treatment of all farmers and ranchers, since the first use of animals for such purposes normally varies from region to region and from farm to farm within a given region.

The second modification which would be included is that there be a presumption of First In, First Out, as under the present unit livestock price method of inventorying livestock if the animals are not individually identifiable (as in ost commercial range operations). Such presumption would assist in determining the age of raised livestock, since such age is difficult to determine by weight (method commonly used) after an animal exceeds two years of age. Inclusion of such a provision would also make administration of this provision easier and more effective, including verification of returns by revenue agents. A third modification would be to exempt from this increased holding period requirement, as does the proposal of the National Livestock Tax Committee, animals subject to involuntary conversion due to drought or disease. The reason for this exemption is that premature disposition of such animals results from circumstances beyond the taxpayer's control.

C. Proof of Intention for Holding Livestock

One of the proposals suggested by the Tax Committee was that to claim capital gains on the disposition of livestock, a taxpayer be required to prove the purpose for which he held the livestock in addition to showing the length of time they were held. In adopting this proposal, the House Ways and Means Committee Report refers to the fact that ". the mere satisfaction of the holding period requirement in the case of livestock should (not) . . . be considered to conclusively demonstrate that the animals were held for breeding purposes or any of the other specified purposes). . . . This determination should be made on the basis of all the facts and circumstances which may indicate the purpose for which the animal was held."

D. Tar-Free Exchange of Livestock

Another proposal offered by the Tax Committee was that present law be arified to show that it is not proper to exchange male calves or steers tax-free for female calves or cows. This proposal was also adopted by the House Ways and Means Committee and appears in its Report on H.R. 13270, where it is stated that "... Congress did not intend this type of exchange to be considered a like-kind exchange."

E. Treatment of Land Improvement Expenses

Under EDA, gain realized on the sale of farm or ranch land would be recapured and taxed at ordinary income tax rates to the extent of land clearing and il and water conservation expenses deducted in the five years previous to the ale. Since such expenses are frequently incurred and deducted on a continuing Fearly basis, this would result in the gain realized on the sale of much farm ranch land, which is presently taxed at capital gains rates, being taxed at the higher ordinary income rates, thereby reducing the overall profit. Such a provision could cause considerable harm to a large number of farmers and ranchers who only reap a substantial profit when their land is sold.

Adoption of the National Livestock Tax Committee's proposal for recapturing these land clearing and soil and water conservation expenditures on a graduated basis if farm or ranch land is sold within 10 years after acquisition would be more equitable and would not cause harm to the legitimate long-term farmer and rancher, since such proposal is based on the length of time the farm or ranch and was held and not when these expenses were sustained. In addition, the National Livestock Tax Committee's proposal would have the beneficial effect of Encouraging the improvement of farm and ranch land by permanent operators, yet discouraging the purchase of farm and ranch land by tax profiteers on a short-term basis.

F. Income Averaging Provision Would Be Beneficial to Industry

The Tax Committee supports the sections of H.R. 13270 improving and sim plifying the income averaging provisions of the tax law.

V. TAX PROFITEERING NOT WIDESPREAD AND IS DECREASING

A. Basis for "Farm Loss" Provisions is Incomplete

The basis and reason for enactment of the "farm loss provisions" of H.R. 1327 is found in the statement in the House Ways and Means Committee Report tha according to Treasury Department data for the years 1964 to 1966, "as the tax payer's adjusted gross income level increases, the size of the average farm los also consistently increases."

This statement is incomplete and fails to recognize the entire economic pic ture. For the years 1963-66, the 1966 Statistics of Income, Individual Income Tas Returns compiled and reported by the Treasury Department, analyzing individua income tax returns filed and sources of income, reveals that returns filed by individuals showing net farm losses amounted to only about one-third of the tota returns filed showing farm income and losses. The 1966 Report further indicates that the number of returns reporting net farm losses has decreased from 1,086,000 in 1963 to 1,012,000 in 1966. Also significant is the fact that these returns reflec a slight decrease from $1,902,000,000 in farm losses in 1963 to $1,853,000,000 in such losses in 1965. If as alleged, a large number of high-income-tax bracket individuals are being attracted into farming for tax write-off purposes, it would apepar that the number of returns showing farming losses would have increased substantially since 1963 inasmuch as the total number of tax returns filed in 1966 by all classes of taxpayers increased 9.7% over 1963.

From the all inclusive application of these "farm loss provisions" of H.R. 13270 to farmers and ranchers, it might be concluded that tax profiteering operations were widespread. This is not true as the 1966 Report shows that, except for the $600 and under adjusted gross income bracket, where the aggregate amount of net farm losses exceeded net farm profits, only in the $100,000 and above bracket did net farm losses exceed net farm profits. Further significant is the fact that only 3,598 returns (.001% of total farm returns) were filed showing net farm losses in the $100,000 and above tax bracket.

B. Farm Losses Not Significantly Different From Other Business Losses

Also relevant is the fact that the 1966 Report reveals that more losses were reported by individuals in the $100,000 and above adjusted gross income bracket with respect to other businesses and professions than by individuals in the same income bracket who reported net farming losses. This is revealed in the following except from the 1966 Report:

However, no other businesses are singled out for discriminatory tax treatment by subjecting them to an EDA or by including their business losses as "tax preferences" under the LTP and Allocation of Deductions provisions of H.R. 13270.

If the basis for enactment of these "farm loss provisions" of H.R. 13270 is predicated on the statement that the size of the average farm loss increases consistently as adjusted gross income rises, then closer scrutiny of such Treasury Department data is required. This is because this same Treasury Department data set forth in the following table reveals that the size of the average loss from non-farm businesses and professions also increases consistently as adjusted gross income rises.

Yet, these non-farm businesses and professions are not subjected to EDA or are these non-farm losses classed as "tax preferences" under the LTP or Allocation of Deductions provisions of H.R. 13270.

Average Farm Profit also Increases Consistently as Adjusted Gross Income Levels Rise

An examination of this same Treasury Department data further shows that the size of the average farm profit also generally increases as adjusted gross ine rises. This is reflected in the following table.

From the foregoing statistics showing the relative size of net farm profits and losses, it would appear that in general the larger the operation the greater are the sizes of both profits and losses. This is because a business such as farming and ranching which is subject to so many elements beyond its control can either have a profit or a loss in any given year, and the amount of the profit loss of a particular operation can be and is frequently in direct proportion its size. Under these conditions, and based on the foregoing statistics, singling the entire livestock industry for discriminatory tax treatment under these unneeded provisions of H.R. 13270 is not warranted or justified.

D. Drawing Farm Loss Demaracation Line at $15,000 or $25,000 not justified H.R. 13270, under its Hobby Loss Presumption and EDA provisions, would treat even legitimate farmers and ranchers who incur farm losses in excess of $25,000 for one year or a period of years as "hobby operators" and restrict the amount of capital gains they could claim on the sale of their livestock or other farm property.

In similar manner, the official position of the Treasury Department as stated by Mr. Edwin S. Cohen before this Committee on September 4, 1969 is to treat even legitimate farmers and ranchers as non-bona fide operators if farm losses exceed $15,000 under EDA and to include all losses in EDA if such farmer's or rancher's non-farm adjusted gross income is also in excess of $25,000. As an apparent basis for this conclusion, Mr. Cohen stated that:

"... large farm losses generally represent capital expenditures which have been deducted under the liberal cash method of accounting. The cash method has been allowed to farmers primarily to help small farmers, but taxpayers with large farm losses are generally not in this class but are wealthy investors who obtain a tax shelter." [Emphasis added.]

This statement is too general. For instance, there are no statistics cited by Mr. Cohen or of which the Tax Committee is aware that show that large farm losses generally represent capital expenditures which have been deducted under the cash basis. Further, the cash basis is under present law allowed to all farmers and ranchers, regardless of their size, and is necessary because of the nature of livestock operations. To restrict or deny farm loss deductions or use of the cash basis by legitimate farmers and ranchers who, because of the size of their operation, incur large losses (or profits) in a certain year or period of years is not justified. Many legitimate and lifetime farmers and ranchers have farm losses in excess of $15,000 or even $25,000. One bad storm alone can cause this much of a loss in one year.

To classify legitimate lifetime farmers and ranchers as "wealthy investors" seeking a tax shelter just because their farm losses exceed $15,000 or $25,000, besides being unsubstantiated, is not warranted. The amount of farm losses (or even the amount of non-farm income) a farmer or rancher sustains is no indication, nor should it be, of whether he is in the business on a legitimate basis.

Mr. Cohn stated that under the Treasury-modified EDA only 9,300 individuals, with farm losses aggregating $418 million, would be affected. This statement implies that this is an insignificant number of farmers and ranchers and only a relatively few wealthy taxpayers will be affected. Yet, according to Treasury Department data for 1966, there are 9 states where there were about 9,300 or less returns filed by farmers and ranchers. These states are: Arizona (6,784), Connecticut (5,299), Delaware (5,010), Hawaii (4,002), Maine (9,753), Massachusetts (5,483), Nevada (1,941), New Hampshire (2,766 and Vermont (5,918). Further, this same Treasury Department data reveals that a $418 million farm loss would be approximately 22% of all farm losses in 1966 and would represent about 7% of the total net farm profit reported for that year.

VI. TAX COMMITTEE ALSO OPPOSED TO PROVISIONS AND PRINCIPLES IN METCALF AND MILLER BILLS

In addition to the unneeded provisions of H.R. 13270, the Tax Committee is also opposed to the provisions and principles embodied in S. 500, introduced and sponsored by Senator Lee Metcalf of Montana and S. 1560, introduced and sponsored by Senator Jack Miller of Iowa, which would restrict or totally deny the deduction of farm losses. Although these bills are obviously intended in good faith to help the livestock industry, the Tax Committee feels that these bills would seriously harm the whole industry and perhaps cause the greatest damage to the small and medium-sized family farms and ranches.

Under Senator Metcalf's bill, farm loss deductions would be restricted or totally denied to farmers or ranchers who were not on a "proper" accrual method of accounting and who had non-farm income in excess of $15,000. Legitimate farmers or ranchers who earned $30,000 of non-farm income would have all farm losses disallowed. Treasury data for 1966 reveals that this bill would adversely affect at least 79,263 returns (reflecting adjusted gross income above $15,000) and possibly more," a number equal to approximately the total returns reflecting farm income or loss filed by all persons in the State of Oklahoma.

14 Since losses from business operations, including farming and ranching, are deducted from gross income in arriving at adjusted gross income, it is possible that the number of farming operations affected by this proposal could be well in excess of 79,263.

Legitimate farmers and ranchers who are elected to political office and who receive more than $15,000 would find their farm loss deductions restricted and in some cases completely disallowed. The ramifications of this could discourage qualified legitimate farmers and ranchers from entering public life.

In recent Congressional hearings on federal grazing fee increases, Senator Clifford Hansen of Wyoming, noting that profits in the livestock business have been low, stated that: "I've had to find outside employment to keep my livestock business going." This statement is generally applicable throughout the livestock industry and is supported by statistics which reveal that in recent years, nonfarm income received by each farm operator family almost equals total net farm income,15

The previously discussed adverse and detrimental effects of the unneeded provisions of H.R. 13270 are also generally applicable to Senator Metcalf's bill. They would include forcing many farmers and ranchers on the impossible "proper" accrual system; restricting the flow of needed new blood and legitimate outside capital into agriculture, discouraging diversification and investment in nonfarm businesses by farmers and ranchers; impairing existing and proposed Government programs; impeding vital agricultural research programs; isolating agriculture from the rest of the nation's economy; and jeopardizing the credit base of agricultural lands.

Senator Miller's bill would in general prevent the deduction of farm losses if farm income did not equal or exceed two-thirds of total net income. Although this bill would not have the effect of forcing farmers and ranchers on to a "proper" accrual method of accounting, it follows basically the same underlying and objectionable principle of Senator Metcalf's bill in that it would base disallowance of farm losses on the amount of non-farm income earned by a legitimate farmer or rancher.

VII. SENATOR GORE'S BILL (S. 2645) A PARTIAL SOLUTION

S. 2645 introduced by Senator Albert Gore of Tennessee contained a specific provision (Section 13) pertaining to suggested changes in the livestock tax laws. Senator Gore's bill would: (1) provide that the Secretary of the Treasury could not prescribe in his regulations for the useful life of livestock held for breeding purposes to be less than 10 years; and (2) extend the holding period for livestock from 12 months to 24 months in order to qualify for capital gains treatment.

Because of its simplicity and ease of application, and the fact that it would be at least a partial solution to eliminating tax profiteering in the livestock industry, the National Livestock Tax Committee feels there is considerable merit in the provisions and approach taken by Senator Gore's bill.

However, the Tax Committee is of the opinion that in order to meet the objectives of an equitable and sound tax system, the depreciation recapture rules of present law which apply to all depreciable personal property, other than livestock, should also be extended to livestock. In this sense, including livestock under the depreciation recapture provision of present law would make the restriction of useful life provision in Senator Gore's bill unnecessary.

VIII. CONCLUSION

Proposals of National Livestock Tax Committee would eliminate tax profiteering while not substantially harming industry

Since the National Livestock Tax Committee is convinced that this Committee is intent on maintaining an equitable and sound tax system and not inflicting harm on the entire industry, it is the urgent request of the Tax Committe that this Committee amend H.R. 13270 to include just those proposals offered by the Tax Committee, with the suggested modifications previously noted, that are contained in this bill and referred to in the House Ways and Means Committee Report, These proposals would preserve for the serious permanent farmer and rancher the time-honored and essential cash basis and presently used unit livestock price methods of accounting, retain capital gains for livestock, and permit all farmers and ranchers the right to deduct currently the costs of soil and water conservation, fertilizing and land clearing under sections 175, 180 and 182 of the Internal

15 M. L. Upchurch, Administrator of Economic Research Service. U.S. Department of Agriculture, Address to Annual Agricultural Outlook Conference on February 18, 1969.

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