Sept. 16 IRS deadline for tobacco quota holders to participate in like-kind exchange
An announcement by the Internal Revenue Service may help some Virginia tobacco farmers postpone their tax liability on payments they expect to receive under the provisions of the Tobacco Buyout. Farmers must take action by Sept. 16, said Daniel Osborne, Virginia Cooperative Extension farm business management agent at Smyth County.
The “quota holders” can defer the taxes on those payments by taking advantage of a part of the tax code known as a section 1031, Like-Kind Exchange, Osborne said.
The Tobacco Buyout ended federal tobacco price support and supply control programs. Under provisions of the buyout, money from assessments on tobacco product manufacturers and importers is used to compensate tobacco “quota holders” and active tobacco growers for the elimination of the tobacco quota asset.
Provisions of the Tobacco Buyout allow payments of $7 per pound to tobacco “quota holders” and up to $3 per pound to tobacco “producers.” Many “quota holders” are interested in reducing their tax liability.
In a 1031 exchange, “quota holders” could defer and possibly avoid taxes on the payment. The 1031 exchange provision allows them to exchange their tobacco buyout payments for business or investment real estate. Because the proceeds from the tobacco quota are reinvested in replacement property, which in this case is real estate, taxes will not have to be paid until the replacement property is sold.
This action by the IRS is only transitional relief in order to allow more farmers to utilize the 1031 exchange opportunity, he said. Tobacco buyout growers must enter into an exchange agreement with a qualified intermediary by Sept. 16.
“Any ‘quota holders’ who think they might be eligible for a 1031 exchange should seek professional advice and service from their accountants, lawyers, or financial institutions,” Osborne said. The 1031 is available to tobacco “quota holders” who applied to enter into a contract with the U.S. Department of Agriculture by June 17, and there are other specific provisions that must be met.
General guidelines for conducting a 1031 exchange under the IRS’ Transitional Relief for Tobacco Quota Holders Farmers must: Be a tobacco “quota holder” who applied to enter into a contract with USDA for quota holder payments by June 17. Enter into an exchange agreement with a qualified intermediary by Sept. 16. Identify replacement property and notify the qualified intermediary in writing by Oct. 31. Use the replacement property for business or investment purposes. For example, farmland and rental properties would qualify, but a personal residence would not. Complete the purchase of the replacement property by March 15, 2006, or by the due date of the 2005 tax return if it is due before March 15, 2006.
A “quota holder” who receives a “quota holder” payment must remit the amount to the qualified intermediary within five business days of entering into the exchange agreement or within five business days of receipt if the payment is received after entering into the exchange agreement.