Business-involvement stipulation for heir raises some concerns

By TIM HEARDEN

Capital Press

Farmers and ranchers are supporting a bill in Congress that would exempt certain land from the federal estate tax as long as the property is kept in agriculture.

The bill by U.S. Reps. Mike Thompson, D-Calif., and John Salazar, D-Colo., would deduct from the estate tax the value of farmland in cases where the heir had been involved in the farm operation for five of the past eight years.

The idea pleases ranchers such as California cattle producer Kevin Kester, whose family had to pay $2 million over 10 years to the Internal Revenue Service after his grandfather died in 1993.

"We struggled, and the net result over 10 years was we were not able to invest and reinvest in the ranch or have the employees that we should have," said Kester, who runs cows and grows winegrapes on 22,000 acres near Paso Robles.

"I have three children," he said. "Two are still in college and one is still in middle school, so they're not at the age to take over yet, but all three of them ... seem to have an interest and a desire to stay in the family cattle business."

Currently, under a tax-relief bill signed by then-President George W. Bush, estates valued at more than $3.5 million, or $7 million for a couple, are taxed at a 45 percent rate. If Congress doesn't act, the rate is set to revert in 2011 to 55 percent on estates worth $1 million or more.

Farmers and ranchers have long contended that the tax often forces families to sell all or part of their land when a loved one dies.

"There've been a lot of ranches lost over the years because they couldn't pay inheritance tax," said Tom McDonnell, executive vice president of the Idaho Cattle Association. Repealing the tax, he said, has been a priority for cattlemen's groups for years.

Among those has been the National Cattlemen's Beef Association, which has been meeting with the House of Representatives' Agriculture Committee members and other lawmakers to seek relief from the so-called "death tax," said Jill Davidsaver, the organization's manager of legislative affairs in Washington, D.C.

"We've had so many people weigh in with their stories where maybe they've not had to sell the entire farm, but they've had to sell a family's portion to pay the tax," Davidsaver said. "We've had some who had to go out of business because of the tax. We were pleased to see this bill come forward."

The bill has raised some concerns among producers, largely because of the stipulation that the heir has had to have been involved in the business, said Kester, the first vice president of the California Cattlemen's Association.

Also, if the land is used or sold for other purposes besides agriculture, a recapture tax would be imposed.

Still, the legislation breathes new life into farm groups' tax-relief hopes after a Senate budget amendment to raise exemptions from the estate tax failed earlier this year.

U.S. Sens. Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., wanted to raise the exemption to $5 million for an individual and $10 million for a couple, indexed for inflation. But a House-Senate conference committee stripped the provision from the budget bill in late April.

Thompson, the main sponsor of the Family Farm Preservation and Conservation Estate Tax Act, serves a district that traverses the Northern California coastline and includes the wine-rich Napa Valley and Sonoma County areas. But the bill may be more about preserving open space than wine.

The California Cattlemen's Association has stressed to Thompson that ranches have value for their preservation of wildlife and other natural resources as well as for their food production, said Matt Byrne, the organization's executive vice president.

In Idaho, the ranching industry consists of mostly family operations, with brother partnerships and father-and-son businesses the most common. The estate tax can take up to 50 percent of a ranch's value, McDonnell said.

That's because the real estate value far exceeds the ranch's true economic value -- what it produces to grow its value over the years, he said. With the land value based on potential scenic and recreational assets, the tax essentially prices operators out of the ranch, McDonnell said.

The same is true in California, Byrne said.

"California is a unique with its land value situation and the fact that many ranches far exceed the exemption level under the current estate tax," he said. "Along with the fact that the exemption is set to expire ... it creates a lot of uncertainty.

"Really, it (the bill) provides a whole degree of protection at the time of generational transfer," Byrne said. "There's a whole lot of ranchers in the state that want to keep their traditions alive. ... The last thing they want to have is a tax bill that finally pushes the ranch under."

Capital Press staff writer Carol Ryan Dumas contributed to this report.

Online

Read House Resolution 3524, the Family Farm Preservation and Conservation Estate Tax Act, at http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.3524