In 2001, two farming partnerships received Federal crop insurance proceeds relating to sugar beet crops destroyed by excess moisture in 2001.
Held: The partnerships and the partners thereof may not, under
130 T.C. 70">*70 OPINION
SWIFT,
| Penalty | ||
| Petitioners | Deficiency | |
| Jon W. and Kristi Nelson | $ 23,707 | $ 4,741 |
| Steven P. and Jaime Nelson | 31,197 | 6,239 |
| Wayne E. and Joann Nelson | 23,181 | 4,636 |
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the relevant years, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issue for decision is whether two farming partnerships and the partners thereof may, under
The facts of this case were submitted fully stipulated 2008 U.S. Tax Ct. LEXIS 5">*6 under
Petitioners Jon, Steven, and Wayne Nelson are brothers, and petitioners Kristi, Jaime, and Joann Nelson are their respective wives.
Petitioners herein are partners in two related family partnerships that are engaged in the business of farming -- namely, WJS Nelson, Ltd. LLP (WJS-LLP) and WJS Nelson Partnership (WJS-Partnership).
Jon, Steven, and Wayne are equal one-third partners in WJSLLP, and Jon, Steven, Wayne, and their respective spouses are equal one-sixth partners in WJS-Partnership.
WJS-LLP raises only sugar beets while WJS-Partnership raises sugar beets and other crops.
In 2001, the sugar beet crops of WJS-LLP and of WJS-Partnership were destroyed by excess moisture. Neither partnership harvested any sugar beets in 2001, and neither partnership received any proceeds in 2001 or in later years from the sale of sugar beets the partnerships planted in 2001.
Each partnership's 2001 sugar beet crop, however, was insured against loss by Federal crop insurance, and in 2001 WJSLLP and WJS-Partnership received $ 80,589 and $ 121,330, respectively, a total of $ 201,919, in Federal crop 2008 U.S. Tax Ct. LEXIS 5">*7 insurance proceeds relating to their sugar beet crops destroyed in 2001.
In 2001, WJS-Partnership also planted and harvested other crops.
The books and records of WJS-LLP and of WJS-Partnership were maintained and their Federal income tax returns were filed using the cash method of accounting.
Each year, however, for Federal income tax purposes income from the harvest and sale of sugar beet crops was and is reported by WJS-LLP and by WJS-Partnership not on the basis of when the partnerships sell the crops, receive the proceeds, or realize the income therefrom but rather on the basis of the following formula: 65 percent of the income realized from the sale of the sugar beet crops is reported in 130 T.C. 70">*72 the year of the harvest of the crops, and the remaining 35 percent is reported in the year following the harvest.
Consistently, on information tax returns, Forms 1065, U.S. Return of Partnership Income, submitted to respondent each year, WJS-LLP and WJS-Partnership allocate among petitioners herein the income from the harvest and sale of sugar beet crops not on the basis of when the partnerships receive the proceeds or realize income from the sale of the sugar beet crops, but rather on the basis 2008 U.S. Tax Ct. LEXIS 5">*8 of the above formula: namely, 65 percent in the year of harvest and 35 percent in the year following the harvest.
If WJS-LLP's and WJS-Partnership's 2001 sugar beet crops had not been destroyed and if the crops had been sold in 2001, for 2001 WJS-LLP and WJS-Partnership would have allocated to petitioners and reported to respondent a total of 65 percent of the partnerships' income relating thereto and for 2002 a total of 35 percent of the partnerships' income relating thereto.
The parties have stipulated that the above method and percentages used by WJS-LLP and by WJS-Partnership for allocating and reporting income relating to a particular year's sugar beet crop between the year of the harvest (65 percent) and the year following the harvest (35 percent) (regardless of the year in which the crops are sold and the proceeds and income are received) are consistent with the partnerships' above cash method of accounting and with accounting and tax reporting practices within the sugar beet industry and are recognized and accepted generally by respondent. See generally
Each year for Federal income tax purposes 2008 U.S. Tax Ct. LEXIS 5">*9 WJS-Partnership (and its individual partners) reports income from the harvest and sale of its other farm crops not on the basis of when crops are sold and the proceeds are received, but rather on the basis of similar formulas that defer a percentage of the sales proceeds and income until the following year.
Under the various formulas used by WJS-Partnership for reporting in the current year and deferring until the following year a portion of crop proceeds and income, WJS-Partnership typically defers until the following year over 50 percent of total income relating to all crops grown in the current year.
130 T.C. 70">*73 Specifically in and for 2001, WJS-LLP and WJS-Partnership did not treat as income and did not report to respondent on information returns, Forms 1065, any of the $ 201,919 in Federal crop insurance proceeds that were received in 2001 with regard to the sugar beet crops destroyed in 2001.
Rather, with the 2001 partnership information tax returns of WJS-LLP and of WJS-Partnership, Forms 1065, elections under
Petitioners filed their respective 2001 2008 U.S. Tax Ct. LEXIS 5">*10 individual joint Federal income tax returns, reporting thereon their respective amounts of 2001 WJS-LLP and WJS-Partnership income, deductions, and credits as reported by the partnerships (i.e., not reporting any of the Federal crop insurance proceeds received in 2001).
On audit of petitioners' respective individual joint Federal income tax returns for 2001, respondent treated as income for 2001 all $ 201,919 of the Federal crop insurance proceeds WJS-LLP and WJS-Partnership received in 2001, charged each petitioner with additional income for his or her respective allocation thereof, and determined the tax deficiencies and penalties at issue.
Generally, a cash method taxpayer reports income in the year of receipt.
(d) Special Rule for Crop Insurance Proceeds or Disaster Payments. -- In the case of insurance proceeds received as a result of destruction or damage to crops, a taxpayer reporting on the cash receipts and disbursements method of accounting may elect to include such proceeds in income for the taxable year following the taxable year of destruction or damage, if he establishes that, under his practice, income from such crops 130 T.C. 70">*74 would have been reported in a following taxable year. * * * An election under this subsection for any taxable year shall be made at such time and in such manner as the Secretary prescribes.
Although the above statute does not expressly provide that under the farmer's normal tax reporting for crop income "all" (or some particular percentage) of a farmer's crop income must be deferred to a following year in order to qualify for the
Similarly, with regard to the time and manner of making an election to defer crop insurance proceeds,
130 T.C. 70">*75 The stated legislative purpose for the deferral of crop insurance proceeds under
The Senate report provides the following explanation:
As stated, under normal practice WJS-LLP, WJS-Partnership, and petitioners did not report "the" income from the current year's sugar beet crops in the following year. Rather, WJS-LLP, WJS-Partnership, and petitioners reported 65 percent of the income relating to the current year's sugar beet crops in 2008 U.S. Tax Ct. LEXIS 5">*16 the current year and only 35 percent thereof in the following year. Accordingly, on the basis of the above-stated rationale for the
In
Also, the above revenue ruling concluded, consistently with
The referenced regulations and the above ruling would appear to preclude prorating of the insurance proceeds which WJS-LLP and WJS-Partnership received between the current year (65 percent) and the following year (35 percent).
130 T.C. 70">*77 Respondent also takes the position, relying on
Respondent acknowledges that
Petitioners point out that although
We acknowledge that the word "substantial" appears in other contexts throughout the Internal Revenue Code as well as throughout the regulations and often is used to refer to "less than 50 percent". 42008 U.S. Tax Ct. LEXIS 5">*20
Although the statutory and regulatory provisions are not free of ambiguity, we agree with respondent's position. As explained, the legislative history of the deferral provision of
The stipulated evidence does not tell us when WJS-LLP and WJS-Partnership sold their sugar beet crops -- in the year of 130 T.C. 70">*78 production or in the following year (or over the course of both years). The stipulated evidence does not explain to us the basis for the apparent accounting and tax convention used in the sugar beet industry to report in the 2008 U.S. Tax Ct. LEXIS 5">*21 current year only 65 percent and in the following year 35 percent of sugar beet income.
The use in the related regulations of the definite article "the" to describe crop income that a farmer normally must defer to a year following crop production (in order to qualify for the
For 2001, WJS-LLP and WJS-Partnership reported only 35 percent of sugar beet crop income from 2000 and (but for the sugar beet crop damage) would have reported 65 percent of the sugar beet crop income from 2001. Both of these figures suggest that the crop insurance proceeds WJS-LLP and WJS-Partnership received in 2001 should be reported in 2001. To hold otherwise would further distort the income reported in 2001 and 2002 (namely, for 2001 only 35 percent of 2000 crop income would be reported, but for 2002 100 percent of the insurance proceeds received in 2001 and also 65 percent of 2002 sugar beet crop income would 2008 U.S. Tax Ct. LEXIS 5">*22 be reported).
We conclude that on the facts before us, WJS-LLP and WJS-Partnership and the petitioners are required to report as taxable income in 2001 all $ 201,919 of the sugar beet crop insurance proceeds received in 2001.
Under
However, if there was reasonable cause for the underpayment and the taxpayer acted in good faith, the taxpayer will not be liable for the accuracy-related penalty.
In light of the difficult interpretation of
To reflect the foregoing,
1. Cases of the following petitioners are consolidated herewith: Steven P. and Jaime Nelson, docket No. 2604-06, and Wayne E. and Joann Nelson, docket No. 2605-06.↩
2. * * * * (b)(1) (i) A declaration that the taxpayer is making an election under (ii) Identification of the specific crop or crops destroyed or damaged; (iii) A declaration that under the taxpayer's normal business practice the income derived from the crops which were destroyed or damaged would have been included in his gross income for a taxable year following the taxable year of such destruction or damage; (iv) The cause of destruction or damage of crops and the date or dates on which such destruction or damage occurred; (v) The total amount of payments received from insurance carriers, itemized with respect to each specific crop and with respect to the date each payment was received; (vi) The name(s) of the insurance carrier or carriers from whom payments were received. [Emphasis added.]
3. * * * * (2) In the case of a taxpayer who receives insurance proceeds as a result of the destruction of, or damage to two or more specific crops, if such proceeds may, under
We note that this regulation does not help petitioners (particularly WJS-Partnership, which does harvest each year more than one crop and which does defer to the following year most of its total income from all its crops), and petitioners do not rely on it, because of the predicate in the regulation that it pertains only to crop insurance proceeds received that first are qualified for the
4. For example, under
Under
