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Farm Bill Offsets

January 10, 2008 - by Donny Shaw

I’m no economist, but this is pretty interesting to me. When Congress comes back from recess and appoints a conference committee to start working on reconciling the House and Senate’s versions of the Farm Bill, one of the main sticking points will be a proposal from the Senate version that seeks to codify a judicial principle known as the economic substance doctrine as a means to raise revenues. The Bush administration and some Republicans in Congress are calling the proposal a tax increase and Bush is threatening not to sign the bill if it is included. Democrats (and some Republicans) insist it closes a loophole that some businesses have been using to skirt their responsibility to pay a fair share of taxes.

The economic substance doctrine is a tool that the IRS has been using in court to combat tax shelters. According to Wikipedia, the doctrine, like others like it, is used in court to “invalidate a transaction that would achieve a result contradictory to the intent or basic structure of the tax code provisions at issue.”

While I haven’t seen a thorough justification of the claim that codifying the doctrine into law amounts to a tax increase, I have come across two arguments — one in favor and one against — that are pretty compelling. The argument in favor is from a floor speech from Republican Senator Chuck Grassley (pictured):

>Codifying the economic substance doctrine will clarify the test is a conjunctive test requiring both a meaningful change in economic position and a business purpose independent of Federal taxes.
>The courts are split on whether a transaction must have both economic substance and business purpose. This will give courts a uniform doctrine to apply to non-economic transactions that are inappropriately motivated solely to avoid Federal taxes.
>It will also ensure that a court will not overturn the doctrine, as the trial judge in the Coltec case tried to do, saying that “the use of the economic substance doctrine to trump the mere compliance with the Code would violate the separation of powers.”
>Although the court of appeals reversed that decision, I am still concerned that another strict constructionist judge might reach a similar conclusion.
>Most importantly, codifying the economic substance doctrine will provide an additional deterrent against taxpayers entering into transactions solely for tax purposes in ways that are inconsistent with congressional intent.

The argument against codifying the doctrine comes from a New York Times article from June 2007:

>“Codifying it into law creates rigidity that defeats the function that the doctrine has played over the years,” said Prof. Bernard Wolfman, a tax specialist at Harvard Law School. “Codifying will cause us to look to the words and letters, rather than underlying spirit. Tax lawyers have no limits in their imagination, and once there’s a rigid statement of it, people will seek to get around it, and there will be an ‘it’ to get around.”
>Indeed, the move to write the standard into law is not supported by the I.R.S. and the Treasury Department.
>Donald L. Korb, chief counsel at the I.R.S., said in a brief telephone interview that converting the flexibility of the doctrine into the rigidity of law could provide a road map of sorts to questionable tax planners. “I’m worried taxpayers would go right up to the edge; they will structure around the statutory rule,” he said.
>That view is echoed by the Treasury Department. A spokesman said that “this is something that should be used only in the courts, and codifying could pose some serious administrative and enforcement problems. Right now it is used case by case in the court, and we need to have it nuanced enough not to be a blanket provision.”

The provision would raise $10 billion over 10 years, which would go towards funding a disaster program for farmers suffering from weather-related losses and increasing the amount set aside for conservation. Pretty popular stuff, and the same Times article contains a prediction that, regardless of merit, it will be approved. We’ll see if the administration uses it as leverage for one of their other priorities in the negotiations:

>Lee Sheppard, a writer on tax issues for, an influential trade publication, predicted that “Congress will enact economic substance codification because a large revenue estimate has been attached to it.”
>She continued: “In lots of bills, there are things the Bush administration doesn’t like, and it signs them anyway. The question is, is this a deal breaker — and I don’t think it is.”

For more about the Farm Bill, the AP has this handy guide to the differences of the Senate and House versions as they head into negotiations.

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  • Anonymous 01/11/2008 4:30am

    The bill looks like Congress and their lobbyists and Congressmen ‘getting even’ for the last farm bill.

    The bill seems to be geared toward foreign policy regarding sugar, cotton and rice. The land problems are being addressed through conservation and ‘biomass’ programs that are a popular way for foreign governments to use land that is being used by farmers who the government claims have no rights. USAID runs programs like this in ‘biomass’ and conservation as a way for the government to ‘use’ the land.

    The taxing of the food programs for conservation and ‘biomass’ programs seems to be cash for private organizations involved in land purchase and ‘biomass’ programs. These may have been the lobbyists and Congressmen who wanted the last bill passed with the exceptions of sugar, rice and cotton due to foreign policy considerations, USAID and other US programs in foreign countries.

    Codifying seems to be the price for not passing the other farm bill.

  • Anonymous 01/11/2008 11:52am

    The bill guarantees leverage purchase of land by the US government and wants a transition to private banking after the leveraged purchase. Banks already have this problem with real estate housing loans. Also, we are dealing with commodity producing land and, possibly, land purchased for conservation. Maybe this should be traded like leveraged commodities in the futures exchange with no US government guarantee of the leverage for the loan?

    Land used for biomass energy production might be better preserved temporarily under a loan progam for maintaining the land until it is needed for food production. Biomass energy programs are popular overseas, but there is now a car in production that runs on compressed air. Those alternative might be the answer to biomass energy producing land that could have been preserved until it is needed for food production and maintained when it is no longer needed based on the loan term for maintenance rather than leveraged land purchases and grants from the US government for long term land preservation.

    The bill is ‘sugar coated.’

  • Anonymous 02/27/2008 10:29am

    Um yeah, exactly.

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