be deferred on the sale of land when the proceeds are rein- 

 vested in like-kind property even though the taxpayer, to 

 fully reinvest the proceeds, will make substantial improve- 

 ments on the replacement property. (Gain can normally be 

 deferred until the end of the second tax year after the prop- 

 erty was disposed of or requisitioned.) [LTR 9421002] 



Deductibility of Points 



The immediate deductibility of points (prepaid inter- 

 est) now includes points paid by a seller. The same con- 

 ditions for immediate deductibility must be met (as out- 

 lined below) and the buyer must deduct the amount of seller- 

 paid points from the purchase price in computing the basis 

 of the residence. 



The IRS will treat points paid by a cash basis tax- 

 payer as a deductible expense in the taxable year that they 

 are incurred, provided they are: ( 1 ) designated on the Uni- 

 form Settlement Statement (Form HUD-1) as payable in 

 connection with a loan, (2) computed as a percentage of 

 the amount borrowed, (3) charged under established busi- 

 ness practice, (4) paid for the acquisition of a principal 

 residence with the loan secured by that residence, and (5) 

 paid directly to the taxpayer from funds that have not been 

 borrowed for that purpose. 



Cost of points may not be deducted immediately and 

 must be amortized over the life of the loan if: (1) the loan 

 is for improvement of the principal residence, not purchase, 

 (2) the residence is not the principal residence, or (3) the 

 loan is a refinancing, home equity, or line of credit. 



The change is retroactive. If you have been amortizing 

 points paid during tax years beginning after December 31, 

 1990, and before January 1, 1994, and you qualify for 

 immediatedeductibility, as noted above, you may file an 

 amended tax return on Form 1040X for the appropriate 

 year. Taxpayers filing amended returns should write "Seller- 

 paid Points" in the top right margin of the amended return 

 and should attach a copy of Form HUD- 1 (or other settle- 

 ment statement) showing the amount of points paid by the 

 seller in connection with the transaction on Form 1098, or 

 on line 10 if the points were not reported on Form 1098. 

 [Rev. Proc. 94-27] 



Selling of Processed Farm Products 



Farmers who process their produce beyond that nor- 

 mally carried out on a farm may have to file both Sched- 

 ule F and Schedule C. The term "farming business" DOES 

 NOT include the processing of commodities or products 

 beyond those activities which are normally incident to the 

 growing, raising, or harvesting of such products. However, 

 the term "farming business" DOES include processing ac- 

 tivities which are normally a part of tiie growing, raising 

 or harvesting of agricultural products. For example, assume 

 a taxpayer is a fruit and vegetable grower. When the fruits 

 and vegetables are ready to be harvested, the taxpayer picks, 



washes, inspects, and packages the fruits and vegetables 

 for sale. Such activities are normally a part of the raising 

 of these crops by farmers. The taxpayer will be considered 

 to be in the business of farming with respect to the growing 

 of fruits and vegetables, and the processing activities inci- 

 dent to their harvest. [Treas. Reg. I.263A-4T(4)]. Maple 

 syrup production is also a farming activity. Activities that 

 are part of the farming business appear on Schedule F. The 

 rest appear on Schedule C. 



Example: Johnny and Jane Seed have an apple orchard 

 and they sell some apples to a wholesaler. They also sell 

 some apples through their roadside stand and make apple 

 cider that they sell to a grocery store. The receipts from the 

 wholesaler and from the roadside stand are reported on 

 Schedule F The sale of cider is on Schedule C. 



Payment in kind to Agricultural Workers 



Payment of non-cash wages to an employee may be a 

 legitimate way to share the returns from risk-taking or it 

 may be intended simply to lower the wages subject to FICA 

 and hence reduce the FICA taxes paid by both employer 

 and employee. The IRS will disallow the transaction if its 

 purpose is simply to avoid the payment of FICA taxes. Note: 

 it may not always be to the employee's advantage to reduce 

 FICA taxes since this can reduce social security benefits. 

 Wages not subject to FICA also are not subject to income 

 tax withholding; however they are still subject to income 

 tax (and must be reported on the employee's W-2 form but 

 not in box 3). 



In two recent situations the IRS held that the circum- 

 stances indicated that wages paid to farm employees in the 

 form of grain rather than cash had no business purpose 

 other than to avoid payment of FICA. The IRS treated the 

 payments as though they were cash and were therefore sub- 

 ject to FICA. What makes a bona fide non-cash transfer to 

 an employee? Factors to consider include: 



(1) whether there is documentation of the transfer, 



(2) whether the in-kind payment was intended to be a sub- 

 stitute for cash, 



(3) whether the employee negotiates the subsequent sale 

 independent of the employer, 



(4) whether the risk of gain or loss (both of price and physi- 

 cal damage) is shifted to the employee, 



(5) the length of time between employee's receipt of the 

 commodity and its subsequent sale, 



(6) whether the employee bears the ownership costs (stor- 

 age, insurance, etc.). 



For a bona fide transaction, the employee should bear 

 the ownership costs and must exert "dominion and con- 

 trol" over the commodity. The IRS is planning to issue 

 guidelines for meeting the requirements of the law that are 

 likely to be quite stringent. Affected taxpayers should note 

 that the conditions listed above are subject to revision, 

 possibly substantially. (I.R.C. §3121(a)(8)(A) as affected 

 by LTR 9428003 and LTR 9403001] 



Fruit Notes, Winter, 1995 



21 



