Tax-Deferred Installment Sale Background:

The use of deferred payment reporting on the sale of farmland and farm commodities has existed in various forms since its inception in 1918 and is commonly referred to as an installment sale. It was the Omnibus Budget Reconciliation Act of 1987 and passed in 1988 which exempted farm property from what is known as the “Pledge Rule”. This exemption permits the seller in the “business of farming of farm property” to obtain a loan using the Installment Agreement and/ or different financial instruments as security without being in “constructive receipt” of the seller’s funds, which would otherwise trigger capital gain tax.

The legislation also provided an exemption from the “interest charge”. This is interest that the IRS charges on an Installment Sale over certain limits, this exemption removed all limits. Theses exemptions extend to “any property used or produced in the trade or business of farming, within the meaning of Code § 2032(A)(e)(4) or (5)”.

This code defines any land that is zoned agriculture or the business of “stock, dairy, poultry, fruit, furbearing animal, as well as plantations, ranches, nurseries, ranges, greenhouses, and other similar structures used primarily for the raising of agricultural or horticultural commodities, orchards, and woodlands.”

In 2012 the Chief Counsels office of the IRS affirmed the regulation for farm property in a Technical Advice Memorandum (TAM) where a large transaction undertaken by a public traded company was reviewed with the following analysis:

“The Transaction meets the statutory and regulatory requirements of I.R.C. § 453. Because Asset meets the definition of farm property under I.R.C. § 2032A(e)(4), Taxpayer can pledge the Purchase Notes and obtain cash through a separate loan under I.R.C. § 453A(b)(3)(B) without the proceeds being treated as a payment for installment sale purposes. The Code and the regulations also allow a standby letter of credit, cash or other security to secure an installment sale obligation”. Chief Counsel Memorandum 20123401F.pdf