Old McDonald Didn’t Get a Tax Break

The “farmer and rancher rule” gives qualified farmers a boost when claiming a tax deduction for a conservation easement by letting them deduct up to 100% of their adjusted gross income, rather than the 50% limit for non-farmers. This helps farmers keep farming. But how well does the tax court understand agriculture?

The tax court issued its first interpretation of the rule on August 7, 2017. In it, the tax court interpreted the definition of “qualified farmer” narrowly. The tax code defines a “qualified farmer” as someone who gets more than half his income from farming. In a case where income from the sale of a conserved ranch constituted more than half of the income for the taxpayers in the year in question, the tax court found that taxpayers were not “qualified farmers.”

The taxpayers argued that the sale of the farm was agricultural income because it was the sale of a commodity they had cultivated, namely soil, which is necessary for agriculture. The tax court refused to accept this interpretation. Instead of seeking input from farmers, the tax court referred to Webster’s dictionary for the definitions of terms like “cultivate” and “harvest.” Using the expert advice of the dictionary, the court found that the sale did not fit within the farming activities listed by the tax code. Even though the taxpayers continued to farm and the Tax Court acknowledged, “the taxpayers are in the business of farming,” it held that being a “qualified” farmer is different from being a farmer.