Gary McCall

Iowa Farmer
17558 Sumac Avenue
Ute, Iowa 51060-8061

Statement for the Record
U.S. Senate Finance Committee
Federal Estate Tax:  Uncertainty in Planning Under the Current Law
November 14, 2007

My name is Gary McCall. I am an Iowa farmer. I am 64 years old. My wife, Karen and our son John, 38, and his family, own and operate a family farm near Ute, Iowa. Ute is a small rural community of approximately 380 people located in West Central Iowa…between Omaha and Sioux City.  

Our farm operation consists of slightly over 2,100 acres of Iowa farmland. We produce corn, soybeans, and finish approximately 4-500 fat cattle per year.         

We have been a farming family in Iowa for over 5 generations. During this period our family survived….

 

  • the “great depression of the 30s”…
  • droughts, torrential downpours and floods…
  • transitions to new “methodology” in farming. Gone is the attitude of “all tillage” which left no residue and plows which turned the soil “black”. Today’s practices of “no tillage” or “minimum tillage” leave most of the previous year’s crop residue on the surface and benefits our soil, water and conservation efforts...
  • extreme cyclical price swings for our farms production:

 

--embargos dropped our grain inventories value by 50% in less than a week 

--8-10 cents a pound for our hog production in ’98 closing out our farms hog operation permanently 

--losses of $150 a head on fat cattle due to “mad cow” scares

Please understand, I am not writing this testimony to “whine and complain” about any of the above. We accept the challenge of dealing with Mother Nature and cyclical markets. But I would like to point out there is something far more fearful looming in our farm’s future, something our farm family may not be able to withstand. It is a law, which would re-institute the “Death Tax” as it was prior to 2001. 

In my view, the re-implementation of the Death Tax (as previously written) will have a tremendous negative impact on our family farm operation and has the potential to create future encumbrances on our farm and family for generations.

Why? Whenever current inventories of grain, livestock, cash, and all other liquid assets/investments are not enough to pay federal estate taxes due upon the death of the farms major land holder, often all, or a portion of, the deceased’s land base is sold to pay this indebtedness.

With land and commodity prices at near record levels, one might ask, “Why is this a problem?…Sell land!… Pay the taxes!”  

Please understand this is not an option for many of today’s multi generational farms, including ours. Today’s farmers may appear to be ASSET RICH because of high land and current commodity prices, but they can be CASH FLOW POOR as well. Along with record land values and farm income we also have record farm expenses, including record purchase costs for machinery and other inputs needed to operate our farm.  

When a sale of land takes place generating cash in order to pay estate taxes, even if it’s only a portion of farmer’s land holdings, it erodes a farm’s future production capabilities. This “restriction” in cash flows has a tremendous impact on the “economic engine” that drives our farm and other small businesses in rural America. How? Because past cash flows available for farm inputs are now being paid to federal government for estate taxes, resulting in fewer machinery purchases, less livestock fed, and decreased purchases of inputs from small businesses selling fuel, fertilizer, and other farm needs. As you can see, such restrictions of a farm’s cash flows have a multiplier effect which impacts other small businesses dependent upon farmer’s purchases for their livelihood.   

So what do we do? Each year we continue to do our best to develop our farm’s operational plan and try to allow for unforeseen events…i.e.—weather, market disruptions, and NEW governmental tax laws and policies.

However, we remain tremendously concerned about what happens to our 5-generation farm after our death, especially when our children attempt to pay off our estate taxes due and still maintain cash flows needed to continue to operate our farm. If cash flows are not adequate to pay estate taxes and settle the estate, land may need to be sold, investments in new equipment, operational growth, and farm inputs purchased may need to be curtailed or restricted. If our family does manage to develop a plan to generate “cash” to continue the farm operation and pay off the Death Tax over time… one thing will be certain, our children will then have a NEW PARTNER in their farming operation. UNCLE SAM! This time he will be taking cash OUT of the operation, for taxes due, instead of providing a base of support as in past USDA farm programs. 

So…What can Congress do to help family farms like ours during this Death Tax debate?  Here are a few suggestions I believe will help the transition of our farm to our 5th and hopefully one day, the 6th generation in our family….

1. Naturally, my first choice would be to continue 2010 provisions…No Federal Estate Tax!

2. Retain stepped up basis after 2010 ---Please consider keeping the existing provisions which allow for a “stepped up basis” for family farm land. If inflation or double digit land value increases continue…this will be extremely important for the preservation of our family farm from generation to generation…especially in the event a future non farming heir wants to “claim” their share of a family estate in the form of cash. This usually leads to a “forced sale” of existing farm land by the farming child in order to buy out shares of non farming child.

Suggestion—Could congress implement provisions which would allow a stepped up basis to be triggered by something other than receiving it only at death? Implement a provision which would allow a “long time” farming family to sell land to their farming children…PRIOR to the parents death…at a time the children truly need this asset and they are still young enough to effectively utilize the farm. Why is this important? People live longer. They now live into their 90s. If a landowner in a family lives to be in 90’s or approaches 100…do his children, now most likely in their 60’s and 70s, really want to “farm” at this age? Their need for the farm land was years before… when they were in their 30s, and 40s, …even early 50s. Yet today…many multi generational families’ patriarchs still hold property until their death … Why?...because the  fear of tax consequences of selling the land which has increased in value 10 times over their purchase price many years ago! So nothing is done while they live! What a waste and loss of economic opportunities for younger farmers in 30’s to early 50’s! What a loss of collateral for an energetic young farmer/couple (including my son, John, age 38!).    Holding land to obtain a better basis position and therefore less tax on the estate stifles opportunities for younger farmers/small businesses and rural communities through out America.

3. I would urge congress to expand estate tax exemptions to 7-10 million per person…AND …index this to inflation. 

4. Gift tax should be eliminated. If not possible… exemptions should be triple what they are now.

In conclusion, I leave you with this request. Please… YOU… can make a difference.  YOU… can help us pass our legacy and our farm on to our 5th and 6th generation. 

Please do your “due diligence”. Do your homework on the Death Tax. When you do, I feel you will come to the same conclusion as I. The Death Tax is very counter productive, anti-growth, and anti-family. Its reimplementation in its pre-2001 form will have a tremendous negative impact on our family and farm. Please …I ask you to stand opposed to the reimplementation of the “Death Tax”.   

Thank you for your time and consideration in this matter.