Dear Michael: Years ago, my father was advised to start a family farm corporation. My eldest brother worked with him for some time, but when Dad retired, he transferred his stock to myself and my younger brother. A few years back, my eldest brother retired and my brother and I kept on farming. Now, we’ve all reached the age when we would like to quit but no one wants to buy the other out. We had talked about a buy-sell agreement but never put anything into writing. Now, the assets of the farm corporation are depreciating and I’m losing values on my shares every year. What can I do about this?
– Depreciating Asset
Dear Depreciating Asset: Many farmers were told to set up corporations and then lease their land back to the corporation to avoid paying Social Security and Self-Employment taxes on the income. Rent income is considered passive income and, therefore, is not subject to these taxes.
When it comes time to end the corporation, all of these depreciated assets can be taxed twice. First, they are taxed to the corporation as a recapture of depreciation. Second, they are taxed to the individuals receiving these dollars as a dividend.
For this reason, many farmers try to run down the value of their corporation as they get closer and closer to retirement or quitting. Many just run the machinery down so there is little or no value to these depreciated assets by the time they retire.
However, if you came back to the farm and were given corporate stocks thinking that they would have some value someday and didn’t realize behind the scenes this is what’s happening by whoever runs the corporation, you could work a lot of years and find out your stock is virtually worthless at the time the corporation is ended.
However, even if there are not formal paperwork, the state of North Dakota has laws about how partnerships and corporations will be handled in the event there is no paperwork right in the codified law. These codified laws may not be exactly what you would like them to be, but they are often the last line of defense when you are fighting about values.
In addition, there has to be a line in the sand drawn as to when you want to withdraw from the corporation and cease your ownership of the stock. You must have an attorney draft this letter for you, have it presented or served to the other stockholders on a given day so that you have a day when the valuation of the business is what it is as of that day.
If you keep going back and forth about values without a formal cessation of ownership letter having being sent and duly received (signed for by the other stockholders or their legal representative) then the games can keep going on.
Crops from past years can disappear, income from anything from oil and gas or wind towers can be used up, and as long as the corporation is continuing to do the business in “good faith” – although knowingly driving down the value – it will stand if you don’t set a date by a formal cessation letter served upon the owners.
Once they sign this letter, any changes in value after that date – good or bad – doesn’t make a difference anymore.