To amend the Internal Revenue Code of 1986 to provide a tax credit for farmers' investments in value-added agriculture.

January 4, 2005

Mr. MCHUGH introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to provide a tax credit for farmers' investments in value-added agriculture.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Agricultural Producers Value-Added Investment Tax Credit Act of 2005'.

SEC. 2. CREDIT FOR FARMER INVESTMENT IN VALUE-ADDED AGRICULTURAL PROPERTY.

(a) In General- Subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to business related credits) is amended by adding at the end the following new section:

`SEC. 45J. VALUE-ADDED AGRICULTURAL PROPERTY INVESTMENT CREDIT.

`(a) General Rule- For purposes of section 38, in the case of a taxpayer who is--

`(1) an eligible person, or

`(2) a farmer-owned entity,

the value-added agricultural property investment credit determined under this section for any taxable year is 50 percent of the basis of any qualified value-added agricultural property placed in service during the taxable year. In the case of a farmer-owned entity, such credit shall be allocated on a pro rata basis among eligible persons holding qualified investments in such entity as of the last day of such taxable year.

`(b) Maximum Credit- For purposes of subsection (a)--

`(1) PROPERTY PLACED IN SERVICE BY ELIGIBLE PERSON- In the case of property placed in service during a taxable year by an eligible person, the credit determined under this section for such year shall not exceed $30,000, reduced by the amount of the creditable investments allowed for the taxable year under paragraph (2).

`(2) PROPERTY PLACED IN SERVICE BY FARMER-OWNED ENTITY-

`(A) IN GENERAL- In the case of property placed in service by a farmer-owned entity, the credit determined under this section shall not exceed the sum of the eligible person's creditable investments in such entity as of the date such property is placed in service.

`(B) CREDITABLE INVESTMENTS- For purposes of subparagraph (A), the term `creditable investments' means, with respect to any property placed in service by a farmer-owned entity, the aggregate qualified investments made by the eligible person in such entity, reduced (but not below zero) by the sum of--

`(i) the amount of the aggregate qualified investments made by such person in such entity which were taken into account under this section with respect to property previously placed in service by such entity, and

`(ii) the amount of the aggregate qualified investments made by such person in all other farmer-owned entities which were taken into account under this section with respect to property previously placed in service by such other entities.

`(C) LIMITATION- For purposes of this paragraph, the aggregate qualified investments made by the eligible person which may be taken into account for any taxable year shall not exceed $30,000.

`(c) Definitions- For purposes of this section--

`(1) QUALIFIED VALUE-ADDED AGRICULTURAL PROPERTY- The term `qualified value-added agricultural property' means property--

`(A) which is used to add value to a good or product, suitable for food or nonfood use, derived in whole or in part from organic matter which is available on a renewable basis, including agricultural crops and agricultural wastes and residues, wood wastes and residues, and domesticated animal wastes,

`(B)(i) to which section 168 applies without regard to any useful life, or

`(ii) with respect to which depreciation (or amortization in lieu of depreciation) is allowable and having a useful life (determined as of the time such property is placed in service) of 3 years or more, and

`(C) which is owned and operated by an eligible person or a farmer-owned entity.

`(2) ELIGIBLE PERSON-

`(A) IN GENERAL- The term `eligible person' means a person who materially participates during the taxable year in an eligible farming business.

`(B) MATERIAL PARTICIPATION- For purposes of subparagraph (A), the determination of whether a person materially participates in the trade or business of farming shall be made in a manner similar to the manner in which such determination is made under section 2032A(e)(6). In the case that the person is a corporation, cooperative, partnership, estate, or trust, such determination shall be made at the shareholder, partner, or beneficial interests level (as the case may be).

`(C) ELIGIBLE FARMING BUSINESS- For purposes of subparagraph (A), the term `eligible farming business' means a farming business (as defined in section 263A(e)(4)) which is not a passive activity (within the meaning of section 469(c)).

`(3) FARMER-OWNED ENTITY-

`(A) IN GENERAL- The term `farmer-owned entity' means--

`(i) a corporation (including an S corporation) in which eligible persons own 50 percent or more of the total voting power of the stock and 50 percent or more (in value) of the stock,

`(ii) a partnership in which eligible persons own 50 percent or more of the total voting power of the profits interest and 50 percent or more (in value) of the profits interest, and

`(iii) a cooperative in which eligible persons own 50 percent or more of the total voting power of the member patronage interests and 50 percent or more (in value) of the member patronage interests.

`(B) CONSTRUCTIVE OWNERSHIP RULES- For purposes of subparagraph (A), rules similar to the rules of section 263A(e)(2)(B) shall apply; except that, in applying such rules, the members of an individual's family shall be the individuals described in subparagraph (C).

`(C) MEMBERS OF FAMILY- The family of any individual shall include only his spouse and children, grandchildren, and great grandchildren (whether by the whole or half blood), and the spouses of his children, grandchildren, and great grandchildren, who reside in the same household or jointly operate farming businesses (as defined in section 263A(e)(4)). For purposes of the preceding sentence, a child who is legally adopted, or who is placed with the taxpayer by an authorized placement agency for adoption by the taxpayer, shall be treated as a child by blood.

`(4) QUALIFIED INVESTMENTS-

`(A) IN GENERAL- The term `qualified investments' means a payment of cash for the purchase of a qualified equity interest in a farmer-owned entity.

`(B) QUALIFIED EQUITY INTEREST- The term `qualified equity interest' means--

`(i) any stock in a domestic corporation if such stock is acquired by the taxpayer after December 31, 2004, and before January 1, 2011, at its original issue (directly or through an underwriter) from the corporation solely in exchange for cash,

`(ii) any capital or profits interest in a domestic partnership if such interest is acquired by the taxpayer after December 31, 2004, and before January 1, 2011, and

`(iii) any patronage interest in a cooperative if such interest is acquired by the taxpayer after December 31, 2004, and before January 1, 2011.

Rules similar to the rules of section 1202(c)(3) shall apply for purposes of this paragraph.

`(d) Special Rules- For purposes of this section--

`(1) TREATMENT OF MARRIED INDIVIDUALS- In the case of a separate return by a married individual (as defined in section 7703), subsection (b)(3)(A) shall be applied by substituting `$15,000' for `$30,000'.

`(2) APPLICABLE RULES- Under regulations prescribed by the Secretary--

`(A) ALLOCATION OF CREDIT IN THE CASE OF ESTATES AND TRUSTS- Rules similar to the rules of subsection (d) of section 52 shall apply.

`(B) CERTAIN PROPERTY NOT ELIGIBLE- Rules similar to the rules of section 50(b) shall apply.

`(3) BASIS ADJUSTMENT- For purposes of this subtitle, if a credit is allowed under this section to any eligible person with respect to qualified value-added agricultural property, the basis of such property shall be reduced by the amount of the credit so allowed and increased by the amount of recapture under subsection (e).

`(e) Recapture in the Case of Certain Dispositions-

`(1) IN GENERAL- Under regulations prescribed by the Secretary, rules similar to the rules of section 50(a) shall apply with respect to an eligible person if, within the 5-year period beginning on the date qualified value-added agricultural property with respect to which such person was allowed a credit under subsection (a) is originally placed in service--

`(A) such property ceases to be qualified for purposes of this section,

`(B) the eligible person or the farmer-owned entity (as the case may be) disposes of all or part of such property, or

`(C) the eligible person or the farmer-owned entity (as the case may be) ceases to be an eligible person or farmer-owned entity for purposes of this section.

`(2) SPECIAL RULES IN EVENT OF DEATH-

`(A) IN GENERAL- The period in paragraph (1) shall be suspended with respect to an eligible person for the 2-year period beginning on the date of death of such person.

`(B) HEIRS WHO ARE ELIGIBLE PERSONS- In the case that an heir of an eligible person is also an eligible person, neither paragraph (1) nor subparagraph (A) of this paragraph (unless elected by such heir) shall apply with respect to the transfer of property to such heir.

`(f) Regulations- The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

`(g) Termination- This section shall not apply to property placed in service after December 31, 2010.'.

(b) Credit Allowed as Part of General Business Credit- Section 38(b) of such Code (defining current year business credit) is amended by striking `plus' at the end of paragraph (18), by striking the period at the end of paragraph (19) and inserting `, plus', and by adding at the end the following new paragraph:

`(20) in the case of an eligible person (as defined in section 45J(c)), the value-added agricultural property investment credit determined under section 45J(a).'.

(c) Credit Allowable Against Minimum Tax-

(1) IN GENERAL- Paragraph (3) of section 38(c) of such Code is amended--

(A) by inserting `AND VALUE-ADDED AGRICULTURAL PROPERTY CREDIT' after `EMPLOYEE CREDIT' in the heading,

(B) by inserting `and the value-added agricultural property credit' after `employee credit' each place it appears in subparagraph (A), and

(C) by adding at the end the following new subparagraph:

`(C) VALUE-ADDED AGRICULTURAL PROPERTY CREDIT- For purposes of this subsection, the term `value-added agricultural property credit' means the credit determined under section 45J.'

(2) CONFORMING AMENDMENT- Subclause (II) of section 38(c)(2)(A)(ii) of such Code is amended by inserting `or the value-added agricultural property credit' after `employment credit'.

(d) Deduction for Certain Unused Business Credits- Subsection (c) of section 196 of such Code is amended by striking `and' at the end of paragraph (11), by striking the period at the end of paragraph (12) and inserting `, and', and by adding after paragraph (12) the following new paragraph:

`(13) the value-added agricultural property investment credit determined under section 45J.'.

(e) Basis Adjustment- Subsection (a) of section 1016 of such Code is amended by striking `and' at the end of paragraph (30), by striking the period at the end of paragraph (31) and inserting `; and', and by adding at the end the following new paragraph:

`(32) to the extent provided in section 45J(d)(3), in the case of payments with respect to which a credit has been allowed under section 38.'.

(f) Clerical Amendment- The table of sections for subpart D of part IV of subchapter A of chapter 1 of such Code is amended by adding at the end thereof the following new item:

`Sec. 45J. Value-added agricultural property investment credit.'.

(g) Effective Date- The amendments made by this section shall apply to qualified investments (as defined in section 45J(c)(5) of the Internal Revenue Code of 1986, as added by this section) made, and property placed in service, after December 31, 2004.

END