When you dispose of property used in your farm business, your taxable gain or loss is usually a section 1231 gain or loss. Its treatment as ordinary income, which is taxed at the same rates as wages and interest income, or capital gain, which is generally taxed at lower rates, is determined under the rules for section 1231 transactions. When you dispose of depreciable property, that is section 1245 or 1250 property, at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Any remaining gain is a section 1231 gain, which may be taxed as a capital gain. However special rules and options may apply when property used in a trade or business is disposed of due to an involuntary conversion.

An involuntary conversion occurs when you receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, or certain other events such as weather or disease related conversions of livestock.

With drought conditions occurring in many farming areas in 1999 and the Winter/Spring of 2000, some livestock producers may have already sold, or will be selling, extra livestock. An awareness of, and proper treatment and documentation of, such transactions can have a significant affect on taxes paid on the sale of these animals. The same rules may also apply to animals disposed of due to a disease outbreak.

If livestock die from disease, or are destroyed, sold, or exchanged because of disease, even thought the disease is not of epidemic proportions, you may treat these occurrences as involuntary conversions. If the livestock was raised or purchased for resale, follow the rules for livestock applying to farming losses otherwise the rules for capital gains and losses will apply. However, you may be able to postpone reporting the gain. If you choose to do this, you must attach a statement to your return explaining that the livestock was disposed of because of disease.

If you sell or exchange livestock (other than poultry) held for draft, breeding, or dairy purposes, solely because of drought, flood, or other weather-related conditions, it is considered to be an involuntary conversion. Like animals disposed of due to disease, the gain or loss on these transactions is treated as ordinary farming income or capital gains or losses.

Only livestock sold in excess of the number you normally would sell under usual business practice, in the absence of weather-related conditions, are considered involuntary conversions. If you replace the animals, you may be able to postpone reporting the gains. If you do not replace the livestock, you may be able to report the gain in the following year's income.

If you choose to postpone the gain on weather-related sales of livestock, you must show the following information on a statement attached to your return for the tax year in which you first realize any of the gain: evidence of the weather-related conditions that forced the sale or exchange of the livestock; the gain realized on the sale or exchange; the number and kind of livestock sold or exchanged; the number of livestock of each kind you would have sold or exchanged under your usual business practice.

Subsequently you must show all of the following information on the return for the year in which you replace the livestock: the date you bought replacement livestock; the cost of the replacement livestock; the number and kind of the replacement livestock. To postpone all the gain, the cost of your replacement property must be at least as much as the reimbursement you eceive. If the cost of the replacement property is less than the reimbursement, you must include the gain in your income, up to the amount of the unspent reimbursement.

You must buy replacement property for the specific purpose of replacing your property. Your replacement property must be similar or related in service or use to the property it replaces. You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. If you spend the money you receive for other purposes, and borrow money to buy replacement property, you can still choose to postpone the gain if you meet the other requirements. Property you acquire as a gift or inheritance does not qualify as replacement property and you cannot postpone reporting a gain from a casualty, theft, or other involuntary conversion if you buy the replacement property from a related person.

To postpone reporting your gain, you must buy replacement property within a specified period of time. The replacement period begins on the date your property was damaged, destroyed, stolen, sold, or exchanged. The replacement period ends 2 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion.

Additional options are available for the involuntary conversion losses for livestock (and other items) in a Presidentially declared disaster area. A Presidentially declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Disaster Relief and Emergency Assistance Act. If you have a deductible loss from a Presidentially declared disaster area, you can elect to deduct that loss on your return or an amended return for the immediately preceding tax year. If you make this election, the loss is treated as having occurred in the preceding year.

This discussion presents some of the potential tax benefits of options available with the involuntary conversion of livestock. Due to space limitations, many important points could not be covered in detail. Livestock producers are advised to consult with their tax preparer for specific advice or refer to IRS Publication Number 225, Farmer's Tax Guide.

Last year=s mild winter, combined with our current drought conditions, have created a haven for variety of crop pests. So far this year, several insect pests have appeared earlier, and in greater numbers than ususal. Lack of soil moisture has increased the stress on soybeans, and this year it is more important than ever to scout your fields on a regular basis. The following are insects to look out for in your fields through the end of August.

Blister Beetles: Blister beetles are 2 - : inches long, slender, with narrow necks and long legs. Several species are present in our area, the most common is yellow and black striped blister beetle. Other species occasionally seen are solid gray or black. This pest is a general feeder, and is has often left the field by the time damage is noticed. Large numbers of blister beetles may cause isolated, extensive damage in certain areas of the field in July and August. Characteristic damage is removal of most of the leaf, with only the net-like web of leaf veins remaining.

Corn earworms: Also known as the soybean podworm, these worms are 12 inches long, green, pink, brown, or black, and have irregular light and dark stripes down their back. When disturbed, corn earworms curl into a C-shape and Aplay dead@. They feed on leaves and pods, and can reduce yields in a severe outbreak. Of the three generations, the third, which occurs in August or September, is the most damaging. Damage is usually most severe in late-planted or double-cropped beans.

Grasshoppers: Several grasshopper species attack soybeans, they range in color from yellow to brown. Grasshoppers feed on leaves and pods, leaving ragged, irregular holes when they feed on leaves. Feeding usually begins at end and border rows. Both nymphs and adults feed on beans, and scouting for nymphs (which look like small, wingless adults) should be done through June, as control measures are cheaper and more effective at this stage. Grasshopper damage is most likely in drought years, and occurs more uniformly in no-till beans. The threshold for control is 10 or more grasshoppers per square yard along field edges and four or more per square yard in the interior of the field, or when there is at least 50% defoliation during vegetative growth or 33% during bloom.

Green cloverworms: Both the green cloverworm and the looper are green caterpillars, at least one inch long at maturity, with thin white stripes. Green cloverworms have three pairs of middle legs, called prolegs. Their feeding leaves the top leaves of the plant looking ragged. They are most common in late-planted beans, and treatment for these worms is usually not necessary.

Loopers: Like the green cloverworm, the looper a green caterpillar with thin white stripes. While the green cloverworm has three pairs of prolegs, the looper has only two pairs. Both the looper and green cloverworm have many natural parasites and predators, and control is not usually necessary.

Potato Leafhoppers: These wedge-shaped leafhoppers have the general body shape of a grasshopper, but are small (c inch or smaller) and easy to miss. They suck sap from the underside of leaves, causing the leaves to turn yellow. A minor pest of soybeans, control is usually not necessary.

Southern Corn Rootworm: Also known as the spotted cucumber beetle, this yellow beetle with 11 black spots on its wings has a feeding pattern similar to that of the bean leaf beetle. The SCRW is a constant pest of soybeans, but usually a minor pest, and control measures are not necessary.

Spider mites: Spider mites cannot be seen without a hand lens. By sucking sap from the leaf undersides, a yellow, sandblasted appearance is left. Webbing beneath the leaves may be visible. This pest is most severe during a drought, with damage becoming evident in July and August. Scouting should begin on border rows. A heavy rain will often take care of the spider mite problem. Before treating affected plants, make sure that spider mites are present by shaking leaves over a white paper, and watching for movement of the mites.

Stink Bugs: Adult stink bugs are a green or brown color, can have up to three generations per year, and reach their peak population between August and September. Stink bugs primarily feed on developing pods and seeds, although they will also feed on stems, leaves, and flowers. Feeding on seeds and pods results in reduced seed number, size, and quality. Feeding on other plant parts may result in the Agreen bean effect@, delayed plant maturity and abnormal pod and leaflet production.

If you see crop damage you do not recognize, or would like control measures, please give me a call.

AG ENGINEERING NOTES
John Brumett
(573) 767-5273