The prices which farmers and ranchers pay for inputs have generally increased in recent years while the prices which they receive for their production have remained at the same level or declined, largely because of excess production. This cost-price squeeze has resulted in low returns to the resources employed in the farming and ranching industry. The resultant of these low returns has been an increased interest by farmers and ranchers as to the possible effects of federal income tax regulations on the supply and price of farm and ranch products.
Some ranchers and farmers feel that the provisions of the federal income tax regulations with respect to capital gains have tended to promote the movement of excess capital into the agricultural industry, especially the beef breeding sector, through investments by high income nonfarm persons. The overvaluation of resources in the agricultural industry, specifically the beef breeding sector, is evidenced by the low returns to the resources in the agricultural industry. If overvalued resources in the agricultural industry are causing the low returns, the problem to be studied is whether the excess capital is caused to flow into the agricultural industry as a result of the federal income tax regulations on capital gains.
In short, the problem to be studied is whether high-income nonfarm persons are able to increase after tax net income by investing in agriculture. This possible increase in after tax net income to be studied will come through the conversion of ordinary income into essentially capital gains under certain provisions of the Internal Revenue Code. The study will also include the effect of different systems of farm organization of after tax net income of ranch and farm owner- operators.
The objectives of this study are:
1. To determine the effects of Section 1231 of the Internal Revenue Code on farm and ranch owner-operators.
2. To study the possibility of Section 1231 as an incentive for high income nonfarm individuals investing in a large ranch.
3. To determine the effects of variations in ranch and farm organization of the after tax income of the large ranch owner-operator, and of high income nonfarm persons who invest in a large ranch.
Advisor: Abram W. Ep
