Rev. Rul. 80-22

ISSUE

Must a mutual casualty insurance company file a Form 1099-MISC, Statement for Recipient of Miscellaneous Income, to report the payment of hail crop insurance proceeds to a farmer required to capitalize expenses pursuant to either section 278 or 447 of the Internal Revenue Code if the farmer has informed the insurance company that the expenses have been capitalized?

LAW AND ANALYSIS

Section 6041(a) of the Code requires that all persons engaged in a trade or business and making payment in the course of such trade or business to another person of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income, of $600 or more in any taxable year, shall render a true and accurate return in such form and manner and to such extent as may be prescribed by the regulations.

Section 278(a) of the Code requires the capitalization of certain expenses attributable to the planting, cultivation, maintenance, or development of any citrus or almond grove. Section 278(b) requires the capitalization of certain expenses of a farming syndicate engaged in planting, cultivating, maintaining, or developing a grove, orchard, or vineyard in which fruits or nuts are grown.

Section 447 of the Code requires the capitalization of preproductive period expenses of a corporation engaged in the business of farming and a partnership, one of whose partners is a corporation, engaged in the business of farming.

Section 1.6041-1(a)(2) of the Income Tax Regulations provides that the return required by section 6041(a) of the Code shall be made on Forms 1096 and 1099.

Section 1.6041-1(c) of the regulations defines "fixed or determinable income." Income is fixed when it is paid in amounts definitely predetermined. Income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained.

Rev. Rul. 78-110, 1978-1 C.B. 390, holds that a mutual casualty insurance company is required to file information returns to report hail crop insurance proceeds paid to farmers who elect, under section 451(d) of the Code, to include such proceeds in income for the taxable year following the taxable year that the crop was destroyed. The election provided by section 451(d) does not affect the status of the insurance proceeds as fixed or determinable income.

The capitalization of expenses under either section 278 or 447 of the Code will establish the farmer's basis in the crops. The determination of whether any insurance proceeds received for the destroyed crops are in excess of the basis of the destroyed crops and, thus, constitute "gains, profits, or income," depends upon the farmer's basis in the crops. Because the insurance company cannot require a farmer to disclose the basis in the destroyed crops, the amount of "gains, profits, or income," if any, resulting from the payment of the hail crop insurance proceeds is not fixed or determinable by the company.

HOLDING

The company is not required to file a Form 1099-MISC if the farmer has informed the insurance company that expenses have been capitalized pursuant to either section 278 or 447 of the Code. However, if the farmer does not inform the insurance company that the expenses have been capitalized pursuant to either section 278 or 447, the company is required to file a Form 1099-MISC.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 78-110, 1978-1 C.B. 390, is clarified to the extent that if the farmers making the election under section 451(d) of the Code were also required to capitalize expenses pursuant to either section 278 or 447, the holding of this present revenue ruling would apply.