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Post-buyout update

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Quota holders and growers started receiving tobacco buyout checks in July.

Rocky Womack

Moot says the checks are in the mail. That’s right. John “Moot” Truluck, director of the U.S. Department of Agriculture and Farm Service Agency’s (FSA) Tobacco Division in Washington, D.C., confirms that more than 40,000 quota holders and growers started receiving tobacco quota buyout checks in the form of electronic transfers
beginning in mid-July. The process will continue through September, until all who signed up and were eligible receive the first year’s payment. He estimates that more than 600,000 quota holders and growers signed contracts, with about $9.1 billion requested for payment.

Some request duplication may have occurred, however. “When we took applications, we didn’t screen them,” Truluck says. “I think that’s pretty well in line, but it’s going to be difficult to hit 100 percent.”

Quota holders and growers who are having difficulty with paperwork or contacting heirs to the quota can still work things out by September at the FSA, he says, as long as they signed up for the buyout by June 17, 2005.

Truluck says the federal government’s Commodity Credit Corp. (CCC), which is issuing the currently distributed checks, will also make buyout payments for 2006 through 2014 in mid-January of each year for quota holders and growers who elected to receive payments over the 10-year period.

Signup for buyout payments began March 14 and ended June 17 at local FSA offices. The buyout occurred as a result of U.S. President George W. Bush signing the Jobs Creation Act of 2004 on Oct. 22. That legislation included the Fair and Equitable Tobacco Reform Act, which established the Tobacco Transition Payment Program (TTPP), better known as the tobacco quota buyout. Man-ufacturers and importers of tobacco products are paying for the buyout through quarterly assessments that will not exceed $10.14 billion over a 10-year period starting in 2005.

Under the TTPP, quotaholders will receive $7 per pound based on their quota at the 2002 marketing-year level. Active growers receive $3 per pound based on their share of the risk in the 2002, 2003 or 2004 crops. Active growers are considered owners, operators, landlords, tenants or sharecroppers. These active growers could receive a total of $10 per pound from the tobacco quota buyout ($7 as a quota holder, $3 as an active grower).

Growers eligible for the buyout are those who raise flue-cured, burley, dark fire-cured, dark air-cured, Virginia sun-cured and cigar filler/binder tobaccos.

The payment process
Under the buyout terms, quota holders and growers can receive their annual payments over 10 years from the CCC, starting in 2005. Will they be assured of their money over 10 years? While Truluck says the FSA cannot guarantee payment, he says the CCC has never defaulted on a loan in its history, and he does not foresee that happening over the 10-year period of the buyout contract.

If quota holders and growers want their money sooner rather than stretching it over 10 years, they can elect to take a lump-sum payment beginning in years 2-10 from a financial institution, private entity or an individual. Truluck says the CCC has no authority to make lump-sum payments.

As a lump-sum payment, quota holders and growers can agree to an assignment contract at any time from a third party or a successor-in-interest contract from a third party beginning in years 2-10 of the buyout. If the quota holder or grower decides to enter into a lump-sum payment during any of the years 2-10 (successor-in-interest contract), they must do so by Nov. 1 of the year they choose before they can receive scheduled January buyout payments.

Under an assignment contract, they retain ownership of their buyout contract, and the financial institution holds it for them. The quotaholder or grower can revoke an assignment contract as long as the assignee agrees.

Under the successor-in-interest contract, the financial institution, private entity or individual whom quota holders and growers choose pays a lump sum to them. However, the third party receives ownership of the buyout contract, meaning the quota holder and grower no longer have contracts with the CCC. At the same time, the third party offers an agreed-upon percentage or discount rate for the payments up front to the quota holder or grower. For example, let’s say a quota holder or grower will receive a $100,000 buyout payment. If the discount rate offered is 5 percent, the quota holder’s or grower’s lump-sum payment would be $77,217, according to a scenario from Virginia Tech. At 6 percent it would be $73,601, and at 7 percent the payment would be $70,236.

The percentage a third party offers cannot exceed the cap that the CCC places on it. This federal agency has set the discount rate at the prime rate plus two percentage points, rounded to the nearest whole number. To view the current prime rate, quota holders and growers can go to http://federalreserve.gov/releases/h15/update. The CCC also will issue a monthly press release of the rate. Quota holders and growers cannot revoke a successor-in-interest contract, which can be sold to another party. Assignment contracts start in fiscal year 2005 (Oct. 1 through Sept. 30). Successor-in-interest contracts start fiscal year 2006. For more information on these type of contracts, quota holders and growers can visit their local FSA office.

If they visit the FSA Web site at www.fsa.usda.gov/tobacco, they can figure assignment and successor-in-interest payments using a tobacco lump-sum calculator with directions on how to use it. They just enter specific information such as the prime rate, a discount rate, their annual buyout payment, the lump-sum offer by the third party, the date of the lump-sum payment, and the date of the first scheduled buyout payment. They also can enter other information to assist them in their decisions.

Think before acting
When considering whether to take a lump-sum payment, be aware of scams, says Blake Brown, an economist with North Carolina State University. With this much money on the line, he says they are possible. Brown also advises quota holders and growers to seek out the best lump-sum payment options available to them, because some good options will exist from third parties. Besides looking at options, he says quota holders and growers should consider the tax implications facing them.

Each person’s tax situation will be different, so relying on the neighbor next door for advice is a disaster waiting to happen. Truluck advises quota holders and growers to seek a tax advisor or good accountant. The Internal Revenue Service (IRS) has ruled that the buyout payments of quota holders will be taxed as capital gains because tobacco quota is considered an interest-in-land. A gain occurs if payments amount to more than the owner’s adjusted basis in the quota. A loss occurs if the payments equal less than the owner’s adjusted basis. If the buyout payment is $600 or more in a taxable year, the USDA will report the payment of quota holders on Form 1099-S, Proceeds From Real Estate Transactions, according to the IRS. If the interest amount is $600 or more in a taxable year, USDA will report it on Form 1099-INT, Interest Income.

The challenge
The tobacco quota buyout was a major undertaking for the FSA’s Tobacco Division. “It has been a tremendous challenge, because we were virtually working on it as the bill was signed,” Truluck says. “It was a complex law. The magnitude of it was the biggest thing and getting the word out to the people. It will be remarkable how many things went well, but I’m sure there will be some things we didn’t foresee.

“There’s still a lot of work going on [in Washington, D.C.],” he continues. “There will still be things going on with the program for 10 years. There will be changes that have to be made.”

For more information on the buyout, visit the FSA Web site www.fsa.usda.gov/tobacco, and the university site www.tobaccobuyoutinfo.com.