Tobacco quota owners must determine the basis or adjusted basis of the tobacco quota in order to calculate their gain or loss for federal and state tax purposes should a tobacco quota buyout occur.

There are generally three ways an individual can acquire tobacco quota and basis in the quota. Those ways are: by purchase, by inheritance or by gift. Basis may also be "adjusted" if there has been a change to the basis value, for example, by amortization of quota basis.

What is the basis of quota acquired by PURCHASE?
Quota owners who have purchased quota should have a relatively simply task in determining the basis of that quota. Generally basis will be what the quota owner paid for the quota "lot" ("lot" means total pounds involved in the particular purchase).

Example 1. Leif Brown purchased 5,000 pounds of tobacco quota from his maiden aunt in 1997 for $2.00 per pound.

Question: What is the basis of the quota Leif bought?
Answer: $10,000 is the cost basis of the quota. Leif should retain a record of this purchase in his permanent farm records.

Question: If the Secretary of Agriculture changes the national tobacco quota, does the basis of Leif's quota change?
Answer: No. For the quota "lot" that Leif bought from his aunt, the basis does not change; it remains $10,000. However, the basis per pound in the "lot" will change as quota increases or decreases.

Question: If quota has gone down 50% (2500 pounds) since 1997, what is the basis per pound of Leif's quota?
Answer: Leif's basis in the "lot" remains $10,000, however, the basis per pound is now $4.00 ($10,000/2500 pounds) an increase of $2.00 per pound. Leif still paid $10,000 for the original "lot" therefore, it does not change.

What is the basis of quota acquired by INHERITANCE?
Quota owners who receive assets as a bequest or inheritance from a decedent, have a basis equal to the fair market value (FMV) of the asset on date of death of the decedent (six months after the date of death if the alternate valuation date is elected). Assets, such as tobacco quota, that are inherited qualify for long-term capital gain (loss) treatment for income tax purposes. [I.R.C. §1223(11)]

Example 2. Sam Jones inherited land and 7,500 pounds of tobacco quota attached to that land from his father when his father died. The land was valued in the estate at $50,000 and the quota was valued at $15,000.

Question: What is Sam's basis in tobacco quota he inherited from his father's estate?
Answer: The basis is $15,000 for the "lot" of quota ($2.00 per pound) and is deemed to have a "long-term" holding period.

Question: What if the land and quota was inherited but the quota was not valued as a separate asset. What is the basis of the quota?
Answer: The quota owner needs to make an allocation for the value of the quota. Example 6, below, illustrates how this allocation might be made. In this case, the year of the death is important to look to, as assets are allowed to be "stepped up" to fair market value on the date of death. A similar method is used to calculate the basis as described in the discussion of Example 6.

What is the basis of quota acquired by GIFT?
Quota owners who receive assets, such as tobacco quota, as a gift, have the donor's carryover basis in the asset increased by the portion of gift taxes attributable to the appreciation in value of the property. There is not a "step-up" to the FMV of the gift on the date of the gift.

Example 3. Sam Jones, from Example 2, receives the farm and tobacco quota as a gift from his father Bill. When BIll purchased the land and quota, he allocated $20,000 of the $23,600 purchase price to the land and $3,600 of the purchase price to the tobacco quota. Bill did not owe any gift taxes.

Question: What is Sam's basis in the tobacco quota?
Answer: Sam has a carryover basis from Bill, which is $3,600. Sam should make a note of this basis in his permanent farm records.

If Quota has been amortized, for example, what is the ADJUSTED BASIS?
If quota owners have incorrectly taken amortization deductions for the tobacco quota purchased after August 10, 1993, the basis of their quota is adjusted by the amount of amortization taken. Quota basis may also be adjusted due to other factors such as changes made by USDA or inheritance.

Example 4. Bob Smith bought tobacco quota in January of 1994 for $10,000. Bob amortized his quota for one year due to the confusion surrounding the intangible life issue when Congress created the 15-year life for intangible assets. Bob deducted $333 of amortization on his 1994 tax return. In 1995 Bob stopped taking the amortization expense for tobacco quota.

Question: What is Bob's basis in his tobacco quota?
Answer: The adjusted basis, due to the amortization deduction taken, is $9,667.

What is quota basis if there are NO RECORDS?
If quota owners do not have records, but acquired the quota from other than the US Government when it was originally assigned (1938), how then is basis determined? Quota owners may be able to allocate a value to basis from historical records. These records might come from permanent farm records, but where allocation to quota was not made at the time of purchase. Historical records might be obtained from the county appraiser's office, real estate transaction records for a county, or from research sources such as USDA, NCDA or Extension Service.

Quota owners attempting to calculate a basis value without actual data must remember the three general methods of acquiring basis and NOT simply pick a number. A good faith effort on the part of the quota holder must be made. If an historical data set is available, quota holders may be able to extrapolate a value of tobacco quota many years after the quota was acquired.

See the list below for sources providing historical data that may help in the calculation of basis.

Example 5. Dyrt Clodd bought an 100 acre farm in 1976 in Aggie County. Dyrt paid $1,850 per acre for the land and attached quota for a total of $185,000. Quota attached was 800 lbs per acre. Unfortunately Dyrt did not make an allocation at the time of purchase between the land and the quota. Dyrt may receive a buyout of his tobacco quota; Dyrt wants to determine his basis for income tax planning and future possible tax reporting.

Question: How can Dyrt determine his basis in his tobacco quota 26 years after the purchase of the farm?
Answer: Dyrt knows what was paid for the land, $1,850 per acre.

If research indicates that in 1976 the value of tobacco quota was $800 per acre ($1.00 per pound) he may be able to defend a basis allocation of $80,000 ($800 per acre x 100 acres) since he in fact purchased land in 1976 and historical records support the $1.00 per pound quota value.

Question: Where did Dyrt get the historical data?
Answer: Dyrt obtained the data from his county appraiser's office at the Aggie county seat. The office had historical records of land with and land without tobacco quota. If the appraiser's office does not have records then other information sources as listed below might also provide similar data for a basis calculation.

CAUTION: Quota holders must apply a good faith effort in deter-mining the basis of tobacco quota when records for the farm are missing. When using third party historical data to calculate basis of tobacco quota erring on the side of conservatism is prudent.

Sources that may provide data:

• Farm Real Estate Values in the United States by County 1850 - 1982. USDA, ERS Statistical Bulletin 751, Published March 1987.
• County Appraisers Office of Local County
• Historical records from Real Estate agencies

DISCLAIMER:Information provided is for educational purposes only: nothing herein constitutes the provision of legal advice or accounting services. Quota owners should contact their tax practitioner relative to their circumstances in regards to these issues.

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