Tree Farmer - January/February 2009 - (Page 30)

Carbon Sequestration Income Bill The compensation of Tree Farmers for the environmental services you provide is long overdue. The first major advance since conservation easements is payments for sequestering carbon, usually referred to as selling carbon credits. This is now possible in most regions of the united States. As with any new economic activity, existing contract and tax law applies until modified by legislation, the courts, and rulings of the irS and state revenue agencies. The lack of definitive rules during the intervening years makes taxpayers uncomfortable. How to Treat taxing issues By hoover This article presents my analysis of how the costs and revenues associated with carbon sequestration contracts should be treated for federal income tax purposes. Since the IRS has provided no guidance on this topic and no published analyses were found, my conclusions are meant to fulfill the immediate need of Tree Farmers incurring costs and receiving payments to report them on their tax returns. Your personal tax and legal advisors must be consulted to determine the treatment in your specific circumstances. My analysis does not constitute legal advice and has not been reviewed. Your comments and criticism of it are welcome. mined by the actual sale price of the unit, but otherwise tax treatment is determined by the terms of the contract between the Tree Farmer and the aggregator. These contracts do not use the language typically associated with leasehold interests in real property, but the end result appears to be the same. The Tree Farmer is contractually obligated to let grow and manage a designated mix of tree species according to standardized management practices on a defined area of land for a specified period of time. Most contracts are for trees planted on land that was not forested prior to afforestation or was a highly degraded forest. The Tree Farmer retains title to the land and the trees under contract and is obligated to provide the management and cover the costs necessary for the trees to grow as projected. In legal terms these contracts appear to establish a negative servitude, that is, an obligation for the owner of real property not to do something—not cut the trees in this case. As the holder of the servitude, the aggregator has the right to enter the property to verify that the terms of the contract are met. The Tree Farmer has not made an outright disposal of real property, but has in effect leased trees for a designated period of time and remains responsible for the management of the property. Tax Treatment of rental Property The tax treatment of rental property is well established. Costs of acquisition and major repairs are capital and recovered by depreciation or amortization in the case of improvements made by lessees. The costs of maintenance and provision of services associated with the rental activity are deductible against rental income. Rent payments are ordinary income. form of Contract for Tax Purposes Except for very large ownerships, Tree Farmers contract with an aggregator. This is an organization that accumulates a bundle of carbon contracts large enough in the aggregate to meet the minimum tonnage requirement to constitute a unit that can be traded on the Chicago Climate Exchange (CCX). The base amount of the payments received by the Tree Farmer is deter- William L. “Bill” Hoover is forestry professor, Extension coordinator, and assistant head for the Department of Forestry and Natural Resources, Purdue University 1159, W. Lafayette, IN 47907-1159; . 30 Tree Farmer JANUARY/FEBRUARY 2009

Table of Contents for the Digital Edition of Tree Farmer - January/February 2009

Treefarmer - January/February 2009
Contents
Cover Story
Inspectors Honored
Bears: The Good & the Bad
Wildlife matters
Tree Farmers Gather
Taxing issues
Tools & Techniques
Sharing your experience

Tree Farmer - January/February 2009