TN 14 (06-07)
SI 01140.320 Tobacco Transition Payment Program (TTPP) or The Tobacco Buyout
Citations:7 CFR 1463.100-1463.114
On October 22, 2004 Congress enacted the, “Fair and Equitable Tobacco Reform Act of 2004 which repealed the tobacco quota system for certain types of tobacco grown in the United States and provides for compensating tobacco quota holders and quota producers with the value of lost quota. The United States Department of Agriculture (USDA), in its regulations, established the TTPP also known as the Tobacco Buyout, whereby eligible quota holders/producers, who apply for the program, can receive annual installment payments over a 10-year period (2005-2014) as compensation for lost quota.
The TTPP does not provide for a lump sum payment in lieu of the installment payments. However, it permits the quota holder/producer to enter into an assignment or successor-in-interest contract and receive a discounted cash payment in exchange for the installment payments. The successor-in-interest option to contract with financial institutions first became available 10/14/2005 after receipt of the 2005 installment payment. The successor-in-interest option to sell the contract to a family member was effective 03/20/2006.
An individual could have multiple USDA contracts if he or she owned quota or produced eligible tobacco in different counties.
An assignment is a contractual agreement between the quota holder/producer (assignor) and a third party (assignee) whereby the quota holder/producer transfers all or part of the Tobacco Buyout installment payments to a third party for a cash payment or like-property. The quota holder/producer retains ownership of the USDA Tobacco Buyout contract including tax liability on the installment payments. An assignment, which can be done at any time, must be accepted by both the quota holder/producer and the third party before it can be approved by the Commodity Credit Corporation (CCC).
2. CCC Maximum Discount Rate
The CCC maximum discount rate is the highest percentage rate a CCC approved financial institution can charge in determining the lump sum cash payment to the quota holder/producer.
The CCC establishes the maximum discount rate the first of each month and posts it to the USDA Internet web site at www.fsa.usda.gov.
The CCC does not apply the maximum discount rate to:
Contracts with family members,
Transfers upon the death of a quota holder/producer,
Individuals who purchased a tobacco marketing quota before 10/22/2004 and placed the quota on a farm with the owner’s consent before that date, or
one-year contracts with CCC approved financial institutions as long as the discount rate is the same rate the financial institution charges other customers.
3. Family Member
For the purposes of the Tobacco Buyout a family member is a parent; grandparent or other direct lineal ancestor; child or other direct lineal descendant; spouse; or sibling of a tobacco quota holder/producer.
4. Imputed Interest
Imputed interest is a term used by the IRS to describe interest considered to be paid, even though no explicit interest payments have or will be made. Imputed interest generally applies to circumstances involving installment sales or other deals that involve delayed payments or future payments. The portion of the selling price that represents interest on the delayed installment payments is recognized as “imputed interest.” Imputed interest is not income for SSI.
5. Quota Holder
A quota holder is the individual who owns the land to which tobacco quota was assigned.
6. Quota Producer
A quota producer is the individual who planted and produced a tobacco crop on land with assigned quota. A quota producer includes land owners, operators, landlords, tenants or sharecroppers who shared in the risk of producing tobacco during any of the 2002, 2003 or 2004 marketing years.
A successor-in-interest contract is a contractual agreement between a quota holder/producer and a CCC approved financial institution whereby the quota holder/producer sells the USDA contract, including all remaining installment payments, to a CCC approved financial institution in exchange for a discounted lump sum payment. Successor-in-interest contracts can also be between family members or individuals who purchased quota before 10/22/2004 and placed it on a farm with the owner’s consent before that date. The CCC must approve all successor-in-interest contracts.
8. Tobacco Quota
Tobacco quota represents the pounds of tobacco allocated to a farm that can be grown and marketed from that farm.
The TTPP, otherwise known as the Tobacco Buyout, is the name assigned to the regulatory process for compensating individuals for lost quota when the tobacco quota system was repealed by the Fair and Equitable Tobacco Reform Act of 2004.
C. Policy—USDA Contract As a Resource
The USDA contract for the installment payments is a resource as of the month following the notification date month shown in item 2 on the CCC-960, “Tobacco Transaction Payment Notification of Contract Approval and Appeal Rights”, because the contract can be converted to cash by entering into an assignment or successor-in-interest contract. See SI 01140.320F. for determining the cash value of the USDA contract.
D. Policy—Assignment or Successor-in-Interest Contract
1. Conversion of a resource
If the claimant enters into an assignment or successor-in-interest contract with a CCC approved financial institution, the transaction is considered a conversion of a resource in the transaction date month.
Since each contract must meet CCC maximum account guidelines, the cash received is considered fair market value for the installment payments and, thus, a resource transfer penalty does not apply.
EXCEPTION: An assignment or successor-in-interest contract between the quota holder/producer and a family member or individual who purchased the claimant’s quota before 10/22/2004 and placed it on a farm with the owner’s consent before that date must be evaluated under the transfer of a resource policy in SI 01150.003 because a transfer penalty may apply. This is because the CCC maximum discount rate guidelines do not apply. Develop the fair market value (FMV) of the contract under SI 01140.320F.
2. Cash payment
a. Quota holder
If the claimant is a quota holder, any cash received as a result of the assignment/successor-in-interest contract that is retained as of the first moment of the month following the transaction date month is considered a resource.
b. Quota producer
If the claimant is a quota producer, any cash received from entering into an assignment or successor-in-interest contract is considered NESE for the transaction date year.
NOTE: The policy for quota producers is an exception to the normal resource policy. We adopted the Internal Revenue Service policy for quota producers which is to treat the cash payment as NESE for the year it is received.
3. Assignment for other property
If the claimant enters into an assignment contract with a third party in exchange for other property, e.g., a new tractor, the transaction is considered a conversion of resource in the assignment date month and the property obtained becomes the new resource as of the first moment of the month following the assignment date month. See SI 01150.003 for the procedures for resource transfers since a penalty may apply and SI 01140.320F. for determining the contract value.
4. Assignment is revoked
If the assignment is revoked, the quota holder/producer may enter into another assignment or a successor-in-interest contract. The revocation of the assignment is treated as a conversion of a resource in the month the contract is revoked and the discounted cash value of the USDA contract is a resource as of the first moment of the month following the revocation date month.
NOTE: An assignment is revocable only by the assignee (third party).
E. Policy— Death of quota holder/producer
If the quota holder/producer dies, the right to receive the installment payments transfers to his or her surviving spouse. If there is no surviving spouse, the right to the installment payments transfers to the quota holder’s/producer’s estate.
F. Procedure—Determining the Resource Value of the USDA Contract
Determine the resource value of the USDA contract as follows:
Does the claimant have a copy of the CCC-960?
If YES, verify:
eligibility for the installment payments (item 2),
whether the claimant is a quota holder/producer, and
the total amount payable in installment payments.
Subtract from the total amount due in installment payments as shown on the CCC-960, all installment payments that the claimant already received or assigned to a third party.
Go to STEP 3
If NO, go to STEP 2.
If the CCC-960 is unavailable, determine the value of the USDA contract by:
NOTE: A list of the local USDA county offices and contact information is available at www.fsa.usda.gov. Click on “contact us” in the tool bar. On the next screen scroll down to the heading, “County Offices” and click on, “Locate the Service Center closest to you.”
Go to STEP 3
NOTE: To obtain the monthly discount rate for each month in the current year, go to the USDA’s Internet web site at www.fsa.usda.gov. On the homepage click on “more” to the right of “News Releases” and scroll down to find the specific monthly release entitled, “USDA Announces CCC Lending Rates for (month of announcement).
To find the monthly releases for previous years, on the homepage enter the year in the, “View News Releases by Year”, field and scroll down to the specific monthly release. Click on the item to open it.
EXAMPLE: Mr. Smith applied for SSI benefits on 11/15/2006. During the claims interview, he submits a copy of his CCC-960 indicating a notification date of 12/04/2005 and 8 annual installment payments totaling $7104. The claims representative (CR) checks the USDA Internet web site for the December 2005 discount rate. The rate is 10 percent. The CR multiplies $7104 by .9 to obtain the discounted cash value of the contract which equals $6394. Since Mr. Smith’s USDA contract meets the definition of a resource in 12/2005, the $6394 is a countable resource effective 11/2006. Mr. Smith is over the SSI resource limit and not eligible for SSI benefits. The CR denies his claim and advises Mr. Smith to contact SSA when his resources fall below the SSI resource limitation of $2000.
G. Procedure—Assignment/Successor-in-Interest Contract
Follow these procedural steps for assignments and successor-in-interest contracts:
Did the claimant enter into an assignment contract?
verify that the CCC approved the assignment by obtaining a copy of the CCC assignment form from the claimant or by contacting the local USDA office.
review the CCC assignment form to determine the parties involved and the amount assigned, and
obtain a copy of the third party agreement between the claimant and the financial institution/third party to verify the cash payment or property the claimant received in exchange for the assigned installment payment amount.
NOTE: An assignment to a family member or to a third party for property that is less than FMV may result in a transfer of a resource penalty. See SI 01150.003 for the procedures for resource transfers. Use the contract value developed in SI 01140.320F. as the resource value.
Go To STEP 2
If NO, Go to STEP 3
Quota holder :
Treat the cash payment that the quota holder receives as a conversion of a resource in the assignment date month.
Treat the cash payment to a quota producer as NESE in the assignment date year.
Did the claimant execute a successor-in-interest contract?
Obtain a copy of the:
successor-in-interest contract from the claimant or by contacting the National Tobacco Processing Center (NTPC) at 1-800-673-2331 to verify that the third party bought the USDA contract from the claimant, and
third party contract between the claimant and the third party to determine the terms of the contract, i.e., the amount of the lump sum and when it was paid to the claimant.
Go to STEP 4
If NO, Go to STEP 5
Treat the successor-in-interest contract as a conversion of a resource in the month it was executed and the lump sum cash payment, if retained, a resource as of the first moment of the month following the receipt date month.
Assume that a successor-in-interest contract between a quota holder and a CCC financial institution is a conversion of a resource for FMV, i.e., no resource transfer penalty applies. If the third party is not a CCC approved financial institution, review the third party contract carefully and determine if a transfer for less than fair market value applies. See SI 01150.005 for the resource transfer policy. To determine FMV, see SI 01140.320F.
Treat the discounted lump sum payment to a quota producer as NESE for the year in which the lump sum payment is received.
Count the value of the USDA contract as a resource per SI 01140.320C. See SI 01140.320F. for determining the resource value of the contract.
Record the pertinent information, e.g., contract number, date of contract, quota holder/producer designation, third party contact information, discounted lump sum amount, from documents submitted (CCC-960, other CCC forms or third party contracts) on the EVID screen.
If a contact is made to verify information with the local USDA office or NTPC, record the contact person’s name, date of contact and the information obtained on the Modernized Supplemental Security Income Claims System (MSSICS) DROC screen, or for non-MSSICS cases, use the remarks field of the SSR.
Mr. Jones, a quota holder, submits a CCC-960 indicating his notification date as 05/17/2005 and ten annual installment payments for a total of $7500 due. On 05/20/2005, Mr. Jones went to State Bank to negotiate obtaining cash for his USDA contract. State Bank agreed to pay Mr. Jones $6300 for his contract. On 05/25/2005 Mr. Jones completed the required CCC form at his local USDA office to assign his 10 installment payments to State Bank. The USDA office approved his request and State Bank paid Mr. Jones $6300 in 05/2005 in exchange for the installment payments. Mr. Jones submitted a copy of the agreement he entered into with State Bank which verified he received a discounted cash payment in exchange for the installment payments. The $6300 check Mr. Jones received is considered a conversion of a resource in 05/2005 for fair market value. Since Mr. Jones retained the money into June 2005, he is ineligible for SSI benefits effective 06/2005 based on excess resources.
If Mr. Jones is a quota producer, the $6300 payment he received from State Bank in 05/2005 would be considered NESE for 2005.
J. Process--IRS Alerts
1. Quota holder
A quota holder will receive one IRS-1099-S (capital gains) in the CCC-960 notification date year. He or she may also receive an IRS-1099-INT if the USDA contract is less than $250,000 or an IRS-1099-OID if the USDA contract is equal to or exceeds $250,000. The IRS-1099-INT and IRS-1099-OID represent imputed interest which is not income for SSI purposes. However, receipt of the IRS-1099-INT or IRS-1099-OID is an indication that the claimant is an owner of a USDA contract that may have significant cash value.
2. Quota Producer
A quota producer will receive an annual IRS-1099G for the value of that year’s installment payment unless he or she executes a successor-in-interest contract. If a successor-in-interest contract is executed, the buyer of the contract will receive all future IRS-1099Gs.
K. Procedure—Processing IRS Alerts
Follow the procedures in SI 02310.007 for processing IRS alerts and SI 02310.045 for information on the IRS interface.
Do not count as income to the quota holder the imputed interest reported on IRS-1099-INT or IRS-1099-OID. However, receipt of the IRS-1099-INT or IRS-1099-OID is an indication that the claimant is an owner of a USDA contract that may have significant cash value.
If there is no determination in MSSICS regarding the cash value of the Tobacco Buyout contract, determine:
the cash value by following the procedures in SI 01140.320F. and
whether the claimant entered into an assignment or successor-in-interest contract. If yes, follow the procedures in SI 01140.320G.
If the claimant has questions about the Tobacco Buyout or wants a list of approved financial institutions, refer the individual to the local USDA/FSA office or its Internet web site at www.fsa.usda.gov/tobacco.
NOTE: The local USDA office handles questions regarding