Giving Grain to Charity Instead of Cash
The Farmer’s Perspective:
Many of our farm clients like to make some of their gifts to charity, especially their local church, in the form of grain instead of cash. There are some really good reasons to make charitable contributions of farm products instead of cash. There is some paperwork involved, but the benefits are probably worth the effort. However, if you are making such giftswithout the proper paperwork, you are inviting Trouble to your next tax audit!
By giving the grain it is as though you get to take a tax deduction for the production expenses, too. You will be taking those expenses off on Schedule F (assuming you’re an operating farmer) and you don’t have to report income from the grain you give. Therefore it has the benefit of reducing your income tax, social security of self-employment tax liability and your state income taxes.
But you cannot write a check to the church to somehow represent grain you sold (that is probably obvious), and you can’t just tell the elevator to write the check to the church (this is not so obvious).
In order to be IRS compliant, there is a critical first step: you have to give up control of the grain. This requires a very specific paper trail. (If you are audited and you have no paper trail showing that you gave up ownership and control of the grain while it was grain, the IRS can say you had constructive receipt of that grain sale: that is, that you had the grain, you sold the grain, and then you simply directed your check to be made payable to the church instead of to you.)
So here is what you should do. Before delivering the grain for sale, you need to send or deliver a letter to the church saying, something like this:
“I’m giving you X bushels of corn and here is where it is located: _____ [this could be a bin on your farm, or could be in storage at the elevator, and doesn’t have to be segregated from the rest of your grain; but it should be a specific number of bushels]. Please send me written instructions (could be a letter, fax, email, so long as I can save a printed copy for my tax records) and tell me where and when you want your grain to be sold, and I will deliver it for you.”
Now the church has control of that grain and documentation to show it is no longer yours. If the church would ever after that direct you to sell their X bushels of grain that was stored [wherever you said it was] and you don’t do it, you could be convicted of stealing it! And that’s the point, there is written proof that there is grain in your possession (or even at the elevator in storage under your name) that you do not own, you are holding it for the church.
The church should respond in writing (again, email or fax would work, so long as you can and do print it out and save the paper for your records) with directions on when and where to sell its grain. When you receive such directions, and then are delivering the church’s grain, you have the documentation in hand to prove it isn’t yours, and that the elevator must pay the church for the church’s grain.
Note that the number of bushels given to the church doesn’t have to match the number of bushels in a particular delivery. If your truck holds about 500 bushels, and you gave the church 500 bushels, but the actual delivery is 496 bushels, you haven’t delivered all of the church’s grain in that load. You will need to make sure they get 4 bushels from another load. Be practical, and your church will be, too. Make sure they know about what you can deliver, and it would be much easier to have the church instruct you to sell 250 bushels, in which case you tell the elevator “250 bushels of this load belongs to the church, the rest of it is on my account.” Keep this in mind when you actually make the gift, too.
The Elevator’s Perspective:
From the elevator’s side of this transaction there is probably no tax risk. It received grain and paid for it. The elevator can send the check to the church instead of the farmer who delivers the grain, if the farmer tells them to do so. To the elevator, for their tax records, it really doesn’t matter who they paid or whose grain it was.
In the business transaction, a farmer or his hired help drives up, weighs, unloads, weighs again, and you (elevator personnel) place the grain on the farmer’s account: sold at today’s price, credited toward a prior contract, or to be stored until sale instructions are received. A receipt is given. You are accustomed to receiving spoken instructions from whoever is delivering it. At times nothing is said at all, you simply recognize the farmer delivering the grain.
But what if the farmer orally tells you (elevator personnel) “this load is for my church, send them the check,” then later the farmer claims he gave no such directive? It would be a rare farmer to be so dishonest, of course, but the pressure of an audit might make someone do something we wouldn’t expect him to. If the farmer were audited, and his claimed tax deduction is not respected, he just might claim he never provided such instructions and that he was supposed to receive credit for the delivery, that the money was his and the grain was his, and that the elevator should never have sent the check to the church!
When a person delivers the grain, you can assume the person in possession (making the delivery) is the owner, or is an agent/employee of the owner. As a matter of fact, the better you (elevator personnel) know the person delivering, and the fact that you can “assume” the grain is for that particular farmer, makes it less reliable for you to do anything but put it on the farmer’s account. Unless you receive something very direct to the contrary, should you accept a shouted, “this one is for First Church!” instruction?
Be careful to document the instructions you are given, and make sure all paperwork matches those instructions. Do you need to receive copies of the documentation that the Farmer and Church created? There is no such requirement, but it would not be a bad idea. So that you know who owns the grain, and to whose credit it should be placed, why not make it a policy? By adding this “inconvenience” to your procedure you might be helping “force” the farmer to keep his own documentation in order, and that could save the farmer from losing his own tax deduction in an audit someday. What might the policy be?
When grain being delivered is to be credited to a party who is outside of the usual pattern for the person making the delivery, the party making the delivery should provide you with documentation showing who owns the grain and leave a copy for the elevator file. The documentation would include the following:
1. A copy of a paper saying that X bushels have been given to the church/charity, and
2. A copy of instruction from that owner (church/charity) directing the person to deliver and sell.
Such documentation should be available, if the farmer is doing what he ought for his own records.
To ensure compliance with requirements imposed by U.S. Internal Revenue Service we hereby inform you that tax advice, if any, contained in this communication (including attachments) was neither written nor intended to be used and cannot be used by any Taxpayer for the purpose of (1) avoiding tax related penalties that may be imposed under U.S. tax law or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
The author is not rendering legal, accounting or other professional advice or opinions on specific facts or matters, assumes no liability whatsoever in connection with its use and no client-attorney relationship is created by reading this communication. Readers should seek legal advice before taking any action with respect to the matters discussed herein.