This bulletin contains a summary of the Act. There are several procedural and regulatory issues that have yet to be decided, and these issues are highlighted below. Please watch for a future Poyner & Spruill Tobacco Buyout Bulletin for more on these issues.

Greg Camp, Partner, Business Organizations Practice Group 

What We Know Today

The Act uses different eligibility requirements and formulas to determine the buyout payments for quota holders and for growers. 

Quota Holder Information

To be eligible for the buyout, quota holders must have owned a farm on October 22, 2004 for which a basic tobacco quota or allotment was established for the 2004 marketing year. The Act allows the Secretary of Agriculture (the "Secretary") to determine the eligibility of parties who agreed to sell such a farm or transfer quotas on or before October 22, 2004. 

The Secretary will establish a base quota level for eligible quota holders, determined by their poundage quotas for the 2002 marketing year or by their marketing quotas or allotments for the 2002 marketing year. These will be adjusted by the average production yield during the 2001, 2002, and 2003 crop years. Eligible quota holders will receive $7.00 per pound multiplied by their base quota levels, to be paid in 10 equal, annual payments beginning sometime in 2005. 

Grower Information

Eligible growers are owners, operators, landlords, tenants, or sharecroppers who shared the risk of producing tobacco in the 2002, 2003, or 2004 marketing years. If there is more than one eligible grower for the same tobacco, then the Secretary will distribute payments based on the relative share of risk and other appropriate factors.

The Secretary will also establish a base quota level for eligible growers. For flue-cured and burley tobacco, the base quota level will be the effective tobacco marketing quota for the 2002 marketing year. For other varieties of tobacco, the base quota level will be the basic tobacco farm acreage allotment for the 2002 marketing year multiplied by the average annual yield during the 2001, 2002, and 2003 crop years.

Eligible growers will receive $3.00 per pound multiplied by the base quota level for each variety of tobacco, multiplied by 1/3 for each year of 2001, 2002, and 2003 that tobacco was grown. For example, if a grower planted tobacco in only one of the three years, he would only be entitled to receive 1/3 of the total compensation; but if he planted tobacco in all three years, he would receive the entire amount. The payments to eligible growers will also be made in 10 equal, annual installments beginning sometime in 2005.

Outstanding Issues

The United States Department of Agriculture is currently preparing regulations for the tobacco buyout, with adoption expected in early 2005. The process of applying for payments and other administrative issues associated with the buyout should be addressed by these regulations. We hope the regulations will clear up some key questions associated with the buyout. Some of the questions we have appear below. 

Question 1: Estate Planning

The Act states that if an eligible quota holder or grower dies and is survived by a spouse or dependents, his right to receive payments will transfer to his surviving spouse or estate. What happens if the quota holder or grower dies without a surviving spouse or dependents?

Question 2: Tax Treatment of Buyout Payments 

The Act does not address the tax treatment of the buyout payments. Will they be considered capital gain for quota holders and ordinary income for growers, as was the case with peanut buyout payments? Will buyout payments to quota holders be eligible for tax-deferred exchanges with investment real property to avoid treatment as capital gain? Bear in mind that the assignment of future installments of buyout payments for lump-sum payments as discussed below could significantly affect the timing of taxes paid on such payments.

Question 3: Future Buyout Payment Arrangements 

The Act allows quota holders and growers to assign their future buyout payments to a financial institution in return for a lump-sum payment. To do this, notice of the assignment must be given to the Secretary, and subsequent payments will be made directly to the designated financial institution. The term "financial institution" is not defined in the Act. Is a "financial institution" limited to banks, savings and loans, and credit unions? May future buyout payments be assigned to parties other than financial institutions?

Question 4: Phase II Payments 

Beginning in 1999, qualifying quota holders and growers have been receiving periodic payments from the four major tobacco manufacturers as compensation for the decline in domestic tobacco leaf purchases. These are known as Phase II payments, and the agreement creating them provides that Phase II payments will cease once a tobacco buyout is enacted. Will the Act affect the Phase II payment due to be made on December 30, 2004? The North Carolina Business Court is currently considering whether this payment must be made, and a decision is expected before Christmas. 

Summary

We hope this bulletin has been helpful to you. We plan to issue a supplemental bulletin addressing the questions listed above and other uncertainties of the Act once they are answered by the United States Department of Agriculture. If you have any questions regarding the Act, the tobacco buyout, or any other legal issues, please feel free to contact Gregory S. Camp at 252.446.2341 or by e-mail at gscamp@poynerspruill.com.