Does incorporating a farm void the individual farmer's tax exemption permit, and can the new corporation use the farmer's sales history to qualify?

Plain-English summary

A farmer (an individual) held a Connecticut Farmer Tax Exemption Permit — the permit that lets a qualifying farmer buy certain items for agricultural production without paying sales tax. He planned to transfer his farm to a newly organized corporation in exchange for the corporation's stock (a tax-free incorporation, after which he would control the corporation), and the corporation would carry on the farming as a trade or business. He asked two questions.

(1) Does his permit survive the transfer? No — it's null and void. A corporation is a distinct legal entity separate from its stockholders. The farmer's permit covers only "sales of tangible personal property made to [the farmer]" — it does not cover sales to anyone else, including his new corporation. Once the farm is transferred, the individual's permit is null and void. (The corporation would need to obtain its own permit.)

(2) Can the corporation borrow the farmer's sales history to qualify? No. To get a permit, an applicant must have had at least $2,500 of gross income from agricultural sales in the immediately preceding calendar year (Conn. Gen. Stat. § 12-412(63)). DRS ruled the corporation cannot count the individual farmer's prior-year sales, because the statute's phrase "such farmer" refers to the applicant — here, the corporation — and the individual farmer is no longer engaged in agricultural production as a trade or business (the corporation is). The corporation must meet the threshold on its own record.

What this means for you

Incorporating your farm cancels your individual farmer exemption permit

The Farmer Tax Exemption Permit is personal to the holder. If you move your farm into a corporation (or, by the same logic, another separate entity), your individual permit becomes void — the entity is a different taxpayer, and your permit doesn't cover purchases made by it.

The new entity has to qualify from scratch

A newly formed farm corporation cannot inherit the individual's sales history to clear the statutory gross-income threshold. Plan for a gap: the entity must independently satisfy the qualification requirement before it can buy exempt.

Plan the timing before you reorganize

Because the exemption doesn't carry over, farmers reorganizing into an entity should think through when the new entity can qualify and how to handle taxable purchases in the interim, so the reorganization doesn't accidentally strip the operation of its exemption.

Common questions

Q: If I move my farm into a corporation, does my Farmer Tax Exemption Permit still work?
A: No. DRS ruled the permit becomes null and void on the transfer, because it covers only sales to you as an individual, not sales to your corporation (a separate legal entity).

Q: Can my new farm corporation use my past farm sales to meet the $2,500 threshold?
A: No. The statute's "such farmer" means the applicant — the corporation — so it must meet the prior-year gross-income threshold on its own, not by counting your individual sales.

Q: Why does the corporation count as a different taxpayer?
A: Because a corporation is a distinct legal entity separate from its stockholders, even one you control after incorporating.

Q: What should the corporation do to buy exempt?
A: It must apply for and qualify for its own Farmer Tax Exemption Permit based on its own agricultural sales meeting the statutory threshold.

Citations and references

Statutes and forms:

• Conn. Gen. Stat. § 12-412(63) (farmer tax exemption; $2,500 prior-year agricultural-sales threshold; engaged in agricultural production as a trade or business)
• 26 U.S.C. § 368(c) (control after a tax-free incorporation exchange)
• Forms OR-248 (Permit), REG-8 (Application); LSN-101 (Special Notice concerning Farmer Tax Exemption Permits)

Case law and authority (as cited by the ruling):

• Saphir v. Neustadt, 177 Conn. 191, 413 A.2d 843 (1979); 18 Am. Jur. 2d Corporations §§ 42-43 (1985)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 91-23

Original ruling text

Ruling 91-23, Sales and Use Taxes / Farmer Tax Exemption Permits

Ruling 91-23

Sales and Use Taxes

Farmer Tax Exemption Permits

FACTS

A natural person [hereinafter, "the Farmer"] has applied for and been issued a Farmer Tax Exemption Permit (Form OR-248) [herein after, "the Permit"] by completing an Application for Farmer Tax Exemption Permit (Form REG-8) in accordance with instructions contained in LSN-101 (Special Notice concerning Farmer Tax Exemption Permits).

Before the date of expiration stated on the Permit, the Farmer intends to transfer his farm to a newly organized corporation [hereinafter, "the Farm Corporation"] solely in exchange for its common stock. Immediately after the exchange, the Farmer will be in control (as defined in 26 U.S.C. §368(c)) of the Farm Corporation.

The Farm Corporation will be "engaged in agricultural production as a trade or business"; Conn. Gen. Stat. §12-412(63).

ISSUES:

Whether the Farmer Tax Exemption Permit will be null and void upon the transfer of the Farmer's farm to the Farm Corporation.

Whether, in determining its gross income from sales of agricultural products in the immediately preceding calendar year, as required by Form REG-8, the Farm Corporation may take into account the Farmer's gross income from such sales in such year.

RULING:

1. The Farm Corporation is "an entity distinct from its individual members or stockholders ...."; 18 Am. Jur. 2d Corporations §42 (1985); "existing separate and apart from the persons composing it ...." Id. at §43. "Generally, a corporation is a distinct legal entity and the stockholders are not personally liable for the acts and obligations of the corporation." Saphir v. Neustadt , 177 Conn. 191, 209, 413 A.2d 843 (1979) (citations omitted).

The Permit that was issued to the Farmer covers "[sales of tangible personal property made to [the Farmer]." It does not cover sales made to anyone other than the Farmer. The Permit will be null and void upon the transfer of the Farmer's farm to the Farm Corporation.

2. As a condition precedent to the issuance of a Permit by the Department to a farmer, Conn. Gen. Stat. §12-412(63) provides in part that "in the immediately preceding calendar year such farmer's gross income from sales of agricultural products ... shall have been not less than two thousand five hundred dollars ..." [emphasis furnished]. In completing the Form REG-8, the Farm Corporation cannot take into account the Farmer's gross income from sales of agricultural products during the immediately preceding calendar year, because "such farmer" refers to the applicant (in this instance, the Farm Corporation), and not to the Farmer (who is not the applicant because, unlike the Farm Corporation, he is no longer engaged in agricultural production as a trade or business).

LEGAL DIVISION

August 29, 1991