Using Subchapter S status gives this family an equitable system for spreading a farm's income and assets.

When it comes to farming equipment, the Dunlop family doesn't quibble over what's mine and what's yoursÑit's all theirs. More precisely, machinery and facilities to operate nearly 4,000 acres of crops in eastern Kansas are owned by Dunlop Farms, Inc., a Subchapter S family corporation. Shareholders in the closely held corporation are brothers Charlie and Raymond Dunlop and their wives; Raymond's son, Chuck, and his wife, Cheri; and Charlie's son, Darin.

With the operation headquartered near Centerville, Kan., Dunlop Farms, Inc., farms land in Linn and Bourbon counties. Several years ago, Charlie and Raymond formed a conventional Chapter C corporation and operated with that structure of ownership, which made them subject to income taxes both at the corporate level and as individual shareholders.

"We didn't think taxes were going down any time soon, so we re-organized as a Subchapter S corporation," said Charlie. "We sat down with Kansas State University farm management specialists to help us value the stock and brought other family members into the corporation."

Only family members who were directly involved in the farm operation were to be shareholders. Establishing a Subchapter S corporation would allow a more workable tax strategy and simpler estate planning. Still, putting an initial value on each share of stock can be a daunting task, the Dunlops found.

"It's not as simple as picking numbers out of the air," agreed Parman Green, University of Missouri farm management specialist. "Initially, you need to identify all assets that will be turned over to the corporation and establish a fair market value for themÑa value all shareholders can agree on. Then, you need to put down the tax basis of each piece of equipment. Older equipment may be depreciated out, but any remaining depreciation in the equipment needs to be transferred to the corporation."

"Our corporation owns equipment and facilities, but not real estate," said Chuck Dunlop. "Each shareholder owns land and leases land to the corporation. That provides individual shareholders with a source of income outside of the corporation, in the form of lease payments. And, land in this area is going up in price, which means each landowner's net worth is increasing-at least on paper."

In letting individuals retain ownership of the land, the Dunlops were looking ahead. As older members approach retirement, the lease payment provides a source of income, even after that member is taking a less active role in the operation. Some families, who enrolled all assets- including land-in the corporation, have found that the corporation can wind up asset rich while the principals or shareholders are asset poor, with no good way to get assets out of the corporation without incurring a big tax liability or dissolving the company.

"Making a Subchapter S corporation work fairly for all members takes some planning," agreed Chuck Dunlop. "We have agreed that as my father and uncle approach retirement, Darin and I will buy into a bigger share of the corporate ownership. In fact, I purchased several shares from my father this past year. But he still has the rental income on the land he owns. This simplifies the transfer of assets to succeeding generations of the family."

Good records are as vital with a Subchapter S corporation as with any kind of farm ownership structure-maybe more so. Chuck's wife, Cheri, keeps meticulous computerized records, and backs them up with a manual version.

"The Dunlops have as good a records system as I have seen," said Paul Acton, manager of the AgChoice outlet at Blue Mound, Kan., a major supplier of crop inputs to Dunlop Farms, Inc. Acton added, chuckling: "I believe they even know how much it costs to turn a combine around at the end of the row."

"Good records let you know what you're doing this year, and give you an accurate road map for next year," said Chuck Dunlop. "Without accurate production and financial records, you're flying blind.

"But even with good records and planning, leveling income from year to year can be a problem with a Subchapter S corporation," Dunlop added. "If you sell all of your crop in a good year and distribute the income to members, they are hit by taxes. If you try to put away some money [in the corporation] as a buffer against a lean year, you can also get into trouble."

The Dunlops plan their way around some of these potential pitfalls with a careful buying and selling strategy.

"This past year [2004] was the best crop season we've had," Chuck added. "We topped our average corn yield by more than 25 bushels per acre-some fields made nearly 250 bushels per acre. Our soybeans averaged right at 50 bushels per acre. Even with prices trending lower, we had a very good year. We have bins full that haven't had any grain in them for the past several years."

Rather than distribute that entire windfall to shareholders in the form of taxable dividends, Dunlop Farms, Inc., is buying ahead for next year.

"We'll advance buy-and pay for-a lot of our crop supplies for 2005," said Chuck. "We're even paying insurance premiums as far ahead as possible."

The corporation sometimes forward-sells grain, but the main marketing strategy is 210,000 bushels of on-farm storage and over-the-road grain trucks.

"We spread out marketing and watch for opportunities," said Chuck Dunlop. "Poultry feeders in southwest Missouri and northwest Arkansas have been our biggest corn customers. Poultry feed mills don't buy a lot of grain ahead, and they get most of their corn by rail. But if rail cars are delayed and the mill is getting low on grain, they're willing to pay a premium to anyone who can get corn to them in a hurry. We can.

"Our corn market may change in another year," he added. "We have invested in the new ethanol plant being built at Garnet, just a few miles down the road. We anticipate selling most of our corn there once the ethanol plant comes on line. We'll have the potential of earning more on our corn and also earning a dividend on the ethanol process.

Whether the Subchapter S form of ownership and operation would work for every farm family, Dunlop hesitates to say.

"It has worked-and is working-very well for this family," he said.