[Federal Register: June 4, 2003 (Volume 68, Number 107)]
[Rules and Regulations]
[Page 33341-33347]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04jn03-1]
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Rules and Regulations
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[[Page 33341]]
DEPARTMENT OF AGRICULTURE
Commodity Credit Corporation
7 CFR Part 1400
RIN 0560-AG86
Income Limits
AGENCY: Commodity Credit Corporation, USDA.
ACTION: Final rule.
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SUMMARY: This rule sets forth at 7 CFR part 1400 the regulations to
implement provisions of the Farm Security Act of 1985 (1985 Act) as
amended by the Farm Security and Rural Investment Act of 2002 (2002
Act) regarding limits on the income of individuals and entities
eligible for certain USDA commodity and conservation programs. These
regulations set forth the criteria to determine whether income limits
have been exceeded by an applicant for those benefits. The final rule,
generally, provides that, for individuals, CCC will use the adjusted
gross incomes reported in the prior three years to the United States
Department of the Treasury, Internal Revenue Service (IRS), and a
comparable measure for other entities such as corporations, limited
partnerships, and charitable organizations. This rule also includes an
addition to subpart C of this part concerning payment eligibility
determinations for program participants who are reservist military
personnel called to active duty as the result of Operation Iraqi
Freedom, and other similar military operations. The rule is intended,
as provided by the 1985 Act, to impose limits on the amount of average
adjusted gross income that a program participant can have and still
remain eligible for program benefits and also allow reservist military
personnel called to active duty to remain eligible for payments in
certain circumstances.
DATES: This rule is effective on June 3, 2003.
FOR FURTHER INFORMATION CONTACT: Daniel McGlynn, Production,
Emergencies and Compliance Division, United States Department of
Agriculture (USDA), Stop 0517, 1400 Independence Ave. SW., Washington,
DC 20250-0517. Telephone: (202) 720-3463. Electronic mail: Dan_
McGlynn@wdc.usda.gov. Persons with disabilities who require alternative
means for communication (Braille, large print, audio tape, etc.) should
contact the USDA Target Center at (202) 720-2600 (voice and TDD).
SUPPLEMENTARY INFORMATION:
Notice and Comment
Section 1601(c) of the 2002 Act provides that the regulations
needed to implement Title I of the 2002 Act, including those involved
here, may be promulgated without regard to the notice and comment
provisions of 5 U.S.C. 553 or the Statement of Policy of the Secretary
of Agriculture effective July 24, 1971, (36 FR 13804) relating to
notices of proposed rulemaking and public participation in rulemaking.
Because the provisions of this rule are not effective until the 2003
crop, and due to the complexity of the issues presented in the rule, it
was determined that it was in the public's interest to solicit comments
on the proposed rule before it became effective.
Executive Order 12866
This final rule has been determined to be significant under
Executive Order 12866 and has been reviewed by the Office of Management
and Budget (OMB).
Federal Assistance Programs
This final rule has a potential impact on all programs listed in
the Catalog of Federal Domestic Assistance in the Agency Program Index
under the Department of Agriculture, Farm Service Agency and Natural
Resources Conservation Service. Other assistance programs are also
impacted.
Regulatory Flexibility Act
The Regulatory Flexibility Act is not applicable to this rule
because the Commodity Credit Corporation (CCC) is not required by 5
U.S.C. 553 or any other law to publish a notice of proposed rulemaking
for the subject matter of this rule.
Environmental Assessment
The environmental impacts of this rule have been considered under
the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et
seq., the regulations of the Council on Environmental Quality (40 CFR
parts 1500-1508), and regulations of the Farm Service Agency (FSA) of
the Department of Agriculture (USDA) for compliance with NEPA, 7 CFR
part 799. An Environmental Evaluation was completed and the proposed
action has been determined not to have the potential to significantly
impact the quality of the human environment and no environmental
assessment or environmental impact statement is necessary. A copy of
the environmental evaluation is available for inspection and review
upon request.
Executive Order 12778
This rule has been reviewed under Executive Order 12778. This rule
preempts State laws that are inconsistent with it, however, this rule
is not retroactive. Before judicial action may be brought concerning
this rule, all administrative remedies must be exhausted.
Executive Order 12372
This program is not subject to Executive Order 12372, which
requires intergovernmental consultation with State and local officials.
See the notice related to 7 CFR part 3015, subpart V, published at 48
FR 29115 (June 24, 1983).
Unfunded Mandates
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) does
not apply to this rule because CCC was not required by 5 U.S.C. 553 or
any other law to publish a notice of proposed rulemaking for the
subject matter of this rule. Also, this rule contains no mandates as
defined in sections 202 and 205 of UMRA.
Paperwork Reduction Act
Section 1601(c) of the 2002 Act provides that the promulgation of
regulations and the administration of Title I of the 2002 Act shall be
done without regard to chapter 5 of title 44 of the United States Code
(the Paperwork Reduction Act). Accordingly, these regulations and the
forms and other information collection activities
[[Page 33342]]
needed to administer the provisions authorized by these regulations are
not subject to review by the Office of Management and Budget under the
Paperwork Reduction Act.
Government Paperwork Elimination Act
FSA is committed to compliance with the Government Paperwork
Elimination Act (GPEA) and the Freedom to E-File Act, which require
Government agencies in general and FSA in particular to provide the
public the option of submitting information or transacting business
electronically to the maximum extent possible. The form that applicants
will use to certify their income has been developed for on-line use.
However, because of the nature of the other paperwork and documentation
that may be needed to verify eligibility based on income, the use of
electronic means of submission for those information collections is not
feasible at this time.
Discussion of the Final Rule
Background
The 2002 Act authorized new programs and benefits, including direct
payments and counter-cyclical payments for producers of certain covered
commodities and for payments and other benefits under a number of new
and revised conservation programs. Section 1604 of that Act amended the
1985 Act by adding a new section, 1001D, to provide that individuals or
entities shall not be eligible to receive direct payments, counter-
cyclical payments, marketing loan gains or a payment under any of the
conservation programs authorized under title XII of the 1985 Act, nor a
payment under the conservation programs of title II of the 2002 Act, if
the three-year average of the adjusted gross income of the individual,
or comparable measure for an entity, exceeds $2.5 million. An
exemption, though, is provided where not less than 75 percent of the
average adjusted gross income is derived from farming, ranching, or
forestry operations. Section 1001D also requires a commensurate
reduction in the shares of payments to an entity proportional to the
interest held in the entity by parties whose adjusted gross income is
more than $2.5 million.
CCC published a proposed rule as to its intentions for implementing
income limits on October 28, 2002 at 67 FR 65738. The Agency received
72 timely filed letters containing 129 comments. Respondents included
the following: 21 individuals, 15 corporations and similar entities, 8
commodity groups and similar organizations, 7 State and Federal
agencies, 4 churches, colleges and universities, 2 Certified Public
Accountants, 1 financial institution, 10 farm management companies, and
4 research and environmental organizations. Comments were received from
respondents in the following States: California, Colorado, Florida,
Georgia, Hawaii, Iowa, Indiana, Kansas, Louisiana, Missouri, Minnesota,
Mississippi, North Dakota, Nebraska, New York, Pennsylvania, Rhode
Island, South Dakota, Tennessee, Texas, Washington, and the District of
Columbia.
Discussion of Comments and Changes
Specific comments received, addressed in the same sequence as the
final rule, are as follows:
Section 1400.600 Applicability
Comments were received from 32 respondents who were concerned about
the programs to which the income limits are applied. Some respondents
commented that the income limitation will adversely affect
participation in conservation and environmental programs. These
respondents suggested that conservation and environmental program
participants be exempted from income limits. The respondents asserted
an exemption was appropriate because the rule may preclude large
landowners participation in these programs and thus defeat the purposes
of environmental projects and initiatives, both State and Federal. It
was also argued that under certain programs, such as the Wetland
Reserve Program, easement payments are for reimbursing landowners for
rights foregone. As such, in their opinion, these payments should not
be classified as benefits and, therefore, not subject to the adjusted
gross income limitation. It was also commented that the income
limitation would adversely impact compliance with highly erodible land
conservation and wetland conservation provisions. Several respondents
commented that other programs, not referenced in the proposed rule,
which have a gross revenue restriction should use the average adjusted
gross income limitation instead. It was also commented that private
colleges and educational institutions should be exempt from the rule
altogether, as are public institutions, since the missions of the
institutions are the same.
The statute provides that the average adjusted gross income
limitation applies to any program authorized by title XII of the 1985
Act or titles I or II of the 2002 Act. There are no exceptions for
conservation and environmental programs and, in fact, they are
specifically included. Section 1604 of the 2002 Act applies to all
payments and covered benefits of the programs under the titles
specified. Therefore, no exceptions are made in the final rule for
payments and benefits authorized by these titles.
As to the comments concerning the application of this rule to other
programs not referenced in the 2002 Act, it is true that a gross
revenue restriction has been applied as a requirement for eligibility
for other programs not included in the proposed rule. Although the
gross revenue restriction and the average adjusted gross income
limitation share a similar purpose, there are significant differences,
different statutory schemes, and this rule is limited to application of
the test provided for in the 2002 Act. For example, although the desire
for one rule for all programs is understandable, the application of a
qualifying gross revenue restriction per ``person'' to payments under
the Noninsured Crop Disaster Assistance Program (NAP) is required by
the statute authorizing NAP. However, for flexibility, provision is
made to apply this subpart to other programs if so provided by statute
or regulation in the future.
As to the program participants to be covered by these income
limits, section 1001D(a)(1) of the 2002 Act provides that ``* * * the
term `average adjusted gross income,' with respect to an individual or
entity (for purposes of this section as defined in section
1001(e)(2)(A)(ii)), means the three-year average of the adjusted gross
income or comparable measure of the individual or entity over the
preceding tax years, as determined by the Secretary.'' Section 1001 of
the 1985 Act sets forth the statutory payment limitations applicable to
certain commodity and conservation program benefits. Generally, these
provisions have been the same since the enactment in 1987, and provide
that the total amount of specified payments that a ``person'' may
receive is limited to specified amounts per year.
Section 1001(e)(2)(A) defines the term ``person'' as follows:
* * * the term ``person'' means--
(i) An individual, including any individual participating in a
farming operation as a partner in a general partnership, a
participant in a joint venture, a grantor of a revocable trust, or a
participant in a similar entity (as determined by the Secretary);
(ii) A corporation, joint stock company, association, limited
partnership, charitable organization, or other similar entity (as
determined by the Secretary, including any such entity or
organization participating in the farming operation as a partner in
a general partnership, a participant in a joint
[[Page 33343]]
venture, a grantor or a revocable trust, or as a participant in a
similar entity (as determined by the Secretary); and
(iii) A State, political subdivision, or agency thereof.
In determining who is a ``person'' for purposes of section 1001D,
an ``entity'' is specifically defined to be the same as an ``entity''
as provided in section 1001(e)(2)(A)(ii) of the 1985 Act. Notably,
section 1001D does not contain such a mandate to use the definitions in
sections 1001(e)(2)(A)(i) and (iii). Accordingly, this final rule
provides that the definition of an ``entity'' shall be the same for
purposes of sections 1001 and 1001D of the 1985 Act. Further, in order
to provide consistency in the application of both sections 1001 and
1001D, the final rule also provides that the definition of an
``individual'' will be the same for both purposes.
As to the respondents'' suggestion that private schools be exempted
from income limits, the definition of ``entity'' in the 1985 Act does
not include States, political subdivisions, and agencies thereof (which
include a public school or university), but does include charitable
organizations and other nonprofit organizations (including churches and
private schools). Furthermore, the 2002 Act does not exempt any
charitable or nonprofit organization from the average adjusted gross
income limitation. Also, this final rule does not extend the average
adjusted gross income limitation to States, counties, political
subdivisions, agencies thereof, or recognized Indian tribes because
Governmental organizations do not have ``income'' similar to the other
listed individuals and entities. Although a private institution may
indeed serve some of the same purposes as some public institution,
there is no statutory authority to treat them the same within the
context of this rule. Accordingly, this comment was not adopted and
this provision of the proposed rule is not changed in the final rule.
However, the final rule does recognize the special nature of some
activities of such charitable organizations as was set out in the
proposed rule.
A respondent commented that the disqualification should include all
payment methods for certain benefits, including commodity certificates
issued under marketing assistance loans. The respondent believed that
the use of such certificates undermines the intent of Congress to limit
program payments. Under the 2002 Act, the average adjusted gross income
limitation applies to loan deficiency payments and marketing loan
gains, but does not include certificate transactions or to other forms
in which loan benefits might otherwise be obtained (such as loan
forfeitures). Accordingly, the provisions of this rule cannot be
extended to include such transactions.
Other comments on this section included: the $2.5 million level is
too high; the adjusted gross income limitation will force landowners to
switch from share leases to cash leases and thus place the operators at
substantially greater risk; and the adjusted gross income limitation is
not equitable in that a test based on the assets of the potential
recipient would be a more equitable test for payment eligibility. The
dollar amount of the average adjusted gross income limitation and the
disqualifications are provided by statute. There is no discretion to
modify the amount or impose an alternative requirement for payment
eligibility. Therefore, the final rule makes no changes in this
provision.
Section 1400.601 Determination of Average Adjusted Gross Income
Comments were received from 14 respondents on this section of the
proposed rule. The comments dealt primarily with the manner in which
average adjusted gross income is determined, either by tax information
or comparable measure, and the definition of income from farming,
ranching and forestry operations. It was commented that ``comparable
measure'' needed to be better defined. Other concerns were that
compliance with the average adjusted gross income limitation would be
adversely affected if income from various sources that the respondents
believed were agricultural or farm-related, but do not fit in certain
taxing categories for Internal Revenue Service (IRS) purposes, would
not be considered income from farming, ranching or forestry operations.
One respondent commented that there are occasions when 2 or more
corporations are allowed to file a single, consolidated tax return and
suggested that a certification indicating the amount each entity would
have paid if separate returns had been filed should be allowed to be
submitted.
The term ``adjusted gross income,'' for IRS purposes, applies only
to taxpayers who are ``individuals.'' As previewed in the proposed
rule, this final rule provides, for individuals, that adjusted gross
income be generally based on the IRS definition of that term and
associated filings. Section 1001D(a)(1) of the 2002 Act takes into
account the limited IRS use of this term by providing that the
Secretary is to fashion a ``comparable measure'' for other entities.
Here also, as indicated in the proposed rule, prior years' tax filings
will be the starting point of reference. Due to the severe penalties
associated with the filing of a false tax return, such information may
be the most credible evidence available to make income determinations.
While this rule defines the adjusted gross income for the different
types of program participants, it does not specify the line item on tax
returns for participants from which critical information will be
gathered since such references may likely change from year-to-year.
However, the CCC forms that will be used to make these determinations
will specify the specific lines from various IRS forms that will be
used to the extent practicable. Also to the extent practicable, for
information from the entity that is needed which cannot be ascertained
solely from the IRS forms, CCC will specify in its forms what other
information is needed.
For individuals, the adjusted gross income would generally be the
amount so specified on the individual's final (including amendments)
income tax return for the applicable year. Where there is a joint
return filed, the adjusted gross income specified on the joint return
will be used unless a certified public accountant or attorney provides
a certified statement delineating the distribution of income and
expenses of the individual seeking payments had such individual filed a
separate return. Accordingly, it is possible that one tax return will
be used by more than one individual for purpose of this rule.
For corporations, including a ``sub-chapter S corporation,'' the
adjusted gross income will be the final taxable income plus charitable
contributions. Charitable contributions are included in order to
provide equitable treatment vis-a-vis individuals. For an individual,
charitable deductions are deducted from adjusted gross income, along
with a variety of other items, to determine the individual's taxable
income. Generally, the other items deducted from an individual's
adjusted gross income, such as personal exemptions and child care
credits, do not have a corresponding relevancy on a corporate return.
No change is made in the final rule to response to the comment
about the treatment of corporations filing a single, consolidated tax
return. Certifications of average adjusted gross income are required
from a payment entity and all individuals and entities with an interest
in the payment entity. If one corporation is a subsidiary of another
corporation, the average adjusted gross income of the parent
corporation would include the average adjusted gross income of the
[[Page 33344]]
subsidiary corporation. If the consolidated tax returns indicate the
average adjusted gross income of the parent company exceeds the
limitation, all subsidiaries of the parent company would also be
ineligible according to this subpart.
For charitable or nonprofit organizations with income that is not
subject to Federal income taxation, the comparable measure of adjusted
gross income is defined in this rule to be the ``unrelated business
taxable income'' of the entity as reported to the Internal Revenue
Service less any other income CCC determines to be from non-commercial
activities. Currently, that amount is specified on line 34 of Internal
Revenue Service Form 990-T. Generally, this excludes receipts that are
gifts, grants and contributions that are tax deductible by the donor.
Effectively, the adjusted gross income for these entities is the net
income from only their commercial activities.
For a limited liability company, limited partnership, limited
liability partnership or similar organization, the adjusted gross
income is the sum of the income from trade or business activities plus
the guaranteed payments to the members as reported for the applicable
tax year. Charitable contributions will be dealt with in the same
manner as with other entities.
For an estate or trust, the adjusted gross income is the sum of the
adjusted total income plus the charitable deductions as reported for
the applicable tax year.
As indicated, individuals and entities who have average adjusted
gross income in excess of $2.5 million may still be eligible for
covered benefits where their average adjusted gross income from
farming, ranching, and forestry is not less than 75 percent of the
total. Generally, the average adjusted gross income (AGI) of the
individual or entity derived from farming, ranching or forestry will
be, under the rule, determined based on the amounts as reported to IRS.
The amount reported on applicable forms, currently IRS form 4835 and
Schedule F, represent the net income from the farming operation after
deductions for the cost of production. Income derived from forestry
operations, to the extent it is not reported on these forms, will be
the subject of a separate certification by the individual or entity as
will be the case with other special income allowed to be counted toward
the 75 percent level by the provisions of this rule.
Several respondents were concerned whether income from certain
sources would be considered income from farming, ranching and forestry
operations. Of particular concern was the consideration of gains from
the sale of assets used in the enterprise; income from the leasing of
farmland; income from commercial hunting operations on the farm;
proceeds from the sale of water rights; income from contract
operations; and, whether income from participation in the Conservation
Reserve Program, Wetlands Reserve Program, Environmental Quality
Incentives Program and similar programs would be considered farm
income.
By denying program benefits to those individuals and entities who
have exceeded the $2.5 million threshold, Congress intended that those
individuals and entities who are dependent upon farming, ranching and
forestry should be accorded deferential treatment. However, taking that
into account and in response to the concerns expressed by respondents,
the following clarifications and revisions are made:
(1) Income of a landowner generated by selling the landowner's land
(including the sale of easements and development rights) used by the
landowner or others for farming, ranching, or forestry operations will
be considered to be income derived from farming, ranching or forestry
operations;
(2) Income generated by selling farm water rights will be
considered to be income derived from farming, ranching or forestry
operations;
(3) Income from sales by a retail dealership of implements used in
farming, ranching or forestry will not be considered to be income
derived from farming, ranching or forestry operations, but income
derived from the sale of a farm's agricultural equipment otherwise
subject to depreciation expense on the IRS Form 4835 or Schedule F will
be considered to be such income;
(4) Income from the rental of land used for farming, ranching or
forestry operations will be considered to be income derived from
farming, ranching or forestry operations, regardless of whether the
rental arrangement is on a cash or crop share basis;
(5) Income from agricultural or conservation program payments will
be considered to be income from farming, ranching or forestry
operations;
(6) Income from commercial hunting operations on farmland will be
considered to be income derived from farming, ranching, or forestry
operations;
(7) Income from sales at a market will only be considered to be
income derived from farming, ranching or forestry operations if the
commodity being sold was produced by the individual or entity or a
joint operation in which the individual or entity had an interest;
(8) Income from sales as a commission broker, auctioneer or
warehouse operator or similar enterprise will not be considered to be
income derived from farming, ranching or forestry operations; and
(9) In integrated operations, undifferentiated income (for example,
income from a forestry operation that could not be differentiated
between income from the production of the tree and from the sale of a
finished product) will not be considered to be income derived from
farming, ranching or forestry operations.
The proposed rule provided that, for the purpose of applying the
average adjusted gross income limitation and calculating the three-year
average, the average shall be the adjusted gross income for the three
tax years immediately preceding the applicable crop, program, or fiscal
year, as determined by CCC, excluding any year in which the individual
or entity did not have income or had adjusted gross income considered
to be zero. Several respondents suggested the exclusion of any year an
individual or entity is not required to file a tax return, rather than
excluding any year the individual or entity did not have income or the
adjusted gross income was zero. The proposed rule was drafted to
provide that a producer would not be allowed to average a loss year
with a profitable year. Based on the suggestions, the wording of the
final rule has been revised to allow for averaging loss years and no-
income years with others, but for ongoing operations only. In some
cases, the income of new entities will be averaged with those they
replace in order to assure proper application of the average. Relief
can be provided from that combination to the extent it would work
unfairly in a particular instance.
Section 1400.602 Compliance
A total of 18 respondents provided comments on this section of the
proposed rule. Some comments suggested that in addition to allowing the
certification of compliance by a CPA or an attorney as provided in the
proposed rule, certification from other professionals, such as farm
management firms, should be allowed. One respondent commented that it
would be a burdensome task for an entity with a large number of
stockholders to obtain certifications of compliance with the average
AGI limitation from stockholders. It was suggested that an exemption be
made for corporations with more than 500 stockholders, and that the
average AGI limitation be
[[Page 33345]]
applied to the corporation, but not to the individual stockholders.
There were also concerns expressed as to whether the business
information provided to the local FSA offices would remain
confidential. In other words, there were concerns about what safeguards
and confidentiality measures would be implemented to ensure this
information would remain private and not made public in some manner.
The statute requires that to comply with the average AGI
limitation, an individual or entity shall provide either: (1) A
certification from a ``* * * certified public accountant or another
third party that is acceptable to the Secretary;'' or (2) information
and documentation regarding the average adjusted gross income of the
individual or entity through other procedures established by the
Secretary. The proposed rule indicated that, in addition to a
certification from a CPA, the only other acceptable certification from
a third party would be from an attorney. Although others may have
knowledge of the average adjusted gross income of an individual or
entity, the Agency believes that limiting third party certifications to
a CPA or an attorney is unlikely to create any hardship on participants
and will provide a convenient and proper way of guaranteeing some
expertise and training in the particular matter at issue. As to the
comment about the application of the average AGI limitation to
stockholders of a corporation, the statute requires a reduction in
payments to an entity, general partnership or joint venture
commensurate with the interest held by each individual who has an
average adjusted gross income in excess of the limitation. There is no
authority provided in the statute for any exemption to the requirement
for a commensurate reduction when an individual who holds an interest
in an entity has an average adjusted gross income in excess of the
limitation. Therefore, the final rule makes no changes regarding the
certification of compliance with this subpart.
With respect to confidentiality, the provisions of the final rule
avoid conflict with existing regulations and procedures. All
information submitted with respect to AGI matters will be treated with
regard to confidentiality concerns in accordance with existing rules.
Those rules take into account concerns like those expressed in the
comments.
Section 1400.603 Commensurate Reduction
Comments were received from 4 respondents on this section of the
proposed rule. It was commented that the number of levels should be
lessened to 2 or 3 rather than 5 before a commensurate reduction is
applied. However, it was also commented that no level of restriction
for the commensurate reduction should be established.
Based upon the agency's experience in administering section 1001
relating to the maximum payments a ``person'' may receive, CCC has
determined that business enterprises comprised of layered ownership are
often established simply to maximize the receipt of government
payments. The rule should allow sufficient layering to accomplish
legitimate business need while affording what otherwise would be a
dodge of a statutory test or endless tracing of corporate interests
back to individuals. Accordingly, no changes were made in the final
rule to this section on commensurate reduction.
Miscellaneous
Miscellaneous comments were received suggesting editorial and
grammatical corrections and such. A few editorial changes are made from
the text and structure of the proposed rule for clarity and for ease of
administration. This rule also includes an addition to the ``actively
engaged in farming'' provisions subpart C of part 1400 to address
eligibility issues relating to reservist military personnel called to
active duty.
Cost Benefit Assessment
The average adjusted gross income limitation not only applies to
payments under the commodity and price support programs, but to all
payments and benefits under the conservation and related programs. It
includes, but is not limited to, direct and counter-cyclical payments,
conservation reserve and environmental quality incentive program
payments, loan deficiency payments and marketing loan gains.
For the 2003 through 2007 crop, program or fiscal years,
individuals and entities are not eligible for payments or benefits from
the above-mentioned programs if their average adjusted gross income
exceeds $2.5 million for the three tax years immediately preceding the
applicable crop, program or fiscal year. This requirement applies
unless 75 percent or more of that average adjusted gross income amount
was derived from farming, ranching or forestry operations.
The determinations necessary for compliance with the average
adjusted gross income limitation will be generally based on Internal
Revenue Service concepts and information included on final tax filings.
Comparable measures for adjusted gross income have been developed for
entities, partnerships and for organizations that do not have such a
line item on tax filings, and that are non-profit, or are not required
to file tax information.
By statute, under the average adjusted gross income provisions,
there is a required commensurate reduction of program payments in the
situations where an owner of an entity applying for benefits fails the
test. Accordingly, any program payment or benefit issued to an entity,
general partnership, or joint venture shall be reduced by an amount
commensurate with the direct or indirect interest held by that
individual or entity that is determined to have an average adjusted
gross income that exceeds the limitation.
Note that those ineligible for marketing loan gains and loan
deficiency payments because of the adjusted gross income restriction
may still be eligible to participate to a degree in the marketing
assistance loan programs. Loans may be obtained and forfeited when
commodity prices decrease. An individual or entity that fails the test
will still be able to use commodity certificates to repay those loans
at a rate lower than the original loan rate. Benefits they realize from
the reduced payment rate, essentially the same as marketing loan gains,
are not subject to payment limits or the adjusted gross income
restrictions.
The 2002 Act mandates that the adjusted gross income limitation
apply to the 2003 through 2007 crop years. In May 2002, the
Congressional Budget Office estimated that savings from the average
adjusted gross income limitation will total $22 million in fiscal years
2002 through 2006.
The Cost/Benefit Assessment of the adjusted gross income limitation
is available from James Baxa, Production, Emergencies, and Compliance
Division, United States Department of Agriculture (USDA), 1400
Independence Ave, SW., Washington, DC 20250. Phone: (202) 720-4189. E-
mail: James Baxa@wdc.usda.gov.
List of Subjects in 7 CFR Part 1400
Agriculture, Price support programs, Reporting and recordkeeping
requirements.
0
For the reasons stated in the preamble, 7 CFR part 1400 is amended as
follows:
[[Page 33346]]
PART 1400--PAYMENT LIMITATION AND PAYMENT ELIGIBILITY
0
1. The authority section for part 1400 is revised to read as follows:
Authority: 7 U.S.C. 1308 et seq.
Subpart A--General Provisions
0
2. Section 1400.1 is revised to add a new paragraph (h), to read as
follows:
Sec. 1400.1 Applicability.
* * * * *
(h) As provided in Subpart G of this part, additional requirements
are applicable to certain of the payments specified in paragraph (g) of
this section.
Subpart C--Actively Engaged in Farming Determinations
0
3. Section 1400.213 is added to read as follows:
Sec. 1400.213 Military personnel.
If an individual is called to active duty in the military because
of Operation Iraqi Freedom, or any other similar military operation,
before a determination is made that the individual is actively engaged
in farming, the individual may be considered to be actively engaged in
farming if the determining authority determines that such individual
did make a conscious effort to, and would have been determined to be,
actively engaged in farming if the individual would not have been
called to active duty. If the individual is called to active duty after
being determined to be actively engaged in farming, such determination
shall remain in effect for the program year.
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4. Subpart G is added to read as follows:
Subpart G--Average Adjusted Gross Income Limitation
Sec.
1400.600 Applicability.
1400.601 Determination of average adjusted gross income.
1400.602 Compliance.
1400.603 Commensurate reduction.
Subpart G--Average Adjusted Gross Income Limitation
Sec. 1400.600 Applicability.
(a) For the 2003 through 2007 crop years, program years, or fiscal
years, an individual or entity is not eligible for any payment or
benefit identified in Sec. 1400.1 as being subject to this part if the
individual's or entity's average adjusted gross income exceeds $2.5
million for the three tax years immediately preceding the applicable
crop, program or fiscal year. Payments may also be reduced under the
commensurate share rules set out in Sec. 1400.603.
(b) Notwithstanding paragraph (a) of this section, the individual
or entity may be considered to meet the requirements of this subpart if
not less than 75 percent of the individual's or entity's average
adjusted gross income for the three tax years immediately preceding the
applicable crop, program or fiscal year, is derived from farming,
ranching, or forestry operations.
(c) In addition to payments or benefits identified under Sec.
1400.1, this subpart applies to benefits provided to participants under
contracts or agreements entered into for the 2003 through 2007 crop,
program or fiscal years for the following programs:
(1) The program authorized by part 1466 of this chapter or its
successor regulations;
(2) The program authorized by part 1467 of this chapter or its
successor regulations;
(3) The program authorized by part 636 of this chapter or its
successor regulations;
(4) Any other program authorized by Title XII of the 1985 Act, as
amended, or Title II of the 2002 Act.
(5) Any other program to which this subpart is made applicable by
statute or regulation.
(d) Determinations made under this subpart with regard to the
programs described in paragraphs (c)(1) through (c)(5) of this section
will be based on the year for which the contract or agreement is
approved and that determination will apply for the entire term of the
subject agreement or contract.
(e) Vendors that receive payment for technical services or
assistance provided in conjunction with programs under Title II of the
2002 Act and Title XII of the 1985 Act, but who are not beneficiaries
of the program, are not subject to this subpart for services that are
of the type that are also performed by the Federal Government in
connection with such programs.
(f) Payments to an escrow agent or other of similar capacity in
which the recipient is maintaining temporary custody of the funds for
eventual disbursement to an eligible program participant are not
subject to this subpart so long as the party ultimately receiving the
payment is eligible under this subpart.
(g) Payments to States, counties, political subdivisions and
agencies thereof, and Indian tribes are not subject to this subpart.
Sec. 1400.601 Determination of average adjusted gross income.
(a) For purposes of this subpart, income from farming, ranching or
forestry operations means income of an individual or entity derived
from:
(1) Producing crops, livestock or unfinished raw forestry products;
(2) Selling (including the sale of easements and development
rights) their own farm, ranch or forestry land or water rights;
(3) Selling, but not as a dealer, equipment purchased to conduct
farm, ranch or forestry operations when the equipment is otherwise
subject to depreciation expense on the IRS Form 4835 or Schedule F;
(4) Renting land used for farming, ranching or forestry operations;
and
(5) Payments made under any program authorized under chapters VI,
VII or XIV of this title.
(b) For purposes of this subpart, except as otherwise provided in
this subpart, adjusted gross income means:
(1) For an individual filing a separate tax return, the amount
reported as ``adjusted gross income'' on the final federal income tax
return for the individual for the applicable tax year;
(2) For an individual filing a joint tax return, the amount
reported as ``adjusted gross income'' on the final federal income tax
return for the applicable tax year unless a certified statement is
provided by a certified public accountant or attorney specifying the
manner in which such income would have been declared and reported if
the individuals had filed two separate returns and that this
calculation is consistent with the information actually supporting the
filed joint return;
(3) For a corporation, including a subchapter S corporation, the
total reported ``taxable income'' as reported to the Internal Revenue
Service plus the amount of the charitable contributions as reported on
the final federal income tax return for the applicable tax year;
(4) For a tax exempt entity, the ``unrelated business taxable
income'' of the entity as reported to the Internal Revenue Service on
the final federal income tax return, less any other income CCC
determines to be from non-commercial activities;
(5) For a limited liability company, limited partnership, limited
liability partnership or similar type of organization, the income from
trade or business activities plus the amount of guaranteed payments to
the members as reported to the Internal Revenue Service on the final
federal income tax return for the applicable tax year; and
(6) For an estate or trust, the adjusted total income plus
charitable deductions
[[Page 33347]]
as reported to the Internal Revenue Service on the final federal income
tax return for the applicable tax year, or the amount of net increase
in the estate's or trust's value resulting from its business or
investment interests.
(c) For purposes of applying this subpart and calculating the
three-year average referenced in Sec. 1400.600, that average shall be
for the adjusted gross income for the three tax years immediately
preceding the applicable crop, program or fiscal year, as determined by
CCC. For an entity that is not required to file a federal income tax
return, or an individual or entity that did not have taxable income in
one or more tax years, the average shall be the adjusted gross income,
including losses, averaged for the three tax years immediately
preceding the applicable crop, program or fiscal year, as determined by
CCC. However, a new entity will have its adjusted gross income averaged
only for those years of the base period for which it was in business,
but a new entity shall not be considered ``new'' to the extent it takes
over a existing operation and has any elements of common ownership or
interests with the preceding entity, or with individuals or entities
with an interest in the ``old'' entity. When there is such commonality,
income of the ``old'' entity will be averaged with that of the ``new''
entity for the base period.
Sec. 1400.602 Compliance.
(a) To comply with the average adjusted gross income limitation, an
individual or entity, including all interest holders in an entity,
general partnership or joint venture, shall provide the following as
required by CCC:
(1) A certification in the manner prescribed by CCC from a
certified public accountant or attorney that the average adjusted gross
income of the individual or entity does not exceed this limitation;
(2) A certification in the manner prescribed by CCC from the
individual or entity that the average adjusted gross income of the
individual or entity does not exceed this limitation; or
(3) Submission to CCC of the relevant Internal Revenue Service
documents and supporting financial data as requested by CCC. Supporting
financial data may include State income tax returns, financial
statements, balance sheets, reports prepared for or provided to another
Government agency, information prepared for a private lender, and other
credible information relating to the amount and source of the
individual's or entity's income.
(b) Audits of certifications of average adjusted gross income may
be conducted as necessary to determine compliance with the requirements
of this subpart. As a part of this audit income tax returns may be
requested and if requested must be supplied. Relevant income tax
returns and documentation must be retained a minimum of two years after
the end of the calendar year corresponding to the year for which
payments or benefits are requested. If an individual or entity has
submitted information to CCC, including a certification from a
certified public accountant or attorney, that relied upon information
from a form previously filed with the Internal Revenue Service, such
individual or entity shall provide to CCC a copy of any amended form
filed with the Internal Revenue Service within 30 days of the filing.
(c) The individual or entity shall provide all information and
documentation the reviewing authority determines necessary to verify
any information or certification provided under this subpart, including
all documents referred to in paragraph (a)(2) of this section. Failure
to provide necessary and accurate information to verify compliance, or
failure to comply with this subpart's requirements, will result in
ineligibility for all program benefits subject to this subpart for the
year or years subject to the request.
(d) All information provided to CCC for the purposes of determining
compliance with this subpart will remain confidential and not be
subject to any request submitted under the Freedom of Information Act.
Sec. 1400.603 Commensurate reduction.
(a) Any program payment or benefit subject to this subpart provided
to an entity, general partnership or joint venture shall be reduced by
an amount commensurate with the direct and indirect ownership interest
in the entity, general partnership, or joint venture of each individual
or entity determined to have an average adjusted gross income in excess
of the limitation under the standards provided elsewhere in this
subpart for the direct recipient of such payments.
(b) Ownership interest in an entity shall be reviewed to the fifth
level of ownership to determine whether a commensurate reduction is
applicable and the extent of such reduction. If an ownership interest
is not held by an individual in the fifth level of ownership in an
entity, no payment or benefit shall be made with respect to such
interest.
Signed in Washington, DC, on May 28, 2003.
James R. Little,
Executive Vice President, Commodity Credit Corporation.
[FR Doc. 03-13946 Filed 6-3-03; 8:45 am]
BILLING CODE 3410-05-P