Income Limits

Proposed Rules
Federal Register: October 28, 2002 (Volume 67, Number 208)
 

From the Federal Register Online via GPO Access www.access.gpo.gov
[DOCID:fr28au02-23]

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Federal Register
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DEPARTMENT OF AGRICULTURE

Natural Resources Conservation Service

7 CFR Part 1400

RIN 0560-AA86


Agricultural Management Assistance Program

AGENCY: Commodity Credit Corporation, USDA.

ACTION: Proposed rule with request for comments.

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SUMMARY: This proposed rule would implement provisions of the Farm
Security and Rural Investment Act of 2002 regarding limits on the
income of persons eligible for program participation. These regulations
set forth the criteria to be applied in determining whether certain
income limits have been exceeded by an individual or entity and thus
making such individual or entity ineligible for certain Commodity
Credit Corporation (CCC) commodity and conservation program benefits.
The proposed rule, generally, provides that for individuals CCC will
use the adjusted gross incomes reported by the individual in the prior
three years to the Internal Revenue Service (IRS), United States
Department of Treasury, and a comparable amount for all other entities
such as corporations, limited partnerships, and charitable
institutions.

DATES: To be assured of consideration comments must be received by
November 27, 2002.

ADDRESSES: Comments and requests for further information should be
directed to Dan 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: Income--Limits@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 Farm Security and Rural Investment Act of
2002 (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 the rule are not effective until the 2003 crop, and due
to the complexity of the issues presented in the rule, it has been
determined that it is in the public's interest to solicit comments on
this rule before it becomes effective.


Executive Order 12866

This proposed 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 proposed 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 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. 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 needed to administer
the program 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 is being 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.

Background and Discussion

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 1603 of that Act amended the
Food Security Act of 1985 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 nor a payment
under any of

the conservation program authorized under title XII of the Food
Security Act of 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 adjusted gross income is derived from farming,
ranching, or forestry operations. In determining the scope of coverage
to an individual or entity, section 1001D(a)(1) provides:

In this section, 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 3-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
enactment in 1987, with amendments made since then to include new
payments authorized by statutes enacted after 1987, and provide that
the total amount of specified payments that a ``person'' may receive
are limited to specified amounts per year. Section 1001(e)(2)(A)
contains one of the fundamental components of the statutory payment
limitation scheme in that it 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 venture, a grantor
of 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 proposed rule
provides that the definition of an "entity'' shall be the same for
purposes of sections 1001 and 1001D of the 1985 Act. In order to
provide consistency in the application of both sections 1001 and 1001D,
the proposed rule also provides that the definition of an
"individual'' will be the same for both purposes.

This proposed rule does not propose to extend the adjusted gross
income limits 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.

The term "adjusted gross income,'' for IRS purposes, applies only
to taxpayers who are "individuals.'' Thus, this proposed rule
proposes, for individuals, that adjusted gross income be based on the
IRS definition of that term and associated filings. Section 1001D(a)(1)
takes into account the limited use of this term by providing that the
Secretary is to fashion a "comparable measure'' for other entities. In
order to maintain a consistent application of this statutory provision
as compared to its application to individuals, this proposed rule
proposes that prior years' tax filings will be the starting point of
reference. In addition, due to the severe penalties associated with the
filing of a false tax return, CCC has determined that such information
is likely to be the most credible evidence available to determine this
"comparable measure'' of adjusted gross income. While this proposed
rule defines the adjusted gross income for the different program
participants, the proposed rule does not specify the line item on tax
returns for participants from which the critical information will be
gathered since such references may likely change from year-to-year. CCC
anticipates that 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 information from the entity is needed
that can not be ascertained solely from the IRS forms, CCC will specify
in its forms what other information is needed. Because of the large
number of business entities that may be affected by this rule and the
desire to rely to the maximum extent possible only on the information
already set forth on the IRS forms, CCC specifically requests comments
on which IRS forms and lines on the forms that would be rational to use
in the application of this rule.

For individuals, the adjusted gross income would be the amount so
specified on the individual's final (including amendments) 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 if the
two taxpayers would have filed separate returns. 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. The proposed rule includes charitable contributions 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. Inclusion of charitable contributions by corporations
would, in the view of CCC, be more comparable to the actions of an
individual.

For charitable organizations with income that is not subject to
Federal income taxation, the comparable measure of adjusted gross
income is proposed to be "unrelated business taxable income'' of the
entity as reported to the Internal Revenue Service less any other
income CCC determines to be from commercial activities. Currently, that
amount is specified on line 34 of Internal Revenue Service Form 990-T.
Generally, this would exclude from inclusion as adjusted gross income
receipts that are gifts, grants and contributions that are tax
deductible by the donor; and receipts from rent, royalties and asset
sales. Effectively, the adjusted gross income for these entities would
be the net income from only their commercial activities.

For a general partnership, foreign partnership, limited liability
company, limited partnership, limited liability partnership or similar
organization, the adjusted gross income will be the sum of the income
from trade or business activities plus the guaranteed payments to the
members as reported for the applicable tax year.

For an estate or trust, the adjusted gross income will be the sum
of the adjusted total income plus the charitable deductions as reported
for the applicable tax year.

Individuals and entities who have adjusted gross income in excess
of $2.5 million and whose average adjusted gross income from farming,
ranching, and forestry is less than 75 percent of

such income are ineligible for the specified CCC program benefits. The
determination of this income from farming, ranching and forestry will
be that which is included in the an individual's adjusted gross income.
Generally, for farming and ranching incomes, this amount will be from
the IRS forms used to determine farm income, currently IRS form 4865
and Schedule F, and would represent the net income from the farming
operation after deductions for the cost of production. CCC specifically
requests comments on what should be classified as income from farming,
ranching and forestry activities. Income derived from forestry
operations, to the extent it is not reported on these forms, would be
the subject of a separate report by the individual or entity.

With respect to those persons who have exceeded the $2.5 million
threshold, Congress intended that those persons who are dependent upon
farming, ranching and forestry should be accorded deferential
treatment; however, there is no legislative history with respect to the
manner in which income derived from specific types of asset sales
should be treated. Because of the inherent inability of CCC to try to
distinguish the treatment of different types of sales of assets, CCC
proposes that:

(1) Income from selling land used to produce forestry or
agricultural commodities would not be considered to be derived from
framing, ranching or forestry;

(2) Farm or forestry implement sales by a retail dealership would
not be considered farm or forestry income but the sale of equipment
otherwise subject to depreciation expense on the IRS Form 4865 or
Schedule F would be considered to be included as such income;

(3) Investment income of an individual would not be considered
income from farming, ranching or forestry even though the invested
funds were derived from such sources;

(4) Income from sales at a market would only be considered to be
income from farming, ranching and forestry if the commodity being sold
was produced by the person;

(5) Income from sales as a commission broker, auctioneer or
warehouse operator or similar enterprise would not be income from
farming, ranching or forestry; and

(6) In integrated operations, undifferentiated income, for example,
income that could not be differentiated between income for the
production of the tree and for the sale of a finished product, would
not be considered to be derived from farming, ranching and forestry.

Section 1603 also requires a commensurate reduction in the share of
payments going to an entity which is proportional to the interest held
in the entity by parties whose adjusted gross income is over $2.5
million. Information regarding ownership of interests in entities will
be requested to a maximum of five levels of organization. Based upon
past experience in administering the provisions of section 1001
relating to the maximum amount of specified payments a person may
receive, CCC has determined that business enterprises comprised of such
layered ownership generally are done so simply to maximize the receipt
of government payments.

The proposed rule also provides that payments, incidental to the
actual program payments, made to vendors that receive payment for
services or technical assistance that otherwise would be provided to
producers and program participants by the government will not be
included as payments and benefits subject to this limitation.

Cost/Benefit Analysis

The adjusted gross income limitation not only applies payments
under the commodity and price support programs, but to all payments and
benefits under the conservation and related programs. Included, but not
limited to, are 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, an
individual or entity is not eligible for payments or benefits from the
above-mentioned programs if their average adjusted gross income exceeds
$2.5 million for the 3 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 adjusted gross
income requirement will be 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.

Under the adjusted gross income provisions, there is a required
commensurate reduction of program payments in the situations where an
individual or entity fails to comply. 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 in the marketing assistance loan
programs. Further, when commodity prices decrease they will still be
able to use commodity certificates to repay those loans at rate lower
that the original loan rates. Benefits they realize from the reduced
payment rate, essentially the same as marketing loan gains, are subject
neither to payment limits nor the adjusted gross income restrictions.

The 2002 Act mandates that the adjusted gross income requirement
apply to the 2003 through 2007 crop years. In May 2002, the
Congressional Budget Office estimated that savings from the adjusted
gross income requirement 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.

For the reasons stated in the preamble, CCC proposes to amend 7 CFR
part 1400 as follows:

PART 1400--PAYMENT LIMITATION AND PAYMENT ELIGIBILITY

1. The authority citation for part 1400 is continues to read as
follows:

Authority: 7 U.S.C. 1308 et seq.

2. Section 1400.1 is amended by adding 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.

3. 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 crops, programs 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 3 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 3 tax years immediately proceeding the
applicable crop, program or fiscal year, is derived from farming,
ranching, and 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 during the 2003 through 2007
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 Food Security
Act of 1985, as amended, or Title II of the Farm Security and Rural
Investment Act of 2002.

(d) Determinations made under this subpart with regard to the
programs described in paragraph (c) of this section will be based on
the year 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 in the class of
persons who are 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.

(f) Payments to a person as an escrow agent or other similar
capacity in which the recipient is maintaining temporary custody of the
funds for eventual disbursement to eligible program participant are not
subject to this part so long as the party ultimately receiving the
payment is eligible under this part.

(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 and
forestry means income derived from producing crops, livestock and
unfinished raw forestry products.

(b) For purposes of 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 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 filed federal 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 determined 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 final 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 adjusted gross income is 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;
(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 on the federal tax return for the applicable
year; and
(6) For an estate or trust, the adjusted total income plus
charitable deductions as reported on the federal tax return for the
applicable tax year.

(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, excluding any year in which the individual or entity did not have
income or had adjusted gross income considered to be zero.

Sec.  1400.602  Compliance.

(a) To comply with the adjusted gross income limitation, an
individual or entity shall provide either as required by CCC:

(1) A certification in the manner prescribed by CCC from a
certified public accountant or attorney that the individual's or
entity's average adjusted gross income of the individual or entity does
not exceed this limitation; or
(2) Submission to CCC of the relevant Internal Revenue Service
documents and supporting financial data as requested by CCC. Such
information 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
source of information relating to the amount and source of the person's
income.

(b) Audits of certifications of average adjusted gross income may
be conducted as necessary to determine compliance with requirements of
this part. As a part of this audit income tax forms may be requested
and if requested must be supplied. If a person 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 person shall
provide to CCC a copy of any amended form filed with the Internal
Revenue Service within 30 days of the filing.

(c) The program participant shall provide all information and
documentation the reviewing authority determines necessary to verify
any information or certification provided under this part, 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 the this subpart's requirements, will result in
the determination of ineligibility for all program benefits for the
year or years subject to the request.

Sec.  1400.603  Commensurate reduction.

(a) Any program payment or benefit subject to this part 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
this limitation under the standards elsewhere provided 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 any of the first five levels of
ownership, no payment or benefit shall be made with respect to such
interest.

Signed in Washington, DC, on October 21, 2002.
James R. Little,
Executive Vice President, Commodity Credit Corporation.
[FR Doc. 02-27227 Filed 10-25-02; 8:45 am]
BILLING CODE 3410-05-P