[Congressional Record Volume 141, Number 168 (Friday, October 27, 1995)]
[Senate]
[Pages S16108-S16110]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LIEBERMAN:
  S. 1367. A bill to amend the Food Security Act of 1985 to strengthen 
the payment limitations, and for other purposes; to the Committee on 
Agriculture, Nutrition, and Forestry.


                     the farm fairness act of 1995

 Mr. LIEBERMAN. Mr. President, the commitment we have made to 
balancing the budget has forced each of us to reassess a wide variety 
of Federal programs. We are asking tough but necessary questions about 
welfare, Medicare, funding for the arts, and so forth, all with an eye 
toward determining whether we are truly doing right by the taxpayer, 
and whether we can afford to continue the status quo.
  One corner of the budget that I believe deserves this kind of 
heightened scrutiny is the U.S. Department of Agriculture's farm 
subsidy programs. Each year about $10 billion gets plowed into price 
and income supports for commodities, in the name of helping the 
struggling family farmer. But there's substantial evidence to show that 
these programs are not serving the interests of those small farmers, 
nor are they doing justice to America's taxpayers.
  The current system for distributing commodity payments is too 
complicated, plagued by too many loopholes, and permits far too many 
tax dollars to flow to wealthy landowners, passive investors, and 
others who the programs are not designed to serve. Perhaps worst of 
all, the system in place today actually encourages farmers to try to 
circumvent the laws governing who is eligible for program payments and 
the limits on how much they can receive. The resulting waste and abuse 
is not fair to the taxpayer, nor is it fair to the overwhelming 
majority of hard-working farmers who are obeying the spirit as well as 
the letter of the law.
  That is why I rise today to introduce the Farm Fairness Act of 1995, 
a plan to dramatically reform the payment limit and eligibility laws, 
and restore some basic fairness to the way subsidies are distributed. 
This legislation would go a long way toward rooting out the waste and 
abuse in the commodity programs while strengthening our commitment to 
the family farmer these programs are meant to support. What's more, it 
would save hundreds of millions of dollars each year, which would 
enable us to significantly reduce the cuts in the commodity programs we 
are asking the small- and medium-sized farmer to absorb over the next 
budget cycle.
   Mr. President, the need for the kind of changes I am proposing has 
been well established by the USDA inspector general. Over the last few 
years, the IG's office has produced dozens of investigative reports 
documenting widespread attempts to cash in on loopholes in the law. 
These plans invariably involve the creation of shell corporations set 
up for the sole purpose of getting around the $50,000 cap on payments 
that was set by Congress. These efforts have been effective, too: in 
1993, nearly 10,000 farms received payments above the $50,000 limit.
  The law is so full of loopholes that these excessive payments are 
technically legal, even though they make a mockery of the $50,000 cap. 
In fact, a U.S. Attorney's Office recently declined to prosecute a 
substantial fraud case against a big farming group because, in the 
judgment of the U.S. Attorney, the law seemed to sanction the group's 
deceptive behavior. ``[T]he program rules are not simply complex, but 
actually invite the creation of complicated entities, and numerous 
federal payments, that arguably do not correspond to a common sense 
notion of farming,'' the U.S. Attorney wrote.
  Perhaps the most notorious case of abuse is that of landowner 
profiled a few years ago on ``60 Minutes,'' whose family exploited 
several loopholes in the eligibility laws to receive almost $3 million 
in USDA money over a 2 year period. He did it by creating an ornate 
ownership structure that looked like a Christmas tree, but this tree 
was trimmed with phony partners: among them were three churches and a 
local boy scout council that the landowner used to maximize his 
payments.
  Like this landowner, many farmers are enticed by these loopholes to 
concentrate more on farming the government than farming their land. 
This trend of farming the government is so pervasive that one former 
Agriculture Secretary called it ``the principal problem'' in the 
farming community today.
  As a result of these flaws in the law, you don't have to be a farmer 
to receive farm subsidies. In fact, a recent study showed that at least 
$2 billion in crop payments have been made to individuals living in 
America's 50 biggest cities over the last decade. We cannot think of 
any justification for crop subsidies going to Manhattan, Greenwich, and 
Beverly Hills.
  More farm subsidies are going to nonfarming locales than any taxpayer 
would ever guess. That's because, in spite of the rhetoric about the 
family farmer, these programs are disproportionately benefiting wealthy 
landowners and off-farm investors: The richest 4 percent of program 
participants receive more than 40 percent of all payments.
  If we are to justify a continued investment in the commodity 
programs, I believe there must be some fundamental reforms. The 
legislation I am introducing today would do just that. It is designed 
to restore some common sense to the administration of these programs, 
to remove the incentives for farming the government, and ultimately to 
better target the subsidies to those who were meant to receive them.
  Among other things, this proposal would: Close the loopholes that 
allow huge sums of farm subsidies to flow to nonfarmers; eliminate the 
shell corporations the current rules encourage farmers to create; set 
tough penalties for cheating the Government to add a real deterrent for 
engaging in fraudulent behavior; bring some simplicity into a system 
that is nearly unintelligible to anyone but a well-trained lawyer; and 
reduce the budget in a way that minimizes the pain for the small family 
farmer who is playing by the rules.
  The Congressional Budget Office estimates that the Farm Fairness Act 
would save approximately $1.8 billion over the next 7 years. I believe 
that is a conservative estimate, and that if the reforms I am proposing 
are properly enforced, this legislation would reduce commodity payments 
anywhere from $2 billion to $3 billion over 7 years. That amounts to a 
significant chunk of the $13.4 billion in commodity program cuts called 
for in the budget reconciliation package we are in the process of 
considering.
  Without a proposal like this, those cuts will be made across the 
board, meaning the small wheat farmer in Fargo will suffer as much as 
the passive investor in Key Largo. To prevent that from happening, I 
intend to offer a version of the Farm Fairness Act as an amendment to 
the budget reconciliation bill this week.
  This proposal is called the Farm Fairness Act because it will restore 
some fairness to the way we support farmers, by targeting payments to 
the people who are actually plowing the fields and harvesting the 
crops. And it will make sure that taxpayers finally get a fair return 
for the tax dollars we spend on the commodity programs. It is a 
balanced measure, one that Members from both farm and nonfarm States 
can support, and I would urge my colleagues to do so.
  Mr. President, I ask unanimous consent that the full text of this 
legislation be included in the Record, along with a section-by-section 
summary that I have prepared explaining the contents of the bill.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1367

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Farm Fairness Act of 1995''.
     
[[Page S 16109]]


     SEC. 2. PAYMENT LIMITATIONS.

       (a) In General.--Section 1001 of the Food Security Act of 
     1985 (7 U.S.C. 1308) is amended by striking paragraphs (1) 
     through (3) and inserting the following:
       ``(1)(A) Subject to sections 1001A through 1001C, for each 
     of the 1996 and subsequent crops, the total amount of 
     payments specified in subparagraph (B) that a person shall be 
     entitled to receive under 1 or more of the annual programs 
     established under the Agricultural Act of 1949 (7 U.S.C. 1421 
     et seq.) for wheat, feed grains, upland cotton, extra long 
     staple cotton, rice, and oilseeds may not exceed $35,000.
       ``(B) In subparagraph (A), the term `payments' means--
       ``(i) deficiency payments;
       ``(ii) land diversion payments;
       ``(iii) any part of any payment that is determined by the 
     Secretary of Agriculture to represent compensation for 
     resource adjustment or public access for recreation;
       ``(iv) any gain realized by a producer from repaying a loan 
     for a crop of any commodity (other than honey) at a lower 
     level than the original loan level established under the 
     Agricultural Act of 1949;
       ``(v) any deficiency payment received for a crop of wheat 
     or feed grains under the Agricultural Act of 1949 as the 
     result of a reduction of the loan level for the crop under 
     the Act;
       ``(vi) any loan deficiency payment received for a crop of 
     wheat, feed grains, upland cotton, rice, or oilseeds under 
     the Agricultural Act of 1949; and
       ``(vii) any inventory reduction payment received for a crop 
     of wheat, feed grains, upland cotton, or rice under the 
     Agricultural Act of 1949.
       ``(2) In applying the limitation specified in paragraph 
     (1)(A) to payments specified in paragraph (1)(B):
       ``(A) The Secretary shall attribute the payments directly 
     to persons who receive the payments.
       ``(B) In the case of payments that are received by an 
     entity, the Secretary shall attribute the payments to 
     individuals who own the entity in proportion to the ownership 
     interest of the individuals in the entity.''.

     SEC. 3. DEFINITION OF PERSON.

       Section 1001(5)(B)(i)(II) of the Food Security Act of 1985 
     (7 U.S.C. 1308(5)(B)(i)(II)) is amended by inserting 
     ``general partnership, joint venture,'' after ``limited 
     partnership,''.

     SEC. 4. REMOVAL OF 3-ENTITY RULE.

       Subsection (a) of section 1001A of the Food Security Act of 
     1985 (7 U.S.C. 1308-1) is amended to read as follows:
       ``(a) Prevention of Creation of Entities to Qualify as 
     Separate Persons.--The Secretary shall attribute payments 
     specified in section 1001(1)(B) to persons in accordance with 
     section 1001(2).''.

     SEC. 5. ACTIVELY ENGAGED IN FARMING.

       (a) Personal Labor and Active Personal Management.--
       (1) Individuals.--Section 1001A(b)(2)(A)(i) of the Food 
     Security Act of 1985 (7 U.S.C. 1308-1(b)(2)(A)(i)) is amended 
     by striking subclause (II) and inserting the following:

       ``(II) personal labor and active personal management;''.

       (2) Corporations or other entities.--Section 1001A(b)(2)(B) 
     of the Act is amended to read as follows:
       ``(B) Corporations or other entities.--
       ``(i) Significant contribution.--A corporation or other 
     entity shall be considered as actively engaged in farming 
     with respect to a farming operation if--

       ``(I) the entity separately makes a significant 
     contribution (based on the total value of the farming 
     operation) of capital, equipment, or land;
       ``(II) stockholders or members who individually or 
     collectively own at least a 50 percent interest in the 
     operation make a significant contribution of personal labor 
     and active personal management to the operation; and
       ``(III) the standards provided in clauses (ii) and (iii) of 
     subparagraph (A), as applied to the entity, are met by the 
     entity.

       ``(ii) No significant contribution.--Notwithstanding clause 
     (i), if the stockholders or members who are not described in 
     clause (i)(II) do not individually or collectively make a 
     significant contribution of personal labor or active personal 
     management to the operation, the payments to the entity shall 
     be reduced by a percentage equal to the percentage ownership 
     in the entity of the members.
       ``(iii) Transition rule.--A family farm corporation shall 
     meet the requirements of clause (i)(II) during the 10-year 
     period beginning on October 1, 1996, if--

       ``(I) the corporation met the requirements of this 
     subparagraph (as in effect prior to the amendment made by 
     section 5(a)(2) of the Farm Fairness Act of 1995) during at 
     least the 5-year period ending on the date of enactment of 
     the Act;
       ``(II) the corporation ceases as a result of the death, 
     disability, or retirement of a stockholder or member of the 
     corporation to meet the requirements of clause (i)(II); and
       ``(III) stockholders or members who individually or 
     collectively own at least a 10 percent interest in the 
     operation make a significant contribution of personal labor 
     and active personal management to the operation.''.

       (3) Entities making significant contributions.--Section 
     1001A(b)(2) of the Act is amended--
       (A) by striking subparagraph (C); and
       (B) by redesignating subparagraph (D) as subparagraph (C).
       (4) Family members.--The first sentence of section 
     1001A(b)(3)(B) of the Act is amended by striking ``active 
     personal management or personal labor'' and inserting 
     ``active personal management and personal labor''.
       (b) Landowners.--Section 1001A(b)(3)(A) of the Act is 
     amended to read as follows:
       ``(A) Landowners.--A person that is a landowner 
     contributing the owned land to the farming operation, if the 
     person demonstrates to the satisfaction of the Secretary that 
     the person--
       ``(i) receives rent for the use of the land based on the 
     production of the land or the operating results of the 
     operation;
       ``(ii) rents the land only to persons who are considered 
     actively engaged in farming under this section; and
       ``(iii) meets the standards provided in clauses (ii) and 
     (iii) of paragraph (2)(A).''.
       (c) Definitions.--Section 1001A(b) of the Act is amended by 
     adding at the end the following:
       ``(7) Definitions.--In this subsection and section 
     1001(5)(D) (7 U.S.C. 1308(5)(D)):
       ``(A) Active personal management.--The term `active 
     personal management' means personally providing, on a daily 
     basis as required during the entire growing season for a 
     crop--
       ``(i) direct supervision and direction of activities and 
     labor involved in a farming operation; or
       ``(ii) on-site services that are directly related and 
     necessary to a farming operation.
       ``(B) Capital.--The term `capital' does not include any 
     payment described in paragraph (1) or (2) of section 1001 (7 
     U.S.C. 1308). The Secretary shall establish procedures to 
     ensure that the term is applied in a manner that does not 
     include any such payment.
       ``(C) Significant contribution.--The term `significant 
     contribution' means--
       ``(i) in the case of land, capital, or equipment 
     contributed by a person to an operation, a percentage of the 
     land, capital, or equipment, respectively, to the operation 
     that is at least equal to the percentage interest of the 
     person in the operation; and
       ``(ii) in the case of personal labor and personal active 
     management contributed by a person to an operation, at least 
     1,000 hours annually or 50 percent of the commensurate share, 
     whichever is less.''.
       (d) Conforming Amendments.--Section 1001(5) of the Act (7 
     U.S.C. 1308(5)) is amended--
       (1) by striking subparagraph (D); and
       (2) by redesignating subparagraph (E) as subparagraph (D).

     SEC. 6. SCHEMES OR DEVICES.

       Section 1001B of the Food Security Act of 1985 (7 U.S.C. 
     1308-2) is amended by striking ``applicable to'' and all that 
     follows through ``succeeding crop year'' and inserting 
     ``applicable to--
       ``(1) the crop year for which the scheme or device was 
     adopted and the succeeding 5 crop years; and
       ``(2) if fraud was committed in connection with a scheme or 
     device involving a price support, production adjustment, or 
     conservation program administered by the Secretary of 
     Agriculture, the crop year for which the scheme or device was 
     adopted and the succeeding 10 crop years''.

     SEC. 7. EFFECTIVE DATE.

       This Act and the amendments made by this Act shall become 
     effective on October 1, 1996.
                                                                    ____


       The Farm Fairness Act of 1995--Section-by-Section Summary


                               section 1

       [Bill title.]


                               section 2

       Payment limits: This section would set a new, single 
     payment limit of $35,000 for any individual, corporation or 
     any other legal ``entity'' seeking to enroll in the USDA's 
     main crop subsidy programs. This limit would apply to all 
     commodity payments, but it would not include the various 
     conservation programs.
       Under current law, there is a confusing multi-tier system 
     of various payment limits. An individual or corporation can 
     receive up to $50,000 in deficiency payments; up to $75,000 
     in several other price support payments (marketing loan 
     gains, loan deficiency payments, and the sporadically-used 
     ``Findlay'' payments); and up to a total of $250,000 for all 
     payments.
       In light of the fact that fewer than 2% of all program 
     participants receive more than $40,000 in deficiency 
     payments, creating a single $35,000 cap seems a reasonable 
     step that would impact very few family while producing 
     significant budget savings.
       Direct attribution: One of the biggest problems with the 
     current system of payment limits is that it has established 
     different limit levels depending on how the farming operation 
     is structured. This makes it relatively easy for large 
     producers to receive payments several times the current 
     $50,000 and $75,000 limits.
       This section would solve that problem by requiring the 
     attribution of all crop subsidy payments directly to 
     individuals, via social security numbers. For corporations, 
     payments would still be distributed to the legal entity, but 
     it would be attributed to the individual shareholders based 
     on their respective interests in the corporation.


                               section 3

       This section would close a widely-exploited loophole in the 
     existing rules by adding general partnerships and joint 
     ventures to the 

[[Page S 16110]]
     list of business organizations that are subject to the payment 
     limitations.
       Under current law, general partnerships and joint ventures 
     are not listed under the definition of legal ``persons'' and 
     are thus exempt from the payment limitations. This exemption 
     gives farming operations a heavy incentive to structure their 
     businesses under the aegis of a general partnership: the more 
     ``entities'' included in the partnership, the more payments 
     the operation can receive.


                               section 4

       This section would repeal the most flagrantly-abused 
     provision in the payment limit laws: the ``Three-Entity 
     Rule.''
       This rule was passed by Congress in 1987 purportedly to 
     limit the number of sources from which a farmer could receive 
     payments. In reality, though, it has mostly been an 
     invitation for farmers to structure their operations in such 
     a way as to maximize payments.
       This section would allow farmers to receive payments from 
     any number of sources. But because of the strict $35,000 
     limit we establish, and the direct attribution system, there 
     will be few remaining incentives for farmers to form multiple 
     corporations and ``shell'' entities that exist only on paper.


                               section 5

       For any payment limitation reforms to work, the loopholes 
     in the rules defining who is ``actively engaged in farming'' 
     need to be tightened. Otherwise, significant dollars will 
     continue to flow to off-farm investors, and big operations 
     will continue to flout the payment limits.
       This section contains several sensible changes in the 
     eligibility rules. Among others, it would:
       Require any individual or majority shareholder(s) in a 
     corporation to make a significant contribution of ``active 
     personal management'' and ``active personal labor.'' Current 
     rules require only one or the other.
       Require minority shareholders to contribute at least 
     ``active management'' or ``active labor'' on the farm. 
     Current rules allow too many passive stockholders to receive 
     payments just by making a contribution of capital, land or 
     equipment, i.e., money. If a minority shareholder does not 
     meet this threshold, the corporation's payments will be 
     reduced in proportion to that shareholders stake in the 
     venture.
       Redefine ``active personal management'' to demand a regular 
     and consistent presence on the farm during the growing 
     season, to guarantee that payees are closely involved in the 
     day-to-day operations of the farming venture. The current 
     definition is exceedingly vague, requiring only that the 
     contribution be ``critical to the farm's profitability.''
       Toughen the requirements on landowners. Under current law, 
     landowners are essentially exempt from the labor and 
     management contribution requirements, as long as they are 
     engaged in a true share-lease arrangement with a tenant. This 
     provision would require that the tenant actually be 
     ``actively engaged'' for the landowner to qualify for 
     payments.
       Lastly, this section would expressly prohibit individuals 
     or shareholders from using their subsidy payments to account 
     for their required capital contribution. Under current rules, 
     farmers can apply their advanced deficiency payments toward 
     their capital contribution, which undercuts the legal 
     requirement that a recipient be at risk.


                               section 6

       This section would increase the penalties for engaging in a 
     ``scheme or device''--creating bogus corporations, etc.--and 
     defrauding the government.
       Under current law, any individual or entity found by the 
     USDA to be engaged in a scheme or device is prohibited from 
     receiving payments for the rest of that crop year as well as 
     the next crop year. This provision would ban payments for the 
     succeeding five crop years. In addition, any individual or 
     entity participating in commodity programs that is convicted 
     of defrauding the government would be banned from receiving 
     payments for the next 10 years. (There is currently no 
     additional punishment for persons convicted of fraud.)
       These steps are designed to create a real deterrent against 
     attempts to milk the system and deceive the government. The 
     existing penalties are clearly not having any impact.


                               section 7

       This section would establish the effective date of these 
     changes as October 1, 1996.

                          ____________________