[Congressional Record Volume 149, Number 44 (Wednesday, March 19, 2003)]
[Senate]
[Pages S4005-S4009]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself, Mr. Baucus, Mr. Roberts, Mr. 
        Brownback, Mrs. Lincoln, Mr. Burns, Mr. Craig, Mr. Crapo, Mr. 
        Fitzgerald, Mr. Johnson, Mr. Hagel, Mr. Miller, Mr. Dorgan, and 
        Mr. Daschle):
  S. 665. A bill to amend the Internal Revenue Code of 1986 to provide 
tax relief for farmers and fishermen, and for other purposes; to the 
Committee on Finance.
  Mr. GRASSLEY. Mr. President, I rise today to introduce, along with my 
good friend, Senator Baucus, to introduce the Tax Empowerment and 
Relief for Farmers and Fishermen Act, which I will refer to as the 
``TERFF Act.'' I am pleased that Senators Roberts, Brownback, Lincoln, 
Burns, Craig, Crapo, Fitzgerald, Hagel, and Dorgan are joining Senator 
Baucus and me as cosponsors of this important legislation.
  I am a farmer, like my father was before me. I understand farming and 
how policy decisions from Washington impact hardworking farmers, like 
my son Robin. Before I ran for elected office and after I leave, God 
willing, I'll still be farming. There is little that I feel more 
strongly about than providing the agriculture community with the 
potential to survive and to thrive. As far as I'm concerned, 
agriculture is my ``turf'' and as long as I'm in this town, I'll do all 
I can to serve my friends and neighbors in the agriculture community.
  This legislation has already been adopted by the Senate multiple 
times. In the midst of a serious downturn in the agriculture economy, 
it seems to me we ought to be doing everything we can to help farmers, 
and this would provide significant assistance.
  First, this legislation includes Farm, Fish, and Ranch Risk 
Management Accounts. These farmer saving accounts would allow farmers 
to contribute up to 20 percent of their income in an account, and 
deduct it in the same year. Farm accounts would be a very important 
risk management tool that will help farmers put away money when there's 
actual income, so that, in the bad times, there will be a safety net. 
This measure has strong bipartisan support and was actually sent to 
President Clinton, who vetoed it.
  In addition, this legislation would exempt Conservation Reserve 
Program payments from self-employment tax. Under current law, farmers 
who participate in the CRP are unnecessarily struggling during tax 
season because of a case pushed by the IRS. The latest 6th Circuit 
court's ruling treats CRP payments as farm income subject to the 
additional self-employment tax rate of 15 percent.
  Senator Brownback has taken the lead on fixing this problem. This 
unfair tax not only ignores the intent of Congress in creating the CRP, 
it discourages farmers from using environmentally pro-active measures. 
At a time when farmers are struggling to regain their footing 
economically and do the right thing environmentally, it's important 
that Congress support them by upholding its promise on CRP.
  In addition, Senator Lugar has led the effort to expand the current 
program that allows companies to donate to food banks, so that farmers 
and restaurants can also donate surplus food directly to needy food 
banks. This will be a win for the farmers and a big win for people who 
depend on food bank assistance.
  In addition, when we passed income averaging for farmers a few years 
ago, we neglected to take into account the problem of running into the 
alternative minimum tax, which many farmers are facing now. My bill 
will fix this growing problem.
  My bill also expands opportunities for beginning farmers who are in 
need of low interest rate loans for capital purchases of farmland and 
equipment.
  Current law permits State authorities to issue tax exempt bonds and 
to lend the proceeds from the sale of the bonds to beginning farmers 
and ranchers to finance the cost of acquiring land, buildings and 
equipment used in a farm or ranch operation.
  Unfortunately, aggie bonds are subject to a volume cap and must 
compete with big industrial projects for bond allocation. Aggie bonds 
share few similarities to industrial revenue bonds and should not be 
subject to the volume cap established for industrial revenue bonds.
  Insufficient allocation of funding due to the volume cap limits the 
effectiveness of this program. We can't stand by and allow the next 
generation of farmers to lose an opportunity to participate in farming 
because of competition with industry for reduced interest loan rates.

[[Page S4006]]

  In addition, the IRS recently determined that some cooperatives 
should be exposed to a regular corporate tax due to the fact that they 
are using organic value-added practices rather than manufactured value-
added practices. This is unfair, and needs to be fixed.
  It is also imperative that we not neglect the difficulties many 
producers are facing in light of persistent drought conditions. Under 
current law, a producer who loses livestock, or is forced to sell 
livestock, or is forced to sell livestock, is required to replace that 
livestock within two years. However, some parts of the country have 
already experienced two years of drought with no end in sight.
  It goes against common sense for these producers to replace livestock 
until conditions improve. My legislation would extend the 2-year 
deadline to 4 years.
  And of course my package wouldn't be complete without a provision 
leveling the playing field for ethanol producers.
  The Small Ethanol Producer Credit will allow small cooperative 
producers of ethanol to be able to receive the same tax benefits as 
large companies. This provision provides cooperatives the ability to 
elect to pass through small ethanol producer credits to its patron.
  The ``TERFF'' package will do more to reform taxes for the American 
farmer than any other measure in recent memory. I urge my colleagues to 
strongly support this measure.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 665

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

     SECTION 1. SHORT TITLE; ETC.

       (a) Short Title.--This Act may be cited as the ``Tax 
     Empowerment and Relief for Farmers and Fishermen (TERFF) 
     Act''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Table of Contents.--

Sec. 1. Short title; etc.
Sec. 2. Farm, fishing, and ranch risk management accounts.
Sec. 3. Exclusion of rental income from self-employment tax.
Sec. 4. Exclusion of conservation reserve program payments from self-
              employment tax.
Sec. 5. Exemption of agricultural bonds from private activity bond 
              volume limits.
Sec. 6. Modifications to section 512(b)(13).
Sec. 7. Charitable deduction for contributions of food inventory.
Sec. 8. Coordinate farmers and fishermen income averaging and the 
              alternative minimum tax.
Sec. 9. Modification to cooperative marketing rules to include value 
              added processing involving animals.
Sec. 10. Extension of declaratory judgment procedures to farmers' 
              cooperative organizations.
Sec. 11. Small ethanol producer credit.
Sec. 12. Payment of dividends on stock of cooperatives without reducing 
              patronage dividends.
Sec. 13. Special rules for livestock sold on account of weather-related 
              conditions.

     SEC. 2. FARM, FISHING, AND RANCH RISK MANAGEMENT ACCOUNTS.

       (a) In General.--Subpart C of part II of subchapter E of 
     chapter 1 (relating to taxable year for which deductions 
     taken) is amended by inserting after section 468B the 
     following new section:

     ``SEC. 468C. FARM, FISHING, AND RANCH RISK MANAGEMENT 
                   ACCOUNTS.

       ``(a) Deduction Allowed.--In the case of an individual 
     engaged in an eligible farming business or commercial 
     fishing, there shall be allowed as a deduction for any 
     taxable year the amount paid in cash by the taxpayer during 
     the taxable year to a Farm, Fishing, and Ranch Risk 
     Management Account (hereinafter referred to as the `FFARRM 
     Account').
       ``(b) Limitation.--
       ``(1) Contributions.--The amount which a taxpayer may pay 
     into the FFARRM Account for any taxable year shall not exceed 
     20 percent of so much of the taxable income of the taxpayer 
     (determined without regard to this section) which is 
     attributable (determined in the manner applicable under 
     section 1301) to any eligible farming business or commercial 
     fishing.
       ``(2) Distributions.--Distributions from a FFARRM Account 
     may not be used to purchase, lease, or finance any new 
     fishing vessel, add capacity to any fishery, or otherwise 
     contribute to the overcapitalization of any fishery. The 
     Secretary of Commerce shall implement regulations to enforce 
     this paragraph.
       ``(c) Eligible Businesses.--For purposes of this section--
       ``(1) Eligible farming business.--The term `eligible 
     farming business' means any farming business (as defined in 
     section 263A(e)(4)) which is not a passive activity (within 
     the meaning of section 469(c)) of the taxpayer.
       ``(2) Commercial fishing.--The term `commercial fishing' 
     has the meaning given such term by section (3) of the 
     Magnuson-Stevens Fishery Conservation and Management Act (16 
     U.S.C. 1802) but only if such fishing is not a passive 
     activity (within the meaning of section 469(c)) of the 
     taxpayer.
       ``(d) FFARRM Account.--For purposes of this section--
       ``(1) In general.--The term `FFARRM Account' means a trust 
     created or organized in the United States for the exclusive 
     benefit of the taxpayer, but only if the written governing 
     instrument creating the trust meets the following 
     requirements:
       ``(A) No contribution will be accepted for any taxable year 
     in excess of the amount allowed as a deduction under 
     subsection (a) for such year.
       ``(B) The trustee is a bank (as defined in section 408(n)) 
     or another person who demonstrates to the satisfaction of the 
     Secretary that the manner in which such person will 
     administer the trust will be consistent with the requirements 
     of this section.
       ``(C) The assets of the trust consist entirely of cash or 
     of obligations which have adequate stated interest (as 
     defined in section 1274(c)(2)) and which pay such interest 
     not less often than annually.
       ``(D) All income of the trust is distributed currently to 
     the grantor.
       ``(E) The assets of the trust will not be commingled with 
     other property except in a common trust fund or common 
     investment fund.
       ``(2) Account taxed as grantor trust.--The grantor of a 
     FFARRM Account shall be treated for purposes of this title as 
     the owner of such Account and shall be subject to tax thereon 
     in accordance with subpart E of part I of subchapter J of 
     this chapter (relating to grantors and others treated as 
     substantial owners).
       ``(e) Inclusion of Amounts Distributed.--
       ``(1) In general.--Except as provided in paragraph (2), 
     there shall be includible in the gross income of the taxpayer 
     for any taxable year--
       ``(A) any amount distributed from a FFARRM Account of the 
     taxpayer during such taxable year, and
       ``(B) any deemed distribution under--
       ``(i) subsection (f )(1) (relating to deposits not 
     distributed within 5 years),
       ``(ii) subsection (f )(2) (relating to cessation in 
     eligible farming business), and
       ``(iii) subparagraph (B) or (C) of subsection (f )(3) 
     (relating to prohibited transactions and pledging account as 
     security).
       ``(2) Exceptions.--Paragraph (1)(A) shall not apply to--
       ``(A) any distribution to the extent attributable to income 
     of the Account, and
       ``(B) the distribution of any contribution paid during a 
     taxable year to a FFARRM Account to the extent that such 
     contribution exceeds the limitation applicable under 
     subsection (b) if requirements similar to the requirements of 
     section 408(d)(4) are met.

     For purposes of subparagraph (A), distributions shall be 
     treated as first attributable to income and then to other 
     amounts.
       ``(f ) Special Rules.--
       ``(1) Tax on deposits in account which are not distributed 
     within 5 years.--
       ``(A) In general.--If, at the close of any taxable year, 
     there is a nonqualified balance in any FFARRM Account--
       ``(i) there shall be deemed distributed from such Account 
     during such taxable year an amount equal to such balance, and
       ``(ii) the taxpayer's tax imposed by this chapter for such 
     taxable year shall be increased by 10 percent of such deemed 
     distribution.

     The preceding sentence shall not apply if an amount equal to 
     such nonqualified balance is distributed from such Account to 
     the taxpayer before the due date (including extensions) for 
     filing the return of tax imposed by this chapter for such 
     year (or, if earlier, the date the taxpayer files such return 
     for such year).
       ``(B) Nonqualified balance.--For purposes of subparagraph 
     (A), the term `nonqualified balance' means any balance in the 
     Account on the last day of the taxable year which is 
     attributable to amounts deposited in such Account before the 
     4th preceding taxable year.
       ``(C) Ordering rule.--For purposes of this paragraph, 
     distributions from a FFARRM Account (other than distributions 
     of current income) shall be treated as made from deposits in 
     the order in which such deposits were made, beginning with 
     the earliest deposits.
       ``(2) Cessation in eligible business.--At the close of the 
     first disqualification period after a period for which the 
     taxpayer was engaged in an eligible farming business or 
     commercial fishing, there shall be deemed distributed from 
     the FFARRM Account of the taxpayer an amount equal to the 
     balance in such Account (if any) at the close of such 
     disqualification period. For purposes of the

[[Page S4007]]

     preceding sentence, the term `disqualification period' means 
     any period of 2 consecutive taxable years for which the 
     taxpayer is not engaged in an eligible farming business or 
     commercial fishing.
       ``(3) Certain rules to apply.--Rules similar to the 
     following rules shall apply for purposes of this section:
       ``(A) Section 220(f )(8) (relating to treatment after death 
     of account holder).
       ``(B) Section 408(e)(2) (relating to loss of exemption of 
     account where individual engages in prohibited transaction).
       ``(C) Section 408(e)(4) (relating to effect of pledging 
     account as security).
       ``(D) Section 408(g) (relating to community property laws).
       ``(E) Section 408(h) (relating to custodial accounts).
       ``(4) Time when payments deemed made.--For purposes of this 
     section, a taxpayer shall be deemed to have made a payment to 
     a FFARRM Account on the last day of a taxable year if such 
     payment is made on account of such taxable year and is made 
     on or before the due date (without regard to extensions) for 
     filing the return of tax for such taxable year.
       ``(5) Individual.--For purposes of this section, the term 
     `individual' shall not include an estate or trust.
       ``(6) Deduction not allowed for self-employment tax.--The 
     deduction allowable by reason of subsection (a) shall not be 
     taken into account in determining an individual's net 
     earnings from self-employment (within the meaning of section 
     1402(a)) for purposes of chapter 2.
       ``(g) Reports.--The trustee of a FFARRM Account shall make 
     such reports regarding such Account to the Secretary and to 
     the person for whose benefit the Account is maintained with 
     respect to contributions, distributions, and such other 
     matters as the Secretary may require under regulations. The 
     reports required by this subsection shall be filed at such 
     time and in such manner and furnished to such persons at such 
     time and in such manner as may be required by such 
     regulations.''.
       (b) Tax on Excess Contributions.--
       (1) Subsection (a) of section 4973 (relating to tax on 
     excess contributions to certain tax-favored accounts and 
     annuities) is amended by striking ``or'' at the end of 
     paragraph (3), by redesignating paragraph (4) as paragraph 
     (5), and by inserting after paragraph (3) the following new 
     paragraph:
       ``(4) a FFARRM Account (within the meaning of section 
     468C(d)), or''.
       (2) Section 4973 is amended by adding at the end the 
     following new subsection:
       ``(g) Excess Contributions to FFARRM Accounts.--For 
     purposes of this section, in the case of a FFARRM Account 
     (within the meaning of section 468C(d)), the term `excess 
     contributions' means the amount by which the amount 
     contributed for the taxable year to the Account exceeds the 
     amount which may be contributed to the Account under section 
     468C(b) for such taxable year. For purposes of this 
     subsection, any contribution which is distributed out of the 
     FFARRM Account in a distribution to which section 
     468C(e)(2)(B) applies shall be treated as an amount not 
     contributed.''.
       (3) The section heading for section 4973 is amended to read 
     as follows:

     ``SEC. 4973. EXCESS CONTRIBUTIONS TO CERTAIN ACCOUNTS, 
                   ANNUITIES, ETC.''.

       (4) The table of sections for chapter 43 is amended by 
     striking the item relating to section 4973 and inserting the 
     following new item:

``Sec. 4973. Excess contributions to certain accounts, annuities, 
              etc.''.

       (c) Tax on Prohibited Transactions.--
       (1) Subsection (c) of section 4975 (relating to tax on 
     prohibited transactions) is amended by adding at the end the 
     following new paragraph:
       ``(6) Special rule for ffarrm accounts.--A person for whose 
     benefit a FFARRM Account (within the meaning of section 
     468C(d)) is established shall be exempt from the tax imposed 
     by this section with respect to any transaction concerning 
     such account (which would otherwise be taxable under this 
     section) if, with respect to such transaction, the account 
     ceases to be a FFARRM Account by reason of the application of 
     section 468C(f )(3)(A) to such account.''.
       (2) Paragraph (1) of section 4975(e) is amended by 
     redesignating subparagraphs (E) and (F) as subparagraphs (F) 
     and (G), respectively, and by inserting after subparagraph 
     (D) the following new subparagraph:
       ``(E) a FFARRM Account described in section 468C(d),''.
       (d) Failure To Provide Reports on FFARRM Accounts.--
     Paragraph (2) of section 6693(a) (relating to failure to 
     provide reports on certain tax-favored accounts or annuities) 
     is amended by redesignating subparagraphs (C) and (D) as 
     subparagraphs (D) and (E), respectively, and by inserting 
     after subparagraph (B) the following new subparagraph:
       ``(C) section 468C(g) (relating to FFARRM Accounts),''.
       (e) Clerical Amendment.--The table of sections for subpart 
     C of part II of subchapter E of chapter 1 is amended by 
     inserting after the item relating to section 468B the 
     following new item:

``Sec. 468C. Farm, Fishing and Ranch Risk Management Accounts.''.

       (f ) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 3. EXCLUSION OF RENTAL INCOME FROM SELF-EMPLOYMENT TAX.

       (a) Internal Revenue Code.--Section 1402(a)(1)(A) (relating 
     to net earnings from self-employment) is amended by striking 
     ``an arrangement'' and inserting ``a written lease 
     agreement''.
       (b) Social Security Act.--Section 211(a)(1)(A) of the 
     Social Security Act is amended by striking ``an arrangement'' 
     and inserting ``a written lease agreement''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 4. EXCLUSION OF CONSERVATION RESERVE PROGRAM PAYMENTS 
                   FROM SELF-EMPLOYMENT TAX.

       (a) Internal Revenue Code.--Section 1402(a)(1) (relating to 
     net earnings from self-employment) is amended by inserting 
     ``and including payments under section 1233(2) of the Food 
     Security Act of 1985 (16 U.S.C. 3833(2))'' after ``crop 
     shares''.
       (b) Social Security Act.--Section 211(a)(1) of the Social 
     Security Act is amended by inserting ``and including payments 
     under section 1233(2) of the Food Security Act of 1985 (16 
     U.S.C. 3833(2))'' after ``crop shares''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to payments made after the date of the enactment 
     of this Act.

     SEC. 5. EXEMPTION OF AGRICULTURAL BONDS FROM PRIVATE ACTIVITY 
                   BOND VOLUME LIMITS.

       (a) In General.--Section 146(g) (relating to exception for 
     certain bonds) is amended by striking ``and'' at the end of 
     paragraph (3), by striking the period at the end of paragraph 
     (4) and inserting ``, and'', and by inserting after paragraph 
     (4) the following new paragraph:
       ``(5) any qualified small issue bond described in section 
     144(a)(12)(B)(ii).''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to bonds issued after the date of the enactment 
     of this Act.

     SEC. 6. MODIFICATIONS TO SECTION 512(B)(13).

       (a) In General.--Paragraph (13) of section 512(b) (relating 
     to special rules for certain amounts received from controlled 
     entities) is amended by redesignating subparagraph (E) as 
     subparagraph (F) and by inserting after subparagraph (D) the 
     following new subparagraph:
       ``(E) Paragraph to apply only to excess payments.--
       ``(i) In general.--Subparagraph (A) shall apply only to the 
     portion of a specified payment received or accrued by the 
     controlling organization that exceeds the amount which would 
     have been paid or accrued if such payment met the 
     requirements prescribed under section 482.
       ``(ii) Addition to tax for valuation misstatements.--The 
     tax imposed by this chapter on the controlling organization 
     shall be increased by an amount equal to 20 percent of the 
     larger of--

       ``(I) such excess determined without regard to any 
     amendment or supplement to a return of tax, or
       ``(II) such excess determined with regard to all such 
     amendments and supplements.''.

       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     apply to payments received or accrued after December 31, 
     2000.
       (2) Payments subject to binding contract transition rule.--
     If the amendments made by section 1041 of the Taxpayer Relief 
     Act of 1997 did not apply to any amount received or accrued 
     in the first 2 taxable years beginning on or after the date 
     of the enactment of the Taxpayer Relief Act of 1997 under any 
     contract described in subsection (b)(2) of such section, such 
     amendments also shall not apply to amounts received or 
     accrued under such contract before January 1, 2001.

     SEC. 7. CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD 
                   INVENTORY.

       (a) In General.--Subsection (e) of section 170 (relating to 
     certain contributions of ordinary income and capital gain 
     property) is amended by adding at the end the following new 
     paragraph:
       ``(7) Application of paragraph (3) to certain contributions 
     of food inventory.--For purposes of this section--
       ``(A) Extension to individuals.--In the case of a 
     charitable contribution of apparently wholesome food--
       ``(i) paragraph (3)(A) shall be applied without regard to 
     whether the contribution is made by a C corporation, and
       ``(ii) in the case of a taxpayer other than a C 
     corporation, the aggregate amount of such contributions from 
     any trade or business (or interest therein) of the taxpayer 
     for any taxable year which may be taken into account under 
     this section shall not exceed 10 percent of the taxpayer's 
     net income from any such trade or business, computed without 
     regard to this section, for such taxable year.
       ``(B) Limitation on reduction.--In the case of a charitable 
     contribution of apparently wholesome food, notwithstanding 
     paragraph (3)(B), the amount of the reduction determined 
     under paragraph (1)(A) shall not exceed the amount by which 
     the fair market value of such property exceeds twice the 
     basis of such property.
       ``(C) Determination of basis.--If a taxpayer--
       ``(i) does not account for inventories under section 471, 
     and
       ``(ii) is not required to capitalize indirect costs under 
     section 263A,


[[Page S4008]]


     the taxpayer may elect, solely for purposes of paragraph 
     (3)(B), to treat the basis of any apparently wholesome food 
     as being equal to 25 percent of the fair market value of such 
     food.
       ``(D) Determination of fair market value.--In the case of a 
     charitable contribution of apparently wholesome food which is 
     a qualified contribution (within the meaning of paragraph 
     (3), as modified by subparagraph (A) of this paragraph) and 
     which, solely by reason of internal standards of the taxpayer 
     or lack of market, cannot or will not be sold, the fair 
     market value of such contribution shall be determined--
       ``(i) without regard to such internal standards or such 
     lack of market and
       ``(ii) by taking into account the price at which the same 
     or substantially the same food items (as to both type and 
     quality) are sold by the taxpayer at the time of the 
     contribution (or, if not so sold at such time, in the recent 
     past).
       ``(E) Apparently wholesome food.--For purposes of this 
     paragraph, the term `apparently wholesome food' has the 
     meaning given such term by section 22(b)(2) of the Bill 
     Emerson Good Samaritan Food Donation Act (42 U.S.C. 
     1791(b)(2)), as in effect on the date of the enactment of 
     this paragraph.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to contributions made after the date of the 
     enactment of this Act.

     SEC. 8. COORDINATE FARMERS AND FISHERMEN INCOME AVERAGING AND 
                   THE ALTERNATIVE MINIMUM TAX.

       (a) In General.--Section 55(c) (defining regular tax) is 
     amended by redesignating paragraph (2) as paragraph (3) and 
     by inserting after paragraph (1) the following new paragraph:
       ``(2) Coordination with income averaging for farmers and 
     fishermen.--Solely for purposes of this section, section 1301 
     (relating to averaging of farm and fishing income) shall not 
     apply in computing the regular tax.''.
       (b) Allowing Income Averaging for Fishermen.--
       (1) In general.--Section 1301(a) is amended by striking 
     ``farming business'' and inserting ``farming business or 
     fishing business''.
       (2) Definition of elected farm income.--
       (A) In general.--Clause (i) of section 1301(b)(1)(A) is 
     amended by inserting ``or fishing business'' before the 
     semicolon.
       (B) Conforming amendment.--Subparagraph (B) of section 
     1301(b)(1) is amended by inserting ``or fishing business'' 
     after ``farming business'' both places it occurs.
       (3) Definition of fishing business.--Section 1301(b) is 
     amended by adding at the end the following new paragraph:
       ``(4) Fishing business.--The term `fishing business' means 
     the conduct of commercial fishing as defined in section 3 of 
     the Magnuson-Stevens Fishery Conservation and Management Act 
     (16 U.S.C. 1802).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 9. MODIFICATION TO COOPERATIVE MARKETING RULES TO 
                   INCLUDE VALUE ADDED PROCESSING INVOLVING 
                   ANIMALS.

       (a) In General.--Section 1388 (relating to definitions and 
     special rules) is amended by adding at the end the following 
     new subsection:
       ``(k) Cooperative Marketing Includes Value-Added Processing 
     Involving Animals.--For purposes of section 521 and this 
     subchapter, the term `marketing the products of members or 
     other producers' includes feeding the products of members or 
     other producers to cattle, hogs, fish, chickens, or other 
     animals and selling the resulting animals or animal 
     products.''.
       (b) Conforming Amendment.--Section 521(b) is amended by 
     adding at the end the following new paragraph:
       ``(7) Cross Reference.--

  ``For treatment of value-added processing involving animals, see 
section 1388(k).''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 10. EXTENSION OF DECLARATORY JUDGMENT PROCEDURES TO 
                   FARMERS' COOPERATIVE ORGANIZATIONS.

       (a) In General.--Section 7428(a)(1) (relating to 
     declaratory judgments of tax exempt organizations) is amended 
     by striking ``or'' at the end of subparagraph (B) and by 
     adding at the end the following new subparagraph:
       ``(D) with respect to the initial classification or 
     continuing classification of a cooperative as described in 
     section 521(b) which is exempt from tax under section 521(a), 
     or''.
       (b) Effective Date.--The amendments made by this section 
     shall apply with respect to pleadings filed after the date of 
     the enactment of this Act.

     SEC. 11. SMALL ETHANOL PRODUCER CREDIT.

       (a) Allocation of Alcohol Fuels Credit to Patrons of a 
     Cooperative.--Section 40(g) (relating to alcohol used as 
     fuel) is amended by adding at the end the following new 
     paragraph:
       ``(6) Allocation of small ethanol producer credit to 
     patrons of cooperative.--
       ``(A) Election to allocate.--
       ``(i) In general.--In the case of a cooperative 
     organization described in section 1381(a), any portion of the 
     credit determined under subsection (a)(3) for the taxable 
     year may, at the election of the organization, be apportioned 
     pro rata among patrons of the organization on the basis of 
     the quantity or value of business done with or for such 
     patrons for the taxable year.
       ``(ii) Form and effect of election.--An election under 
     clause (i) for any taxable year shall be made on a timely 
     filed return for such year. Such election, once made, shall 
     be irrevocable for such taxable year.
       ``(B) Treatment of organizations and patrons.--The amount 
     of the credit apportioned to patrons under subparagraph (A)--
       ``(i) shall not be included in the amount determined under 
     subsection (a) with respect to the organization for the 
     taxable year,
       ``(ii) shall be included in the amount determined under 
     subsection (a) for the taxable year of each patron for which 
     the patronage dividends for the taxable year described in 
     subparagraph (A) are included in gross income, and
       ``(iii) shall be included in gross income of such patrons 
     for the taxable year in the manner and to the extent provided 
     in section 87.
       ``(C) Special rules for decrease in credits for taxable 
     year.--If the amount of the credit of a cooperative 
     organization determined under subsection (a)(3) for a taxable 
     year is less than the amount of such credit shown on the 
     return of the cooperative organization for such year, an 
     amount equal to the excess of--
       ``(i) such reduction, over
       ``(ii) the amount not apportioned to such patrons under 
     subparagraph (A) for the taxable year,

     shall be treated as an increase in tax imposed by this 
     chapter on the organization. Such increase shall not be 
     treated as tax imposed by this chapter for purposes of 
     determining the amount of any credit under this chapter or 
     for purposes of section 55.''.
       (b) Improvements to Small Ethanol Producer Credit.--
       (1) Definition of small ethanol producer.--Section 40(g) 
     (relating to definitions and special rules for eligible small 
     ethanol producer credit) is amended by striking 
     ``30,000,000'' each place it appears and inserting 
     ``60,000,000''.
       (2) Small ethanol producer credit not a passive activity 
     credit.--Clause (i) of section 469(d)(2)(A) is amended by 
     striking ``subpart D'' and inserting ``subpart D, other than 
     section 40(a)(3),''.
       (3) Allowing credit against entire regular tax and minimum 
     tax.--
       (A) In general.--Subsection (c) of section 38 (relating to 
     limitation based on amount of tax), as amended by section 
     301(b) of the Job Creation and Worker Assistance Act of 2002, 
     is amended by redesignating paragraph (4) as paragraph (5) 
     and by inserting after paragraph (3) the following new 
     paragraph:
       ``(4) Special rules for small ethanol producer credit.--
       ``(A) In general.--In the case of the small ethanol 
     producer credit--
       ``(i) this section and section 39 shall be applied 
     separately with respect to the credit, and
       ``(ii) in applying paragraph (1) to the credit--

       ``(I) the amounts in subparagraphs (A) and (B) thereof 
     shall be treated as being zero, and
       ``(II) the limitation under paragraph (1) (as modified by 
     subclause (I)) shall be reduced by the credit allowed under 
     subsection (a) for the taxable year (other than the small 
     ethanol producer credit).

       ``(B) Small ethanol producer credit.--For purposes of this 
     subsection, the term `small ethanol producer credit' means 
     the credit allowable under subsection (a) by reason of 
     section 40(a)(3).''.
       (B) Conforming amendments.--Subclause (II) of section 
     38(c)(2)(A)(ii), as amended by section 301(b)(2) of the Job 
     Creation and Worker Assistance Act of 2002, and subclause 
     (II) of section 38(c)(3)(A)(ii), as added by section 
     301(b)(1) of such Act, are each amended by inserting ``or the 
     small ethanol producer credit'' after ``employee credit''.
       (4) Small ethanol producer credit not added back to income 
     under section 87.--Section 87 (relating to income inclusion 
     of alcohol fuel credit) is amended to read as follows:

     ``SEC. 87. ALCOHOL FUEL CREDIT.

       ``Gross income includes an amount equal to the sum of--
       ``(1) the amount of the alcohol mixture credit determined 
     with respect to the taxpayer for the taxable year under 
     section 40(a)(1), and
       ``(2) the alcohol credit determined with respect to the 
     taxpayer for the taxable year under section 40(a)(2).''.
       (c) Conforming Amendment.--Section 1388 (relating to 
     definitions and special rules for cooperative organizations) 
     is amended by adding at the end the following new subsection:
       ``(k) Cross Reference.--For provisions relating to the 
     apportionment of the alcohol fuels credit between cooperative 
     organizations and their patrons, see section 40(g)(6).''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 12. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES 
                   WITHOUT REDUCING PATRONAGE DIVIDENDS.

       (a) In General.--Subsection (a) of section 1388 (relating 
     to patronage dividend defined) is amended by adding at the 
     end the following new sentence: ``For purposes of paragraph 
     (3), net earnings shall not be reduced by amounts paid during 
     the year as dividends on capital stock or other proprietary

[[Page S4009]]

     capital interests of the organization to the extent that the 
     articles of incorporation or bylaws of such organization or 
     other contract with patrons provide that such dividends are 
     in addition to amounts otherwise payable to patrons which are 
     derived from business done with or for patrons during the 
     taxable year.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions in taxable years beginning after 
     the date of the enactment of this Act.

     SEC. 13. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF 
                   WEATHER-RELATED CONDITIONS.

       (a) Rules for Replacement of Involuntarily Converted 
     Livestock.--Subsection (e) of section 1033 (relating to 
     involuntary conversions) is amended--
       (1) by striking ``Conditions.--For purposes'' and inserting 
     ``Conditions.--
       ``(1) In general.--For purposes'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Extension of replacement period.--
       ``(A) In general.--In the case of drought, flood, or other 
     weather-related conditions described in paragraph (1) which 
     result in the area being designated as eligible for 
     assistance by the Federal Government, subsection (a)(2)(B) 
     shall be applied with respect to any converted property by 
     substituting `4 years' for `2 years'.
       ``(B) Further extension by secretary.--The Secretary may 
     extend on a regional basis the period for replacement under 
     this section (after the application of subparagraph (A)) for 
     such additional time as the Secretary determines appropriate 
     if the weather-related conditions which resulted in such 
     application continue for more than 3 years.''.
       (b) Income Inclusion Rules.--Section 451(e) (relating to 
     special rule for proceeds from livestock sold on account of 
     drought, flood, or other weather-related conditions) is 
     amended by adding at the end the following new paragraph:
       ``(3) Special election rules.--If section 1033(e)(2) 
     applies to a sale or exchange of livestock described in 
     paragraph (1), the election under paragraph (1) shall be 
     deemed valid if made during the replacement period described 
     in such section.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

  Mr. BAUCUS. Mr. President, I am pleased to join Chairman Grassley in 
introducing the Tax Empowerment and Relief for Farmers and Fishermen 
Act.
  Rural America has been experiencing some hard times. Drought, low 
prices, and an economic downturn have left agricultural producers in 
dire straits and have left rural economies reeling. Farmers and 
ranchers are the life blood to rural economies, and when agriculture is 
hurting, rural America hurts. Small towns are dying, stores on Main 
Street are closing and farmers are leaving their land.
  Congress has worked hard to help our nation's agricultural producers, 
but with this bill, we are giving them the tools to help themselves. 
This package includes Farm, Fish, and Ranch Risk Management Accounts, 
otherwise known as FFARRM Accounts. These farmer savings accounts would 
allow farmers to contribute up to 20 percent of their income to a 
savings account, and deduct it in the same year. FFARRM accounts would 
be a very important risk management tool to help farmers put away money 
when there's actual income, so that in the really bad times there would 
be a safety net.
  This legislation also reverses unfair IRS decisions on self-
employment tax for farmers. Farmers who participate in the Conservation 
Reserve Program are unnecessarily struggling during tax season because 
of a case pursued by the IRS. The latest 6th-Circuit Court ruling 
treats CRP as farm income subject to the additional self-employment tax 
rate of 15 percent. This unfair tax not only ignores the intent of 
Congress in creating the CRP, but it also discourages farmers from 
using environmentally pro-active measures. The bill also includes a 
provision to reverse an IRS attempt to apply the self-employment tax on 
farmers' cash rental income.
  Also included in the package is a provision to hold farmers harmless 
from the Alternative Minimum Tax when they use income averaging. When 
Congress passed income averaging for farmers a few years ago, it 
neglected to take into account the problem of running into the 
alternative minimum tax, which many farmers are facing now. This 
legislation will fix this growing problem.
  It also contains an expansion of first-time farmer loans, or Aggie 
Bonds. This expands opportunities for beginning farmers who need low-
interest rate loans for purchases of farmland and equipment. Current 
law permits state authorities to issue tax-exempt bonds and to lend the 
proceeds from the sale of the bonds to beginning farmers and ranchers 
to finance the cost of acquiring land, buildings and equipment used in 
a farm or ranch operation. Unfortunately, Aggie Bonds are subjected to 
a volume cap and must compete with big industrial projects for bond 
allocation. Aggie Bonds share few similarities to Industrial Revenue 
Bonds and should not be subjected to the volume cap established for 
IRBs. Insufficient allocation of funding due to the volume cap limits 
the effectiveness of this program.
  Farmer co-op initiatives are also included. Recently the IRS 
determined that some cooperatives should be exposed to a regular 
corporate tax due to the fact that they are using organic value-added 
practices rather than manufactured value-added practices. The bill also 
would permit small cooperative producers of ethanol to receive the same 
tax benefits as large companies.
  Another important provision provides tax relief for ranchers that are 
forced to sell their livestock on account of drought. The bill gives 
producers the time they need to reinvest proceeds tax-free when drought 
makes it impossible to feed their herds.
  I look forward to working with my colleagues to enact this crucial 
piece of legislation.
                                 ______