[Federal Register Volume 67, Number 208 (Monday, October 28, 2002)]
[Proposed Rules]
[Pages 65738-65742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27227]



[[Page 65738]]

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DEPARTMENT OF AGRICULTURE

Commodity Credit Corporation

7 CFR Part 1400

RIN 0560-AG86


Income Limits

AGENCY: Commodity Credit Corporation, USDA.

ACTION: Proposed rule.

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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: [email protected]. 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

[[Page 65739]]

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

[[Page 65740]]

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 [email protected].

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.

[[Page 65741]]

    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.

[[Page 65742]]

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