[Federal Register Volume 68, Number 107 (Wednesday, June 4, 2003)]
[Rules and Regulations]
[Pages 33341-33347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-13946]



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  Federal Register / Vol. 68, No. 107 / Wednesday, June 4, 2003 / Rules 
and Regulations  

[[Page 33341]]



DEPARTMENT OF AGRICULTURE

Commodity Credit Corporation

7 CFR Part 1400

RIN 0560-AG86


Income Limits

AGENCY: Commodity Credit Corporation, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This rule sets forth at 7 CFR part 1400 the regulations to 
implement provisions of the Farm Security Act of 1985 (1985 Act) as 
amended by the Farm Security and Rural Investment Act of 2002 (2002 
Act) regarding limits on the income of individuals and entities 
eligible for certain USDA commodity and conservation programs. These 
regulations set forth the criteria to determine whether income limits 
have been exceeded by an applicant for those benefits. The final rule, 
generally, provides that, for individuals, CCC will use the adjusted 
gross incomes reported in the prior three years to the United States 
Department of the Treasury, Internal Revenue Service (IRS), and a 
comparable measure for other entities such as corporations, limited 
partnerships, and charitable organizations. This rule also includes an 
addition to subpart C of this part concerning payment eligibility 
determinations for program participants who are reservist military 
personnel called to active duty as the result of Operation Iraqi 
Freedom, and other similar military operations. The rule is intended, 
as provided by the 1985 Act, to impose limits on the amount of average 
adjusted gross income that a program participant can have and still 
remain eligible for program benefits and also allow reservist military 
personnel called to active duty to remain eligible for payments in 
certain circumstances.

DATES: This rule is effective on June 3, 2003.

FOR FURTHER INFORMATION CONTACT: Daniel McGlynn, Production, 
Emergencies and Compliance Division, United States Department of 
Agriculture (USDA), Stop 0517, 1400 Independence Ave. SW., Washington, 
DC 20250-0517. Telephone: (202) 720-3463. Electronic mail: [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 2002 Act provides that the regulations 
needed to implement Title I of the 2002 Act, including those involved 
here, may be promulgated without regard to the notice and comment 
provisions of 5 U.S.C. 553 or the Statement of Policy of the Secretary 
of Agriculture effective July 24, 1971, (36 FR 13804) relating to 
notices of proposed rulemaking and public participation in rulemaking. 
Because the provisions of this rule are not effective until the 2003 
crop, and due to the complexity of the issues presented in the rule, it 
was determined that it was in the public's interest to solicit comments 
on the proposed rule before it became effective.

Executive Order 12866

    This final rule has been determined to be significant under 
Executive Order 12866 and has been reviewed by the Office of Management 
and Budget (OMB).

Federal Assistance Programs

    This final rule has a potential impact on all programs listed in 
the Catalog of Federal Domestic Assistance in the Agency Program Index 
under the Department of Agriculture, Farm Service Agency and Natural 
Resources Conservation Service. Other assistance programs are also 
impacted.

Regulatory Flexibility Act

    The Regulatory Flexibility Act is not applicable to this rule 
because the Commodity Credit Corporation (CCC) is not required by 5 
U.S.C. 553 or any other law to publish a notice of proposed rulemaking 
for the subject matter of this rule.

Environmental Assessment

    The environmental impacts of this rule have been considered under 
the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et 
seq., the regulations of the Council on Environmental Quality (40 CFR 
parts 1500-1508), and regulations of the Farm Service Agency (FSA) of 
the Department of Agriculture (USDA) for compliance with NEPA, 7 CFR 
part 799. An Environmental Evaluation was completed and the proposed 
action has been determined not to have the potential to significantly 
impact the quality of the human environment and no environmental 
assessment or environmental impact statement is necessary. A copy of 
the environmental evaluation is available for inspection and review 
upon request.

Executive Order 12778

    This rule has been reviewed under Executive Order 12778. This rule 
preempts State laws that are inconsistent with it, however, this rule 
is not retroactive. Before judicial action may be brought concerning 
this rule, all administrative remedies must be exhausted.

Executive Order 12372

    This program is not subject to Executive Order 12372, which 
requires intergovernmental consultation with State and local officials. 
See the notice related to 7 CFR part 3015, subpart V, published at 48 
FR 29115 (June 24, 1983).

Unfunded Mandates

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) does 
not apply to this rule because CCC was not required by 5 U.S.C. 553 or 
any other law to publish a notice of proposed rulemaking for the 
subject matter of this rule. Also, this rule contains no mandates as 
defined in sections 202 and 205 of UMRA.

Paperwork Reduction Act

    Section 1601(c) of the 2002 Act provides that the promulgation of 
regulations and the administration of Title I of the 2002 Act shall be 
done without regard to chapter 5 of title 44 of the United States Code 
(the Paperwork Reduction Act). Accordingly, these regulations and the 
forms and other information collection activities

[[Page 33342]]

needed to administer the provisions authorized by these regulations are 
not subject to review by the Office of Management and Budget under the 
Paperwork Reduction Act.

Government Paperwork Elimination Act

    FSA is committed to compliance with the Government Paperwork 
Elimination Act (GPEA) and the Freedom to E-File Act, which require 
Government agencies in general and FSA in particular to provide the 
public the option of submitting information or transacting business 
electronically to the maximum extent possible. The form that applicants 
will use to certify their income has been developed for on-line use. 
However, because of the nature of the other paperwork and documentation 
that may be needed to verify eligibility based on income, the use of 
electronic means of submission for those information collections is not 
feasible at this time.

Discussion of the Final Rule

Background

    The 2002 Act authorized new programs and benefits, including direct 
payments and counter-cyclical payments for producers of certain covered 
commodities and for payments and other benefits under a number of new 
and revised conservation programs. Section 1604 of that Act amended the 
1985 Act by adding a new section, 1001D, to provide that individuals or 
entities shall not be eligible to receive direct payments, counter-
cyclical payments, marketing loan gains or a payment under any of the 
conservation programs authorized under title XII of the 1985 Act, nor a 
payment under the conservation programs of title II of the 2002 Act, if 
the three-year average of the adjusted gross income of the individual, 
or comparable measure for an entity, exceeds $2.5 million. An 
exemption, though, is provided where not less than 75 percent of the 
average adjusted gross income is derived from farming, ranching, or 
forestry operations. Section 1001D also requires a commensurate 
reduction in the shares of payments to an entity proportional to the 
interest held in the entity by parties whose adjusted gross income is 
more than $2.5 million.
    CCC published a proposed rule as to its intentions for implementing 
income limits on October 28, 2002 at 67 FR 65738. The Agency received 
72 timely filed letters containing 129 comments. Respondents included 
the following: 21 individuals, 15 corporations and similar entities, 8 
commodity groups and similar organizations, 7 State and Federal 
agencies, 4 churches, colleges and universities, 2 Certified Public 
Accountants, 1 financial institution, 10 farm management companies, and 
4 research and environmental organizations. Comments were received from 
respondents in the following States: California, Colorado, Florida, 
Georgia, Hawaii, Iowa, Indiana, Kansas, Louisiana, Missouri, Minnesota, 
Mississippi, North Dakota, Nebraska, New York, Pennsylvania, Rhode 
Island, South Dakota, Tennessee, Texas, Washington, and the District of 
Columbia.

Discussion of Comments and Changes

    Specific comments received, addressed in the same sequence as the 
final rule, are as follows:

Section 1400.600 Applicability

    Comments were received from 32 respondents who were concerned about 
the programs to which the income limits are applied. Some respondents 
commented that the income limitation will adversely affect 
participation in conservation and environmental programs. These 
respondents suggested that conservation and environmental program 
participants be exempted from income limits. The respondents asserted 
an exemption was appropriate because the rule may preclude large 
landowners participation in these programs and thus defeat the purposes 
of environmental projects and initiatives, both State and Federal. It 
was also argued that under certain programs, such as the Wetland 
Reserve Program, easement payments are for reimbursing landowners for 
rights foregone. As such, in their opinion, these payments should not 
be classified as benefits and, therefore, not subject to the adjusted 
gross income limitation. It was also commented that the income 
limitation would adversely impact compliance with highly erodible land 
conservation and wetland conservation provisions. Several respondents 
commented that other programs, not referenced in the proposed rule, 
which have a gross revenue restriction should use the average adjusted 
gross income limitation instead. It was also commented that private 
colleges and educational institutions should be exempt from the rule 
altogether, as are public institutions, since the missions of the 
institutions are the same.
    The statute provides that the average adjusted gross income 
limitation applies to any program authorized by title XII of the 1985 
Act or titles I or II of the 2002 Act. There are no exceptions for 
conservation and environmental programs and, in fact, they are 
specifically included. Section 1604 of the 2002 Act applies to all 
payments and covered benefits of the programs under the titles 
specified. Therefore, no exceptions are made in the final rule for 
payments and benefits authorized by these titles.
    As to the comments concerning the application of this rule to other 
programs not referenced in the 2002 Act, it is true that a gross 
revenue restriction has been applied as a requirement for eligibility 
for other programs not included in the proposed rule. Although the 
gross revenue restriction and the average adjusted gross income 
limitation share a similar purpose, there are significant differences, 
different statutory schemes, and this rule is limited to application of 
the test provided for in the 2002 Act. For example, although the desire 
for one rule for all programs is understandable, the application of a 
qualifying gross revenue restriction per ``person'' to payments under 
the Noninsured Crop Disaster Assistance Program (NAP) is required by 
the statute authorizing NAP. However, for flexibility, provision is 
made to apply this subpart to other programs if so provided by statute 
or regulation in the future.
    As to the program participants to be covered by these income 
limits, section 1001D(a)(1) of the 2002 Act provides that ``* * * the 
term `average adjusted gross income,' with respect to an individual or 
entity (for purposes of this section as defined in section 
1001(e)(2)(A)(ii)), means the three-year average of the adjusted gross 
income or comparable measure of the individual or entity over the 
preceding tax years, as determined by the Secretary.'' Section 1001 of 
the 1985 Act sets forth the statutory payment limitations applicable to 
certain commodity and conservation program benefits. Generally, these 
provisions have been the same since the enactment in 1987, and provide 
that the total amount of specified payments that a ``person'' may 
receive is limited to specified amounts per year.
    Section 1001(e)(2)(A) defines the term ``person'' as follows:

* * * the term ``person'' means--
    (i) An individual, including any individual participating in a 
farming operation as a partner in a general partnership, a 
participant in a joint venture, a grantor of a revocable trust, or a 
participant in a similar entity (as determined by the Secretary);
    (ii) A corporation, joint stock company, association, limited 
partnership, charitable organization, or other similar entity (as 
determined by the Secretary, including any such entity or 
organization participating in the farming operation as a partner in 
a general partnership, a participant in a joint

[[Page 33343]]

venture, a grantor or a revocable trust, or as a participant in a 
similar entity (as determined by the Secretary); and
    (iii) A State, political subdivision, or agency thereof.

    In determining who is a ``person'' for purposes of section 1001D, 
an ``entity'' is specifically defined to be the same as an ``entity'' 
as provided in section 1001(e)(2)(A)(ii) of the 1985 Act. Notably, 
section 1001D does not contain such a mandate to use the definitions in 
sections 1001(e)(2)(A)(i) and (iii). Accordingly, this final rule 
provides that the definition of an ``entity'' shall be the same for 
purposes of sections 1001 and 1001D of the 1985 Act. Further, in order 
to provide consistency in the application of both sections 1001 and 
1001D, the final rule also provides that the definition of an 
``individual'' will be the same for both purposes.
    As to the respondents'' suggestion that private schools be exempted 
from income limits, the definition of ``entity'' in the 1985 Act does 
not include States, political subdivisions, and agencies thereof (which 
include a public school or university), but does include charitable 
organizations and other nonprofit organizations (including churches and 
private schools). Furthermore, the 2002 Act does not exempt any 
charitable or nonprofit organization from the average adjusted gross 
income limitation. Also, this final rule does not extend the average 
adjusted gross income limitation to States, counties, political 
subdivisions, agencies thereof, or recognized Indian tribes because 
Governmental organizations do not have ``income'' similar to the other 
listed individuals and entities. Although a private institution may 
indeed serve some of the same purposes as some public institution, 
there is no statutory authority to treat them the same within the 
context of this rule. Accordingly, this comment was not adopted and 
this provision of the proposed rule is not changed in the final rule. 
However, the final rule does recognize the special nature of some 
activities of such charitable organizations as was set out in the 
proposed rule.
    A respondent commented that the disqualification should include all 
payment methods for certain benefits, including commodity certificates 
issued under marketing assistance loans. The respondent believed that 
the use of such certificates undermines the intent of Congress to limit 
program payments. Under the 2002 Act, the average adjusted gross income 
limitation applies to loan deficiency payments and marketing loan 
gains, but does not include certificate transactions or to other forms 
in which loan benefits might otherwise be obtained (such as loan 
forfeitures). Accordingly, the provisions of this rule cannot be 
extended to include such transactions.
    Other comments on this section included: the $2.5 million level is 
too high; the adjusted gross income limitation will force landowners to 
switch from share leases to cash leases and thus place the operators at 
substantially greater risk; and the adjusted gross income limitation is 
not equitable in that a test based on the assets of the potential 
recipient would be a more equitable test for payment eligibility. The 
dollar amount of the average adjusted gross income limitation and the 
disqualifications are provided by statute. There is no discretion to 
modify the amount or impose an alternative requirement for payment 
eligibility. Therefore, the final rule makes no changes in this 
provision.

Section 1400.601 Determination of Average Adjusted Gross Income

    Comments were received from 14 respondents on this section of the 
proposed rule. The comments dealt primarily with the manner in which 
average adjusted gross income is determined, either by tax information 
or comparable measure, and the definition of income from farming, 
ranching and forestry operations. It was commented that ``comparable 
measure'' needed to be better defined. Other concerns were that 
compliance with the average adjusted gross income limitation would be 
adversely affected if income from various sources that the respondents 
believed were agricultural or farm-related, but do not fit in certain 
taxing categories for Internal Revenue Service (IRS) purposes, would 
not be considered income from farming, ranching or forestry operations. 
One respondent commented that there are occasions when 2 or more 
corporations are allowed to file a single, consolidated tax return and 
suggested that a certification indicating the amount each entity would 
have paid if separate returns had been filed should be allowed to be 
submitted.
    The term ``adjusted gross income,'' for IRS purposes, applies only 
to taxpayers who are ``individuals.'' As previewed in the proposed 
rule, this final rule provides, for individuals, that adjusted gross 
income be generally based on the IRS definition of that term and 
associated filings. Section 1001D(a)(1) of the 2002 Act takes into 
account the limited IRS use of this term by providing that the 
Secretary is to fashion a ``comparable measure'' for other entities. 
Here also, as indicated in the proposed rule, prior years' tax filings 
will be the starting point of reference. Due to the severe penalties 
associated with the filing of a false tax return, such information may 
be the most credible evidence available to make income determinations.
    While this rule defines the adjusted gross income for the different 
types of program participants, it does not specify the line item on tax 
returns for participants from which critical information will be 
gathered since such references may likely change from year-to-year. 
However, the CCC forms that will be used to make these determinations 
will specify the specific lines from various IRS forms that will be 
used to the extent practicable. Also to the extent practicable, for 
information from the entity that is needed which cannot be ascertained 
solely from the IRS forms, CCC will specify in its forms what other 
information is needed.
    For individuals, the adjusted gross income would generally be the 
amount so specified on the individual's final (including amendments) 
income tax return for the applicable year. Where there is a joint 
return filed, the adjusted gross income specified on the joint return 
will be used unless a certified public accountant or attorney provides 
a certified statement delineating the distribution of income and 
expenses of the individual seeking payments had such individual filed a 
separate return. Accordingly, it is possible that one tax return will 
be used by more than one individual for purpose of this rule.
    For corporations, including a ``sub-chapter S corporation,'' the 
adjusted gross income will be the final taxable income plus charitable 
contributions. Charitable contributions are included in order to 
provide equitable treatment vis-a-vis individuals. For an individual, 
charitable deductions are deducted from adjusted gross income, along 
with a variety of other items, to determine the individual's taxable 
income. Generally, the other items deducted from an individual's 
adjusted gross income, such as personal exemptions and child care 
credits, do not have a corresponding relevancy on a corporate return.
    No change is made in the final rule to response to the comment 
about the treatment of corporations filing a single, consolidated tax 
return. Certifications of average adjusted gross income are required 
from a payment entity and all individuals and entities with an interest 
in the payment entity. If one corporation is a subsidiary of another 
corporation, the average adjusted gross income of the parent 
corporation would include the average adjusted gross income of the

[[Page 33344]]

subsidiary corporation. If the consolidated tax returns indicate the 
average adjusted gross income of the parent company exceeds the 
limitation, all subsidiaries of the parent company would also be 
ineligible according to this subpart.
    For charitable or nonprofit organizations with income that is not 
subject to Federal income taxation, the comparable measure of adjusted 
gross income is defined in this rule to be the ``unrelated business 
taxable income'' of the entity as reported to the Internal Revenue 
Service less any other income CCC determines to be from non-commercial 
activities. Currently, that amount is specified on line 34 of Internal 
Revenue Service Form 990-T. Generally, this excludes receipts that are 
gifts, grants and contributions that are tax deductible by the donor. 
Effectively, the adjusted gross income for these entities is the net 
income from only their commercial activities.
    For a limited liability company, limited partnership, limited 
liability partnership or similar organization, the adjusted gross 
income is the sum of the income from trade or business activities plus 
the guaranteed payments to the members as reported for the applicable 
tax year. Charitable contributions will be dealt with in the same 
manner as with other entities.
    For an estate or trust, the adjusted gross income is the sum of the 
adjusted total income plus the charitable deductions as reported for 
the applicable tax year.
    As indicated, individuals and entities who have average adjusted 
gross income in excess of $2.5 million may still be eligible for 
covered benefits where their average adjusted gross income from 
farming, ranching, and forestry is not less than 75 percent of the 
total. Generally, the average adjusted gross income (AGI) of the 
individual or entity derived from farming, ranching or forestry will 
be, under the rule, determined based on the amounts as reported to IRS. 
The amount reported on applicable forms, currently IRS form 4835 and 
Schedule F, represent the net income from the farming operation after 
deductions for the cost of production. Income derived from forestry 
operations, to the extent it is not reported on these forms, will be 
the subject of a separate certification by the individual or entity as 
will be the case with other special income allowed to be counted toward 
the 75 percent level by the provisions of this rule.
    Several respondents were concerned whether income from certain 
sources would be considered income from farming, ranching and forestry 
operations. Of particular concern was the consideration of gains from 
the sale of assets used in the enterprise; income from the leasing of 
farmland; income from commercial hunting operations on the farm; 
proceeds from the sale of water rights; income from contract 
operations; and, whether income from participation in the Conservation 
Reserve Program, Wetlands Reserve Program, Environmental Quality 
Incentives Program and similar programs would be considered farm 
income.
    By denying program benefits to those individuals and entities who 
have exceeded the $2.5 million threshold, Congress intended that those 
individuals and entities who are dependent upon farming, ranching and 
forestry should be accorded deferential treatment. However, taking that 
into account and in response to the concerns expressed by respondents, 
the following clarifications and revisions are made:
    (1) Income of a landowner generated by selling the landowner's land 
(including the sale of easements and development rights) used by the 
landowner or others for farming, ranching, or forestry operations will 
be considered to be income derived from farming, ranching or forestry 
operations;
    (2) Income generated by selling farm water rights will be 
considered to be income derived from farming, ranching or forestry 
operations;
    (3) Income from sales by a retail dealership of implements used in 
farming, ranching or forestry will not be considered to be income 
derived from farming, ranching or forestry operations, but income 
derived from the sale of a farm's agricultural equipment otherwise 
subject to depreciation expense on the IRS Form 4835 or Schedule F will 
be considered to be such income;
    (4) Income from the rental of land used for farming, ranching or 
forestry operations will be considered to be income derived from 
farming, ranching or forestry operations, regardless of whether the 
rental arrangement is on a cash or crop share basis;
    (5) Income from agricultural or conservation program payments will 
be considered to be income from farming, ranching or forestry 
operations;
    (6) Income from commercial hunting operations on farmland will be 
considered to be income derived from farming, ranching, or forestry 
operations;
    (7) Income from sales at a market will only be considered to be 
income derived from farming, ranching or forestry operations if the 
commodity being sold was produced by the individual or entity or a 
joint operation in which the individual or entity had an interest;
    (8) Income from sales as a commission broker, auctioneer or 
warehouse operator or similar enterprise will not be considered to be 
income derived from farming, ranching or forestry operations; and
    (9) In integrated operations, undifferentiated income (for example, 
income from a forestry operation that could not be differentiated 
between income from the production of the tree and from the sale of a 
finished product) will not be considered to be income derived from 
farming, ranching or forestry operations.
    The proposed rule provided that, for the purpose of applying the 
average adjusted gross income limitation and calculating the three-year 
average, the average shall be the adjusted gross income for the three 
tax years immediately preceding the applicable crop, program, or fiscal 
year, as determined by CCC, excluding any year in which the individual 
or entity did not have income or had adjusted gross income considered 
to be zero. Several respondents suggested the exclusion of any year an 
individual or entity is not required to file a tax return, rather than 
excluding any year the individual or entity did not have income or the 
adjusted gross income was zero. The proposed rule was drafted to 
provide that a producer would not be allowed to average a loss year 
with a profitable year. Based on the suggestions, the wording of the 
final rule has been revised to allow for averaging loss years and no-
income years with others, but for ongoing operations only. In some 
cases, the income of new entities will be averaged with those they 
replace in order to assure proper application of the average. Relief 
can be provided from that combination to the extent it would work 
unfairly in a particular instance.

Section 1400.602 Compliance

    A total of 18 respondents provided comments on this section of the 
proposed rule. Some comments suggested that in addition to allowing the 
certification of compliance by a CPA or an attorney as provided in the 
proposed rule, certification from other professionals, such as farm 
management firms, should be allowed. One respondent commented that it 
would be a burdensome task for an entity with a large number of 
stockholders to obtain certifications of compliance with the average 
AGI limitation from stockholders. It was suggested that an exemption be 
made for corporations with more than 500 stockholders, and that the 
average AGI limitation be

[[Page 33345]]

applied to the corporation, but not to the individual stockholders. 
There were also concerns expressed as to whether the business 
information provided to the local FSA offices would remain 
confidential. In other words, there were concerns about what safeguards 
and confidentiality measures would be implemented to ensure this 
information would remain private and not made public in some manner.
    The statute requires that to comply with the average AGI 
limitation, an individual or entity shall provide either: (1) A 
certification from a ``* * * certified public accountant or another 
third party that is acceptable to the Secretary;'' or (2) information 
and documentation regarding the average adjusted gross income of the 
individual or entity through other procedures established by the 
Secretary. The proposed rule indicated that, in addition to a 
certification from a CPA, the only other acceptable certification from 
a third party would be from an attorney. Although others may have 
knowledge of the average adjusted gross income of an individual or 
entity, the Agency believes that limiting third party certifications to 
a CPA or an attorney is unlikely to create any hardship on participants 
and will provide a convenient and proper way of guaranteeing some 
expertise and training in the particular matter at issue. As to the 
comment about the application of the average AGI limitation to 
stockholders of a corporation, the statute requires a reduction in 
payments to an entity, general partnership or joint venture 
commensurate with the interest held by each individual who has an 
average adjusted gross income in excess of the limitation. There is no 
authority provided in the statute for any exemption to the requirement 
for a commensurate reduction when an individual who holds an interest 
in an entity has an average adjusted gross income in excess of the 
limitation. Therefore, the final rule makes no changes regarding the 
certification of compliance with this subpart.
    With respect to confidentiality, the provisions of the final rule 
avoid conflict with existing regulations and procedures. All 
information submitted with respect to AGI matters will be treated with 
regard to confidentiality concerns in accordance with existing rules. 
Those rules take into account concerns like those expressed in the 
comments.

Section 1400.603 Commensurate Reduction

    Comments were received from 4 respondents on this section of the 
proposed rule. It was commented that the number of levels should be 
lessened to 2 or 3 rather than 5 before a commensurate reduction is 
applied. However, it was also commented that no level of restriction 
for the commensurate reduction should be established.
    Based upon the agency's experience in administering section 1001 
relating to the maximum payments a ``person'' may receive, CCC has 
determined that business enterprises comprised of layered ownership are 
often established simply to maximize the receipt of government 
payments. The rule should allow sufficient layering to accomplish 
legitimate business need while affording what otherwise would be a 
dodge of a statutory test or endless tracing of corporate interests 
back to individuals. Accordingly, no changes were made in the final 
rule to this section on commensurate reduction.

Miscellaneous

    Miscellaneous comments were received suggesting editorial and 
grammatical corrections and such. A few editorial changes are made from 
the text and structure of the proposed rule for clarity and for ease of 
administration. This rule also includes an addition to the ``actively 
engaged in farming'' provisions subpart C of part 1400 to address 
eligibility issues relating to reservist military personnel called to 
active duty.

Cost Benefit Assessment

    The average adjusted gross income limitation not only applies to 
payments under the commodity and price support programs, but to all 
payments and benefits under the conservation and related programs. It 
includes, but is not limited to, direct and counter-cyclical payments, 
conservation reserve and environmental quality incentive program 
payments, loan deficiency payments and marketing loan gains.
    For the 2003 through 2007 crop, program or fiscal years, 
individuals and entities are not eligible for payments or benefits from 
the above-mentioned programs if their average adjusted gross income 
exceeds $2.5 million for the three tax years immediately preceding the 
applicable crop, program or fiscal year. This requirement applies 
unless 75 percent or more of that average adjusted gross income amount 
was derived from farming, ranching or forestry operations.
    The determinations necessary for compliance with the average 
adjusted gross income limitation will be generally based on Internal 
Revenue Service concepts and information included on final tax filings. 
Comparable measures for adjusted gross income have been developed for 
entities, partnerships and for organizations that do not have such a 
line item on tax filings, and that are non-profit, or are not required 
to file tax information.
    By statute, under the average adjusted gross income provisions, 
there is a required commensurate reduction of program payments in the 
situations where an owner of an entity applying for benefits fails the 
test. Accordingly, any program payment or benefit issued to an entity, 
general partnership, or joint venture shall be reduced by an amount 
commensurate with the direct or indirect interest held by that 
individual or entity that is determined to have an average adjusted 
gross income that exceeds the limitation.
    Note that those ineligible for marketing loan gains and loan 
deficiency payments because of the adjusted gross income restriction 
may still be eligible to participate to a degree in the marketing 
assistance loan programs. Loans may be obtained and forfeited when 
commodity prices decrease. An individual or entity that fails the test 
will still be able to use commodity certificates to repay those loans 
at a rate lower than the original loan rate. Benefits they realize from 
the reduced payment rate, essentially the same as marketing loan gains, 
are not subject to payment limits or the adjusted gross income 
restrictions.
    The 2002 Act mandates that the adjusted gross income limitation 
apply to the 2003 through 2007 crop years. In May 2002, the 
Congressional Budget Office estimated that savings from the average 
adjusted gross income limitation will total $22 million in fiscal years 
2002 through 2006.
    The Cost/Benefit Assessment of the adjusted gross income limitation 
is available from James Baxa, Production, Emergencies, and Compliance 
Division, United States Department of Agriculture (USDA), 1400 
Independence Ave, SW., Washington, DC 20250. Phone: (202) 720-4189. E-
mail: James [email protected].

List of Subjects in 7 CFR Part 1400

    Agriculture, Price support programs, Reporting and recordkeeping 
requirements.


0
For the reasons stated in the preamble, 7 CFR part 1400 is amended as 
follows:

[[Page 33346]]

PART 1400--PAYMENT LIMITATION AND PAYMENT ELIGIBILITY

0
1. The authority section for part 1400 is revised to read as follows:

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

Subpart A--General Provisions

0
2. Section 1400.1 is revised to add a new paragraph (h), to read as 
follows:


Sec.  1400.1  Applicability.

* * * * *
    (h) As provided in Subpart G of this part, additional requirements 
are applicable to certain of the payments specified in paragraph (g) of 
this section.

Subpart C--Actively Engaged in Farming Determinations

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3. Section 1400.213 is added to read as follows:


Sec.  1400.213  Military personnel.

    If an individual is called to active duty in the military because 
of Operation Iraqi Freedom, or any other similar military operation, 
before a determination is made that the individual is actively engaged 
in farming, the individual may be considered to be actively engaged in 
farming if the determining authority determines that such individual 
did make a conscious effort to, and would have been determined to be, 
actively engaged in farming if the individual would not have been 
called to active duty. If the individual is called to active duty after 
being determined to be actively engaged in farming, such determination 
shall remain in effect for the program year.

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4. Subpart G is added to read as follows:
Subpart G--Average Adjusted Gross Income Limitation
Sec.
1400.600 Applicability.
1400.601 Determination of average adjusted gross income.
1400.602 Compliance.
1400.603 Commensurate reduction.

Subpart G--Average Adjusted Gross Income Limitation


Sec.  1400.600  Applicability.

    (a) For the 2003 through 2007 crop years, program years, or fiscal 
years, an individual or entity is not eligible for any payment or 
benefit identified in Sec.  1400.1 as being subject to this part if the 
individual's or entity's average adjusted gross income exceeds $2.5 
million for the three tax years immediately preceding the applicable 
crop, program or fiscal year. Payments may also be reduced under the 
commensurate share rules set out in Sec.  1400.603.
    (b) Notwithstanding paragraph (a) of this section, the individual 
or entity may be considered to meet the requirements of this subpart if 
not less than 75 percent of the individual's or entity's average 
adjusted gross income for the three tax years immediately preceding the 
applicable crop, program or fiscal year, is derived from farming, 
ranching, or forestry operations.
    (c) In addition to payments or benefits identified under Sec.  
1400.1, this subpart applies to benefits provided to participants under 
contracts or agreements entered into for the 2003 through 2007 crop, 
program or fiscal years for the following programs:
    (1) The program authorized by part 1466 of this chapter or its 
successor regulations;
    (2) The program authorized by part 1467 of this chapter or its 
successor regulations;
    (3) The program authorized by part 636 of this chapter or its 
successor regulations;
    (4) Any other program authorized by Title XII of the 1985 Act, as 
amended, or Title II of the 2002 Act.
    (5) Any other program to which this subpart is made applicable by 
statute or regulation.
    (d) Determinations made under this subpart with regard to the 
programs described in paragraphs (c)(1) through (c)(5) of this section 
will be based on the year for which the contract or agreement is 
approved and that determination will apply for the entire term of the 
subject agreement or contract.
    (e) Vendors that receive payment for technical services or 
assistance provided in conjunction with programs under Title II of the 
2002 Act and Title XII of the 1985 Act, but who are not beneficiaries 
of the program, are not subject to this subpart for services that are 
of the type that are also performed by the Federal Government in 
connection with such programs.
    (f) Payments to an escrow agent or other of similar capacity in 
which the recipient is maintaining temporary custody of the funds for 
eventual disbursement to an eligible program participant are not 
subject to this subpart so long as the party ultimately receiving the 
payment is eligible under this subpart.
    (g) Payments to States, counties, political subdivisions and 
agencies thereof, and Indian tribes are not subject to this subpart.


Sec.  1400.601  Determination of average adjusted gross income.

    (a) For purposes of this subpart, income from farming, ranching or 
forestry operations means income of an individual or entity derived 
from:
    (1) Producing crops, livestock or unfinished raw forestry products;
    (2) Selling (including the sale of easements and development 
rights) their own farm, ranch or forestry land or water rights;
    (3) Selling, but not as a dealer, equipment purchased to conduct 
farm, ranch or forestry operations when the equipment is otherwise 
subject to depreciation expense on the IRS Form 4835 or Schedule F;
    (4) Renting land used for farming, ranching or forestry operations; 
and
    (5) Payments made under any program authorized under chapters VI, 
VII or XIV of this title.
    (b) For purposes of this subpart, except as otherwise provided in 
this subpart, adjusted gross income means:
    (1) For an individual filing a separate tax return, the amount 
reported as ``adjusted gross income'' on the final federal income tax 
return for the individual for the applicable tax year;
    (2) For an individual filing a joint tax return, the amount 
reported as ``adjusted gross income'' on the final federal income tax 
return for the applicable tax year unless a certified statement is 
provided by a certified public accountant or attorney specifying the 
manner in which such income would have been declared and reported if 
the individuals had filed two separate returns and that this 
calculation is consistent with the information actually supporting the 
filed joint return;
    (3) For a corporation, including a subchapter S corporation, the 
total reported ``taxable income'' as reported to the Internal Revenue 
Service plus the amount of the charitable contributions as reported on 
the final federal income tax return for the applicable tax year;
    (4) For a tax exempt entity, the ``unrelated business taxable 
income'' of the entity as reported to the Internal Revenue Service on 
the final federal income tax return, less any other income CCC 
determines to be from non-commercial activities;
    (5) For a limited liability company, limited partnership, limited 
liability partnership or similar type of organization, the income from 
trade or business activities plus the amount of guaranteed payments to 
the members as reported to the Internal Revenue Service on the final 
federal income tax return for the applicable tax year; and
    (6) For an estate or trust, the adjusted total income plus 
charitable deductions

[[Page 33347]]

as reported to the Internal Revenue Service on the final federal income 
tax return for the applicable tax year, or the amount of net increase 
in the estate's or trust's value resulting from its business or 
investment interests.
    (c) For purposes of applying this subpart and calculating the 
three-year average referenced in Sec.  1400.600, that average shall be 
for the adjusted gross income for the three tax years immediately 
preceding the applicable crop, program or fiscal year, as determined by 
CCC. For an entity that is not required to file a federal income tax 
return, or an individual or entity that did not have taxable income in 
one or more tax years, the average shall be the adjusted gross income, 
including losses, averaged for the three tax years immediately 
preceding the applicable crop, program or fiscal year, as determined by 
CCC. However, a new entity will have its adjusted gross income averaged 
only for those years of the base period for which it was in business, 
but a new entity shall not be considered ``new'' to the extent it takes 
over a existing operation and has any elements of common ownership or 
interests with the preceding entity, or with individuals or entities 
with an interest in the ``old'' entity. When there is such commonality, 
income of the ``old'' entity will be averaged with that of the ``new'' 
entity for the base period.


Sec.  1400.602  Compliance.

    (a) To comply with the average adjusted gross income limitation, an 
individual or entity, including all interest holders in an entity, 
general partnership or joint venture, shall provide the following as 
required by CCC:
    (1) A certification in the manner prescribed by CCC from a 
certified public accountant or attorney that the average adjusted gross 
income of the individual or entity does not exceed this limitation;
    (2) A certification in the manner prescribed by CCC from the 
individual or entity that the average adjusted gross income of the 
individual or entity does not exceed this limitation; or
    (3) Submission to CCC of the relevant Internal Revenue Service 
documents and supporting financial data as requested by CCC. Supporting 
financial data may include State income tax returns, financial 
statements, balance sheets, reports prepared for or provided to another 
Government agency, information prepared for a private lender, and other 
credible information relating to the amount and source of the 
individual's or entity's income.
    (b) Audits of certifications of average adjusted gross income may 
be conducted as necessary to determine compliance with the requirements 
of this subpart. As a part of this audit income tax returns may be 
requested and if requested must be supplied. Relevant income tax 
returns and documentation must be retained a minimum of two years after 
the end of the calendar year corresponding to the year for which 
payments or benefits are requested. If an individual or entity has 
submitted information to CCC, including a certification from a 
certified public accountant or attorney, that relied upon information 
from a form previously filed with the Internal Revenue Service, such 
individual or entity shall provide to CCC a copy of any amended form 
filed with the Internal Revenue Service within 30 days of the filing.
    (c) The individual or entity shall provide all information and 
documentation the reviewing authority determines necessary to verify 
any information or certification provided under this subpart, including 
all documents referred to in paragraph (a)(2) of this section. Failure 
to provide necessary and accurate information to verify compliance, or 
failure to comply with this subpart's requirements, will result in 
ineligibility for all program benefits subject to this subpart for the 
year or years subject to the request.
    (d) All information provided to CCC for the purposes of determining 
compliance with this subpart will remain confidential and not be 
subject to any request submitted under the Freedom of Information Act.


Sec.  1400.603  Commensurate reduction.

    (a) Any program payment or benefit subject to this subpart provided 
to an entity, general partnership or joint venture shall be reduced by 
an amount commensurate with the direct and indirect ownership interest 
in the entity, general partnership, or joint venture of each individual 
or entity determined to have an average adjusted gross income in excess 
of the limitation under the standards provided elsewhere in this 
subpart for the direct recipient of such payments.
    (b) Ownership interest in an entity shall be reviewed to the fifth 
level of ownership to determine whether a commensurate reduction is 
applicable and the extent of such reduction. If an ownership interest 
is not held by an individual in the fifth level of ownership in an 
entity, no payment or benefit shall be made with respect to such 
interest.

    Signed in Washington, DC, on May 28, 2003.
James R. Little,
Executive Vice President, Commodity Credit Corporation.
[FR Doc. 03-13946 Filed 6-3-03; 8:45 am]
BILLING CODE 3410-05-P