Farm Program Payments: USDA Needs to Strengthen Regulations and
Oversight to Better Ensure Recipients Do Not Circumvent Payment
Limitations (30-APR-04, GAO-04-407).
Farmers receive about $15 billion annually in federal farm
program payments to help produce major commodities, including
corn, cotton, rice, and wheat. The Farm Program Payments
Integrity Act of 1987 (1987 Act) limits payments to individuals
and entities--such as corporations and partnerships-- that are
"actively engaged in farming." GAO (1) determined how well USDA's
regulations limit payments, (2) assessed USDA's oversight of the
act, and (3) summarized the distribution of farm payments by type
of entity.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-407
ACCNO: A09922
TITLE: Farm Program Payments: USDA Needs to Strengthen
Regulations and Oversight to Better Ensure Recipients Do Not
Circumvent Payment Limitations
DATE: 04/30/2004
SUBJECT: Agricultural products
Agricultural programs
Evaluation methods
Payments
Standards evaluation
Surveys
Program abuses
Agricultural policies
Farmers
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GAO-04-407
United States General Accounting Office
GAO Report to the Chairman, Committee on Finance, U.S. Senate
April 2004
FARM PROGRAM PAYMENTS
USDA Needs to Strengthen Regulations and Oversight to Better Ensure Recipients
Do Not Circumvent Payment Limitations
a
GAO-04-407
Highlights of GAO-04-407, a report to the Chairman, Committee on Finance,
U.S. Senate
Farmers receive about $15 billion annually in federal farm program
payments to help produce major commodities, including corn, cotton, rice,
and wheat. The Farm Program Payments Integrity Act of 1987 (1987 Act)
limits payments to individuals and entities-such as corporations and
partnerships- that are "actively engaged in farming." GAO (1) determined
how well USDA's regulations limit payments, (2) assessed USDA's oversight
of the act, and (3) summarized the distribution of farm payments by type
of entity.
GAO recommends that USDA (1) develop measurable requirements defining a
significant contribution of active personal management; (2) clarify
regulations and guidance as to what constitutes a scheme or device to
effectively evade payment limitations; (3) improve its sampling method for
selecting farming operations for review; and (4) develop controls to
ensure all available tools are used to assess compliance with the act.
In commenting on this report, USDA agreed to act on most of our
recommendations. However, USDA stated that its current regulations are
sufficient for determining active engagement in farming and assessing
whether operations are schemes or devices to evade payment limitations. We
still believe measurable standards and clarified regulations would better
assure the act's goals are realized.
www.gao.gov/cgi-bin/getrpt?GAO-04-407
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Lawrence J. Dyckman, (202)
512-3841 or [email protected]..
April 2004
FARM PROGRAM PAYMENTS
USDA Needs to Strengthen Regulations and Oversight to Better Ensure Recipients
Do Not Circumvent Payment Limitations
USDA's regulations to ensure recipients are actively engaged in farming do
not specify a measurable standard for what constitutes a significant
contribution of active personal management. By not specifying such a
measurable standard, USDA allows individuals who may have limited
involvement with the farming operation to qualify for payments. According
to GAO's survey of USDA's compliance reviews, about 99 percent of payment
recipients asserted they met eligibility requirements through active
personal management. USDA's regulations lack clarity as to whether certain
transactions and farming operation structures that GAO found could be
considered schemes or devices to evade, or that have the effect of
evading, payment limitations. Under the 1987 Act, if a person has adopted
such a scheme or device, then that person is not eligible to receive
payments for the year in which the scheme or device was adopted or the
following year. Because it is not clear whether fraudulent intent must be
shown in order to find that a person has adopted a scheme or device, USDA
may be reluctant to pursue the question of whether certain farming
operations, such as the ones GAO found, are schemes or devices.
According to GAO's survey and review of case files, USDA is not
effectively overseeing farm program payments. That is, USDA does not
review a valid sample of farm operation plans to determine compliance and
thus does not ensure that only eligible recipients receive payments, and
compliance reviews are often completed late. As a result, USDA may be
missing opportunities to recoup ineligible payments. For about one-half of
the farming operations GAO reviewed for 2001, field offices did not use
available tools to determine whether persons were actively engaged in
farming.
Of the $17 billion in payments USDA distributed to recipients in 2001,
$5.9 billion went to about 140,000 entities. According to GAO's analysis
of USDA's data, corporations and general partnerships represented 39 and
26 percent of these entities, respectively. General partnerships received
45 percent of the payments to entities, or $2.7 billion; these entities
receive more payments if they have more partners.
Average Farm Program Payments to General Partnerships, by Number of
Partners, 2001
Contents
Letter
Results in Brief
Background
Individuals May Circumvent Farm Payment Limitations Because of
Weaknesses in FSA's Regulations Weaknesses in FSA's Oversight May Enable
Ineligible Farmers to Receive Program Payments General Partnerships
Received Almost One-Half of Farm Program
Payments Made to Entities Conclusions Recommendations for Executive Action
Agency Comments and Our Evaluation
1 5 9
14
27
34 37 38 38
Appendixes
Appendix I:
Appendix II: Appendix III:
Appendix IV:
Appendix V:
Appendix VI: Common Ways Farmers Organize Their Farming Operations
Objectives, Scope, and Methodology
Distribution of Farm Program Payments by Type of Entity and Number of
Members, Crop Year 2001
Results of Survey on Implementation and Effectiveness of Actively Engaged
in Farming Requirements
Comments from the U.S. Department of Agriculture
GAO's Comments
GAO Contacts and Staff Acknowledgments
GAO Contacts Acknowledgments
42 45
49
52
58 64
68 68 68
Related GAO Products
Tables Table 1: Contribution Requirements for Recipients to Be
Considered Actively Engaged in Farming 10
Table 2: Types of Entities and Total Farm Program Payments,
2001 35
Table 3: Type and Number of Entities and Farm Program Payments,
Categorized by the Number of Members, 2001 36
Contents
Table 4: Number of General Partnerships and Farm Program Payments,
Categorized by the Number of Partners, Crop Year 2001 49
Table 5: Number of Joint Ventures and Farm Program Payments, Categorized
by the Number of Members, Crop Year 2001 50
Figures Figure 1: Figure 2:
Figure 3:
Figure 4:
Compliance Reviews Selected by FSA for 2001 13
Percentage of FSA Field Offices Indicating Specific
Improvements Would Strengthen the Active Personal
Management Contribution 19
Large Operation Containing Farming and Nonfarming
Entities 23
Number of States with Farming Operations Selected for
Compliance Reviews and Number of States that
Completed the Reviews within 12 Months, 1999 to
2001 30
Abbreviations
FSA Farm Service Agency
USDA U.S. Department of Agriculture
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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separately.
A
United States General Accounting Office Washington, D.C. 20548
April 30, 2004
The Honorable Charles E. Grassley Chairman, Committee on Finance United
States Senate
Dear Mr. Chairman:
Between 1999 and 2002, farmers received about $60 billion in federal farm
program payments-averaging $15 billion annually-from the U.S. Department
of Agriculture (USDA) to help support the production of major commodities,
including corn, cotton, rice, soybeans, and wheat. These payments go to
1.3 million producers: individuals and entities such as corporations,
partnerships, and trusts.1 Annually, almost two-thirds of these payments
go to about 10 percent of the producers. Large farming operations get the
most payments because the payments are based primarily on the amount of
crop produced and/or the historical acres farmed.
After hearing several concerns about farm payments going to individuals
not involved in farming, the Congress enacted the Agricultural
Reconciliation Act of 1987 (1987 Act), commonly referred to as the Farm
Program Payments Integrity Act, which among other things, set eligibility
conditions to limit the number of payments going to recipients and to
ensure that only individuals and entities "actively engaged in farming"
received payments.2 To be considered actively engaged in farming, an
individual recipient must make significant contributions to the farming
operation in two areas: (1) capital, land, or equipment and (2) personal
labor, or active personal management. An entity is considered actively
1According to the U.S. Census of Agriculture, in 2002, 2.1 million farms
produced and sold agricultural products. Approximately 1.3 million
individuals and entities receive federal farm program payments on major
commodities. Entities also include other legal organizations such as joint
ventures, limited liability companies, limited partnerships, limited
liability partnerships, estates, and charitable organizations.
Additionally, for federal farm program purposes, entities include states,
political subdivisions, or agencies thereof. USDA's Farm Service Agency
uses the term "persons" to refer to individuals or entities that receive
farm program payments. See appendix I for more information on the most
common ways farmers organize their farming operations, including the types
of legal entities used.
2Most of its provisions became effective in the 1989 crop year.
Agricultural Reconciliation Act of 1987, as enacted by the Omnibus Budget
Reconciliation Act of 1987, Pub. L. No. 100-203, S:S: 1301-1307, 101 Stat.
1330, 1330-12-1330-19.
engaged in farming if the entity separately makes a significant
contribution of capital, land, or equipment, and its members collectively
make a significant contribution of personal labor or active personal
management to the farming operation. USDA's Farm Service Agency's (FSA)
regulations define active personal management to include such tasks as
arranging financing for the operation, supervising the planting and
harvesting of crops, and marketing the crops. For both individuals and
entities, their share of the farming operation's profits or losses must
also be commensurate with their contributions to the farming operation and
those contributions must be at risk. The 1987 Act also limits the number
of entities through which a person can receive program payments. Under the
act, a person can receive payments as an individual and through no more
than two entities, or through three entities and not as an individual. The
statutory provision imposing this limit is commonly known as the
three-entity rule. Under the Farm Security and Rural Investment Act of
2002, "persons"-individuals or entities-are generally limited to a total
of $180,000 annually in farm program payments, or $360,000 if they are
members of up to three entities.3
While one of the purposes of the 1987 Act was to prevent the use of
multiple legal entities to avoid the effective application of the payment
limitations, individuals can still pool resources within certain entities
to receive farm program payments and significantly increase payments to a
single farming operation. For example, individuals who on their own would
generally be limited to $180,000 for their farming operation can instead
set up a partnership composed of three partners, each of whom is qualified
to receive up to $180,000 in farm program payments, and thereby triple the
total amount of payments to the farming operation, assuming the land
qualifies for additional payments. This partnership could include (1)
individual A, (2) a corporation with individuals A and B, and (3) a
corporation with individuals A and C. In this example, the partnership
could receive up to $540,000 annually in the following way: individual A
receives up to $180,000; the corporation with individuals A and B receives
up to $180,000; and the corporation with individuals A and C receives up
to $180,000. Under this arrangement, individual A could receive $360,000
($180,000 as an individual and $90,000 from each of the two corporations).
FSA is responsible for administering the 1987 Act and ensuring that
recipients meet the eligibility criteria and do not receive payments that
3Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-171, 116
Stat. 134, 213.
exceed those allowed. It carries out this responsibility through its
headquarters office, 50 state offices, and over 2,500 field offices.4
Before applying for farm program payments, farming operations file a farm
operating plan with the local FSA field office.5 The plan documents the
name of each recipient, the number of recipients that qualify for
payments, and the recipients' share of profits and losses. FSA reviews the
plan to determine the number of recipients that qualify for payments and
whether the recipients are actively engaged in farming. At the end of the
year, FSA field offices review a sample of these plans to help monitor
whether farming operations were conducted in accordance with these
approved plans. These reviews include an assessment of whether payment
recipients met the requirement for active engagement in farming and
whether the farming operations have the documents to demonstrate that each
individual or entity receiving payments is separate and distinct from
other individuals or entities. FSA's state offices review plans for
farming operations with more than five recipients. After the state offices
review these plans, they send them to the county where the farming
operation is located. FSA selects its sample of farming operations based
on, among other criteria, (1) whether the operation has undergone an
organizational change in the past year by, for example, adding another
recipient to the operation and (2) whether the operation receives payments
above a certain dollar threshold. These criteria have principally resulted
in sampling large farming operations in areas that produce cotton and
rice-Arkansas, California, Louisiana, Mississippi, and Texas. Cotton and
rice typically receive higher payments per acre than other commodity
crops.
You asked us to examine FSA's implementation of the 1987 Act. As agreed
with your office, we (1) determined how well FSA's regulations for active
engagement in farming help limit farm program payments; (2) assessed the
effectiveness of FSA's oversight of farm program payments' requirements
for active engagement in farming; and (3) summarized the distribution of
farm payments by type of entity, such as a corporation, partnership, and
trust.
To address these issues, we reviewed FSA's regulations and guidelines
implementing the provisions of the 1987 Act and spoke with FSA officials
in
4FSA offices are also located in Guam, Puerto Rico, and the Virgin
Islands.
5Farming operations are only required to update the plan when there is a
change in the operation.
headquarters, state offices, and field offices who are responsible for
ensuring that recipients are actively engaged in farming. To evaluate
FSA's application of procedures and standards and to assess the overall
effectiveness of its review process for deciding whether recipients are
actively engaged in farming, we reviewed selected participant files and
conducted a two-part, nonprobability, Web-based survey of all 535 field
offices responsible for 1 or more of the 1,573 operations selected for
review in FSA's sample for 2001, the latest year for which data are
available. The first part of the survey solicited detailed information
about specific farming operations selected for review in the 535 field
offices; the second part was designed to obtain the views of field staff
on issues about the actively engaged in farming requirements and payment
limitation rules. We received responses for 96 percent of the farming
operations under review in part 1 of the survey, and we received responses
from 89 percent of the 535 field offices queried in part 2 of our survey.
FSA participant files with the needed information-farm operation
documents, including leases, contracts, partnership agreements, accounting
records, bank statements, and tax statements-were readily available only
for 523 of the 1,573 farming operations FSA field offices selected for
review. Of the remaining farming operations, 966 had their compliance
reviews waived by FSA and therefore were not reviewed.6 If FSA does not
review a farming operation, that operation does not have to provide
supporting documentation. As such, it was difficult and impractical for us
to obtain the documents needed for a reliably projectable sample from the
total population of farming operations. At the time we began our field
work, FSA had not completed its examination of the 523 farming
operations.7 Five states had the largest number of farming operations
selected for review-Arkansas, California, Louisiana, Mississippi, and
Texas-and in these states, the reviews were generally concentrated in a
small percentage of counties.8 In these 5 states, we examined 64 reviews
in the counties with the largest number of completed reviews. For
comparative purposes, we also reviewed 22 files FSA selected for review in
several counties in Nebraska, which is a large
6For the remaining 84 operations selected for review, in 72 cases, survey
respondents did not provide information on whether the reviews for these
entities were waived or will be conducted in the future; in 12 cases, we
were unable to determine the field office responsible for reviewing the
entities because of inconsistencies in FSA's data files.
7During our field office visits, FSA had completed reviews on 250 farming
operations. As of January 2004, FSA completed an additional 97 reviews for
a total of 347 reviews.
8At the time of our study, Arkansas had not begun conducting the reviews
of its farming operations.
producer of corn and soybeans. To summarize the distribution of farm
payments by type of farming operation, we obtained and analyzed FSA's
computer databases for program payments and the individuals or entities
receiving these payments. For the entities, the databases contain detailed
information on the individuals that are members or beneficiaries, their
share of payments, and additional organizational details, allowing us to
determine the total number and type of entities receiving payments. We
assessed the reliability of FSA's data by (1) performing electronic
testing of required data elements, (2) reviewing existing information
about the data and the system that produced them, and (3) interviewing
agency officials knowledgeable about the data. We determined that the data
were sufficiently reliable for the purposes of this report. Appendix II
contains more detailed information on our scope and methodology, and
appendix IV contains detailed results on our survey.
We conducted our review from May 2003 through March 2004 in accordance
with generally accepted government auditing standards.
Results in Brief Individuals may circumvent the farm payment limitations
because of weaknesses in FSA's regulations. FSA's regulations do not
provide a measurable standard for what constitutes a "significant
contribution" of active personal management, defining it as "activities
that are critical to the profitability of the farming operation, taking
into consideration the individual's or entity's commensurate share in the
farming operation."9 In contrast, the regulations provide specific
standards for what constitutes a significant contribution of capital,
land, equipment, and active personal labor. For example, the regulations
define a significant contribution of personal labor as the lesser of 1,000
hours of work per calendar year or 50 percent of the hours necessary to
conduct a farming operation comparable in size to the individual's or
entity's share in the farming operation. By not specifying quantitative
standards for a significant contribution of active personal management,
FSA allows individuals and entities who may have had limited involvement
in the farming operation to qualify for payments. According to our survey
of FSA field offices and our review of large farming operations, nearly
all recipients meet one of the actively engaged in farming requirements by
asserting that they have made a significant contribution of active
personal management. Survey respondents indicated
97 C.F.R. S: 1400.3(b).
that 99 percent of about 1,000 recipients who were members of partnerships
and joint ventures for which FSA completed compliance reviews in 2001,
asserted that they contributed active personal management solely or in
combination with personal labor to meet the requirements for actively
engaged in farming.
In addition to not providing a measurable standard for what constitutes a
significant contribution of active personal management, FSA's regulations
and guidance lack clarity as to whether certain transactions that we found
could be considered schemes or devices. We found examples of farming
operations where recipients may circumvent the payment limits by
organizing large farming operations to maximize program payments and then
channeling the payments to affiliated nonfarming operations, such as
financial services companies or crop processing companies that are owned
by one or a few individuals. These individuals are either partners in the
farming operation or have close ties to the farming operation's partners.
The farming operation's partners are employees of, or have close ties to,
the owners of the nonfarming operations. With these types of legal
structures, the farming operation receiving farm payments usually has only
minimal assets and comprises many partners, each qualifying the farming
operation for an additional $180,000 in payments. The nonfarming
operations control significant assets-land, equipment, and capital-and are
owned by one or a few individuals who were instrumental in setting up the
legal structure for the farming operation. The nonfarming operations
engage in transactions that do not appear to be at arm's length with the
farming operations to provide goods and services, including land,
equipment, and capital, and to purchase the crops. The net effect of these
transactions between the nonfarming operations and the farming operations
is to channel the farm payments to owners of the nonfarming operations.
These payments to the owners of the nonfarming operations may
significantly exceed the limit that would have applied to these
individuals had they received the payments directly as sole owners of the
farming operation. Depending on how the FSA's regulations are interpreted,
these types of cases might be considered schemes or devices to evade, or
that have the effect of evading, payment limitations. Under the 1987 Act,
as amended, if the Secretary of Agriculture determines that any person has
adopted a "scheme or device" to evade, or that has the purpose of evading,
the act's provisions-in other words, the payment limitations-then that
person is not eligible to receive farm program payments for the year the
scheme or device was adopted and the following crop year.10 Some FSA
officials believe that fraudulent intent is necessary to prove adoption of
a scheme or device; however, it is not clear whether either the statutory
provision or FSA's regulations require a demonstration of fraudulent
intent in order to find that someone has adopted a scheme or device.
Moreover, FSA's guidance contained in its payment limitations handbook
does not clarify the matter, as it does not provide any additional
examples, beyond those contained in the regulations. This lack of clarity
over whether fraudulent intent must be shown in order for FSA to deny
payments under the scheme or device provision of the law may be inhibiting
FSA from finding that some questionable operations are schemes or devices.
In light of the problems we identified, we are recommending that the
Secretary of Agriculture revise FSA's regulations to better define active
personal management and to clarify whether schemes and devices require
fraudulent intent. We are also recommending that FSA issue more detailed
guidance on the kinds of arrangements that may constitute a scheme or
device under its regulations.
Moreover, FSA is not effectively overseeing farm program payments,
according to our analysis of FSA's compliance reviews and our survey of
FSA field offices. In 2001, FSA reviewed 347 farming operations and
identified 18 operations that had members who did not comply with the
actively engaged in farming requirements. While FSA's reviews found cases
of noncompliance, the overall level of compliance with the actively
engaged in farming and payment limitation provisions is unknown because of
shortcomings in key areas. Specifically:
o FSA is not reviewing a valid sample of farm operation plans to
reasonably assess the overall level of compliance because its selection
methodology does not incorporate additional cases to replace cases where
compliance reviews have been waived, resulting in a smaller final sample
size that may affect the validity of the sample results. As a result, FSA
does not have reasonable assurance that only eligible recipients are
receiving payments. In particular, for 2001, FSA developed a judgmental
sample of 1,573 farm operation plans from the 247,831 entities that
received federal farm payments. The sample selection included 966 farming
operations that were waived for various reasons, primarily because they
were previously reviewed, leaving 523 farming operations to be reviewed.
As of January 2004, FSA had only completed reviews for
107 U.S.C. S: 1308-2.
347 plans, but expects to complete reviews for another 176 plans.
Consequently, only about one-third of the 1,573 operations will be
reviewed, providing FSA only a limited assessment of recipients'
compliance with the actively engaged in farming and payment limitation
requirements.
o Six FSA state offices responsible for conducting more than 400 year-end
reviews for 2001 did not require their field offices to conduct these
reviews within 12 months, as FSA's policy requires. Officials told us
other priorities took precedence, including implementing the 2002 farm
bill. As of summer 2003, the field offices had not yet begun these
reviews. As a result, FSA is not in a position to comment on the likely
extent of compliance with the 1987 Act or to correct problems; it may also
be missing opportunities to recapture payments that were made to
ineligible recipients who were part of a farming operation that
reorganized or ceased operations.
o Our field office visits revealed that for one-half of the farming
operations we reviewed for 2001, field offices did not use all available
tools to determine whether individuals and entities are actively engaged
in farming and eligible to receive farm program payments by, among other
things, conducting interviews to substantiate management contributions or
obtaining key financial information to verify that farm program payments
are going to separate and distinct entities.
o FSA has provided only limited training on how to examine legal and
financial documents to staff we surveyed. Nearly 90 percent of these field
staff said that training would help them conduct compliance reviews more
effectively.
We are making a number of recommendations to the Secretary of Agriculture
for improving FSA's oversight of compliance with the 1987 Act, including
improving its sampling method for selecting farming operations for review,
developing management controls to ensure that FSA field staff make use of
all available tools to assess payment recipients' compliance with the act,
and providing training that emphasizes the financial and legal aspects of
compliance reviews.
In 2001, USDA distributed about $17 billion in federal farm program
payments to 1.3 million recipients-individuals and entities. Over
one-third of these payments, or $5.9 billion, went to about 140,000
entities. Corporations and general partnerships represented 39 and 26
percent of
these entities, respectively, followed by joint ventures, and other
entities, according to our analysis of FSA's databases. General
partnerships received 45 percent of the program payments going to
entities, or $2.7 billion. Partnerships with 2 partners collected an
average of $57,890 in farm program payments in 2001, while partnerships
with more than 20 partners collected an average of $698,235. Corporations
collected about 38 percent of the program payments entities received, or
$2.2 billion. Joint ventures, and other entities-such as limited
partnerships, trusts, and charitable organizations-received the remaining
$1.0 billion in program payments going to entities.
We provided a draft of this report to USDA for its review and comment.
USDA agreed to act on most of our recommendations, but it disagreed with
two of them. For example, USDA agreed it would consider whether its
guidance on what constitutes a scheme or device can be improved and
whether it can develop a better methodology for selecting farms for
review. However, it disagreed with our recommendation for developing a
measurable standard for assessing a recipient's contribution of active
personal management and with our recommendation for clarifying whether
fraudulent intent must be demonstrated to establish a scheme or device
under its regulations. For both recommendations, USDA believes that its
implementation of the 1987 Act is consistent with the intent of Congress.
However, we continue to believe that USDA's current implementation of the
payment limitation requirements may allow some individuals to circumvent
the established payment limitations and that our recommendations would
better assure that the goals of the 1987 Act are realized. Our detailed
response to USDA's comments appears at the end of this letter and
following USDA's written comments in appendix V.
Background In 1987, Congress enacted what is commonly known as the Farm
Program Payments Integrity Act, requiring that an individual or entity be
actively engaged in farming in order to receive farm program payments. To
be considered actively engaged in farming, the act requires an individual
or entity to provide a significant contribution of inputs of capital,
land, or equipment, as well as a significant contribution of services of
personal labor or active personal management to the farming operation.
Hired labor or hired management may not be used to meet the service
contribution requirement. The act's definition of a "person" eligible to
receive farm program payments includes an individual, as well as certain
kinds of corporations, partnerships, trusts, or similar entities. Table 1
shows the input and service requirements that recipients must meet. In
addition to
meeting the input and service requirements, recipients must demonstrate
that their contributions to the farming operation are in proportion to
their share of the operation's profits and losses and that these
contributions are at risk.
Table 1: Contribution Requirements for Recipients to Be Considered
Actively Engaged in Farming
Input contribution Service contribution
Significant contribution to the farming Significant contribution to the
farming operation of one or a combination of the operation of one or a
combination of the following: following:
o capital o personal labor, or
o land, or o active personal management
o equipment
Source: GAO.
recipient could suffer a loss.
Congress has established limitations on how much money recipients can
receive annually through the various programs. Farmers can receive federal
farm payments for major commodity crops, including corn, cotton, rice,
soybeans, and wheat, through the following income support programs under
the Farm Security and Rural Investment Act of 2002.
o Direct payments to farmers are tied to a fixed payment rate for each
covered commodity crop and are not dependent on current production or
current market prices. Direct payments are based on the farm's historical
acreage and on historical yields. They are similar to production
flexibility contract payments of the Federal Agriculture Improvement and
Reform Act of 1996.11
o Counter-cyclical payments provide price-dependent benefits for covered
commodities whenever the effective price for the commodity is less than a
pre-determined price (called the target price). Counter-cyclical payments
are based on the farm's historical acreage and yields, and are not tied to
current production of the covered
11Pub. L. No. 104-127, 110 Stat. 888 (1996).
commodity. These payments were developed to replace most ad hoc market
loss assistance payments that were provided to farmers during 1998 through
2001.
o Marketing assistance loan gains, marketing assistance loan forfeitures,
loan deficiency payments, and commodity certificate gains also provide
benefits for covered commodities when market prices are low. Specifically,
under USDA's marketing assistance loan program, the federal government
accepts harvested crops as collateral for interest-bearing loans
(marketing assistance loans) that are due in 9 months. When market prices
drop below the loan rate (the loan price per pound or bushel), the
government allows farmers to repay the loan at a lower rate and retain
ownership of their commodity for eventual sale. The difference between the
loan rate and the lower repayment rate is called the marketing assistance
loan gain. In lieu of repaying the loan, farmers may forfeit their crops
to the government when the loan matures and keep the loan principal.
Conversely, farmers who do not have marketing assistance loans can also
receive a benefit when prices are low, which is called a loan deficiency
payment. The loan deficiency payment is equal to the marketing assistance
loan gain that the farmer would have received if the farmer had a loan.
Finally, commodity certificate exchanges allow farmers to redeem their
marketing assistance loan at a lower repayment rate. By purchasing these
certificates, farmers can immediately reclaim their commodities under
loan. The difference between the loan rate and the lower repayment rate is
called the commodity certificate gain. Benefits under the marketing
assistance loan program are similar to those benefits provided under the
Federal Agriculture Improvement and Reform Act of 1996.
Each of the income support programs has a separate payment limit. For
example, under the Farm Security and Rural Investment Act of 2002, a
recipient generally may only receive up to $40,000 in direct payments, up
to $65,000 in counter-cyclical payments, and up to $75,000 in loan
deficiency payments, and marketing assistance loan gains, for a total of
$180,000 per
year.12 Under the three-entity rule, an individual may receive up to twice
the payment per year from three entities, that is, a full payment on the
first entity and up to a half payment for each of two additional entities
for a total of $360,000. Benefits received through commodity certificate
gains and marketing loan forfeitures do not count against the payment
limitations. In addition, effective for 2003 through 2007, under FSA's
regulations, a recipient-an individual or entity-is ineligible for farm
program payments if (1) the 3-year average of the adjusted gross income
for the recipient exceeds $2.5 million and (2) less than 75 percent of the
recipient's average adjusted gross income is derived from farming,
ranching, or forestry operations.
Some farming operations may reorganize to overcome payment limits to
maximize their farm program benefits. Larger farming operations and
farming operations producing crops with high payment rates such as rice
and cotton may establish several related entities that are eligible to
receive payments. However, each entity must be separate and distinct and
is required to demonstrate that it is actively engaged in farming by
providing a significant contribution of capital, land, or equipment, as
well as a significant contribution of personal labor or active personal
management to the farming operation.
USDA is responsible for enforcing the actively engaged in farming and
payment limitation rules and has delegated this specific responsibility to
its FSA. FSA field offices review a sample of farming plans at the end of
the year to help monitor whether farming operations were conducted in
accordance with approved plans, including whether payment recipients met
the requirement for active engagement in farming and whether the farming
operations have the documents to demonstrate that the entities receiving
payments are in fact separate and distinct legal entities. FSA selects its
sample of farming operations based on, among other criteria, (1) whether
the operation has undergone an organizational change in the past year by,
for example, adding another entity or partner to the operation and (2)
whether the operation receives payments above a certain threshold.
12Recipients who also produce peanuts may receive up to an additional
$40,000 in direct payments, $65,000 in counter-cyclical payments, and
$75,000 in loan deficiency payments and marketing assistance loan gains,
for a total of up to an additional $180,000 per year. Also recipients of
Conservation Reserve Program payments, to retire environmentally sensitive
land, may receive up to an additional $50,000 per year. Under the
three-entity rule, recipients who produce peanuts may receive up to
$360,000 in payments, and recipients who receive Conservation Reserve
Program payments may receive up to $100,000 in payments.
Individuals May Circumvent Farm Payment Limitations Because of Weaknesses
in FSA's Regulations
Weaknesses in FSA's regulations may enable some individuals to circumvent
farm payment limitations. FSA's regulations do not provide a measurable
standard for what constitutes a significant contribution of active
personal management. As a result, individuals and entities that have
little involvement in a farming operation can assert a significant
contribution of active personal management and receive farm payments. In
addition, FSA's regulations and guidance lack clarity as to whether
certain transactions and farming operation structures that we found could
be considered schemes or devices. We found several examples of recipients
that may be circumventing the payment limits by organizing large farming
operations to maximize program payments and then channeling the payments
to affiliated nonfarming operations, such as financial services companies
or crop processing companies that are owned by one or a few individuals.
These individuals are either partners in the farming operation or have
close ties to the farming operation's partners. Under the 1987 Act, as
amended, if the Secretary of Agriculture determines that any person has
adopted a "scheme or device" to evade, or that has the purpose of evading,
the act's provisions-in other words, the payment limitations-then that
person is not eligible to receive farm program payments for the year the
scheme or device was adopted and the following crop year.13 Some FSA
officials believe that fraudulent intent is necessary to prove adoption of
a scheme or device, but it is not clear whether either the statutory
provision or FSA's regulations require a demonstration of fraudulent
intent in order to find that someone has adopted a scheme or device.
Moreover, guidance contained in FSA Handbook Payment Limitations, 1-PL
(Revision 1), Amendment 40, does not clarify the matter, as it does not
provide any additional examples, beyond those contained in the
regulations, for FSA officials of the types of arrangements that might be
considered schemes or devices. This lack of clarity over whether
fraudulent intent must be shown in order for FSA to deny payments under
the scheme or device provision of the law may be inhibiting FSA from
finding that some questionable operations are schemes or devices.
137 U.S.C. S: 1308-2.
Lack of a Measurable Standard for What Constitutes a Significant
Management Contribution Allows Individuals and Entities Who May Have Had
Limited Involvement in the Farming Operation to Qualify for Payments
Many recipients meet one of the farm program payments' eligibility
requirements by asserting that they have made a significant contribution
of active personal management. As we noted before, in order to be
considered actively engaged in farming, a person must make a significant
contribution of land, equipment, or capital, and a significant
contribution of personal labor or active personal management. Because
FSA's regulations do not provide a measurable, quantifiable standard for
what constitutes a significant management contribution, people who appear
to have little involvement, according to our survey of FSA field offices
and our review of 86 case files, are receiving farm program payments.
Indeed, most large farming operations meet the requirement for personal
labor or active personal management by asserting a significant
contribution of management. Survey respondents provided information on 347
partnerships and joint ventures for which FSA completed compliance reviews
in 2001; these entities comprised 992 recipients, such as individuals and
corporations who were members of these farming operations. Of these 992
recipients, 46 percent, or 455, asserted that they contributed active
personal management; 1 percent, or 7, asserted that they contributed
personal labor; and the remaining 530 asserted they provided a combination
of active personal management and personal labor, to meet the actively
engaged in farming requirement.
While FSA's regulations define active personal management more
specifically to include such things as arranging financing for the
operation, supervising the planting and harvesting of crops, and marketing
the crops, the regulations lack measurable criteria for what constitutes a
significant contribution of active personal management. FSA regulations
define a "significant contribution" of active personal management as
"activities that are critical to the profitability of the farming
operation, taking into consideration the individual's or entity's
commensurate share in the farming operation." In contrast, FSA provides
quantitative standards for what constitutes a significant contribution of
active personal labor, capital, land, and equipment. For example, FSA's
regulations define a significant contribution of active personal labor as
the lesser of 1,000 hours of work annually, or 50 percent of the total
hours necessary to conduct a farming operation that is comparable in size
to such individual's or entity's commensurate share in the farming
operation. By not specifying quantifiable standards for what constitutes a
significant contribution of active personal management, FSA allows
recipients who may have had limited involvement in the farming operation
to qualify for payments.
In FSA's 1988 proposed regulations to implement the 1987 Act, it defined a
significant contribution of active personal management as the lesser of
1,000 hours annually, or 50 percent of the hours necessary to conduct a
farming operation of comparable size to the person's share in the farming
operation.14 During the public comment period, some commentators expressed
a concern that in determining a significant contribution of personal
management, time was not a good measure of such a contribution; they
believed that the type of decisions an individual made about a farming
operation was far more important than the number of hours the individual
took to make the decision. Other commentators said that the 1,000-hour
requirement was too high a standard and that it should be changed to 500
hours, which was the amount of hours the U.S. Internal Revenue Service
used to determine material participation in a business enterprise. After
considering the public comments, FSA removed the requirement that an
individual must provide a specific number of management hours; instead,
the final regulations discuss a significant contribution with respect to
active personal management in terms of the relative worth of the
individual's contribution to the farming operation. Specifically, the
regulations define a significant contribution as activities that are
critical to the overall profitability of the farming operation, taking
into consideration the person's commensurate share in the farming
operation. These management activities include arranging financing for the
operation, supervising the planting and harvesting of crops, and marketing
crops. However, this broad definition has allowed a substantial number of
recipients to qualify for farm payments and may not have served to limit
payments to those recipients whose contributions to the farming operation
are significant. According to our survey, of 347 completed reviews of
farming operations for 2001, FSA found 18 operations with members,
asserting a management contribution, that were not in compliance with the
actively engaged in farming requirements.
Our survey and our review of case files show that the largest farming
operations usually are structured as general partnerships or joint
ventures with individuals, corporations, or trusts, as partners. One
individual often fulfills the management contribution requirement for
multiple entities within the partnership or joint venture. Through the
three-entity rule, persons can collect farm program payments as members of
up to three
14In 1995, FSA assumed responsibility for programs previously under the
jurisdiction of the Agricultural Stabilization and Conservation Service.
entities.15 These entities are generally corporations or limited liability
companies comprised of two shareholders, each with 50 percent ownership.
Often, one individual fulfills the actively engaged in farming requirement
for three entities by contributing active personal management for all
three entities at once. Essentially, when an individual contributes
management activities for one entity, that individual is also contributing
the same management activities for the other two entities. In 24 of the 31
files we reviewed, where the partnership or joint venture included
corporations or limited liability companies, a single individual claimed
to fulfill the management contribution requirement for multiple
recipients.
For 26 of the 86 FSA compliance review files we examined in which the
recipients asserted they made a significant contribution of active
personal management to the farming operation, some recipients appeared to
have little involvement with the farming operation. For example, in 2001,
11 partners in a general partnership operated a farm of 11,900 cropland
acres. These partners asserted they met the actively engaged in farming
requirement by making a significant contribution of equipment and active
personal management. FSA's compliance review found that all partners of
the farming operation were actively engaged in farming and met all
requirements for the approximately $1 million the partnership collected in
farm program payments in 2001. Our review found that the partnership held
five management meetings during the year, three in a state other than the
state where the farm was located, and two on-site meetings at the farm.
Some of the partners attended the meetings in person while others joined
the meetings by telephone conference. Although all 11 partners claimed an
equal contribution of management, minutes of the management meetings
indicated seven partners participated in all five meetings, two
participated in four meetings, and two participated in three meetings. All
partners resided in states other than the state where the farm was located
and only one partner attended all five meetings in person. Based on our
review of minutes documenting the meetings, it is unclear whether some of
the partners contributed significant active personal management. If FSA
had found that some of the partners had not contributed active personal
management, the partnership's total farm program payments would have been
reduced by about 9 percent, or $90,000, for each partner that FSA
15Alternatively, individuals can collect farm program payments as an
individual and as a member in two entities. Individuals with an ownership
interest in an entity that exceeds 50 percent lose eligibility for their
share of program payments for that entity.
determined was ineligible.16 State FSA officials agreed that the evidence
to support the management contribution for some partners was questionable
and that FSA reviewers could have taken additional steps to confirm the
contributions for these partners. However, the officials also stated they
do not have any plans to revisit the review of this farming operation.
In another example, in 2001, six partners in a general partnership
operated a farm of about 6,400 cropland acres. All six partners asserted
they met the actively engaged in farming requirement by making a
significant contribution of equipment and providing active personal
management. FSA's compliance review found that all partners of the farming
operation were actively engaged in farming and met all requirements for
the approximately $700,000 the partnership collected in farm program
benefits in 2001. FSA's review documentation noted that all management was
provided on-site on a "daily" basis. However, our review found that two of
the six partners resided in a state several hundred miles away from the
farm, raising questions about how these two partners could have provided
this level of management. Moreover, the FSA field staff conducting the
review did not interview any of the partners to determine the management
duties each partner actually performed and how these duties helped the
profitability of the farming operation. A state FSA official agreed that
they could have conducted interviews with the partners to confirm the
contributions for these partners. However, the official also stated FSA
does not have any plans to revisit the review of this farming operation.
According to our survey of 535 FSA field offices, FSA could make key
improvements to strengthen the management contribution standard. These
offices reported that the management standard can be strengthened by
clarifying the standard, including providing quantifiable criteria,
certifying
16Each partner's share in the farming operation is about 9 percent. Nine
percent of $1 million is $90,000.
actual contributions, and requiring management to be on-site.17 As figure
2 shows, the percentage of respondents supporting these changes ranged
from 41 to 63.
Figure 2: Percentage of FSA Field Offices Indicating Specific Improvements
Would Strengthen the Active Personal Management Contribution
Percentage of survey respondents lude
Clarifydefinition Incquantifiab
criteriaRequire certified
el
statement of actual
utionsRequire on-sitrib
conte
entme
gies
manaactivit Improvements to management standard
Greatly strengthen
Generally strengthen
Source: GAO survey results.
Moreover, in 2003, a USDA commission established to look at the impact of
changes to payment limitations concluded that determining what constitutes
a significant contribution of active management is difficult and lack of
clear criteria likely makes it easier for farming operations to add
17Certifying actual contributions could include requiring an affidavit
from each recipient delineating management activities performed.
recipients in order to avoid payment limitations.18 In discussing the
management contribution issue in February 2004, FSA officials acknowledged
that under current regulations, only land, equipment, capital, and labor
are measurable, and that enforcing the current management contribution
standard is difficult because of its subjective nature.
Lack of Clarity in FSA's Regulations and Guidance Concerning Schemes and
Devices May Reduce Effectiveness of Payment Limitations
Our review found that some individuals or entities have engaged in
transactions that might constitute schemes or devices to evade payment
limitations, but neither FSA's regulations nor its guidance address
whether such transactions could constitute schemes or devices. Under the
1987 Act, as amended, if the Secretary of Agriculture determines that any
person has adopted a "scheme or device" to evade, or that has the purpose
of evading, the act's provisions-in other words, the payment
limitations-then that person is not eligible to receive farm program
payments for the year the scheme or device was adopted and the following
crop year.19 FSA's regulations implementing this statutory provision
provide that it (1) includes persons who adopt or participate in adopting
a scheme or device and (2) includes schemes or devices that are designed
to evade or have "the effect of evading" payment limitation rules. The
regulations state that a scheme or device shall include concealing
information that affects a farm program payment application, submitting
false or erroneous information, or creating fictitious entities for the
purpose of concealing the interest of a person in a farming operation.20
As one court has noted, the regulations "seek to identify sham
transactions" to obtain more farm program payments.21
We found several large farming operations that were structured as one or
more partnerships, each consisting of multiple corporations that increased
farm program payments in a questionable manner. The farming operations
engage in transactions with nonfarming operations that may be owned by
18See U.S. Department of Agriculture, Office of the Chief Economist,
Commission on the Application of Payment Limitations for Agriculture,
Report of the Commission on the Application of Payment Limitations for
Agriculture (Washington, D.C.: August 2003).
197 U.S.C. S: 1308-2.
207 C.F.R. S: 1400.5.
21Stegall v. United States, 19 Cl. Ct. 765, 769 (1990).
or have close ties to the farming operation's partners who were
instrumental in setting up the legal structure for the farming operation.
These transactions include activities such as purchasing the farming
operation's goods and services-including land, equipment, and capital-and
also selling the farming operation's crops. According to our review of
farming operation files and interviews with FSA officials, these
transactions may not be at arm's length and the farming operation often
loses money because apparently it pays above-market prices for the goods
and services and receives net returns for its crops that are below-market
prices. The net effect of these transactions between the nonfarming and
farming operations is that farm program payments are not distributed as
profits to the partners or corporations that comprise the farming
operation, but rather are channeled to the owners of the nonfarming
operations. In this manner, the owners of the nonfarming operations-who
set up the legal structure for the farming operation-often receive funds
significantly in excess of the amount they would have received as a member
of the farming operation.
The following two examples illustrate how farming operations, depending on
how the FSA regulations are interpreted, might be considered to evade, or
have the effect of evading, payment limitations. In one case, we found a
family set up the legal structures for its farming operation and also
owned the affiliated nonfarming entities. This operation included two
farming partnerships comprised of eight limited liability companies.22 The
two partnerships operated about 6,000 acres and collected more than
$800,000 in farm program payments in 2001. The limited liability companies
included family and nonfamily members, although power of attorney for all
of the companies was granted to one family member to act on behalf of the
companies, and ultimately the farming partnerships. The operation also
included nonfarming entities-nine partnerships, a joint venture, and a
corporation-that were owned by family members. The affiliated nonfarming
entities provided the farming entities with goods and services, such as
capital, land, equipment, and administrative services. The operation also
included a crop processing entity to purchase and process the farming
operation's crop. According to our review of accounting records for the
farming operation, both farming partnerships incurred a small net loss in
2001, even though they had received more than $800,000 in farm program
payments. In contrast, average net income for similar-sized farming
operations in 2001 was $298,000, according to USDA's Economic
22See appendix I for more information on limited liability companies.
Research Service. The records we reviewed showed that the loss occurred,
in part, because the farming operations paid above-market prices for goods
and services and received a net return from the sale of the crop to the
nonfarming entities that appeared to be lower than market prices because
of apparent excessive charges. The structure of this operation allowed the
farming operation to maximize farm program payments, but because the farm
operated at a loss these payments were not distributed to the members of
the operation. In effect, these payments were channeled to the family-held
nonfarming entities. Figure 3 shows the organizational structure of this
operation and the typical flow of transactions between farming and
nonfarming entities.
Figure 3: Large Operation Containing Farming and Nonfarming Entities
Source: GAO analysis of FSA compliance files.
Note: Percentages shown are share of ownership.
Similarly, we found another general partnership that farmed more than
50,000 acres in 2001 conducted business with nonfarming entities including
a land leasing company, an equipment dealership, a petroleum
distributorship, and crop processing companies with close ties to the
farming partnership. The partnership, which comprised more than 30
corporations, collected more than $5 million in farm program payments in
2001.23 The shareholders who contributed the active personal management
for these corporations were officers of the corporations. Each officer
provided the active personal management for 3 corporations. Some of these
officers were also officers of the nonfarming entities-the entities that
provided the farming partnership goods and services such as the capital,
land, equipment, and fuel. The nonfarming entities also included a gin and
grain elevators to purchase and process the farming partnership's crops.
Our review of accounting records showed that even though the farming
partnership received more than $5 million in farm payments, it incurred a
net loss in 2001, which was distributed among the corporations that
comprised the partnership.24
Factors contributing to the loss included the above-market prices for
goods and services charged by the nonfarming entities and the net return
from the sale of crops to nonfarming entities that appeared to be lower
than market prices because of apparent excessive charges for storage and
processing. For example, one loan made by the nonfarming financial
services entity to the farming partnership for $6 million had an interest
rate of 10 percent while the prevailing interest rate for similar loans at
the time was 8 percent. Similarly, the net receipts from the sale of the
harvested crop, which were sold almost exclusively to the nonfarming
entities, were below market. For example, in one transaction the gross
receipt was about $1 million but after the grain elevators deducted fees
such as for drying, storage, and grain quality, the net proceeds to the
farming entity were only about $500,000. In this particular operation, all
of the nonfarming entities had common ownership linked to one individual.
This individual had also set up the
23In 2003, the operation divided into six new farming partnerships
comprised of the same corporations.
24The accounting records also showed that the capital (equity) account for
each of the corporations carried a negative balance indicating multiple
years of net losses.
legal structure for the farming entities but had no direct ownership
interest in the farming entities.25
It is unclear whether either of these operations falls within the
statutory definition of a scheme or device or whether they otherwise
circumvent the payment limitation rules. State FSA officials in Arkansas,
Louisiana, Mississippi, and Texas, where many of the large farming
operations are located, believed that some large operations with
relationships between the farming and nonfarming entities were organized
primarily to circumvent payment limitations.26 In this manner, these
farming operations may be reflective of the organizational structures that
some members of Congress indicated were problematic when enacting the 1987
Act and the scheme or device provision. The House of Representatives
report for the 1987 Act states: "A small percentage of producers of
program crops have developed methods to legally circumvent these
limitations to maximize their receipt of benefits for which they are
eligible. In addition to such reorganizations, other schemes have been
developed that allow passive investors to qualify for benefits intended
for legitimate farming operations."27 In discussing the issue of farming
operations that circumvent the payment limitation rules with FSA
headquarters officials in February 2004, they noted that while an
operation may be legally organized, the operation may be misrepresenting
who in effect receives the farm program payments. FSA has no data on how
many of the types of operations that we identified exist. However, FSA is
reluctant to question these operations because it does not believe current
regulations provide a sufficient basis to take action.
25In addition, this individual also set up the legal structure for a
separate farming operation that collected about $2 million in farm program
payments in 2001. The operation is set up as a general partnership and is
comprised of more than 20 corporations. According to FSA field staff, this
farming operation also conducts transactions with the individual's
nonfarming operations. We did not review this operation because FSA did
not select this operation for review in 2001.
26FSA officials noted that as part of the actively engaged in farming
compliance review, FSA checks whether rates for land or equipment leased
from an individual or nonfarming entity with an interest in the farming
operation are consistent with prevailing rates. However, when an
individual or nonfarming entity does not have an ownership interest in the
farming operation, FSA's regulations and policy do not require that the
lease rates be at prevailing rates even in situations such as we
identified above where family members do have such an interest in the
farming operation.
27H.R. Rep. No. 100-391 (1987) (emphasis added).
Other officials said that USDA could review such an operation under the
1987 Act's scheme or device provision if it becomes aware that the
operation is using a scheme or device for the purpose of evading the
payment limitation rules. However, these FSA officials stated it is
difficult to prove fraudulent intent-which they believe is a key element
in proving scheme or device-and requires significant resources to pursue
such cases. In addition, they stated that even if a recipient is found
ineligible to receive payments this decision might be overturned on appeal
within USDA. The FSA officials noted that when FSA loses these cases, it
tends to discourage other field offices from aggressively pursuing these
types of cases.
It is not clear whether either the statutory provision or FSA's
regulations require a demonstration of fraudulent intent in order to find
that someone has adopted a scheme or device. As discussed above, the
statute limits payments if the Secretary of Agriculture determines that
any person has adopted a scheme or device "to evade, or that has the
purpose of evading," the farm payment limitation provisions. The
regulations state that payments may be withheld if a person "adopts or
participates in adopting a scheme or device designed to evade . . . or
that has the effect of evading" the farm payment limitations. The
regulations note that schemes or devices shall include, for example,
creating fictitious entities for the purpose of concealing the interest of
a person in a farming operation. Some have interpreted this as appearing
to require intentionally fraudulent or deceitful conduct.28 On the other
hand, FSA regulations only provide this as one example of what FSA
considers to be a scheme or device. They do not specify that all covered
schemes or devices must involve fraudulent intent. As previously stated,
covered schemes or devices under FSA regulations include those that have
"the effect of evading" payment limitation rules.29
28See Alan R. Malasky, ASCS Appeals and Payment Limitation Revisions in
the 1990 Farm Bill: What Did the American Farmer Really Gain (or Lose)?,
North Dakota Law Review 365, 385 and n. 72 (1992) (noting that the
regulatory examples of schemes and devices support the interpretation that
some form of fraud or misrepresentation was necessary). See also
Vandervelde v. Espy, 908 F. Supp. 11, 16 (D.D.C. 1995) (implying in dicta
that to find a scheme or device there is a necessary inference that a
person acted in bad faith).
29See Christopher R. Kelley, Introduction to Federal Farm Program Payment
Legislation and Payment Eligibility Law, Arkansas Law Notes 11, 37 (2002)
("Although the regulations appear to require a `scheme or device' to
involve intentionally fraudulent or deceitful conduct, the meaning of the
phrase is the subject of disagreement. By including actions that merely
have the `effect' of evading the rules in its regulations, the FSA seems
to take the position that a producer's unintentional oversight in
completing his, her, or its farm operating plan can constitute a `scheme
or device.' Whether this is what Congress intended is open to debate.").
Finally, guidance contained in FSA Handbook Payment Limitations, 1-PL
(Revision 1), Amendment 40, does not clarify the matter, as it does not
provide any additional examples for FSA officials of the types of
arrangements that might be considered schemes or devices. This lack of
clarity over whether fraudulent intent must be shown in order for FSA to
deny payments under the scheme or device provision of the law may be
inhibiting FSA from finding that some questionable operations are schemes
or devices.
We have referred the two cited operations to USDA's Office of Inspector
General for further investigation.
Weaknesses in FSA's Oversight May Enable Ineligible Farmers to Receive
Program Payments
In addition to weaknesses in the regulations cited above, FSA does not
effectively oversee farm program payments in five key areas, according to
our analysis of FSA compliance reviews and our survey of FSA field
offices. First, FSA does not review a valid sample of farm operation plans
for compliance in order to have greater assurance that only eligible
recipients receive payments. Second, field offices in 29 states did not
conduct compliance reviews in a timely manner. Third, according to our
review of case files, for one-half of the farming operations we reviewed
for 2001, field offices did not use all available tools, such as
interviews and key financial information, to determine whether persons
were actively engaged in farming. Fourth, FSA has not established a
methodology for collecting and summarizing compliance review data for
comparison from year to year and assessing field offices' performance to
be assured that its state and field offices are consistently and
accurately applying payment eligibility requirements. Finally, these
problems are exacerbated by a lack of periodic training for FSA staff on
the payment limitation and eligibility rules. As a result, FSA's finding
that virtually all individuals receiving farm payments in large farming
operations were actively engaged in farming in 2001 is questionable.
FSA Does Not Review a FSA is not reviewing a valid sample of farm
operation plans to determine Valid Sample of Recipients compliance because
its methodology does not incorporate additional cases to Be Reasonably
Assured to replace cases where compliance reviews are later waived,
resulting in a
smaller final sample size that may affect the validity of the sample
results.of Compliance with the In 2001, about two-thirds of farming
operations selected for review were Payment Limitations waived because
they were previously reviewed or the farming operation
involved only a husband and wife. Consequently, FSA does not have
reasonable assurance that only eligible recipients are receiving payments.
To conduct the compliance reviews, FSA annually selects a judgmental
sample of farming operations. Specifically, in 2001, FSA selected 1,573
farming operations from its file of 247,831 entities to review producers'
compliance with actively engaged in farming requirements. FSA's sample
selection focuses on entities that have undergone an organizational change
during the year or received large farm program payments.30 When the state
offices receive the selections and forward them to the field locations,
field staff seek waivers for farming operations reviewed within the last 3
to 5 years-the time frame varies by state. As a result, according to FSA
officials, of the farming operations selected for review each year, more
than half are waived and therefore not actually reviewed. According to
these officials, many of the waived cases show up year after year because
FSA's sampling methodology does not take into consideration when an
operation was last reviewed. According to survey respondents who provided
written comments on FSA's sampling method, the repetitive selection of
operations recently reviewed is one of the reasons they seek waivers. For
example, one respondent commented that some farming operations must be
waived every year because FSA headquarters does not monitor the sample
selection process and the farming operations are selected repeatedly.
Another respondent noted many of the same farming operations in his county
were selected for review for 5 consecutive years and suggested using other
selection methods. In 2001, the latest year for which data are available,
only 523 of 1,573 sampled entities were to be reviewed.31 Field offices
sought and received waivers for 966 entities for various reasons, but
primarily because the entities were previously reviewed or the farming
operation involved only a husband and wife.32 As of January 2004, FSA had
only completed reviews for 347 of the 523 entities and expects to complete
reviews for the remaining 176 entities. FSA's selection methodology does
30Under the 1987 Act, the Secretary of Agriculture is prohibited from
approving, for farm program payment purposes, any change in a farming
operation that will increase the number of persons to which the payment
limitations apply unless the change is bona fide and substantive. 7 U.S.C.
S: 1308.
31For 72 of the 1,573 sampled entities, survey respondents did not provide
information on whether the reviews for these entities were waived or will
be conducted in the future. In addition, we were unable to determine the
field offices responsible for reviewing 12 of the 1,573 sampled entities.
32State offices may waive selected compliance reviews for farming
operations that were previously reviewed, did not receive an adverse
determination, and for which the reviewing authority has no reason to
believe there have been changes that affect the original eligibility
decision.
not take into consideration how review waivers result in a smaller final
sample size that may affect the validity of the sample results.
Consequently, the results from the review of these 523 entities provide
only a limited assessment of the population of all 247,831 entities. In
discussing this issue with FSA headquarters officials in February 2004,
they said the sampling process was developed in the mid-1990s and
acknowledged that it can be improved and better targeted. In responding to
a draft of this report, FSA noted that it is currently discussing changes
to the current selection process with USDA's Office of Inspector General.
Although a smaller sample size of operations can produce reliable results
for assessing compliance nationwide, certain statistical methods have to
be used to provide that level of assurance.33 However, FSA is not using
these methods.
Field Offices Do Not Always Conduct Compliance Reviews in a Timely Manner
Only 9 of 38 FSA state offices responsible for conducting compliance
reviews for 2001 completed the reviews and reported the results to FSA
headquarters within 12 months, as FSA policy requires.34 FSA headquarters
selected the 2001 sample on March 27, 2002, and forwarded the selections
to its state offices on April 4, 2002. FSA headquarters required the state
offices to conduct the compliance reviews and report the results by March
31, 2003. Six of the 26 FSA state offices that failed to report the
results to headquarters had not yet begun these reviews for 470 farming
operations as of summer 2003: Arkansas, California, Colorado, Louisiana,
Ohio, and South Carolina. Until we brought this matter to their attention
in July 2003, FSA headquarters staff were unaware that these six states
had not conducted compliance reviews for 2001. Similarly, they did not
know the status of the remaining 20 states that were required to report
the results of their compliance reviews. Because of this long delay, FSA
cannot reasonably assess the level of recipients' compliance with the act
and may be missing opportunities to recapture payments that were made to
ineligible recipients if a farming operation reorganizes or ceases
operations. FSA officials in the six states told us that implementing
various provisions of the Farm Security and Rural Investment Act of 2002,
which
33The smaller sample size would be sufficient if FSA used a probability
sample design to select a representative sample of farm entities. In this
case, a desired precision and level of confidence could be used to
determine the sample size. Use of a probability sample allows the
projection of results from the sample to the population as a whole.
34Three additional FSA state offices submitted the required report after
the due date.
was enacted in May 2002, took precedence over conducting the 2001
compliance reviews. Figure 4 shows, for 1999 through 2001, that few states
annually complete the compliance reviews within 12 months, as required by
FSA.
Figure 4: Number of States with Farming Operations Selected for Compliance
Reviews and Number of States that Completed the Reviews within 12 Months,
1999 to 2001
Number of states 50
45
40
35
30
25
20
15
10 5
0 1999 2000 2001 Years
States with reviews
States completing reviews on time
Source: FSA.
Note: GAO analysis of FSA data.
FSA Staff Do Not Use All Our review of case files indicate that for
one-half of the farming operations Available Tools in Assessing we
reviewed in 2001, field offices did not use all available tools to
Compliance and Do Not determine whether persons are actively engaged in
farming, such as
conducting interviews, to substantiate management contributions orMaintain
Documents to obtaining key financial information to verify that farm
program payments Support Their Decisions are going to separate and
distinct entities. FSA policy requires field staff
conducting the compliance reviews to interview persons asserting that they
are actively engaged in farming before making a final eligibility
decision, unless the reason for not interviewing the person is obvious and
adequately justified in writing.35 Indeed, 83 percent of field offices
responding to our survey indicated that interviews are helpful in
conducting compliance reviews. However, in 27 of the 86 case files we
reviewed in six states, field staff did not interview persons asserting
that they met the active engagement in farming requirement and did not
adequately document why they had not conducted interviews. In one of the
states we visited, field staff had not conducted any interviews.
We also found that some field offices do not obtain and review certain key
financial information regarding the farming operation before making final
eligibility decisions. For example, our review of case files indicate that
for one-half of the farming operations, field staff did not use financial
records, such as bank statements, cancelled checks, or accounting records,
to substantiate that capital was contributed directly to the farming
operation from a fund or account separate and distinct from that of any
other individual or entity with an interest in the farming operation, as
required by FSA's policy.36 Instead, FSA staff often rely on their
personal knowledge of the individuals associated with the farming
operation to determine whether these individuals meet the requirement for
active engagement in farming. Furthermore, during our field office visits,
we identified at least one state FSA office that requires its field staff
to obtain only 3 months of bank statements to conduct the compliance
reviews. Because the field staff obtained only 3 months of bank
statements, we were unable to determine whether an individual's or
entity's capital contributions to the farming operation were from a fund
or account separate and distinct from any other individual or entity with
an interest in the farming operation. According to FSA staff in field
offices in other states that we visited, 12 months of bank statements are
critical to gain complete and accurate understanding of transactions among
individuals and entities within a farming operation. Similarly, 77 percent
of field offices responding to our survey indicated that obtaining 12
months of bank statements is helpful in conducting compliance reviews.
35FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40. 36FSA
Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
Finally, FSA field staff do not always maintain documentation supporting
their decisions on the results of their compliance reviews, as required by
FSA policy.37 For example, in 31 of 86 compliance review cases we
examined, the files contained a worksheet documenting the decision but no
evidence to show how FSA verified the recipient's input
contributions-capital, land, or equipment-to the farming operation. That
is, FSA could not document whether (1) the recipient's contribution of
inputs to the farming operation were significant and (2) these inputs were
at risk.
FSA Does Not Consistently Collect and Analyze Monitoring Data
FSA has not established a methodology for collecting and summarizing
compliance review data so that it can (1) reliably compare farming
operations' compliance with the actively engaged in farming requirements
from year to year and (2) assess its field offices' conduct of compliance
reviews. Under Office of Management and Budget Circular A-123, agencies
are required to develop and implement management controls to reasonably
ensure that they obtain, maintain, report, and use reliable and timely
information for decision-making. Because FSA has not instituted these
controls, it cannot determine whether its staff are consistently applying
the payment eligibility requirements across states and over time. For
example, as discussed above, until we brought it to their attention, FSA
headquarters staff were unaware that 6 of 38 states responsible for
conducting compliance reviews, had not begun the reviews for 2001, even
though state compliance review results were due to headquarters by March
31, 2003. As of July 2003, another 20 states had not submitted their
compliance review results to headquarters for 2001. In addition, 8 of
these 20 states had not submitted any compliance review results for 1998
through 2001. Until we began this review, FSA had not examined the data it
had collected to identify potential problem areas and develop strategies
for addressing them. Since we brought this issue to its attention,
however, FSA has begun to consider how it can obtain and systematically
review the data.
As of January 2004, FSA had completed only 347 of the 523 farming
operations scheduled for review for 2001. Of the 347 farming operations
that were reviewed, FSA found 18 operations with members that were not in
compliance with the actively engaged in farming requirements. According to
FSA, debt collection procedures may be taken against these
37FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
18 operations because they received farm program payments that they were
ineligible to receive.38
FSA Staff Responsible for Compliance Reviews Have Not Received Training
The implementation problems we have identified are exacerbated by a lack
of training for FSA staff on the actively engaged in farming requirements
and payment limitations. Training has generally not been available since
the mid-1990s, which has led to difficulty in assessing compliance with
the payment limitation and eligibility rules. For example, in 8 of the 16
field offices we visited, staff had not received updated training on how
to conduct these reviews, which may have contributed to some of the
problems we identified in making eligibility determinations. In one field
office in California, FSA staff conducting the compliance reviews found
errors in the initial eligibility determination for four farming
operations reviewed.39 For example, in one case, the review found the
original eligibility determination was incorrect because a farming
operation did not have separate contracts reflecting the fair market value
of both leased equipment and hired labor, as required by FSA policy when
the equipment and labor are provided by one individual.
In another field office, in Texas, FSA staff found that one of three
members of a joint venture was not actively engaged in farming for 2001
and therefore was ineligible to receive $65,541 in farm program payments.
The member had asserted he contributed active personal management to the
joint venture, but the review found that the individual had received
several checks totaling $104,000 for management fees. However, according
to FSA's regulations, individuals cannot receive compensation for their
contribution of active personal management. The member appealed the
decisions to FSA, stating he was not skilled in bookkeeping and simply
miscoded the checks issued to him by the joint venture as management fees.
The member was allowed to amend his paperwork to be in compliance with
active engagement requirements. He retained his $65,541 in program
payments and repaid the $104,000 to the farming operation as repayment of
a loan with interest. According to FSA staff, they were not
38Noncompliance decisions are not final; payment recipients may appeal the
decisions within USDA.
39At the beginning of the planting season, FSA field offices review each
recipient's farm operating plan to determine whether the recipient's plan
meets the requirement for active engagement in farming.
aware that FSA's policy prevented such amendments and they believe that
training would help to avoid such problems in the future.
Similarly, over one-third of survey respondents noted that they had never
received formal training or that it had been at least 5 years since they
received training on the payment limitation and eligibility rules, and 85
percent indicated that training is helpful in conducting compliance
reviews. Additionally, 132 respondents in 535 field offices surveyed
provided written comments regarding the need to receive training. For
example, one respondent noted that FSA staff in one state received limited
training on payment limitation and eligibility rules and are either not
comfortable making compliance decisions or are making inaccurate
decisions. Other respondents commented that more training, specifically on
accounting and legal issues, is needed to better understand how to apply
the eligibility requirements to complex legal entities. In discussing this
issue with FSA headquarters officials in February 2004, they acknowledged
that they have not provided updated training in recent years and agreed
that this lack of training is a problem. They said that although budgetary
and resource constraints limit training, FSA intends to offer some
training to staff in its state offices in 2004. However, decisions to
provide training to staff in field offices are made by FSA's state
offices.
General Partnerships Received Almost One-Half of Farm Program Payments
Made to Entities
Of the approximately $17 billion in federal farm program payments in 2001
to 1.3 million recipients-individuals and entities-over one-third of these
payments, or $5.9 billion, went to 141,884 entities.40 Corporations and
general partnerships represented 39 and 26 percent of these entities,
respectively, followed by joint ventures, and other types of farming
operations, according to our analysis of FSA's databases. Corporations
received 38 percent of the program payments to entities, or $2.2 billion,
while general partnerships received 45 percent of the payments, or $2.7
billion. Joint ventures, and other entities-such as limited partnerships,
trusts, and charitable organizations-received the remaining 17 percent of
program payments going to entities, or $1.0 billion. Table 2 shows the
types of entities and the farm program payments they received in 2001.
40The total for entities does not include 17,964 entities that received
$938 million because FSA's files were incomplete and we were unable to
identify the type of entity.
Table 2: Types of Entities and Total Farm Program Payments, 2001
Dollars in millions
Entities Payments
Type Number Percent Total Percent
Corporations 54,637 38.5 $2,248 37.9
General
partnerships 37,193 26.2 2,684 45.2
Joint ventures 8,888 6.3 583
Othera 41,166 29.0 419
Total 141,884 100.0 $5,934 100.0
Source: GAO analysis of FSA data.
Notes:
Data include production flexibility contract payments, market loss
assistance payments, loan deficiency payments, and marketing assistance
loan gains. In 2001, recipients were limited to $40,000 for production
flexibility contract payments, $40,000 for market loss assistance
payments, and $150,000 for loan deficiency payments and marketing
assistance loan gains. Recipients in three entities could receive up to
double the amount for each of these types of payments.
Data do not include 17,964 entities that received $938 million because we
were unable to identify the type of entity.
aIncludes limited partnerships, estates, trusts, charitable organizations,
and federal agencies.
General partnerships receive more farm program payments as the number of
partners in partnerships increase. General partnerships with 2 partners
collected an average of $57,890 in farm program payments in 2001, while
partnerships with more than 20 partners collected an average of $698,235.
Table 3 shows the type and number of entities receiving federal farm
program payments in 2001.
Table 3: Type and Number of Entities and Farm Program Payments, Categorized by
the Number of Members, 2001 Entities Payments
Type Partners/members Number Percent Total Percent Average
General 2 19,152 51.5 $1,108,708,233 41.3 $57,890
partnerships
3-5 15,459 41.6 1,169,100,368 43.6 75,626
6-10 2,296 6.2 335,485,915 12.5 146,118
11-20 252 0.7 46,975,225 1.8 186,410
21 or more 34 0.1 23,739,989 0.9 698,235
Total 37,193 100.0 $2,684,009,730 100.0 $72,164
Joint 2 5,707 64.2 $407,817,751 70.0 $71,459
ventures
3-5 2,523 28.4 123,250,433 21.2 48,851
6-10 537 6.0 42,432,967 7.3 79,019
11-20 104 1.2 5,184,475 0.9 49,851
21 or more 17 0.2 3,893,350 0.7 229,021
Total 8,888 100.0 $582,578,976 100.0 $65,547
Total 2 24,859 53.9 $1,516,525,984 46.4 $61,005
3-5 17,982 39.0 1,292,350,801 39.6 71,869
6-10 2,833 6.1 377,918,882 11.6 133,399
11-20 356 0.8 52,159,700 1.6 146,516
21 or more 51 0.1 27,633,339 0.8 541,830
Total 46,081 100.0 $3,266,588,706 100.0 $70,888
Source: GAO analysis of FSA data.
Notes:
Data include production flexibility contract payments, market loss
assistance payments, loan deficiency payments, and marketing assistance
loan gains. In 2001, recipients were limited to $40,000 for production
flexibility contract payments, $40,000 for market loss assistance
payments, and $150,000 for loan deficiency payments and marketing
assistance loan gains. Recipients in three entities could receive up to
double the amount for each of these types of payments.
Percentages may not total to 100 due to rounding.
More detailed information on farm program payments to general partnerships
and joint ventures is contained in appendix III.41
41In addition, for more detailed information on the distribution of farm
program payments to farming entities, see U.S. Department of Agriculture,
Office of the Chief Economist, Commission on the Application of Payment
Limitations for Agriculture, Report of the Commission on the Application
of Payment Limitations for Agriculture (Washington, D.C.: August 2003).
Conclusions The Farm Program Payments Integrity Act of 1987, while enacted
to limit payments to individuals and entities actively engaged in farming,
allows farming operations to maximize the receipt of federal farm payments
as long as all recipients meet eligibility requirements. However, we found
cases where payment recipients may have developed methods to circumvent
established payment limitations. This seems contrary to the goals of the
1987 Act and was caused by weaknesses in USDA's regulation and oversight.
The regulations need to better define what constitutes a significant
contribution of active personal management and clarify whether fraudulent
intent is necessary to find that someone has adopted a scheme or device.
Without specifying measurable standards for what constitutes a significant
contribution of active personal management, FSA allows individuals who may
have had limited involvement in the farming operation to qualify for
payments. By providing more specific requirements for what constitutes a
significant contribution of active personal management, as it has for
other eligibility requirements, FSA could help ensure that individuals
receiving farm program payments are not simply getting paid for allowing
their name to be used in a farming operation document. Furthermore,
because of a lack of clarity in its regulations, FSA may be reluctant to
pursue whether certain farming operations such as those we found are
schemes or devices. By acting to resolve these issues, the government
could save millions of dollars in farm payments annually.
Moreover, FSA is not providing adequate oversight of farm program payments
under its current regulations and policies. First, its sampling
methodology does not eliminate from the universe of farming operations
those operations recently reviewed for compliance with the payment limits.
These operations are therefore included in the sample and then waived for
review. In effect, FSA is missing opportunities to review a more
representative sample of operations to better determine overall compliance
with the payment limitations. Second, FSA's compliance reviews are often
completed late. As a result, FSA may be missing opportunities to recoup
ineligible payments from farming operations. Third, when FSA's field
offices do not use available tools to determine whether recipients are
actively engaged in farming, such as interviews to substantiate management
contributions, they miss opportunities to better ensure that recipients
are eligible for farm payments. Fourth, FSA lacks a system for reviewing
compliance reports so it can reliably compare, on a national basis,
farming operations' compliance with the actively engaged in farming
requirements from year to year and assess its field offices' conduct of
compliance reviews. Finally, FSA staff do not receive the periodic
training
they need to ensure that they can ascertain whether individuals receiving
farm program payments meet the requirements for active engagement in
farming.
Recommendations for Executive Action
To better ensure that recipients of farm program payments do not
circumvent payment limitations, we recommend that the Secretary of
Agriculture direct the Administrator of the Farm Service Agency to take
the following eight actions:
o develop and enforce measurable requirements defining a significant
contribution of active personal management;
o revise its regulations to clarify whether schemes and devices require
fraudulent intent and seek congressional authority if necessary;
o issue more detailed guidance on the kinds of arrangements that may
constitute a scheme or device under its regulations;
o improve the sampling methodology for selecting farming operations for
review in order to have greater assurance that only eligible recipients
receive payments;
o ensure that FSA field offices conduct compliance reviews in a timely
manner;
o develop management controls to ensure that FSA field staff make use of
all available tools to assess payment recipients' compliance with the act;
o establish and maintain a consistent methodology for collecting,
analyzing, and summarizing data to identify patterns and trends in
compliance over time and across states; and
o provide training that emphasizes the financial and legal aspects of
compliance reviews.
Agency Comments and We provided USDA with a draft of this report for its
review and comment. We received written comments from USDA's Under
Secretary for Farm and
Our Evaluation Foreign Agricultural Services. The department agreed to act
on most of our recommendations, including whether its guidance on what
constitutes a
scheme or device can be improved and whether it can develop a better
methodology for selecting farms for review. It, however, disagreed with
recommendations to develop measurable requirements for defining a
significant contribution of active personal management and to revise its
regulations to clarify whether schemes and devices require fraudulent
intent.
With respect to developing a measurable standard for a significant
contribution of active personal management, USDA believes that its
implementation of the 1987 Act is consistent with the intent of the
Congress. USDA agreed that it would be beneficial to have a measurable
standard to help measure active personal management for those recipients
required to be actively engaged in farming. It stated that a measure of
time was proposed when initial rules were written to implement the 1987
Act. However, based on comments it received, USDA removed the time measure
from the proposed regulations and adopted a standard based on the relative
worth of the active personal management performed. No measurable standards
are provided to assist reviewing authorities in making judgments on
whether reported contributions meet the active personal management
requirement. While it may be difficult, we believe that it is possible and
necessary to develop a measurable standard to better assure that
recipients are making a meaningful contribution of active personal
management. We note that the U.S. Internal Revenue Service has established
time as a measurable standard to determine material participation in a
business enterprise. USDA stated that FSA is faced with something of a
dilemma in the implementation of the 1987 Act in that the act requires
participants to provide significant contributions to the farming operation
in order to receive payments, but other, more recent statutes allow
recipients to receive certain payments without growing crops. USDA does
not suggest that these recent statutes have repealed the actively engaged
in farming requirements.
USDA also disagreed with our recommendation to clarify its regulations on
whether fraudulent intent is necessary to demonstrate a scheme or device,
stating that current regulations are sufficiently clear. By focusing on
the difference between avoidance and evasion in its written comments, FSA
seems to imply that it is necessary to demonstrate fraudulent intent to
show the adoption of a scheme or device. However, as we note in this
report, FSA's regulations on the need to demonstrate intent are unclear.
In a February 2004 meeting with USDA officials, they agreed the current
regulations may deter FSA field officials from challenging the types of
cases we identify in our report that may be evading the payment limitation
provisions. They noted that the types of operations we identify in this
report as possible schemes or devices are not specifically addressed in
the regulations, and they were not sure if these cases would meet the
criteria for a scheme or device. However, in its written comments, USDA
did agree to review its procedures on scheme or device to determine if it
can provide additional guidance, as we recommend.
Regarding our recommendation to improve its methodology for selecting
farming operations for compliance reviews, USDA commented it is
considering what, if any, actions it could take to improve its
methodology. However, USDA also stated that it uses a judgmental sample
and that its methodology is valid for the requirements of such a sample.
We do not question USDA's use of a judgmental sample. Our recommendation
to improve the sampling methodology is based on the concern that USDA
annually waives over one-half of its selected sample and does not replace
these waived cases with other selections. If USDA intends to use a sample
size that is less than one-half of the farming operations initially
selected for review, it must use statistical methods to provide reasonable
assurance of compliance with the payment limitations.
USDA also commented that the vast majority of payment recipients are
eligible under any current eligibility test or restriction imposed by the
Congress. Our analysis shows that 90 percent of payment recipients receive
about one-third of farm payments, indicating that the vast majority of
recipients are not likely to reach the payment limits. However, based on
our review of USDA's oversight procedures, we do not have sufficient
information to comment on USDA's assertion that a vast majority of payment
recipients are eligible under any test or restriction imposed by the
Congress.
FSA also provided technical corrections, which we have incorporated into
the report as appropriate. FSA's written comments are presented in
appendix V.
As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its issue date. At that time we will send copies of this report to
appropriate congressional committees, the Secretary of Agriculture; the
Director, Office of Management and Budget; and other interested parties.
In addition, this report will be available at no charge on GAO's Web site
at http://www.gao.gov.
If you have any questions about this report, please contact me at (202)
512-3841. Key contributors to this report are listed in appendix VI.
Sincerely yours,
Lawrence J. Dyckman Director, Natural Resources and Environment
Appendix I
Common Ways Farmers Organize Their Farming Operations
Farmers organize their farming operations in various ways to reduce their
exposure to farming's financial risks. For example, certain business
structures may limit a farmer's liability when the farming operation has
legal problems or debt that cannot be paid from farm earnings. These
riskreducing entities may receive up to $180,000 in farm program payments
annually under payment limitation rules regardless of how many members,
partners, or shareholders they have.1 Some of the most common ways farmers
organize their business and how these business organizations are treated
under payment limitation rules are as follows:
o Sole Proprietorship. About 89 percent of farming operations are owned,
operated, and managed by a single individual. A sole proprietorship has no
legal existence independent of its owner, which means that only the owner,
not the farming operation, can be sued. Owners of sole proprietorships are
personally liable for all their farm's debts. Individuals running sole
proprietorships are limited to $180,000 in payments for their farming
operations.
o Joint Ventures. Joint ventures, defined by FSA as two or more
individuals who pool resources and share profits or losses, make up about
1 percent of farming operations receiving payments. As with sole
proprietorships, joint operations have no legal existence independent of
their owners. Members in a joint operation have unlimited personal
liability for the farm's debts. Each member in a joint venture is limited
to $180,000 in payments. Adding members to the joint venture could qualify
the farming operation for an additional $180,000 in payments for each new
member.
o General Partnerships. General partnerships are the simplest form of
partnership and most states permit their formation with just an oral
agreement. FSA makes farm program payments directly to the partnership
rather than to the individual partners, which may be individuals or
entities. Each partner can qualify the general partnership for $180,000 in
payments. The general partnership can qualify for
1Recipients who also produce peanuts may receive up to an additional
$40,000 in direct payments, $65,000 in counter-cyclical payments, and
$75,000 in loan deficiency payments and marketing assistance loan gains,
for a total of up to an additional $180,000 per year. Also recipients of
Conservation Reserve Program payments, to retire environmentally sensitive
land, may receive up to an additional $50,000 per year. Under the
three-entity rule, recipients who produce peanuts may receive up to
$360,000 in payments, and recipients who receive Conservation Reserve
Program payments may receive up to $100,000 in payments.
Appendix I
Common Ways Farmers Organize Their
Farming Operations
additional payments by adding more individuals or entities to the
partnership. Each partner is personally liable for that partner's own
conduct and for the conduct of those under that partner's direct
supervision, as well as negligence, wrongful acts, and misconduct of other
partners and partnership employees. Partners are personally liable for
partnership commercial obligations such as loans or taxes. About 3 percent
of farming operations are organized as general partnerships.
o Corporations. Corporations have a separate legal existence from their
owners, meaning that the corporation rather than the owners is ordinarily
responsible for farm business debts and that the corporation can be sued.
As a result, some individuals may choose the corporate form of farm
business organization to protect their personal assets in case of farm
financial difficulties. About 5 percent of farming operations are
organized as corporations.
o Limited Liability Companies. Limited liability companies are a hybrid
form of business entity because they have the limited liability feature of
a corporation and the income tax treatment of a general partnership. Their
owners are called members.
o Limited Liability Partnerships. Limited liability partnerships, another
hybrid organizational form, eliminate the liability of an individual
partner for negligence, wrongful acts, and misconduct of other partners
and partnership employees. Each partner remains personally liable for that
partner's own conduct and for the conduct of those under that partner's
direct supervision. Partners remain personally liable for partnership
commercial obligations such as loans or taxes.
o Limited Partnerships. Limited partners in a limited partnership are
investors whose liability for partnership financial obligations is only as
great as the amount of their investment. A limited partnership must have
at least one general partner who manages the farm business and who is
fully liable for partnership financial obligations to be considered
eligible for farm program payments.
o Other. Other types of entities that may qualify as one person under
current payment limitation rules include an irrevocable trust, a revocable
trust combined with the grantor of the trust, an estate, or a charitable
organization. States along with their political subdivisions and agencies
are considered one person under current payment
Appendix I
Common Ways Farmers Organize Their
Farming Operations
limitation rules. Each of these entities is limited to $180,000 in
payments.
Under payment limitation rules, spouses jointly operating a farm may be
treated as two separate recipients if neither spouse owns a substantial
share of another entity that receives farm program payments separately.
Spouses can also be treated as two separate recipients for payment
limitation purposes if they each operated a farm independently before
marriage and continue to do so after marriage. In that case, the spouses
would be operating two independent farms, not jointly operating a farm.
Appendix II
Objectives, Scope, and Methodology
At the request of the Chairman of the Senate Committee on Finance, we
reviewed the Farm Service Agency's (FSA) implementation of the payment
eligibility provisions of the Farm Program Payments Integrity Act of 1987.
Specifically, we agreed to (1) determine how well FSA's regulations for
active engagement in farming help limit farm program payments; (2) assess
the effectiveness of FSA's implementation of the act and the corresponding
regulations; and (3) summarize the distribution of farm payments by type
of entity, such as a corporation, partnership, and trust.
To determine how well FSA's regulations for active engagement in farming
help limit farm program payments to producers actively engaged in farming,
and how effectively FSA is implementing the act to achieve this goal, we
examined the guidance that FSA's field offices use to monitor farmers'
compliance with the payment limitation and eligibility requirements,
including relevant laws; the Code of Federal Regulations, title 7, parts
795 and 1400; and agency policy, including the FSA Handbook Payment
Limitations, 1-PL (Revision 1), Amendment 40, and related state amendments
and notices.
To evaluate FSA's application of procedures and standards and to assess
the overall effectiveness of its review process for deciding whether
recipients are actively engaged in farming, we reviewed selected
participant files and conducted a two-part, Web-based, non-probability
survey of all 535 field offices that had farming operations selected for
review in FSA's sample for 2001, the latest year for which data are
available. Some FSA county directors managed field offices in more than
one county. Consequently, our survey sample consists of 522 respondents,
or county directors, representing the 535 field offices. The first part of
the survey solicited detailed information about 1,561 farming operations
selected for review in the 535 field offices; the second part was designed
to obtain the views of field staff on issues about the actively engaged in
farming requirements and payment limitation rules.1 In part 1 of the
survey, we received responses for 96 percent of the 1,561 farming
operations selected for review by FSA for 2001, and we received responses
from 89 percent of the 522 respondents queried in part 2 of our survey.
FSA's compliance files with the needed information from completed
reviews-farm operation documents, including leases, contracts, partnership
agreements,
1FSA selected 1,573 farming operations for review for 2001. However, due
to data inconsistencies, we were unable to determine the field offices
responsible for reviewing 12 of the 1,573 farming operations.
Appendix II
Objectives, Scope, and Methodology
accounting records, bank statements, and tax statements-were available
only for 347 of the 1,561 farming operations reviewed in part 1 of the
survey. The remaining farming operations had no response (72), an
incomplete review (58), no review (118), or were waived (966).
In developing the Web-based questionnaire, we met with officials in FSA's
headquarters to gain a thorough understanding of payment limitation and
eligibility issues. We also shared a draft copy of the questionnaire with
these officials who provided us comments including technical corrections.
We then pretested the questionnaire with staff in three FSA field offices
in Texas, as well as staff in one office in California, Maryland,
Mississippi, and Nebraska. During these pretests, we asked the officials
to complete the Web-based survey as we observed the process. After
completing the survey, we interviewed the respondents to ensure that (1)
the questions were clear and unambiguous, (2) the terms we used were
precise, (3) the questionnaire did not place an undue burden on the agency
officials completing it, and (4) the questionnaire was independent and
unbiased. On the basis of the feedback from the pretests, we modified the
questions as appropriate.
Information about accessing the questionnaire was provided via e-mail for
those FSA staff selected to participate in the survey. The survey was
activated, and staff informed of its availability on October 21, 2003; it
was available until January 5, 2004. To ensure security and data
integrity, we provided each FSA field staff with a password that allowed
him or her to access and complete a questionnaire for the local office. No
one else could access that questionnaire or edit its data. We also
provided these staff with a pledge of confidentiality to ensure their
candor in completing the survey. Selected tables from part 1 of the
survey, and all responses from part 2 of the survey, are summarized in
appendix IV.2
We also visited 16 FSA field offices located in six states to discuss
implementation of the payment limitation and eligibility requirements and
review compliance files in order to evaluate FSA's application of
procedures and standards and to assess the overall effectiveness of its
review process for deciding whether recipients are actively engaged in
2In addition to responding to our survey questions, many of these field
staff also provided us with written comments. Because of the volume of
these written comments as well as the need to ensure the confidentiality
of individual responses, these comments have not been included in appendix
IV.
Appendix II
Objectives, Scope, and Methodology
farming. FSA's compliance files with the needed information-farm operation
documents, including leases, contracts, partnership agreements, accounting
records, bank statements, and tax statements-are available only for those
farming operations in the 535 FSA field offices selected for review. FSA
does not require entities not selected for review to provide supporting
documentation. As such, it was impractical for us to obtain the documents
needed for a reliably projectable sample from the total population of
entities. During our field office visits, FSA had only completed its
examination of 250 of 523 farming operations it planned to review for
2001.3 Five states had the largest number of reviews-Arkansas, California,
Louisiana, Mississippi, and Texas-and in these states, the reviews were
generally concentrated in a small percentage of counties in each state.4
We examined 86 of the 250 completed reviews in the counties with the
largest number of completed reviews. For comparative purposes, we also
reviewed files in several counties in Nebraska, which is a large producer
of corn and soybeans.
To summarize the distribution of farm payments by type of farming
operation, we obtained and analyzed FSA's computer databases for program
payments and the individuals or entities receiving these payments. For
these entities, the databases contain detailed information on the
individuals that are members or beneficiaries, their share of payments,
and additional organizational details, allowing us to determine the total
number and type of entities receiving payments. We assessed the
reliability of FSA's data by (1) performing electronic testing of required
data elements, (2) reviewing existing information about the data and the
system that produced them, and (3) interviewing agency officials
knowledgeable about the data. We determined that the data were
sufficiently reliable for the purposes of this report.
Finally, we also interviewed members of the Commission on the Application
of Payment Limitations for Agriculture and reviewed the Commission's 2003
report.5 In addition, we spoke with officials from U.S.
3As of January 2004, FSA had completed 347 reviews of farming operations.
4At the time of our study, Arkansas had not begun conducting the reviews
of its farming operations.
5See U.S. Department of Agriculture, Office of the Chief Economist,
Commission on the Application of Payment Limitations for Agriculture,
Report of the Commission on the Application of Payment Limitations for
Agriculture (Washington, D.C.: August 2003).
Appendix II
Objectives, Scope, and Methodology
Department of Agriculture's (USDA) Office of Inspector General and
agriculture experts including attorneys specializing in agriculture law.
We conducted our review from May 2003 through March 2004 in accordance
with generally accepted government auditing standards.
Appendix III
Distribution of Farm Program Payments by Type of Entity and Number of
Members, Crop Year 2001
Table 4: Number of General Partnerships and Farm Program Payments,
Categorized by the Number of Partners, Crop Year 2001
Partnerships Payments
Partners Number Percent Total Percent Average
2 19,152 51.49 $1,108,708,233 41.31 $57,890a
3 8,761 23.56 582,729,706 21.71 66,514
4 4,763 12.81 397,777,416 14.82 83,514
5 1,935 5.20 188,593,246 7.03 97,464
6 1,145 3.08 170,981,215 6.37 149,329
7 474 1.27 40,233,582 1.50 84,881
8 338 0.91 57,999,373 2.16 171,596
9 204 0.55 41,491,143 1.55 203,388
10 135 0.36 24,780,602 0.92 183,560
11 80 0.22 9,405,677 0.35 117,571
12 58 0.16 18,557,203 0.69 319,952
13 30 0.08 3,553,851 0.13 118,462
14 26 0.07 2,405,065 0.09 92,503
15 19 0.05 1,383,891 0.05 72,836
16 11 0.03 801,281 0.03 72,844
17 15 0.04 4,031,603 0.15 268,774
18 6 0.02 3,156,810 0.12 526,135
19 1 0.00 2,699 0.00 2,699
20 6 0.02 3,677,143 0.14 612,857
21 3 0.01 1,439,238 0.05 479,746
22 3 0.01 715,474 0.03 238,491
23 3 0.01 45,587 0.00 15,196
24 2 0.01 233,113 0.01 116,557
25 5 0.01 400,056 0.01 80,011
26 2 0.01 780,961 0.03 390,481
27 1 0.00 107,960 0.00 107,960
28 2 0.01 744,506 0.03 372,253
29 2 0.01 24,168 0.00 12,084
30 1 0.00 298,291 0.01 298,291
More
than 30 10 0.02 18,950,634 0.71 1,895,063
Total 37,193 100.00 $2,684,009,727 100.00 $72,164
Source: GAO analysis of FSA data.
Appendix III Distribution of Farm Program Payments by Type of Entity and
Number of Members, Crop Year 2001
Notes:
Data include production flexibility contract payments, market loss
assistance payments, loan deficiency payments, and marketing assistance
loan gains. In 2001, recipients were limited to $40,000 for production
flexibility contract payments, $40,000 for market loss assistance
payments, and $150,000 for loan deficiency payments and marketing
assistance loan gains. Recipients in three entities could receive up to
double the amount for each of these types of payments.
Percentages may not total to 100 due to rounding.
aOur analysis of the payments received by 19,152 general partnerships
composed of two partners in 2001 showed that 1,118 partnerships exceeded
the limit of $40,000 for production flexibility contract payments for one
"person," and 2,223 partnerships exceeded the limit of $40,000 for market
loss assistance payments for one "person."
Table 5: Number of Joint Ventures and Farm Program Payments, Categorized
by the Number of Members, Crop Year 2001
Joint ventures Payments Members Number Percent Total Percent Average
5,707 64.21 $407,817,751 70.00 $71,459
1,346 15.14 59,035,930 10.13 43,860
755 8.49 39,433,320 6.77 52,230
422 4.75 24,781,183 4.25 58,723
246 2.77 20,021,159 3.44 81,387
110 1.24 6,868,610 1.18 62,442
78 0.88 5,250,279 0.90 67,311
68 0.77 4,970,975 0.85 73,103
35 0.39 5,321,943 0.91 152,056
28 0.32 1,064,020 0.18 38,001
25 0.28 173,127 0.03 6,925
15 0.17 797,214 0.14 53,148
12 0.14 2,907,815 0.50 242,318
8 0.09 49,643 0.01 6,205
4 0.05 44,361 0.01 11,090
17 3 0.03 80,937 0.01 26,979
18 3 0.03 4,959 0.00 1,653
19 3 0.03 35,507 0.01 11,836
20 3 0.03 26,892 0.00 8,964
21 2 0.02 2,706,729 0.46 1,353,365
22 1 0.01 2,377 0.00 2,377
23 1 0.01 1,752 0.00 1,752
24 2 0.02 15,373 0.00 7,687
26 1 0.01 4,356 0.00 4,356
Appendix III Distribution of Farm Program Payments by Type of Entity and
Number of Members, Crop Year 2001
(Continued From Previous Page)
Joint ventures Payments
Members Number Percent Total Percent Average
1 0.01 46,104 0.01 46,104
1 0.01 3,154 0.00 3,154
1 0.01 3,838 0.00 3,838
1 0.01 56,379 0.01 56,379
1 0.01 29,834 0.01 29,834
3 0.03 956,031 0.16 318,677
1 0.01 47,357 0.01 47,357
1 0.01 20,067 0.00 20,067
Total 8,888 100.00 $582,578,976 100.00 $65,547
Source: GAO analysis of FSA data.
Notes:
Data include production flexibility contract payments, market loss
assistance payments, loan deficiency payments, and marketing assistance
loan gains. In 2001, recipients were limited to $40,000 for production
flexibility contract payments, $40,000 for market loss assistance
payments, and $150,000 for loan deficiency payments and marketing
assistance loan gains. Recipients in three entities could receive up to
double the amount for each of these types of payments.
Percentages may not total to 100 due to rounding.
Appendix IV
Results of Survey on Implementation and Effectiveness of Actively Engaged
in Farming Requirements
Part 1-2001 End-of-Year Compliance Reviews
Question 1: What is the status of the 2001 end-of-year review for the farming
operation? Question 2: Please indicate the reason the review was waived.
Question 3: What type of operation is the farm?
Completed, but Don't know/
Completed and not yet No answer/
the COC has presented to Started, but not Not checked/
yet Not
made its COC completed Not Waived completed
decision started
318 29 58 118 966 72
Farming Farming
operation operation is
an
was previously entity (not a
joint
reviewed and did operation)
not with no
Farming receive adverse embedded
entities and
Farming operation determination the members do Don't know/
has all and no not
operation land meeting changes have have other No answer/
the farming Not
involves landowner occurred since interests checked/
only a the receiving Not
husband and exemption review program Other completed
wife payments
415 38 467 18 26 2
Don't know/
No answer/
General Limited Not checked/
liability Not
Individual partnership Joint venture company Other completed
1 225 105 1 2 13
Question 10: Was the member determined to be actively engaged in the
farming operation?
No- No- Don't meet meet No Not
did did know/ the the answer/ hand hand checked/ Yes requirement requirement completed
not not left right Not 920 10 11 51
Question 12: Did the farming operation contribute capital, land, or
equipment on behalf of the member to meet the left-hand requirement?
Don't know/ No answer/ Not checked/
Yes No Not completed
826 111 55
Appendix IV
Results of Survey on Implementation and
Effectiveness of ActivelyEngaged in Farming
Requirements
Question 13: Did the member contribute capital to meet the left-hand
requirement?
Don't know/
No answer/
Skipped from Not checked/
Yes No question 12 Not completed
59 52826 55
Question 17: Did the member contribute equipment to meet the left-hand
requirement?
Don't know/ No answer/ Skipped from Not checked/ Yes No question 12 Not
completed
49 62826 55
Question 23: Did the member contribute land to meet the left-hand
requirement?
Don't know/
No answer/
Skipped from Not checked/
Yes No question 12 Not completed
39 70826 57
Question 30: Did the member contribute active personal labor to meet the
right-hand requirement?
Don't know/ No answer/ Not checked/
Yes No Not completed
489 446 57
Question 33: Did the member contribute active personal management to meet
the right-hand requirement?
Don't know/ No answer/ Not checked/
Yes No Not completed
851 75 66
Appendix IV
Results of Survey on Implementation and
Effectiveness of ActivelyEngaged in Farming
Requirements
Part 2-Payment Eligibility and Limitation Issues
Question 1: For calendar year 2001, in addition to the judgmental sample
selected by the Deputy Administrator for Farm Programs (DAFP), how many
other end-of-year reviews were conducted for your county?
0 1 2 3 4 5 12No answer
3972712 7 4 3 1
Question 2: When producers claim to provide active personal management, in
general, how confident are you that their activities actually meet the
right-hand requirements?
Don't know/ No
Moderately Somewhat Not at all answer/ Not
Very confident Confident confident confident confident checked
138 241 56 20 7 4
Question 3: In your opinion, would the following actions strengthen or
weaken the application of the claimed contributions of active personal
management requirement?
Don't
know/
Greatly Generally Have Generally Greatly No
answer/
strengthen strengthen no weaken weaken Not
effect checked
FSA clarifications
of the
definition of 63 220 161 5 0
management
Require the
producer to perform
specific amounts of
management 32 177 185 32 1
Require management
activities
be on-site 63 109 176 47 24
Require a certified statement of
actual management
contributions from the producers
(other than the farm operating
plan) 43 164 192 26 13
Other actions 9 10 12 2 1
Question 4: To what extent do the following factors help or hinder you in
carrying out end-of-year reviews?
Don't know/
Generally Neither helps Generally Greatly No answer/
Greatly helps helps nor hinders hinders hinders Not checked
Guidance from FSA 100 259 76 13 3 15
Emphasis within FSA on doing
end-of-year reviews 60 215 147 14 3 27
State office oversight 76 219 112 25 7 27
Inter-county cooperation 126 239 66 4 2 29
Appendix IV
Results of Survey on Implementation and
Effectiveness of ActivelyEngaged in Farming
Requirements
Don't
know/
Generally Neither Generally Greatly No
helps answer/
Greatly helps nor hinders hinders Not
helps hinders checked
Time of year in which
end-of-
year review lists are
received
(April) 24 84 192 106 32
Time frame in which
reviews are
to be conducted
(April-
December) 23 105 196 88 27
Having complete
federal income
tax returns for all
relevant
producers 185 195 46 13 5
Having 12 months of
bank
statements for all
relevant
producers 147 213 66 12 7
Having supporting
documents
(other than tax and
bank
records) from 179 247 20 2 4
producers
Interviewing producers 135 252 58 7 1
Training in conducting
end-of-
year reviews 247 157 30 1 0
Experience in
conducting end-
of-year reviews 266 181 6 1 0
Adverse determinations
may be
overturned by State 18 58 188 115 28
Office
Adverse determinations
may be
overturned by USDA's
National
Appeals Division 12 47 191 115 41
Political influence 2 2 155 98 132
Other factors 7 5 10 3 7
Question 5: When did you last receive the following types of training on payment
limitation and eligibility determinations?
Within the Never
Within the 5 or received
past 2 to 4 more this No answer/
past year years years training Not checked
ago
Formal, statewide 79 208 126 41 12
training
On the job training (i.e.,
instruction from review team,
District Director, or PT on end
of-year reviews) 189 149 62 45 21
Other training 39 22 7 25 373
Appendix IV
Results of Survey on Implementation and
Effectiveness of ActivelyEngaged in Farming
Requirements
Question 6: How useful was each type of training in preparing you to make
payment limitation and eligibility determinations?
Never
Of received
Somewhat little this No
Extremely Moderately or answer/
useful Very useful useful no use training Not
useful checked
Formal,
statewide 66 174 100 57 14 36
training
On the job training (i.e.,
instruction from review team,
District Director, or PT on end
of-year reviews) 115 179 78 27 7 33
Other training 21 19 10 8 1 22
Question 7: In the space below, please list any additional resources that
would help you in making payment limitation and eligibility
determinations.
Provided comments = 200
Did not provide comments = 266
Question 8: When were the following types of payment limitation and
eligibility determination training last available to your county
committee?
Don't
know/No
Within the Within the 5 or more Never answer/ Not
past past 2
year to 4 years years ago available checked
Formal, statewide 19 67 130 136 114
training
On the job training (i.e.,
instruction from review team,
District Director, or PT on end
of-year reviews) 118 91 63 93 101
Other training 29 9 2 30 396
Question 9: In your opinion, should commodity certificates be counted
towards the $75,000 payment limitation that currently only applies to loan
deficiency payments and marketing loan gains?
Don't
know/
No answer/
Definitely yes Probably yes Uncertain Probably no Definitely no Not
checked
130 77 48 47 78 86
Question 10: Please explain why you believe commodity certificates should
or should not be counted towards payment limitations.
Provided comments = 335
Did not provide comments = 131
Question 11: In your opinion, should nonrecourse marketing loan
forfeitures be counted towards the $75,000 payment limitation that
currently only applies to loan deficiency payments and marketing loan
gains?
Don't know/ No answer/
Definitely yes Probably yes Uncertain Probably no Definitely no Not
checked
51 56 62 72119106
Appendix IV
Results of Survey on Implementation and
Effectiveness of ActivelyEngaged in Farming
Requirements
Question 12: Please explain why you believe nonrecourse marketing loan
forfeitures should or should not be counted towards payment
limitations.
Provided comments = 276
Did not provide comments = 190
Question 13: Please use the space below to provide suggestions or comments
on improving the end-of-year review process.
Provided comments = 304
Did not provide comments = 162
Question 14: Please use the space below to provide suggestions or comments
on improving payment limitations and eligibility
requirements.
Provided comments = 293
Did not provide comments = 173
Question 15: Please use the space below to provide suggestions or comments
on FSA's method of selecting farms for review.
Provided comments = 287
Did not provide comments = 179
Question 16: If you would like to provide any other comments on the issues
covered in this questionnaire, please provide them in the space
below.
Provided comments = 139
Did not provide comments = 327
Appendix V
Comments from the U.S. Department of Agriculture
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
Appendix V
Comments from the U.S. Department of
Agriculture
See comment 1.
See comment 2.
See comment 3.
See comment 4.
See comment 5.
Appendix V
Comments from the U.S. Department of
Agriculture
See comment 6.
See comment 7.
See comment 8.
Appendix V
Comments from the U.S. Department of
Agriculture
See comment 8.
See comment 9.
See comment 10.
Appendix V
Comments from the U.S. Department of
Agriculture
See comment 11.
See comment 11.
See comment 11.
Appendix V
Comments from the U.S. Department of
Agriculture
See comment 12.
Appendix V
Comments from the U.S. Department of
Agriculture
The following are GAO's comments on the U.S. Department of Agriculture's
letter dated April 9, 2004.
GAO's Comments 1.
2.
3.
4.
USDA stated that FSA is faced with something of a dilemma in the
implementation of the Farm Program Payments Integrity Act of 1987 (1987
Act) in that the act requires participants to provide significant
contributions to the farming operation in order to receive payments, but
other, more recent statutes allow recipients to receive certain payments
without growing crops. USDA does not suggest that these recent statutes
have repealed the actively engaged in farming requirements. Our
congressional requester asked us to address these currently existing
statutory and regulatory requirements, which we have done.
Our report recognizes the new requirement precluding payments to persons
with a 3-year average adjusted gross income in excess of $2.5 million in
the background section of this report. This requirement was directed by
the Farm Security and Rural Investment Act of 2002, which amended the Food
Security Act of 1985.
We question FSA's assertion that the vast majority of payment recipients
are eligible under any current eligibility test. As we note in this
report, FSA has a number of weaknesses in its oversight of farm program
payments and as a result does not know how many recipients meet the
eligibility requirements of the 1987 Act. Our analysis shows that 90
percent of payment recipients receive about one-third of farm payments,
indicating that the vast majority of recipients are not likely to reach
the payment limits.
We agree that the average payment received by general partnerships
composed of two members is less than the total of payment limits for the
different types of farm program payments that one "person" may receive.
(The average payment illustrated in app. III has been updated to $57,890
from $58,035, which was in the draft report reviewed by FSA.) However, the
nature of averages is such that some partnerships received total payments
less than the average, and others received total payments greater than the
average. For example, our analysis of the payments received by 19,152
general partnerships composed of two members in 2001 showed that 1,118
partnerships exceeded the limit of $40,000 for production flexibility
contract payments for one person,
Appendix V
Comments from the U.S. Department of
Agriculture
and 2,223 partnerships exceeded the limit of $40,000 for market loss
assistance payments for one person.
5. The tables in appendix III of this report and the draft report that
USDA reviewed contain notes clearly indicating that the data presented in
the tables included production flexibility contract payments, market loss
assistance payments, loan deficiency payments, and marketing assistance
loan gains, and the corresponding payment limit for each type of payment.
6. FSA misinterpreted our statement regarding supporting documents
provided by farming operations when selected for compliance reviews.
According to FSA's policy in FSA Handbook Payment Limitations, 1-PL
(Revision 1), Amendment 40, and as noted in our draft report, before
applying for farm program payments, farming operations file a farm
operating plan with their local FSA field office. The plan documents the
name of each recipient, the number of recipients that qualify for
payments, and the recipients' share of profits and losses. FSA reviews the
plan to determine the number of recipients that qualify for payments and
whether the recipients, based on their statements, are actively engaged in
farming. At the end of the year, FSA field offices review a sample of
these plans to help monitor whether farming operations were conducted in
accordance with these approved plans. For these end-of-year reviews, FSA
requires substantially more documents than it requires at the beginning of
the year. However, FSA participant files with the needed information for
the end-of-year review-farm operation documents, including leases,
contracts, partnership agreements, accounting records, bank statements,
and tax statements-were readily available only for 523 of the 1,573
farming operations FSA field offices selected for review for 2001. Of the
remaining farming operations, 966 had their compliance reviews waived by
FSA and therefore were not reviewed. Since FSA did not conduct a review
for about two-thirds of the farming operations, FSA field offices did not
require these operations to submit additional documents at the end of the
year to support the farm operating plan.
7. This statement contradicts what FSA officials told us during a
conference in February 2004 to discuss the report's findings. At that
time, headquarters officials said the types of operations we identify in
the report are not specifically addressed in FSA's regulations and they
were not sure if these cases would meet the criteria for a scheme or
device. FSA officials also stated they have no data on how many of
Appendix V
Comments from the U.S. Department of
Agriculture
these operations exist. The officials indicated that FSA field officials
who make noncompliance decisions might be reluctant to question these
operations because they do not believe current regulations provide a
sufficient basis to take action. The headquarters officials noted it is
difficult to prove fraudulent intent and requires significant resources to
pursue such cases, and even if a recipient is found ineligible to receive
payments this decision may be overturned on appeal. Although FSA noted in
its written comments on the draft report that determinations of scheme or
device can be made, and have been made, under current regulations, FSA was
unable to provide data on the number of actions it has taken in recent
years.
8. We continue to believe that FSA needs to better define what constitutes
a significant contribution of active personal management. Without
specifying measurable standards for what constitutes a significant
contribution of active personal management, FSA allows individuals who may
have had limited involvement in the farming operation to qualify for
payments. Active personal management should be explicitly defined to make
this criterion more objective and measurable. We note that the Commission
on the Application of Payment Limitations for Agriculture concluded that a
lack of clear criteria likely makes it easier for farming operations to
add recipients in order to circumvent payment limitations. As we note in
this report, the U.S. Internal Revenue Service uses 500 hours to determine
material participation in a business enterprise. USDA believes that its
implementation of the 1987 Act is consistent with the intent of the
Congress. However, USDA agreed that it would be beneficial to have a
measurable standard to help measure active personal management for those
recipients required to be actively engaged in farming. It stated that a
measure of time was proposed when initial rules were written to implement
the 1987 Act. However, based on comments it received, USDA removed the
time measure from the proposed regulations and adopted a standard based on
the relative worth of the active personal management performed. We believe
that by providing more specific requirements for what constitutes a
significant contribution of active personal management, as it has for
other eligibility requirements, FSA could help ensure that individuals
receiving farm program payments are not simply getting paid for allowing
their name to be used in a farming operation document.
9. Based on USDA's comments to our draft report, it is still not clear
whether FSA's regulations, or the statute, require a demonstration of
Appendix V
Comments from the U.S. Department of
Agriculture
fraudulent intent in order to find that someone has adopted a scheme or
device. By focusing on the difference between avoidance and evasion, FSA
seems to imply that it is necessary to demonstrate fraudulent intent.
However, as we note in our report, FSA's regulations are unclear on the
need to demonstrate fraudulent intent for a scheme or device.
10. We agree that the specifics of each particular case must be examined
to determine whether a scheme or device has been adopted. However, we
believe that guidance could be more helpful to officials making those
determinations if it were to provide some examples of what might
constitute a scheme or device.
11. Our recommendation to improve the sampling methodology is based on the
concern that USDA's methodology selects many of the same farming
operations year after year, and as a result, USDA annually waives
compliance reviews for over one-half of its sample. If USDA intends to
continue to use this methodology, then it should develop a means to track
which farming operations are selected each year and remove these
operations from the pool of eligible candidates for the 3 succeeding
years. A reasonable probability sampling plan can be devised without
having to randomly select farming operations in every county, as USDA's
previous plan did. Drawing a few small farming operations in the sample is
not a sound reason to avoid all probabilitysampling methods. A probability
sample is superior to a judgmental sample, which only allows USDA to
measure compliance in the selected sample. A probability sample can be
projected to the population of all farm payment program recipients,
thereby allowing USDA to have greater assurance that only recipients
complying with payment limitation requirements receive payments.
12. We agree that requiring FSA staff to conduct interviews for every
endof-year review would not always yield additional meaningful
information, and we do not mean to imply the need for interviews in all
cases.
Appendix VI
GAO Contacts and Staff Acknowledgments
GAO Contacts Lawrence J. Dyckman (202) 512-3841 Ronald E. Maxon, Jr. (214)
777-5659
Acknowledgments In addition to the individuals named above, Thomas Cook,
Carol Herrnstadt Shulman, and Cleofas Zapata made key contributions to
this report. Important contributions were also made by Jennifer Popovic,
Rebecca Shea, and Amy Webbink.
Related GAO Products
Farm Programs: Changes to the Marketing Assistance Loan Program Have Had
Little Impact on Payments. GAO-01-964. Washington, D.C.: September 28,
2001.
Farm Programs: Information on Recipients of Federal Payments. GAO01-606.
Washington, D.C.: June 15, 2001.
Agriculture Payments: Effectiveness of Efforts to Reduce Farm Payments Has
Been Limited. GAO/RCED-92-2. Washington, D.C.: December 5, 1991.
Farm Payments: Basic Changes Needed to Avoid Abuse of the $50,000 Payment
Limit. GAO/RCED-87-176. Washington, D.C.: July 20, 1987.
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