Adjusted Gross Income Proposed Rule Summary

11/14/02

BACKGROUND

Section 1604 of the Farm Security and Rural Investment Act of 2002 (2002 Farm Bill) amended the Food Security Act of 1985 (1985 Farm Bill) by adding a new Adjusted Gross Income (AGI) provision that limits the eligibility of certain individuals and entities for commodity and conservation programs benefits.

The Commodity Credit Corporation (CCC) published in the Federal Register on October 28, 2002, a Proposed Rule, titled “Income Limits,” that sets forth the criteria to be applied in determining program benefit eligibility. The rule has a 30-day comment period that ends November 27, 2002. The Farm Service Agency has the lead for this rule.

PROPOSED AGI APPLICABILITY

For the 2003 through 2007 crop, fiscal, or program years, an individual or entity is not eligible for program payment or benefit if the individual’s or entity’s average adjusted gross income exceeds $2.5 million for the three tax years immediately preceding the applicable year. An exemption is provided in cases where 75 percent of the adjusted gross income is derived from farming, ranching, or forestry operations. The rule further defines that CCC will not consider the following as income from farming, ranching, and forestry operations:
 

• Income from selling land used to produce forestry or agricultural commodities
• Farm or forestry implement sales by a retail dealership
• Investment income
• Income from sales at a market unless the commodity being sold was produced by the person
• Income from sales as a commission broker, auctioneer, or warehouse operator or similar enterprise
• Undifferentiated income from integrated operations
  
  CCC CONSERVATION PROGRAMS COVERED
  
  AGI applies to programs that have Title XII of the 1985 Farm Bill and Title II of the 2002 Farm Bill as their source authority. This includes:
   
• Conservation Corridor Demonstration Program
• Conservation Reserve Program
• Conservation on Private Grazing Lands
• Conservation Security Program
• Desert Terminal Lakes
• Environmental Quality Incentives Program
• Farmland Protection Program
• Grassland Reserve Program
• Grassroots Source Water Protection Program
• Great Lakes Basin Program for Soil Erosion and Sediment Control
• Wetlands Reserve Program
• Wildlife Habitat Incentives Program
  
  TYPES OF PAYMENTS COVERED
  
  Only payments that are program benefits are encompassed by AGI determinations.
  
  The Office of General Counsel has determined that cost-share assistance and easement and rental payments are benefits under the legal definition and, therefore, program participants receiving such benefits under the covered conservation programs are subject to AGI determinations of payment eligibility.
  
  For FPP, the landowner, not the cooperating entity, is subject to AGI limitations because the ultimate program beneficiary is the landowner.
  
  Payments to technical service providers and contractors for services obtained under a program are not covered by AGI. Services provided include: appraisals, surveys, closing costs, etc.
  
  AGI APPLICATION TIMING
  
  The AGI determination for program benefit payment eligibility will be performed at the time the landowner or program participant signs the conservation contract or, in the case of FPP, when the cooperative agreement is signed.
  
  The AGI determination will remain in effect for the life of the contract.
  
  ENTITIES
  
  Tribal and State governments are not subject to AGI limitations.
  
  Non-government organizations are subject to AGI if they are program participants receiving program benefits. They are not subject to AGI if they are receiving payments for services rendered as vendors.
  
  For charitable organizations, the adjusted gross income would be based upon the unrelated business taxable income reported to the Internal Revenue Service, less any other income CCC determines to be from commercial activities. Currently, that amount is specified on line 34 of the IRS form 990-T.
  
  COMMENSURATE REDUCTION
  
  Payments subject to AGI to an entity, general partnership, or joint venture will be reduced by an amount commensurate with the direct and indirect interest in the entity, general partnership, and joint venture of each individual or entity determined to be in excess of the AGI limitation.