November 25, 2002
Mr. Dan McGlynn
Production, Emergencies and Compliance Division
United States Department of Agriculture
Stop 0517, 1400 Independence Ave., SW
Washington, DC 20250-0517
Re: Adjusted Gross Income Test – Proposed Rule – RIN 0560-AG86
Dear Mr. McGlynn:
The purpose of this letter is to convey the comments of the National Cotton Council of America concerning the Notice of Proposed Rulemaking, 67 FR 65738, published October 28, 2002, by the U.S. Department of Agriculture. The subject of the proposed rule is the adjusted gross income means test to be applied in accordance with section 1001D of the Food Security Act of 1985.
Calculation of Adjusted Gross Income
The National Cotton Council agrees that the starting point for the calculation of the adjusted gross income of individuals should be reflective of that amount reported as adjusted gross income on the final federal tax return for the individual for the applicable tax year (currently line 35 on IRS form 1040).
The NCC also supports the proposal’s approach to determining adjusted gross income for partnerships and similar entities as provided in §1400.601(5), which defines adjusted gross income as the sum of the income from trade or business activities plus the guaranteed payments to the members as reported in the applicable tax year.
The proposed rule states that in determining the average adjusted gross income over the previous three year period, the Department will exclude "any year in which the individual or entity did not have income or had adjusted gross income considered to be zero." The same method of averaging will be made applicable to the 75% income from farming exemption. The NCC believes this part of the rule should be clarified. It is not clear whether the rule simply proposes excluding any year with zero or negative adjusted gross income and then using only a two year average or just one year’s of income, or whether, under the proposal, the Secretary would inquire as to income earned in years prior to the most recent three years
in an effort to establish a three year average. It would appear that simply excluding a year in which an individual had no income from a three-year average calculation could result in significant distortions in the calculation. The NCC recommends that no year be excluded from the three-year average calculation if the individual or entity in fact filed an income tax return.
Income derived from farming, ranching or forestry operations
The placement of income on a tax return is subject to interpretation of the preparer. The NCC supports a rule that provides that all income from farming, ranching and forestry operations is included in the 75 percent test regardless of where this income is reported on a tax return. Even if the preparer made an error in the placement on the return, farm income should nevertheless be included in the 75 percent test. For example: timber sales are often reported on Schedule D; sales of brood stock are normally reported on Schedule D or Form 4797. The final rule should make it clear that these items and others normally associated with income from farming, ranching and forestry operations should be includable as farm income. Farmland rent, if it is for farmland used in a farming operation in which the eligible individual is actively engaged, should be considered to be farming income. Rental income from farm equipment should be similarly considered. Other income items that should be included as income from farming operations are salary and non-employee compensation received from a related entity for services performed in the farming operation and custom work and machine hire. There are instances in which internal interest income may also be properly considered to be income from farming operations.
Investment income, if derived from farming should be eligible for inclusion, particularly where an eligible individual is receiving interest by self-financing farm operations in which the individual is active. This interest has been deducted from farm income in the entity being financed. It is included in the adjusted gross income of the eligible person and should also be included in farm income. Income derived from participation in the conservation reserve program, and similar programs, should be included in the determination of farm income.
The NCC urges the Department to determine that income from selling land used to produce forestry or agricultural commodities is considered to be derived from farming, ranching or forestry. Certainly in the sale of a tract of farmland that includes marketable timber, the value of the timber should be derived from farming, ranching or forestry. Likewise, base acreage history also contributes to the income derived from the sale and is properly attributable to income from farming. The sale of equipment subject to depreciation should continue to be included as farm income as should the sale of assets such as water rights.
The NCC requests clarification of the provision in the supplementary information that provides that undifferentiated income from integrated operations would not be eligible for inclusion as income farming and ranching activities. In the case of a catfish producer/processor, the farm portion of the income could be easily calculated based on known quantities and producer prices. Such a calculation should be allowed.
The proposed rule states that income from sales at a market would only be considered to be income from farming, ranching and forestry if the commodity being sold was produced by the person. What is "produced?" Specifically, would it apply to a farmer who also operates a small calf feeding operation? If that farmer purchased some or all of the cattle he feeds, would he be considered to be "producing" those cattle? The NCC requests clarification from the Department concerning the concept that there may be a difference between "produced" and "resale" for the purposes of determining farm income?
Certification
The proposed rule provides that in order to prove one does not run afoul of the income limit, the individual must either 1) provide a certification from a certified public accountant ("CPA") or an attorney or 2) submit to CCC the relevant Internal Revenue Service documents. Further, concerning joint income, the rule states that income from a joint tax return will be considered to be all the producer’s unless "a certified statement is provided by a [CPA] or attorney specifying the manner in which such income would have been determined if the individuals had filed two separate returns…." If the attorney or CPA provides the certification that the individual’s income does not exceed the limitation, we recommend that the attorney or CPA not be required to simultaneously file a certification concerning the division of income on the joint return. The specific division of income should be left to a later time if necessary to support the initial certification.
Commensurate reductions
The NCC opposes § 1400.603(b) which limits the review of ownership interests in entities to the fifth level of ownership. This limitation is arbitrary and could unjustly deny an individual or corporation of program benefits.
Confidentiality
Under this rule, many producers will be submitting financial information to local offices of the Farm Service Agency that they consider to be business confidential. The NCC recommends that the final regulation discuss safeguards to be established by the Department of Agriculture to ensure that this information is treated as confidentially as possible by the agency.
Thank you for the opportunity to comment on this proposed rule.
Sincerely,
National Cotton Council of America
Oklahoma Cotton Growers Association
Agricultural Council of Arkansas
Oklahoma Cotton Improvement Association
Arizona Cotton Growers Association
Plains Cotton Growers
California Cotton Growers Association
Rolling Plains Cotton Growers, Inc
Cotton Producers of Missouri
Southern Cotton Growers, Inc.
Delta Council
South Texas Cotton and Grain Association, Inc.
Louisiana Cotton Producers Association
North Carolina Cotton Producers Association