Thursday, January 29, 2009

African Rice and More on Payment Limitations

This story is interesting for its treatment of the economic and social risks that many producers in the world take.

Below, please find a conversation regarding payment eligibility. It builds upon my earlier post:

Commentator's First Comment:

I would like of offer a couple of points that I believe you missed in your commentary on the new payment limitation rules. First, there is much more that USDA can do on actively engaged. It is simple and has precedence in the IRS material participation standard for determining whether income is passive, or whether the taxpayer material participates in management. It requires 1,000 hours or 50% of the tax[payer's commensurate share, whichever is less. It is simple and it is the same standard USDA uses for labor in determining whether a taxpayer is actively engaged in farming. I do belieive the statute would allow a combined test to the extent the test was the same for management as for labor (1,000 hours or 50% of commensurate share). I beleive an acceptable legal reading of "labor or management" would be labor and/or management, so that if it was 1,000 hours, a person could qualify with 500 hours of labor and 500 of management.

GAO and the payment limitation commission both recommended a measurable objective standard. That is the "more" that can be done. The proposed rule is very weak. If I as a partner have lead responsibility among partners to review quarterly financial statements (each quarter) my participation is distinct and regular. This is just a new set of rules to manipulate. It is not real reform. USDA has all the authority it needs to do real reform, as stated clearly in the GAO report on the actively engaged in farming rules.

My Response:

Glad to hear your thoughts. I admit, my commentary was incomplete. I do not, however, think that the statute would allow USDA to tell someone that he can't get payments because he didn't do both labor and management. If I labor, I am actively engaged. If I manage, I am actively engaged. Some have called for the rules to require both (not just allow the provision of both to satisfy the active-engagement requirement). I don't the statute allows that. I would agree that the statute likely gives enough flexibility for USDA to say that combinations of labor and management are enough.

I would agree that the regulations regarding management can be strengthened to require some minimum amount of time. In the end, however, I'm not sure this does much. How do I prove that I spent the requisite hours managing my farm. Is it time I spent thinking? I don't have a time card or keep track of billables on the farm. Maybe the rules should require that I do that? That, in turn, opens up the possibility that a county committee with an ax to grind could cause problems for a farmer doing things they don't like, or that a supposed farmer can fake it. In the end, the call for manageable objective standards is a great thought, but extraordinarily difficult to implement in any sort of a way that identifies anyone as ineligible. That's why the former rules used a qualitative standard. I'm not sure a quantitative one works much better, practically speaking. Indeed, one common criticism I hear about the farm program is "It makes liars out of us." I wouldn't go that far, but implementation and verification are important aspects of any rule. And, if that is what you are getting at with the "1000 hours / 50% of the commensurate share of the management" requirement, I'm not sure that it isn't subject to the same manipulation that plagues the current rules.

Qualitative standards are problematic because they involve some judgment calls and the application of standards. "Critical" is subject to application and the proof that would go into it would probably involve bringing in evidence of the decisions that the farmer made (regardless of how much time the farmer spent making those decisions). That too is subject to manipulation by government or by farmers.

My main concerns with the present rules has to do with spouses. I basically think that the statute is written in a way that would allow all married farmers to double the payment limit (i.e., the spouse doesn't have to make any right hand contribution). Was that anticipated? What are your thoughts on allowing changes to way one reports their operation in light of these new rules (e.g., what if my spouse never claimed payments before, can she now or do we need to acquire more land)?

Commentator's Response:

I agree that USDA could not require both labor and management.

Yes, the opening up on the spouse rule was deliberate. It was part of creating a facade of reform that had almost no impact.

Prior to this year, you could double by using either the spouse rule or three entity - but you could not use both to recieve three or four times the limit. It was one or the other.

By requiring direct attribution, Congress said only the spouse rule could be used to double and then made it automatic so all married farmers qualify. They wanted to create the appearance of reform while affecting almost no one.

[According to] EWG records. In most major farm states there are 1-5 (typically 1 or 2) umarried farmers who were getting over the limit and will now get less.

The quantative test is easy to cheat a little but not a lot. If you have a full time job doing something else and never visit the farm -- which is the case with many phony partnerships . . . -- you will have a hard time convincing anyone you meet the test.


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