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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:
[Hyperlink, http: //www.gao.gov/cgi-bin/getrpt?GAO-04-407]:
GAO Highlights:
Highlights of GAO-04-407, a report to the Chairman, Committee on
Finance, U.S. Senate
Why GAO Did This Study:
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.
What GAO Found:
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:
[See PDF for image]
[End of figure]
What GAO Recommends:
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 dyckmanl@gao.gov.
[End of section]
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:
Appendixes:
Appendix I: Common Ways Farmers Organize Their Farming Operations:
Appendix II: Objectives, Scope, and Methodology:
Appendix III: Distribution of Farm Program Payments by Type of Entity
and Number of Members, Crop Year 2001:
Appendix IV: Results of Survey on Implementation and Effectiveness of
Actively Engaged in Farming Requirements:
Appendix V: Comments from the U.S. Department of Agriculture:
GAO's Comments:
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Related GAO Products:
Tables:
Table 1: Contribution Requirements for Recipients to Be Considered
Actively Engaged in Farming:
Table 2: Types of Entities and Total Farm Program Payments, 2001:
Table 3: Type and Number of Entities and Farm Program Payments,
Categorized by the Number of Members, 2001:
Table 4: Number of General Partnerships and Farm Program Payments,
Categorized by the Number of Partners, Crop Year 2001:
Table 5: Number of Joint Ventures and Farm Program Payments,
Categorized by the Number of Members, Crop Year 2001:
Figures:
Figure 1: Compliance Reviews Selected by FSA for 2001:
Figure 2: Percentage of FSA Field Offices Indicating Specific
Improvements Would Strengthen the Active Personal Management
Contribution:
Figure 3: Large Operation Containing Farming and Nonfarming Entities:
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:
Abbreviations:
FSA: Farm Service Agency:
USDA: U.S. Department of Agriculture:
Letter 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.[Footnote 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.[Footnote 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 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.[Footnote 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 exceed those allowed. It carries out this responsibility through
its headquarters office, 50 state offices, and over 2,500 field
offices.[Footnote 4] Before applying for farm program payments, farming
operations file a farm operating plan with the local FSA field
office.[Footnote 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 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.[Footnote 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.[Footnote 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.[Footnote 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 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."[Footnote 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 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.[Footnote
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:
* 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 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.
* 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.
* 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.
* 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: Significant contribution to the farming operation
of one or a combination of the following:
* capital;
* land, or;
* equipment;
Service contribution: Significant contribution to the farming operation
of one or a combination of the following:
* personal labor, or;
* active personal management.
Source: GAO.
Note: Recipients' contributions must be considered "at risk," that is,
there must be a possibility that the recipient could suffer a loss.
[End of table]
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.
* 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.[Footnote 11]
* 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
commodity. These payments were developed to replace most ad hoc market
loss assistance payments that were provided to farmers during 1998
through 2001.
* 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.[Footnote 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. These criteria have
principally resulted in sampling farming operations in areas that
produce cotton and rice--Arkansas, California, Louisiana, Mississippi,
and Texas. Figure 1 shows the location of farming operations selected
by FSA for review.
Figure 1: Compliance Reviews Selected by FSA for 2001:
[See PDF for image]
[End of figure]
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.[Footnote 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.
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.[Footnote 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:
entities.[Footnote 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:
determined was ineligible.[Footnote 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 actual contributions, and requiring management to be on-
site.[Footnote 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:
[See PDF for image]
[End of figure]
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:
recipients in order to avoid payment limitations.[Footnote 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.[Footnote 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.[Footnote 20] As one court has
noted, the regulations "seek to identify sham transactions" to obtain
more farm program payments.[Footnote 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 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.[Footnote 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 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:
[See PDF for image]
Note: Percentages shown are share of ownership.
[End of figure]
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.[Footnote 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.[Footnote 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 legal structure for the farming entities but had no direct
ownership interest in the farming entities.[Footnote 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.[Footnote 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."[Footnote 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.
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.[Footnote 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.[Footnote 29] 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 Valid Sample of Recipients to Be Reasonably
Assured of Compliance with the Payment Limitations:
FSA is not reviewing a valid sample of farm operation plans to
determine compliance because its methodology does not incorporate
additional cases 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. In 2001, about two-thirds of farming
operations selected for review were 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.[Footnote 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.[Footnote 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.[Footnote 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 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.[Footnote
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.[Footnote 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 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:
[See PDF for image]
Note: GAO analysis of FSA data.
[End of figure]
FSA Staff Do Not Use All Available Tools in Assessing Compliance and Do
Not Maintain Documents to Support Their Decisions:
Our review of case files indicate that for one-half of the farming
operations we reviewed in 2001, field offices did not use all available
tools to determine whether persons are actively engaged in farming,
such as conducting interviews, to substantiate management contributions
or obtaining key financial information to verify that farm program
payments 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.[Footnote 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.[Footnote 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.
Finally, FSA field staff do not always maintain documentation
supporting their decisions on the results of their compliance reviews,
as required by FSA policy.[Footnote 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:
18 operations because they received farm program payments that they
were ineligible to receive.[Footnote 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.[Footnote 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 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.[Footnote 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.
Table 2: Types of Entities and Total Farm Program Payments, 2001:
Dollars in millions:
Corporations;
Entities: Number: 54,637;
Entities: Percent: 38.5%;
Payments: Total: $2,248;
Payments: Percent: 37.9%.
General partnerships;
Entities: Number: 37,193;
Entities: Percent: 26.2%;
Payments: Total: $2,684;
Payments: Percent: 45.2%.
Joint ventures;
Entities: Number: 8,888;
Entities: Percent: 6.3%;
Payments: Total: $583;
Payments: Percent: 9.8%.
Other[A];
Entities: Number: 41,166;
Entities: Percent: 29.0%;
Payments: Total: $419;
Payments: Percent: 7.1%.
Total;
Entities: Number: 141,884;
Entities: Percent: 100.0%;
Payments: Total: $5,934;
Payments: Percent: 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.
[A] Includes limited partnerships, estates, trusts, charitable
organizations, and federal agencies.
[End of table]
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:
Type: General partnerships;
Partners/members: 2;
Entities: Number: 19,152;
Entities: Percent: 51.5%;
Total: $1,108,708,233;
Payments: Percent: 41.3%;
Payments: Average: $57,890.
Type: General partnerships;
Partners/members: 3-5;
Entities: Number: 15,459;
Entities: Percent: 41.6%;
Total: $1,169,100,368;
Payments: Percent: 43.6%;
Payments: Average: $75,626.
Type: General partnerships;
Partners/members: 6-10;
Entities: Number: 2,296;
Entities: Percent: 6.2%;
Total: $335,485,915;
Payments: Percent: 12.5%;
Payments: Average: $146,118.
Type: General partnerships;
Partners/members: 11-20;
Entities: Number: 252;
Entities: Percent: 0.7%;
Total: $46,975,225;
Payments: Percent: 1.8%;
Payments: Average: $186,410.
Type: General partnerships;
Partners/members: 21 or more;
Entities: Number: 34;
Entities: Percent: 0.1%;
Total: $23,739,989;
Payments: Percent: 0.9%;
Payments: Average: $698,235.
Type: General partnerships;
Partners/members: Total;
Entities: Number: 37,193;
Entities: Percent: 100.0%;
Total: $2,684,009,730;
Payments: Percent: 100.0%;
Payments: Average: $72,164.
Type: Joint ventures;
Partners/members: 2;
Entities: Number: 5,707;
Entities: Percent: 64.2%;
Total: $407,817,751;
Payments: Percent: 70.0%;
Payments: Average: $71,459.
Type: Joint ventures;
Partners/members: 3-5;
Entities: Number: 2,523;
Entities: Percent: 28.4%;
Total: $123,250,433;
Payments: Percent: 21.2;
48,851.
Type: Joint ventures;
Partners/members: 6-10;
Entities: Number: 537;
Entities: Percent: 6.0%;
Total: $42,432,967;
Payments: Percent: 7.3%;
Payments: Average: $79,019.
Type: Joint ventures;
Partners/members: 11-20;
Entities: Number: 104;
Entities: Percent: 1.2%;
Total: $5,184,475;
Payments: Percent: 0.9%;
Payments: Average: $49,851.
Type: Joint ventures;
Partners/members: 21 or more;
Entities: Number: 17;
Entities: Percent: 0.2%;
Total: $3,893,350;
Payments: Percent: 0.7%;
Payments: Average: $229,021.
Type: Joint ventures;
Partners/members: Total;
Entities: Number: 8,888;
Entities: Percent: 100.0%;
Total: $582,578,976;
Payments: Percent: 100.0%;
Payments: Average: $65,547.
Total;
Partners/members: 2;
Entities: Number: 24,859;
Entities: Percent: 53.9%;
Total: $1,516,525,984;
Payments: Percent: 46.4%;
Payments: Average: $61,005.
Total;
Partners/members: 3-5;
Entities: Number: 17,982;
Entities: Percent: 39.0%;
Total: $1,292,350,801;
Payments: Percent: 39.6%;
Payments: Average: $71,869.
Total;
Partners/members: 6-10;
Entities: Number: 2,833;
Entities: Percent: 6.1%;
Total: $377,918,882;
Payments: Percent: 11.6%;
Payments: Average: $133,399.
Total;
Partners/members: 11-20;
Entities: Number: 356;
Entities: Percent: 0.8%;
Total: $52,159,700;
Payments: Percent: 1.6%;
Payments: Average: $146,516.
Total;
Partners/members: 21 or more;
Entities: Number: 51;
Entities: Percent: 0.1%;
Total: $27,633,339;
Payments: Percent: 0.8%;
Payments: Average: $541,830.
Total;
Entities: Number: 46,081;
Entities: Percent: 100.0%;
Total: $3,266,588,706;
Payments: Percent: 100.0%;
Payments: Average: $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.
[End of table]
More detailed information on farm program payments to general
partnerships and joint ventures is contained in appendix III.[Footnote
41]
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:
* develop and enforce measurable requirements defining a significant
contribution of active personal management;
* revise its regulations to clarify whether schemes and devices require
fraudulent intent and seek congressional authority if necessary;
* issue more detailed guidance on the kinds of arrangements that may
constitute a scheme or device under its regulations;
* improve the sampling methodology for selecting farming operations for
review in order to have greater assurance that only eligible recipients
receive payments;
* ensure that FSA field offices conduct compliance reviews in a timely
manner;
* develop management controls to ensure that FSA field staff make use
of all available tools to assess payment recipients' compliance with
the act;
* 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:
* provide training that emphasizes the financial and legal aspects of
compliance reviews.
Agency Comments and Our Evaluation:
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 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 [Hyperlink, 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,
Signed by:
Lawrence J. Dyckman:
Director, Natural Resources and Environment:
[End of section]
Appendixes:
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 risk-reducing 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.[Footnote 42] Some of the most common ways farmers organize their
business and how these business organizations are treated under payment
limitation rules are as follows:
* 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.
* 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.
* 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 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.
* 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.
* 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.
* 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.
* 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.
* 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 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.
[End of section]
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.[Footnote 43] 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, 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.[Footnote 44]
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
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.[Footnote 45] 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.[Footnote 46] 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.[Footnote 47] In addition, we spoke with
officials from U.S. 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.
[End of section]
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:
Partners: 2;
Partnerships: Number: 19,152;
Partnerships: Percent: 51.49%;
Payments: $1,108,708,233;
Payments: Percent: 41.31%;
Payments: Average: $57,890[A].
Partners: 3;
Partnerships: Number: 8,761;
Partnerships: Percent: 23.56%;
Payments: $582,729,706;
Payments: Percent: 21.71%;
Payments: Average: $66,514.00
Partners: 4;
Partnerships: Number: 4,763;
Partnerships: Percent: 12.81%;
Payments: $397,777,416;
Payments: Percent: 14.82%;
Payments: Average: $83,514.00
Partners: 5;
Partnerships: Number: 1,935;
Partnerships: Percent: 5.20%;
Payments: $188,593,246;
Payments: Percent: 7.03%;
Payments: Average: $97,464.00
Partners: 6;
Partnerships: Number: 1,145;
Partnerships: Percent: 3.08%;
Payments: $170,981,215;
Payments: Percent: 6.37%;
Payments: Average: $149,329.00
Partners: 7;
Partnerships: Number: 474;
Partnerships: Percent: 1.27%;
Payments: $40,233,582;
Payments: Percent: 1.50%;
Payments: Average: $84,881.00
Partners: 8;
Partnerships: Number: 338;
Partnerships: Percent: 0.91%;
Payments: $57,999,373;
Payments: Percent: 2.16%;
Payments: Average: $171,596.00
Partners: 9;
Partnerships: Number: 204;
Partnerships: Percent: 0.55%;
Payments: $41,491,143;
Payments: Percent: 1.55%;
Payments: Average: $203,388.00
Partners: 10;
Partnerships: Number: 135;
Partnerships: Percent: 0.36%;
Payments: $24,780,602;
Payments: Percent: 0.92%;
Payments: Average: $183,560.00
Partners: 11;
Partnerships: Number: 80;
Partnerships: Percent: 0.22%;
Payments: $9,405,677;
Payments: Percent: 0.35%;
Payments: Average: $117,571.00
Partners: 12;
Partnerships: Number: 58;
Partnerships: Percent: 0.16%;
Payments: $18,557,203;
Payments: Percent: 0.69%;
Payments: Average: $319,952.00
Partners: 13;
Partnerships: Number: 30;
Partnerships: Percent: 0.08%;
Payments: $3,553,851;
Payments: Percent: 0.13%;
Payments: Average: $118,462.00
Partners: 14;
Partnerships: Number: 26;
Partnerships: Percent: 0.07%;
Payments: $2,405,065;
Payments: Percent: 0.09%;
Payments: Average: $92,503.00
Partners: 15;
Partnerships: Number: 19;
Partnerships: Percent: 0.05%;
Payments: $1,383,891;
Payments: Percent: 0.05%;
Payments: Average: $72,836.00
Partners: 16;
Partnerships: Number: 11;
Partnerships: Percent: 0.03%;
Payments: $801,281;
Payments: Percent: 0.03%;
Payments: Average: $72,844.00
Partners: 17;
Partnerships: Number: 15;
Partnerships: Percent: 0.04%;
Payments: $4,031,603;
Payments: Percent: 0.15%;
Payments: Average: $268,774.00
Partners: 18;
Partnerships: Number: 6;
Partnerships: Percent: 0.02%;
Payments: $3,156,810;
Payments: Percent: 0.12%;
Payments: Average: $526,135.00
Partners: 19;
Partnerships: Number: 1;
Partnerships: Percent: 0.00%;
Payments: $2,699;
Payments: Percent: 0.00%;
Payments: Average: $2,699.00
Partners: 20;
Partnerships: Number: 6;
Partnerships: Percent: 0.02%;
Payments: $3,677,143;
Payments: Percent: 0.14%;
Payments: Average: $612,857.00
Partners: 21;
Partnerships: Number: 3;
Partnerships: Percent: 0.01%;
Payments: $1,439,238;
Payments: Percent: 0.05%;
Payments: Average: $479,746.00
Partners: 22;
Partnerships: Number: 3;
Partnerships: Percent: 0.01%;
Payments: $715,474;
Payments: Percent: 0.03%;
Payments: Average: $238,491.00
Partners: 23;
Partnerships: Number: 3;
Partnerships: Percent: 0.01%;
Payments: $45,587;
Payments: Percent: 0.00%;
Payments: Average: $15,196.00
Partners: 24;
Partnerships: Number: 2;
Partnerships: Percent: 0.01%;
Payments: $233,113;
Payments: Percent: 0.01%;
Payments: Average: $116,557.00
Partners: 25;
Partnerships: Number: 5;
Partnerships: Percent: 0.01%;
Payments: $400,056;
Payments: Percent: 0.01%;
Payments: Average: $80,011.00
Partners: 26;
Partnerships: Number: 2;
Partnerships: Percent: 0.01%;
Payments: $780,961;
Payments: Percent: 0.03%;
Payments: Average: $390,481.00
Partners: 27;
Partnerships: Number: 1;
Partnerships: Percent: 0.00%;
Payments: $107,960;
Payments: Percent: 0.00%;
Payments: Average: $107,960.00
Partners: 28;
Partnerships: Number: 2;
Partnerships: Percent: 0.01%;
Payments: $744,506;
Payments: Percent: 0.03%;
Payments: Average: $372,253.00
Partners: 29;
Partnerships: Number: 2;
Partnerships: Percent: 0.01%;
Payments: $24,168;
Payments: Percent: 0.00%;
Payments: Average: $12,084.00
Partners: 30;
Partnerships: Number: 1;
Partnerships: Percent: 0.00%;
Payments: $298,291;
Payments: Percent: 0.01%;
Payments: Average: $298,291.00
Partners: More than 30;
Partnerships: Number: 10;
Partnerships: Percent: 0.02%;
Payments: $18,950,634;
Payments: Percent: 0.71%;
Payments: Average: $1,895,063.00
Total;
Partnerships: Number: 37,193;
Partnerships: Percent: 100.00%;
Payments: $2,684,009,727;
Payments: Percent: 100.00%;
Payments: Average: $72,164.00
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.
[A] Our 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.":
[End of table]
Table 5: Number of Joint Ventures and Farm Program Payments,
Categorized by the Number of Members, Crop Year 2001:
Members: 2;
Joint ventures: Number: 5,707;
Joint ventures: Percent: 64.21%;
Payments: Total: $407,817,751;
Payments: Percent: 70.00%;
Payments: Average: $71,459.
Members: 3;
Joint ventures: Number: 1,346;
Joint ventures: Percent: 15.14%;
Payments: Total: $59,035,930;
Payments: Percent: 10.13%;
Payments: Average: $43,860.
Members: 4;
Joint ventures: Number: 755;
Joint ventures: Percent: 8.49%;
Payments: Total: $39,433,320;
Payments: Percent: 6.77%;
Payments: Average: $52,230.
Members: 5;
Joint ventures: Number: 422;
Joint ventures: Percent: 4.75%;
Payments: Total: $24,781,183;
Payments: Percent: 4.25%;
Payments: Average: $58,723.
Members: 6;
Joint ventures: Number: 246;
Joint ventures: Percent: 2.77%;
Payments: Total: $20,021,159;
Payments: Percent: 3.44%;
Payments: Average: $81,387.
Members: 7;
Joint ventures: Number: 110;
Joint ventures: Percent: 1.24%;
Payments: Total: $6,868,610;
Payments: Percent: 1.18%;
Payments: Average: $62,442.
Members: 8;
Joint ventures: Number: 78;
Joint ventures: Percent: 0.88%;
Payments: Total: $5,250,279;
Payments: Percent: 0.90%;
Payments: Average: $67,311.
Members: 9;
Joint ventures: Number: 68;
Joint ventures: Percent: 0.77%;
Payments: Total: $4,970,975;
Payments: Percent: 0.85%;
Payments: Average: $73,103.
Members: 10;
Joint ventures: Number: 35;
Joint ventures: Percent: 0.39%;
Payments: Total: $5,321,943;
Payments: Percent: 0.91%;
Payments: Average: $152,056.
Members: 11;
Joint ventures: Number: 28;
Joint ventures: Percent: 0.32%;
Payments: Total: $1,064,020;
Payments: Percent: 0.18%;
Payments: Average: $38,001.
Members: 12;
Joint ventures: Number: 25;
Joint ventures: Percent: 0.28%;
Payments: Total: $173,127;
Payments: Percent: 0.03%;
Payments: Average: $6,925.
Members: 13;
Joint ventures: Number: 15;
Joint ventures: Percent: 0.17%;
Payments: Total: $797,214;
Payments: Percent: 0.14%;
Payments: Average: $53,148.
Members: 14;
Joint ventures: Number: 12;
Joint ventures: Percent: 0.14%;
Payments: Total: $2,907,815;
Payments: Percent: 0.50%;
Payments: Average: $242,318.
Members: 15;
Joint ventures: Number: 8;
Joint ventures: Percent: 0.09%;
Payments: Total: $49,643;
Payments: Percent: 0.01%;
Payments: Average: $6,205.
Members: 16;
Joint ventures: Number: 4;
Joint ventures: Percent: 0.05%;
Payments: Total: $44,361;
Payments: Percent: 0.01%;
Payments: Average: $11,090.
Members: 17;
Joint ventures: Number: 3;
Joint ventures: Percent: 0.03%;
Payments: Total: $80,937;
Payments: Percent: 0.01%;
Payments: Average: $26,979.
Members: 18;
Joint ventures: Number: 3;
Joint ventures: Percent: 0.03%;
Payments: Total: $4,959;
Payments: Percent: 0.00%;
Payments: Average: $1,653.
Members: 19;
Joint ventures: Number: 3;
Joint ventures: Percent: 0.03%;
Payments: Total: $35,507;
Payments: Percent: 0.01%;
Payments: Average: $11,836.
Members: 20;
Joint ventures: Number: 3;
Joint ventures: Percent: 0.03%;
Payments: Total: $26,892;
Payments: Percent: 0.00%;
Payments: Average: $8,964.
Members: 21;
Joint ventures: Number: 2;
Joint ventures: Percent: 0.02%;
Payments: Total: $2,706,729;
Payments: Percent: 0.46%;
Payments: Average: $1,353,365.
Members: 22;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $2,377;
Payments: Percent: 0.00%;
Payments: Average: $2,377.
Members: 23;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $1,752;
Payments: Percent: 0.00%;
Payments: Average: $1,752.
Members: 24;
Joint ventures: Number: 2;
Joint ventures: Percent: 0.02%;
Payments: Total: $15,373;
Payments: Percent: 0.00%;
Payments: Average: $7,687.
Members: 26;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $4,356;
Payments: Percent: 0.00%;
Payments: Average: $4,356.
Members: 28;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $46,104;
Payments: Percent: 0.01%;
Payments: Average: $46,104.
Members: 29;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $3,154;
Payments: Percent: 0.00%;
Payments: Average: $3,154.
Members: 32;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $3,838;
Payments: Percent: 0.00%;
Payments: Average: $3,838.
Members: 35;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $56,379;
Payments: Percent: 0.01%;
Payments: Average: $56,379.
Members: 36;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $29,834;
Payments: Percent: 0.01%;
Payments: Average: $29,834.
Members: 37;
Joint ventures: Number: 3;
Joint ventures: Percent: 0.03%;
Payments: Total: $956,031;
Payments: Percent: 0.16%;
Payments: Average: $318,677.
Members: 49;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $47,357;
Payments: Percent: 0.01%;
Payments: Average: $47,357.
Members: 56;
Joint ventures: Number: 1;
Joint ventures: Percent: 0.01%;
Payments: Total: $20,067;
Payments: Percent: 0.00%;
Payments: Average: $20,067.
Total;
Joint ventures: Number: 8,888;
Joint ventures: Percent: 100.00%;
Payments: Total: $582,578,976;
Payments: Percent: 100.00%;
Payments: Average: $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.
[End of table]
[End of section]
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?
Completed and the COC has made its decision: 318;
Completed, but not yet presented to COC: 29;
Started, but not yet completed: 58;
Not started: 118;
Waived: 966;
Don't know/No answer/Not checked/Not completed: 72.
[End of table]
Question 2: Please indicate the reason the review was waived.
Farming operation involves only a husband and wife: 415;
Farming operation has all land meeting the landowner exemption: 38;
Farming operation was previously reviewed and did not receive adverse
determination and no changes have occurred since the review: 467;
Farming operation is an entity (not a joint operation) with no
embedded entities and the members do not have other farming interests
receiving program payments: 18;
Other: 26;
Don't know/No answer/Not checked/Not completed: 2.
[End of table]
Question 3: What type of operation is the farm?
Individual: 1;
General partnership: 225;
Joint venture: 105;
Limited liability company: 1;
Other: 2;
Don't know/No answer/Not checked/Not completed: 13.
[End of table]
Question 10: Was the member determined to be actively engaged in the
farming operation?
Yes: 920;
No-did not meet the left hand requirement: 10;
No-did not meet the right hand requirement: 11;
Don't know/No answer/Not checked/Not completed: 51.
[End of table]
Question 12: Did the farming operation contribute capital, land, or
equipment on behalf of the member to meet the left-hand requirement?
Yes: 826;
No: 111;
Don't know/No answer/Not checked/Not completed: 55.
[End of table]
Question 13: Did the member contribute capital to meet the left-hand
requirement?
Yes: 59;
No: 52;
Skipped from question 12: 826;
Don't know/No answer/: Not checked/Not completed: 55.
[End of table]
Question 17: Did the member contribute equipment to meet the left-hand
requirement?
Yes: 49;
No: 62;
Skipped from question 12: 826;
Don't know/No answer/: Not checked/Not completed: 55.
[End of table]
Question 23: Did the member contribute land to meet the left-hand
requirement?
Yes: 39;
No: 70;
Skipped from question 12: 826;
Don't know/No answer/Not checked/Not completed: 57.
[End of table]
Question 30: Did the member contribute active personal labor to meet
the right-hand requirement?
Yes: 489;
No: 446;
Don't know/No answer/Not checked/Not completed: 57.
[End of table]
Question 33: Did the member contribute active personal management to
meet the right-hand requirement?
Yes: 851;
No: 75;
Don't know/No answer/Not checked/Not completed: 66.
[End of table]
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: 397;
1: 27;
2: 12;
3: 7;
4: 4;
5: 3;
12: 1;
No answer: 15.
[End of table]
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?
Very confident: 138;
Confident: 241;
Moderately confident: 56;
Somewhat: confident: 20;
Not at all confident: 7;
Don't know/No answer/Not checked: 4.
[End of table]
Question 3: In your opinion, would the following actions strengthen or
weaken the application of the claimed contributions of active personal
management requirement?
FSA clarifications of the definition of management;
Greatly strengthen: 63;
Generally strengthen: 220;
Have no effect: 161;
Generally weaken: 5;
Greatly weaken: 0;
Don't know/No answer/Not checked: 17.
Require the producer to perform specific amounts of management;
Greatly strengthen: 32;
Generally strengthen: 177;
Have no effect: 185;
Generally weaken: 32;
Greatly weaken: 1;
Don't know/No answer/Not checked: 39.
Require management activities be on-site;
Greatly strengthen: 63;
Generally strengthen: 109;
Have no effect: 176;
Generally weaken: 47;
Greatly weaken: 24;
Don't know/No answer/Not checked: 47.
Require a certified statement of actual management contributions from
the producers (other than the farm operating plan);
Greatly strengthen: 43;
Generally strengthen: 164;
Have no effect: 192;
Generally weaken: 26;
Greatly weaken: 13;
Don't know/No answer/Not checked: 28.
Other actions;
Greatly strengthen: 9;
Generally strengthen: 10;
Have no effect: 12;
Generally weaken: 2;
Greatly weaken: 1;
Don't know/No answer/Not checked: 432.
[End of table]
Question 4: To what extent do the following factors help or hinder you
in carrying out end-of-year reviews?
Guidance from FSA;
Greatly helps: 100;
Generally helps: 259;
Neither helps nor hinders: 76;
Generally hinders: 13;
Greatly hinders: 3;
Don't know/No answer/Not checked: 15.
Emphasis within FSA on doing end-of-year reviews;
Greatly helps: 60;
Generally helps: 215;
Neither helps nor hinders: 147;
Generally hinders: 14;
Greatly hinders: 3;
Don't know/No answer/Not checked: 27.
State office oversight;
Greatly helps: 76;
Generally helps: 219;
Neither helps nor hinders: 112;
Generally hinders: 25;
Greatly hinders: 7;
Don't know/No answer/Not checked: 27.
Inter-county cooperation;
Greatly helps: 126;
Generally helps: 239;
Neither helps nor hinders: 66;
Generally hinders: 4;
Greatly hinders: 2;
Don't know/No answer/Not checked: 29.
Time of year in which end-of-year review lists are received (April);
Greatly helps: 24;
Generally helps: 84;
Neither helps nor hinders: 192;
Generally hinders: 106;
Greatly hinders: 32;
Don't know/No answer/Not checked: 28.
Time frame in which reviews are to be conducted (April-December);
Greatly helps: 23;
Generally helps: 105;
Neither helps nor hinders: 196;
Generally hinders: 88;
Greatly hinders: 27;
Don't know/No answer/Not checked: 27.
Having complete federal income tax returns for all relevant producers;
Greatly helps: 185;
Generally helps: 195;
Neither helps nor hinders: 46;
Generally hinders: 13;
Greatly hinders: 5;
Don't know/No answer/Not checked: 22.
Having 12 months of bank statements for all relevant producers;
Greatly helps: 147;
Generally helps: 213;
Neither helps nor hinders: 66;
Generally hinders: 12;
Greatly hinders: 7;
Don't know/No answer/Not checked: 21.
Having supporting documents (other than tax and bank records) from
producers;
Greatly helps: 179;
Generally helps: 247;
Neither helps nor hinders: 20;
Generally hinders: 2;
Greatly hinders: 4;
Don't know/No answer/Not checked: 14.
Interviewing producers;
Greatly helps: 135;
Generally helps: 252;
Neither helps nor hinders: 58;
Generally hinders: 7;
Greatly hinders: 1;
Don't know/No answer/Not checked: 13.
Training in conducting end-of-year reviews;
Greatly helps: 247;
Generally helps: 157;
Neither helps nor hinders: 30;
Generally hinders: 1;
Greatly hinders: 0;
Don't know/No answer/Not checked: 31.
Experience in conducting end-of-year reviews;
Greatly helps: 266;
Generally helps: 181;
Neither helps nor hinders: 6;
Generally hinders: 1;
Greatly hinders: 0;
Don't know/No answer/Not checked: 12.
Adverse determinations may be overturned by State Office;
Greatly helps: 18;
Generally helps: 58;
Neither helps nor hinders: 188;
Generally hinders: 115;
Greatly hinders: 28;
Don't know/No answer/Not checked: 59.
Adverse determinations may be overturned by USDA's National Appeals
Division;
Greatly helps: 12;
Generally helps: 47;
Neither helps nor hinders: 191;
Generally hinders: 115;
Greatly hinders: 41;
Don't know/No answer/Not checked: 60.
Political influence;
Greatly helps: 2;
Generally helps: 2;
Neither helps nor hinders: 155;
Generally hinders: 98;
Greatly hinders: 132;
Don't know/No answer/Not checked: 77.
Other factors;
Greatly helps: 7;
Generally helps: 5;
Neither helps nor hinders: 10;
Generally hinders: 3;
Greatly hinders: 7;
Don't know/No answer/Not checked: 434.
[End of table]
Question 5: When did you last receive the following types of training
on payment limitation and eligibility determinations?
Formal, statewide training;
Within the past year: 79;
Within the past 2 to 4 years: 208;
5 or more years ago: 126;
Never received this training: 41;
No answer/Not checked: 12.
On the job training (i.e., instruction from review team, District
Director, or PT on end-of-year reviews);
Within the past year: 189;
Within the past 2 to 4 years: 149;
5 or more years ago: 62;
Never received this training: 45;
No answer/Not checked: 21.
Other training;
Within the past year: 39;
Within the past 2 to 4 years: 22;
5 or more years ago: 7;
Never received this training: 25;
No answer/Not checked: 373.
[End of table]
Question 6: How useful was each type of training in preparing you to
make payment limitation and eligibility determinations?
Formal, statewide training;
Extremely useful: 66;
Very useful: 174;
Moderately useful: 100;
Somewhat useful: 57;
Of little or no use: 14;
Never received this training: 36;
No answer/Not checked: 19.
On the job training (i.e., instruction from review team, District
Director, or PT on end-of-year reviews);
Extremely useful: 115;
Very useful: 179;
Moderately useful: 78;
Somewhat useful: 27;
Of little or no use: 7;
Never received this training: 33;
No answer/Not checked: 27.
Other training;
Extremely useful: 21;
Very useful: 19;
Moderately useful: 10;
Somewhat useful: 8;
Of little or no use: 1;
Never received this training: 22;
No answer/Not checked: 385.
[End of table]
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?
Formal, statewide training;
Within the past year: 19;
Within the past 2 to 4 years: 67;
5 or more years ago: 130;
Never available: 136;
Don't know/No answer/Not checked: 114.
On the job training (i.e., instruction from review team, District
Director, or PT on end-of-year reviews);
Within the past year: 118;
Within the past 2 to 4 years: 91;
5 or more years ago: 63;
Never available: 93;
Don't know/No answer/Not checked: 101.
Other training;
Within the past year: 29;
Within the past 2 to 4 years: 9;
5 or more years ago: 2;
Never available: 30;
Don't know/No answer/Not checked: 396.
[End of table]
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?
Definitely yes: 130;
Probably yes: 77;
Uncertain: 48;
Probably no: 47;
Definitely no: 78;
Don't know/No answer/Not checked: 86.
[End of table]
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?
Definitely yes: 51;
Probably yes: 56;
Uncertain: 62;
Probably no: 72;
Definitely no: 119;
Don't know/No answer/Not checked: 106.
[End of table]
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:
[End of section]
Appendix V: Comments from the U.S. Department of Agriculture:
USDA:
United States Department of Agriculture:
Office of the Secretary Washington, D.C. 20250:
TO: Lawrence J. Dyckman,
Director:
Natural Resources and Environment:
General Accounting Office:
Signed by:
FROM: J. B. Penn,
Under Secretary Farm and Foreign Agricultural Services:
APR 09 2004:
SUBJECT: Draft GAO Report: GAO-04-407 Job Code 360338, Farm Program
Payments: USDA Needs to Strengthen Regulations and Oversight to Better
Ensure Recipients Do Not Circumvent Payment Limitations:
The following are general comments in response to the draft subject
audit report.
We would note that the portions of the regulations that are the focus
of this audit report are basically the same provisions that have been
in effect since the implementation of the
1987 amendments to the Food Security Act of 1985 (the 1985 Act), and
have not been changed by Congress. We, therefore, believe the current
implementation of these provisions is consistent with the intent of
Congress.
The 1987 amendments include certain payment eligibility requirements
for the receipt of program benefits. Participants must provide
significant contributions of inputs such as capital, land; equipment,
active personal labor, and/or active personal management to the farming
operation. The amendments also include various payment limitation
amounts that are applicable to the programs that are subject to these
rules now found at 7 CFR Part 1400. With the exception of revised
payment limitation amounts, these rules have remained essentially
unchanged since the initial implementation of the 1987 amendments to
the 1985 Act. However, the programs subject to these rules, and the
requirements of these programs, have changed dramatically.
Until the enactment of the Federal Agriculture Improvement and Reform
Act of 1996 (the 1996 Act), participants generally had to plant certain
crops to be eligible for farm program payments. The payments were
linked directly to the actual crops and acreage planted for the program
year. Under the 1996 Act and the Farm Security and Rural Investment Act
of 2002 (the 2002 Act), the payments were de-coupled. Participants in
the Direct and Counter-cyclical Program are not required to plant a
crop to receive program payments; if a crop is planted, it does not
have to be the same crop for which program benefits are received.
The result is the Farm Service Agency (FSA) is faced with something of
a dilemma in the implementation of the 1987 amendments. One statute
requires the participant to provide significant contributions and
personal activities to the farming operation to meet payment
eligibility requirements. The other statute does not require the
participant to conduct any farming activities, i.e., plant a crop, to
comply with program eligibility requirements.
The types of farming operations and who/what are conducting the farming
operations now are significantly different than in 1987. Certain
business organizations, such as limited liability companies, were just
beginning to be recognized and utilized at the inception of the 1987
amendments. For a variety of reasons, including business, liability,
tax, and economic reasons, the trend is away from farming operations
conducted by individuals to larger, more diversified farming operations
conducted by joint operations whose members are entities. The
application of current rules becomes a challenge, particularly in the
determination of who provides the required contributions of active
personal management, which is one key area of the subject report.
An additional requirement is set forth in section 1001D of the 1985 Act
that precludes the making of certain payments if the person has a
three-year average adjusted gross income in excess of $2.5 million.
This rule is applied to the individual and entity, whereas the payment
limitation is controlled by "person" as defined by statute and
regulation, which in many cases is different than the individual or
entity. This "means test" for program payment eligibility has required
FSA to request and become familiar with financial information and
business documentation not previously an issue for making the required
payment eligibility determinations.
While this report mentions some perceived weaknesses in FSA's
implementation of the
1987 amendments, and some possible cases of rule violations by program
participants, the report fails to mention that the vast majority of
payment recipients are eligible under any current eligibility test or
restriction imposed by Congress. The total payments received for a
large number of farming operations do not approach the amount that one
"person" may receive. The actual numbers illustrated in Appendix III of
the report bear this out. Appendix III shows that the majority of
general partnerships in 2001 that received payments were comprised of
two members, and the partnerships of this nature received an average of
$58,035 in program payments. By statute, the payment limitation for
general partnerships is controlled at the member level. Therefore, with
the total amount received divided by the two members, the result is
approximately $29,000 each. This appendix does not mention that this
$58,035 was the total of all production flexibility contract payments,
market loss assistance payments, loan deficiency payments, and market
loan gains. Pursuant to payment limitations, production flexibility
contract payments by themselves could have totaled $40,000 per
"person." Market loss assistance payments could have totaled an
additional $40,000 per "person." Loan deficiency payments and market
loan gains for 2001 could have totaled $150,000 per "person."
Therefore, in this illustration, the total that each of the members of
the general partnership received was well under any of the respective
payment limitations. The remainder of Appendix III reveals the same.
This report examined the review process that the Agency currently
utilizes for payment eligibility and payment limitation compliance
purposes. As is noted in the report, there are procedures to waive an
end-of-year review of a selected farming operation under specific
circumstances. However, the report included an erroneous conclusion
that if the farming operation is not reviewed, the operation does not
have to provide supporting documentation. We would note that all
participants of programs subject to the rule at 7 CFR Part 1400 must
submit a farm operating plan and supporting documentation for payment
eligibility and payment limitation purposes. Program payments and
benefits cannot be issued until all required documentation is timely
submitted and the appropriate and affirmative payment eligibility and
payment determinations are made. A county FSA committee or other
reviewing authority may request supporting documentation for a farming
operation at any time the activities or representations of the
operation are deemed questionable.
The draft audit report mentioned and illustrated in detail the
structure of a large farming operation that was perceived to be a
scheme to circumvent the payment eligibility and payment limitation
provisions. The report also mentioned that it was organized as a means
for a non-farming entity to obtain benefits. The conclusion was made
that FSA is reluctant to question these operations because it does not
believe current regulations provide sufficient basis to take action. We
do not agree with that characterization. The scheme or device
provisions of the current regulation and the statute itself provide
authority to take action. Determinations of scheme or device can be
made, and have been made, under current regulations.
The following are comments on the specific recommendations for
executive actions.
(1) Develop and enforce measurable requirements defining a significant
contribution of active personal management.
We appreciate the desirability of establishing measurable requirements
for defining a significant contribution of active personal management.
As is noted in the draft audit report, such a measurable requirement
was proposed in 1988 when the original proposed rule implementing the
1987 amendments to the 1985 Act was published in the Federal Register.
It was proposed that a significant contribution of either active
personal management or active personal labor be determined as an amount
which is the smaller of. (1) 1,000 hours per calendar year; or:
(2) 50 percent of the total hours which would be required to conduct a
farming operation which is comparable in size to such individual's or
entity's commensurate share in the farming operation. However, in
response to comments received on the proposed rule, the use of time as
the measure of significance for a contribution of active personal
management was removed from the final rule. We agree that it would be
beneficial if there was a standard that was easy to measure and could
be applied to all farming operations when determining a significant
contribution of active personal management. However, we continue to
question whether the amount of time expended in the performance of
active personal management is an appropriate measure of significance.
If the length of time it takes to perform active personal management is
not the appropriate measure of significance, the remaining alternative
would seem to be the relative worth of the active personal management
performed. The current regulation and procedure pertaining to active
personal management provides that a significant contribution of active
personal management is determined by considering whether the activities
are critical to the profitability of the farming operation, taking into
consideration the individual's or entity's commensurate share in the
farming operation. These contributions of active personal management
must also be at risk, the same as other contributions to the farming
operation. The current procedure requires the reviewing authority to
make a judgment as to whether the claimed contribution of active
personal management is a significant contribution to the farming
operation. Again, we recognize that it would be beneficial if a readily
measurable standard, such as the amount of time expended, could be
applied. We would again note that these provisions have remained
essentially unchanged since the initial implementation of the 1987
amendments to the 1985 Act. Therefore, we believe the current
regulations and procedure on this matter are consistent with the intent
of Congress.
(2) Revise regulations to clarify whether schemes or devices require
fraudulent intent and seek congressional authority if necessary.
We believe the current regulations are sufficient to encompass the
types of cases intended by the statute. The current regulatory
definition of scheme or device refers to a scheme or device that
"evades" payment limitation and payment eligibility provisions and
provides examples of acts that are considered to be schemes or devices.
There is a difference between "evasion" and "avoidance" in the realms
of both payment limitation and taxes. The terms are not
interchangeable. Congress has recognized that a significant number of
farming operations are structured to maximize the amount of payments a
"person" receives, both directly and indirectly. In fact, many people,
including members of Congress, think of the payment limitation as being
twice what it actually is; they assume individuals will receive
payments in a farming operation that is structured to maximize the
amount of payments an individual can receive under the "three entity
rule."
(3) Issue more detailed guidance on the kinds of arrangements that may
constitute a scheme or device under its regulations.
As noted above, we believe the current regulations are sufficient to
encompass the types of cases intended by the statute. However, we will
review our procedures on scheme or device to determine if additional
guidance can be provided. We would note that the nature of a scheme or
device determination is such that the specifics of a particular case
must be examined to determine whether a scheme or device determination
is appropriate. Cases that may, on the surface, appear to be similar
because of the way the operation is structured, or because of other
factors, can currently result in different determinations as to whether
a scheme or device has been adopted.
(4) Improve the sampling methodology for selecting farming operations
for review in order to have a greater assurance that only eligible
recipients receive payments.
Any farming operation subject to payment eligibility and payment
limitation determinations must provide information on the structure and
conduct of the farming operation by completing a farm operating plan
for payment eligibility review. Depending on the nature of the farming
operation, current procedure may require documentation to support the
information on the farm operating plan before the reviewing authority
makes payment eligibility and payment limitation determinations. For
example, a copy of the trust agreement must be provided for any trust
represented to be an irrevocable trust. Additionally, the reviewing
authority may require whatever documentation necessary to make proper
"actively engaged in farming" and "person" determinations. Therefore,
payments are issued only to recipients determined by the reviewing
authority to be eligible to receive the payments.
The current process to select farming operations for "end-of-year"
reviews was developed to select operations that are more likely to have
an adverse payment limitation or payment eligibility determination. The
previous selection process involved a sample drawn from each county.
That selection process often resulted in the selection of producers
that received minimal payments and/or owned all land in the farming
operation. Review of these farming operations was not considered as
being a productive use of resources unless there was a reason to
question the determinations that had been made for a specific farming
operation. The selection process was, therefore, changed to perform a
judgmental selection on a nationwide basis and based on the Office of
the Inspector General (OIG) methodology.
The issue was raised in this report that the sampling is not valid or
statistically sound. As indicated above, the current process is
intended to be a judgmental selection and is not represented to be a
statistical sample. The resultant sample is valid to the extent of the
sampling requirements. However, we are currently in discussions with
OIG to see what, if any, changes to the current selection process would
be appropriate.
(5) Ensure that FSA field offices conduct compliance reviews in a
timely manner.
We agree it is desirable to conduct reviews in a timely manner.
However, an end-of-year compliance review of an operation completed in
an acceptable manner requires extensive time and resources. OIG has
expended extensive time and personnel resources to complete the review
of operations. Although review teams are established to conduct end-of-
year reviews, the same FSA field personnel and resources used to
conduct the review activities are also expected and required to timely
implement and administer all other Agency programs. While deadlines are
established and noted for the completion of these reviews, other more
pressing issues, such as implementation of the 2002 Act and issuance of
program payments and benefits often have to take priority. Ultimately,
however, if it is determined payment eligibility requirements were not
met because a farming operation was not conducted as represented,
adverse determinations are made, and demand letters for refunds issued.
This is true even though the review may not have been completed within
the period provided by procedure.
(6) Develop management controls to ensure that FSA field staff make use
of all available tools to assess payment recipient's compliance with
the act.
As noted above, conducting an end-of-year review can involve the
expenditure of a significant amount of time. Current procedure only
requires interviews if documentation does not adequately establish who
is providing the claimed contributions. Although we agree that
interviews can be beneficial in some cases, we do not believe that
requiring interviews in every case would always yield additional
meaningful information. However, we agree that "personal knowledge" is
not appropriate documentation for an end-of-year review and we will
clarify procedure accordingly.
(7) Establish and maintain a consistent methodology for collecting,
analyzing, and summarizing data to identify patterns and trends in
compliance overtime and across States.
Although current procedure requires reports from State and county
offices on end-of-year reviews, we recognize that a consistent
methodology is not currently in place to analyze and summarize data to
identify patterns and trends. The practical value of such analyses and
summaries is subject to question. However, we are currently building a
database that will include end-of-year reviews.
(8) Provide training that emphasizes the financial and legal aspects of
compliance reviews.
As farming operations become more complex, FSA personnel are required
to review many business documents in addition to Agency documents to
make the necessary payment eligibility and payment limitation
determinations. Agency personnel who are called upon to conduct end-of-
year reviews are not auditors. However, we agree that a certain degree
of knowledge is required in order to know what certain business
documents are, the information to be obtained from them, and how to
appropriately review the documents. We are planning a training session
for later this year and hope to be able to address the perceived
shortcomings identified in the report.
The following are GAO's comments on the U.S. Department of
Agriculture's letter dated April 9, 2004.
GAO's Comments:
1. 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.
2. 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.
3. 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.
4. 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,
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
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
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 probability-sampling 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
end-of-year review would not always yield additional meaningful
information, and we do not mean to imply the need for interviews in all
cases.
[End of section]
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.
[End of section]
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. GAO-01-
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.
(360338):
FOOTNOTES
[1] According 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.
[2] Most 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, §§ 1301-1307,
101 Stat. 1330, 1330-12-1330-19.
[3] Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-
171, 116 Stat. 134, 213.
[4] FSA offices are also located in Guam, Puerto Rico, and the Virgin
Islands.
[5] Farming operations are only required to update the plan when there
is a change in the operation.
[6] For 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.
[7] During 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.
[8] At the time of our study, Arkansas had not begun conducting the
reviews of its farming operations.
[9] 7 C.F.R. § 1400.3(b).
[10] 7 U.S.C. § 1308-2.
[11] Pub. L. No. 104-127, 110 Stat. 888 (1996).
[12] Recipients 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.
[13] 7 U.S.C. § 1308-2.
[14] In 1995, FSA assumed responsibility for programs previously under
the jurisdiction of the Agricultural Stabilization and Conservation
Service.
[15] Alternatively, 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.
[16] Each partner's share in the farming operation is about 9 percent.
Nine percent of $1 million is $90,000.
[17] Certifying actual contributions could include requiring an
affidavit from each recipient delineating management activities
performed.
[18] 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).
[19] 7 U.S.C. § 1308-2.
[20] 7 C.F.R. § 1400.5.
[21] Stegall v. United States, 19 Cl. Ct. 765, 769 (1990).
[22] See appendix I for more information on limited liability
companies.
[23] In 2003, the operation divided into six new farming partnerships
comprised of the same corporations.
[24] The accounting records also showed that the capital (equity)
account for each of the corporations carried a negative balance
indicating multiple years of net losses.
[25] In 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.
[26] FSA 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.
[27] H.R. Rep. No. 100-391 (1987) (emphasis added).
[28] See 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).
[29] See 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.").
[30] Under 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. § 1308.
[31] For 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.
[32] State 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.
[33] The 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.
[34] Three additional FSA state offices submitted the required report
after the due date.
[35] FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
[36] FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
[37] FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
[38] Noncompliance decisions are not final; payment recipients may
appeal the decisions within USDA.
[39] At 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.
[40] The 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.
[41] In 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).
[42] Recipients 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.
[43] FSA 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.
[44] In 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.
[45] As of January 2004, FSA had completed 347 reviews of farming
operations.
[46] At the time of our study, Arkansas had not begun conducting the
reviews of its farming operations.
[47] 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).
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