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Tread carefully in organizing farm operations, attorney says

Mark Maloney tell producers they must navigate a number of regulations to remain actively engaged.

Forrest Laws

July 6, 2021

Most row crop farmers with acreage of any size know they must be “actively engaged” in their farming operations to remain eligible to receive payments from the Agricultural Risk Coverage or Price Loss Coverage and other government farm programs.

The problem, according to Mark Daniel Maloney, an attorney from Decatur, Ala., is that producers and their advisers must navigate a number of the USDA’s Farm Service Agency or FSA regulations to make sure they remain actively engaged.

One of those rules Maloney discussed in a presentation to the Eight Annual Mid-South Agricultural and Environmental Law Conference, which was held virtually again this year, involves the financial arrangements some growers must make to fund their operations at the beginning of each year.

“To be actively engaged in farming, the person or entity must make a significant contribution of capital, equipment or land or a combination of capital, equipment and land to the farming operation,” he said. “That seems pretty straightforward, but there are certain circumstances where a farming operation is thriving but does not meet this significant contribution requirement.”

Four-part test

According to Farm Service Agency regulations, which were adopted following the passage of the 2014 farm bill and modified after passage of the 2018 farm bill, a person or entity is “actively engaged in farming” if they meet this four-part test:

-- The person or entity makes a significant contribution of capital, equipment or land or a combination of capital, equipment and land to the farming operation;

-- The person or entity makes a significant contribution of active personal labor or active personal management or a combination of active personal labor and active personal management to the farming operation;

-- The person’s or entity’s share of the profits or losses from the farming operation is commensurate with the person’s or entity’s contribution to the operation; and

-- The person’s or entity’s share of the profits or losses from the farming operation are at risk.

“I asked the question at the end of this section that how can the farming operation’s financing arrangements adversely affect farm program eligibility,” Maloney said. “It gets back to that financing rule. I have seen farming operations where a family-owned entity owns land and leases that land to the farming partnership.

“Also, that entity may be guaranteeing the operating loan for the partnership, may be loaning the money necessary to the partnership or may be borrowing the money from someone else and then loaning it on to the partnership. In that case, you have a loan made by or perhaps guaranteed by an entity with an interest in the farming operation.”

Maloney, a partner in the firm of Blackburn, Maloney and Schuppert, LLC in Decatur, said those loan proceeds will not qualify towards a significant contribution of capital or significant contribution of land or a significant contribution of equipment.

“If the partnership completely divests itself of assets at the end of every crop year and relies solely on financing to obtain the capital necessary to operate, it is possible and quite likely that partnership will not have funds from a permitted source to qualify for a significant contribution of capital, land or equipment,” he noted.

“In that case, the members of the partnership or the entity that's conducting the farming operation, the corporation or the limited liability company will not be able to make a significant contribution of land, capital or equipment and therefore will not qualify for farm program payment purposes, and this can be in a family situation where the same family members own the partnership, and they also own the entity that owns the land.”

In a situation where a separate entity owns all the equipment and none of the land and that equipment is leased to the farming operation, whether it's a partnership or an entity, having the guarantee from the equipment entity or having the loan come from the equipment entity is not an issue, he said.

“That’s because ownership of equipment used in the farming operation is not an interest in the farming operation – it’s only in the case of the ownership of land. Now, this could also be an issue if you have several members of a family in a farming partnership, and mom and dad borrow the money, and mom and dad are in the partnership.

“But then you've got children as well in the farming operation. Mom and dad borrow the money; and the children have no liability on the note. If that's the case, since they are partners in the partnership, they have an interest in the farming operation, and you would have some of the partners not making a significant contribution of capital or having significant sufficient resources from an appropriate financing arrangement to make a significant contribution of land or equipment.”

Considerations

Maloney said farmers should consider – if they have a certain amount of accumulated capital in your farming operation at the beginning of the year – adopting the following strategy to avoid running afoul of the payment limit rules:

“As long as that exceeds 50% of the land rent that you have to pay or 50% of the equipment rent that you have to pay, then you do have a significant contribution of either land or equipment. In that case, you can use any other financing arrangement. You just have to make sure to cross that significant contribution threshold first.”

Maloney discussed other payment limit issues such as those involving the Cash Rent Tenant Rule, in which farmers who are cash renting land must satisfy an additional eligibility requirement to receive payments.

It’s difficult to put a number on how much money growers may lose due to payment limitation issues annually, he said.

“I've seen some cases where it was determined that producers did not meet the actively engaged in farming rule, and they could lose a couple hundred thousand dollars for that year. Then the question would come up about subsequent years or prior years. In some cases, it could involve millions of dollars.”

About the Author(s)

Forrest Laws

Forrest Laws, senior director of content for Farm Press, spent 10 years with The Memphis Press-Scimitar before joining Delta Farm Press in 1980. He has written extensively on farm production practices, crop marketing, farm legislation, environmental regulations and alternative energy. He now oversees the content creation for Delta, Southeast, Southwest and Western Farm Press. He resides in Memphis, Tenn. He served as a missile launch officer in the U.S. Air Force before resuming his career in journalism with The Press-Scimitar.

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