USDA finalizes program payment rule for family members

The U.S. Department of Agriculture (USDA) has issued an official amendment to make corrections to the final rule on payment eligibility for farm programs published on August 24. USDA initially published the final rule via the Federal Register in August to implement the mandatory changes required by the 2018 Farm Bill, including the new definitions for family members which were expanded to include nephews, nieces, and first cousins. The expansion of
these family definitions has been a major priority for advocates of family farms since the 2018 Farm Bill debate.

In addition to the mandatory changes required by the Farm Bill, USDA inadvertently made changes to other regulations used to determine if individuals meet the "actively engaged in farming" requirements. The most significant concern in the August rule was the deletion of the "significant contribution of active personal management" definition including commensurate share. In its place, USDA chose to apply the same definition for "significant contribution of active personal management" to both family farms and non-family farms. This definition was already in place for non-family farms as an outcome of the 2014 Farm Bill and resulting rulemaking by USDA under the previous Administration.

For an individual to be considered actively engaged in farming:

● The person, independently and separately, makes a significant contribution to the farming operation of (a) capital, equipment, or land; and (b) active personal labor, active personal management, or a combination of active personal labor and management.
● The person’s share of profits or losses is commensurate with his/her contribution to the farming operation.
● The person shares in the risk of loss from the farming operation.

Family farms (not a corporation or an LLC), have a special rule where every adult is deemed to meet these requirements. Remember also, since the 2018 farm bill that in addition to lineal family relationships, siblings and spouses this includes first cousins, nieces and nephews. There is also a special spousal rule, where one spouse is actively engaged, the other is deemed to be as well (similar to tax rules regarding passive activities).

There are also different rules for general partnerships (and joint ventures) where members are treated separately in determining whether they pass the above tests. Similarly, corporate (and LLC) requirements mandate that in addition to meeting the individual AEF criteria above for profit and risk sharing, that each owner make a significant contribution of personal labor or active management (regardless of compensation) that is (a) performed on a regular basis, (b)
identifiable and documentable, and (c) separate and distinct from contributions of other stockholders or members.

Congress has stated that this change in active personal management has been done intentionally in order to reduce payments to those passive investors who were not actively contributing to the farming operation. As a result, “a limit is placed on the number of non-family members of a farming operation who can qualify as a farm manager . . . [but] no such limit applies to the potential number of qualifying family members.

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