a

GAO

United States General Accounting Office

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

GAO-04-407
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and methodology, click on the link above. 

For more information, contact Lawrence J. 

Dyckman, (202) 512-3841 or 

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Highlights of GAO-04-407, a 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 

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 

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. 

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. 
Page i GAO-04-407 Farm Program Payments

Contents

Letter 1

Results in Brief 5

Background 9

Individuals May Circumvent Farm Payment Limitations Because of 

Weaknesses in FSA’s Regulations 14

Weaknesses in FSA’s Oversight May Enable Ineligible Farmers to 

Receive Program Payments 27

General Partnerships Received Almost One-Half of Farm Program 

Payments Made to Entities 34

Conclusions 37

Recommendations for Executive Action 38

Agency Comments and Our Evaluation 38

Appendixes

Appendix I: Common Ways Farmers Organize Their Farming 

Operations 42

Appendix II: Objectives, Scope, and Methodology 45

Appendix III: Distribution of Farm Program Payments by Type of Entity 

and Number of Members, Crop Year 2001 49

Appendix IV: Results of Survey on Implementation and Effectiveness of 

Actively Engaged in Farming Requirements 52

Appendix V: Comments from the U.S. Department of Agriculture 58

GAO’s Comments 64

Appendix VI: GAO Contacts and Staff Acknowledgments 68

GAO Contacts 68

Acknowledgments 68

Related GAO Products 69

Tables Table 1: Contribution Requirements for Recipients to Be 

Considered Actively Engaged in Farming 10

Table 2: Types of Entities and Total Farm Program Payments, 

2001 35

Table 3: Type and Number of Entities and Farm Program Payments, 

Categorized by the Number of Members, 2001 36
Contents

Page ii GAO-04-407 Farm Program Payments

Table 4: Number of General Partnerships and Farm Program 

Payments, Categorized by the Number of Partners, Crop 

Year 2001 49

Table 5: Number of Joint Ventures and Farm Program Payments, 

Categorized by the Number of Members, Crop Year 

2001 50

Figures Figure 1: Compliance Reviews Selected by FSA for 2001 13

Figure 2: Percentage of FSA Field Offices Indicating Specific 

Improvements Would Strengthen the Active Personal 

Management Contribution 19

Figure 3: Large Operation Containing Farming and Nonfarming 

Entities 23

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 30

Abbreviations

FSA Farm Service Agency

USDA U.S. Department of Agriculture

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Page 1 GAO-04-407 Farm Program Payments

United States General Accounting Office

Washington, D.C. 20548

A

April 30, 2004 Letr

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.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.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 

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. 
Page 2 GAO-04-407 Farm Program Payments

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.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 

3

Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-171, 116 Stat. 134, 213.
Page 3 GAO-04-407 Farm Program Payments

exceed those allowed. It carries out this responsibility through its 

headquarters office, 50 state offices, and over 2,500 field offices.4

 Before 

applying for farm program payments, farming operations file a farm 

operating plan with the local FSA field office.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 

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.
Page 4 GAO-04-407 Farm Program Payments

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.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.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.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 

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. 
Page 5 GAO-04-407 Farm Program Payments

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.”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 

9

7 C.F.R. § 1400.3(b).
Page 6 GAO-04-407 Farm Program Payments

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 
Page 7 GAO-04-407 Farm Program Payments

scheme or device was adopted and the following crop year.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 

107 U.S.C. § 1308-2.
Page 8 GAO-04-407 Farm Program Payments

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 
Page 9 GAO-04-407 Farm Program Payments

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 
Page 10 GAO-04-407 Farm Program Payments

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

Source: GAO.

Note: Recipients’ contributions must be considered “at risk,” that is, there must be a possibility that the 

recipient could suffer a loss.

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 1996.11

• 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 

Input contribution Service contribution

Significant contribution to the farming 

operation of one or a combination of the 

following:

• capital

• land, or

• equipment

Significant contribution to the farming 

operation of one or a combination of the 

following:

• personal labor, or

• active personal management

11Pub. L. No. 104-127, 110 Stat. 888 (1996).
Page 11 GAO-04-407 Farm Program Payments

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 
Page 12 GAO-04-407 Farm Program Payments

year.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. 

12Recipients 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. 
Page 13 GAO-04-407 Farm Program Payments

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

Source: GAO analysis of FSA data.

Each dot represents one farming

operation selected for review.
Page 14 GAO-04-407 Farm Program Payments

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.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. 

137 U.S.C. § 1308-2.
Page 15 GAO-04-407 Farm Program Payments

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. 
Page 16 GAO-04-407 Farm Program 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.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 

14In 1995, FSA assumed responsibility for programs previously under the jurisdiction of the 

Agricultural Stabilization and Conservation Service. 
Page 17 GAO-04-407 Farm Program Payments

entities.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 

15Alternatively, 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.
Page 18 GAO-04-407 Farm Program Payments

determined was ineligible.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 

16Each partner’s share in the farming operation is about 9 percent. Nine percent of $1 million 

is $90,000.
Page 19 GAO-04-407 Farm Program Payments

actual contributions, and requiring management to be on-site.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

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 

17Certifying actual contributions could include requiring an affidavit from each recipient 

delineating management activities performed.

0

10

20

30

40

50

60

70

80

90

100

Clarify 

definition

Include

quantifiable

criteria

Require certified

statement of actual

contributions

Require on-site

management

activities 

Improvements to management standard

Percentage of survey respondents

Generally strengthen

Greatly strengthen

Source: GAO survey results.
Page 20 GAO-04-407 Farm Program Payments

recipients in order to avoid payment limitations.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.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.20 As one court has noted, the regulations 

“seek to identify sham transactions” to obtain more farm program 

payments.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 

18See 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). 

197 U.S.C. § 1308-2.

207 C.F.R. § 1400.5.

21Stegall v. United States, 19 Cl. Ct. 765, 769 (1990).
Page 21 GAO-04-407 Farm Program Payments

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.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 

22See appendix I for more information on limited liability companies.
Page 22 GAO-04-407 Farm Program Payments

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.
Page 23 GAO-04-407 Farm Program Payments

Figure 3: Large Operation Containing Farming and Nonfarming Entities

Note: Percentages shown are share of ownership.

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 

Administrative services,

limited partnership

Crop processing,

limited partnership

Equipment maintenance,

limited partnership

Equipment leasing,

limited partnership

Financial services,

joint venture

Seed supply,

limited partnership

Land leasing,

limited partnership I

Land leasing,

limited partnership II

Land leasing,

limited partnership III

Cattle company,

limited partnership

Ranching

corporation

Nonfarming entities

Farming entities

Farm Program Payments

Payments at abovemarket prices for 

capital, land, 

equipment, and 

other inputs

Payments at belowmarket prices for 

cotton and grain

Cash to 

recipient

General

Partnership

I

General

Partnership

II

Individual B

50%

Individual D

50%

Individual B

50%

Individual C

100%

Individual A

50%

Limited Liability

Company 1

33.3%

Individual A

100%

Limited Liability

Company 2

33.3%

Limited Liability

Company 3

33.3%

Limited Liability

Company 4

20%

Individual A

50%

Individual E

50%

Individual D

100%

Individual C

50%

Individual D

50%

Limited Liability

Company 5

20%

Individual C

50%

Individual E

50%

Limited Liability

Company 6

20%

Limited Liability

Company 7

20%

Limited Liability

Company 8

20%

Net effect of transactions is to channel farm 

program payments to nonfarming entities and avoid 

payment limitation rules

Source: GAO analysis of FSA compliance files.
Page 24 GAO-04-407 Farm Program Payments

farming partnership. The partnership, which comprised more than 30 

corporations, collected more than $5 million in farm program payments in 

2001.23 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.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 

23In 2003, the operation divided into six new farming partnerships comprised of the same 

corporations. 

24The accounting records also showed that the capital (equity) account for each of the 

corporations carried a negative balance indicating multiple years of net losses. 
Page 25 GAO-04-407 Farm Program Payments

legal structure for the farming entities but had no direct ownership interest 

in the farming entities.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.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.”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. 

25In 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.

26FSA 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.

27H.R. Rep. No. 100-391 (1987) (emphasis added).
Page 26 GAO-04-407 Farm Program Payments

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.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.29

28See 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).

29See 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.”).
Page 27 GAO-04-407 Farm Program Payments

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 
Page 28 GAO-04-407 Farm Program Payments

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.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.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.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 

30Under 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. 

31For 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.

32State 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. 
Page 29 GAO-04-407 Farm Program Payments

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.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.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 

33The 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. 

34Three additional FSA state offices submitted the required report after the due date.
Page 30 GAO-04-407 Farm Program Payments

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

Note: GAO analysis of FSA data.

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 

Source: FSA.

0

5

10

15

20

25

30

35

40

45

50

1999

2000

2001

Years

Number of states

States with reviews

States completing reviews on time
Page 31 GAO-04-407 Farm Program Payments

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.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.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.

35FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.

36FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
Page 32 GAO-04-407 Farm Program Payments

Finally, FSA field staff do not always maintain documentation supporting 

their decisions on the results of their compliance reviews, as required by 

FSA policy.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 

37FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
Page 33 GAO-04-407 Farm Program Payments

18 operations because they received farm program payments that they 

were ineligible to receive.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.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 

38Noncompliance decisions are not final; payment recipients may appeal the decisions 

within USDA.

39At 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.
Page 34 GAO-04-407 Farm Program Payments

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.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.

40The 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. 
Page 35 GAO-04-407 Farm Program Payments

Table 2: Types of Entities and Total Farm Program Payments, 2001

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. 

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. 

Dollars in millions

Type

Entities Payments

Number Percent Total Percent

Corporations 54,637 38.5 $2,248 37.9

General 

partnerships 37,193 26.2 2,684 45.2

Joint ventures 8,888 6.3 583 9.8

Othera 41,166 29.0 419 7.1

Total 141,884 100.0 $5,934 100.0
Page 36 GAO-04-407 Farm Program Payments

Table 3: Type and Number of Entities and Farm Program Payments, Categorized by the Number of Members, 2001

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.

More detailed information on farm program payments to general 

partnerships and joint ventures is contained in appendix III.41

Entities Payments

Type Partners/members Number Percent Total Percent Average

General partnerships 2 19,152 51.5 $1,108,708,233 41.3 $57,890 

3-5 15,459 41.6 1,169,100,368 43.6 75,626 

6-10 2,296 6.2 335,485,915 12.5 146,118 

11-20 252 0.7 46,975,225 1.8 186,410 

21 or more 34 0.1 23,739,989 0.9 698,235 

Total 37,193 100.0 $2,684,009,730 100.0 $72,164

Joint ventures 2 5,707 64.2 $407,817,751 70.0 $71,459 

3-5 2,523 28.4 123,250,433 21.2 48,851 

6-10 537 6.0 42,432,967 7.3 79,019 

11-20 104 1.2 5,184,475 0.9 49,851 

21 or more 17 0.2 3,893,350 0.7 229,021 

Total 8,888 100.0 $582,578,976 100.0 $65,547

Total 2 24,859 53.9 $1,516,525,984 46.4 $61,005 

3-5 17,982 39.0 1,292,350,801 39.6 71,869 

6-10 2,833 6.1 377,918,882 11.6 133,399 

11-20 356 0.8 52,159,700 1.6 146,516 

21 or more 51 0.1 27,633,339 0.8 541,830

Total 46,081 100.0 $3,266,588,706 100.0 $70,888

41In 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). 
Page 37 GAO-04-407 Farm Program Payments

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 
Page 38 GAO-04-407 Farm Program Payments

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 
Page 39 GAO-04-407 Farm Program Payments

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 
Page 40 GAO-04-407 Farm Program Payments

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 

http://www.gao.gov.
Page 41 GAO-04-407 Farm Program Payments

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, 

Lawrence J. Dyckman

Director, Natural Resources

 and Environment
Page 42 GAO-04-407 Farm Program Payments

Appendix I

Common Ways Farmers Organize Their Apendxies

Farming Operations ApendxiI

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 riskreducing 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.1

 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 

1

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. 
Appendix I

Common Ways Farmers Organize Their 

Farming Operations

Page 43 GAO-04-407 Farm Program Payments

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 
Appendix I

Common Ways Farmers Organize Their 

Farming Operations

Page 44 GAO-04-407 Farm Program Payments

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.
Page 45 GAO-04-407 Farm Program Payments

Appendix II

Objectives, Scope, and Methodology ApendxiI

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.1

 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, 

1

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.
Appendix II

Objectives, Scope, and Methodology

Page 46 GAO-04-407 Farm Program Payments

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.2

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 

2

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.
Appendix II

Objectives, Scope, and Methodology

Page 47 GAO-04-407 Farm Program Payments

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 2001.3

 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.4

 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.5

 In addition, we spoke with officials from U.S. 

3

As of January 2004, FSA had completed 347 reviews of farming operations.

4

At the time of our study, Arkansas had not begun conducting the reviews of its farming 

operations. 

5

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). 
Appendix II

Objectives, Scope, and Methodology

Page 48 GAO-04-407 Farm Program Payments

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.
Page 49 GAO-04-407 Farm Program Payments

Appendix III

Distribution of Farm Program Payments by 

Type of Entity and Number of Members, Crop 

Year 2001 ApendxiI

Table 4: Number of General Partnerships and Farm Program Payments, Categorized 

by the Number of Partners, Crop Year 2001

Source: GAO analysis of FSA data.

Partnerships Payments

Partners Number Percent Total Percent Average

2 19,152 51.49 $1,108,708,233 41.31 $57,890a

3 8,761 23.56 582,729,706 21.71 66,514 

4 4,763 12.81 397,777,416 14.82 83,514 

5 1,935 5.20 188,593,246 7.03 97,464 

6 1,145 3.08 170,981,215 6.37 149,329 

7 474 1.27 40,233,582 1.50 84,881 

8 338 0.91 57,999,373 2.16 171,596 

9 204 0.55 41,491,143 1.55 203,388 

10 135 0.36 24,780,602 0.92 183,560 

11 80 0.22 9,405,677 0.35 117,571 

12 58 0.16 18,557,203 0.69 319,952 

13 30 0.08 3,553,851 0.13 118,462 

14 26 0.07 2,405,065 0.09 92,503 

15 19 0.05 1,383,891 0.05 72,836 

16 11 0.03 801,281 0.03 72,844 

17 15 0.04 4,031,603 0.15 268,774 

18 6 0.02 3,156,810 0.12 526,135 

19 1 0.00 2,699 0.00 2,699 

20 6 0.02 3,677,143 0.14 612,857 

21 3 0.01 1,439,238 0.05 479,746 

22 3 0.01 715,474 0.03 238,491 

23 3 0.01 45,587 0.00 15,196 

24 2 0.01 233,113 0.01 116,557 

25 5 0.01 400,056 0.01 80,011 

26 2 0.01 780,961 0.03 390,481 

27 1 0.00 107,960 0.00 107,960 

28 2 0.01 744,506 0.03 372,253 

29 2 0.01 24,168 0.00 12,084 

30 1 0.00 298,291 0.01 298,291 

More 

than 30 10 0.02 18,950,634 0.71 1,895,063

Total 37,193 100.00 $2,684,009,727 100.00 $72,164
Appendix III

Distribution of Farm Program Payments by 

Type of Entity and Number of Members, Crop 

Year 2001

Page 50 GAO-04-407 Farm Program Payments

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.”

Table 5: Number of Joint Ventures and Farm Program Payments, Categorized by the 

Number of Members, Crop Year 2001

Joint ventures Payments

Members Number Percent Total Percent Average 

2 5,707 64.21 $407,817,751 70.00 $71,459

3 1,346 15.14 59,035,930 10.13 43,860

4 755 8.49 39,433,320 6.77 52,230

5 422 4.75 24,781,183 4.25 58,723

6 246 2.77 20,021,159 3.44 81,387

7 110 1.24 6,868,610 1.18 62,442

8 78 0.88 5,250,279 0.90 67,311

9 68 0.77 4,970,975 0.85 73,103

10 35 0.39 5,321,943 0.91 152,056

11 28 0.32 1,064,020 0.18 38,001

12 25 0.28 173,127 0.03 6,925

13 15 0.17 797,214 0.14 53,148

14 12 0.14 2,907,815 0.50 242,318

15 8 0.09 49,643 0.01 6,205

16 4 0.05 44,361 0.01 11,090

17 3 0.03 80,937 0.01 26,979

18 3 0.03 4,959 0.00 1,653

19 3 0.03 35,507 0.01 11,836

20 3 0.03 26,892 0.00 8,964

21 2 0.02 2,706,729 0.46 1,353,365

22 1 0.01 2,377 0.00 2,377

23 1 0.01 1,752 0.00 1,752

24 2 0.02 15,373 0.00 7,687

26 1 0.01 4,356 0.00 4,356
Appendix III

Distribution of Farm Program Payments by 

Type of Entity and Number of Members, Crop 

Year 2001

Page 51 GAO-04-407 Farm Program Payments

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.

28 1 0.01 46,104 0.01 46,104

29 1 0.01 3,154 0.00 3,154

32 1 0.01 3,838 0.00 3,838

35 1 0.01 56,379 0.01 56,379

36 1 0.01 29,834 0.01 29,834

37 3 0.03 956,031 0.16 318,677

49 1 0.01 47,357 0.01 47,357

56 1 0.01 20,067 0.00 20,067

Total 8,888 100.00 $582,578,976 100.00 $65,547

(Continued From Previous Page)

Joint ventures Payments

Members Number Percent Total Percent Average 
Page 52 GAO-04-407 Farm Program Payments

Appendix IV

Results of Survey on Implementation and 

Effectiveness of Actively Engaged in Farming 

Requirements ApendxiIV

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?

Question 2: Please indicate the reason the review was waived.

Question 3: What type of operation is the farm?

Question 10: Was the member determined to be actively engaged in the farming operation?

Question 12: Did the farming operation contribute capital, land, or equipment on behalf of the member to meet the left-hand requirement?

Completed and 

the COC has 

made its decision

Completed, but 

not yet 

presented to 

COC

Started, but not yet 

completed Not started Waived

Don’t know/ 

No answer/ 

Not checked/ Not 

completed

318 29 58 118 966 72

Farming 

operation 

involves only a 

husband and wife

Farming 

operation has all 

land meeting the 

landowner 

exemption

Farming operation 

was previously 

reviewed and did not 

receive adverse 

determination and no 

changes have 

occurred since the 

review

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 Other

Don’t know/

 No answer/ Not 

checked/ Not 

completed

415 38 467 18 26 2

Individual

General 

partnership Joint venture

Limited liability 

company Other

Don’t know/ 

No answer/ 

Not checked/ Not 

completed

1 225 105 1 2 13

Yes

No- did not 

meet the left 

hand 

requirement

No- did not 

meet the right 

hand 

requirement

Don’t know/ 

No answer/ 

Not checked/ Not 

completed

920 10 11 51

Yes No

Don’t know/ 

No answer/ 

Not checked/ 

Not completed

826 111 55
Appendix IV

Results of Survey on Implementation and 

Effectiveness of Actively Engaged in Farming 

Requirements

Page 53 GAO-04-407 Farm Program Payments

Question 13: Did the member contribute capital to meet the left-hand requirement?

Question 17: Did the member contribute equipment to meet the left-hand requirement?

Question 23: Did the member contribute land to meet the left-hand requirement?

Question 30: Did the member contribute active personal labor to meet the right-hand requirement?

Question 33: Did the member contribute active personal management to meet the right-hand requirement?

Yes No

Skipped from 

question 12

Don’t know/ 

No answer/

 Not checked/ 

Not completed

59 52 826 55

Yes No

Skipped from 

question 12

Don’t know/

 No answer/ 

Not checked/ 

Not completed

49 62 826 55

Yes No

Skipped from 

question 12

Don’t know/ 

No answer/ 

Not checked/ 

Not completed

39 70 826 57

Yes No

Don’t know/ 

No answer/ 

Not checked/ 

Not completed

489 446 57

Yes No

Don’t know/ 

No answer/ 

Not checked/ 

Not completed

851 75 66
Appendix IV

Results of Survey on Implementation and 

Effectiveness of Actively Engaged in Farming 

Requirements

Page 54 GAO-04-407 Farm Program Payments

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?

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?

Question 3: In your opinion, would the following actions strengthen or weaken the application of the claimed contributions of active 

personal management requirement?

Question 4: To what extent do the following factors help or hinder you in carrying out end-of-year reviews?

0 1 2 3 4 5 12 No answer

397 27 12 7 4 3 1 15

Very confident Confident

Moderately 

confident

Somewhat 

confident

Not at all 

confident

Don’t know/ No 

answer/ Not 

checked

138 241 56 20 7 4

Greatly 

strengthen

Generally 

strengthen

Have 

no effect

Generally 

weaken

Greatly 

weaken

Don’t know/ 

No answer/ 

Not checked

FSA clarifications of the 

definition of management 63 220 161 5 0 17

Require the producer to perform 

specific amounts of 

management 32 177 185 32 1 39

Require management activities 

be on-site 63 109 176 47 24 47

Require a certified statement of 

actual management 

contributions from the producers 

(other than the farm operating 

plan) 43 164 192 26 13 28

Other actions 9 10 12 2 1 432

Greatly helps

Generally 

helps

Neither helps 

nor hinders

Generally 

hinders

Greatly 

hinders

Don’t know/ 

No answer/ 

Not checked

Guidance from FSA 100 259 76 13 3 15

Emphasis within FSA on doing 

end-of-year reviews 60 215 147 14 3 27

State office oversight 76 219 112 25 7 27

Inter-county cooperation 126 239 66 4 2 29
Appendix IV

Results of Survey on Implementation and 

Effectiveness of Actively Engaged in Farming 

Requirements

Page 55 GAO-04-407 Farm Program Payments

Question 5: When did you last receive the following types of training on payment limitation and eligibility determinations?

Time of year in which end-ofyear review lists are received 

(April) 24 84 192 106 32 28

Time frame in which reviews are 

to be conducted (AprilDecember) 23 105 196 88 27 27

Having complete federal income 

tax returns for all relevant 

producers 185 195 46 13 5 22

Having 12 months of bank 

statements for all relevant 

producers 147 213 66 12 7 21

Having supporting documents 

(other than tax and bank 

records) from producers 179 247 20 2 4 14

Interviewing producers 135 252 58 7 1 13

Training in conducting end-ofyear reviews 247 157 30 1 0 31

Experience in conducting endof-year reviews 266 181 6 1 0 12

Adverse determinations may be 

overturned by State Office 18 58 188 115 28 59

Adverse determinations may be 

overturned by USDA’s National 

Appeals Division 12 47 191 115 41 60

Political influence 2 2 155 98 132 77

Other factors 7 5 10 3 7 434

Within the 

past year

Within the 

past 2 to 4 

years

5 or more 

years ago

Never 

received this 

training

No answer/ 

Not checked

Formal, statewide training 79 208 126 41 12

On the job training (i.e., 

instruction from review team, 

District Director, or PT on endof-year reviews) 189 149 62 45 21

Other training 39 22 7 25 373

Greatly helps

Generally 

helps

Neither helps 

nor hinders

Generally 

hinders

Greatly 

hinders

Don’t know/ 

No answer/ 

Not checked
Appendix IV

Results of Survey on Implementation and 

Effectiveness of Actively Engaged in Farming 

Requirements

Page 56 GAO-04-407 Farm Program Payments

Question 6: How useful was each type of training in preparing you to make payment limitation and eligibility determinations?

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?

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?

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?

Extremely 

useful Very useful

Moderately 

useful

Somewhat 

useful

Of little or 

no use

Never 

received this 

training

No answer/ 

Not checked

Formal, statewide training 66 174 100 57 14 36 19

On the job training (i.e., 

instruction from review team, 

District Director, or PT on endof-year reviews) 115 179 78 27 7 33 27

Other training 21 19 10 8 1 22 385

Within the past 

year

Within the past 2 

to 4 years

5 or more 

years ago

Never 

available

Don’t know/No 

answer/ Not 

checked

Formal, statewide training 19 67 130 136 114

On the job training (i.e., 

instruction from review team, 

District Director, or PT on endof-year reviews) 118 91 63 93 101

Other training 29 9 2 30 396

Definitely yes Probably yes Uncertain Probably no Definitely no

Don’t know/ 

No answer/

Not checked

130 77 48 47 78 86

Definitely yes Probably yes Uncertain Probably no Definitely no

Don’t know/

No answer/ 

Not checked

51 56 62 72 119 106
Appendix IV

Results of Survey on Implementation and 

Effectiveness of Actively Engaged in Farming 

Requirements

Page 57 GAO-04-407 Farm Program Payments

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
Page 58 GAO-04-407 Farm Program Payments

Appendix V

Comments from the U.S. Department of 

Agriculture ApendxiV

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.
Appendix V

Comments from the U.S. Department of 

Agriculture

Page 59 GAO-04-407 Farm Program Payments

See comment 1.

See comment 2.

See comment 3.

See comment 4.

See comment 5.
Appendix V

Comments from the U.S. Department of 

Agriculture

Page 60 GAO-04-407 Farm Program Payments

See comment 6.

See comment 7.

See comment 8.
Appendix V

Comments from the U.S. Department of 

Agriculture

Page 61 GAO-04-407 Farm Program Payments

See comment 8.

See comment 9.

See comment 10.
Appendix V

Comments from the U.S. Department of 

Agriculture

Page 62 GAO-04-407 Farm Program Payments

See comment 11.

See comment 11.

See comment 11.
Appendix V

Comments from the U.S. Department of 

Agriculture

Page 63 GAO-04-407 Farm Program Payments

See comment 12.
Appendix V

Comments from the U.S. Department of 

Agriculture

Page 64 GAO-04-407 Farm Program Payments

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, 
Appendix V

Comments from the U.S. Department of 

Agriculture

Page 65 GAO-04-407 Farm Program Payments

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 
Appendix V

Comments from the U.S. Department of 

Agriculture

Page 66 GAO-04-407 Farm Program Payments

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 
Appendix V

Comments from the U.S. Department of 

Agriculture

Page 67 GAO-04-407 Farm Program Payments

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 probabilitysampling 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 endof-year review would not always yield additional meaningful 

information, and we do not mean to imply the need for interviews in all 

cases. 
Page 68 GAO-04-407 Farm Program Payments

Appendix VI

GAO Contacts and Staff Acknowledgments ApendxiVI

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.
Page 69 GAO-04-407 Farm Program Payments

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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. GAO01-606. 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)
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