II

105TH CONGRESS

2D SESSION S. 2078

To amend the Internal Revenue Code of 1986 to provide for Farm and

Ranch Risk Management Accounts, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MAY 13, 1998

Mr. GRASSLEY (for himself, Mr. BAUCUS, Mr. ROBERTS, Mr. KERREY, Ms.

MOSELEY-BRAUN, Mr. ALLARD, and Mr. HAGEL) introduced the following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

for Farm and Ranch Risk Management Accounts, and

for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Farm and Ranch Risk

5 Management Act’’.

6 SEC. 2. FARM AND RANCH RISK MANAGEMENT ACCOUNTS.

7 (a) IN GENERAL.—Subpart C of part II of sub8 chapter E of chapter 1 of the Internal Revenue Code of

9 1986 (relating to taxable year for which deductions taken)
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1 is amended by inserting after section 468B the following

2 new section:

3 ‘‘SEC. 468C. FARM AND RANCH RISK MANAGEMENT AC4 COUNTS.

5 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi6 vidual engaged in an eligible farming business, there shall

7 be allowed as a deduction for any taxable year the amount

8 paid in cash by the taxpayer during the taxable year to

9 a Farm and Ranch Risk Management Account (herein10 after referred to as the ‘FARRM Account’).

11 ‘‘(b) LIMITATION.—The amount which a taxpayer

12 may pay into the FARRM Account for any taxable year

13 shall not exceed 20 percent of so much of the taxable in14 come of the taxpayer (determined without regard to this

15 section) which is attributable (determined in the manner

16 applicable under section 1301) to any eligible farming

17 business.

18 ‘‘(c) ELIGIBLE FARMING BUSINESS.—For purposes

19 of this section, the term ‘eligible farming business’ means

20 any farming business (as defined in section 263A(e)(4))

21 which is not a passive activity (within the meaning of sec22 tion 469(c)) of the taxpayer.

23 ‘‘(d) FARRM ACCOUNT.—For purposes of this sec24 tion—
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1 ‘‘(1) IN GENERAL.—The term ‘FARRM Ac2 count’ means a trust created or organized in the

3 United States for the exclusive benefit of the tax4 payer, but only if the written governing instrument

5 creating the trust meets the following requirements:

6 ‘‘(A) No contribution will be accepted for

7 any taxable year in excess of the amount al8 lowed as a deduction under subsection (a) for

9 such year.

10 ‘‘(B) The trustee is a bank (as defined in

11 section 408(n)) or another person who dem12 onstrates to the satisfaction of the Secretary

13 that the manner in which such person will ad14 minister the trust will be consistent with the re15 quirements of this section.

16 ‘‘(C) The assets of the trust consist en17 tirely of cash or of obligations which have ade18 quate stated interest (as defined in section

19 1274(c)(2)) and which pay such interest not

20 less often than annually.

21 ‘‘(D) All income of the trust is distributed

22 currently to the grantor.

23 ‘‘(E) The assets of the trust will not be

24 commingled with other property except in a
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1 common trust fund or common investment

2 fund.

3 ‘‘(2) ACCOUNT TAXED AS GRANTOR TRUST.—

4 The grantor of a FARRM Account shall be treated

5 for purposes of this title as the owner of such Ac6 count and shall be subject to tax thereon in accord7 ance with subpart E of part I of subchapter J of

8 this chapter (relating to grantors and others treated

9 as substantial owners).

10 ‘‘(e) INCLUSION OF AMOUNTS DISTRIBUTED.—

11 ‘‘(1) IN GENERAL.—Except as provided in para12 graph (2), there shall be includible in the gross in13 come of the taxpayer for any taxable year—

14 ‘‘(A) any amount distributed from a

15 FARRM Account of the taxpayer during such

16 taxable year, and

17 ‘‘(B) any deemed distribution under—

18 ‘‘(i) subsection (f)(1) (relating to de19 posits not distributed within 5 years),

20 ‘‘(ii) subsection (f)(2) (relating to ces21 sation in eligible farming business), and

22 ‘‘(iii) subparagraph (A) or (B) of sub23 section (f)(3) (relating to prohibited trans24 actions and pledging account as security).
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1 ‘‘(2) EXCEPTIONS.—Paragraph (1)(A) shall not

2 apply to—

3 ‘‘(A) any distribution to the extent attrib4 utable to income of the Account, and

5 ‘‘(B) the distribution of any contribution

6 paid during a taxable year to a FARRM Ac7 count to the extent that such contribution ex8 ceeds the limitation applicable under subsection

9 (b) if requirements similar to the requirements

10 of section 408(d)(4) are met.

11 For purposes of subparagraph (A), distributions

12 shall be treated as first attributable to income and

13 then to other amounts.

14 ‘‘(3) EXCLUSION FROM SELF-EMPLOYMENT

15 TAX.—Amounts included in gross income under this

16 subsection shall not be included in determining net

17 earnings from self-employment under section 1402.

18 ‘‘(f) SPECIAL RULES.—

19 ‘‘(1) TAX ON DEPOSITS IN ACCOUNT WHICH

20 ARE NOT DISTRIBUTED WITHIN 5 YEARS.—

21 ‘‘(A) IN GENERAL.—If, at the close of any

22 taxable year, there is a nonqualified balance in

23 any FARRM Account—
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1 ‘‘(i) there shall be deemed distributed

2 from such Account during such taxable

3 year an amount equal to such balance, and

4 ‘‘(ii) the taxpayer’s tax imposed by

5 this chapter for such taxable year shall be

6 increased by 10 percent of such deemed

7 distribution.

8 The preceding sentence shall not apply if an

9 amount equal to such nonqualified balance is

10 distributed from such Account to the taxpayer

11 before the due date (including extensions) for

12 filing the return of tax imposed by this chapter

13 for such year (or, if earlier, the date the tax14 payer files such return for such year).

15 ‘‘(B) NONQUALIFIED BALANCE.—For pur16 poses of subparagraph (A), the term ‘non17 qualified balance’ means any balance in the Ac18 count on the last day of the taxable year which

19 is attributable to amounts deposited in such Ac20 count before the 4th preceding taxable year.

21 ‘‘(C) ORDERING RULE.—For purposes of

22 this paragraph, distributions from a FARRM

23 Account shall be treated as made from deposits

24 in the order in which such deposits were made,

25 beginning with the earliest deposits. For pur-
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1 poses of the preceding sentence, income of such

2 an Account shall be treated as a deposit made

3 on the date such income is received by the Ac4 count.

5 ‘‘(2) CESSATION IN ELIGIBLE FARMING BUSI6 NESS.—At the close of the first disqualification pe7 riod after a period for which the taxpayer was en8 gaged in an eligible farming business, there shall be

9 deemed distributed from the FARRM Account (if

10 any) of the taxpayer an amount equal to the balance

11 in such Account at the close of such disqualification

12 period. For purposes of the preceding sentence, the

13 term ‘disqualification period’ means any period of 2

14 consecutive taxable years for which the taxpayer is

15 not engaged in an eligible farming business.

16 ‘‘(3) CERTAIN RULES TO APPLY.—Rules similar

17 to the following rules shall apply for purposes of this

18 section:

19 ‘‘(A) Section 408(e)(2) (relating to loss of

20 exemption of account where individual engages

21 in prohibited transaction).

22 ‘‘(B) Section 408(e)(4) (relating to effect

23 of pledging account as security).

24 ‘‘(C) Section 408(g) (relating to commu25 nity property laws).
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1 ‘‘(D) Section 408(h) (relating to custodial

2 accounts).

3 ‘‘(4) TIME WHEN PAYMENTS DEEMED MADE.—

4 For purposes of this section, a taxpayer shall be

5 deemed to have made a payment to a FARRM Ac6 count on the last day of a taxable year if such pay7 ment is made on account of such taxable year and

is made within 31 8 ⁄2 months after the close of such

9 taxable year.

10 ‘‘(5) INDIVIDUAL.—For purposes of this sec11 tion, the term ‘individual’ shall not include an estate

12 or trust.

13 ‘‘(g) REPORTS.—The trustee of a FARRM Account

14 shall make such reports regarding such Account to the

15 Secretary and to the person for whose benefit the Account

16 is maintained with respect to contributions, distributions,

17 and such other matters as the Secretary may require

18 under regulations. The reports required by this subsection

19 shall be filed at such time and in such manner and fur20 nished to such persons at such time and in such manner

21 as may be required by those regulations.’’.

22 (b) DEDUCTION ALLOWED IN COMPUTING AD23 JUSTED GROSS INCOME.—Subsection (a) of section 62 of

24 such Code (defining adjusted gross income) is amended
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1 by inserting after paragraph (17) the following new para2 graph:

3 ‘‘(18) CONTRIBUTIONS TO FARM AND RANCH

4 RISK MANAGEMENT ACCOUNTS.—The deduction al5 lowed by section 468C(a).’’

6 (c) TAX ON EXCESS CONTRIBUTIONS.—

7 (1) Subsection (a) of section 4973 of such Code

8 (relating to tax on certain excess contributions) is

9 amended by striking ‘‘or’’ at the end of paragraph

10 (3), by redesignating paragraph (4) as paragraph

11 (5), and by inserting after paragraph (3) the follow12 ing new paragraph:

13 ‘‘(4) a FARRM Account (within the meaning of

14 section 468C(d)), or’’.

15 (2) Section 4973 of such Code is amended by

16 adding at the end the following new subsection:

17 ‘‘(g) EXCESS CONTRIBUTIONS TO FARRM AC18 COUNTS.—For purposes of this section, in the case of a

19 FARRM Account (within the meaning of section

20 468C(d)), the term ‘excess contributions’ means the

21 amount by which the amount contributed for the taxable

22 year to the Account exceeds the amount which may be con23 tributed to the Account under section 468C(b) for such

24 taxable year. For purposes of this subsection, any con25 tribution which is distributed out of the FARRM Account
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1 in a distribution to which section 468C(e)(2)(B) applies

2 shall be treated as an amount not contributed.’’.

3 (3) The section heading for section 4973 of

4 such Code is amended to read as follows:

5 ‘‘SEC. 4973. EXCESS CONTRIBUTIONS TO CERTAIN AC6 COUNTS, ANNUITIES, ETC.’’.

7 (4) The table of sections for chapter 43 of such

8 Code is amended by striking the item relating to sec9 tion 4973 and inserting the following new item:

‘‘Sec. 4973. Excess contributions to certain accounts, annuities,

etc.’’.

10 (d) TAX ON PROHIBITED TRANSACTIONS.—

11 (1) Subsection (c) of section 4975 of such Code

12 (relating to prohibited transactions) is amended by

13 adding at the end the following new paragraph:

14 ‘‘(6) SPECIAL RULE FOR FARRM ACCOUNTS.—

15 A person for whose benefit a FARRM Account

16 (within the meaning of section 468C(d)) is estab17 lished shall be exempt from the tax imposed by this

18 section with respect to any transaction concerning

19 such Account (which would otherwise be taxable

20 under this section) if, with respect to such trans21 action, the account ceases to be a FARRM Account

22 by reason of the application of section 468C(f)(3)(A)

23 to such Account.’’.
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1 (2) Paragraph (1) of section 4975(e) of such

2 Code is amended by redesignating subparagraphs

3 (E) and (F) as subparagraphs (F) and (G), respec4 tively, and by inserting after subparagraph (D) the

5 following new subparagraph:

6 ‘‘(E) a FARRM Account described in sec7 tion 468C(d),’’.

8 (e) FAILURE TO PROVIDE REPORTS ON FARRM AC9 COUNTS.—Paragraph (2) of section 6693(a) of such Code

10 (relating to failure to provide reports on certain tax-fa11 vored accounts or annuities) is amended by redesignating

12 subparagraphs (C) and (D) as subparagraphs (D) and

13 (E), respectively, and by inserting after subparagraph (B)

14 the following new subparagraph:

15 ‘‘(C) section 468C(g) (relating to FARRM

16 Accounts).’’.

17 (f) CLERICAL AMENDMENT.—The table of sections

18 for subpart C of part II of subchapter E of chapter 1 of

19 such Code is amended by inserting after the item relating

20 to section 468B the following new item:

‘‘Sec. 468C. Farm and Ranch Risk Management Accounts.’’.

21 (g) EFFECTIVE DATE.—The amendments made by

22 this section shall apply to taxable years beginning after

23 the date of the enactment of this Act.

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