I
107TH CONGRESS
1ST SESSION
H. R. 2347
To amend the Internal Revenue Code of 1986 to provide tax relief for
farmers and fishermen, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JUNE 27, 2001
Mr. NUSSLE introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide
tax relief for farmers and fishermen, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; ETC.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Tax Empowerment and Relief for Farmers and Fisher-
men (TERFF) Act’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; etc.
Sec. 2. Farm, fishing, and ranch risk management accounts.
Sec. 3. Written agreement relating to exclusion of certain farm rental income
from net earnings from self-employment.
Sec. 4. Treatment of conservation reserve program payments as rentals from
real estate.
Sec. 5. Exemption of agricultural bonds from State volume cap.
Sec. 6. Modifications to section 512(b)(13).
Sec. 7. Charitable deduction for contributions of food inventory.
Sec. 8. Income averaging for farmers and fishermen not to increase alternative
minimum tax liability.
Sec. 9. Cooperative marketing includes value-added processing through animals.
Sec. 10. Declaratory judgment relief for section 521 cooperatives.
Sec. 11. Small ethanol producer credit.
Sec. 12. Payment of dividends on stock of cooperatives without reducing pa-
tronage dividends.
SEC. 2. FARM, FISHING, AND RANCH RISK MANAGEMENT
ACCOUNTS.
(a) IN GENERAL.—Subpart C of part II of sub-
chapter E of chapter 1 (relating to taxable year for which
deductions taken) is amended by inserting after section
468B the following new section:
‘‘SEC. 468C. FARM, FISHING, AND RANCH RISK MANAGE-
MENT ACCOUNTS.
‘‘(a) DEDUCTION ALLOWED.—In the case of an indi-
vidual engaged in an eligible farming business or commer-
cial fishing, there shall be allowed as a deduction for any
taxable year the amount paid in cash by the taxpayer dur-
ing the taxable year to a Farm, Fishing, and Ranch Risk
Management Account (hereinafter referred to as the
‘FFARRM Account’).
‘‘(b) LIMITATION.—
‘‘(1) CONTRIBUTIONS.—The amount which a
taxpayer may pay into the FFARRM Account for
any taxable year shall not exceed 20 percent of so
much of the taxable income of the taxpayer (deter-
mined without regard to this section) which is at-
tributable (determined in the manner applicable
under section 1301) to any eligible farming business
or commercial fishing.
‘‘(2) DISTRIBUTIONS.—Distributions from a
FFARRM Account may not be used to purchase,
lease, or finance any new fishing vessel, add capacity
to any fishery, or otherwise contribute to the over-
capitalization of any fishery. The Secretary of Com-
merce shall implement regulations to enforce this
paragraph.
‘‘(c) ELIGIBLE BUSINESSES.—For purposes of this
section—
‘‘(1) ELIGIBLE FARMING BUSINESS.—The term
‘eligible farming business’ means any farming busi-
ness (as defined in section 263A(e)(4)) which is not
a passive activity (within the meaning of section
469(c)) of the taxpayer.
‘‘(2) COMMERCIAL FISHING.—The term ‘com-
mercial fishing’ has the meaning given such term by
section (3) of the Magnuson-Stevens Fishery Con-
servation and Management Act (16 U.S.C. 1802)
but only if such fishing is not a passive activity
(within the meaning of section 469(c)) of the tax-
payer.
‘‘(d) FFARRM ACCOUNT.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘FFARRM Ac-
count’ means a trust created or organized in the
United States for the exclusive benefit of the tax-
payer, but only if the written governing instrument
creating the trust meets the following requirements:
‘‘(A) No contribution will be accepted for
any taxable year in excess of the amount al-
lowed as a deduction under subsection (a) for
such year.
‘‘(B) The trustee is a bank (as defined in
section 408(n)) or another person who dem-
onstrates to the satisfaction of the Secretary
that the manner in which such person will ad-
minister the trust will be consistent with the re-
quirements of this section.
‘‘(C) The assets of the trust consist en-
tirely of cash or of obligations which have ade-
quate stated interest (as defined in section
1274(c)(2)) and which pay such interest not
less often than annually.
‘‘(D) All income of the trust is distributed
currently to the grantor.
‘‘(E) The assets of the trust will not be
commingled with other property except in a
common trust fund or common investment
fund.
‘‘(2) ACCOUNT TAXED AS GRANTOR TRUST.—
The grantor of a FFARRM Account shall be treated
for purposes of this title as the owner of such Ac-
count and shall be subject to tax thereon in accord-
ance with subpart E of part I of subchapter J of
this chapter (relating to grantors and others treated
as substantial owners).
‘‘(e) INCLUSION OF AMOUNTS DISTRIBUTED.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), there shall be includible in the gross in-
come of the taxpayer for any taxable year—
‘‘(A) any amount distributed from a
FFARRM Account of the taxpayer during such
taxable year, and
‘‘(B) any deemed distribution under—
‘‘(i) subsection (f )(1) (relating to de-
posits not distributed within 5 years),
‘‘(ii) subsection (f )(2) (relating to ces-
sation in eligible farming business), and
‘‘(iii) subparagraph (B) or (C) of sub-
section (f )(3) (relating to prohibited trans-
actions and pledging account as security).
‘‘(2) EXCEPTIONS.—Paragraph (1)(A) shall not
apply to—
‘‘(A) any distribution to the extent attrib-
utable to income of the Account, and
‘‘(B) the distribution of any contribution
paid during a taxable year to a FFARRM Ac-
count to the extent that such contribution ex-
ceeds the limitation applicable under subsection
(b) if requirements similar to the requirements
of section 408(d)(4) are met.
For purposes of subparagraph (A), distributions
shall be treated as first attributable to income and
then to other amounts.
‘‘(f ) SPECIAL RULES.—
‘‘(1) TAX
ON
DEPOSITS
IN
ACCOUNT
WHICH
ARE NOT DISTRIBUTED WITHIN 5 YEARS.—
‘‘(A) IN GENERAL.—If, at the close of any
taxable year, there is a nonqualified balance in
any FFARRM Account—
‘‘(i) there shall be deemed distributed
from such Account during such taxable
year an amount equal to such balance, and
‘‘(ii) the taxpayer’s tax imposed by
this chapter for such taxable year shall be
increased by 10 percent of such deemed
distribution.
The preceding sentence shall not apply if an
amount equal to such nonqualified balance is
distributed from such Account to the taxpayer
before the due date (including extensions) for
filing the return of tax imposed by this chapter
for such year (or, if earlier, the date the tax-
payer files such return for such year).
‘‘(B) NONQUALIFIED BALANCE.—For pur-
poses of subparagraph (A), the term ‘non-
qualified balance’ means any balance in the Ac-
count on the last day of the taxable year which
is attributable to amounts deposited in such Ac-
count before the 4th preceding taxable year.
‘‘(C) ORDERING RULE.—For purposes of
this paragraph, distributions from a FFARRM
Account (other than distributions of current in-
come) shall be treated as made from deposits in
the order in which such deposits were made, be-
ginning with the earliest deposits.
‘‘(2) CESSATION
IN
ELIGIBLE
BUSINESS.—At
the close of the first disqualification period after a
period for which the taxpayer was engaged in an eli-
gible farming business or commercial fishing, there
shall be deemed distributed from the FFARRM Ac-
count of the taxpayer an amount equal to the bal-
ance in such Account (if any) at the close of such
disqualification period. For purposes of the pre-
ceding sentence, the term ‘disqualification period’
means any period of 2 consecutive taxable years for
which the taxpayer is not engaged in an eligible
farming business or commercial fishing.
‘‘(3) CERTAIN RULES TO APPLY.—Rules similar
to the following rules shall apply for purposes of this
section:
‘‘(A) Section 220(f )(8) (relating to treat-
ment on death).
‘‘(B) Section 408(e)(2) (relating to loss of
exemption of account where individual engages
in prohibited transaction).
‘‘(C) Section 408(e)(4) (relating to effect
of pledging account as security).
‘‘(D) Section 408(g) (relating to commu-
nity property laws).
‘‘(E) Section 408(h) (relating to custodial
accounts).
‘‘(4) TIME WHEN PAYMENTS DEEMED MADE.—
For purposes of this section, a taxpayer shall be
deemed to have made a payment to a FFARRM Ac-
count on the last day of a taxable year if such pay-
ment is made on account of such taxable year and
is made on or before the due date (without regard
to extensions) for filing the return of tax for such
taxable year.
‘‘(5) INDIVIDUAL.—For purposes of this sec-
tion, the term ‘individual’ shall not include an estate
or trust.
‘‘(6) DEDUCTION NOT ALLOWED FOR SELF-EM-
PLOYMENT TAX.—The deduction allowable by reason
of subsection (a) shall not be taken into account in
determining an individual’s net earnings from self-
employment (within the meaning of section 1402(a))
for purposes of chapter 2.
‘‘(g) REPORTS.—The trustee of a FFARRM Account
shall make such reports regarding such Account to the
Secretary and to the person for whose benefit the Account
is maintained with respect to contributions, distributions,
and such other matters as the Secretary may require
under regulations. The reports required by this subsection
shall be filed at such time and in such manner and fur-
nished to such persons at such time and in such manner
as may be required by such regulations.’’.
(b) TAX ON EXCESS CONTRIBUTIONS.—
(1) Subsection (a) of section 4973 (relating to
tax on excess contributions to certain tax-favored ac-
counts and annuities) is amended by striking ‘‘or’’
at the end of paragraph (3), by redesignating para-
graph (4) as paragraph (5), and by inserting after
paragraph (3) the following new paragraph:
‘‘(4) a FFARRM Account (within the meaning
of section 468C(d)), or’’.
(2) Section 4973 is amended by adding at the
end the following new subsection:
‘‘(g) EXCESS CONTRIBUTIONS
TO FFARRM AC-
COUNTS.—For purposes of this section, in the case of a
FFARRM Account (within the meaning of section
468C(d)), the term ‘excess contributions’ means the
amount by which the amount contributed for the taxable
year to the Account exceeds the amount which may be con-
tributed to the Account under section 468C(b) for such
taxable year. For purposes of this subsection, any con-
tribution which is distributed out of the FFARRM Ac-
count in a distribution to which section 468C(e)(2)(B) ap-
plies shall be treated as an amount not contributed.’’.
(3) The section heading for section 4973 is
amended to read as follows:
‘‘SEC. 4973. EXCESS CONTRIBUTIONS TO CERTAIN AC-
COUNTS, ANNUITIES, ETC.’’.
(4) The table of sections for chapter 43 is
amended by striking the item relating to section
4973 and inserting the following new item:
‘‘Sec. 4973. Excess contributions to certain accounts, annuities,
etc.’’.
(c) TAX ON PROHIBITED TRANSACTIONS.—
(1) Subsection (c) of section 4975 (relating to
tax on prohibited transactions) is amended by add-
ing at the end the following new paragraph:
‘‘(6) SPECIAL RULE FOR FFARRM ACCOUNTS.—
A person for whose benefit a FFARRM Account
(within the meaning of section 468C(d)) is estab-
lished shall be exempt from the tax imposed by this
section with respect to any transaction concerning
such account (which would otherwise be taxable
under this section) if, with respect to such trans-
action, the account ceases to be a FFARRM Ac-
count by reason of the application of section
468C(f )(3)(A) to such account.’’.
organization that exceeds the amount
which would have been paid if such pay-
ment met the requirements prescribed
under section 482.
‘‘(ii) ADDITION
TO
TAX
FOR
VALU-
ATION MISSTATEMENTS.—The tax imposed
by this chapter on the controlling organiza-
tion shall be increased by an amount equal
to 20 percent of such excess.’’.
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to payments received or ac-
crued after December 31, 2000.
(2) PAYMENTS SUBJECT TO BINDING CONTRACT
TRANSITION
RULE.—If the amendments made by
section 1041 of the Taxpayer Relief Act of 1997 did
not apply to any amount received or accrued in the
first 2 taxable years beginning on or after the date
of the enactment of this Act under any contract de-
scribed in subsection (b)(2) of such section, such
amendments also shall not apply to amounts re-
ceived or accrued under such contract before Janu-
ary 1, 2001.
SEC. 7. CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF
FOOD INVENTORY.
(a) IN GENERAL.—Subsection (e) of section 170 (re-
lating to certain contributions of ordinary income and cap-
ital gain property) is amended by adding at the end the
following new paragraph:
‘‘(7) SPECIAL RULE FOR CONTRIBUTIONS OF
FOOD INVENTORY.—For purposes of this section—
‘‘(A) CONTRIBUTIONS BY NON-CORPORATE
TAXPAYERS.—In the case of a charitable con-
tribution of food by a taxpayer, paragraph
(3)(A) shall be applied without regard to wheth-
er or not the contribution is made by a corpora-
tion.
‘‘(B) LIMIT ON REDUCTION.—In the case
of a charitable contribution of food which is a
qualified contribution (within the meaning of
paragraph (3)(A), as modified by subparagraph
(A) of this paragraph)—
‘‘(i) paragraph (3)(B) shall not apply,
and
‘‘(ii) the reduction under paragraph
(1)(A) for such contribution shall be no
greater than the amount (if any) by which
the amount of such contribution exceeds
twice the basis of such food.
‘‘(C) DETERMINATION
OF
BASIS.—For
purposes of this paragraph, if a taxpayer uses
the cash method of accounting, the basis of any
qualified contribution of such taxpayer shall be
deemed to be 50 percent of the fair market
value of such contribution.
‘‘(D) DETERMINATION
OF
FAIR
MARKET
VALUE.—In the case of a charitable contribu-
tion of food which is a qualified contribution
(within the meaning of paragraph (3), as modi-
fied by subparagraphs (A) and (B) of this para-
graph) and which, solely by reason of internal
standards of the taxpayer, lack of market, or
similar circumstances, or which is produced by
the taxpayer exclusively for the purposes of
transferring the food to an organization de-
scribed in paragraph (3)(A), cannot or will not
be sold, the fair market value of such contribu-
tion shall be determined—
‘‘(i) without regard to such internal
standards, such lack of market, such cir-
cumstances, or such exclusive purpose, and
‘‘(ii) if applicable, by taking into ac-
count the price at which the same or simi-
lar food items are sold by the taxpayer at
the time of the contribution (or, if not so
sold at such time, in the recent past).
‘‘(E) 
TERMINATION.—This 
paragraph
shall not apply to any contribution made during
any taxable year beginning after December 31,
2004.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 2001.
SEC. 8. INCOME AVERAGING FOR FARMERS AND FISHER-
MEN NOT TO INCREASE ALTERNATIVE MIN-
IMUM TAX LIABILITY.
(a) IN GENERAL.—Section 55(c) (defining regular
tax) is amended by redesignating paragraph (2) as para-
graph (3) and by inserting after paragraph (1) the fol-
lowing new paragraph:
‘‘(2) COORDINATION WITH INCOME AVERAGING
FOR
FARMERS
AND
FISHERMEN.—Solely for pur-
poses of this section, section 1301 (relating to aver-
aging of farm and fishing income) shall not apply in
computing the regular tax.’’.
(b) ALLOWING INCOME AVERAGING
FOR FISHER-
MEN.—
(1) IN GENERAL.—Section 1301(a) is amended
by striking ‘‘farming business’’ and inserting ‘‘farm-
ing business or fishing business’’.
(2) DEFINITION OF ELECTED FARM INCOME.—
(A) IN
GENERAL.—Clause (i) of section
1301(b)(1)(A) is amended by inserting ‘‘or fish-
ing business’’ before the semicolon.
(B) CONFORMING AMENDMENT.—Subpara-
graph (B) of section 1301(b)(1) is amended by
inserting ‘‘or fishing business’’ after ‘‘farming
business’’ both places it occurs.
(3) DEFINITION OF FISHING BUSINESS.—Sec-
tion 1301(b) is amended by adding at the end the
following new paragraph:
‘‘(4) FISHING
BUSINESS.—The term ‘fishing
business’ means the conduct of commercial fishing
as defined in section 3 of the Magnuson-Stevens
Fishery Conservation and Management Act (16
U.S.C. 1802).’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 9. COOPERATIVE MARKETING INCLUDES VALUE-
ADDED PROCESSING THROUGH ANIMALS.
(a) IN GENERAL.—Section 1388 (relating to defini-
tions and special rules) is amended by adding at the end
the following new subsection:
‘‘(k) COOPERATIVE MARKETING INCLUDES VALUE-
ADDED PROCESSING THROUGH ANIMALS.—For purposes
of section 521 and this subchapter, the term ‘marketing
the products of members or other producers’ includes feed-
ing the products of members or other producers to cattle,
hogs, fish, chickens, or other animals and selling the re-
sulting animals or animal products.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 10. DECLARATORY JUDGMENT RELIEF FOR SECTION
521 COOPERATIVES.
(a) IN GENERAL.—Section 7428(a)(1) (relating to
declaratory judgments of tax exempt organizations) is
amended by striking ‘‘or’’ at the end of subparagraph (B)
and by adding at the end the following new subparagraph:
‘‘(D) with respect to the initial qualifica-
tion or continuing qualification of a cooperative
as described in section 521(b) which is exempt
from tax under section 521(a), or’’.