Minding Ag's Business

Pay Limits and Burden of Proof

The U.S. Attorney in Springfield Illinois announced that it had reached a $5.364 million civil settlement with a prominent Illinois farm family, as DTN's Chris Clayton reported Wednesday, and that's been the buzz in farm country since (see DTN Farm Business page). The central Illinois family farm business, collectively known as Dowson Farms, had been newsworthy for setting the bar on sizzling cash rents in recent years, much to local farmers' dismay. But Illinois farm management firms held them in high regard as tenants, both for their farming practices and their returns.

Now the Justice Department alleges the farm's principal owners violated the False Claims Act by creating sham business entities and claiming farm subsidies they were not entitled to receive between 2002 through 2008. If that sounds like ancient history, welcome to our legal system.

The issue in question is the now defunct "three-entity rule," which died in the 2008 Farm Act. Under that restriction, no person could receive payments subject to these rules from more than three businesses they owned, such as partnerships or limited liability companies. Using this provision, an individual was effectively allowed to receive payments to himself and on up to two additional entities in which the individual help up to a 50% interest. According to the U.S. Attorney, the Dowsons allegedly created multiple limited partnerships to conceal their interests, using employees as straw men.

In their defense, the Dowsons note that they cleared their arrangements with the Farm Service Agency in advance, both at the county and state level. Neither side admitted wrong doing in this settlement and no criminal charges are involved.

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One irony is that the 2008 Farm Act linked farm payments to Social Security numbers, to prevent overpayments, so potential abuses have been limited since then. Todd Jennison, an agricultural consultant for Kennedy and Coe in Garden City, Kan., would not comment specifically on the Dowson case, but thinks USDA is stepping up enforcement even though farm program payments have waned in recent years. "It's probably anecdotal, but it appears USDA is being more vigilant in the reviews," he told DTN.

To be actively engaged in farming and eligible for payments, an individual must have share risk, divide business returns commensurate with their contributions and provide either land, equipment or capital and either active labor or active management, Jennison said. Farm operators should document their contributions--including the hours they work and minutes from regular management meetings. To qualify for a labor contribution, one must work at least 1,000 hours per year.

IRS generally has a seven-year statute of limitations on tax disputes. However, once the government opens a negotiation in cases like this, it can go back as far as it feels justified, a spokeswoman for the U.S. Attorney in Springfield said. In essence, there is no statute of limitations on farm program payments so growers must keep records indefinitely. Often, the government seeks back payments, penalties and interest, so a 12-year-old offense can add up, Jennison said.

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