To amend the Internal Revenue Code of 1986 to provide for Farm and Ranch Risk Management Accounts, and for other purposes.

February 26, 2003

Mr. HULSHOF (for himself and Mr. SANDLIN) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to provide for Farm and Ranch Risk Management Accounts, and for other purposes.

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

SECTION 1. SHORT TITLE.

This Act may be cited as the `Farm and Ranch Risk Management Act'.

SEC. 2. FARM AND RANCH RISK MANAGEMENT ACCOUNTS.

(a) IN GENERAL- Subpart C of part II of subchapter E of chapter 1 of the Internal Revenue Code of 1986 (relating to taxable year for which deductions taken) is amended by inserting after section 468B the following:

`SEC. 468C. FARM AND RANCH RISK MANAGEMENT ACCOUNTS.

`(a) DEDUCTION ALLOWED- In the case of an individual engaged in an eligible farming business or commercial fishing, there shall be allowed as a deduction for any taxable year the amount paid in cash by the taxpayer during the taxable year to a Farm and Ranch Risk Management Account (hereinafter referred to as the `FARRM Account').

`(b) LIMITATION-

`(1) CONTRIBUTIONS- The amount which a taxpayer may pay into the FARRM Account for any taxable year shall not exceed 20 percent of so much of the taxable income of the taxpayer (determined without regard to this section) which is attributable (determined in the manner applicable under section 1301) to any eligible farming business or commercial fishing.

`(2) DISTRIBUTIONS- Distributions from a FARRM Account may not be used to purchase, lease, or finance any new fishing vessel, add capacity to any fishery, or otherwise contribute to the overcapitalization of any fishery. The Secretary of Commerce 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 business (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 `commercial fishing' has the meaning given such term by section (3) of the Magnuson-Stevens Fishery Conservation 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 taxpayer.

`(d) FARRM ACCOUNT- For purposes of this section--

`(1) IN GENERAL- The term `FARRM Account' means a trust created or organized in the United States for the exclusive benefit of the taxpayer, 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 allowed 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 demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section.

`(C) The assets of the trust consist entirely of cash or of obligations which have adequate 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 FARRM Account shall be treated for purposes of this title as the owner of such Account and shall be subject to tax thereon in accordance 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 paragraph (2), there shall be includible in the gross income of the taxpayer for any taxable year--

`(A) any amount distributed from a FARRM Account of the taxpayer during such taxable year, and

`(B) any deemed distribution under--

`(i) subsection (f)(1) (relating to deposits not distributed within 5 years),

`(ii) subsection (f)(2) (relating to cessation in eligible farming business), and

`(iii) subparagraph (A) or (B) of subsection (f)(3) (relating to prohibited transactions and pledging account as security).

`(2) EXCEPTIONS- Paragraph (1)(A) shall not apply to--

`(A) any distribution to the extent attributable to income of the Account, and

`(B) the distribution of any contribution paid during a taxable year to a FARRM Account to the extent that such contribution exceeds 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 FARRM 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 taxpayer files such return for such year).

`(B) NONQUALIFIED BALANCE- For purposes of subparagraph (A), the term `nonqualified balance' means any balance in the Account on the last day of the taxable year which is attributable to amounts deposited in such Account before the 4th preceding taxable year.

`(C) ORDERING RULE- For purposes of this paragraph, distributions from a FARRM Account (other than distributions of current income) shall be treated as made from deposits in the order in which such deposits were made, beginning 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 eligible farming business or commercial fishing, there shall be deemed distributed from the FARRM Account of the taxpayer an amount equal to the balance in such Account (if any) at the close of such disqualification period. For purposes of the preceding 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 treatment 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 community 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 FARRM Account on the last day of a taxable year if such payment 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 section, the term `individual' shall not include an estate or trust.

`(6) DEDUCTION NOT ALLOWED FOR SELF-EMPLOYMENT 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 FARRM 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 furnished 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 of such Code (relating to tax on excess contributions to certain tax-favored accounts and annuities) is amended by striking `or' at the end of paragraph (3), by redesignating paragraph (4) as paragraph (5), and by inserting after paragraph (3) the following:

`(4) a FARRM Account (within the meaning of section 468C(d)), or'.

(2) Section 4973 of such Code is amended by adding at the end the following:

`(g) EXCESS CONTRIBUTIONS TO FARRM ACCOUNTS- For purposes of this section, in the case of a FARRM 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 contributed to the Account under section 468C(b) for such taxable year. For purposes of this subsection, any contribution which is distributed out of the FARRM Account in a distribution to which section 468C(e)(2)(B) applies shall be treated as an amount not contributed.'.

(3) The section heading for section 4973 of such Code is amended to read as follows:

`SEC. 4973. EXCESS CONTRIBUTIONS TO CERTAIN ACCOUNTS, ANNUITIES, ETC.'.

(4) The table of sections for chapter 43 of such Code is amended by striking the item relating to section 4973 and inserting the following:

`Sec. 4973. Excess contributions to certain accounts, annuities, etc.'.

(c) TAX ON PROHIBITED TRANSACTIONS-

(1) Subsection (c) of section 4975 of such Code (relating to tax on prohibited transactions) is amended by adding at the end the following:

`(6) SPECIAL RULE FOR FARRM ACCOUNTS- A person for whose benefit a FARRM Account (within the meaning of section 468C(d)) is established 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 transaction, the account ceases to be a FARRM Account by reason of the application of section 468C(f)(3)(A) to such account.'.

(2) Paragraph (1) of section 4975(e) of such Code is amended by redesignating subparagraphs (E) and (F) as subparagraphs (F) and (G), respectively, and by inserting after subparagraph (D) the following:

`(E) a FARRM Account described in section 468C(d),'.

(d) FAILURE TO PROVIDE REPORTS ON FARRM ACCOUNTS- Paragraph (2) of section 6693(a) of such Code (relating to failure to provide reports on certain tax-favored accounts or annuities) is amended by redesignating subparagraphs (C) and (D) as subparagraphs (D) and (E), respectively, and by inserting after subparagraph (B) the following:

`(C) section 468C(g) (relating to FARRM Accounts),'.

(e) CLERICAL AMENDMENT- The table of sections for subpart C of part II of subchapter E of chapter 1 of such Code is amended by inserting after the item relating to section 468B the following:

`Sec. 468C. Farm and Ranch Risk Management Accounts.'.

(f) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

END