CDFA Spotlight: Beginning Farmer Aggie Bond Programs By Stan Provus

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This article examines the tax-exempt, beginning farmer agricultural development bond program. Future Learning Corner articles will include a review of other areas of tax-exempt bond finance.

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This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel.

Under state beginning farmer agricultural bond programs, more commonly called “ Aggie Bond Programs,” typically a state issuer establishes an Aggie Bond Program, which can issue tax-exempt bonds to private investors. Approximately 16 states operate programs. Issuers include some CDFA members like the Arkansas Development Finance Authority as well as several specialized authorities like the Illinois Farm Development Authority. Bond investors include many agricultural banks in farming communities that directly purchase bonds, even though Aggie Bonds are not Bank Qualified.

The Internal Revenue Code (IRC) section 147(c) provides that no more than 25% of bond proceeds may be spent on land acquisitions, and no portion of the proceeds may be used for the acquisition of land for farming purposes. However, the Code provides an exception to this rule for land acquisitions by first time farmers. This rule applies to all qualified private activity bonds.

IRC section 147(c)(2)(c) defines “first-time farmer” (includes ranchers as well) as any individual: who has not at any time had direct or indirect ownership of, and material participation in, “substantial farmland,” AND who has not received tax-exempt financing more than $250,000, including any proposed financing.

“Substantial Farmland” means any parcel of land unless: it is smaller than 30 percent of the median size of a farm in the county where it is located, AND the value of the land does not exceed $125,000.

Other rules applicable to first-time farmers include:

• Ownership, material participation or financing by a spouse or minor child is treated as ownership and material participation by the individual first-time farmer. Parent’s ownership of a farm is not treated as ownership by the first-time farmer.

• If the property is being purchased from a closely-related family member, the family member must not have a financial interest in the farming operation.

• The individual acquiring the farmland must be the principal user of the land and must materially participate in the operation of the farm.

• If an individual had previously owned farmland and had disposed of the land due to insolvency, the individual will be considered a first-time farmer.

• First-time farmers may use bond proceeds to purchase new and used farm equipment, land, and other depreciable property. However, only up to $62,500 of the $250,000 aggregate financing limit may be used to acquire used agricultural equipment.