Rollin J. & Maureen B. Morehouse v. Commissioner ( 2013 )

140 T.C. No. 16UNITED STATES TAX COURT
ROLLIN J. MOREHOUSE AND MAUREEN B. MOREHOUSE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 823-11. Filed June 18, 2013.
During 2006 and 2007 P-H received payments under the U.S.
Department of Agriculture Conservation Reserve Program (CRP).
Respondent determined that P-H was liable for self-employment tax
under I.R.C. sec. 1401 on the CRP payments. P-H claims that the
CRP payments are not includible in his self-employment income
because he was neither engaged in nor derived the CRP payments
from operation of a trade or business. Alternatively, P-H claims that
the CRP payments are excluded from the calculation of his net
earnings from self-employment under I.R.C. sec. 1402(a)(1) because
the CRP payments constituted “rentals from real estate”.
Held: P-H’s CRP payments are includible in his self-
employment income under I.R.C. sec. 1401 because he was engaged
in a trade or business during the years in issue and there was a nexus
between his trade or business and the CRP payments he received.
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Held, further, P-H’s CRP payments are not “rentals from real
estate” within the meaning of I.R.C. sec. 1402(a)(1). Wuebker v.
Commissioner, 110 T.C. 431 (1998), rev’d, 205 F.3d 897 (6th Cir.
2000), is overruled.
Paul J. Quast and Neal J. Shapiro, for petitioners.
Blaine C. Holiday, for respondent.
MARVEL, Judge: In a notice of deficiency dated October 14, 2010,
respondent determined deficiencies with respect to petitioners’ Federal income tax
of $3,341 and $3,664 for 2006 and 2007, respectively. After concessions,1 the
sole issue for decision is whether petitioners are liable for self-employment tax
under section 14012 on payments they received under the U.S. Department of
Agriculture (USDA) Conservation Reserve Program (CRP).
1
On their 2006 Schedule E, Supplemental Income and Loss, petitioners
reported that they paid management fees of $2,001 with respect to property in
Grant County, South Dakota, that Rollin J. Morehouse owned. See infra p. 3.
Petitioners concede that their tax return preparer erroneously entered $2,001 and
that they actually paid management fees of $201 with respect to the property.
2
Unless otherwise indicated, all section references are to the Internal
Revenue Code, as amended and in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure. Some amounts
have been rounded to the nearest whole number.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of
facts is incorporated herein by this reference. Petitioners resided in Minnesota
when they filed their petition.
I. Background
Mr. Morehouse (hereinafter, petitioner) holds a bachelor’s degree in
business from the University of Minnesota. Following graduation he worked as a
regional sales manager and as an associate publisher. In 1987 petitioner began
providing marketing and fundraising services for the University of Texas at
Austin.
In 1994 petitioner acquired 503 acres of land in Grant County, South
Dakota (Grant County property), 320 acres of land in Roberts County, South
Dakota (Roberts County property), and 400 acres of land in Day County, South
Dakota (Day County property) (collectively, South Dakota properties). He
acquired the South Dakota properties through inheritance and by purchasing
various undivided interests in the properties from his relatives. All of the land was
tillable cropland, with the exception of: (1) a gravel pit on the Grant County
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property; and (2) 129 acres of the Roberts County property, which petitioner’s
father had placed in the CRP program.3
Petitioner, who lived in Texas at the time he acquired the South Dakota
properties, did not personally farm any of the land. Instead, he rented the tillable
portions of the South Dakota properties to various individuals who farmed their
rented portions.4
In 2003 petitioner left his position at the University of Texas and moved
with his family to Minnesota. Upon moving to Minnesota petitioner became the
primary caregiver for his four sons. Although petitioner retired from the corporate
sphere, he continued to manage his various investments and property interests,
including his interests in the South Dakota properties.
3
The CRP contract with respect to the 129-acre parcel in Roberts County
was conveyed with the land to petitioner in 1994. In 1999 petitioner in his
capacity as owner of the Roberts County property entered into a new CRP contract
with respect to the 129-acre parcel. See infra p. 8.
4
Petitioner rented the Grant County property and the remaining 191 acres of
the Roberts County property until 1997, when he placed that land in the CRP. See
infra p. 6. He rented the Day County property from the time of his acquisition
through the years in issue.
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II. Petitioner’s Participation in the CRP
A. The CRP in General
The CRP was established pursuant to the Food Security Act of 1985. See
Food Security Act of 1985, Pub. L. No. 99-198, secs. 1231-1236, 99 Stat. at 1509-
1514 (codified as amended at 16 U.S.C. secs. 3831-3835 (2012)); see also 7
C.F.R. pt. 1410 (2011). Under the CRP, the USDA may enter into contracts with
owners and operators of land “to conserve and improve the soil, water, and
wildlife resources of such land and to address issues raised by State, regional, and
national conservation initiatives.” 16 U.S.C. sec. 3831(a). Owners and operators
of land agree to implement a conservation plan and refrain from using the land for
agricultural purposes. Id. sec. 3832(a). In return, the USDA shares the cost of
carrying out the conservation plan and pays to the owner or operator an “annual
rental payment”.5 Id. sec. 3833.
5
Tit. 16 U.S.C. sec. 3833(2) (2012) provides that the annual “rental”
payment is intended to compensate owners and operators for “(A) the conversion
of highly erodible cropland normally devoted to the production of an agricultural
commodity on a farm or ranch to a less intensive use; and (B) the retirement of any
cropland base and allotment history that the owner or operator agrees to retire
permanently.”
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B. Petitioner’s Enrollment in the CRP and the CRP Contracts
In 1997 petitioner submitted applications to the USDA, offering for
enrollment in the CRP the tillable land on the Grant County property as well as the
remaining 191 acres of the Roberts County property.
In 1997 the Grant County and Roberts County Farm Service Agency (FSA)
offices approved petitioner’s applications and accepted his land into the CRP.
Subsequently, the Commodity Credit Corporation (CCC) executed the resulting
CRP contracts with respect to the Grant County and Roberts County properties.
Petitioner personally assumed all obligations and responsibilities of compliance
under the CRP contracts.
With respect to the Grant County property, petitioner and the CCC executed
two contracts: (1) contract No. 262, covering 180 acres of land (contract 262);
and (2) contract No. 263, covering 251 acres of land (contract 263). Both Grant
County CRP contracts listed petitioner as the owner of the land and did not
identify anyone as the operator of the land. Contract 262 provided that the CCC
would pay to petitioner a first-year payment of $8,609 and an annual contract
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payment of $9,391.6 Contract 263 provided that the CCC would pay to petitioner
a first year payment of $12,405 and an annual contract payment of $13,533.7
Pursuant to a conservation plan attached to the Grant County CRP contracts,
petitioner agreed to: (1) maintain already established grass and legume cover for
the life of the contract; (2) “[e]stablish perennial vegetative cover on land
temporarily removed from agricultural production”, including pubescent or
intermediate wheatgrass, alfalfa, and sweet clover; and (3) engage in “pest control
and pesticide management” for the life of the contract. The CCC agreed to share
with petitioner the cost of establishing these conservation plans.
The Roberts County CRP contract covered 191 acres of petitioner’s land.
The Roberts County CRP contract listed petitioner as the owner of the land and
did not identify anyone as the operator of the land. The Roberts County CRP
contract provided that the CCC would make an annual contract payment of
$9,666.8
6
The “rental rate” under contract 262 was set at $52.26 per acre.
7
The “rental rate” under contract 263 was set at $53.83 per acre.
8
The “rental rate” under the Roberts County CRP contract was set at $50.50
per acre.
-8-
Pursuant to a conservation plan attached to the Roberts County CRP
contract, petitioner agreed to: (1) “[c]ontrol pests such as weeds, livestock, insects
and disease” and (2) “[e]stablish adapted native perenial [sic] vegetative cover”
including Western wheatgrass, green needlegrass, and alfalfa. The conservation
plan also provided an estimated cost share for the plan. Once the work was
completed, petitioner was required to provide to the CCC “a report of
performance” and “submit receipts and seed tags affiliated with practice
establishment”. The CCC agreed to share with petitioner the costs of establishing
the conservation plan.9
In June 1999 petitioner and the CCC executed a new CRP contract (1999
Roberts County CRP contract) with respect to the 129-acre parcel in Roberts
County that petitioner had acquired in 1994 already subject to a CRP contract.
The 1999 Roberts County CRP contract listed petitioner as the owner of the land
and did not identify any operator of the land. The 1999 Roberts County CRP
contract provided that the CCC would make an annual contract payment of
9
In September 2006 the CCC agreed to modify the Roberts County CRP
contract and extend the expiration date of that contract to September 30, 2012.
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$5,757.10 Under the 1999 Roberts County CRP contract, petitioner agreed to: (1)
maintain already established grass and legume cover for the life of the contract;
(2) “establish native perennial vegetative cover on land temporarily removed from
agricultural production”; (3) engage in “pest control and pesticide management”
for the life of the contract; and (4) control weeds by either mowing or chemical
means. The 1999 Roberts County CRP contract prohibited petitioner from haying
or grazing the enrolled land.
C. Implementation of the Conservation Plans
Petitioner hired Wallace Redlin to carry out some of petitioner’s obligations
under the CRP contracts.11 Mr. Redlin was a retired farmer who had placed all of
10
The “rental rate” under the 1999 Roberts County CRP contract was set at
$44.63 per acre.
11
On July 30, 1997, petitioner mailed to the Grant County FSA a letter, titled
as an addendum. In the letter petitioner indicated that he will “assume all
obligations and responsibilities of contractual compliance as may be administered
by and through FSA or otherwise pertaining to subject lands by independent
contract with WALLACE L. REDLIN, Jr. for machine hire, monitoring and
supervision as essential and necessary on all land identified in the CRP contract”.
Petitioner testified that he sent the addendum to the Grant County FSA to clarify
how he planned to comply with the CRP contract considering the fact that he
resided in Texas at the time.
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his land in the CRP. Mr. Redlin previously had rented the Grant County and
Roberts County properties from petitioner for use in Mr. Redlin’s farming
operations.
In 1998 petitioner purchased the required seeding materials and shipped the
materials to Mr. Redlin. Mr. Redlin then performed the initial seedbed preparation
and seeding. In 2000, pursuant to the 1999 Roberts County CRP contract, Mr.
Redlin plowed a portion of the land and reseeded it with various grasses.
D. Termination of CRP Contract 262
In 2001 Grant County FSA employees discovered that petitioner was
engaging in gravel quarry activity on the Grant County property and had been
using part of the property for a road. The Grant County FSA, acting on behalf of
the USDA, terminated petitioner’s participation in the CRP with respect to nine
acres of the Grant County property and required him to refund $2,540, an amount
equal to all prior payments with respect to that portion of the property, plus
interest and liquidated damages. The Grant County FSA also provided for the
implementation of CRP contract No. 262-A, covering the remaining 171 acres of
the Grant County property, which continued to be enrolled in the CRP program.
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III. Petitioner’s Activities With Respect to the South Dakota Properties
Although Mr. Redlin performed some of petitioner’s obligations under the
CRP contracts at petitioner’s request and direction, petitioner fulfilled other
obligations, including the making of annual certifications that he was
implementing the conservation plans in accordance with the CRP contracts.
Between 1997 and 2007 petitioner participated in three CRP haying programs with
respect to the South Dakota properties. In July 2002 petitioner requested authority
for emergency haying or grazing.12 Petitioner signed the necessary forms and
made donations to ranchers and farmers as provided for by the CRP.
Petitioner also personally purchased materials needed to implement the
conservation plans, which he then shipped to Mr. Redlin. Petitioner paid Mr.
Redlin for the work he performed to satisfy some of petitioner’s obligations under
the CRP contracts. Petitioner also sought and received from the USDA cost-
sharing payments for the seeding and weeding activities on the Grant County and
Roberts County properties. Petitioner gathered various documents, including
12
Petitioner donated the hay and/or the haying or grazing privileges to a
livestock producer and accordingly was not required to reduce the amount of his
CRP payment with respect to that land.
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receipts and invoices, and submitted these documents along with official
applications in order to receive the cost-sharing payments.
In addition to his activities with respect the CRP contracts, petitioner
engaged in various other activities with respect to the South Dakota properties.
Petitioner allowed individuals to hunt on portions of the South Dakota properties.
He traveled to meetings with various parties with the express purpose of
negotiating agreements with people interested in hunting on the South Dakota
properties. Petitioner also operated a gravel pit on the Grant County property.
During the years at issue petitioner sold gravel to the Grant County Highway
Department and Lura Township, the local township. Petitioner also rented the
Day County property.
Between 1994 and 2007 petitioner visited the South Dakota properties
several times each year. In 2006 petitioner visited the South Dakota properties
four times. In 2007 petitioner visited the South Dakota properties two times. He
typically visited the South Dakota properties for two to three days at a time. On
such trips petitioner would visit the gravel pit to ensure that there had been no
unauthorized excavation or removal of gravel, drive to each of the South Dakota
properties, and meet with officials at the FSA and the Grant County Highway
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Department. He also would meet with individuals who had an interest in renting
one of his properties or in hunting on the properties.
IV. Petitioner’s Income With Respect to the South Dakota Properties
In 2006 petitioner received CRP payments of $22,449 and $15,423 with
respect to the Grant County and Roberts County properties, respectively.
In 2007 petitioner received income of $25,869 with respect to the Grant
County property as follows: (1) CRP payments of $22,449; (2) a payment of
$2,515 from Mr. Redlin for hunting privileges; and (3) a payment of $905 from
Mike Krakow for the right to cut hay on the land. He received income of $17,281
with respect to the Roberts County property as follows: (1) CRP payments of
$15,423; and (2) a payment of $1,858 from the South Dakota Game and Fish
Department for participation in a walk-in hunting program.
V. Petitioners’ Tax Reporting and the Notice of Deficiency
Petitioners timely filed Forms 1040, U.S. Individual Income Tax Return, for
2006 and 2007. On their returns petitioners identified their occupations as “self-
employed”. On attached Schedules E petitioners reported income and expenses
with respect to their three properties as follows:
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2006 Schedule E
Day County Grant County Roberts County
property property property
Rents received $22,478 $22,449 $15,423
Total expenses 3,287 7,606 4,662
Net income 19,191 14,843 10,761
2007 Schedule E
Day County Grant County Roberts County
property property property
Rents received $37,962 $25,869 $17,281
Total expenses 3,017 5,194 4,287
Net income 34,945 20,675 12,994
On October 14, 2010, respondent mailed to petitioners the notice of
deficiency for 2006 and 2007 determining that: (1) petitioners erroneously
reported their CRP payments as farm rental income on their returns; (2) petitioners
should have reported the CRP payments as income on a Schedule F, Profit or Loss
From Farming, for each year. Respondent also determined that the CRP payments
constituted self-employment income and therefore determined that petitioners had
unreported self-employment income of $25,60413 and $28,39114 for 2006 and
13
This figure represents the net income petitioner received in 2006 with
respect to the Grant County and Roberts County properties. As stated supra
p. 13, in 2006 petitioner’s only income with respect to the Grant County and
Roberts County properties consisted of CRP payments.
14
This figure represents the net CRP payments petitioner received in 2007
(continued...)
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2007, respectively.15 Respondent allowed petitioners additional deductions with
respect to the self-employment tax liabilities.
OPINION
A taxpayer’s self-employment income is subject to self-employment tax.
Sec. 1401(a) and (b). Self-employment tax is assessed and collected as part of the
income tax, must be included in computing any income tax deficiency or
overpayment for the applicable tax period, and must be taken into account for
estimated tax purposes. Sec. 1401; see also sec. 1.1401-1(a), Income Tax Regs.
Self-employment income generally is defined as “the net earnings from self-
employment derived by an individual”. Sec. 1402(b). Section 1402(a) defines
“[n]et earnings from self-employment” as “the gross income derived by an
individual from any trade or business carried on by such individual, less the
deductions allowed by this subtitle which are attributable to such trade or
14
(...continued)
with respect to the Grant County and Roberts County properties. As discussed
supra p. 13, in 2007 petitioner received additional income of $5,278 with respect
to these properties. Respondent did not include this additional income in
calculating petitioners’ unreported self-employment income.
15
Respondent appears to have accepted that the income generated by
petitioner’s rental activity with respect to the Day County property is not subject
to self-employment tax, presumably because of the provisions of sec. 1402(a)(1).
See also Henderson v. Flemming, 283 F.2d 882, 888 (5th Cir. 1960).
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business”. See also sec. 1.1402(a)-1, Income Tax Regs. In computing a
taxpayer’s net earnings from self-employment, section 1402(a)(1) provides:
[T]here shall be excluded rentals from real estate and from personal
property leased with the real estate (including such rentals paid in
crop shares)[16] together with the deductions attributable thereto,
unless such rentals are received in the course of a trade or business as
a real estate dealer; except that the preceding provisions of this
paragraph shall not apply to any income derived by the owner or
tenant of land if (A) such income is derived under an arrangement,
between the owner or tenant and another individual, which provides
that such other individual shall produce agricultural or horticultural
commodities (including livestock, bees, poultry, and fur-bearing
animals and wildlife) on such land, and that there shall be material
participation by the owner or tenant (as determined without regard to
16
In 2008 Congress amended sec. 1402(a) to read: “[T]here shall be
excluded rentals from real estate and from personal property leased with the real
estate (including such rentals paid in crop shares, and including payments under
section 1233(2) of the Food Security Act of 1985 (16 U.S.C. 3833(2)) to
individuals receiving benefits under section 202 or 223 of the Social Security
Act)”. Under sec. 1402(a) as amended, payments made under 16 U.S.C. sec.
3833(2) to individuals who were receiving benefits under sec. 202 or sec. 223 of
the Social Security Act (SSA) are excluded from the calculation of net earnings
from self-employment. Tit. 16 U.S.C. sec. 3833(2) (2012) refers to payments
received from the USDA under the CRP. See supra p. 5. The amendment applies
to CRP payments made after December 31, 2007. Food, Conservation, and
Energy Act of 2008, Pub. L. No. 110-246, sec. 15301(c), 122 Stat. at 2263. SSA
sec. 202 provides for the payment of old-age and survivors insurance benefits. 42
U.S.C. sec. 402 (2012). SSA sec. 223 provides for the payment of disability
insurance benefits. 42 U.S.C. sec. 423 (2012).
Petitioner received the payments at issue before December 31, 2007.
Furthermore, petitioner does not contend, and he has not introduced any evidence
to show, that he was receiving benefits under the SSA. Accordingly, the 2008
amendment to sec. 1402(a) is inapplicable to our analysis herein.
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any activities of an agent of such owner or tenant) in the production
or the management of the production of such agricultural or
horticultural commodities, and (B) there is material participation by
the owner or tenant (as determined without regard to any activities of
an agent of such owner or tenant) with respect to any such
agricultural or horticultural commodity.[17] * * *
The self-employment tax provisions are construed broadly in favor of treating
income as earnings from self-employment. Braddock v. Commissioner, 95 T.C.
639, 644 (1990); Hornaday v. Commissioner, 81 T.C. 830, 834 (1983); Hennen v.
Commissioner, T.C. Memo. 1999-306; S. Rept. No. 81-1669 (1950), 1950-2 C.B.
302, 354.
Respondent contends that the CRP payments are taxable as self-employment
income because petitioner derived the CRP payments from his trade or business of
conducting an environmentally friendly farming operation.18
17
The regulations under sec. 1402(a)(1) refer to the farm rental income that
is included in a taxpayer’s net earnings from self-employment as includible farm
rental income. See, e.g., sec. 1.1402(a)-4(b), Income Tax Regs. In this Opinion
we will refer to such income as includible farm rental income.
18
In arguing that petitioner was engaged in an active trade or business,
respondent relies on determinations made by the Grant County FSA that petitioner
was “actively engaged in a farming operation”. This Court previously has held
that a determination by the USDA that an individual was actively engaged in
farming “is not a determination for Federal income tax purposes that * * * [the
individual was] actively engaged in a trade or business for purposes of section
162(a).” Hasbrouck v. Commissioner, T.C. Memo. 1998-249, 1998 WL 373337,
at *12, aff’d without published opinion, 189 F.3d 473 (9th Cir. 1999).
(continued...)
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Petitioner contends that the CRP payments are not income from a trade or
business and therefore are not includible in his self-employment income.
Petitioner contends that he was not involved in the trade or business of farming,
that his minimal activities with respect to the CRP land did not cause him to
become active in the trade or business of farming, and that there was no nexus
between the CRP payments received and his business activities. In the alternative,
petitioner contends that the CRP payments are excluded from the calculation of
net earnings from self-employment under the “rentals from real estate” exclusion
in section 1402(a)(1).
We examine the parties’ contentions below, taking into account the burden
of proof, which rests upon petitioners. See Rule 142(a)(1). Respondent’s
determinations are presumed to be correct; petitioners must prove that
respondent’s determinations are erroneous in order to rebut the presumption and
satisfy their burden of proof. See id.; Welch v. Helvering, 290 U.S. 111, 115
(1933).
18
(...continued)
Accordingly, the Grant County FSA determination does not control our decision
as to whether petitioner was actively engaged in a trade or business for purposes
of sec. 162(a).
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I. Self-Employment Income
A taxpayer’s net earnings from self-employment include the gross income
derived from any trade or business carried on by the taxpayer. Sec. 1402(a)(1).
The term “derived from” “necessitates a nexus between the income and the trade
or business actually carried on by the taxpayer.” Bot v. Commissioner, 353 F.3d
595, 599 (8th Cir. 2003), aff’g 118 T.C. 138 (2002); see also McNamara v.
Commissioner, 236 F.3d 410, 413 (8th Cir. 2000), rev’g T.C. Memo. 1999-333.
The term “trade or business” “shall have the same meaning as when used in
section 162 (relating to trade or business expenses)”. Sec. 1402(c). The
applicable regulations provide that “[t]he trade or business must be carried on by
the individual, either personally or through agents or employees.” Sec. 1.1402(a)-
2(b), Income Tax Regs. Under these principles, payments constitute self-
employment income if they: “(1) are derived (2) from a trade or business (3)
carried on by * * * [the taxpayer or his] agents.” Bot v. Commissioner, 353 F.3d
at 599; see also Wuebker v. Commissioner, 205 F.3d 897, 901 (6th Cir. 2000),
rev’g 110 T.C. 431 (1998). Accordingly, we must decide: (1) whether petitioner
carried on a trade or business during the years in issue, whether personally or
through an agent; and (2) if so, whether there was a nexus between the trade or
business conducted and the income petitioner received.
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A. Existence of a Trade or Business
1. Analysis
To be engaged in a trade or business with respect to which deductions are
allowable under section 162, the taxpayer must be involved in the activity with
continuity and regularity, and the taxpayer’s primary purpose for engaging in the
activity must be for income or profit. Commissioner v. Groetzinger, 480 U.S. 23,
35 (1987). Additionally, the taxpayer’s business operations must have
commenced. Goodwin v. Commissioner, 75 T.C. 424, 433 (1980), aff’d without
published opinion, 691 F.2d 490 (3d Cir. 1982). Whether a taxpayer is engaged in
a trade or business must be ascertained from a review of all relevant facts and
circumstances. Commissioner v. Groetzinger, 480 U.S. at 35.
The record establishes that petitioner expanded his participation in the CRP
over the years and that he participated in the CRP with continuity and regularity
during 2006 and 2007. The record further establishes that petitioner did so with
the primary purpose of making a profit. After his initial experience with the CRP
petitioner decided to enroll the Grant County and Roberts County properties in the
CRP because he could get a higher rate of return from participating in the CRP
than from leasing the properties for farming. He negotiated and executed the CRP
contracts and, by doing so, obligated himself, as the owner of the properties to
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satisfy significant contractual obligations regarding planting, maintenance, and use
of the properties enrolled in the CRP and compliance with CRP requirements.
Although petitioner did not actually perform the planting and maintenance work
required by the CRP, he hired an individual, Mr. Redlin, to perform the work
according to CRP specifications, purchased necessary materials, such as seed, and
provided them to Mr. Redlin, and regularly inspected the properties to ensure that
they were being maintained and used in accordance with the CRP contractual
obligations. On these facts we find that petitioner engaged in the business of
participating in the CRP and managing his CRP properties with the primary intent
of making a profit.
Petitioner contends that his actual participation in the CRP and his work
complying with the CRP contract requirements were de minimis and did not
constitute farming. He maintains that all physical labor necessary to plant, seed,
weed, mow, and maintain the properties (property maintenance activities) in
accordance with the CRP contracts was performed by his contractor and should
not be attributed to him. It is immaterial, however, that the property maintenance
activities were carried out by someone other than petitioner. As noted supra, for
purposes of section 1402 a taxpayer may conduct his trade or business personally
or through an agent. Sec. 1.1402(a)-2(b), Income Tax Regs.; Rev. Rul. 60-32,
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1960-1 C.B. 23 (stating that similar payments made to individuals under the Soil
Bank Act were includible in the individual’s net earnings from self-employment if
the individual operated his farm either personally or through agents or
employees).19 A taxpayer who hires another “to render the services necessary to
fulfill” the taxpayer’s obligations under a contract is nonetheless liable for self-
employment tax with respect to the income the taxpayer receives pursuant to that
contract. Moorhead v. Commissioner, T.C. Memo. 1993-314, 1993 WL 267200,
at *6.
19
Rev. Rul. 60-32, 1960-1 C.B. 23, 26, states in pertinent part:
Payments and benefits attributable to the acreage reserve
program are includible in determining the recipient’s net earnings
from self-employment if he operates his farm personally or through
agents or employees. This is also true if his farm is operated by
others and he participates materially in the production of
commodities, or management of such production, within the meaning
of section 1402(a)(1) * * *. * * * If he does not so operate or
materially participate, payments received are not to be included in
determining net earnings from self-employment.
The Internal Revenue Service (IRS) has stated that Notice 2006-108, 2006-2 C.B.
1118, discussed infra pp. 30-34, would render Rev. Rul. 60-32, supra, obsolete.
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As a participant in the CRP, petitioner, either directly or through Mr. Redlin
as his agent,20 regularly and continuously: (1) satisfied seeding and weed control
20
Neither party addresses whether, under applicable State law, Mr. Redlin
was petitioner’s agent. Because South Dakota has the most significant
relationship to petitioner and Mr. Redlin and the transaction at issue, whether Mr.
Redlin was petitioner’s agent is governed by South Dakota law. See Stockmen’s
Livestock Exch. v. Thompson, 520 N.W.2d 255, 257-258, 258 n.1 (S.D. 1994).
Under South Dakota law, the elements required to create an agency relationship
are “‘manifestation by the principal that the agent shall act for him, the agent’s
acceptance of the undertaking, and the understanding of the parties that the
principal is to be in control of the undertaking.’” Tisdall v. Tisdall, 422 N.W.2d
105, 107-108 (S.D. 1988) (quoting Southard v. Hansen, 376 N.W.2d 56, 58 (S.D.
1985)). In Tisdall, the Supreme Court of South Dakota found that a principal-
agent relationship existed when the principal directed the agent to distribute
revenue according to applicable statutory guidelines.
Petitioner hired Mr. Redlin to perform all of the physical farming duties
required under the CRP contracts. Mr. Redlin apparently accepted petitioner’s
offer, as indicated by Mr. Redlin’s completion of the seeding, weeding, mowing
and maintenance activities required under the CRP contracts. Although petitioner
testified that he never directed Mr. Redlin’s activities, we reject the testimony as it
is apparent from the record that petitioner initially directed Mr. Redlin to perform
the property maintenance activities required by the CRP contracts and retained the
ability to direct and control the work that Mr. Redlin was to perform to comply
with the CRP contracts. See id. Accordingly, we find that Mr. Redlin was
petitioner’s agent.
We note that Notice 2006-108, supra, states that “[p]articipation in a CRP
contract meets the criteria to be a trade or business irrespective of whether the
participant performs the required activities personally or arranges for his
obligations to be satisfied by a third party.” Notice 2006-108, supra, does not
discuss the apparent requirement under sec. 1.1402(a)-2(b), Income Tax Regs.,
that the trade or business be carried on by the individual either personally, or
through the individual’s employee, as that term is defined in sec. 1402(d), or
(continued...)
- 24 -
obligations with respect to the Grant County and Roberts County properties as
required under the CRP contracts; (2) visited the Grant County and Roberts
County properties to ensure that the properties maintained their status as CRP
properties; (3) filed annual certifications; (4) participated in emergency haying
programs; (5) requested cost-sharing payments; and (6) made decisions regarding
the profitability of keeping the Grant County and Roberts County properties
enrolled in the CRP. Regardless of whether some or all of these activities qualify
as farming, we find that petitioner was engaged in the business of participating in
the CRP and that he enrolled, maintained, and managed multiple properties subject
to CRP contracts with the primary intent of making a profit.
2. Additional Support
Our conclusion is supported by and is consistent with existing caselaw and
the administrative position of the IRS set forth in Notice 2006-108, 2006-2 C.B.
1118, which was released on December 5, 2006. It is also consistent with
Congress’ enactment in 2008 of a limited exclusion for CRP payments made to
20
(...continued)
agent, as that term is defined under applicable State law. Because we find that Mr.
Redlin was petitioner’s agent, we need not decide whether an individual’s
participation in a CRP contract constitutes a trade or business under sec. 1402(a)
where the individual arranges for a third party to perform the obligations required
by the CRP contract and the third party is neither an employee nor an agent of the
individual.
- 25 -
taxpayers receiving Social Security retirement or disability benefits. We explain
below.
a. Caselaw
This Court previously has addressed the proper treatment of CRP payments
for self-employment tax purposes. Wuebker v. Commissioner, 110 T.C. 431;21
Ray v. Commissioner, T.C. Memo. 1996-436. However, we are unable to find any
case other than Ray that addresses whether and to what extent a taxpayer who
receives CRP payments is engaged in a trade or business. While there is very little
law focusing on whether and to what extent participation in the CRP constitutes a
trade or business, Bot v. Commissioner, 118 T.C. 138, provides guidance
regarding the proper treatment of analogous payments for self-employment tax
purposes. Accordingly, we examine each of these decisions and their application
to the case at bar.
21
In Wuebker v. Commissioner, 110 T.C. 431 (1998), rev’d, 205 F.3d 897(6th Cir. 2000), this Court considered whether the taxpayers were liable for self-
employment tax on CRP payments they had received. However, in that Opinion
this Court did not address whether the taxpayers were engaged in a trade or
business but instead addressed only whether the CRP payments were excluded
from the taxpayers’ net earnings from self-employment as “rentals from real
estate” under sec. 1402(a)(1). In Wuebker v. Commissioner, 205 F.3d 897, the
U.S. Court of Appeals for the Sixth Circuit addressed whether the CRP payments
derived from the taxpayers’ farming business but did not decide whether the
taxpayers were in the trade or business of farming. We discuss both of the
Wuebker decisions later in this Opinion. See infra pp. 37-39.
- 26 -
In Ray v. Commissioner, T.C. Memo. 1996-436, the taxpayer was engaged
in the trade or business of farming. He then purchased land that had been placed
in the CRP by the previous owner. The taxpayer fulfilled the previous owner’s
obligations under the CRP contract and received CRP payments in exchange. This
Court concluded that the taxpayer received the CRP payments in connection with
his ongoing trade or business of farming. See also Hasbrouck v. Commissioner,
T.C. Memo. 1998-249, aff’d, 189 F.3d 473 (9th Cir. 1999), in which the
Commissioner, on the basis of this Court’s decision in Ray, conceded that the
taxpayers were involved in the trade or business of farming and therefore entitled
to the deductions claimed on their Schedules F. In so conceding, the
Commissioner noted that the only difference between the two factual scenarios
was that the taxpayer in Ray was a farmer when he acquired the CRP land,
whereas the taxpayers in Hasbrouck had no prior farming experience.
In Bot v. Commissioner, 118 T.C. at 141, this Court addressed the treatment
for self-employment tax purposes of payments taxpayers received from an
agricultural cooperative (MCP). The taxpayers were retired farmers who
purchased MCP cooperative stock and units of equity participation, which
“specified the maximum number of bushels of corn the member could be required
to produce and deliver to” MCP each year. Id. at 141-142. The taxpayers also
- 27 -
entered into uniform marketing agreements (UMAs) with MCP. Id. at 141. In
return, MCP was required under the UMAs to process the corn its members
produced and make payments to each individual member equal to at least 80% of
the loan value of each bushel of corn delivered by the individual plus a value-
added payment, representing “[the] value added to the corn as a result of its
processing”, a payment from MCP’s earnings in accordance with its bylaws, and,
in some instances, a storage fee and interest. Id. at 143. The taxpayers satisfied
their production and delivery obligations using corn that MCP held in its option
pool, rather than corn they personally had grown on their farm, and accordingly
received only the value-added payments. Id. at 142, 144. The Commissioner
determined that the value-added payments were includible in the calculation of the
taxpayers’ net earnings from self-employment. Id. at 144.
In deciding whether the taxpayers’ actions constituted a trade or business,
this Court acknowledged that although the taxpayers had retired from farming,
they continued to participate in MCP and their participation constituted a trade or
business. Id. at 147. In particular, this Court stated:
Although petitioners retired from daily farming in 1987 and
turned over their farm operation to the sons, petitioners nevertheless
continued to maintain their membership in MCP from 1987 through
at least 1995. As active members of MCP during 1994 and 1995 [the
years in issue,] petitioners, either directly or through the sons as their
- 28 -
agents, regularly and continuously (1) maintained their status as
producers under the UMAs, (2) made decisions regarding how to
satisfy their production and delivery obligations * * * under the
UMAs, (3) acquired option pool corn which they used to satisfy their
production and delivery obligations to MCP several times each year,
and (4) sold corn and corn products for profit through MCP.
Id. at 147-148 (fn. ref. omitted). In rejecting the taxpayers’ contention that their
involvement was too minimal to constitute a trade or business, this Court relied on
the fact that the taxpayers “regularly and continuously purchased and sold corn
with the intention of making a profit” and purchased additional units of equity
over time. Id. at 149.
The U.S. Court of Appeals for the Eighth Circuit affirmed the decision of
the Tax Court. Bot v. Commissioner, 353 F.3d 595. While the Court of Appeals
emphasized the unique nature of the cooperative arrangement, the court also
distinguished the taxpayers’ participation in the cooperative, which constituted a
trade or business, from an individual’s investment in a corporation or gas well,
which was merely a passive investment. Id. at 599-600. Unlike a passive
investment, the investment in MCP required the taxpayers “to do more than hold
the stock or equity units” in order to receive payment. Id. at 600.
In Ray v. Commissioner, T.C. Memo. 1996-436, this Court relied on the fact
that the taxpayer was engaged in the trade or business of farming before and
- 29 -
during his participation in the CRP in finding that the CRP payments were
includible in his self-employment income. However, we do not read Ray to make
the taxpayer’s engagement in the business of farming before enrolling property in
the CRP determinative of whether CRP payments constitute income from self-
employment. A taxpayer is not required to have prior experience in a particular
trade or business to be permitted deductions under section 162; what is required is
that the taxpayer have commenced an activity that qualifies as a trade or business.
Goodwin v. Commissioner, 75 T.C. at 433.
Like the taxpayers in Bot v. Commissioner, 118 T.C. 138, petitioner was an
active participant in a payment program (in this case the CRP) who regularly and
continuously maintained his status as a participant, maintained the eligibility
status of his properties, made decisions regarding how to satisfy his obligations
under the CRP contracts, including hiring Mr. Redlin, entering into the 1999
Roberts County CRP, removing a portion of the Grant County property from the
CRP, and participating in the emergency haying programs, and he engaged in such
activities for profit. Furthermore, because the receipt of CRP payments depended
on petitioner’s continued maintenance of his land in accordance with the CRP
contracts, his participation in the CRP was not merely a passive investment.
Whether petitioner’s activities with respect to the CRP constituted farming or
- 30 -
simply continuous and regular participation in an activity for profit, we are
convinced that petitioner was engaged in a trade or business as defined by section
162.22
b. Notice 2006-108
On December 5, 2006, the IRS released Notice 2006-108, supra, which
contained a proposed revenue ruling regarding whether CRP payments were
includible in net income from self-employment for purposes of calculating a
taxpayer’s liability for self-employment tax, and solicited comments concerning
the conclusions reached in the proposed revenue ruling. The IRS in Notice 2006-
108, supra, explained that it had previously issued an announcement,
Announcement 83-43, Q&A-3, 1983-10 I.R.B. 29, regarding the self-employment
tax treatment of payments made by the USDA under land diversion programs in
22
In deciding whether a full-time gambler who made wagers solely for his
own account was engaged in a trade or business for Federal income tax purposes,
the Supreme Court in Commissioner v. Groetzinger, 480 U.S. 23, 27 n.7 (1987),
stated as follows: “Judge Friendly some time ago observed that ‘the courts have
properly assumed that the term [trade or business] includes all means of gaining a
livelihood by work, even those which would scarcely be so characterized in
common speech.’ Trent v. Commissioner, 291 F.2d 669, 671 (CA2 1961).”
(Emphasis added.)
The concept of work that the term “trade or business” embodies is incorporated
into the CRP contracts, which impose meaningful obligations and duties on
petitioner that he had to perform with continuity and regularity in order to receive
the CRP payments.
- 31 -
which it stated that a farmer who receives cash or a payment in kind from the
USDA for participation in a land diversion program is liable for self-employment
tax on the payments, a conclusion that was consistent with guidance provided in
Rev. Rul. 60-32, supra, with respect to two earlier land diversion programs. The
IRS also noted, however, that Rev. Rul. 60-32, supra, states that participants in
land diversion programs are not subject to self-employment tax on the payments if
the participants do not operate a farm or materially participate in the farming
activities. The IRS explained that the conclusion in Rev. Rul. 60-32, supra, is
relevant only with respect to the exception from net income from self-employment
provided in section 1402(a)(1) for “rentals from real estate”. It cited with approval
and relied on the opinion of the U.S. Court of Appeals for the Sixth Circuit in
Wuebker v. Commissioner, 205 F.3d 897, for the proposition that CRP payments
do not fall within the rental income exclusion but pointed out that the taxpayer in
Wuebker was engaged in the business of farming when he received the CRP
payments. Because the IRS had received questions regarding whether CRP
payments received by a recipient who is retired or not otherwise actively engaged
in farming are subject to self-employment tax, it issued the proposed revenue
ruling to respond to those questions.
- 32 -
In Notice 2006-108, 2006-2 C.B. at 119, the proposed revenue ruling holds
that CRP rental payments (including incentive payments) from the USDA to (1)
“a farmer actively engaged in the trade or business of farming who enrolls land in
CRP and fulfills the CRP contractual obligations personally” (taxpayer A) and (2)
“an individual not otherwise actively engaged in the trade or business of farming
who enrolls land in CRP and fulfills the CRP contractual obligations by arranging
for a third party to perform the required activities” (taxpayer B) are both includible
in net income from self-employment and are not excluded from net income from
self-employment as “rentals from real estate” under section 1402(a)(1). The IRS
explained the holdings of the proposed revenue procedure as follows:
Participation in a CRP contract is a trade or business for both A and
B. The participant is obligated to perform a number of activities,
including but not limited to tilling, seeding, fertilizing, and weed
control. Although more extensive activities are required at the
beginning of the contract term than later, the obligation to perform
activities extends throughout the ten-year period, giving participation
in CRP the continuity and regularity necessary to be considered a
trade or business. Also, both A and B enrolled land in the CRP
program to earn a profit. Participation in a CRP contract meets the
criteria to be a trade or business irrespective of whether the
participant performs the required activities personally or arranges for
his obligations to be satisfied by a third party. Thus, the trade or
business treatment is the same for A and B even though A meets the
CRP requirements for maintenance of the land himself whereas B
arranges for someone else to do it. Furthermore, the CRP meets the
criteria to be a trade or business based on the activities required
directly under the program and without being affected by whether the
- 33 -
participant is otherwise engaged in farming or any other trade or
business. * * * Thus, for both A and B, the CRP rental payments are
includible in their net income from self-employment.
Id., 2006-2 C.B. at 1120.
Although we are not obligated to defer to the IRS’ interpretation of a statute
as reflected in administrative pronouncements such as Notice 2006-108, supra,
see, e.g., Tax Analysts v. IRS, 416 F. Supp. 2d 119, 125-126 (D.D.C. 2006), the
notice sets forth the IRS’ interpretation of the statute and, consequently, “may
provide evidence of the proper construction of the statute”, Wells Fargo & Co. &
Subs. v. Commissioner, 224 F.3d 875, 886 (8th Cir. 2000) (discussing the
precedential value of private rulings), aff’g in part, rev’g in part Norwest Corp. &
Subs. v. Commissioner, 112 T.C. 89 (1999); see Nelson v. Commissioner, 568
F.3d 662, 665 (8th Cir. 2009) (adopting the framework set forth in Skidmore v.
Swift & Co., 323 U.S. 134, 140 (1944), in considering what weight to give
revenue rulings), aff’g 130 T.C. 70 (2008); see also Berger v. Xerox Corp. Ret.
Income Guar. Plan, 338 F.3d 755, 762 (7th Cir. 2003) (discussing the precedential
value of IRS notices); Esden v. Bank of Boston, 229 F.3d 154, 168-169 (2d Cir.
2000) (discussing the precedential value of IRS notices). In this instance, we
conclude that the IRS’ analysis of the CRP and the payments made thereunder and
the classification of the CRP payments for self-employment tax purposes as set
- 34 -
forth in Notice 2006-108, supra, while not controlling, are nevertheless well-
grounded and consistent with the analysis set forth herein.
c. Congressional Intent Regarding CRP Payments
Several attempts have been made to convince Congress to enact a blanket
exclusion for self-employment tax purposes with respect to CRP payments, but
Congress did not enact proposed legislation amending section 1402 to exclude
CRP payments from self-employment tax entirely. See 153 Cong. Rec. 9170-9171
(2007); 149 Cong. Rec. 15950-15951 (2003); 147 Cong. Rec. 1776-1783 (2001);
133 Cong. Rec. 8557 (1987). Congress did, however, enact a partial exclusion.
Following the issuance of Notice 2006-108, supra, Congress in 2008 amended
section 1402(a)(1) to exclude CRP payments from the calculation of a taxpayer’s
net earnings from self-employment where the taxpayer is receiving Social Security
retirement or disability payments.23 Food, Conservation, and Energy Act of 2008,
Pub. L. No. 110-246, sec. 15301(a), 122 Stat. at 2263. If we were to interpret
section 1402 to exclude entirely CRP payments from the calculation of net
earnings from self-employment as petitioners contend we should, such an
23
The Staff of the Joint Committee on Taxation has noted that CRP
payments generally constitute self-employment income, except in the case of
taxpayers who receive Social Security retirement or disability benefits. See Staff
of J. Comm. on Taxation, Description of the Social Security Tax Base, at 22 (J.
Comm. Print 2011).
- 35 -
interpretation would render the enactment of the 2008 exclusion meaningless. By
enacting only a limited exclusion with respect to taxpayers receiving Social
Security retirement or disability payments who are also receiving CRP payments,
Congress has evidenced an intent not to exclude all CRP payments in calculating a
taxpayer’s net earnings from self-employment under section 1402.
Having found that petitioner, either individually or through his agent, was
engaged in a trade or business during the years at issue, we examine what would
appear to be self-evident--whether there was a nexus between the CRP payments
petitioner received and his business activity.
B. “Derived From” Requirement
Petitioner received the CRP payments as consideration for fulfilling his
obligations under the CRP contracts for the years in issue. Such consideration
provides the required nexus between the CRP payments and his trade or business
of participating in the CRP during the years in issue. See Bot v. Commissioner,
353 F.3d at 600; see also Wuebker v. Commissioner, 205 F.3d at 902-903 (holding
that CRP payments had a direct nexus to the taxpayers’ trade or business of
farming); Ray v. Commissioner, T.C. Memo. 1996-436.
- 36 -
II. Petitioner’s Alternative Argument Under Section 1402(a)(1)
Section 1402(a)(1) provides that “rentals from real estate” shall be excluded
from the calculation of net earnings from self-employment. Petitioner
alternatively contends that the CRP payments are excluded from his net earnings
from self-employment under section 1402(a)(1) because the payments constituted
rental income.24 Respondent contends that petitioner is not eligible for the “rentals
from real estate” exception under section 1402(a)(1) because petitioner did not
receive the CRP payments in exchange for the USDA’s occupancy or use of the
South Dakota properties but instead received the payments as compensation for
conducting his farming operation in an environmentally friendly manner.
Accordingly, we must decide whether the CRP payments constituted “rentals from
real estate” within the meaning of section 1402(a)(1).
Neither section 1402 nor any other self-employment tax provision of the
Code defines the term “rentals from real estate”. See also Wuebker v.
Commissioner, 205 F.3d at 903. However, this Court has stated that the exception
for “rentals from real estate” must be “narrowly construed.” Johnson v.
Commissioner, 60 T.C. 829, 833 (1973); see also Delno v. Celebrezze, 347 F.2d
24In so arguing, petitioner relies, in part, on the fact that the CRP contracts
identified the payments as “rental payments”.
- 37 -
159, 165 (9th Cir. 1965). Ordinarily, rent is defined as compensation “for the use
or occupancy of property”. Wuebker v. Commissioner, 205 F.3d at 904.
In Wuebker v. Commissioner, 110 T.C. at 437, the taxpayers argued that the
CRP payments they received constituted “rentals from real estate”. In addressing
the taxpayers’ contention, this Court first noted that rent ordinarily is defined “as
compensation for the occupancy or use of property.” Id. at 436. The Court went
on to find that the CRP statute, the applicable regulations, and the CRP contract
identified the payments as rental payments. Id. at 438. After briefly discussing
the taxpayers’ obligations under the CRP contracts, this Court concluded that
In imposing the above-described restrictions on the use of the
land, the primary purpose of the CRP contract was to effectuate the
statutory intention of converting highly erodible croplands to soil
conserving uses. The services that petitioner was required to perform
over the contract term included maintaining the vegetative cover,
controlling weeds, insects, and pests on the land, and fulfilling certain
reporting requirements. These service obligations were not
substantial and were incidental to the primary purpose of the contract.
Thus, the CRP payments represented compensation for the use
restrictions on the land, rather than remuneration for petitioner’s
labor. * * *
Id. Accordingly, the Court held that the CRP payments qualified as “rentals from
real estate” under section 1402(a)(1). Id.The U.S. Court of Appeals for the Sixth Circuit reversed this Court’s
decision, holding that the CRP payments were not “rentals from real estate” within
- 38 -
the meaning of section 1402(a). Wuebker v. Commissioner, 205 F.3d at 903-905.
The Court of Appeals began its analysis by stating that generally, rental payments
constitute consideration paid for either the use or occupancy of property. Id. at
904. The Court of Appeals quickly dispensed with the issue of whether the CRP
payments constituted consideration for the occupancy of the taxpayers’ property,
noting that the USDA’s access was limited to inspections of the property to
determine whether the taxpayers were in compliance with their CRP contract. Id.The Court of Appeals acknowledged that the second issue, i.e., whether the
CRP payments constituted consideration for the use of the taxpayers’ property,
presented a much closer question. Id. However, the Court of Appeals ultimately
decided that the USDA did not make the CRP payments in exchange for the use of
the taxpayers’ property:
Citing the many objectives of the CRP, such as the reduction of soil
erosion and the protection of the nation’s long-term food production
capabilities, the * * * [taxpayers] assert, and the dissent agrees, that
the government is “using” the land in question. We believe, however,
that such an argument impermissibly stretches the plain meaning of
the term “use,” especially in light of the narrow construction required
of the rentals-from-real-estate exclusion. * * * Although it is true that
the * * * [USDA] is seeking, and receiving, a public benefit by
conserving lands enrolled in the CRP, the * * * [taxpayers] continue
to maintain control over and free access to their premises. The
dissent reasons that, because the government “greatly reduced the
range of uses to which the * * * [taxpayers] could put their property,”
it exercised a level of control akin to “use.” We remain unpersuaded,
- 39 -
however, that the restrictions imposed by the * * * [USDA] on a
farmer’s use of his own land somehow translate into “use” by the
* * * [USDA] itself.
The essence of the program is to prevent participants from
farming the property and to require them to perform various activities
in connection with the land, both at the start of the program and
continuously throughout the life of the contract, with the
government’s access limited to compliance inspections. Given this
arrangement, we disagree with the Tax Court’s determination that the
* * * [taxpayers’] maintenance obligations were legally insignificant.
Id. at 903-905. In so holding, the Court of Appeals also stated that although the
CRP statute, the applicable regulations, and the contract referred to the amounts as
rental payments, such references did not dictate a conclusion that the CRP
payments fell within the “rentals from real estate” exclusion. Id. at 904.
Following the decision in Wuebker, the IRS issued Notice 2006-108, supra,
proposing a revenue procedure holding that “CRP rental payments are not
payments for the right to use or occupy real property. CRP rental payments are
made in exchange for conducting activities that meet the commitments of a CRP
contract. Therefore, CRP rental payments are not * * * rentals from real estate.”
Following the issuance of Notice 2006-108, supra, in 2008 Congress amended the
section 1402(a)(1) exclusion for “rentals from real estate”, effective for CRP
payments received after December 31, 2007, to exclude from the calculation of net
earnings from self-employment CRP payments made to taxpayers who are
- 40 -
receiving Social Security retirement or disability payments. However, Congress
neither enacted a blanket exclusion with respect to CRP payments nor evidenced
any disagreement with the analysis of the Court of Appeals for the Sixth Circuit in
Wuebker v. Commissioner, 205 F.3d 897.
Given the history recited above and our obligation to reconsider our
position following the reversal of our decision in Wuebker by the Court of
Appeals for the Sixth Circuit, we agree with and adopt the analysis of the Court of
Appeals in Wuebker v. Commissioner, 205 F.3d at 903-905, regarding whether,
under section 1402(a)(1), CRP payments are excluded from the calculation of net
earnings from self-employment as “rentals from real estate”. Under the CRP, a
participating owner who enrolls land in the program does not relinquish control of
the land to the USDA, and the USDA does not engage in any activities with
respect to the land that constitute “use” of the land by the USDA, applying a
commonsense definition of the term. See, e.g., Merriam Webster’s Collegiate
Dictionary 1297 (10th ed. 2002) (“to put into action or service: avail oneself of:
EMPLOY”). Taxpayers participating in the CRP “maintain control over and free
access to their premises”. Wuebker v. Commissioner, 205 F.3d at 904. Although
the CRP restricts the taxpayer’s use of the property, i.e., the taxpayer’s ability to
plant certain crops and engage in certain activities with respect to the enrolled
- 41 -
property, which the taxpayer agrees to in exchange for consideration, the
Government does not take possession of the property or acquire the right to use
the property for its own purposes.
Furthermore, we agree with the finding of the Court of Appeals for the Sixth
Circuit in Wuebker, that a taxpayer’s activities with respect to the CRP contract
are legally significant. Id. As discussed supra pp. 23-24, a taxpayer who
participates in a CRP contract, either individually or through an agent or
employee, must engage in property maintenance activities for the benefit of the
enrolled properties with regularity and perform periodic administrative and
reporting duties to satisfy his obligations under the contract and receive CRP
payments. The contractual obligations are substantial and require more than de
minimis action by the taxpayer or his agent to satisfy them.
Additionally, we note that the activities required of petitioner under the
CRP contracts were not limited to maintenance activities and instead included the
performance of duties not “usually or customarily rendered in connection with”
the mere rental of farmland. Johnson v. Commissioner, 60 T.C. at 831-832(holding that boat stall rental payments did not constitute “rentals from real estate”
where the taxpayer also provided various services at no additional charge,
including the providing gas and oils, selling sundry items, making arrangements
- 42 -
for boat repairs, recharging batteries, loaning boating equipment, providing fishing
tips, and checking for overdue boats); see also Delno, 347 F.2d at 165
(interpreting an identical provision of the SSA and finding that the individual’s
activities with respect to the property were not those usually rendered in
connection with the rental of property).
Although the CRP statute, the regulations, and the contracts refer to the
payments as rental payments, we do not find that the use of the term “rental”
dictates a conclusion that the payments constituted “rentals from real estate”. See,
e.g., Wuebker v. Commissioner, 205 F.3d at 904 (noting that Congress qualified
the use of the term “rent” with respect to CRP payments by providing that the CRP
payments would be made “in the form of rental payments”). We are not required
to treat as rental payments all payments labeled “rent”. Instead we may examine
the substance of so-called rent payments to decide whether the payments actually
constituted rent or some other type of income. See Opine Timber Co. v.
Commissioner, 64 T.C. 700, 709-711 (1975), aff’d without published opinion, 552
F.2d 368 (5th Cir. 1977). The CRP payments petitioner received appear to be
proceeds from his own use of the land rather than rent he received for permitting
another entity to use his land. See, e.g., Webster Corp. v. Commissioner, 25 T.C.
55, 61 (1955), aff’d, 240 F.2d 164 (2d Cir. 1957); Harding v. Commissioner, T.C.
- 43 -
Memo. 1970-179 (holding that conservation reserve program payments “are in the
nature of receipts from farm operations in that they replace income which
producers could have expected to realize from the normal use of the land devoted
to the program”); Rev. Rul. 60-32, supra. Such a conclusion is consistent with our
holding that the “rentals from real estate” exception should be narrowly construed.
Johnson v. Commissioner, 60 T.C. at 833.
We hold that the CRP payments at issue do not constitute “rentals from real
estate” within the meaning of section 1402(a)(1) and are not excluded from the
calculation of petitioner’s net earnings from self-employment for 2006 and 2007.
In so doing, we overrule our holding in Wuebker v. Commissioner, 110 T.C. 431.
III. Conclusion
We sustain respondent’s determination that the CRP payments petitioner
received in 2006 and 2007 must be included in the calculation of his net earnings
from self-employment under section 1401 and hence are subject to self-
employment tax. The CRP payments are not excluded from this calculation by
virtue of section 1402(a)(1) because the CRP payments do not constitute “rentals
from real estate”. Because we find that the CRP payments are not “rentals from
real estate”, we need not reach the issue of whether the CRP payments constituted
includible farm income.
- 44 -
We have considered all of the parties’ arguments. To the extent not
discussed above, we find those arguments to be irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.
Reviewed by the Court.
COLVIN, HALPERN, FOLEY, VASQUEZ, GALE, GOEKE, WHERRY,
KROUPA, HOLMES, GUSTAFSON, MORRISON, KERRIGAN, BUCH, and
LAUBER, JJ., agree with this opinion of the Court.
PARIS, J., did not participate in the consideration of this opinion.