Posted March 11, 2014
In a case which could have
broad implications for passive investors in farmland, the U.S. Tax Court ruled
that a non-farmer’s Conservation Reserve Program (CRP) income is subject to the
self-employment tax, according to a Western Farm Press article available here. An article by Iowa State University’s Center
for Agricultural Law and Taxation is available here.
Since the 1980s, the IRS consistently took the position
that a taxpayer “had to be materially participating in a farming operation for
CRP payments to be subject to self-employment tax” and the courts agreed. In 2003, however, the IRS altered its
position: “the mere signing of a CRP contract resulted in the taxpayer being engaged
in the trade or business of farming with the result that the CRP payments were
subject to the self-employment tax.”
In Morehouse v. C.I.R., 140 T.C. No. 16 (2013), available here,
the U.S. Tax Court agreed with the IRS, ruling that the CRP payments received
by non-farmer participants are subject to the self-employment tax because they
are engaged in the trade or business of farming as a result of signing the CRP
contract.
Morehouse was a non-farmer who lived in Texas. He inherited land in South Dakota and put a
majority of the property into CRP, hiring a local farmer to maintain the CRP
land consistent with the CRP contract.
He reported the CRP income in Schedule E, where it was not subject to
the self-employment tax.
The Tax Court ruled that CRP payments may not
constitute “rents from real estate” and are not exempt from self-employment tax
under I.R.C. § 1402(a)(1). In addition,
the issue of whether a taxpayer is engaged in a trade or business as required
by I.R.C. § 1402(a) is a fact question.
The Court concluded that by signing the CRP contract and fulfilling its
obligations, Morehouse’s involvement was regular and continuous and constituted
a trade or business, thus making the CRP payments subject to the
self-employment tax.
For more information on agricultural tax issues, please
visit the National Agricultural Law Center’s website here.
