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.