Tax Court - Farmland owner liable for self-employment tax on USDA conservation program payments 

June 18:  The U.S. Tax Court today issued an opinion upholding an IRS deficiency determination that conservation reserve program (CRP) payments made to the taxpayer by the U.S. Agriculture Department are to be included in the taxpayer’s net earnings from self-employment under section 1401 and thus are subject to self-employment tax. The Tax Court rejected the taxpayer’s claim that the CRP payments constituted “rentals from real estate.” Morehouse v. Commissioner, 140 T.C. No. 16 (June 18, 2013)

Read the Tax Court’s opinion [PDF 158 KB]

Summary

The issue in this case was whether amounts received by a taxpayer / owner of farmland under the USDA’s conservation reserve program (CRP) were subject to self-employment tax under section 1401.


Under the CRP, the USDA enters into contracts with owners and operators of land to conserve and improve the soil, water, and wildlife resources of the land and to address conservation initiatives. Owners and operators of the land agree to implement a conservation plan and to refrain from using the land for agricultural purposes. In return, the USDA shares the cost of carrying out the conservation plan, and pays the owner or operator an “annual rental payment.”


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.


During 2006 and 2007, the taxpayer received CRP payments from the USDA. The IRS determined that the taxpayer was liable for self-employment tax on these CRP payments. The taxpayer, however, countered that the CRP payments were not includible in self-employment income because:


  • He claimed that he was neither engaged in nor derived the CRP payments from the operation of a trade or business.
  • Alternatively, he claimed that the CRP payments constituted “rentals from real estate.”

The Tax Court today held that the CRP payments were includible in the taxpayer’s self-employment income because the taxpayer 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 that he received.


In addressing the alternative contention, the Tax Court concluded that the CRP payments were not “rentals from real estate” within the meaning of section 1402(a)(1).



For more information, contact KPMG’s National Director of Cooperative Tax Services:


David Antoni, in Philadelphia

(267) 256-1627


Or Associate National Director of KPMG’s Cooperative Tax Services


Brett Huston, in Sacramento


(916) 554-1654




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