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]


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

©2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.


Current and future KPMG clients may subscribe to TaxNewsFlash email alerts.

Email your contact information.

TaxNewsFlash-Cooperatives by year