Last year, the U.S. Tax Court said a non-farmer’s Conservation Reserve Program income is subject to self-employment tax. The ruling, which involved a resident of Texas who inherited farm land in South Dakota, caused quite a bit of consternation in tax circles.
“Since the late 1980s, the IRS and the courts have issued various rulings, advices, notices and opinions concerning the issue of whether CRP payments are subject to self-employment tax,” says Roger McEowen, Leonard Dolezal Professor of Agricultural Law at Iowa State University. “Until 2003, the IRS always 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.
“The courts agreed. But, in 2003, the IRS took the position that the mere signing of a CRP contract resulted in the signing taxpayer being engaged in the trade or business of farming with the result that CRP payments were subject to self-employment tax. Last year, the U.S. Tax Court agreed with the IRS.”
Read more about the “Top Ten” ag law & tax issues from 2013 .
This particular case involved an individual who lived in Texas and inherited farmland in South Dakota. “He was not a farmer and, in fact, worked for the University of Texas when he inherited this farmland,” said McEowen. “He bought out his siblings and wound up owning all of the farmland. He hired a local farmer who initially farmed it for him. Then he put it in the CRP and had the local farmer meet the contract obligations.”
The taxpayer who was collecting the CRP rents didn’t report the CRP rents as subject to self-employment tax on the basis that he was not a farmer. He did not have Schedule F income or was participating materially with respect to the CRP so it was not subject to self-employment tax.
The U.S. Tax Court ruling is being appealed. McEowen expects a ruling could be handed down in late 2014 or in 2015.
Related: Top ten agricultural law developments of 2012