What is in this article?:
- Legal issues will shape the future of American agriculture.
- Here are the most significant agricultural law and taxation developments of 2013.
We begin 2014 with our annual look at the most significant agricultural law and taxation developments of the previous year. Legal and tax issues continue to be at the forefront of developments that are shaping the present and future of American agriculture, and it is very likely that the involvement of the legal system in agriculture will continue to grow. The following is my list of what I view as the top ten agricultural law developments of 2013 based on their impact (or potential impact) on U.S. agricultural producers and the sector as a whole.
1. U.S. Tax Court says non-farmer’s Conservation Reserve Program (CRP) income is subject to self-employment tax. 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. 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 in a Chief Counsel Advice 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 the CRP payments were subject to self-employment tax. With a June 18, 2013 opinion, the U.S. Tax Court agreed. The implications of the court’s decision could be far reaching by subjecting mere passive investors in farmland and non-farming heirs to self-employment tax on CRP rental income.
The facts of the case are fairly straightforward. The petitioner was a non-farmer who lived in Texas and worked for the University of Texas. In 1994, he inherited farmland in South Dakota and bought other farmland from his family members. He never personally farmed the land, but rented it out. In 1997, he put the bulk of the property in the CRP while continuing to rent-out the non-CRP land. He hired a local farmer to maintain the CRP land consistent with the CRP contract (e.g., plant a cover crop and maintain weed control). In 2003, the petitioner moved to Minnesota, but still never personally engaged in farming activities. Consequently, the petitioner reported his CRP income on Schedule E where it was not subject to self-employment tax.
The Tax Court, in breaking with its own past precedent, ruled in favor of the IRS. The court determined that the petitioner was in the business of participating in the CRP with the intent to make a profit. The court skipped entirely over the material participation requirement and determined the existence of a trade or business on either the petitioner’s personal involvement with the CRP contract or through the local farmer that he hired to maintain the land. The court cited the Sixth Circuit’s decision in a 2000 case as controlling even though the taxpayer in that case was an active farmer and the petitioner in this case was a mere investor who had never been engaged in farming. Thus, the Sixth Circuit case was factually distinguishable. However, the Tax Court stated that the petitioner was in the business of maintaining “an environmentally friendly farming operation.” In addition, the Tax Court noted that a statutory change made by the 2008 Farm Bill was narrow in its application and showed a congressional intent not to exclude CRP payments from self-employment in their entirety.
While, as the Tax Court ruled, CRP payments may not constitute “rents from real estate” such that they are exempt from self-employment tax under the exception of I.R.C. §1402(a)(1), that determination has no bearing on the issue of whether the taxpayer is engaged in a trade or business as required by I.R.C. §1402(a). That question can only be answered by examining the facts pertinent to a particular taxpayer. Mere signing of a CRP contract and satisfying the contract terms via an agent is insufficient to answer that question.
The Tax Court’s decision is the first court opinion holding that a non-farmer’s CRP income is subject to self-employment tax simply by virtue of signing a CRP contract. As a result of the Tax Court’s decision, it is hard to imagine any situation where CRP rental income will not be subject to self-employment tax – especially in the Eighth Circuit (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota). The case is presently on appeal to the United States Court of Appeals for the Eighth Circuit. Morehouse v. Comr., 140 T.C. No. 16 (2013).