UNITED STATES TAX COURT

140 T.C. No. 16

UNITED STATES TAX COURT

ROLLIN J. MOREHO SE AND MAUREEN B. MOREHOUSE, Petitioners v.

COMMISSIO

OF INTERNAL.REVENUE, Respondent

Docket No. 823-11.

Filed June.18, 2013.

During 2006 and 2007 P-H received payments under the U.S.

Department of Agriculture Conservation Reserve Program (CRP)

Respondent detern ined that P.-H was liable for self-employment tax

under I.R.C. sec. 1401 on the CRP payments. P-H claims that the

CRP payments are ot includible in his self-employment income

because he was nei her engaged in nor derived the CRP payments

from operation of a trade or business. Alternatively, P-H claims that

the CRP paym,ents are excluded from the calculation of his net

earnings.from self-employment under I.R.C..sec. 1402(a)(1) because

the CRP payments constituted "rentals from real estate".

Held: P-H's CRP payments are includible in his selfemployment inco e under I.R.C. sec. 1401 because he was engaged

in a trade or busin ss during the years in issue and there was a nexus

between his trade cr business 'and the CRP payments he received.

SERVED Jun 18 2013

-2Held, further, P-H's CRP payments are not "rentals from real

estate" within the meaning of I.R.C. sec. 1402(a)(1). Wuebker v.

Commissioner, 110 T.C. 431 (1998), rev'd, 205 F.3d 897 (6th Cir.

2000), is overruled.

Paul J. Quast and Neal J. Shapiro, for petitioners.

Blaine C. Holiday, for respondent.

MARVEL, Judge: In a notice of deficiency dated October 14, 2010,

respondent determined deficiencies with respect to petitioners' Federal income tax

of $3,341 and $3,664 for 2006 and 2007, respectively. After concessions,' the

sole issue for decision is whether petitioners are liable for self-employment tax

under section 14012 on payments they received under the U.S. Department of

Agriculture (USDA) Conservation Reserve Program (CRP).

'On their 2006 Schedule E, Supplemental Income and Loss, petitioners

reported that they paid management fees of $2,001 with respect to property in

Grant County, South Dakota, that Rollin J. Morehouse owned. See infra p. 3:

Petitioners concede that their tax return preparer erroneously entered $2,001 and

that they actually paid management fees of $201 with respect to the property.

2Unless otherwise indicated, all section references are to the Internal

Revenue Code, as amended and in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure. Some amounts

have been rounded to the nearest whole number.

3FINDINGS OF FACT

Some of the facts 1.ave been stipulated and are so found. The stipulátion of

facts is incorporated herein by this reference. Petitioners resided in Minnesota

when they filed·their petition.

I.

Background

Mr. Morehouse (hereinafter, petitioner) holds a bachelor's degree in

business from the University of Minnesota. Following graduation he worked as a

regional sales manager and as an associate publisher. In 1987 petitioner began

providing marketing and fundraising services for the University of Texas at

Austin.

In 1994 petitioner µcquired 503 acres of land in Grant County, South

Dakota (Grant County pr perty), 320 acres of land in Roberts County, South

Dakota (Roberts County property), and 400 acres of land in Day County, South

Dakota (Day County pro erty) (collectively, South Dakota properties). He

acquired the South Dakota properties through inheritance and by purchasing

various undivided interests in the properties from his relatives. All of the land was

tillable cropland, with the exception of: (1) a gravel pit on'the Grant County

property; and (2) 129 acres of the Roberts County property, which petitioner's

father had placed iri the CRP program.3

Petitioner, who lived in Texas at the time he acquired the South Dakota

properties, did not personally farm any of the land. Instead, he rented the tillable

portions of the South Dakota properties to various individuals who farmed their

rented portions.4

In 2003 petitioner left his position at the University of Texas and moved

with his family to Minnesota. Upon moving to Minnesota petitioner became the

primary caregiver for his four sons. Although petitioner retired from the corporate

sphere, he continued to manage his various investments and property interests,

including his interests in the South Dakota properties.

3The CRP contract with respect to the 129-acre parcel in Roberts County

was conveyed with the land to petitioner in 1994. In 1999 petitioner in his

capacity as owner of the Roberts County property entered into a new CRP contract

with respect to.the 129-acre.parcel. See infra p. 8.

4Petitioner rented the Grant County property and the remaining 191 acres of

the Roberts County property until 1997, when he placed that land in the CRP. See

infra p. 6. He rented the Day County property from the time of his acquisition

through the years in issue.

-5II.

Petitioner's Participation in the CRP

-

A. m The CRP in General

The.CRP was esta lished pursuant to the Food Security Act of 1985. See

Food Security Act of 1985, Pub. L. No. 99-198, secs 1231-1236, 99 Stat. at 1.5091514 (codified as amended at 16 U:S.C. secs;3831-3835 (2012)); see also 7

C.F.R. pt. 1410.(2011). .Under the CRP, the USDA may enter into contracts with

owners and operators of and "to conserve and improve.the soil,.water, and

wildlife resources of such land and to address issues raised by State, regional, and

national conservation initiatives." 16 U.S;C. sec. 3831(a). Owners and operators

of land agree to implement a conservation plan and refrain.from using the;land for

agricultural purposes. Id. sec. 3832(a). In return, the USDA shares the cost of

carrying out the conser tion plan and pays to the owner or operator an "annual

rental payment".5 Id. sec. 3833.

5Tit. 16 U.S.C. sec. 3833(2) (2012) provides that the annual "rental"

payment is intended to e mpensate owners and operators for "(A) the conversion

of highly erodible cropland normally devoted to the production of an agricultural

commodity on a farm or :anch to a less intensive use; and (B) the retirement of any

cropland base and allotment history that the owner or operator agrees to retire

permanently."

-6B.

Petitioner's Enrollment in the CRP and the CRP Contracts

In 1997 petitioner submitted applications to the USDA, offering for

enrollment in the CRP the tillable land on the Grant County property as well as the

remaining 191 acres of the Roberts County property.

In 1.997 the Grant County and Roberts County Farm Service Agency (FSA)

offices approved petitioner's applications and accepted his land into the CRP

Subsequently, the Commodity Credit Corporation (CCC) executed the resulting

CRP contracts with respect to the Grant County and Roberts County properties

Petitioner personally assumed all obligations and responsibilities of compliance

under the CRP contracts.

With respect to the Grant County property, petitioner and the CCC executed

two contracts: (11) contract No. 262, covering 180 acres of land (contract 262);

and (2) contract No. 263, covering 251 acres of land (contract 263). Both Grant

County CRP contracts listed petitioner as the owner of the land and did not

identify anyone as the operator of the land. Contract 262 provided that the CCC

would pay to petitioner a first-year payment of $8,609 and an annual contract

-7payment of $9,391.? Contfact 263 provided that the CCC would pay to petitioner

a first year payment of $l2,405 andian·annual contract payment of $13,533.7

Pursuant to a conservation.plan attached to the Grant Còunty CRP contracts,

petitioner agreed to:. (1)'maintain alreády established grass and legume cover for

the life of the contract; (2) "[e]stablish perennial vegetative cover on land

temporarily removed -from agricultural production", including pubescent or

intermediate wheatgrass, alfalfa, and sweet clover; and (3) engage-in "pest control

and pesticide management" for the life of-the contract. The CCC agreed to share

with petitioner the cost of establishing these conservation plans.

The Roberts Coun:y CRP.contract covered 191 acres of petitioner's land.

The Roberts County CRP contract listed petitioner as the owner of the land and

did not identify anyone as the operator of the land. The Roberts County CRP

contract provided that the CCC would make an annual contract payment of

s

$9,666.8

6The "rental rate" under contract 262 was set at $52.26 per acre.

7The "rental rate" under contract 263 was set at $53.83 per acre.

8The "rental·rate" under the Roberts Coùnty CRP contract was set at $50.50

per acre.

-8Pursuant to a conservation plan attached to the Roberts County.CRP

contract, petitioner agreed to: (1) "[c]ontrol.pests such as weeds, livestock, insects

and disease",and (2)"[e]stablish adapted native perenial [sic] vegetative cover"

including Western wheatgrass, green needlegrass, and alfalfa. The conservation

plan also provided an estimated cost share for the plan. Once the work was ;

completed, petitioner was required to provide to the CCC "a report of

performance" and "submit receipts and seed tags affiliated with practice

establishment". The CCC agreed to share with petitioner the costs of establishing

the conservation plan.9

In June 1999 petitioner. and the CCC executed a new.CRP contract (1999

Roberts County CRP contract) with respect to the 129-acre parcel in Roberts

County that petitioner had acquired in 1994 already subject to a CRP contract.

The 1999 Roberts County CRP contract listed.petitioner as the owner of the land

and did not identify any operator of the land. The 1999 Roberts County CRP

contract provided that the CCC would make an annual contract payment of

9In September 2006 the CCC agreed to modify the Roberts County CRP

contract and extend the expiration date of that contract to September 30, 2012.

-9$5,757.1° Under the 1999 Roberts.County CRP contract,3petitioner agreed to: (1)

maintain already establis ied grass and legume cover for the life of the contract;

(2) "establish native perennial vegetative cover on land temporarily removed from

agricultural production"; (3) engage in "pest control and pesticide management"

for the life of the contrac:; and (4) control weeds b'y either mowing or chemical

means. The 1999 Roberts County CRP contract prohibited petifioner from haying

or grazing the enrolled land.

C.

Implementation of the Conservation Plans

.

Petitioner hired Wallace Redlin to carry out some of petitioner's obligations

under the CRP contracts.

Mr. Redlin was aretired farmer who had placed all of

1°The "rental rate" under the 1999 Roberts County CRP contract·was set at

$44.63 per acre.

"On July 30, 1997 petitioner mailed to the Grant County FSA a letter, titled

as an addendum. In the 1 tter petitioner indicated that he will "assume all

. .

obligations and responsi ilities of contractual compliance as may be administered

by and through3FSA or otherwise pertaining to subject lands by independent

contract with WALLACE L. REDLIN, Jr. for machine hire, monitoring and

supervision as essential and necessary on all land identified in the CRP contract".

Petitioner testified that he sent the addendum to the Grant County FSA to clarify

how he planned to comply with the CRP contract considering the fact that he

resided in Texas at the time.

- 10 his land in the CRP. Mr. Redlin previously had rented the Grant County and

Roberts County properties from petitioner for use in Mr. Redlin's farming

operations.

In 1998 petitioner purchased the required seeding materials and shipped the

materials to Mr. Redlin. Mr. Redlin then performed the initial seedbed preparation

and seeding.. In 2000, pursuant to the 1999 Roberts County CRP contract, Mr.

Redlin plowed a portion of the land and reseeded it with various grasses.

D.

Termination of CRP Contract 262

In 2001 Grant County FSA employees discovered that petitioner was

engaging in gravel quarry activity on the Grant County property and had been

using part of the property for a road. The Grant County FSA, acting on behalf of

the USDA, terminated petitioner's participation in the CRP with respect to nine

acres of the Grant County property and required him to refund $2,540, an amount

equal to all prior payments with respect to that portion of the property, plus

interest and liquidated damages. The Grant County FSA also provided for the

implementation of CRP contract No. 262-A, covering the remaining 171 acres of

the Grant County property, which continued to be enrolled in the CRP program.

. -=11 III.

Petitioner's Activiiies With Respect to the South Dakota Properties

Although Mr. Redlin performed some of petitioner's obligations under the

CRP contracts at petitioner's request and direction, petitioner fulfilled other

obligations, including the making of annual certifications that he was

implementing the conservation plans in accordance with the CRP contracts.

Between 1997 and 2007 3etitioner participated in three CRP haying programs with

respect to the South Dakota properties. In July 2002 petitioner requested authority

for emergency haymg or grazmg.

Petitioner signed.the,necessary forms_and

made donations to ranch rs and farmers as provided for by the CRP.

Petitioner also personally·purchased materials needed to implement-the

conservation plans, which he then shipped to Mr. Redlin. Petitioner paid Mr.

Redlin for the work he performed to satisfy some of petitioner's obligations under

the CRP contracts: ·Petitioner also sought and received from the USDA cosk

.

sharing payments for the seeding and.weeding activities on the Grant County and

Roberts County propertie s. Petitioner gathered varioüs documents, including

Petitioner donated the hay and/or the haying or grazing privileges to a

livestock producer and a cofdingly was not required to reduce the amount of his

CRP payment with respect to that lánd.

112 receipts and invoices, and submitted these documents along with official

applications in order to receive the cost-sharing payments.

In addition to his activities with respect the CRP contracts, petitioner

'

engaged in various other activities with respect to the South Dakota properties.

Petitioner allowed individuals to hunt on portions of the South Dakota properties.

He traveled to meetingá with various parties with the express purpose of

negotiating agreements with people interested in hunting on the South·Dakota

properties. Petitioner also operated a gravel pit on the Grant County property.

During the years at issue petitioner sold gravel to the Grant County Highway

Department and Lura Township, the local township. Petitioner also rented the

Day County property.

Between 1994 and 2007 petitioner visited the South Dakota properties

several times each year. In 2006 petitioner visited the South Dakota properties·

four times. In 2007 petitioner visited the South Dakota properties two times. He

typically visited the South Dakota properties for two to three days at a time. On

such trips petitioner would visit the gravel pit to ensure that there had been no

unauthorized excavation or removal of gravel, drive to each of the South Dakota

properties, and meet with officials at the FSA and the Grant County Highway

- 13 Department. He also wo.ild meet with individuals who had an interest in renting

one of his properties or in hunting on the properties. IV.

Petitioner's Income With.Respect to the South Dakota Properties

In 2006 petitioner received CRP payments of $22,449 and $15,423. with

respect to the Grant County and Roberts County properties, respectively.

In 2007 petitioner received income of $25,869 with respect to the Grant

County property as follows: (1) CRP payments. of $22,449; (2) a payment of

$2,515 from Mr. Redlin for hunting privileges; and (3) a payment of $905 from

Mike Krakow for.the right to cut hay on the land. He received income of $17,281

with respect to the Roberts Co,unty,property,as follows: (1) CRP;payments of

$15,423; and (2) a payment of $1,858 from the South Dakota Game and Fish

Department for participation in a walk-in hunting program.

V.

..

Petitioners' Tax Reporting and the Notice of Deficiency

Petitioners timelyfiled Forms.1040, U.S. Individual Income Tax Return, for

2006 and 2007. On their returns petitioners identified their occupations as "self-

employed". On attached Schedules E petitioners reported income'and expenses

with respect to their three properties as follows:

- 14 2006 Schedule E

Rentsreceived

Totalexpenses

Netincome

Day County

property

Grant County

. property ·

Roberts County

property

$22,478

3,287

19,191

$22,449

7,606

14,843

$15,423

4,662

10,761

Day County

property

Grant County

property

Roberts County

property

$37,962

3,017

34,945

$25,869

5,194

20,675 .

$17,281

4,287

12,994

2007 Schedule E

Rents received

Total expenses

Net income

On October 14, 2010, réspondent mailed to petitioners the notice of

deficiency for 2006 and 2007 determining that: (1) petitioners erroneously

reported their CRP payments as farm rental iricome on their returns; (2) petitioners

should have reported the CRP payments as income on a Schedule F, Profit or Löss

From Farming, for each year. Respondent also determined that the CRP payments

constituted sélf-employment income and therefore determined that petitioners had

unreported self-employment income of $25,604° and $28,391" for 2006 and

This figure represents the net income petitioner received in 2006 with

respect to the Grant County and Roberts County properties. As stated supra

p. 13, in 2006 petitioner's only income.with respect to the Grant County and

Roberts County properties consisted of CRP payments.

This figure represents the net CRP payments petitioner received in 2007

(continued...)

15 2007, respectively." Respondent allowed:petitioners additional deductions with

respect to the self-employment tax liabilities. .

.

.

.

OPINION

A taxpayer's self-employment incóme is subject to self-employment tax.

Sec. 1401(a) and (b). Self-employment tax is àssessed and collected as part of the

income tax, must be incl ded in computing any income tax deficiency or

overpayment for the applicable tax period,.and must be taken into account for

estimated tax purposes. Sec. 1401; see also sec. 1.1401-1(a), Iricome Tax Regs.

Self-employment income generally is defined as "the net earnings from self-

employment derived by an individual". Sec. 1402 b). Section 1402(a) defines

"[n]et earnings from sel employment" as "the åross income dérived by an

individual from any trade or Í>usiness carried oii by such individual, less the

deductions allowed by tiiis subtitlè which are attributable to such trade or

(...continued)

with respect to the Grant County and Roberts County próperties. As discussëd

suprá p 13, in 2007 petitioner received additioríal income of $5,278 with respect

to thesó properties. Respondent did not include this additional income in

calculating petitioners' u reported self'-employment income.

"Respondent appears to háve accepted that the income generated by

petitioner's rental activit with respect to the Day County property is not subject

to self-employment tax, presumably because of the provisions of sec. 1402(a)(1).

See also Henderson v. Flemming,.283 F.2d 882; 888 (5th Cir. 1960).

.

-.16 business". See also sec. 1.1402(a)-1, Income Tax Regs. In computing a

taxpayer's net earnings from self-employment, section 1402(a)(1) provides:

[T]here shall be excluded rentals from real estate and from personal

property leased with the real estate (including such rentals paid in

crop shares)riel together with the deductions attributable thereto,.

unless such rentals are received in the course of a trade or business as

a real estate dealer; except that the preceding provisions of this

paragraph shall not apply to any income derived by the owner or

tenant of land if (A) such income is derived under an arrangement,

between the owner or tenant and another individual, which provides

that such other individual shall produce agricultural or horticultural

commodities (including livestock, bees, poultry, and fur-bearing

animals and wildlife) on such land, and that there shall be material

participation by the owner or tenant (as determined without regard to

.

16In 2008 Congress amended sec. 1402(a) to read: "[T]here shall be

excluded rentals from real estate and from personal property leased with the real

estate (including such rentals paid in crop shares, and including payments under

section 1233(2) of the Food Security Act of 1985 (16 U.S.C. 3833(2)) to

individuals receiving benefits under section 202 or 223 of the Social Security

Act)". Under sec. 1402(a) as amended, payments made under 16 U.S.C. sec.

3833(2) to individuals who were receiving benefits under sec. 202 or sec. 223 of

the Social Security Act (SSA) are excluded from the calculátion of net earnings

from self-employment. Tit. 16 U.S.C. sec. 3833(2) (2012) refers to payments

received from the USDA under the CRP. See supra p. 5. The amendment applies

to CRP payments made after December 31, 2007. Food, Conservation, and

Energy Act of 2008, Pub. L. No. 110-246, sec. 15301(c), 122 Stat. at 2263. SSA

sec. 202 provides for the payment of old age and survivors insurance benefits. 42

U.S.C. sec. 402 (2012). SSA sec. 223 provides for the payment of disability

insurance benefits. 42 U.S.C..sec. 423 (2012).

Petitioner received the payments at issue before December 31, 2007.

Furthermore, petitioner does not contend, and he has not introduced any evidence

to show, that he was receiving benefits under the SSA. Accordingly, the 2008

amendment to sec. 1402(a) is inapplicable to our analysis herein.

- 17 any activities of ar agent of such.owher or tenant),in the production

or the managemen: of the production of such agricultural or

horticultural commodities, and (B) there is material participation by

the owner or tenant (as determined without regard to any activities of

an agent of such owner or;tenant) with respect to any such

agricultural or horticultural commodity.[171 * * *

The self-employment tax provisions are construed broadly in fávor of treating

income as earnings from self-employment. Braddock v. Commissioner, 95. T.C.

639, 644 (1990); Hornaday v. Commissioner 81 T.C. 830, 834 (1983); Hennen v. .

Commissioner, T.C. Meno. 1999-306; S. Rept. No. 81-1669 (1950), 1950-2 C.B.

302,354.

'

Respondent conter ds that the CRP payments are taxable às self-employment

income because petitioner derived the CRP payments from his trade or business of

conducting an environmentally friendly farming operation 8

The regulations under sec. 1402(a)(1) refer,to the farm rental income that

is included in a taxpayer's net earnings from self-employment as includible farm

rental income. See, e.g., sec. 1.1402(a)-4(b), Income Tax Regs. .In this Opinion

we will refer to such income as includible farm rental income.

18In arguing that petitioner was engaged in an active trade or business,

respondent relies on determinations made by the Grant County FSA that petitioner

was "actively engaged in a farming operation". This Court previously has held

that a determination by the USDA that an individual was actively engaged in

farming "is not a determination for Federal income tax purposes that *¯* * [the

individual was] actively engaged in a trade or business for purposes of section

162(a).". Hasbrouck v.. C mmissioner, T.C. Memo. 1998-249, 1998 WL 373337,

at *12, aff'd without published opinion, 189 F.3d,473 (9th Cir.i1999).

(continued...)

- 18 Petitioner contends that the CRP payments are not income from a trade or

business and therefore are not includible in his self-employment income.

Petitioner contends that he was not iiivolved in the trade or business of farming,

that his minimal activities with respect to the CRP land did not cause him to

become active in the trade or business of farming, and that there was no nexus

between the CRP payments received and his business activities. In the alternative,

petitioner contends that the CRP payments are excluded from the calculation of

net earnings from self-employment under the "rentals from real estate" exclusion

in section 1402(a)(1).

We examine the parties' contentions below, taking into account the burden

of proof, which rests upon petitioners. See Rule 142(a)(1). Respondent's

determinations are presumed to be correct; petitioners must prove that

respondent's determinations are erroneous in order to rebut:the presumption and

satisfy their burden of proof. See id.; Welch v. Helvering, 290 U.S. 111, 115

(1933).

"(...continued)

Accordingly, the Grant County FSÄ determination does not control our decision

as to whether petitioner was actively engaged in4a trade or business for purposes

of sec. 162(a).

- 19 I.

Self-Employment Income

A taxpayer's net earnings from self-employment include the gross income

derived from any trade or business carried on by the taxpayer. Sec. 1402(a)(1).

The term "derived from" "necessitates a nexus between the income and the trade

or business actually carried on by the taxpayer." Böt v. Commissioner,-353 F.3d

595, 599 (8th Cir. 2003), aff'g 118 T.C. 138 (2002); see also McNamara v.

Commissioner, 236 F.3d|410, 413 (8th Cir. 2000), rev'g T.C. Memo. 1999-333.

The term "trade or business" "shallshave the same meaning as when used.in .

section 162 (relating to tr ade or business expenses)". Sec. 1402(c). The

applicable regulations provide that "[t]he trade or business must be carried on by

the individual, either personally or through agents or employees." Sec. 1.1402(a)2(b), Income Tax Regs. Under these prmeiples, payments constitute self

employment income.if they: "(1) are derived (2) from a trade or business (3)

carried on by * * * [the taxpayer or his] agents." Bot v. Commissioner, 353 F.3d

at 599; see.also Wuebker v. Commissioner, 205 F.3d 897, 901 (6th Cir. 2000),

rev's 110 T.C. 431 (1998). Accordingly, we must decide: (1.) whether petitioner

carried on a trade or business during the years in issue, whèther personally or

through an agent; and (2 if.so, whether there was a nexus between the trade or

business conducted and the income petitioner received:

- 20 A.

.

,

.

Existence of a Trade or Business

,

1.

Analysis

.

..

. To be engaged in a trade or business with respect to which deductions are

allowable under section 162, the taxpayer must be involved in the activity with

continuity and regularity, and the taxpayer's primary purpose for engaging in the

activity must be for income or profit. Commissioher v. Groetzinger, 480 U.S. 23,

35 (1987). Additionally, the taxpayer's business.operations must have

commenced. Goodwin v. Commissioner, 75 T.C. 424, 433 (1980), aff'd without

published opinion, 691 F.2d 490 (3d Cir. 1982). Whether a taxpayer is engaged in

a trade or business must be ascertained from a review of all relevant facts and

circumstances. Commissioner v. Groetzinger, 480 U.S. at 35.

The record establishes that petitioner expanded his participation in the CRP

over the years and that he participated in the CRP with continuity and regularity

during 2006 and 2007. The reco'rd further establishes that petitioner did so with

the primarý purpose of making á profit. After his initial experience with the CRP

petitioner decided to enroll the Grant County and Roberts County properties in the

CRP because he could get a higher rate of return from participating in the CRP

than from leasing the properties for farming. He negotiated and executed the CRP

contracts and, by doing so, obligated himself, as the owner of the.properties to

. - 21 satisfy significant contractual obligations regarding planting, maintenance, and use

of the properties enrolled in.the CRP and compliance with CRP requirements.

Although petitioner did not actually perform the planting and maintenance.work

required by the CRP, he hired an individual, Mr. Redlin, to perform the=work .

accörding tò CRP specificatiohs, purchased necessary materials, such as seed, and

provided them to Mr. Redlin, and regularly inspected the properties to ensure that

they were being maintained and used in accordance with the CRP contractual

.

obligations. On these facts we find that petitioner engaged in the business of

participating in the CRP and managing his CRP properties with the primary intent

of making a profit.

Petitioner contends that his actual participation in the CRP and his work

complying with the CRP contract requirements were de minimis and did not

constitute farming. He n aintains that all physical labdf necessary to pladt, seed,

weed, mow, and maintain the properties (propeity maintenance activities) in

accordance with the C

contraàts via 541

performed by his contractor and should

not be attributed to him. It is irnmaterial, hov ever, that the property maintenance

activities were carried o t by someone other than petitioner. As noted supra, for

purposes of section 1402 a taxpayer'may conduct his trade or businèss personally

or through an agent. Sec. 1.1402(a)-2(b), Income Tax Regs.; Rev. Rul. 60-32,

- 22 1960-1 C.B. 23 (stating that similar payments made to individuals under the Soil

Bank Act v/ere includible in the individual's net earnings from self-employment if

the individual operated his farm either personally or through agents or

employees).19 A taxpayer who hires another "to render the services necessary to

fulfill'' the taxpayer's obligations under a contract is nonetheless liable for selfemployment tax with respect to the income the taxpayer receives pursuant to that

contract. Moorhead v. Commissioner, T.C. Memo. 1993-314, 1993 WL 267200,

at *6.

19Rev. Rul. 60-32, 1960-1 C.B. 23, 26, states in pertinent part:

Payments and benefits attributable to the acreage reserve

program are includible in determining the recipient's net earnings

from self-employment if he operates his farm personally or through

agents or employees. .This is also true if his farm is operated by

others and he participates materially in the production of

commodities, or management of such production, within the meaning

of section 1402(a)(1) * * *. * * * If he does not so operate or

materially participate, payments received are not to be included in

determining net earnings from self-employment.

The Internal Revenue Service (IRS) has stated that Notice 2006-108, 2006-2 C.B.

1118, discussed infra pp. 30-34, would render Rev. Rul. 60-32, supra, obsolete.

:223 -

As a participant in the CRP,,petitioner, either,directly or through>Mr. Redlin

as his agent, regularly and.continuously:. (1) satisfied seeding and weed control

Neither party ad resses whether, under applicable State law, Mr. Redlin

was petitioner's,agent. Because South Dakyta has the most significant

relationship to petitioner and Mr. Redlin and the transaction at issue, wl ether Mr.

Redlin was petitioner's agent is governed by South Dakota law. See Stockmen's

Livestock Exch. v. Thondpson, $20 N.W.2d 255, 257-258, 258 n.1 (S.D. 1994).

Under South Dako,ta law the eJements required to create an agency relationship

are "'manifestation by the principal that the agent shall act for him, the agent's

acceptance of the undertaking, and the understanding of the parties,that the

principal is to be in contr 1 of the undertaking '" Tisdall v. Tisdall, 422 N.W.2d

105,. 107-108 (S.D. 1988 (quoting Southard v. Hansen, 376 N.W.2d 56, 58 (S.D.

1985)). In Tisdall, the Supreme Couft of South I akota found that a principalagent relationship existed when the principal directed the agent to distribute

revenue according to applicable statutory guidelines.

Petitioner hired Mr. I(edlin to perform all of the physical farming duties

required under the CRP contracts. Mr. Redlin apparently accepted petitioner's

offer, as indicated by Mr. Redlin's completion of the seeding, weeding, mowing

and maintenance activities required under/he CRP contracts. Although petitioner

testified that hè never dir eted Mr. Redliii's activities, we reject the testimony as it

is apparent from the, record that petitioner initially directed Mr. Redlin to perform

the property maintenance activities required by the CRP contracts and retained the

ability to direct and cont ol the work that Mr. Redlin was to perform to comply

with the CRP contracts. See id. Accordingly, we find that Mr. Redlin was

petitioner's agent.

We note that Notice 2006-108, supra, states that "[p]articipation in-a CRP

contract meets the criteria to be a trade or business irrespective ofwhether the

participant performs the required. activities personally or arranges for his

obligations to be satisfied by a third party." Notice 2006-108, supra,, does not

discuss the apparent requirement under sec. 1.1402(a) 2(b), Income Tax.Regs.,

that the trade or business be carried on by the individual either personally, or

through the individual's<mployee, as that term is defined in sec..1402(d), or

(continued...)

24 obligations with respect to the Grant County and Roberts County properties as

required under the CRP contracts; (2) visited the Grant County and Roberts

County properties to ensure that the properties maintained their status as CRP

properties; (3) filed annual certifications; (4) participated in emergency haying

programs; (5) requested cost-sharing payments; and (6) made decisions regarding

the profitability of keeping the Grant County and Roberts County properties

enrolled in the CRP. Regardless of whether some or all of these activities qualify

as farming, we find that petitioner was engáged in the business of participating in

the CRP and that he enrolleil, maintained, and managed multiple properties subject

to CRP contracts with the primary intent of making a profit.

2.

Additional Support

Our conclusion is supported by and is consistent with existing caselaw and

the administrative position of the IRS set forth in Nòtice 2006-108, 2006-2 C.B.

1118, which was relèased on December 5, 2006. It is also consistent with

Congress' enactment in 2008 of a limited exclúsion for CRP payments made to

20(...continued)

agent, as that term is defined under applicable State law. Because we find that Mr.

Redlin was petitioner's agent, we need not decide whether an individual's

participation in a CRP contract constitutes a trade or business under sec. 1402(a)

where the individual arranges for a third party to perform the obligations required

by the CRP contract and the third party is neither an employee nor an agent of the

individual.

- 25 taxpayers receiving'Sociàl Security retirement or disability benefits. We explain

belos.

a. '

Caselaw

This Court previot sly has addressed the proper treatment of CRP payments

for self-employment tax purposes. Wuebker v. Commissioner, 110 T.C. 431;F .

Ray v. Commissioner, T. . Memo. 1996-436. However,-we are.unable to find any

case other than R_ay that ddresses whether and to what extent a taxpayer who

receives CRP payments is"engaged in a trade br business. While there is very little

law focusing on whether and to what extent participation in the CRP constitutes a

trade or business, Bot v.'Commissioneé, 118 T.C. 138, provides guidance

regarding the proper treatment of analogous payments for self-employment tax

purposes.. Accordingly, we-examine each of these decisions and their application

to the case at bar.

In Wuebker v. Commissioner, 110 T.C. 431 (1998), rev'd, 2Z)5 F.3d 897

(6th Cir. 2000), this Cou t considered whether the taxpayers were liable for selfemployment tax on CRP payments they had received. However, in that Opinion

this Court did not addres¼ whether the taxpayers were engaged in a trade or

business but instead add essed only whether the CRP payments were excluded

from the taxpayers' net earnings from self-employment as "rentals from real

estate" under sec. 1402(a)(1). In Wuebker v. Commissioner, 205 F.3d 897, the

U.S. Court of Appeals fo the Sixth Circuit ad,dressed whether the CRP payments

derived from the taxpayers' farming business but did not decide whether the

taxpayers. were in the tra e or business of farming. ,We discuss both of the

Wuebker decisions later in this Opinion. Se_e in±a pp. 37-39.

- 26 In Ray v. Commissioner, T.C. Memo. 1996-436, the taxpayer was engaged

in the trade or business of farming. He then purchased land that had been placed

in the CRP by the previous owner. The taxpayer fulfilled the previous owner's

obligations under the CRP contract and received CRP payments in exchange. This

Court concluded that the taxpayer received the CRP.payments in connection with

his ongoing trade or business of farming. See also Hasbrouck v. Commissioner,.

T.C. Memo. 1998-249, aff'd, 189 F.3d 473 (9th Cir. 1999), in which the

Commissioner, on the basis of this Court's decision in.R_ay, conceded that the

taxpayers were involved in the trade or business of farming and therefore entitled

to the deductions claimed on their Schedules F. In so conceding, the

Commissioner noted that the only difference between the two factual scenarios

was that the taxpayer in R_ay was a farmer when he acquired the CRP land,

whereas the taxpayers in Hasbrouck had no prior farming experience.

In Bot v. Commissioner, 118 T.C. at 141, this Court addressed the treatment

for self-employment tax purposes of payments taxpayers received from an

agricultural cooperative (MCP). The taxpayers were retired farme'rs who

purchased MCP cooperative stock and units of equity participation, which

"specified the maximum number of bushels of corn the member could be required

to produce and deliver to" MCP each year. Id. at 141-142. The taxpayers also

. .: 27 entered into uniform marketing agreements (UMAs) with MCP. Id. at 141. In

return, MCP was required under the UMAs to process the corn its members

produced and make payments to each individual member equal to at least 80% of

the loan value of each bushel of corn delivered by the individual plus a valueadded payment, representing "[the] value added to the corn as a result of its

processing", a payment from MCP's earnings in accordance with its bylaws, and,

in some instances, a storage fee and interest. Id. at 143. The taxpayers satisfied

their production and delivery obligations using corn that MCP held in its option

pool, rather than corn they personally had grown on their farm, and accordingly

received only the value- dded payments. Id. at 142, 144. The Commissioner

determined that the valu -added payments were includible in the calculation of the

taxpayers' net earnings from Self-employment. Id. at 144.

In.deciding whether the taxp ye s' act ns constituted a trad or business,

this Court acknowledged that although the taxpayers had retired from farming,

they continued to participate in MCP and their participation constituted a trade or

business. Id. at 147. In particular, this Court stated:

Although petitioners retired from daily farming in 1987 and

turned over their farm operation to the sons, petitioners,nevertheless

continued to maintain their membership in MCP from 1987 through

at least 1995. As ctive members of MCP during 1994 and 1995 [the

years in issue,] petitioners, either directly or through the sons as their

- 28 agents, regularly and continuously (1) maintained their status as

producers under the UMAs, (2) made decisions regarding how to

satisfy their production and delivery obligations * * * under the

UMAs, (3) acquired option pool corn which they used to satisfy their

production and delivery obligations to MCP several times each year,

and (4) sold corn and corn products for profit through MCP.

Id. at 147-148 (fn. ref. omitted). In rejecting the taxpayers' contention that their

involvement was too minimal to constitute a trade or business, this Court relied on

the fact that the taxpayers "regularly and continuously purchased and sold corn

with the intention of making a profit" and purchased additional units of equity

over time. Id. at 149.

The U.S. Court of Appeals for the Eighth Circuit affirmed the decision of

the Tax Court. Bot v. Commissioner, 353 F.3d 595. While the Court of Appeals

emphasized the unique nature of the cooperative arrangement, the court also

distinguished the taxpayers' participation in the cooperative, which constituted a

trade or business, from an individual's investment in a corporation or gas well,

which was merely a passive investment. Id. at 599-600. Unlike a passive

investment, the investment in MCP required the taxpayers "to do more than hold

the stock or equity units" in order to receive payment. Id. at 600.

In Ray v. Commissioner, T.C. Memo. 1996-436, this Court relied on the fact

that the taxpayer was engaged in the trade or business of farming before and

- 29 during his participation in the CRP in finding that the CRP payments were

includible.in his self-employment income. However, we do not read R__ay to make

the taxpayer's engagement in the business of farming before enrolling property.in

the CRP determinative of whether CRP payments constitute income from selfemployment. 'A taxpaye is not required to have prior experience in a particular

trade or business to be permitted deductions under section 162; what is required is

that the taxpayer.have commenced an activity that qualifies as a trade or business.

Goodwin v. Commissioner, 75 T.C. at 433.

Like the taxpayers in Bot v. Commissioner, 1.18 T.C. 138, petitioner was an

active participant in a payment program (in this case the CRP)·who regularly and

I

continuously maintained his status as a participant, maintained the eligibility

status of his properties, made decisions regarding.how to satisfy his obligations

under the CRP contracts, including hiring Mr. Redlin, entering into the 1999

Roberts County CRP, removing a portion of the Grant County pròperty from the

CRP, and participatmg m the emergency haying programs, and he engaged in such

activities for prbfit. Furt1ermore, becatise the receipt of CRP payments depended

on petitioner's continued maintenance of his land in accordance with the CRP

contracts, his participation in the CRP was not merely a passivé in 570estment

Whether petitioner's acti ities withiespect to the CRP constituted farming or

- 30 simply continuous and regular participation in an activity for profit, we are

convinced that petitioner was engaged in a trade or business as.defmed by section

162.22

b.

Notice 2006-108

On December 5, 2006, the IRS released;Notice 2006-108, supra,.which

contained a proposèd revenue ruling regarding whether CRP payments were

includible in net income from self-ernployment for purposes of calculating a

taxpayer's liability for self-employment tax, and solicited comments cpncerning

the conclusions reached in the proposed revenue ruling. The IRS in Notice 2006108, supra, explained that it had previously issued an announcement,

Announcement·83-43, Q&A-3, 1983-10 I.R.B. 29, regarding the self-employment

tax treatment of payments made.by the USDA under land diversion programs in

22In deciding whether a full-time gambler who made wagers solely for his

own account was engaged in a trade or business for Federal income tax purposes,

the Suprème Court in Commissioner v. Groetzinger, 480 U.S. 23, 27 n.7 (1987),

stated as follows: "Judge Friendly some time ago observed that 'the courts have

properly assumed that the term [trade or business] includes all means of gaining a

livelihood by work, even those which would scarcely be so characterized in

common speech.' Trent v. Commissioner, 291 F.2d 669, 671 (CA2 1961)."

(Emphasis added.)

The concept of work that the term "trade or business" embodies is incorporated

into the CRP contracts, which impose meaningful obligations and duties on

petitioner that he had to perform with continuity and regularity in order to receive

the CRP payments.

31 which.it stated that a farraer»who receives cash or a,payment in kind from the

USDA for participation in.a lánd diversion program is liable for. self-employment

tax on the payments,,á coríclusion that was consistent with guidance provided in

. Rev. Rul. 60-32, supra, with respect to two earlier land diversion programs. The

IRS also noted, however, that Rev. Rul. 60-32, supra; states that participants in

land diversion programs are not subject to self-employment tax on.the payments if

the participants do not operate a farm or·materially participate in the farming

activities. The IRS expleined that the conclusion in Rev. Rul.·60-32, supra, is

relevant only with respect to the exception from net income from self-employment

provided in section 1402'a)(1) for-"rentals from real estate". It cited with approval

and relied on the opinion of the U.S. Court of Appeals for the Sixth Circuit in

Wuebker v. Commissiòner, 205 F.3d 897, for the proposition that CRP payments

do not fall within the ren al income exclusion but pointed out that the taxpayer in

Wuebker was engaged in the business of farming when he received the CRP

payments. Because the I1S had received questions regarding whether CRP

payments received by a recipient who is retired or not otherwise actively engaged

in farming are subject to self-employment tax, it issued the proposed revenue

ruling to respond to those questions.

- 32 In Notice 2006-108, 2006-2 C.B. at 119, the proposed revenue ruling holds

that CRP rental-payments (including incentive payments) from the USDA to (1)

"a farmer actively engaged in the trade or business of farming.who enrolls land in

CRP and fulfills the CRP contractual obligations personally" (taxpayer A) and'(2)

"an individual not otherwise actively engaged in the trade or business of farming

who enrolls land in CRP and fulfills the CRP contractual obligations by arranging

for a third party to perform the required activities" (taxpayer B) are both includible

in net income from self-employment and are not excluded from net income from

self-employment as "rentals from real estate" under section 1402(a)(1). The IRS

explained the holdings of the proposed revenue procedure as follows:

.

Participation in a CRP contract is a trade or business for both A and

B. The participant is obligated to perform a number of activities,

including but not limited to tilling, seeding, fertilizing, and weed

control. Although more extensive activities are required at the

beginning of the contract term than later, the obligation to perform

activities extends throughout the ten-year period, giving.participation

in CRP the continuity and regularity necessary to be considered a

trade or business. Also, both A and B enrolled land in the CRP

program to earn a profit. Participation in a CRP contract meets the

criteria to be a trade or business irrespective of whether the

participant performs the required activities personally or arranges for

his obligations to be satisfied by a third party. Thus, the trade or

business treatment is the same for A and B even though A meets the

CRP requirements for maintenance of the land himself whereas B

arranges for someone else to do it. Furthermore, the CRP meets the

criteria to be a trade or business based on the activities required

directly under the program and without being affected by whether the

- 33 participant is otherwise engaged in farming or any.other trade or

business. * * * Thus, for both A and B, the CRP rental payments are

includible in their et income from self-employment.

Id., 2006-2 C.B. at 1120.

e

Although we are not óbligated to defer to the IRS' interpretation of a statute

as reflected in administrative-pronouncements such as Notiçe.2006-108, supra,.

see; e.g., Tax Analysts v. IRS,,416.E. Suppr2d 119 125-126 (D.D.C. 2006), the .

nötice sets forth the IRS' interpretation of the statute and, consequently, "may

.

provide evidence of the proper construction of the statute", Wells.Fargo & Co. &

Subs. v. Commissioner, 224 F.3d 875, 886 (8th Cir. 2000) (discussing the

précedential value of private rulings), aff'g in part; rev'g in part Norwest Corp: &

Subs. v.t Conimissioner, 112 T.Cu89:(1999)psee>Nelson v. Commissioner,-568

F.3d 662, 665 (8th Cir. 2009) (adopting the framework set fórth in Skidmore v. .

Swift & Co., 323 U.S: 134,, 140 (1944·),tin considering what weight to give v .

revenue rulings), aff_g 130 T:C. 70 (2008); see also Berger v. Xerox Corp. Ret.

Income Guar. Plan, 338 F.3d 755, 762 (7th Cii.. 2003) (discussing the precedential

value of IRS notices); Esden v. Bank of Boston 229 F..3d 15.4, 168-169 (2d Cir.

2000) (discussing the precedential value of IRS notices). In this instanc~e, we

conclude ihat the IRS' analysis f the CRP nd the payments made thereunder and

the classification óf thé CRP payments for self-employnient tax purposes'as set

- 34 forth in Notice 2006-108, supra, while not controlling, are nevertheless wellgrounded and consistent with the analysis set forth herein.

c.

.

,-

Congressional Intent Regarding CRP Payments ·

r Several attempts have been made to convince Congress to enact a blanket

exclusion for self-employment tax purposes with respect to CRP payments,. but

Congress did not enact proposed legislation amending section 1402 to exclude

CRP payments from self-employment tax entirely. See 153> Cong. Rec. 9170-9171

(2007); 149 Cong. Rec.~15950-15951 (2003); 147 Cong. Rec. 1776-1783 (2001);

133 Cong. Rec. 8557 (1987). Congress did:however, enact a partial exclusion.3

Following the issuance of Notice 2006-108, supra, Congress in ;!008 amended ,

section 1402(a)(1) to exclude CRP payments from the calculation of a taxpayer's

net earnings from self-employment where the taxpayer is receiving Social Security

retirement or disability payments 23 FOOd, Conservation; and Energy Act of 2008,

Pub; L. No. 110-246, sec. 15301(a), 122 Stat. at 2263. If we were to interpret

section 1402·to exclude éntirely CRP payments from the calculation of net

earnings from self-employmerit as petitioners contend we should, such an

23The Staff of the Joint Committee on Taxation has noted that CRP

payments generally constitute self-employment incoine, except in the case of

taxpayers who receive Social Security retirement or disability benefits. See Staff

of J. Comm. on Taxation, Description of the Social Security Tax Base, at 22 (J.

Comm. Print 2011).

- 35 interpretation would'render the enactment of the 2008 exclusion meaningless. By

enacting only a limited èxclusion with respect to taxpayers receiving Social

Security retirement or disability payments-who are also receiving·CRP;paymeints,

Congress has evidenéed an intent not to excludé all CRP payments in calculating a

taxpayer's net earnings f om self-employment under section 1402

Having found that petitioner,~either individually or-through his agent, was

engaged in a:trade or bu iness during the years at issue, we examine what would.

appear to be self-evident -ùhether there was a riexus between the CRP payments

petitioner received and his business activity.

B.

"Derived From" Requirement

r

Petitioner received-the CRP payments as consideration for fulfilling his

obligations under the CRP contracts for thé years in issue. Such consideration

provides thè required nexus between the CRP payments and,his trade or business

of participating in the CRP during the years in.issue.. See Bot v. Commissioner,

353 F:3d at 600; see also Wuebker v. Commissioner, 205 F.3d at 902-903 (holding

that CRP.payments had a direct nexus to the taxpayers' trade or business of,

farming); Ray v. Conimissioner, T.C. Memo. 1996 43.6.

m.

- 36 II. ·. Petitioner's Alternative Argument Under Section 1402(a)(1)

Section 1402(a)(1) provides that "rentals from real estate" shall be excluded

from the calculation of net earnings from self-employment. Petitioner

alternatively contends that the CRP liayments are excluded from his net earningsfrom self-employment under section 1402(a)(1) because"the payments constituted

rental income.24 Respondent contends that petitioner is not eligible for.the "rentals

from real estate" exception under section 1402(a)(1) because petitioner did not

receive the CRP payments in exchange for the USDA's occupancy or use of the

South Dakota properties but instead received the payments as compensation for

conducting his farming operation in an environmentálly friendly manner.

Accordingly,-we must decide whether the CRP payments constituted "rentals from

real estate" within the meaning of section 1402(a)(1).

Neither section 1402 nor any bther self employment tax provision of the,

Code defines the term "rentals from real estate". See also Wuebker v.

Commissioner,'205 F.3d at 903. However, this Court has stated that the exception

for "rentals from real estate" must be ''narrowly construed." Johnson v.

Commissioner, 60 T.C. 829, 833 (1973); see also Delno v. Celebrezze, 347 F.2d

24In so arguing, petitioner relies, in part, on the fact that the CRP contracts

identified the payments as "rental payments".

- 37 159, 165 (9th Cir.·1965).. Ordinarily, rent is defined as compensation "for the use

or occupancy.ofpropert ". Wuebker v. Commissioner, 205 F.3d at 904.

In Wuebker v. Commissioner,×110 T.C. at 437 the taxpayers argued that the

CRP payments they received constituted 'frentals from real estate". In addressing

the taxpayers' contentio , this Court first noted.that rent ordinarily is defined "as

compensation for the occupancy or use of property." Id. at 436. The Court went

on to find that the CRP statute, the applicable regulations, and thê CRP contract

identified the payments as rental+payments. Id. at 438. After briefly discussing

the taxpayers'-obligations under theíCRP contracts, this Court concluded that

In imposing the above-described restrictions on the use of the

land, the primary purpose of the CRP contract was to effectuate the

statutory intention of converting highly erodible croplands to soil

conserving uses. The services that petitioner was required to perform

over the contract term included maintaining the vegetative cover,

controlling weeds, insects, and pests on the land, and fulfilling certain

reporting requireménts. These service obligations were not

substantial and we e incidental to the primary purpose of the contract.

Thus, the CRP payments represented compensation for the use

restrictions on the land, rather thaiiremuneration for petitioner's

labor. * * *

Id. Accordingly, the Court held that the CRP payments qualified as "rentals from

real estate"'under section 1402(a)(1). Id.

The U.S. Court o Appeals for the ixth Circuit revérsed this Court's

decision, holding that the CRP payments were not ''r ntals froni real estate" within

- 38 the meaning of section.1402(a). Wuebker v..Commissioner, 205 F.3d at 903-905.

The Court of Appeals began its analysis by stating that geperally, rental payments

constitute consideration paid for either the use or occupancy of property. Id. at

904. The Court of Appeals quickly dispensed with the issue of whether the CRP

payments constituted consideration for the occupancy of the taxpayers' property,

noting that the USDA's access was limited to inspections of the property to

determine whether the taxpayers were in compliance with their CRP contract. Id.

The Court of Appeals acknowledged that the second issue, i.e., whether the

CRP payments constituted consideration for the use of the taxpayers' property,

presented a much closer question. Id. However, the Court of Appeals ultimately

decided that the USDA did not make the CRP payments in exchange for the use of

the taxpayers' property:

Citing the many objectives of the CRP, such as the reduction of soil

erosion and the protection of the nation's long-term food production

capabilities, the * * * [taxpayers] assert, and the dissent agrees, that

the government is "using"- the land in question. We believe, however,

that such an argument impermissibly stretches the plain meaning of

the term "use," especially in light of the narrow construction required

of the rentals-from-real-estate exclusion. * * * Although it is true that

the * * * [USDA] is seeking, and receiving, a public benefit by

conserving lands enrolled in the CRP, the * * * [taxpayers] continue

to maintain control over and free access to their premises. The

dissent reasons that, because the government "greatly reduced the

range of uses to which the * * * [taxpayers] could put their property,"

it exercised a level of control akin to "use." We remain unpersuaded,

39 however, that the restrictions imposed by the * * * [USDA] on a

farmer's use of his own land somehow translate into "use" by the

* * * [USDA] itself.

.

The essence of the prográm is to prevent participants from

farming the property and to require them to perform various activities

in connection with the land, both at the start of the program and .

continuously throughout the life of the contract, with the

government's access limited to compliance inspections. Given this

arrangement, we disagree with the Tax Court's determination that the

*·*. * [taxpayers'] maintenance obligatioris were legally insignificant.

Id. at 903-905. .In so holding, the Court of Appeals also stated that although the

CRP statute, the applicable regulations, and the contract referred to the amounts as

rental payments, such references did not dictate a conclusion that the CRP

payments fell within the "rentals froni real estate" exclusion:- Id. at 904.

Following the decision in Wuebker, the IRS issued.Notice 2006-108, supra,

proposmg a revenue procedure holding that "CRP rental payments are not

.

payments for the right to use or occupy real property. CRP rental payments are

made in exchange for conducting activities that meet the commitments of a CRP

contract. Therefore,,CRP rental payments arernot * * * rentals from real estate.".

Following the issuance of Notice 2006-108, súpra, in 2008 Congress amended the

section.1402(a)(1) exclusion for "rentals from real estate", effective for CRP

payments received after December 31, 2007, to exclude from the calculation of net

earnings from self-employment CRP payments made to taxpayers who are

- 40 receiving Social Security retirement or disability payments. However, Congress

neither enacted a blanket exclusion with respect to CRP payments nor evidenced

any disagreement with the analysis of the Court of Appeals for the Sixth Circuit in

Wuebker v. Commissioner, 205 F.3d 897.

Given the history recited above and our obligation to reconsider our

position following the reversal of our decision in Wuebker by the Court of

Appeals for the Sixth Circuit, we agree with and adopt the analysis of the Court of

Appeals in Wuebker v. Commissioner, 205 F.3d at 9032905', regarding whether,

under section 1402(a)(1), CRP payments are excluded from the calculation of net

earnings from self-employment as "rentals from real estate". Under the CRP, 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, applying a

commonsense definition of the term. See, e.g., Merriam Webster's Collegiate

Dictionary 1297 (10th ed. 2002) ("to put into action*or service: avail oneself of:

EMPLOY"). Taxpayers participating in the CRP "maintain control over and free

access to their preniises". Wuebker v. Commissioner, 205 F.3d at 904. Although

the CRP restricts the taxpayer's use of the property, i.e., the taxpayer's ability to

plant certain crops and engage in certain activities with respect to the enrolled

property, which the taxpàyer agrees to in exchange for consideration, the

Government does not take possession,0f the property.or acquire the right,to use

the þroperty for its own urposes

Furthermore, we a ree with the finding of the Court of Appeals for the Sixth

Circuit in Wuebker, that a taxpayer's activities witla respect to thevCRP contract

are legally significant. I

As discussed supra pp. 23-24: a taxpayer who -

participates in a CRP co tract, either individually or through an agent or

employee, must engage ih propertyimaintenance activities for the benefit of the

enrolled properties with regularity ánd perform periodic administrative and

reporting duties to satisf his obligations under.the contract and,receive CRP

payments: .The contractual obligations are substantial and:require more than de

minimis action by the.taxpayer or his agent to satisfy them.i -.

. . -

Additionally, ve note that theiactivities required of¢etitioner under the

CRP contracts were not limited to maintenance activities and instead included the

performance of duties not "usually or custömärily rendered in connection with

the mere rental of farmland, Johnson v.:Commissioner, 60 T.C.·at.831-832.

(holding that boat stall rental pa nients did not constitute "rentals fromereal estate"

where the taxpayer also rovided.various service 541

at no additional charge, .

including the providing as and oils, selling sundry items: making arrangements

- 42 for boat repairs, recharging batteries, loaning boating equipment, providing fishing

tips, and checking for overdue boats); see also:Delno, 347 F.2d at 165- .

(interpreting an identical provision of the SSA and finding that the individual's

activities with respect to the property were not those usually rendered in

connection with the rental of property).

.

Although the CRP statute, the regulations, and the contracts refer to the ,

payments as rental payments, we do not find that the use of the term "rental"

dictates a conclusion that the payments constituted-"rentals from real estate". S_ee

eg, Wuebker v. Commissioner, 205 F.3d at 904 (noting that Congress qualified

the use of the term "rent" with respect to CRP payments by providiñg that the CRP

payments would be made "in the form of rental payments"). We are not required

to treat as rental payments all payments labeled "rent". Instead we may examine

the substance of so-called rent payments to decide whether the payments actually

constituted rent or some other type of income. See Opine Timber Co. v.

Commissioner, 64 T.Cr700, 709-711:(1975), aff'd without published opinion, 552

F.2d 368 (5th Cir. 1977). The CRP payments petitioner received appear to be

proceeds from his own use of the land rather than rent he received for permitting

another entity to use his land. See, e.g., Webster Corp. v. Commissioner, 25 T.C.

55, 61.(1955), aff'd, 240 F.2d 164 (2d Cir. 1957); Harding v. Commissioner, T.C.

43 Memo. 1970-179 (holding that conservation reserve program payments "are in the

nature of receipts from fárm operations in that they replace income which

producers could have expected to realize from the normal use of the land devoted

to the program"); Rev. Rul. 60-32, supra. Such a conclusion is consistent with our

holding that the "rentals from real estate" exception should be narrowly construed.

Johnson v. Commissioner, 60 T.C. at 833.

We hold that the CRP payments at issue do not constitute "rentals from real

estate" within the meaniiig of seòtion 1402(a)(1) and are not excluded from the

calculation of petitioner's net earnings from self-employment for 2006 and 2007.

In so doing, we overrule bur holding in Wuebker v. Commissioner, 110 T.C. 431.

III.

Conclusion

We sustain respondent's determination that the CRP payments petitioner

received in 2006 and 2007 must be included in the calculation of his net earnings

from self-employment.urider section 1401 and hence are subject to selfemployment tax. The CRP payments are not excluded from this calculation by

virtue of section 1402(a)(1) because the CRP payments do not constitute "rentals

from real estate". Because we find that the CRP payments are not "rentals from

real estate", we need not each the issue of whether the CRP payments constituted

includible farm income.

- 44 We have considered all of the parties' arguments. To the extent not

discussed above, we find those arguments to be irrelevant, moot, or without merit.

To reflect the foregoing,

Decision will be entered under

Rule 155.

Reviewed by the.Court.

COLVIN, HALPERN, FOLEY, VASQUEZ, GALE, GOEKE, WHERRY,

KROUPA, HOLMES, GUSTAFSON, MORRISON, KERRIGAN, BUCH, and

LAUBER, JJ., agree with this opinion of the Court.

PARIS, J., did not participate in the consideration of this opinion.