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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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'sNelson 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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Af0ae0ae2fb3cd024. Public record. Not legal advice.