SSR 61-7. FARM RENTAL INCOME -- MATERIAL PARTICIPATION

A claim for benefits raises the questions whether income from crops

produced under a crop-sharing arrangement is rental income to the owner or

tenant of the land (hereinafter referred to as the "landowner") and, if

rental income, under what circumstances it can be credited as net earnings

from self-employment for social security purposes.

In deciding these questions, it is necessary to consider first whether

the share farmer is an employee or whether he is self-employed. This was

clarified by the Social Security Amendments of 1956 and the report of the

Committee on Ways and Means, House Report No. 1189, 84th Cong., 1st Sess.

Section 210(a)(16) of the Act, as amended in 1956 (effective with respect

to service performed after 1954), excepts from the term employment:

The following quotation, relative to the above amendment of the Act, is

from page 9 of the House Report:

The 1954 amendments to the Social Security Act, which extended coverage

to farmers, modified section 211(a)(1) of the Act which excludes rentals

from real estate, by including the parenthetical statement "including such

rentals paid in crop shares." Section 1.1402(a)-1(c)(1) of the

Self-Employment Tax Regulations (relative to section 1402(a)(1) of the

Internal Revenue Code, which is identical to section 211(a)(1) of the

Social Security Act), defines "rentals paid in crop shares" as follows:

As is apparent from the above quotations, the criteria for determining

whether the share farmer is a self-employed person are identical to those

used to determine whether the landowner's income is rentals from real

estate. Thus, farm rental income received by the landowner under typical

crop-sharing arrangements is rentals from real estate.

efines "rentals paid in crop shares" as follows:

As is apparent from the above quotations, the criteria for determining

whether the share farmer is a self-employed person are identical to those

used to determine whether the landowner's income is rentals from real

estate. Thus, farm rental income received by the landowner under typical

crop-sharing arrangements is rentals from real estate.

Congress recognized that many farm owners whose farms were operated under

crop-sharing arrangements were active in the work on or management of

their farms. It was for this reason that section 211(a)(1) of the Social

Security Act was amended in 1956 to provide that the exclusion of rental

income would not apply to:

Thus, there are two pertinent requirements which must be met in order for

farm rental income to be counted for social security purposes, i.e., an

agreement for material participation in the production or the management

of the production of crops or livestock by the landowner and actual

material participation by such landowner. In some localities the right of

the landowner to significantly direct and control the share farmer nearly

always exists. If this is true in the particular case, the requirement

that there be an agreement to participate is usually met. However, the

degree to which a landowner will actually participate varies greatly

because of such factors, among others, as the ability and reliability of

the share farmer and the age and physical condition of the landowner. In

other words, even though the landowner has the right under the arrangement

to participate in the operation of the enterprise, if he does not exercise

his right to a sufficient extent he will fail to meet the requirements of

"material participation."

se of such factors, among others, as the ability and reliability of

the share farmer and the age and physical condition of the landowner. In

other words, even though the landowner has the right under the arrangement

to participate in the operation of the enterprise, if he does not exercise

his right to a sufficient extent he will fail to meet the requirements of

"material participation."

Although the law doe snot define material participation, the reports of

the Senate Committee on Finance, Senate Report No. 2133, 84th Cong., 2d

Sess., and the Report of the Committee on Ways and Means, House Report No.

1189, 84th Cong., 1st Sess., indicate that the purpose of the congress in

enacting the material participation provision was to cover income from

actual work. This purpose is expressed on page 8 of the Senate Report:

The following statement, from page 38 of the Senate Report, contains

certain criteria to be considered in determinations of material

participation:

The elements of participation set forth in the Senate Report are the

factors considered by the Social Security Administration in making

decisions as to a landowner's participation in individual cases.

Activities which relate to the protection of property or investment as

distinguished from those more directly affecting crop production are not

considered in deciding whether a landowner materially participated.

The decision as to whether or not a landowner's income from a

crop-sharing arrangement is excludable from net earnings from

self-employment as rentals from real estate must be made under Federal law

rather than under the laws of the individual States

distinguished from those more directly affecting crop production are not

considered in deciding whether a landowner materially participated.

The decision as to whether or not a landowner's income from a

crop-sharing arrangement is excludable from net earnings from

self-employment as rentals from real estate must be made under Federal law

rather than under the laws of the individual States. Although under the

laws of several States it is not considered that a landlord-tenant

relationship is created by certain crop-sharing arrangements, the intent

of Congress is clear that the requirements of section 210(a)(16) of the

Act is rental income and is creditable as net earnings from

self-employment for social security purposes only if the landowner meets

the requirement of material participation set out above.