Academic journal article Journal of Accountancy

Eighth Circuit Weighs in on Soil Conservation Payments: A Taxpayer Not Engaged in the Farming Business Who Received Payments from a Government Soil Conservation Program Did Not Thereby Have Self-Employment Income

Academic journal article Journal of Accountancy

Eighth Circuit Weighs in on Soil Conservation Payments: A Taxpayer Not Engaged in the Farming Business Who Received Payments from a Government Soil Conservation Program Did Not Thereby Have Self-Employment Income

Article excerpt

A split decision of a three-judge panel of the Eighth Circuit held that U.S. Department of Agriculture (USDA) Conservation Reserve Program (CRP) payments were not self-employment income to a nonfarmer landowner, reversing a prior decision of the Tax Court. The appeals court's holding followed prior IRS guidance that land conservation payments to nonfarmers are rental payments from real estate exempt from the self-employment tax.

Facts: In 1994, Rollin Morehouse inherited 1,223 acres in South Dakota, most of which was tillable cropland. Morehouse never farmed the land but rented portions of it to others who farmed it. In 1997, Morehouse enrolled a significant portion of the inherited land in the CRP, agreeing to (1) not produce any agricultural crops, (2) establish and maintain perennial plant cover, and (3) periodically control weeds and pests. To ensure compliance, he visited the properties about three times each year.

In both 2006 and 2007, he received CRP payments of $37,872, which he reported as rental income on his tax returns for each of those years. In 2010, the IRS assessed deficiencies for both years, treating the CRP payments as self-employment income. Morehouse petitioned the Tax Court for relief, but the IRS prevailed when the court held that the payments were not rentals from real estate and thus were not exempt from the self-employment tax (see "Tax Matters: Government Farm Payments Subject to SE Tax," JofA, Nov. 2013, page 56).

Issues: If an individual engages in a trade or business activity, the net profit resulting from that activity is self-employment income subject to the self-employment tax. Sec. 1402(a)(1) specifically excludes rental real estate income and CRP payments to specified Social Security recipients from self-employment income. Concerning other CRP payments, the IRS, in Rev. …

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