June 27, 2013
A June 18, 2013 ruling by the U.S. Tax Court on the taxation of Conservation Reserve Program (CRP) payments may have a significant impact on the decision of landowners to enroll land in the CRP. Prior to the ruling in Morehouse v. Commissioner of Internal Revenue, the prevailing view was that a CRP payment is not subject to the federal self-employment tax, unless that taxpayer is a farmer materially participating in a farming operation. CRP payments to non-farmers, including passive investors in farmland and non-farming heirs to farm property, were not considered subject to the self-employment tax.
But in the Morehouse case, the U.S. Tax Court ruled that a landowner or investor — who was not involved in the trade or business of farming — could be subject to the self-employment tax based on engagement “in the business of participating in the CRP.” This business includes enrolling and maintaining properties in the CRP and making management decisions in accordance with the terms of the CRP contracts with the primary intent of making a profit.
The U.S. Tax Court also ruled that the CRP payments do not constitute “rentals from real estate” that the federal tax code excludes from the self-employment tax. The Tax Court relied on the 2006 decision of a federal appeals court that concluded that a CRP contract is not a rental payment that gives USDA the right to use or occupy the CRP land in exchange for CRP payments. Instead, that court found that the CRP payment is a payment made by USDA in exchange for the services of the landowner in undertaking activities on the land that meet the commitments in the CRP contract. Following that decision, Congress in the 2008 Farm Bill decided to exclude CRP payments from self-employment income for taxpayers receiving regular retirement benefits from Social Security as well as those receiving Social Security disability benefits.
Professor Roger A. McEowen of the Iowa State University Center for Agricultural Law and Taxation has issued a summary of the Morehouse decision that details the history of IRS rulings and court cases concerning the tax status of CRP payments leading up to the decision. His summary notes that if a landowner cash rents farmland instead of putting it in the CRP, the rental income would not be subject to self-employment taxes.
The Morehouse decision may yet be overturned on appeal. If not, some landowners may be less likely to enroll land in the CRP or, if they choose to enroll the land in CRP, more likely to increase their bids for enrolling land into the CRP in order to compensate for the self-employment tax on the CRP payment.
Categories: Conservation, Energy & Environment