140 T.C. 16
T.C.2013Background
- Petitioners Rollin J. Morehouse and Maureen B. Morehouse owned multiple South Dakota properties and enrolled portions in the USDA Conservation Reserve Program (CRP).
- They did not farm the land themselves but rented tillable portions to tenants while participating in CRP contracts that required maintenance and compliance with conservation plans.
- CRP payments were received in 2006–2007 for Grant County, Roberts County, and Roberts County 129-acre parcel, with additional income from hunting-related activities and gravel operations on some parcels.
- Respondent determined petitioners owed self-employment tax under I.R.C. § 1401 on the CRP payments and treated them as self-employment income.
- Petitioners reported CRP-derived amounts as rental income on Schedule E and argued either trade/business nexus or 1402(a)(1) real estate rentals exclusion could exclude these payments from self-employment tax.
- The Tax Court overruled a prior Sixth Circuit view and held CRP payments are not rentals from real estate and are includible in net earnings from self-employment under § 1401, sustaining the deficiency.
- Note: The court relied on agency arrangements (via Mr. Redlin) and substantial CRP obligations to establish a trade or business.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CRP payments are self-employment income | Morehouse contends no trade/business nexus | Respondent asserts CRP payments arise from a CRP trade/business | Yes; CRP participation constitutes a trade/business with nexus to payments |
| Whether Mr. Redlin's involvement affects Nexus | Participation via agent should not create trade/business | Agent involvement satisfies continuity and control under Sec. 1402 | Yes; petitioner's CRP activity through an agent constitutes trade/business |
| Whether CRP payments are rentals from real estate under 1402(a)(1) | Payments are rentals for land use | CRP payments are not rentals; they are CRP labor-based payments | No; CRP payments are not rentals from real estate under 1402(a)(1) |
| Who bears the nexus between CRP payments and business activity | There is a direct nexus to CRP obligations | The nexus requirement is not met | Yes; there is a nexus between CRP payments and the CRP business activity |
Key Cases Cited
- Bot v. Commissioner, 353 F.3d 595 (8th Cir. 2004) (CRP-like payments can be within trade or business for SE tax purposes)
- Wuebker v. Commissioner, 110 T.C. 431 (1998) (CRP payments not rentals from real estate; background on use restrictions vs. labor services)
- Wuebker v. Commissioner, 205 F.3d 897 (6th Cir. 2000) ( Sixth Circuit overruled Tax Court on rentals issue; affirms strong link between CRP and farming activity)
- Ray v. Commissioner, T.C. Memo. 1996-436 (1996) (CRP payments linked to ongoing farming business (distinguishes based on involvement))
- Johnson v. Commissioner, 60 T.C. 829 (1973) (Rentals from real estate narrowly construed; services may negate rental characterization)
- Delno v. Celebrezze, 347 F.2d 159 (9th Cir. 1965) (Narrow construction of 'rentals from real estate')