The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Your CRP Income May Be Subject to SE Tax
Jun 19, 2013
In the Morehouse Tax Court case just issued yesterday, the court ruled that the receipt of CRP payments by a non-farmer are subject to self-employment taxes. The case involved a taxpayer located in Minnesota who inherited property in South Dakota and continued to invest in additional farm land in that state. At all times, the taxpayer never "farmed" the property, but instead either rented the land out or participated in CRP. Over the years, the taxpayer placed additional land into CRP.
The court ruled that the payments were subject to self-employment tax since the taxpayer was in the business of farming primarily due to his participation in the following activities:
- Satisfied seeding and weed control obligations;
- Visited properties to ensure that the properties maintained their status as CRP properties;
- Filed annual certificates;
- Participated in emergency haying programs;
- Requested cost-sharing payments; and
- Made decisions regarding the profitability of keeping the properties enrolled in CRP.
Additionally, the court indicated that taxpayer was engaged in an "environmental friendly farming operation". It seems to me the taxpayer was simply trying to make more money from enrolling the land in CRP than he could get from cash renting the property.
The Court also ruled that the taxpayer was not a farmer, but "was engaged in the business of participating in the CRP and that he enrolled, maintained, and managed multiple properties subject to CRP contracts with the primary intent of making a profit." It seems under this logic that the court could easily extend this definition to any rental activity that has some type of contract with a governmental agency such as low-income housing, etc. This may become a slippery slope by the court.
The Court also overruled its own Wuebker decision in arriving at its current ruling in this case. Courts are like people, they can change their mind.
Under the ruling of this case, it appears that almost any farmland enrolled in CRP will be subject to SE tax (at least in the Eighth Circuit) unless the case gets appealed and overruled which may take a couple of years to resolve. We will keep you posted with any update on the case, but for now, if you have land enrolled in CRP, make sure to discuss this case with your tax advisor.