New Case on Taxation of CRP Payments for Non-Farmers

In an opinion issued October 10, 2014, the 8th Circuit Court of Appeals in the case of Morehouse v. Comr. overturned the decision of the U.S. Tax Court on the issue of whether Conservation Reserve Program (CRP) payments to non-farmers are subject to self-employment tax.  The Tax Court had determined that Mr. Morehouse was “‘engaged in the business of participating in the CRP․ with the primary intent of making a profit’ and that there was a sufficient nexus between this business and the CRP payments, thus categorizing the payments as net earnings from self-employment.”  The Tax Court rejected the argument that were rentals from real estate and therefore not included in net earnings from self-employment.

Prior to 2003, the IRS had taken the position that CRP rental payments paid to a person who did not materially participate in a farming operation were not subject to self-employment tax.  Subsequently, that position changed and the IRS began asserting that all CRP payments were subject to self-employment tax.

In overturning the decision of the Tax Court, the 8th Circuit stated: “we embrace the agency's longstanding position that land conservation payments made to non-farmers constitute rentals from real estate and are excluded from the self-employment tax. While CRP contracts may require farmers to conduct a small subset of activities similar to those used in a portion of their general farming operations, the same cannot be said for non-farmers. The only reason they even indirectly engage in or arrange for any “tilling, seeding, fertilizing, and weed control” activities on their CRP land is because the agreement with the government requires them to do so.” (Citations omitted).

While the decision is only directly applicable to the States in the 8th Circuit (Arkansas, Iowa, Missouri, Minnesota, Nebraska, North Dakota and South Dakota), it provides a good argument for non-farmer recipients of CRP payments in other states.  It remains to be seen how the IRS will now respond.  If you would like to read more about this check out Roger McEowen’s article at:  https://www.calt.iastate.edu/sites/default/files/files-page/Morehouse%20CRP%20SE%20Tax%20Article.pdf