Conservation Reserve Program Payments: Self-Employment Income, Rental Income, or Something Else?
Conservation Reserve Program Payments:
Self-Employment Income, Rental Income, or
April 14, 2008
Carol A. Pettit
American Law Division
Conservation Reserve Program Payments: Self-
Employment Income, Rental Income, or Something
Under the Conservation Reserve Program (CRP), owners and operators of
eligible land may enter into a contract with the Secretary of Agriculture to enroll land
in the program and convert it to less intensive use under an approved conservation
plan. In return, participants receive an annual payment that the statute refers to as
“rent.” Legislation establishing and extending the program has been silent as to the
appropriate tax treatment of these payments. For many years, the Internal Revenue
Service (IRS) generally treated the payments as farming income when received by
someone who was engaged in the trade or business of farming, but as rental income
when received by others.
The IRS’s position appears to have changed to one that would treat all
Conservation Reserve Program payments as farming income and, thus, subject to
self-employment tax. Recently, the IRS published a proposed revenue ruling that
explains its treatment of CRP payments as income from the trade or business of
farming and, thus, subject to self-employment tax.
Currently, case law provides some support for the IRS’s position that the CRP’s
annual rental payments are not rent that is excludible from self-employment tax.
This case law has not, however, considered CRP payments received by individuals
who were not previously engaged in farming and who have purchased property and
immediately enrolled it in the CRP (or agreed to continue the enrollment begun by
the previous owner/operator). Neither have courts considered CRP payments to
those who hire third parties to perform activities required by the CRP contract.
The possibility that the payments may not constitute self-employment income
even if they do not qualify as excludible rent has not been considered by either the
courts or the IRS. Neither has yet considered the statutory requirement that all
payments must be returned if the contract is terminated.
The Heartland, Habitat, Harvest, and Horticulture Act of 2007 (S. 2242),th
introduced in the 110 Congress, contained provisions that would exclude CRP
payments from self-employment income for some taxpayers and would allow all
recipients to choose to receive a tax credit in lieu of the payments. These provisions
were incorporated into the 2007 Farm Bill (H.R. 2419), which is in conference.
This report outlines the history of the program, the changing positions of the
IRS, pertinent case law, and other provisions of the Internal Revenue Code (IRC).
Several possible approaches to the taxation of CRP payments are discussed.
Background and Introduction.....................................1
Tax Treatment by the Internal Revenue Service and the Courts..........2
Treatment by IRS Before 1996...............................2
1996 Shift in Tax Treatment.................................3
Post-1995 Guidance from the IRS.............................4
1998 Shift by the Tax Court: Wuebker v. Commissioner...........5
Court of Appeals Reverses Wuebker...........................7
Recent Guidance from the IRS...............................8
Response to Notice 2006-108...................................10
Other Income and Tax Provisions................................11
Rentals of Real Estate.....................................11
Other IRS Rulings and Notices..............................12
Comparison of CRP Payments to Other Types of Income..............14
Rental Real Estate........................................14
Soil Bank Program Payments...............................16
Dairy Termination Program Payments.........................17
Examining the Unexamined Factor: The Repayment Requirement......18
Fair Market Rental Values..................................21
Self-Employment Taxes and the Repayment Provision............21
Appendix. The Conservation Reserve Program..........................22
The Food Security Act of 1985..............................22
The Food, Agriculture, Conservation, and Trade Act of 1990......22
The Federal Agriculture Improvement and Reform Act of 1996.....23
The Farm Security and Rural Investment Act of 2002............24
The 2007 “Farm Bill”.....................................24
Conservation Reserve Program Payments:
Self-Employment Income, Rental Income, or
Background and Introduction
The Conservation Reserve Program1 is a federal program originally intended to
remove highly erodible croplands from production for periods of 10 to 15 years.
Participants in the program agree to remove the land from production and follow an
approved conservation plan. The program was established by the Food Security Act
of 1985.2 Originally enacted to be in effect through 1990, it has been extended34
repeatedly. The most recent extension was through the end of 2007, but legislation
proposed in the 110th Congress would extend it through 2012.5
Participants in the program receive annual payments based on the acreage they
have enrolled in the program. Early termination of the CRP contract requires
repayment of all amounts the participant has received.6
The applicable statute refers to the annual payments as “rental payments.”7
Rental real estate income is generally not subject to self-employment tax even when
received in connection with a trade or business.8 However, early in the program,
1 P.L. 99-198, § 1231, et seq., 99 Stat. at 1509-16 (codified in 16 U.S.C. § 3831, et seq.).
2 P.L. 99-198, 99 Stat. 1354.
3 The Food, Agriculture, Conservation, and Trade Act of 1990, P.L. 101-624, § 1432(2), 104
Stat. 3359, 3577-78; The Federal Agriculture Improvement and Reform Act of 1996, P.L.
P.L 107-171, § 2101(a), 116 Stat. 134, 238. In addition to extending the duration of the
program, legislation has expanded the list of land eligible for the program as well as
modifying the ways in which land enrolled in the program was to be maintained and could
be used. The major bills extending and modifying the program are discussed in the
4 The Farm Security and Rural Investment Act of 2002, P.L 107-171, § 2101(a), 116 Stat.
5 H.R. 2419 (this and all subsequent references are to the engrossed amendment agreed to
by the Senate Dec. 14, 2007).
6 16 U.S.C. § 3832(a)(5)-(6). See also CRS Report RS21613, Conservation Reserve
Program: Status and Current Issues, by Tadlock Cowan.
7 16 U.S.C. § 3833(2).
8 26 U.S.C. § 1402(a).
using a revenue ruling9 written regarding a prior agricultural program,10 the Internal
Revenue Service took the position that CRP annual payments received by farmers
were to be included as self-employment income along with other farm income and,
therefore, subject to self-employment tax. The payments were treated by the IRS as
rental income when received by non-farmers.
Over the years, the IRS has expanded its position regarding CRP payments and
self-employment taxes.11 In December 2006, the IRS issued a notice of a proposed
revenue ruling that takes the position that virtually all CRP annual rental payments
are subject to self-employment taxes.12 The notice has been responded to by
Congress, as well as by others.13
This report outlines the evolution of the IRS’s position along with relevant case
law and legislative history. It also provides comparisons to treatment of income from
other sources where that income has some similarity to CRP payments.
Tax Treatment by the Internal Revenue Service
and the Courts
Taxpayers and the Internal Revenue Service have generally agreed that CRP
payments must be included in gross income and are subject to income tax. However,
there has been conflict regarding whether the payments should be considered income
from farming and, therefore, subject to self-employment tax.
The self-employment tax rate is 15.3%. Many participants would prefer that
their CRP payments be excluded from self-employment tax treatment. Other
individuals may want to increase their eligibility for Social Security benefits by
including the payments in self-employment income. The IRS, to varying degrees, has
treated the payments as includible self-employment income.
Treatment by IRS Before 1996. Until 1996, the IRS treated CRP payments
as self-employment income for those who were otherwise engaged in the trade or
business of farming. For all others, the payments were treated as rental payments and
were not subject to self-employment tax. This treatment was similar to that in an
earlier revenue ruling14 for payments received under the Soil Bank Act.15
In distinguishing between those who were engaged in the trade or business of
farming and all others, it appears that the IRS looked at the participant’s activities
9 Rev. Rul. 60-32.
10 The Soil Bank Act, P.L. 84-540, 70 Stat. 188.
11 See “Tax Treatment by the Internal Revenue and the Courts,” infra.
12 See I.R.S. Notice 2006-108, 2006-51 I.R.B. 1118.
13 Infra “Response to Notice 2006-108.”
14 Rev. Rul. 60-32, 1960-1 C.B. 23.
15 P.L. 84-540, 70 Stat. 188.
just before enrolling land in the program. A participant who had leased his land to
a tenant from March 1, 1984, to March 1, 1985, then farmed it himself for a year, and
subsequently leased it again from March 1, 1986, to March 1, 1987, was considered
retired from the business of farming when he enrolled his land in the CRP in 1987.16
At the time the participant was 71 years old. Since he had previously farmed the land
personally, it is possible that the IRS’s position might have been different had he
been younger and, therefore, not of retirement age.
1996 Shift in Tax Treatment. In 1996, the IRS changed its position
regarding CRP payments received by those not otherwise engaged in the trade or
business of farming. Initially, this shift was signaled by the IRS’s concession, in
Hasbrouck v. Commissioner,17 to taxpayers who had no traditional farming activity
either before or after acquiring the CRP land. The taxpayers had reported the CRP
payments on Schedule F and, after deducting expenses, claimed a loss from farming.
The IRS attributed its concession to the Tax Court’s ruling in another case, Ray v.
Commissioner;18 however, since Ray involved a taxpayer who was involved in
farming and ranching outside of his CRP involvement, it is unclear why the results
in Ray led to the concession in Hasbrouck.
Hasbrouck v. Commissioner. Generally, participants pay less in total taxes
if their CRP payments are treated as rental income rather than as farm income
because they do not have to pay self-employment tax on rental income. However,
when taxpayers have expenses connected to the land that exceed their CRP income,
their tax burden may be lower if they treat the CRP payments as farm income; this
was the case in Hasbrouck.
In Hasbrouck, a couple purchased land in 1987 that had been enrolled in the
CRP by the previous owner.19 The taxpayers chose to continue that enrollment.
They incurred significant expenses, which they maintained were related to the
conservation plan for the CRP land. They then reported their annual CRP payments
on Schedule F, even though they were not otherwise engaged in the trade or business
of farming. On Schedule F, they deducted expenses they incurred, which exceeded
the income from the CRP.20 In 1995, the couple’s tax returns were examined by the
IRS.21 The examination report denied the losses claimed on Schedule F. The report
explained, “Because the amount of income you receive each year is fixed by the
federal government, no amount of effort or management skill on your part can
16 I.R.S. Priv. Ltr. Rul. 88-22-064 (Mar. 7, 1988).
17 76 T.C.M. 48 (1998).
18 72 T.C.M. 780 (1996).
19 76 T.C.M. 48.
20 The nature of these expenses is unclear. Upon examination, the IRS allocated only some
of the expenses to the CRP income saying that these were the only expenses “directly
connected with the maintenance of the [CRP land].” Hasbrouck, 76 T.C.M. 48.
21 It is unclear which tax returns were examined. The case refers to 1990, 1992, and 1994
as the years for which deficiencies were determined, but states that the couple’s 1992, 1993,
and 1994 tax years were examined. Hasbrouck v. Comm’r, 76 T.C.M. 48 (1998).
increase it. Therefore it has been determined that, at this point in your operation, you
are not yet in business.”22 The report went on to say that because the taxpayers were
not in the business of farming, use of the Schedule F was inappropriate.
The couple appealed the IRS determination, providing copies of letters received
each year from the Agricultural Stabilization and Conservation Service office for
their county. These letters stated that their farm operating plan for each year had
been reviewed and it had been determined that they were actively engaged in a
After receiving a notice of deficiency, the Hasbroucks petitioned the U.S. Tax
Court. Just before filing their petition, the couple received a letter from an IRS
Problems Resolution Officer who advised them that “Title 16 of the U.S. Code
specifically designates [CRP] payments as rental payments.”24
Before the case was heard by the Tax Court, the IRS conceded the case,
allowing the losses the couple had claimed on their tax returns. It proceeded as a
claim for attorney’s fees and costs, thus providing a public record of the underlying
facts in the tax controversy.25
Ray v. Commissioner. In Ray, as in Hasbrouck, the taxpayers purchased
land that had been enrolled in the CRP by the previous owner, and they chose to
continue in the program. However, unlike the Hasbroucks, who arguably had no
current farming activity, Mr. Ray was a farmer and a rancher who already owned and
operated other farmland. The Tax Court found that “the CRP acreage was added to
his existing farmland and since [he] was already in the business of farming and
ranching, this was a payment to him in connection with his ongoing trade or
Post-1995 Guidance from the IRS. Since neither tax returns nor IRS
examination reports are generally available to the public, there is no way to know for
certain whether the IRS began, after Ray and Hasbrouck, to treat CRP payments as
self-employment income for those who were not otherwise engaged in the trade or
business of farming. However, a 1997 Market Segment Specialization Audit
Technique Guide for Farming indicated that proper treatment of CRP payments could
22 Hasbrouck, 76 T.C.M. 48 (quoting June 9, 1995 examination report).
23 The Tax Court noted that determining that a participant was actively engaged in a farming
operation involved different criteria from those involved in determining whether one was
in the trade or business of farming. Hasbrouck, 76 T.C.M. 48.
24 Hasbrouck, 76 T.C.M. 48.
25 Fees and costs were denied because the court found that the IRS’s position that the
taxpayers had not established that they were actively engaged in the trade or business of
farming was substantially justified. Hasbrouck, 76 T.C.M. 48.
26 Ray v. Comm’r, 72 T.C.M. 780 (1996).
only be determined on a case-by-case basis.27 An example was provided for a
situation in which the payments would not be subject to self-employment tax: a
retired farmer who would have rented the land out had it not been enrolled in the
Conservation Reserve Program.
Nothing about proposed alternative uses for the land was mentioned, however,
in the Farmer’s Tax Guide for 1996. That IRS publication indicated that “[t]he
annual CRP payment is farm income, ... [reported on] Schedule F. However, if you
do not materially participate in farming operations on the land, the annual payment
is rental income, which you report on Form 4835.”28 In contrast, the same guide for
tax year 1995 stated,
The annual CRP payment is a receipt from farm operations, ... [reported on]
Schedule F. However, if you do not materially participate in production or
management of production of the farm products on your land, the annual29
payment is rental income, which you report on Form 4835.
The change in the IRS publication for taxpayers seems to indicate that the IRS
adopted the view that simply having land enrolled in the CRP was itself a farming
operation, which would be self-employment income so long as the taxpayer
materially participated in that operation — essentially the taxpayers’ view in
1998 Shift by the Tax Court: Wuebker v. Commissioner. In 1998, in
Wuebker v. Commissioner,30 the U.S. Tax Court held that CRP payments were rental
income and, therefore, excluded from self-employment income. The case was heard
by a Special Trial Judge, but the opinion was agreed to and adopted by the Tax Court.
In Wuebker, the taxpayer had been farming for about 20 years before enrolling
all of his tillable land in the Conservation Reserve Program. The contract provided
for rent at $85 per acre. The taxpayer had previously grown crops on the hilly,
erosion-prone land and thought that the land would benefit from participation in the
CRP. He had an additional 44.67 acres not enrolled in the program. This land
consisted of “woods, waterways, and land containing improvements.” He had been
raising laying hens on this additional land and continued to do so after enrolling the
27 Farming — Specific Issues and Farm Cooperatives, TPDS No. 84403T, at 5-7. Available
28 Farmer’s Tax Guide, I.R.S. Pub. No. 225, at 18 (1996) (emphasis added). Available at
[http://www.irs.gov/pub/irs-prior/p225--1996.pdf]. The same guide for 1997 said the same
thing. Farmer’s Tax Guide, I.R.S. Pub. No. 225, at 17 (1997). Available at
[ h t t p : / / www.i r s.go v/ pub/ i r s-pr i o r / p225--1997.pdf ] .
29 Farmer’s Tax Guide, I.R.S. Pub. No. 225, at 18 (1995) (emphasis added). Available at
[http://www.irs.gov/pub/irs-prior/p225--1995.pdf]. The same guide for 1994 said the same
thing. Farmer’s Tax Guide, I.R.S. Pub. No. 225, at 17 (1994). Available at
[ ht t p: / / www.i r s.gov/ pub/ i r s-pr i or / p225--1994.pdf ] .
30 110 T.C. 431 (1998).
previous cropland in the program. He also farmed separate land under a sharecrop
agreem ent . 31
The first year of the CRP contract, the taxpayer established a ground cover as
required by the contract. This involved first disking the 214 acres and then planting
seed. According to the court, little or no upkeep was performed in later years.32
In finding that the CRP payments received by the taxpayer were rent and not
subject to self-employment tax, the court recognized that Congress intended the
exclusion of rent from self-employment income to apply only “for use of space, and,
by implication, such services as are required to maintain the space in condition for
occupancy.”33 In cases where additional services are provided that are so substantial
that the payments received include compensation for those services, the entire
amount is included as self-employment income rather than being excluded as rent.34
The court pointed out that “[t]he statute, the regulations, and the CRP contract
identify the payments as rental payments or rent. The CRP statute and regulations
repeatedly and consistently refer to the annual payments as rent or rentals.”35 The
court noted that “rent” generally referred to compensation for either the occupancy
or use of land.36 The CRP contract placed restrictions on the taxpayer’s use of the
land, which the court apparently viewed as another sort of use.37 The court found that
the primary purpose of the CRP contract was to achieve environmental benefits38 by
restricting usage and that the services required from the taxpayer “were not
substantial and were incidental to the primary purpose of the contract.”39 Therefore,
the payments qualified as rent that was excludible from self-employment income.
31 It is unclear whether this sharecropping began before or after enrolling his cropland in the
32 Only two tax years were in question — 1992 and 1993 — but the case was decided in
1998 and the court, in discussing later upkeep, referred to multiple years subsequent to the
initial year of the contract.
33 Wuebker, 110 T.C. at 436 (quoting Delno v. Celebrezze, 347 F.2d 159, 163 (9th Cir. 1965)
(internal quotation marks omitted).
35 Wuebker, 110 T.C. at 437 (citing 16 U.S.C. §§ 3833(2), 3834(a), (c); 7 C.F.R. §§ 1401.3,
36 Wuebker, 110 T.C. at 436.
37 Property rights are frequently referred to as a bundle of rights — “use” may comprise
several rights such that if one does not have full use of one’s land, another entity is deemed
to have some use of it. See Keith Wiebe, et al., Partial Interests in Land: Policy Tools for
Resource Use and Conservation, AER-744 at 2 (Econ. Research. Serv./USDA 1996).
Available at [http://www.ers.usda.gov/publications/AER744/aer744b.pdf].
38 Wuebker, 110 T.C. at 437.
39 Wuebker, 110 T.C. at 438.
Court of Appeals Reverses Wuebker. The court of appeals did not
agree.40 The majority opinion acknowledged that there was some basis for a position
that the government was using the land by restricting the taxpayer’s use of that land,
but “believe[d] that such an argument impermissibly stretches the plain meaning of
the term ‘use,’ especially in light of the narrow construction required of the rentals-
from-real-estate exclusion.”41 It stated that it was not compelled to conclude that the
CRP payments were rentals even though references in the CRP statute, regulations,
and contract might favor such a conclusion.42 The IRS had argued that the nature of
the payments rather than the label placed on them should lead to a conclusion that
they were not excludible rent and the court agreed.43 It supported its conclusion that
the payments had the form, but not the substance, of rental payments, with the
language of the CRP statute:
[I]n setting forth the CRP payment rules, Congress expressly qualified its use of
the term “rental” by providing that “[t]he amounts payable ... in the form of rental
payments under contracts entered into ... may be determined through ... the44
submission of bids ... or ... [through] other means....
The dissent, however, “believe[d] that the substantial and wide-ranging
limitations”45 the CRP imposed on the taxpayer’s use of the land resulted in the sort
of use by the government that would be compatible with the ordinary meaning of
“rent . ”
The appeals court also disagreed with the Tax Court’s finding that the
maintenance services provided by the taxpayer were legally insignificant. The
appeals court’s finding does not address the actual extent of the taxpayer’s
maintenance services. The finding appears to be based only on what the court
deemed to be the program’s essence — “to prevent participants from farming the
property and to require them to perform various activities in connection with the
land, both at the start of the program and continuously throughout the life of the
contract....”46 Although the Tax Court had cited both a Senate and a House report47
to support its conclusion that “[t]he primary purpose of the CRP is to achieve
40 Wuebker v. Comm’r, 205 F.3d 897 (6th Cir. 2000).
41 Wuebker, 205 F.3d at 904.
42 Wuebker, 205 F.3d at 904.
43 Wuebker, 205 F.3d at 903.
44 Wuebker, 205 F.3d at 905-05 (quoting 16 U.S.C. § 3834(c)(2)) (deletions and emphasis
as supplied by the court).
45 Wuebker, 205 F.3d at 905 (Jones, J. dissenting).
46 Wuebker, 205, F.3d at 904.
47 “S.Rept. 101-357, at 199-200 (1990); H.Rept. 99-271(I), at 81 (1985).” Wuebker, 110
T.C. at 437.
specified environmental benefits,”48 the appeals court cited no support for its
conclusion as to the “essence of the program.”49
Recent Guidance from the IRS. In contrast to the 1997 Market Segment50
Specialization Audit Technique Guide for Farming indicating that proper treatment
of CRP payments could only be determined on a case by case basis, a 2006 guide
indicates that the payments “are reportable on Schedule F and subject to self-
employment tax.”51 The guide provides no exceptions to that treatment.
It appears that the IRS has shifted its position regarding CRP payments again.
Although in 1997, the taxpayer’s material participation in the farm operations was
cited in IRS publications as determining whether the CRP payments were subject to
self-employment tax, the IRS seems to now take the position that material
participation in providing required services under the CRP is irrelevant in
determining whether the payments are subject to self-employment tax. In 2006, the
IRS proposed a revenue ruling that indicates an intent to treat CRP payments as self-
employment income even if the participant’s only “farming activity” was being a
participant in the Conservation Reserve Program, even if the participant hired a third52
party to perform all required activities.
A 2003 Chief Counsel Advice (CCA) came to conclusions about CRP payments
and self-employment tax that are similar to those in the proposed revenue ruling,53
though they do not extend to include payments received by those who do not
materially participate. The CCA relied on two revenue rulings54 and an55
announcement to support its position that CRP payments are includible in self-
employment income whether or not the recipient was otherwise engaged in the trade
or business of farming. Each of the cited sources was released before the inception
of the Conservation Reserve Program. They each addressed payments received under
a different government program. The two revenue rulings are discussed later in this
report.56 The CCA appears to be the first time the announcement was used to support57
a position regarding CRP payments.
48 Wuebker, 110 T.C. at 437.
49 Wuebker, 205 F.3d at 904.
50 Farming — Specific Issues and Farm Cooperatives, TPDS No. 84403T, at 5-7. Available
51 Farmers: Audit Technique Guide at 2-6 (July 2006). Available at [http://www.irs.gov/
52 I.R.S. Notice 2006-108, 2006-51 I.R.B. 1118.
53 See C.C.A. 2003-25-002 (May 29,2003). Available at [http://tax.cchgroup.com].
54 Rev. Rul. 60-32, 1960-1 C.B. 23; Rev. Rul. 65-149, 1965-1 C.B. 434.
55 Announcement 83-43, 1983-10 I.R.B. 29.
56 Infra “Other IRS Rulings and Notices.”
57 A search on CCH for “Announcement 83-43” shows that the announcement has been cited
in another IRS document three times. One of these is this CCA. Another is the 2006 notice
IRS Announcement 83-43 consists of answers to a set of three questions
regarding the “PIK Program”58 and other land diversion programs that are sponsored
by the Department of Agriculture. The first two questions address estate tax issues,
and in doing so, the answer to the first states that participation in the “program will
be treated as material participation in the operation of a farm with respect to the
diverted acres.” The third question addresses self-employment tax. The answer
states, “A farmer who receives cash or payment in kind from the Department of
Agriculture for participation in a land diversion program is liable for self-
employment tax on the cash or payment in kind received.”59
Generally, IRS Announcements carry very little authority. They are not
published in the Cumulative Bulletin (CB), but appear only in the weekly Internal
Revenue Bulletin (IRB). Some might question using such weak authority as the basis
for a position regarding CRP payments that appears to have no support in either
statutory or case law. The announcement predates the CRP statute, but was not used
as a basis for the IRS’s position on CRP payments until the 2003 CCA. Additionally,
although the announcement is compatible with the IRS’s early treatment of CRP
payments, it does not clearly support the position that all who receive CRP payments
are subject to self-employment tax on the payments. Instead, it refers to “[a] farmer
who receives [payments].”60
The CCA admitted that there are hazards of litigation in asserting that receipt
of CRP payments denotes operation of a trade or business. The facts of an individual
case could lead a court to determine that the taxpayer was not engaged in a trade or
business. Hazards exist both when the required activities under the CRP contract are
minimal as well as when the participants were not farmers before enrolling land in
the CRP. The IRS acknowledged that “[t]here is no case law or guidance that has
held that an individual is considered to have entered into the trade or business of
farming by merely entering into a CRP contract....”61 There is case law that holds
that a factual determination is required in every case to determine whether a taxpayer
is engaged in a trade or business.62 Despite this, in issuing Notice 2006-108, the IRS
has publicly indicated its intention to adopt the position that entering into the CRP
contract means that one is in the trade or business of farming and that the payments
are self-employment income.
with the proposed revenue ruling. The only citation that predates this CCA is a 1983 letter
ruling, 83-30-016 (Apr. 2, 1983), which also predates the CRP.
58 “PIK” stands for “payment in kind.” A participant received payments in the form of
commodities rather than cash.
59 Announcement 83-43, 1983 I.R.B. 29.
60 Id. (emphasis added).
62 Groetzinger v. Comm’r, 480 U.S. 23, 36 (1987). Note that Notice 2006-108 cites this case
as well (“The question of whether a taxpayer is engaged in a trade or business requires an
examination of the relevant facts in each case”). It then, however, reaches the conclusion
that CRP payments are self-employment income from a trade or business.
Response to Notice 2006-108
Congressional Response. Several bills have been introduced in 110th
Congress to address the tax treatment of the CRP payments. Two were introduced
soon after the IRS notice.63 Each proposed excluding CRP payments from self-
employment income. They were referred to committee. A bill was later introduced
in the Senate that would change both the structure of the payments and their64
taxation. It would clearly exclude the income from self-employment income for
certain participants and would allow all participants the option of receiving non-
taxable tax credits rather than annual rental payments, thus shielding CRP payments
from both income and self-employment taxes.65 These provisions are now contained66
in the 2007 Farm Bill, now in conference.
Other Responses. State universities and departments of agriculture often
provide newsletters that address current issues of interest to farmers. They may also
produce yearly tax guides. The proposed revenue ruling garnered attention from
many of these publications. However, they varied in their interpretation of the
impact of the IRS notice.
One 2007 tax guide for farmers acknowledged the IRS’s announced position
regarding self-employment taxes and CRP payments, but stated that there is
“substantial authority to exclude CRP payments from earnings from self-employment
on current tax returns.”67 Another stated that the proposed revenue ruling is effective
for the 2007 tax year and that preparer penalties will be asserted against preparers
who do not include CRP payments in self-employment income for all recipients if68
they fail to disclose this treatment with the tax return. Others advise those receiving
CRP payments to remain attentive to announcements that may come before April 15,69
63 H.R. 2659; S. 1155.
64 The Heartland, Habitat, Harvest, and Horticulture Act of 2007, S. 2242.
65 For the details of this proposed legislation and discussion, see CRS Report RS22851, The
Conservation Reserve Program: Legal Analysis of Proposed Legislation to Change the
Structure and Taxation of Benefits Received, by Carol A. Pettit.
66 H.R. 2419.
67 George F. Patrick, Income Tax Management for Farmers in 2007, CES Paper No. 364-W
at 24-25 (Purdue Extension Serv. Dec. 2007). Available at [http://www.agecon.purdue.edu/
extension/pubs/TAXPLAN2007final.pdf]. The statement appears to apply only to CRP
payments received by those traditionally considered “non-farmers.”
68 Posting of Stu Ellis to The Farm Gate, [http://www.farmgate.uiuc.edu/archive/2007/11/
beware_of_a_new.html] (Nov. 29, 2007, 12:36 a.m.).
69 See e.g., Farmers See New Tax ‘Stimulus,’ Uncertainties, FARM WEEK, Ill. (Farm Bureau
Feb. 15, 2008). Available at [http://farmweek.ilfb.org/viewdocument.asp?did=
Unlike Treasury Regulations, revenue rulings do not have the force of law —
they express the position of the IRS, but are not binding on the courts.70 If a tax
return is examined by the IRS, the IRS may use the revenue ruling to support
recommendations in the revenue agent’s report (RAR). However, proposed revenue
rulings express a proposed position of the IRS. The revenue agent may still assert
the position in the RAR, but it seems unlikely that penalties would be asserted
against either the preparer or the taxpayer for failure to adhere to that proposed
position on the tax return.
A taxpayer wishing to challenge the IRS’s position on CRP payments and self-
employment tax would need to support such a challenge with relevant case law as
well as statutory authority, including legislative history where relevant. Similar
information may be helpful to Congress as it considers whether to enact legislation
addressing the tax status of CRP payments.
Other Income and Tax Provisions
Rentals of Real Estate. As noted by the Tax Court in Wuebker,71 real estate
rentals do not always generate income that is exempt from self-employment tax.7273
Services provided and average rental period are factors that distinguish rental
income that is from a business from rental that is not from a business and, thus, not
subject to self-employment tax.
Hotels or motels generally involve, at a minimum, such personal services as
daily housekeeping and maintenance. They also generally involve rental periods of
less than thirty days. Similarly, beach houses and other vacation getaways are often
rented for less than thirty days at a time and generally include cooking utensils and
linens as well as furnishings. They often include books, games, and magazines and
may include cleaning during the occupancy period. Some may include even more
substantial services, and all generally include cleaning between occupants — in other
words, they include more extensive furnishings and more substantial services than
standard residential real estate that is rented on a monthly or yearly basis. Both
hotel/motels and recreational rental lodgings are considered businesses74 and, to the
extent owned by individuals rather than corporations, the income is subject to self-
On the other hand, long-term rentals of both commercial and residential
properties where the average rental period is at least 30 days do not generate self-
employment tax. In these rentals, there may be some aspect of personal service —
70 Weubker v. Comm’r, 205 F.3d 897, 903 (6th Cir. 2000).
71 110 T.C. at 436.
72 See Delno v. Celebrezze, 347 F.2d 159, 163 n. 9 (1965) (citing S.Rept. 81-1669 (1950),
reprinted in 1950 U.S.C.C.A.N. 3454).
73 See C.F.R. 1.48-1(h)(2)(ii) (allowing business credits for property used predominantly to
house “transients” and defining “used on a transient basis” to mean rental period normally
lasting less than thirty days).
74 Id. See also, S.Rept. 81-1669; C.F.R. 1.1402(a)-4(c); Rev. Rul. 57-108 1957-1 C.B. 273.
repairs and basic maintenance, for example — but it is not considered a material part
of the rental. Instead these services are considered to be necessary to maintain the
property in a condition for occupancy. The income is, by definition, passive,75 rather
than from an active trade or business even when the owner materially participates.
Easement Income. Easements are a real estate concept.76 Most easements
are positive easements, but there can be negative ones as well. A positive easement
allows a person or entity that does not own the land to use the land in certain ways.
Frequently, the owner of one piece of property (the dominant property) may be
granted an easement by the owner of another piece of property (the servient property)
to use the servient property for access to the dominant property. Another sort of
positive easement is a public utility easement that allows the utility company to use
the land to install lines or pipes to deliver utilities to a series of properties.
Negative easements, on the other hand, do not allow an outside party to use the
owner’s land. Instead, they restrain owners from using their own land in certain ways
specified in the easement. In this case, the easement holder may be an adjacent land
owner or may be some other third party.
In the case of both positive and negative easements, the owners generally remain
responsible for maintaining their property. In many jurisdictions, required
maintenance would include mowing and pest control.
Easements, though they often involve transfers of money to the property owners,
do not result in self-employment income and frequently do not result in income at all
for income tax purposes.77 Instead, money paid for permanent easements reduces the
effective amount the owner has invested in the property. This is referred to as “tax
basis.” It becomes important when the property is sold because a decrease in tax
basis will result in an increase in gain from the sale. Compensation for temporary
easements, on the other hand, is treated as a lease,78 taxable as ordinary rental income
in the year of payment.
Other IRS Rulings and Notices.
Revenue Ruling 60-42, 1960-1 C.B. 23. This revenue ruling addressed
payments received under the Soil Bank Act.79 It concluded that the payments
received were “in the nature of receipts from farm operations in that they replace
income which producers could have expected to realize from the normal use of the
75 26 U.S.C. § 469.
76 For a more detailed discussion of easements, both positive and negative, see Wiebe, supra
note 37, at 4-5.
77 See Sales and Other Dispositions of Assets, I.R.S. Pub. No. 544, at 2 (2007). Available
78 Gilbertz v. U.S., 808 F.2d 1374, 1381.
79 P.L. 84-540, 70 Stat. 188.
land devoted to the program.”80 As such they were includible in gross income under
IRC § 61. The revenue ruling concluded by stating that the payments were also
included as self-employment income by those who operate a “farm personally or
through agents or employees,” but were not included by others. The ruling did not
explain the rationale for this difference.
Revenue Ruling 65-149. This ruling uses Revenue Ruling 60-32 to reach
the conclusion that payments for grain storage are self-employment income when
received for storing grain produced by the storage owner, but are rent when that grain
was produced by a third party, even if the grain is a crop share, so long as the storage
owner did not materially participate in the crop-sharing arrangement.
The situation addressed was one in which a farmer grew grain and received a
price support loan on it through the Commodity Stabilization Service (CSS). Under
the loan agreement, he was to store the grain for a fixed period of time. When that
period was up, he was asked to continue storing it, and his loan period was extended.
The CSS agreed to a set fee per bushel of grain for the storage.
The ruling points out that the agreement extending the loan period had “no
language ... to indicate that the [CSS] was leasing storage space” for which it was
paying rent in a landlord tenant relationship. Further, the farmer “had full dominion
and control over the stored grain and could dispose of it at any time and in any
manner he chose, subject to the discharge of the loan obligation.”
Notice 87-26. This notice was issued regarding the Dairy Termination
Program (DTP),81 which was established in the same legislation as the CRP: the Food
Security Act of 1985. Under this program, participating dairy farmers agreed to sell
all of their dairy cows for either slaughter or export.82 They agreed to refrain from
acquiring any interest in either dairy cows or milk production for the contract
period.83 They were also prohibited from either acquiring a milk production facility
or making one available to anyone for the contract period.
The statute is silent regarding the nature of the compensation; it is referred to
only as “a payment to be made by the Secretary.”84 The IRS notice asserted that the
payments were “intended to compensate the milk producer for lost receipts from two
sources.” These sources were (1) the difference between the actual sale price of the
cows for slaughter or export and the higher price the cows would have commanded
if sold for dairy purposes and (2) the dairy production revenue lost when dairy
operations were terminated. To the extent that revenue was lost on the sale of the
cows, the payments were to be treated as sales of business assets, which are not
80 Rev. Rul. 60-32, 1960-1 C.B. 23.
81 P.L. 99-198 § 101 et seq., 99 Stat. at 1362-66.
82 P.L. 99-198 § 101(b)(1), 99 Stat. at 1364.
83 The notice specifies five years, but the statute refers to “a period of 3, 4, or 5 years, as
specified by the Secretary in each producer contract.” P.L. 99-198 § 101(b)(1), 99 Stat. at
84 P.L. 99-198 § 101(b)(1), 99 Stat. at 1363.
subject to self-employment tax. The remainder of the payments received were to be
treated as replacement for milk production income and reported on Schedule F.
These amounts would be self-employment income and, thus, subject to self-
The notice provides no explanation for how the IRS arrived at its explanation
of the purpose of the compensation or why it determined that the payments were to
be attributed first to sales of business assets. The statute required participating
producers to furnish information about marketing history, size and composition of
the dairy herd during that marketing history, and the size and composition of the
dairy herd at the time the bid to participate was submitted.85 It seems likely that it
would have been easier to accurately calculate lost dairy sales revenue than lost
revenue from the sale of the dairy cows. However, the provision may not have
shielded much of the payments from self-employment tax. The notice put the burden
on the taxpayer to show that a portion of the payments received was compensation
for selling the cows as non-dairy cows and, therefore, for less than if they had been
sold as dairy cows at the same time and place.
Comparison of CRP Payments to Other Types of Income
Rental Real Estate. In a 1960 revenue ruling, the IRS found that payments
made by a steel company to owners of farms were rent from real estate that could be
excluded from self-employment income even though the owners’ right to use the land86
was not restricted and the owners were obligated to maintain the land. In
comparison, CRP participants are also required to maintain their enrolled land, but
their use of that land is very restricted.
The situation that was presented in the revenue ruling was one in which the
company’s plant discharged various gases and fumes and the company wanted to
insulate itself from liability for damage to livestock, crops, and other farm property.
To do so, it entered into leases for rights to the farm land; however, these leases did
not restrict the farmers’ use of those lands, but provided that the company would not
be liable for any damages unless due to negligence. The farmers were allowed full
use of their lands, but they were not required to continue using them. They were,
however, required to maintain the land such that it did not “grow up in weeds or
The only way in which the steel company “used” the land was through the gases,
etc., that emanated from the plant. The IRS found that limited use was sufficient to
“carve out of the owner’s interest a certain estate in the land.” The maintenance
services required under the contract were apparently irrelevant to the IRS, since they
were not mentioned at all in the discussion of why the amounts paid constituted
“rentals from real estate” that were not included in self-employment income.
85 P.L. 99-198 § 101(b)(1), 99 Stat. at 1364.
86 Rev. Rul. 60-170, 1960-1 C.B. 357.
Though it did not find the argument persuasive, the Sixth Circuit Court
acknowledged in Wuebker that it is arguable that the government, by placing
restrictions on the use of property enrolled in the CRP, is “using” the property and
payments made could be considered rent. It could be argued that just as the steel
company in the revenue ruling carved out an estate in the land from the owner’s
interest, the government carves out an estate in the land from the owner’s interest
when it restricts the owner’s use of the land under the CRP.
If one accepts that argument, the question becomes whether the services
required under the contract are of such magnitude that “compensation for them can
be said to constitute a material part of the payments”87 made under the contract. If
so, the entire payment should be considered income from self-employment,88 but if
not, none of the payment should be subject to self-employment tax.
In the case of the steel company, the IRS apparently did not consider
maintaining the land free of weeds and sprouts to be services that required
consideration in its analysis of the nature of the payments made to the land owners.
In Wuebker, the Tax Court recounted the services provided by the taxpayer under the
CRP contract and found them minimal. The Sixth Circuit Court, however, found the
services “legally significant,” without explaining why. Those services were,
however, addressed in explaining why there was a nexus between the CRP payments
and the taxpayer’s farming activity on other land. The new revenue ruling proposed
by the IRS refers to these services saying that the circuit court “noted that the
taxpayers were required under the CRP contract to perform tasks intrinsic to the
farming trade or business (e.g. tilling, seeding, fertilizing, and weed control) that
required the use of their farming equipment.” If it is pertinent that the tasks involved
are intrinsic to the farming trade and pertinent that the equipment used is also used
in the farming trade, could it also follow that an owner of residential property that is
rented out might have to include the rent as part of income from self-employment if
that owner were a plumber, electrician, or carpenter and provided routine
maintenance that involved tasks intrinsic to the owner’s trade, particularly if using
the same equipment used in that trade? If not, why are the tasks or equipment
pertinent in determining that CRP payments are income from self-employment?
A further consideration is the extent to which the annual rental payments
actually include payment for services. The Farm Service Agency (FSA), which is
part of the U.S. Department of Agriculture (USDA), establishes a maximum rental
rate for each offer. Participants may offer their land for enrollment at that rate or at
a lower rate.89 The FSA website states that it “bases rental rates on the relative
productivity of the soils within each county and the average dry land cash rent or
cash-rent equivalent.”90 The average annual rental for all CRP land in February 2008
87 Delno, 347 F.2d at 163.
88 Delno, 347 F.2d at 163.
89 Land might be offered at a lower rate to increase the possibility of the land being accepted
90 Available at [http://www.fsa.usda.gov/FSA/webapp?area=home&subject=
was $50.63 per acre; however, allowed rental rates ranged from $44.16 per acre to
$125.44 per acre.91 CRP annual payments vary depending upon the type of land and
the location of that land, not on services provided. The payments do not exceed the
fair market rental for the land. This leaves the question open as to how and why the
IRS has determined that the payments are for services and subject to self-employment
Easements. The CRP does not acquire a legal easement when it enrolls land
in the program. However, the limitations placed on the use of the enrolled land are
similar to limitations on land use when a negative easement is in place.92 CRP
payments amount to $1.8 billion annually. If the CRP acquired a permanent
easement, these payments would, in most cases, reduce the owner’s basis in the land,
resulting in no immediate tax revenue to offset the payments. However, reasonable
unrestricted use of the enrolled land reverts to the owner/operator at the end of the
enrollment period. Therefore, even if the CRP held a legal easement, it is likely that
the payments would be treated as currently taxable rental payments rather than being
nontaxable to the extent that they did not exceed the basis of the land.
Soil Bank Program Payments. Revenue Ruling 60-32 addressed payments
received under the Soil Bank Act and concluded that they were to be included in self-
employment income when received by those who were otherwise engaged in the
trade or business of farming because they replaced income the recipients would have
generated from farming the land.93 Similar reasoning has been used by the IRS to
support its position regarding CRP payments.
In discussing CRP payments, the IRS has said that the annual rental payments
have “the substantive effect of providing owners and operators with compensation
for the potential income from their land had they devoted such land to the production
of an agricultural commodity.”94 However, nothing in the statutory language for the
Conservation Reserve Program either states or implies that the payments are being
made to compensate for the participant’s loss of commodity income. On the other
hand, the Soil Bank Act explicitly states that
[c]ompensation ... shall ... provide producers with a fair and reasonable return for
reducing their acreage of the commodity, taking into consideration the loss of
production of the commodity on the reserve acreage, any savings in cost which
91 Conservation Reserve Program Monthly Summary (Feb. 2008). Available at
[ h t t p : / / www.f s a.usda.gov/ Int er net / FSA_Fi l e / f eb2008.pdf ] .
92 See Wiebe, supra note 37 at 7 (“The Conservation Reserve Program does not strictly
acquire easements, at least in the legal sense, although the interests acquired are closely
analogous in economic terms”).
93 See supra “Other IRS Rulings and Notices.”
94 I.R.S. Priv. Ltr. Rul. 88-22-064.
result from not planting the commodity on the reserve acreage, and the incentive95
necessary to achieve the reserve acreage goal.
In contrast, virtually all references to CRP payments use the term “rent” to
describe them. Although the Sixth Circuit Court inferred significance from the
phrase “in the form of rental payments,” the legislative history gives no indication
that the payments were rent in form only. Both the House Report and the Conference96
Report refer to the payments as rent.
Use of the “substance over form” doctrine to invalidate, for tax purposes, the
form given to a transaction by Congress is an unusual application of the doctrine.
The doctrine is one that is generally used when the taxpayer was able to influence the
form of a transaction, choosing one with favorable tax consequences rather than
another with less favorable ones even though that form might better reflect the real
substance of the transaction.97 In the case of CRP payments, participants have no
influence over the form of the transaction. Instead it is the government that chose the
form of the transaction. It is arguable that participants may have relied on Congress’s
description of the transaction — and its accompanying tax consequences — when
choosing to enroll their land in the CRP.
Grain Storage. Revenue Ruling 65-149 found that grain storage fees were
includible as self-employment income when there was no language in the agreement
to indicate that the Commodity Stabilization Service was leasing space and paying98
rent. In the provided facts, the farmer had “full dominion and control” of the grain.
In contrast, the CRP contracts state that the payments are rent and set out the
limitations placed on the participant’s use of the enrolled land. The participant does
not have full dominion and control over the land. Even the right to freely transfer the
land is limited since if the land is transferred to anyone who chooses not to continue
the enrollment, repayment of all payments will generally be required.
Dairy Termination Program Payments. IRS Notice 87-26 found that
payments received under the Dairy Termination Program were not includible in self-
employment income to the extent that they represented compensation for the lower
prices received when dairy cows were sold for slaughter or export. The statute
establishing the payments was silent regarding the nature of the payments and the
IRS provided no explanation of its determination of the purpose for the payments.
Both the Dairy Termination Program (DTP) and the Conservation Reserve
Program were established in the same legislation. However, in the former, the IRS
95 P.L. 84-540, 70 Stat. at 191.
96 H.Rept. 99-271 at 81 (“annual rental payments”), 285 (“land rental payments”), 413
(“land rental fee”) (1985); H.Rept. 99-447 at 465 (“annual rental fees” and “rental
payments”) (1985) (Conf. Rep.).
97 BORIS I. BITTKER ET AL., FEDERAL INCOME TAXATION OF INDIVIDUALS ¶ 1.03, at 1-31
to -32 (3d ed. 2002).
98 See supra “Other IRS Rulings and Notices.”
chose to infer purpose and form to the DTP payments, despite the statute’s silence
on those matters. In the latter, the IRS has chosen to ignore the statute’s description
of the payments as rent. Instead, over the years, it has used different interpretations
to support inclusion of the CRP payments in self-employment income.
Initially, the IRS treated the payments as for lost income from crop production
when received by farmers. For those who were not engaged in farming, the payments
were treated as rent, but even that treatment may have been as compensation for lost
income in that a non-farmer might otherwise have rented the land out.99 Unlike the
DTP, the CRP has never required participants to provide information regarding either
the income they had derived from the land before enrolling it in the CRP or other
income they might receive if the land were not enrolled.
More recently, the IRS’s position seems to have shifted to one that considers the
CRP payments to be compensation for services performed under the terms of the
contract. This leaves at least two questions unanswered:
!Why do the payments for services remain the same even though the
extent of those services may vary greatly from year to year?
!Why must the entire amount be repaid if the contract is terminated
Examining the Unexamined Factor:
The Repayment Requirement
Both the Internal Revenue Service and the Tax Court have repeatedly looked at
CRP payments to determine whether they should be included in self-employment
income or excluded under the rental income exclusion. In so doing, neither has
looked at the requirement that all payments received by participants, whether as
annual rental payments or as cost-share payments for the conservation plan, generally
must be repaid if the contract is terminated before it expires.100 Termination may101
occur if the participant violates a term or condition of the contract. Termination
also occurs if owner/operators transfer their rights and interests in the contracted land102
unless the transferee agrees to assume the contract. However, repayment is not
required in two situations: (1) “the land is purchased by or for the United States Fish103
and Wildlife Service” or (2) the Secretary of Agriculture and the new
owner/operator agree to modifications that are in line with the program’s
99 See Farming — Specific Issues and Farm Cooperatives, supra note 57 (providing as an
example a retired farmer who would otherwise rent out the land).
100 16 U.S.C. § 3832(a)(5)-(6). See also CRS Report RS21613, Conservation Reserve
Program: Status and Current Issues, by Tadlock Cowan.
101 16 U.S.C. § 3832(a)(5).
102 16 U.S.C. § 3832(a)(6). However, for some land early termination without repayment
is allowed for contracts entered into prior to 1995 that have been in force for at least five
years. 16 U.S.C. § 3835(c).
objectives.104 Assuming that their tax returns were filed in compliance with the IRS’s
position on CRP annual payments, participants paid both income and self-
employment tax on the annual payments that must be repaid if the contract is
The Internal Revenue Code (IRC) provides a possible income tax solution for
those who have included amounts in taxable income and, after the close of that tax
year, repaid all or part of the amount previously received.105 In this situation, a
taxpayer may be allowed to deduct the amount repaid in the year it is repaid. If the
amount is over $3,000, the IRC allows taxpayers to compare the income tax savings
from the deduction to the income tax savings that would have occurred had the
amount not been included in income in the year it was received, and recoup the larger
tax savings.106 There does not, however, appear to be a similar provision for
recapturing the self-employment tax paid on those previously taxed but repaid
Participants who are actively engaged in farming outside of their CRP land may
be able to recoup both the income tax and self-employment tax paid on the CRP
annual payments that must be repaid after termination. If the participant’s net income
from farming is equal to or greater than the amount repaid, it appears that the self-
employment tax might be reduced in the repayment year to the same degree that it
was increased in the years in which the CRP payments were included in income. If,
however, the participant had no self-employment income other than the CRP
payments, the self-employment tax for the year of repayment would be zero, but this
would not recapture self-employment tax paid in earlier years.107 Thus, though some
participants who must repay CRP annual payments may be able to recoup some or
all of the self-employment taxes paid in previous years, such recoupment is not
certain for all participants.
Amending prior years’ tax returns to remove the CRP payments does not
provide a way to recoup either income or self-employment tax. CRP payments are
received under a “claim of right.”108 At the time the payments were received, the
taxpayer had an unqualified right to the payment. As such, the payments cannot be
removed from income for the tax year in which they were received, even if they are
The requirement to repay all CRP payments that were received raises at least
two issues. First is the equitable issue regarding imposing self-employment tax on
the annual payments but providing no sure means for that self-employment tax to be
105 26 U.S.C. § 1341.
106 See Treas. Reg. § 1.1341-1 for further discussion and examples of calculations.
107 If the repayment were large enough to result in a net operating loss in the year of
repayment, some of the self-employment tax previously paid might be recouped through a
net operating loss carryback.
108 For discussion of “claim of right,” see BITTKER ET AL, supra note 94, ¶ 4.03, at 4-8 to
recouped if the money must be returned. Second is the issue of whether money that
must be repaid if the land does not remain out of production for the duration of the
contract can reasonably be considered money paid for services rather than money
paid for agreeing to refrain from using the land commercially.
It is easy to understand the IRS’s move to treat all CRP payments as self-
employment income subject to self-employment tax. Doing so establishes a bright-
line rule that does not require interpretation of facts and circumstances on a case-by-
case basis. Such a rule is easier for the IRS to enforce and easier for taxpayers to
This is similar to the bright-line rule that treats income from hotels and motels
as self-employment income, but treats longer-term real estate rentals as rental
income. A bright-line rule for CRP payments might be based on a determination by
Congress that the services required under the CRP contracts are significant and
payment for them is included in the CRP “rent.” This would eliminate the need to
examine the services provided on a case-by-case basis. Further, it would eliminate
any arguable need to examine whether the participant was engaged in the trade or
business of farming. The CRP payments would be considered income from self-
employment because they included compensation for significant services. With this
bright-line rule, there would be no need to consider the extent of the services
provided by the recipient on a case-by-case basis.
A different bright-line rule could be established if Congress were to choose to
do so: a bright-line rule that CRP payments are to be treated as rent that is not subject
to self-employment tax. As evidenced by bills repeatedly introduced in Congress,
some Members of Congress have been aware that the IRS was treating some CRP
payments as self-employment income, but, thus far, Congress has not chosen to act
to change that. If Congress now chooses to examine the possibility of explicitly
excluding some or all CRP payments from self-employment income, it may want to
look at the services required under the CRP contracts and conservation plans. It may
also want to determine actual fair market rental values for lands similar to those
enrolled in the CRP to determine whether CRP payments exceed those values.
Services Required. The Tax Court and the Sixth Circuit Court disagreed
regarding the significance of the services provided by the taxpayer in fulfilling the
obligations under the CRP contract. A survey of the activities of participants might
provide information as to the extent and significance of services provided by
participants. It is possible that these may be greater in the first year than in
subsequent years and that services may be more significant for some types of enrolled
lands and conservation plans than for others. Congress might choose to determine
to what extent participants must provide significant services on an ongoing basis over
the life of the contract.
If it were to determine that there were significant services in the first year of a
contract, but negligible ones in subsequent years, it might choose to treat CRP
payments differently in the first year than in subsequent ones. Modifying the way in
which the payments are reported to the participant and the IRS109 would allow the
nature of the payments to be clear and aid the IRS’s enforcement efforts. Of course,
Congress could decide to exclude the CRP payments from self-employment income
in all years even if the services required in the first year were disproportionate to the
services required in later years. Similarly, if Congress determined that some types
of land or conservation plans required more ongoing services, it could designate that
all CRP payments for those lands or plans would be includible in self-employment
income. In either case, the statute could be modified to explicitly define the nature
of the payments received and their tax treatment.
Fair Market Rental Values. The correlation between the annual CRP rental
payments and the fair market rental rates for similar land might be another
consideration. The average rental payments for all CRP property is $51 per acre, but
payments vary depending upon the type of land, its location, and the particular type
of enrollment. Even if Congress finds that the CRP payments are no more than the
rental income that might be received from a third party who would use the land, it
could still determine that the services provided were sufficient that the payments
must be considered self-employment income. However, it might conclude that
payments that were at or below fair market rental values could not be considered to
include compensation for services, thus shielding the payments from self-
employment tax. Conversely, if it should find that the payments made by the CRP
were greater than the fair market rental rate, it could consider that a clear indication
that the CRP payments included compensation for services and thus clearly subject
to self-employment tax.
Self-Employment Taxes and the Repayment Provision. Congress may
choose to enact legislation that explicitly excludes some or all CRP payments from
self-employment income. Taking no legislative action would leave the issue up to
the IRS and the courts. If Congress chooses not to act to exclude any or all CRP
payments from self-employment income, it may want to consider whether some
provision should be made to allow recoupment of self-employment taxes paid
whenever a contract is terminated and the participant is required to return all
109 The first year’s payments might be reported as “non-employee compensation” on Form
Alternatively, Form 1099 — G could be modified to distinguish between first year and
subsequent years’ payments.
Appendix. The Conservation Reserve Program
The Food Security Act of 1985. Under the Food Security Act of 1985, the
Secretary of Agriculture was to “enter into contracts with owners and operators of
farms and ranches containing highly erodible cropland.”110 Other lands could be
included in the program if they “pose[d] an off-farm environmental threat or ... a
threat of continued degradation of productivity due to soil salinity.”111 The contracts
could not be for more than 15 years nor less than 10. No more than 45 million acres
could be enrolled in the program. In the first year — crop year 1986 — the act
required enrollment of at least 5 million acres. Each year, through 1989, the
minimum was increased by 10 million acres. For the final year, the minimum was
increased to 40 million acres. One-eighth of the land under contract was to be
devoted to trees.
Under the program, owner/operators were required to follow a plan, approved
by their local conservation district, to convert the enrolled land to a less intensive use
according to a planned schedule and to establish an approved vegetative cover on the
land. They were generally prohibited from using the land for agricultural purposes,
and could not use the forage from the land commercially, whether for harvesting,
grazing, or any other commercial purpose.112
In return, the owner/operators were to be reimbursed for half of the cost of the
conservation measures when such cost-sharing was “appropriate and in the public
interest.”113 Additionally, they were to be paid an “annual rental payment” in cash
or commodities.114 However, full refunds of both the rental payments and the cost-
share payments could be required in two situations: (1) violation of the contract
sufficient to warrant termination of the contract, or (2) transfer of the
owner/operator’s rights and interests in the land to another who chose not to assume
all the obligations of the contract.115 In case of termination, the act specified that the
repayment was to be with interest. Partial repayment might be required if the
contract had been violated but the Secretary of Agriculture did not find termination
The Food, Agriculture, Conservation, and Trade Act of 1990. This
act extended the Conservation Reserve Program through 1995 and expanded the
types of land eligible for the program.117 In addition to highly erodible croplands,
eligible land included some marginal pasture lands as well as otherwise ineligible
110 P.L. 99-198, § 1231 (b), 99 Stat. at 1509.
112 P.L. 99-198. § 1232, 99 Stat. at 1509-11.
113 P.L. 99-198, § 1234(a)-(b), 99 Stat. at 1511.
114 P.L. 99-198, § 1234(a), 99 Stat. at 1511.
115 P.L. 99-198, § 1232(a)(5)-(6), 99 Stat. at 1510.
116 P.L. 99-198, § 1232(a)(5), 99 Stat. at 1510.
117 P.L. 101-624, § 1432, 104 Stat. 3359, 3577-78.
croplands if their continued use for agricultural production created certain threats to
water or the environment. Otherwise ineligible croplands could also be enrolled if
they were “newly-created, permanent grass sod waterways, or ... contour grass sod
strips established and maintained as part of an approved conservation plan.”118
Croplands that would “be devoted to ... newly established living snow fences,
permanent wildlife habitat, windbreaks, shelterbelts, or filterstrips devoted to trees
or shrubs”119 could also be enrolled in the program.
The 1990 act also modified the duties of contract holders. Rather than requiring
vegetative cover to be established on all enrolled lands, the 1990 act allowed
owner/operators to establish “water cover for the enhancement of wildlife”120 so long
as it did not include commercial fish ponds or ponds used to water livestock or
irrigate crops. Water cover was allowed in addition to vegetative cover. For some
contracts entered into after the date of enactment, the act prohibited owner/operators
from producing agricultural commodities on their unenrolled highly erodible land if
that land was purchased after the date of enactment and had not previously been used
to produce nonforage agricultural commodities.121 However, “alley cropping” of
agricultural commodities could be allowed in conjunction with enrolled land that was
planted in hardwood trees.122
One-eighth of the land enrolled between 1991 and 1995 was to be devoted to
either trees or “shrubs or other noncrop vegetation or water that may provide a
permanent habitat for wildlife including migratory waterfowl.”123 Owner/operators
holding contracts predating the 1990 act were allowed to convert highly erodible
lands from vegetative cover to “hardwood trees, windbreaks, shelterbelts, or wildlife
corridors,”124 but were required to participate in the Forest Stewardship Program.125
In some cases, owner/operators could choose to convert the land to wetlands rather
The Federal Agriculture Improvement and Reform Act of 1996. The127
1996 act extended the Conservation Reserve Program through 2002. It also
reduced the maximum enrollment to 36.4 million acres at any one time. It did not
expand the list of land eligible for enrollment nor modify the duties of the
118 P.L. 101-624, § 1432, 104 Stat. at 3578 (amending P.L. 98-198, § 1231(b)(4)(B)).
119 P.L. 101-624, § 1432, 104 Stat. at 3578 (amending P.L. 98-198, § 1231(b)(4)(C)).
120 P.L. 101-624, § 1433, 104 Stat. at 3579 (amending P.L. 98-198, § 1232(a)(4)).
121 P.L. 101-624, § 1433, 104 Stat. at 3580 (amending P.L. 98-198 to add § 1232(a)(11)).
122 P.L. 101-624, § 1433, 104 Stat. at 3580 (amending P.L. 98-198 to add § 1232(d)).
123 P.L. 101-624, § 1433, 104 Stat. at 3580 (amending P.L. 98-198, § 1232(c)).
124 P.L. 101-624, § 1435, 104 Stat. at 3582 (amending P.L. 98-198 to add § 1235A).
125 P.L. 101-624, § 1435, 104 Stat. at 3583 (amending P.L. 98-198 to add § 1235A(d)).
126 P.L. 101-624, § 1435, 104 Stat. at 3583 (amending P.L. 98-198 to add § 1235A(b)).
127 P.L. 104-127, § 332, 110 Stat. 888, 994 (amending P.L. 98-198, § 1231).
owner/operators. It did, however, allow for early termination of some contracts
predating January 1, 1995.128
The Farm Security and Rural Investment Act of 2002. The 2002 act129
extended the Conservation Reserve Program through 2007. The purpose of the
program was revised to include conservation of the eligible land’s wildlife resources130
as well as soil and water resources. Maximum enrollment was increased to 39.2
million acres. The act expanded the definition of eligible lands to include otherwise
ineligible cropland that was part of a field where more than half of the field was
enrolled as a buffer and the remainder could not feasibly be farmed.
The act also established a pilot program for wetlands and buffers. Wetlands
were eligible only if they had been cropped in 3 out of the last 10 years. To be
eligible for enrollment, buffers had to be contiguous to the wetlands and used to
protect the wetlands. So long as the total acreage of the wetland and its buffers was
no more than 40 acres, buffers could be up to three times the area of the wetland or
150 feet on each side, whichever was larger. Owners and operators of the enrolled
wetlands were required to fulfill the same duties as those with other eligible lands,
but were also required to restore the hydrology as much as possible and establish a
vegetative cover, which could include water-based vegetation.
The 2007 “Farm Bill”. H.R. 2419 is commonly referred to as the “Farm
Bill.” The Senate passed the bill with amendments late in 2007, and the bill is now
in conference. The amendments include provisions for the Conservation Reserve
Program that were found in an earlier Senate bill.131
This act, if passed, would extend the Conservation Reserve Program through
2012. It would expand the purpose of the program to include conservation and
improvement of pollinator habitat resources.132 It authorizes enrollment of several
types of previously ineligible lands. Marginal pasture land and hay land would be
eligible if devoted to appropriate native vegetation, so long as the land would
“contribute to the restoration of a long-leaf pine forest or other declining forest
ecosyst em .”133
The pilot program for wetlands and buffers would continue, but would add two
additional types of land: (1) shallow water areas previously used as a “commercial
pond-raised aqua-culture operation”134 and (2) agricultural drainage water treatment
designed to remove nitrogen, so long as the flow comes from a row crop agricultural
drainage system. Eligible buffers would include those around a shallow water area
128 P.L. 104-127. § 332, 110 Stat. at 994 (amending P.L. 98-198 to add § 1235(e)).
129 P.L. 107-171 § 2101(a), 116 Stat. at 238.
131 The Heartland, Habitat, Harvest, and Horticulture Act of 2007, S. 2242, 110th Congress.
132 H.R. 2419 § 2311(a)(2) (engrossed amendment agreed to by the Senate).
133 H.R. 2419 § 2311 (b)(4).
134 H.R. 2419 § 2311(e).
as well as those around a wetland. The duties of owner/operators of land in the pilot
program would remain the same; however, acceptable vegetative cover would
include “bottomland hardwoods, cypress, and other appropriate tree species in
shallow water areas.”135