Historically the Internal Revenue Service has held that payments from the Conservation Reserve Program (CRP) are only subject to self-employment tax if the person signing is engaged in what it termed the “trade of business” of farming.
In 2003, the IRS changed its position without precedent, declaring that merely signing a CRP agreement indicates a taxpayer is engaged in the “trade or business” of farming such that his or her CRP income is subject to self-employment tax. For the first time, on June 18, the U-S Tax Court upheld that position.
Director of Iowa State University’s Center for Agricultural Law and Taxation, Roger McEowen, above, says the ruling carries serious implications.
Based on this case, I’m not going to put my land in the CRP unless I can increase my bid – and have the USDA accept it – by 15.3%, because that’s the additional tax that we’re talking about here. And I think that’s going to be the practical impact of this, is people that want to put land in the CRP, particularly those people that are not farmers and are purely passive, but farmers also, they’re going to increase their bids to recover the tax that the IRS is going to pay. So you look at it from the government standpoint, what do they win here? Are they going to get more revenue?
Though, maybe initially, but over the long haul, what’s going to happen is the government is going to have to pay out more in CRP prices to reflect the higher bids that the producers, that the landowners are going to ask to be able to recover the additional tax.
So the government pays out more, [then] recovers it back, what have you gained?
The ruling also creates a bizarre situation; two previous cases not addressed by the court demonstrated that signing a CRP contract did not classify taxpayers as engaged in the “trade or business” of farming where it concerned the deduction of business expenses incurred in maintaining CRP acres. However, the latest ruling applies self-employment tax to CRP income by merely signing, and McEowen objects to denying deductions but requiring the self-employment tax.
McEowen says farm or conservation groups may fund an appeal, or petition the U.S. Tax Court for a rehearing. He thinks the latter may be successful, given the situation concerning deductions and self-employment tax, which seems to be a discrepancy in the court’s own opinion.