350

ROLLIN J. MOREHOUSE AND MAUREEN B. MOREHOUSE, 

PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, 

RESPONDENT

Docket No. 823–11. Filed June 18, 2013. 

During 2006 and 2007 P–H received payments under the 

U.S. Department of Agriculture Conservation Reserve Program (CRP). Respondent determined that P–H was liable for 

self-employment tax under I.R.C. sec. 1401 on the CRP payments. P–H claims that the CRP payments are not includible 

in his self-employment income because he was neither 

engaged in nor derived the CRP payments from operation of 

a trade or business. Alternatively, P–H claims that the CRP 

payments are excluded from the calculation of his net 

earnings from self-employment under I.R.C. sec. 1402(a)(1) 

because the CRP payments constituted ‘‘rentals from real 

estate’’. Held: P–H’s CRP payments are includible in his selfemployment income under I.R.C. sec. 1401 because he was 

engaged in a trade or business during the years in issue and 

there was a nexus between his trade or business and the CRP 

payments he received. Held, further, P–H’s CRP payments are 

not ‘‘rentals from real estate’’ within the meaning of I.R.C. 

(350) MOREHOUSE v. COMMISSIONER 351

1On their 2006 Schedule E, Supplemental Income and Loss, petitioners 

reported that they paid management fees of $2,001 with respect to property in Grant County, South Dakota, that Rollin J. Morehouse owned. See 

infra pp. 351–352. Petitioners concede that their tax return preparer erroneously entered $2,001 and that they actually paid management fees of 

$201 with respect to the property. 2 Unless otherwise indicated, all section references are to the Internal 

Revenue Code, as amended and in effect for the years in issue, and all 

Rule references are to the Tax Court Rules of Practice and Procedure. 

Some amounts have been rounded to the nearest whole number. 

sec. 1402(a)(1). Wuebker v. Commissioner, 110 T.C. 431 (1998), 

rev’d, 205 F.3d 897 (6th Cir. 2000), is overruled. 

Paul J. Quast and Neal J. Shapiro, for petitioners. 

Blaine C. Holiday, for respondent. 

MARVEL, Judge: In a notice of deficiency dated October 14, 

2010, respondent determined deficiencies with respect to 

petitioners’ Federal income tax of $3,341 and $3,664 for 2006 

and 2007, respectively. After concessions, 1 the sole issue for 

decision is whether petitioners are liable for self-employment 

tax under section 1401 2 on payments they received under 

the U.S. Department of Agriculture (USDA) Conservation 

Reserve Program (CRP). 

FINDINGS OF FACT 

Some of the facts have been stipulated and are so found. 

The stipulation of facts is incorporated herein by this reference. Petitioners resided in Minnesota when they filed 

their petition. 

I. Background 

Mr. Morehouse (hereinafter, petitioner) holds a bachelor’s 

degree in business from the University of Minnesota. Following graduation he worked as a regional sales manager 

and as an associate publisher. In 1987 petitioner began providing marketing and fundraising services for the University 

of Texas at Austin. 

In 1994 petitioner acquired 503 acres of land in Grant 

County, South Dakota (Grant County property), 320 acres of 

land in Roberts County, South Dakota (Roberts County property), and 400 acres of land in Day County, South Dakota 

(Day County property) (collectively, South Dakota propVerDate Nov 24 2008 10:17 Jul 11, 2014 Jkt 372897 PO 20012 Frm 00002 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\MOOREHOUSE JAMIE
352 140 UNITED STATES TAX COURT REPORTS (350) 

3The CRP contract with respect to the 129-acre parcel in Roberts County 

was conveyed with the land to petitioner in 1994. In 1999 petitioner in his 

capacity as owner of the Roberts County property entered into a new CRP 

contract with respect to the 129-acre parcel. See infra pp. 354–355. 4Petitioner rented the Grant County property and the remaining 191 

acres of the Roberts County property until 1997, when he placed that land 

in the CRP. See infra pp. 353–354. He rented the Day County property 

from the time of his acquisition through the years in issue. 

erties). He acquired the South Dakota properties through 

inheritance and by purchasing various undivided interests in 

the properties from his relatives. All of the land was tillable 

cropland, with the exception of: (1) a gravel pit on the Grant 

County property; and (2) 129 acres of the Roberts County 

property, which petitioner’s father had placed in the CRP 

program. 3

Petitioner, who lived in Texas at the time he acquired the 

South Dakota properties, did not personally farm any of the 

land. Instead, he rented the tillable portions of the South 

Dakota properties to various individuals who farmed their 

rented portions. 4

In 2003 petitioner left his position at the University of 

Texas and moved with his family to Minnesota. Upon moving 

to Minnesota petitioner became the primary caregiver for his 

four sons. Although petitioner retired from the corporate 

sphere, he continued to manage his various investments and 

property interests, including his interests in the South 

Dakota properties. 

II. Petitioner’s Participation in the CRP 

A. The CRP in General 

The CRP was established pursuant to the Food Security 

Act of 1985. See Food Security Act of 1985, Pub. L. No. 99– 

198, secs. 1231–1236, 99 Stat. at 1509–1514 (codified as 

amended at 16 U.S.C. secs. 3831–3835 (2012)); see also 7 

C.F.R. pt. 1410 (2011). Under the CRP, the USDA may enter 

into contracts with owners and operators of land ‘‘to conserve 

and improve the soil, water, and wildlife resources of such 

land and to address issues raised by State, regional, and 

national conservation initiatives.’’ 16 U.S.C. sec. 3831(a). 

Owners and operators of land agree to implement a conservation plan and refrain from using the land for agricultural 

(350) MOREHOUSE v. COMMISSIONER 353

5Tit. 16 U.S.C. sec. 3833(2) (2012) provides that the annual ‘‘rental’’ payment is intended to compensate owners and operators for ‘‘(A) the conversion of highly erodible cropland normally devoted to the production of an 

agricultural commodity on a farm or ranch to a less intensive use; and (B) 

the retirement of any cropland base and allotment history that the owner 

or operator agrees to retire permanently.’’ 6The ‘‘rental rate’’ under contract 262 was set at $52.26 per acre. 

7The ‘‘rental rate’’ under contract 263 was set at $53.83 per acre. 

purposes. Id. sec. 3832(a). In return, the USDA shares the 

cost of carrying out the conservation plan and pays to the 

owner or operator an ‘‘annual rental payment’’. 5 Id. sec. 

3833. 

B. Petitioner’s Enrollment in the CRP and the CRP 

Contracts 

In 1997 petitioner submitted applications to the USDA, 

offering for enrollment in the CRP the tillable land on the 

Grant County property as well as the remaining 191 acres of 

the Roberts County property. 

In 1997 the Grant County and Roberts County Farm 

Service Agency (FSA) offices approved petitioner’s applications and accepted his land into the CRP. Subsequently, the 

Commodity Credit Corporation (CCC) executed the resulting 

CRP contracts with respect to the Grant County and Roberts 

County properties. Petitioner personally assumed all obligations and responsibilities of compliance under the CRP contracts. 

With respect to the Grant County property, petitioner and 

the CCC executed two contracts: (1) contract No. 262, covering 180 acres of land (contract 262); and (2) contract No. 

263, covering 251 acres of land (contract 263). Both Grant 

County CRP contracts listed petitioner as the owner of the 

land and did not identify anyone as the operator of the land. 

Contract 262 provided that the CCC would pay to petitioner 

a first-year payment of $8,609 and an annual contract payment of $9,391. 6 Contract 263 provided that the CCC would 

pay to petitioner a first-year payment of $12,405 and an 

annual contract payment of $13,533. 7

Pursuant to a conservation plan attached to the Grant 

County CRP contracts, petitioner agreed to: (1) maintain 

already established grass and legume cover for the life of the 

contract; (2) ‘‘[e]stablish perennial vegetative cover on land 

354 140 UNITED STATES TAX COURT REPORTS (350) 

8The ‘‘rental rate’’ under the Roberts County CRP contract was set at 

$50.50 per acre. 9 In September 2006 the CCC agreed to modify the Roberts County CRP 

contract and extend the expiration date of that contract to September 30, 

2012. 10The ‘‘rental rate’’ under the 1999 Roberts County CRP contract was 

set at $44.63 per acre. 

temporarily removed from agricultural production’’, including 

pubescent or intermediate wheatgrass, alfalfa, and sweet 

clover; and (3) engage in ‘‘pest control and pesticide management’’ for the life of the contract. The CCC agreed to share 

with petitioner the cost of establishing these conservation 

plans. 

The Roberts County CRP contract covered 191 acres of 

petitioner’s land. The Roberts County CRP contract listed 

petitioner as the owner of the land and did not identify anyone as the operator of the land. The Roberts County CRP 

contract provided that the CCC would make an annual contract payment of $9,666. 8

Pursuant to a conservation plan attached to the Roberts 

County CRP contract, petitioner agreed to: (1) ‘‘[c]ontrol pests 

such as weeds, livestock, insects and disease’’ and (2) 

‘‘[e]stablish adapted native perenial [sic] vegetative cover’’ 

including Western wheatgrass, green needlegrass, and 

alfalfa. The conservation plan also provided an estimated 

cost share for the plan. Once the work was completed, petitioner was required to provide to the CCC ‘‘a report of 

performance’’ and ‘‘submit receipts and seed tags affiliated 

with practice establishment’’. The CCC agreed to share with 

petitioner the costs of establishing the conservation plan. 9

In June 1999 petitioner and the CCC executed a new CRP 

contract (1999 Roberts County CRP contract) with respect to 

the 129-acre parcel in Roberts County that petitioner had 

acquired in 1994 already subject to a CRP contract. The 1999 

Roberts County CRP contract listed petitioner as the owner 

of the land and did not identify any operator of the land. The 

1999 Roberts County CRP contract provided that the CCC 

would make an annual contract payment of $5,757. 10 Under 

the 1999 Roberts County CRP contract, petitioner agreed to: 

(1) maintain already established grass and legume cover for 

the life of the contract; (2) ‘‘establish native perennial vegetative cover on land temporarily removed from agricultural 

(350) MOREHOUSE v. COMMISSIONER 355

11On July 30, 1997, petitioner mailed to the Grant County FSA a letter, 

titled as an addendum. In the letter petitioner indicated that he will ‘‘assume all obligations and responsibilities of contractual compliance as may 

be administered by and through FSA or otherwise pertaining to subject 

lands by independent contract with WALLACE L. REDLIN, Jr. for machine hire, monitoring and supervision as essential and necessary on all 

land identified in the CRP contract’’. Petitioner testified that he sent the 

addendum to the Grant County FSA to clarify how he planned to comply 

with the CRP contract considering the fact that he resided in Texas at the 

time. 

production’’; (3) engage in ‘‘pest control and pesticide 

management’’ for the life of the contract; and (4) control 

weeds by either mowing or chemical means. The 1999 Roberts County CRP contract prohibited petitioner from haying 

or grazing the enrolled land. 

C. Implementation of the Conservation Plans 

Petitioner hired Wallace Redlin to carry out some of petitioner’s obligations under the CRP contracts. 11 Mr. Redlin 

was a retired farmer who had placed all of his land in the 

CRP. Mr. Redlin previously had rented the Grant County 

and Roberts County properties from petitioner for use in Mr. 

Redlin’s farming operations. 

In 1998 petitioner purchased the required seeding materials and shipped the materials to Mr. Redlin. Mr. Redlin 

then performed the initial seedbed preparation and seeding. 

In 2000, pursuant to the 1999 Roberts County CRP contract, 

Mr. Redlin plowed a portion of the land and reseeded it with 

various grasses. 

D. Termination of CRP Contract 262 

In 2001 Grant County FSA employees discovered that petitioner was engaging in gravel quarry activity on the Grant 

County property and had been using part of the property for 

a road. The Grant County FSA, acting on behalf of the 

USDA, terminated petitioner’s participation in the CRP with 

respect to nine acres of the Grant County property and 

required him to refund $2,540, an amount equal to all prior 

payments with respect to that portion of the property, plus 

interest and liquidated damages. The Grant County FSA also 

provided for the implementation of CRP contract No. 262–A, 

356 140 UNITED STATES TAX COURT REPORTS (350) 

12Petitioner donated the hay and/or the haying or grazing privileges to 

a livestock producer and accordingly was not required to reduce the 

amount of his CRP payment with respect to that land. 

covering the remaining 171 acres of the Grant County property, which continued to be enrolled in the CRP program. 

III. Petitioner’s Activities With Respect to the South Dakota 

Properties 

Although Mr. Redlin performed some of petitioner’s obligations under the CRP contracts at petitioner’s request and 

direction, petitioner fulfilled other obligations, including the 

making of annual certifications that he was implementing 

the conservation plans in accordance with the CRP contracts. 

Between 1997 and 2007 petitioner participated in three CRP 

haying programs with respect to the South Dakota properties. In July 2002 petitioner requested authority for emergency haying or grazing. 12 Petitioner signed the necessary 

forms and made donations to ranchers and farmers as provided for by the CRP. 

Petitioner also personally purchased materials needed to 

implement the conservation plans, which he then shipped to 

Mr. Redlin. Petitioner paid Mr. Redlin for the work he performed to satisfy some of petitioner’s obligations under the 

CRP contracts. Petitioner also sought and received from the 

USDA cost-sharing payments for the seeding and weeding 

activities on the Grant County and Roberts County properties. Petitioner gathered various documents, including 

receipts and invoices, and submitted these documents along 

with official applications in order to receive the cost-sharing 

payments. 

In addition to his activities with respect the CRP contracts, 

petitioner engaged in various other activities with respect to 

the South Dakota properties. Petitioner allowed individuals 

to hunt on portions of the South Dakota properties. He traveled to meetings with various parties with the express purpose of negotiating agreements with people interested in 

hunting on the South Dakota properties. Petitioner also operated a gravel pit on the Grant County property. During the 

years at issue petitioner sold gravel to the Grant County 

Highway Department and Lura Township, the local township. Petitioner also rented the Day County property. 

(350) MOREHOUSE v. COMMISSIONER 357

Between 1994 and 2007 petitioner visited the South 

Dakota properties several times each year. In 2006 petitioner 

visited the South Dakota properties four times. In 2007 petitioner visited the South Dakota properties two times. He 

typically visited the South Dakota properties for two to three 

days at a time. On such trips petitioner would visit the 

gravel pit to ensure that there had been no unauthorized 

excavation or removal of gravel, drive to each of the South 

Dakota properties, and meet with officials at the FSA and 

the Grant County Highway Department. He also would meet 

with individuals who had an interest in renting one of his 

properties or in hunting on the properties. 

IV. Petitioner’s Income With Respect to the South Dakota 

Properties 

In 2006 petitioner received CRP payments of $22,449 and 

$15,423 with respect to the Grant County and Roberts 

County properties, respectively. 

In 2007 petitioner received income of $25,869 with respect 

to the Grant County property as follows: (1) CRP payments 

of $22,449; (2) a payment of $2,515 from Mr. Redlin for 

hunting privileges; and (3) a payment of $905 from Mike 

Krakow for the right to cut hay on the land. He received 

income of $17,281 with respect to the Roberts County property as follows: (1) CRP payments of $15,423; and (2) a payment of $1,858 from the South Dakota Game and Fish 

Department for participation in a walk-in hunting program. 

V. Petitioners’ Tax Reporting and the Notice of Deficiency 

Petitioners timely filed Forms 1040, U.S. Individual 

Income Tax Return, for 2006 and 2007. On their returns 

petitioners identified their occupations as ‘‘self-employed’’. On 

attached Schedules E petitioners reported income and 

expenses with respect to their three properties as follows: 

2006 Schedule E 

Day County 

property 

Grant County 

property 

Roberts County 

property 

Rents received $22,478 $22,449 $15,423

Total expenses 3,287 7,606 4,662

Net income 19,191 14,843 10,761

358 140 UNITED STATES TAX COURT REPORTS (350) 

13This figure represents the net income petitioner received in 2006 with 

respect to the Grant County and Roberts County properties. As stated 

supra p. 357, in 2006 petitioner’s only income with respect to the Grant 

County and Roberts County properties consisted of CRP payments. 14This figure represents the net CRP payments petitioner received in 

2007 with respect to the Grant County and Roberts County properties. As 

discussed supra p. 357, in 2007 petitioner received additional income of 

$5,278 with respect to these properties. Respondent did not include this 

additional income in calculating petitioners’ unreported self-employment 

income. 15 Respondent appears to have accepted that the income generated by petitioner’s rental activity with respect to the Day County property is not 

subject to self-employment tax, presumably because of the provisions of 

sec. 1402(a)(1). See also Henderson v. Flemming, 283 F.2d 882, 888 (5th 

Cir. 1960). 

2007 Schedule E 

Day County 

property 

Grant County 

property 

Roberts County 

property 

Rents received $37,962 $25,869 $17,281

Total expenses 3,017 5,194 4,287

Net income 34,945 20,675 12,994

On October 14, 2010, respondent mailed to petitioners the 

notice of deficiency for 2006 and 2007 determining that: (1) 

petitioners erroneously reported their CRP payments as farm 

rental income on their returns; (2) petitioners should have 

reported the CRP payments as income on a Schedule F, 

Profit or Loss From Farming, for each year. Respondent also 

determined that the CRP payments constituted self-employment income and therefore determined that petitioners had 

unreported self-employment income of $25,604 13 and 

$28,391 14 for 2006 and 2007, respectively. 15 Respondent 

allowed petitioners additional deductions with respect to the 

self-employment tax liabilities. 

OPINION 

A taxpayer’s self-employment income is subject to selfemployment tax. Sec. 1401(a) and (b). Self-employment tax is 

assessed and collected as part of the income tax, must be 

included in computing any income tax deficiency or overpayment for the applicable tax period, and must be taken into 

account for estimated tax purposes. Sec. 1401; see also sec. 

1.1401–1(a), Income Tax Regs. Self-employment income generally is defined as ‘‘the net earnings from self-employment 

(350) MOREHOUSE v. COMMISSIONER 359

16 In 2008 Congress amended sec. 1402(a) to read: ‘‘[T]here shall be excluded rentals from real estate and from personal property leased with the 

real estate (including such rentals paid in crop shares, and including payments under section 1233(2) of the Food Security Act of 1985 (16 U.S.C. 

3833(2)) to individuals receiving benefits under section 202 or 223 of the 

Social Security Act)’’. Under sec. 1402(a) as amended, payments made 

under 16 U.S.C. sec. 3833(2) to individuals who were receiving benefits 

under sec. 202 or sec. 223 of the Social Security Act (SSA) are excluded 

from the calculation of net earnings from self-employment. Tit. 16 U.S.C. 

sec. 3833(2) (2012) refers to payments received from the USDA under the 

CRP. See supra p. 352. The amendment applies to CRP payments made 

after December 31, 2007. Food, Conservation, and Energy Act of 2008, 

Pub. L. No. 110–246, sec. 15301(c), 122 Stat. at 2263. SSA sec. 202 provides for the payment of old-age and survivors insurance benefits. 42 

U.S.C. sec. 402 (2012). SSA sec. 223 provides for the payment of disability 

insurance benefits. 42 U.S.C. sec. 423 (2012). 

Petitioner received the payments at issue before December 31, 2007. 

Furthermore, petitioner does not contend, and he has not introduced any 

evidence to show, that he was receiving benefits under the SSA. Accordingly, the 2008 amendment to sec. 1402(a) is inapplicable to our analysis 

herein. 

derived by an individual’’. Sec. 1402(b). Section 1402(a) 

defines ‘‘[n]et earnings from self-employment’’ as ‘‘the gross 

income derived by an individual from any trade or business 

carried on by such individual, less the deductions allowed by 

this subtitle which are attributable to such trade or business’’. See also sec. 1.1402(a)–1, Income Tax Regs. In computing a taxpayer’s net earnings from self-employment, section 1402(a)(1) provides: 

[T]here shall be excluded rentals from real estate and from personal 

property leased with the real estate (including such rentals paid in crop 

shares)[16] together with the deductions attributable thereto, unless such 

rentals are received in the course of a trade or business as a real estate 

dealer; except that the preceding provisions of this paragraph shall not 

apply to any income derived by the owner or tenant of land if (A) such 

income is derived under an arrangement, between the owner or tenant 

and another individual, which provides that such other individual shall 

produce agricultural or horticultural commodities (including livestock, 

bees, poultry, and fur-bearing animals and wildlife) on such land, and 

that there shall be material participation by the owner or tenant (as 

determined without regard to any activities of an agent of such owner 

or tenant) in the production or the management of the production of 

such agricultural or horticultural commodities, and (B) there is material 

participation by the owner or tenant (as determined without regard to 

360 140 UNITED STATES TAX COURT REPORTS (350) 

17The regulations under sec. 1402(a)(1) refer to the farm rental income 

that is included in a taxpayer’s net earnings from self-employment as includible farm rental income. See, e.g., sec. 1.1402(a)–4(b), Income Tax Regs. 

In this Opinion we will refer to such income as includible farm rental income. 18 In arguing that petitioner was engaged in an active trade or business, 

respondent relies on determinations made by the Grant County FSA that 

petitioner was ‘‘actively engaged in a farming operation’’. This Court previously has held that a determination by the USDA that an individual was 

actively engaged in farming ‘‘is not a determination for Federal income tax 

purposes that * * * [the individual was] actively engaged in a trade or 

business for purposes of section 162(a).’’ Hasbrouck v. Commissioner, T.C. 

Memo. 1998–249, 1998 WL 373337, at *12, aff ’d without published opinion, 189 F.3d 473 (9th Cir. 1999). Accordingly, the Grant County FSA determination does not control our decision as to whether petitioner was actively engaged in a trade or business for purposes of sec. 162(a). 

any activities of an agent of such owner or tenant) with respect to any 

such agricultural or horticultural commodity.[17] * * * 

The self-employment tax provisions are construed broadly in 

favor of treating income as earnings from self-employment. 

Braddock v. Commissioner, 95 T.C. 639, 644 (1990); 

Hornaday v. Commissioner, 81 T.C. 830, 834 (1983); Hennen 

v. Commissioner, T.C. Memo. 1999–306; S. Rept. No. 81–1669 

(1950), 1950–2 C.B. 302, 354. 

Respondent contends that the CRP payments are taxable 

as self-employment income because petitioner derived the 

CRP payments from his trade or business of conducting an 

environmentally friendly farming operation. 18

Petitioner contends that the CRP payments are not income 

from a trade or business and therefore are not includible in 

his self-employment income. Petitioner contends that he was 

not involved in the trade or business of farming, that his 

minimal activities with respect to the CRP land did not cause 

him to become active in the trade or business of farming, and 

that there was no nexus between the CRP payments received 

and his business activities. In the alternative, petitioner contends that the CRP payments are excluded from the calculation of net earnings from self-employment under the ‘‘rentals 

from real estate’’ exclusion in section 1402(a)(1). 

We examine the parties’ contentions below, taking into 

account the burden of proof, which rests upon petitioners. 

See Rule 142(a)(1). Respondent’s determinations are presumed to be correct; petitioners must prove that respondent’s 

(350) MOREHOUSE v. COMMISSIONER 361

determinations are erroneous in order to rebut the presumption and satisfy their burden of proof. See id.; Welch v. 

Helvering, 290 U.S. 111, 115 (1933). 

I. Self-Employment Income 

A taxpayer’s net earnings from self-employment include 

the gross income derived from any trade or business carried 

on by the taxpayer. Sec. 1402(a)(1). The term ‘‘derived from’’ 

‘‘necessitates a nexus between the income and the trade or 

business actually carried on by the taxpayer.’’ Bot v. Commissioner, 353 F.3d 595, 599 (8th Cir. 2003), aff ’g 118 T.C. 138 

(2002); see also McNamara v. Commissioner, 236 F.3d 410, 

413 (8th Cir. 2000), rev’g T.C. Memo. 1999–333. The term 

‘‘trade or business’’ ‘‘shall have the same meaning as when 

used in section 162 (relating to trade or business expenses)’’. 

Sec. 1402(c). The applicable regulations provide that ‘‘[t]he 

trade or business must be carried on by the individual, either 

personally or through agents or employees.’’ Sec. 1.1402(a)– 

2(b), Income Tax Regs. Under these principles, payments 

constitute self-employment income if they: ‘‘(1) are derived (2) 

from a trade or business (3) carried on by * * * [the taxpayer or his] agents.’’ Bot v. Commissioner, 353 F.3d at 599; 

see also Wuebker v. Commissioner, 205 F.3d 897, 901 (6th 

Cir. 2000), rev’g 110 T.C. 431 (1998). Accordingly, we must 

decide: (1) whether petitioner carried on a trade or business 

during the years in issue, whether personally or through an 

agent; and (2) if so, whether there was a nexus between the 

trade or business conducted and the income petitioner 

received. 

A. Existence of a Trade or Business 

1. Analysis 

To be engaged in a trade or business with respect to which 

deductions are allowable under section 162, the taxpayer 

must be involved in the activity with continuity and regularity, and the taxpayer’s primary purpose for engaging in 

the activity must be for income or profit. Commissioner v. 

Groetzinger, 480 U.S. 23, 35 (1987). Additionally, the taxpayer’s business operations must have commenced. Goodwin 

v. Commissioner, 75 T.C. 424, 433 (1980), aff ’d without published opinion, 691 F.2d 490 (3d Cir. 1982). Whether a taxVerDate Nov 24 2008 10:17 Jul 11, 2014 Jkt 372897 PO 20012 Frm 00012 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\MOOREHOUSE JAMIE
362 140 UNITED STATES TAX COURT REPORTS (350) 

payer is engaged in a trade or business must be ascertained 

from a review of all relevant facts and circumstances. 

Commissioner v. Groetzinger, 480 U.S. at 35. 

The record establishes that petitioner expanded his participation in the CRP over the years and that he participated in 

the CRP with continuity and regularity during 2006 and 

2007. The record further establishes that petitioner did so 

with the primary purpose of making a profit. After his initial 

experience with the CRP petitioner decided to enroll the 

Grant County and Roberts County properties in the CRP 

because he could get a higher rate of return from participating in the CRP than from leasing the properties for 

farming. He negotiated and executed the CRP contracts and, 

by doing so, obligated himself as the owner of the properties 

to satisfy significant contractual obligations regarding 

planting, maintenance, and use of the properties enrolled in 

the CRP and compliance with CRP requirements. Although 

petitioner did not actually perform the planting and maintenance work required by the CRP, he hired an individual, Mr. 

Redlin, to perform the work according to CRP specifications, 

purchased necessary materials, such as seed, and provided 

them to Mr. Redlin, and regularly inspected the properties to 

ensure that they were being maintained and used in accordance with the CRP contractual obligations. On these facts we 

find that petitioner engaged in the business of participating 

in the CRP and managing his CRP properties with the primary intent of making a profit. 

Petitioner contends that his actual participation in the 

CRP and his work complying with the CRP contract requirements were de minimis and did not constitute farming. He 

maintains that all physical labor necessary to plant, seed, 

weed, mow, and maintain the properties (property maintenance activities) in accordance with the CRP contracts was 

performed by his contractor and should not be attributed to 

him. It is immaterial, however, that the property maintenance activities were carried out by someone other than petitioner. As noted supra, for purposes of section 1402 a taxpayer may conduct his trade or business personally or 

through an agent. Sec. 1.1402(a)–2(b), Income Tax Regs.; 

Rev. Rul. 60–32, 1960–1 C.B. 23 (stating that similar payments made to individuals under the Soil Bank Act were 

includible in the individual’s net earnings from self-employVerDate Nov 24 2008 10:17 Jul 11, 2014 Jkt 372897 PO 20012 Frm 00013 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\MOOREHOUSE JAMIE
(350) MOREHOUSE v. COMMISSIONER 363

19 Rev. Rul. 60–32, 1960–1 C.B. 23, 26, states in pertinent part: 

Payments and benefits attributable to the acreage reserve program 

are includible in determining the recipient’s net earnings from self-employment if he operates his farm personally or through agents or employees. This is also true if his farm is operated by others and he participates materially in the production of commodities, or management 

of such production, within the meaning of section 1402(a)(1) * * *. 

* * * If he does not so operate or materially participate, payments received are not to be included in determining net earnings from selfemployment. 

The Internal Revenue Service (IRS) has stated that Notice 2006–108, 

2006–2 C.B. 1118, discussed infra pp. 368–370, would render Rev. Rul. 60– 

32, supra, obsolete. 20 Neither party addresses whether, under applicable State law, Mr. 

Redlin was petitioner’s agent. Because South Dakota has the most significant relationship to petitioner and Mr. Redlin and the transaction at issue, 

whether Mr. Redlin was petitioner’s agent is governed by South Dakota 

law. See Stockmen’s Livestock Exch. v. Thompson, 520 N.W.2d 255, 257– 

258, 258 n.1 (S.D. 1994). Under South Dakota law, the elements required 

to create an agency relationship are ‘‘ ‘manifestation by the principal that 

the agent shall act for him, the agent’s acceptance of the undertaking, and 

the understanding of the parties that the principal is to be in control of 

the undertaking.’ ’’ Tisdall v. Tisdall, 422 N.W.2d 105, 107–108 (S.D. 1988) 

(quoting Southard v. Hansen, 376 N.W.2d 56, 58 (S.D. 1985)). In Tisdall, 

the Supreme Court of South Dakota found that a principal-agent relationship existed when the principal directed the agent to distribute revenue according to applicable statutory guidelines. 

Petitioner hired Mr. Redlin to perform all of the physical farming duties 

required under the CRP contracts. Mr. Redlin apparently accepted petitioner’s offer, as indicated by Mr. Redlin’s completion of the seeding, weeding, mowing, and maintenance activities required under the CRP contracts. Although petitioner testified that he never directed Mr. Redlin’s activities, we reject the testimony as it is apparent from the record that petitioner initially directed Mr. Redlin to perform the property maintenance 

activities required by the CRP contracts and retained the ability to direct 

Continued 

ment if the individual operated his farm either personally or 

through agents or employees). 19 A taxpayer who hires 

another ‘‘to render the services necessary to fulfill’’ the taxpayer’s obligations under a contract is nonetheless liable for 

self-employment tax with respect to the income the taxpayer 

receives pursuant to that contract. Moorhead v. Commissioner, T.C. Memo. 1993–314, 1993 WL 267200, at *6. 

As a participant in the CRP, petitioner, either directly or 

through Mr. Redlin as his agent, 20 regularly and continuVerDate Nov 24 2008 10:17 Jul 11, 2014 Jkt 372897 PO 20012 Frm 00014 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\MOOREHOUSE JAMIE
364 140 UNITED STATES TAX COURT REPORTS (350) 

and control the work that Mr. Redlin was to perform to comply with the 

CRP contracts. See id. Accordingly, we find that Mr. Redlin was petitioner’s agent. 

We note that Notice 2006–108, supra, states that ‘‘[p]articipation in a 

CRP contract meets the criteria to be a trade or business irrespective of 

whether the participant performs the required activities personally or arranges for his obligations to be satisfied by a third party.’’ Notice 2006– 

108, supra, does not discuss the apparent requirement under sec. 

1.1402(a)–2(b), Income Tax Regs., that the trade or business be carried on 

by the individual either personally, or through the individual’s employee, 

as that term is defined in sec. 1402(d), or agent, as that term is defined 

under applicable State law. Because we find that Mr. Redlin was petitioner’s agent, we need not decide whether an individual’s participation in 

a CRP contract constitutes a trade or business under sec. 1402(a) where 

the individual arranges for a third party to perform the obligations required by the CRP contract and the third party is neither an employee nor 

an agent of the individual. 

ously: (1) satisfied seeding and weed control obligations with 

respect to the Grant County and Roberts County properties 

as required under the CRP contracts; (2) visited the Grant 

County and Roberts County properties to ensure that the 

properties maintained their status as CRP properties; (3) 

filed annual certifications; (4) participated in emergency 

haying programs; (5) requested cost-sharing payments; and 

(6) made decisions regarding the profitability of keeping the 

Grant County and Roberts County properties enrolled in the 

CRP. Regardless of whether some or all of these activities 

qualify as farming, we find that petitioner 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. 

2. Additional Support 

Our conclusion is supported by and is consistent with 

existing caselaw and the administrative position of the IRS 

set forth in Notice 2006–108, 2006–2 C.B. 1118, which was 

released on December 5, 2006. It is also consistent with Congress’ enactment in 2008 of a limited exclusion for CRP payments made to taxpayers receiving Social Security retirement or disability benefits. We explain below. 

(350) MOREHOUSE v. COMMISSIONER 365

21 In Wuebker v. Commissioner, 110 T.C. 431 (1998), rev’d, 205 F.3d 897 

(6th Cir. 2000), this Court considered whether the taxpayers were liable 

for self-employment tax on CRP payments they had received. However, in 

that Opinion this Court did not address whether the taxpayers were engaged in a trade or business but instead addressed only whether the CRP 

payments were excluded from the taxpayers’ net earnings from self-employment as ‘‘rentals from real estate’’ under sec. 1402(a)(1). In Wuebker 

v. Commissioner, 205 F.3d 897, the U.S. Court of Appeals for the Sixth 

Circuit addressed whether the CRP payments derived from the taxpayers’ 

farming business but did not decide whether the taxpayers were in the 

trade or business of farming. We discuss both of the Wuebker decisions 

later in this Opinion. See infra pp. 372–374. 

a. Caselaw 

This Court previously has addressed the proper treatment 

of CRP payments for self-employment tax purposes. Wuebker 

v. Commissioner, 110 T.C. 431; 21 Ray v. Commissioner, T.C. 

Memo. 1996–436. However, we are unable to find any case 

other than Ray that addresses whether and to what extent 

a taxpayer who receives CRP payments is engaged in a trade 

or business. While there is very little law focusing on 

whether and to what extent participation in the CRP constitutes a trade or business, Bot v. Commissioner, 118 T.C. 

138, provides guidance regarding the proper treatment of 

analogous payments for self-employment tax purposes. 

Accordingly, we examine each of these decisions and their 

application to the case at bar. 

In Ray v. Commissioner, T.C. Memo. 1996–436, the taxpayer was engaged in the trade or business of farming. He 

then purchased land that had been placed in the CRP by the 

previous owner. The taxpayer fulfilled the previous owner’s 

obligations under the CRP contract and received CRP payments in exchange. This Court concluded that the taxpayer 

received the CRP payments in connection with his ongoing 

trade or business of farming. See also Hasbrouck v. Commissioner, T.C. Memo. 1998–249, aff ’d, 189 F.3d 473 (9th Cir. 

1999), in which the Commissioner, on the basis of this 

Court’s decision in Ray, conceded that the taxpayers were 

involved in the trade or business of farming and therefore 

entitled to the deductions claimed on their Schedules F. In 

so conceding, the Commissioner noted that the only difference between the two factual scenarios was that the taxpayer in Ray was a farmer when he acquired the CRP land, 

366 140 UNITED STATES TAX COURT REPORTS (350) 

whereas the taxpayers in Hasbrouck had no prior farming 

experience. 

In Bot v. Commissioner, 118 T.C. at 141, this Court 

addressed the treatment for self-employment tax purposes of 

payments taxpayers received from an agricultural cooperative (MCP). The taxpayers were retired farmers who purchased MCP cooperative stock and units of equity participation, which ‘‘specified the maximum number of bushels of 

corn the member could be required to produce and deliver to’’ 

MCP each year. Id. at 141–142. The taxpayers also entered 

into uniform marketing agreements (UMAs) with MCP. Id. 

at 141. In return, MCP was required under the UMAs to 

process the corn its members produced and make payments 

to each individual member equal to at least 80% of the loan 

value of each bushel of corn delivered by the individual plus 

a value-added payment, representing ‘‘[the] value added to 

the corn as a result of its processing’’, a payment from MCP’s 

earnings in accordance with its bylaws, and, in some 

instances, a storage fee and interest. Id. at 143. The taxpayers satisfied their production and delivery obligations 

using corn that MCP held in its option pool, rather than corn 

they personally had grown on their farm, and accordingly 

received only the value-added payments. Id. at 142, 144. The 

Commissioner determined that the value-added payments 

were includible in the calculation of the taxpayers’ net 

earnings from self-employment. Id. at 144. 

In deciding whether the taxpayers’ actions constituted a 

trade or business, this Court acknowledged that although the 

taxpayers had retired from farming, they continued to 

participate in MCP and their participation constituted a 

trade or business. Id. at 147. In particular, this Court stated: 

Although petitioners retired from daily farming in 1987 and turned 

over their farm operation to the sons, petitioners nevertheless continued 

to maintain their membership in MCP from 1987 through at least 1995. 

As active members of MCP during 1994 and 1995 [the years in issue,] 

petitioners, either directly or through the sons as their agents, regularly 

and continuously (1) maintained their status as producers under the 

UMAs, (2) made decisions regarding how to satisfy their production and 

delivery obligations * * * under the UMAs, (3) acquired option pool corn 

which they used to satisfy their production and delivery obligations to 

MCP several times each year, and (4) sold corn and corn products for 

profit through MCP. [Id. at 147–148; fn. ref. omitted.] 

(350) MOREHOUSE v. COMMISSIONER 367

In rejecting the taxpayers’ contention that their involvement 

was too minimal to constitute a trade or business, this Court 

relied on the fact that the taxpayers ‘‘regularly and continuously purchased and sold corn with the intention of making 

a profit’’ and purchased additional units of equity over time. 

Id. at 149. 

The U.S. Court of Appeals for the Eighth Circuit affirmed 

the decision of the Tax Court. Bot v. Commissioner, 353 F.3d 

595. While the Court of Appeals emphasized the unique 

nature of the cooperative arrangement, the court also distinguished the taxpayers’ participation in the cooperative, which 

constituted a trade or business, from an individual’s investment in a corporation or gas well, which was merely a passive investment. Id. at 599–600. Unlike a passive investment, the investment in MCP required the taxpayers ‘‘to do 

more than hold the stock or equity units’’ in order to receive 

payment. Id. at 600. 

In Ray v. Commissioner, T.C. Memo. 1996–436, this Court 

relied on the fact that the taxpayer was engaged in the trade 

or business of farming before and during his participation in 

the CRP in finding that the CRP payments were includible 

in his self-employment income. However, we do not read Ray 

to make the taxpayer’s engagement in the business of 

farming before enrolling property in the CRP determinative 

of whether CRP payments constitute income from selfemployment. A taxpayer is not required to have prior experience in a particular trade or business to be permitted deductions under section 162; what is required is that the taxpayer 

have commenced an activity that qualifies as a trade or business. Goodwin v. Commissioner, 75 T.C. at 433. 

Like the taxpayers in Bot v. Commissioner, 118 T.C. 138, 

petitioner was an active participant in a payment program 

(in this case the CRP) who regularly and continuously maintained his status as a participant, maintained the eligibility 

status of his properties, made decisions regarding how to satisfy his obligations under the CRP contracts, including hiring 

Mr. Redlin, entering into the 1999 Roberts County CRP, 

removing a portion of the Grant County property from the 

CRP, and participating in the emergency haying programs, 

and he engaged in such activities for profit. Furthermore, 

because the receipt of CRP payments depended on petitioner’s continued maintenance of his land in accordance 

368 140 UNITED STATES TAX COURT REPORTS (350) 

22 In deciding whether a full-time gambler who made wagers solely for 

his own account was engaged in a trade or business for Federal income tax 

purposes, the Supreme Court in Commissioner v. Groetzinger, 480 U.S. 23, 

27 n.7 (1987), stated as follows: ‘‘Judge Friendly some time ago observed 

that ‘the courts have properly assumed that the term [trade or business] 

includes all means of gaining a livelihood by work, even those which would 

scarcely be so characterized in common speech.’ Trent v. Commissioner, 

291 F.2d 669, 671 (CA2 1961).’’ (Emphasis added.) 

The concept of work that the term ‘‘trade or business’’ embodies is incorporated into the CRP contracts, which impose meaningful obligations and 

duties on petitioner that he had to perform with continuity and regularity 

in order to receive the CRP payments. 

with the CRP contracts, his participation in the CRP was not 

merely a passive investment. Whether petitioner’s activities 

with respect to the CRP constituted farming or simply 

continuous and regular participation in an activity for profit, 

we are convinced that petitioner was engaged in a trade or 

business as defined by section 162. 22

b. Notice 2006–108 

On December 5, 2006, the IRS released Notice 2006–108, 

supra, which contained a proposed revenue ruling regarding 

whether CRP payments were includible in net income from 

self-employment for purposes of calculating a taxpayer’s 

liability for self-employment tax, and solicited comments concerning the conclusions reached in the proposed revenue 

ruling. The IRS in Notice 2006–108, supra, explained that it 

had previously issued an announcement, Announcement 83– 

43, Q&A–3, 1983–10 I.R.B. 29, regarding the self-employment 

tax treatment of payments made by the USDA under land 

diversion programs in which it stated that a farmer who 

receives cash or a payment in kind from the USDA for 

participation in a land diversion program is liable for selfemployment tax on the payments, a conclusion that was consistent with guidance provided in Rev. Rul. 60–32, supra, 

with respect to two earlier land diversion programs. The IRS 

also noted, however, that Rev. Rul. 60–32, supra, states that 

participants in land diversion programs are not subject to 

self-employment tax on the payments if the participants do 

not operate a farm or materially participate in the farming 

activities. The IRS explained that the conclusion in Rev. Rul. 

60–32, supra, is relevant only with respect to the exception 

(350) MOREHOUSE v. COMMISSIONER 369

from net income from self-employment provided in section 

1402(a)(1) for ‘‘rentals from real estate’’. It cited with 

approval and relied on the opinion of the U.S. Court of 

Appeals for the Sixth Circuit in Wuebker v. Commissioner, 

205 F.3d 897, for the proposition that CRP payments do not 

fall within the rental income exclusion but pointed out that 

the taxpayer in Wuebker was engaged in the business of 

farming when he received the CRP payments. Because the 

IRS had received questions regarding whether CRP payments received by a recipient who is retired or not otherwise 

actively engaged in farming are subject to self-employment 

tax, it issued the proposed revenue ruling to respond to those 

questions. 

In Notice 2006–108, 2006–2 C.B. at 119, the proposed revenue ruling holds that CRP rental payments (including 

incentive payments) from the USDA to (1) ‘‘a farmer actively 

engaged in the trade or business of farming who enrolls land 

in CRP and fulfills the CRP contractual obligations personally’’ (taxpayer A) and (2) ‘‘an individual not otherwise 

actively engaged in the trade or business of farming who 

enrolls land in CRP and fulfills the CRP contractual obligations by arranging for a third party to perform the required 

activities’’ (taxpayer B) are both includible in net income 

from self-employment and are not excluded from net income 

from self-employment as ‘‘rentals from real estate’’ under section 1402(a)(1). The IRS explained the holdings of the proposed revenue procedure as follows: 

Participation in a CRP contract is a trade or business for both A and 

B. The participant is obligated to perform a number of activities, 

including but not limited to tilling, seeding, fertilizing, and weed control. 

Although more extensive activities are required at the beginning of the 

contract term than later, the obligation to perform activities extends 

throughout the ten-year period, giving participation in CRP the continuity and regularity necessary to be considered a trade or business. 

Also, both A and B enrolled land in the CRP program to earn a profit. 

Participation in a CRP contract meets the criteria to be a trade or business irrespective of whether the participant performs the required activities personally or arranges for his obligations to be satisfied by a third 

party. Thus, the trade or business treatment is the same for A and B 

even though A meets the CRP requirements for maintenance of the land 

himself whereas B arranges for someone else to do it. Furthermore, the 

CRP meets the criteria to be a trade or business based on the activities 

required directly under the program and without being affected by 

whether the participant is otherwise engaged in farming or any other 

370 140 UNITED STATES TAX COURT REPORTS (350) 

trade or business. * * * Thus, for both A and B, the CRP rental payments are includible in their net income from self-employment. [Id., 

2006–2 C.B. at 1120.] 

Although we are not obligated to defer to the IRS’ 

interpretation of a statute as reflected in administrative 

pronouncements such as Notice 2006–108, supra, see, e.g., 

Tax Analysts v. IRS, 416 F. Supp. 2d 119, 125–126 (D.D.C. 

2006), the notice sets forth the IRS’ interpretation of the 

statute and, consequently, ‘‘may provide evidence of the 

proper construction of the statute’’, Wells Fargo & Co. & 

Subs. v. Commissioner, 224 F.3d 875, 886 (8th Cir. 2000) 

(discussing the precedential value of private rulings), aff ’g in 

part, rev’g in part Norwest Corp. & Subs. v. Commissioner, 

112 T.C. 89 (1999); see Nelson v. Commissioner, 568 F.3d 

662, 665 (8th Cir. 2009) (adopting the framework set forth in 

Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944), in considering what weight to give revenue rulings), aff ’g 130 T.C. 70 

(2008); see also Berger v. Xerox Corp. Ret. Income Guar. Plan, 

338 F.3d 755, 762 (7th Cir. 2003) (discussing the precedential 

value of IRS notices); Esden v. Bank of Boston, 229 F.3d 154, 

168–169 (2d Cir. 2000) (discussing the precedential value of 

IRS notices). In this instance, we conclude that the IRS’ analysis of the CRP and the payments made thereunder and the 

classification of the CRP payments for self-employment tax 

purposes as set forth in Notice 2006–108, supra, while not 

controlling, are nevertheless well grounded and consistent 

with the analysis set forth herein. 

c. Congressional Intent Regarding CRP Payments 

Several attempts have been made to convince Congress to 

enact a blanket exclusion for self-employment tax purposes 

with respect to CRP payments, but Congress did not enact 

proposed legislation amending section 1402 to exclude CRP 

payments from self-employment tax entirely. See 153 Cong. 

Rec. 9170–9171 (2007); 149 Cong. Rec. 15950–15951 (2003); 

147 Cong. Rec. 1776–1783 (2001); 133 Cong. Rec. 8557 

(1987). Congress did, however, enact a partial exclusion. Following the issuance of Notice 2006–108, supra, Congress in 

2008 amended section 1402(a)(1) to exclude CRP payments 

from the calculation of a taxpayer’s net earnings from selfemployment where the taxpayer is receiving Social Security 

(350) MOREHOUSE v. COMMISSIONER 371

23The Staff of the Joint Committee on Taxation has noted that CRP payments generally constitute self-employment income, except in the case of 

taxpayers who receive Social Security retirement or disability benefits. See 

Staff of J. Comm. on Taxation, Description of the Social Security Tax Base 

22 (J. Comm. Print 2011). 

retirement or disability payments. 23 Food, Conservation, and 

Energy Act of 2008, Pub. L. No. 110–246, sec. 15301(a), 122 

Stat. at 2263. If we were to interpret section 1402 to exclude 

entirely CRP payments from the calculation of net earnings 

from self-employment as petitioners contend we should, such 

an interpretation would render the enactment of the 2008 

exclusion meaningless. By enacting only a limited exclusion 

with respect to taxpayers receiving Social Security retirement or disability payments who are also receiving CRP payments, Congress has evidenced an intent not to exclude all 

CRP payments in calculating a taxpayer’s net earnings from 

self-employment under section 1402. 

Having found that petitioner, either individually or 

through his agent, was engaged in a trade or business during 

the years at issue, we examine what would appear to be selfevident—whether there was a nexus between the CRP payments petitioner received and his business activity. 

B. ‘‘Derived From’’ Requirement 

Petitioner received the CRP payments as consideration for 

fulfilling his obligations under the CRP contracts for the 

years in issue. Such consideration provides the required 

nexus between the CRP payments and his trade or business 

of participating in the CRP during the years in issue. See Bot 

v. Commissioner, 353 F.3d at 600; see also Wuebker v. 

Commissioner, 205 F.3d at 902–903 (holding that CRP payments had a direct nexus to the taxpayers’ trade or business 

of farming); Ray v. Commissioner, T.C. Memo. 1996–436. 

II. Petitioner’s Alternative Argument Under Section 1402(a)(1) 

Section 1402(a)(1) provides that ‘‘rentals from real estate’’ 

shall be excluded from the calculation of net earnings from 

self-employment. Petitioner alternatively contends that the 

CRP payments are excluded from his net earnings from selfemployment under section 1402(a)(1) because the payments 

372 140 UNITED STATES TAX COURT REPORTS (350) 

24 In so arguing, petitioner relies, in part, on the fact that the CRP contracts identified the payments as ‘‘rental payments’’. 

constituted rental income. 24 Respondent contends that petitioner is not eligible for the ‘‘rentals from real estate’’ exception under section 1402(a)(1) because petitioner did not 

receive the CRP payments in exchange for the USDA’s occupancy or use of the South Dakota properties but instead 

received the payments as compensation for conducting his 

farming operation in an environmentally friendly manner. 

Accordingly, we must decide whether the CRP payments constituted ‘‘rentals from real estate’’ within the meaning of section 1402(a)(1). 

Neither section 1402 nor any other self-employment tax 

provision of the Code defines the term ‘‘rentals from real 

estate’’. See also Wuebker v. Commissioner, 205 F.3d at 903. 

However, this Court has stated that the exception for 

‘‘rentals from real estate’’ must be ‘‘narrowly construed.’’ 

Johnson v. Commissioner, 60 T.C. 829, 833 (1973); see also 

Delno v. Celebrezze, 347 F.2d 159, 165 (9th Cir. 1965). Ordinarily, rent is defined as compensation ‘‘for the use or occupancy of property’’. Wuebker v. Commissioner, 205 F.3d at 

904. 

In Wuebker v. Commissioner, 110 T.C. at 437, the taxpayers argued that the CRP payments they received constituted ‘‘rentals from real estate’’. In addressing the taxpayers’ contention, this Court first noted that rent ordinarily 

is defined ‘‘as compensation for the occupancy or use of property.’’ Id. at 436. The Court went on to find that the CRP 

statute, the applicable regulations, and the CRP contract 

identified the payments as rental payments. Id. at 438. After 

briefly discussing the taxpayers’ obligations under the CRP 

contracts, this Court concluded that 

[i]n imposing the above-described restrictions on the use of the land, 

the primary purpose of the CRP contract was to effectuate the statutory 

intention of converting highly erodible croplands to soil conserving uses. 

The services that petitioner was required to perform over the contract 

term included maintaining the vegetative cover, controlling weeds, 

insects, and pests on the land, and fulfilling certain reporting requirements. These service obligations were not substantial and were incidental to the primary purpose of the contract. Thus, the CRP payments 

represented compensation for the use restrictions on the land, rather 

than remuneration for petitioner’s labor. * * * [Id.] 

(350) MOREHOUSE v. COMMISSIONER 373

Accordingly, the Court held that the CRP payments qualified 

as ‘‘rentals from real estate’’ under section 1402(a)(1). Id. 

The U.S. Court of Appeals for the Sixth Circuit reversed 

this Court’s decision, holding that the CRP payments were 

not ‘‘rentals from real estate’’ within the meaning of section 

1402(a). Wuebker v. Commissioner, 205 F.3d at 903–905. The 

Court of Appeals began its analysis by stating that generally, 

rental payments constitute consideration paid for either the 

use or occupancy of property. Id. at 904. The Court of 

Appeals quickly dispensed with the issue of whether the CRP 

payments constituted consideration for the occupancy of the 

taxpayers’ property, noting that the USDA’s access was limited to inspections of the property to determine whether the 

taxpayers were in compliance with their CRP contract. Id. 

The Court of Appeals acknowledged that the second issue, 

i.e., whether the CRP payments constituted consideration for 

the use of the taxpayers’ property, presented a much closer 

question. Id. However, the Court of Appeals ultimately 

decided that the USDA did not make the CRP payments in 

exchange for the use of the taxpayers’ property: 

Citing the many objectives of the CRP, such as the reduction of soil erosion and the protection of the nation’s long-term food production 

capabilities, the * * * [taxpayers] assert, and the dissent agrees, that 

the government is ‘‘using’’ the land in question. We believe, however, 

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. * * * Although it is true that the 

* * * [USDA] is seeking, and receiving, a public benefit by conserving 

lands enrolled in the CRP, the * * * [taxpayers] continue to maintain 

control over and free access to their premises. The dissent reasons that, 

because the government ‘‘greatly reduced the range of uses to which the 

* * * [taxpayers] could put their property,’’ it exercised a level of control 

akin to ‘‘use.’’ We remain unpersuaded, however, that the restrictions 

imposed by the * * * [USDA] on a farmer’s use of his own land 

somehow translate into ‘‘use’’ by the * * * [USDA] itself. 

The essence of the program is 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, with the government’s access limited 

to compliance inspections. Given this arrangement, we disagree with the 

Tax Court’s determination that the * * * [taxpayers’] maintenance 

obligations were legally insignificant. 

[Id. at 903–905.] 

374 140 UNITED STATES TAX COURT REPORTS (350) 

In so holding, the Court of Appeals also stated that although 

the CRP statute, the applicable regulations, and the contract 

referred to the amounts as rental payments, such references 

did not dictate a conclusion that the CRP payments fell 

within the ‘‘rentals from real estate’’ exclusion. Id. at 904. 

Following the decision in Wuebker, the IRS issued Notice 

2006–108, supra, proposing a revenue procedure holding that 

‘‘CRP rental payments are not payments for the right to use 

or occupy real property. CRP rental payments are made in 

exchange for conducting activities that meet the commitments of a CRP contract. Therefore, CRP rental payments 

are not * * * rentals from real estate.’’ Following the 

issuance of Notice 2006–108, supra, in 2008 Congress 

amended the section 1402(a)(1) exclusion for ‘‘rentals from 

real estate’’, effective for CRP payments received after 

December 31, 2007, to exclude from the calculation of net 

earnings from self-employment CRP payments made to taxpayers who are receiving Social Security retirement or disability payments. However, Congress neither enacted a 

blanket exclusion with respect to CRP payments nor evidenced any disagreement with the analysis of the Court of 

Appeals for the Sixth Circuit in Wuebker v. Commissioner, 

205 F.3d 897. 

Given the history recited above and our obligation to 

reconsider our position following the reversal of our decision 

in Wuebker by the Court of Appeals for the Sixth Circuit, we 

agree with and adopt the analysis of the Court of Appeals in 

Wuebker v. Commissioner, 205 F.3d at 903–905, regarding 

whether, under section 1402(a)(1), CRP payments are 

excluded from the calculation of net earnings from selfemployment as ‘‘rentals from real estate’’. Under the CRP, a 

participating owner who enrolls land in the program does not 

relinquish control of the land to the USDA, and the USDA 

does not engage in any activities with respect to the land 

that constitute ‘‘use’’ of the land by the USDA, applying a 

commonsense definition of the term. See, e.g., Merriam Webster’s Collegiate Dictionary 1297 (10th ed. 2002) (‘‘to put into 

action or service: avail oneself of: EMPLOY’’). Taxpayers 

participating in the CRP ‘‘maintain control over and free 

access to their premises’’. Wuebker v. Commissioner, 205 F.3d 

at 904. Although the CRP restricts the taxpayer’s use of the 

property, i.e., the taxpayer’s ability to plant certain crops and 

(350) MOREHOUSE v. COMMISSIONER 375

engage in certain activities with respect to the enrolled property, which the taxpayer agrees to in exchange for consideration, the Government does not take possession of the property or acquire the right to use the property for its own purposes. 

Furthermore, we agree with the finding of the Court of 

Appeals for the Sixth Circuit in Wuebker, that a taxpayer’s 

activities with respect to the CRP contract are legally significant. Id. As discussed supra pp. 363–364, a taxpayer who 

participates in a CRP contract, either individually or through 

an agent or employee, must engage in property maintenance 

activities for the benefit of the enrolled properties with regularity and perform periodic administrative and reporting 

duties to satisfy his obligations under the contract and 

receive CRP payments. The contractual obligations are 

substantial and require more than de minimis action by the 

taxpayer or his agent to satisfy them. 

Additionally, we note that the activities required of petitioner under the CRP contracts were not limited to maintenance activities and instead included the performance of 

duties not ‘‘usually or customarily rendered in connection 

with’’ the mere rental of farmland. Johnson v. Commissioner, 

60 T.C. at 831–832 (holding that boat stall rental payments 

did not constitute ‘‘rentals from real estate’’ where the taxpayer also provided various services at no additional charge, 

including providing gas and oils, selling sundry items, 

making arrangements for boat repairs, recharging batteries, 

loaning boating equipment, providing fishing tips, and 

checking for overdue boats); see also Delno, 347 F.2d at 165 

(interpreting an identical provision of the SSA and finding 

that the individual’s activities with respect to the property 

were not those usually rendered in connection with the 

rental of property). 

Although the CRP statute, the regulations, and the contracts refer to the payments as rental payments, we do not 

find that the use of the term ‘‘rental’’ dictates a conclusion 

that the payments constituted ‘‘rentals from real estate’’. See, 

e.g., Wuebker v. Commissioner, 205 F.3d at 904 (noting that 

Congress qualified the use of the term ‘‘rent’’ with respect to 

CRP payments by providing that the CRP payments would 

be made ‘‘in the form of rental payments’’). We are not 

required to treat as rental payments all payments labeled 

376 140 UNITED STATES TAX COURT REPORTS (350) 

‘‘rent’’. Instead we may examine the substance of so-called 

rent payments to decide whether the payments actually constituted rent or some other type of income. See Opine Timber 

Co. v. Commissioner, 64 T.C. 700, 709–711 (1975), aff ’d without published opinion, 552 F.2d 368 (5th Cir. 1977). The CRP 

payments petitioner received appear to be proceeds from his 

own use of the land rather than rent he received for permitting another entity to use his land. See, e.g., Webster Corp. 

v. Commissioner, 25 T.C. 55, 61 (1955), aff ’d, 240 F.2d 164 

(2d Cir. 1957); Harding v. Commissioner, T.C. Memo. 1970– 

179 (holding that conservation reserve program payments 

‘‘are 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 land devoted to the program’’); Rev. Rul. 60–32, supra. Such a conclusion is consistent with our holding that the ‘‘rentals from real estate’’ 

exception should be narrowly construed. Johnson v. Commissioner, 60 T.C. at 833. 

We hold that the CRP payments at issue do not constitute 

‘‘rentals from real estate’’ within the meaning of section 

1402(a)(1) and are not excluded from the calculation of petitioner’s net earnings from self-employment for 2006 and 

2007. In so doing, we overrule our holding in Wuebker v. 

Commissioner, 110 T.C. 431. 

III. Conclusion 

We sustain respondent’s determination that the CRP payments petitioner received in 2006 and 2007 must be included 

in the calculation of his net earnings from self-employment 

under section 1401 and hence are subject to self-employment 

tax. The CRP payments are not excluded from this calculation by virtue of section 1402(a)(1) because the CRP payments do not constitute ‘‘rentals from real estate’’. Because 

we find that the CRP payments are not ‘‘rentals from real 

estate’’, we need not reach the issue of whether the CRP payments constituted includible farm income. 

We have considered all of the parties’ arguments. To the 

extent not discussed above, we find those arguments to be 

irrelevant, moot, or without merit. 

To reflect the foregoing, 

Decision will be entered under Rule 155. 

(350) MOREHOUSE v. COMMISSIONER 377

Reviewed by the Court. 

COLVIN, HALPERN, FOLEY, VASQUEZ, GALE, GOEKE, 

WHERRY, KROUPA, HOLMES, GUSTAFSON, MORRISON, 

KERRIGAN, BUCH, and LAUBER, JJ., agree with this opinion 

of the Court. 

PARIS, J., did not participate in the consideration of this 

opinion. 

f