T.C. Memo. 2004-55

UNITED STATES TAX COURT

JERE J. AND PAULETTE M. SOLVIE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9525-98. Filed March 9, 2004.

Garry A. Pearson, Jon J. Jensen, and Alexander F. Reichert,

for petitioners.

Blaine C. Holiday, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined deficiencies of

$3,248, $3,577, and $5,817 in petitioners’ Federal income tax

(tax) for 1993, 1994, and 1995, respectively.
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1In addition to the issue that we address herein, there is

another determination in the notice of deficiency (notice) for

1995 that is computational in that its resolution flows automatically from our resolution of that issue.

2All section references are to the Internal Revenue Code in

effect for 1995. All Rule references are to the Tax Court Rules

of Practice and Procedure.

3The parties stipulated that petitioners farmed 928 acres of

land, 415 acres of which they owned and 531 acres of which third

parties owned. That stipulation insofar as it pertains to the

number of acres that third parties owned is clearly contrary to

the record in the instant case, and we shall disregard that

stipulation to that extent. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). On brief, respondent acknowl-

(continued...)

We must decide1 whether certain amounts (reduced by the

deductions attributable to such amounts) that petitioners received during 1995 and that they characterized as rent are

subject to self-employment tax under section 1402(a)(1).2 We

hold that they are.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found

except as discussed below.

At the time petitioners filed the petition in this case,

they resided in Hancock, Minnesota.

In 1968, Jere J. Solvie (Mr. Solvie) began farming. In

1970, Paulette M. Solvie (Ms. Solvie) began farming with Mr.

Solvie. Prior to 1991, petitioners farmed 928 acres of land, 415

acres of which they owned. Third parties owned the remaining 513

acres.3
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3(...continued)

edges that that stipulation is not accurate and that third

parties owned 513 acres.

Prior to 1991, Mr. Solvie participated in the management of,

and in all phases of, crop production and animal production by

performing, inter alia, the following farm-related activities in

the production of agricultural commodities (i.e., hogs): Loading

of the hogs; washing the facilities; checking the feed lines and

water levels; refilling the feed lines when necessary; and

observing hogs for disease. Prior to 1991, Ms. Solvie performed

the following farm-related activities in the production of

agricultural commodities: Entering data into the bookkeeping

system; accounting; conferring with accountants about bookkeeping

and return preparation; picking up orders and spare parts; and

running errands. Prior to 1991, the farming operation had the

capacity to process 1,000 head of hogs.

In December 1991, petitioners formed JJ & P Farms, Inc. 

Petitioners each owned 50 percent of the stock of JJ & P Farms,

Inc., and they comprised the board of directors (board) of that

company. At all relevant times, JJ & P Farms, Inc., engaged in

the farming business, specifically raising hogs for the production of pork. During 1993, 1994, and 1995, JJ & P Farms, Inc.,

farmed the same 928 acres of land that petitioners had farmed

prior to 1991, 415 acres of which petitioners owned. Third
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4See supra note 3.

5During 1993, 1994, and 1995, petitioners had no written

employment agreement with JJ & P Farms, Inc.

6At all relevant times, Mr. Solvie spent 100 percent of his

time working for JJ & P Farms, Inc. 

7At all relevant times, Ms. Solvie spent virtually 100

percent of her time working for JJ & P Farms, Inc.

parties owned the remaining 513 acres.4

After the formation of JJ & P Farms, Inc., that company

hired Mr. Solvie and Ms. Solvie pursuant to an oral arrangement

(oral employment arrangement)5 under which Mr. Solvie was to

serve as its chief executive officer (CEO), its chief financial

officer (CFO), and a member of its board and Ms. Solvie was to

serve as a member of its board. Under that arrangement, Mr.

Solvie and Ms. Solvie were to perform in their respective capacities the same farm-related activities in the production of

agricultural commodities that they had been performing prior to

1991 (petitioners’ farm-related activities). Pursuant to the

oral employment arrangement, at all relevant times, including

during 1993, 1994, and 1995, Mr. Solvie,6 as CEO, CFO, and a

board member, and Ms. Solvie,7 as a board member, performed those

activities. After petitioners incorporated JJ & P, Farms, Inc.,

in 1991 and before petitioners built an 800-head capacity hog

barn in 1995 (discussed below), the farming operation had the

capacity to process 1,000 head of hogs.
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8JJ & P Farms, Inc., also leased certain other farmland from

third-party landlords pursuant to oral rental arrangements with

those third-party landlords.

9During 1993 and 1994, petitioners had no written rental

agreement with JJ & P Farms, Inc., with respect to the lease of

petitioners’ farmland and petitioners’ personal property.

During 1993, 1994, and 1995, JJ & P Farms, Inc., paid wages

to petitioners in exchange for petitioners’ farm-related activities in the production of agricultural commodities. During 1995,

the wages that that company paid to petitioners for such farmrelated activities were calculated without regard to such activities that petitioners performed with respect to processing hogs

through the 800-head capacity hog barn that petitioners built in

1995.

During 1993 and 1994, petitioners leased to JJ & P Farms,

Inc., pursuant to an oral arrangement (oral rental arrangement)

farmland,8 including existing buildings on that land (petitioners’ farmland), and certain personal property (petitioners’

personal property) that they owned.9 Pursuant to the oral rental

arrangement, during each of the years 1993 and 1994, JJ & P

Farms, Inc., was required to, and did, pay to petitioners rent of

$29,400 for petitioners’ farmland, exclusive of existing buildings on that land, and rent of $21,000 for the buildings on that 
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10It is not clear from the record whether in 1993 and 1994

the rent for petitioners’ farmland, exclusive of existing buildings on that land (i.e., $29,400) or the rent for the buildings

(i.e., $21,000) on that land included rent for petitioners’

personal property.

11As discussed below, petitioners reported in their 1993 tax

return $52,050 in rent received from the lease of petitioners’

farmland and petitioners’ personal property. The record does not

disclose the reason for the discrepancy between the total amount

of rent that petitioners received during 1993 from such lease

(i.e., $50,400) and the total amount of rent (i.e., $52,050) that

petitioners reported in their 1993 tax return. 

12For convenience, unless otherwise indicated, we shall

hereinafter refer to petitioners’ farmland, exclusive of petitioners’ 800-head capacity hog barn located on that land, as

petitioners’ farmland.

13During 1995, petitioners had no written rental agreement

with JJ & P Farms, Inc., with respect to the lease of petitioners’ farmland, including petitioners’ 800-head capacity hog barn

located on that land, and petitioners’ personal property.

land,10 or total rent of $50,400.11

In 1995, petitioners built an 800-head capacity hog barn

(petitioners’ 800-head capacity hog barn) on petitioners’ farmland. During that year, petitioners and JJ & P Farms, Inc.,

orally modified the oral rental arrangement (modified oral rental

arrangement) to reflect that, after the completion of that barn,

petitioners were leasing to JJ & P Farms, Inc., petitioners’

farmland,12 including petitioners’ 800-head capacity hog barn

located on that land, as well as petitioners’ personal property.13 Pursuant to the modified oral rental arrangement, during

1995 JJ & P, Farms, Inc., was required to, and did, pay to

petitioners (1) for petitioners’ farmland and petitioners’
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14If during 1995 petitioners became sick or incapacitated or

otherwise were unable to perform for JJ & P Farms, Inc., petitioners’ farm-related activities in the production of agricultural commodities by processing hogs through petitioners’ 800-

head capacity hog barn, that company was not obligated pursuant

to the modified oral rental arrangement to pay rent to them for

petitioners’ 800-head capacity hog barn. 

personal property the same annual rent that that company paid to

them in each of the years 1993 and 1994 (i.e., $29,400 for

petitioners’ farmland, exclusive of existing buildings on that

land, and $21,000 for the buildings on that land) and (2) for

petitioners’ 800-head capacity hog barn $21 per head, per rotation of hogs that petitioners processed through that barn. 

Pursuant to that modified rental arrangement, the rent that that

company was required to, and did, pay to petitioners during 1995

with respect to petitioners’ 800-head capacity hog barn depended

on the number of hogs that petitioners processed through that

barn. During 1995, as a condition to JJ & P Farms, Inc.’s being

obligated pursuant to the modified oral rental arrangement to pay

rent to petitioners for petitioners’ 800-head capacity hog barn,

petitioners were obligated or compelled to perform petitioners’

farm-related activities in the production by that company of

agricultural commodities by processing hogs through that barn.14

If during 1995 petitioners had not performed any of petitioners’

farm-related activities in the production by JJ & P Farms, Inc.,

of agricultural commodities with respect to petitioners’ 800-head

capacity hog barn and therefore did not process any hogs through
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15The parties stipulated that petitioners reported in petitioners’ 1993 return that Mr. Solvie received $18,432.62 of wages

from JJ & P, Farms, Inc. That stipulation is clearly contrary to

petitioners’ 1993 return. That return shows that petitioners

reported that for 1993 Mr. Solvie received $18,423.62 of wages

from JJ & P Farms, Inc. We shall disregard the parties’ stipulation regarding the amount of wages that petitioners reported in

petitioners’ 1993 return Mr. Solvie received from JJ & P Farms,

Inc. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. at 195. 

that barn, under the modified oral rental arrangement they would

not have received any rent from that company with respect to that

barn. To the extent that during 1995 petitioners performed such

activities by processing hogs through petitioners’ 800-head

capacity hog barn, they would have received from JJ & P Farms,

Inc., with respect to that barn $21 per head, per rotation of

hogs processed through that barn. During 1995, petitioners

processed approximately three rotations of hogs through petitioners’ 800-head capacity hog barn as a result of petitioners’ farmrelated activities, and consequently petitioners received $44,500

from JJ & P Farms, Inc., with respect to that barn. 

Petitioners jointly filed Form 1040, U.S. Individual Income

Tax Return, for each of their taxable years 1993 (petitioners’

1993 return), 1994 (petitioners’ 1994 return), and 1995 (petitioners’ 1995 return). In petitioners’ 1993 return, petitioners

reported that Mr. Solvie received $18,423.6215 of wages from JJ &

P Farms, Inc. In that return, petitioners reported that Ms.

Solvie received $80 of “Wages, salaries, tips, etc.” from “MORRIS

PUBLIC SCHOOLS”, $24 of “Wages, salaries, tips, etc.” from “IND.
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16The parties stipulated that petitioners reported in petitioners’ 1993 return that Ms. Solvie received $13,122.21 of wages

from JJ & P, Farms, Inc. That stipulation is clearly contrary to

petitioners’ 1993 return. That return shows that petitioners

reported that for 1993 they received a total of $31,650 of

“Wages, salaries, tips, etc.”, $18,423.62 of which Mr. Solvie

reported as wages from JJ & P Farms, Inc., and $104 of which Ms.

Solvie reported as wages from sources other than JJ & P Farms,

Inc. The difference between (1) the total of the wages (i.e.,

$31,650) reported from all sources and (2) the total of the wages

(i.e., $18,527.62) that Mr. Solvie reported from JJ & P Farms,

Inc., (i.e., $18,423.62) and the total of the wages that Ms.

Solvie reported from sources other than that company (i.e., $104)

is $13,122.38. We shall disregard the parties’ stipulation

regarding the amount of wages that petitioners reported in

petitioners’ 1993 return Ms. Solvie received from JJ & P Farms,

Inc. See Cal-Maine Foods, Inc. v. Commissioner, supra. 

17The parties stipulated that petitioners reported in petitioners’ 1994 return that Ms. Solvie received $5,808 of wages

from JJ & P, Farms, Inc. Petitioners’ 1994 return shows that

petitioners reported that for 1994 Ms. Solvie received $5,808.86

of wages from JJ & P Farms, Inc. The parties erroneously stipulated down to the nearest dollar instead of up to the nearest

dollar. We shall disregard the parties’ stipulation regarding

the amount of wages that petitioners reported in petitioners’

1994 return Ms. Solvie received from JJ & P Farms, Inc. See CalMaine Foods, Inc. v. Commissioner, supra. 

SCHOOL DIST. # 611”, and $13,122.3816 of wages from JJ & P Farms,

Inc. In Schedule E, Supplemental Income and Loss (Schedule E),

included as part of petitioners’ 1993 return, petitioners reported $52,050 in rent received from the rental of petitioners’

farmland and petitioners’ personal property (1993 claimed rent),

$27,212 in expenses, and $24,838 in total rental real estate

income.

In petitioners’ 1994 return, petitioners reported that Mr.

Solvie and Ms. Solvie received $16,356.29 and $5,808.86,17 re-
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spectively, of wages from JJ & P Farms, Inc. In Schedule E

included as part of petitioners’ 1994 return, petitioners reported $50,400 in rent received from the rental of petitioners’

farmland and petitioners’ personal property (1994 claimed rent),

$23,015 in expenses, and $27,385 in total rental real estate

income.

In petitioners’ 1995 return, petitioners reported that Mr.

Solvie received $17,439 of wages from JJ & P Farms, Inc. In that

return, petitioners reported that Ms. Solvie received $95 of

“Wages, salaries, tips, etc.” from “MORRIS PUBLIC SCHOOLS” and

$3,410 of wages from JJ & P Farms, Inc. In Schedule E included

as part of petitioners’ 1995 return, petitioners reported a total

of $94,900 in rent received from the rental of petitioners’

farmland, including petitioners’ 800-head capacity hog barn

located on that land, as well as petitioners’ personal property

(1995 total claimed rent), $50,384 in expenses, and $44,516 in

total rental real estate income. Of the $94,900 of 1995 total

claimed rent that petitioners reported in petitioners’ 1995

return, $50,400 was attributable to petitioners’ farmland and

petitioners’ personal property (1995 claimed rent for petitioners’ farmland and petitioners’ personal property) and $44,500 was

attributable to petitioners’ 800-head capacity hog barn (1995

claimed rent for petitioners’ 800-head capacity hog barn). 

The 1993 claimed rent and the 1994 claimed rent that peti-
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tioners received from JJ & P Farms, Inc., pursuant to the oral

rental arrangement and the 1995 claimed rent for petitioners’

farmland and petitioners’ personal property that petitioners

received from that company pursuant to the modified oral rental

arrangement represented fair market rents.

JJ & P Farms, Inc., filed Form 1120, U.S. Corporation Income

Tax Return, for its taxable year 1995 (JJ & P Farms, Inc.’s 1995

return). In JJ & P Farms, Inc.’s 1995 return, JJ & P Farms,

Inc., reported that it paid $17,439 of compensation to Mr. Solvie

as an officer of that company and $3,410 of compensation to Ms.

Solvie as an officer. In that return, JJ & P Farms, Inc.,

reported that it paid $6,989 of salaries and wages, although it

did not identify in that return the person or persons to whom it

paid those wages. In JJ & P Farms, Inc.’s 1995 return, JJ & P

Farms, Inc., reported that it paid $142,634 in rent, although it

did not specify in that return the amount of such rent that it

paid to petitioners during its taxable year 1995. 

On March 20, 1998, respondent issued a notice to petitioners

with respect to their taxable years 1993, 1994, and 1995. In

that notice, respondent determined that the 1993 claimed rent,

the 1994 claimed rent, and the 1995 total claimed rent, reduced

by the deductions attributable to such respective rents, are

subject to self-employment tax because they constitute net

earnings from self-employment under section 1402(a)(1).
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18Sec. 7491(a) is not applicable in the instant case. That

is because respondent issued the notice to petitioners on Mar.

20, 1998, and a fortiori the examination of the years involved

here would have commenced before July 23, 1998. See Internal

Revenue Service Restructuring and Reform Act of 1998, Pub. L.

105-206, sec. 3001(c), 112 Stat. 727.

OPINION

Petitioners bear the burden of proving that the determinations in the notice that remain at issue are erroneous.18 See

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). 

Respondent no longer maintains, as respondent did in the

notice, that the 1993 claimed rent, the 1994 claimed rent, and

the 1995 claimed rent for petitioners’ farmland and petitioners’

personal property that petitioners received from JJ & P Farms,

Inc., are subject to self-employment tax. The only dispute

remaining between the parties that we must resolve is whether the

1995 claimed rent for petitioners’ 800-head capacity hog barn,

reduced by the deductions attributable to such rent, is subject

to self-employment tax because it constitutes net earnings from

self-employment under section 1402(a)(1).

As applicable here, section 1402(a)(l) defines the term “net

earnings from self-employment” to mean

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 * * * except

that in computing such gross income and deductions 

* * *-- 

(1) there shall be excluded rentals from real
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estate and from personal property leased with the

real estate * * * together with the deductions

attributable thereto * * * 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 * * * commodities * * * on such land, and that there shall be

material participation by the owner or tenant 

* * * in the production or the management of the

production of such agricultural * * * commodities,

and (B) there is material participation by the

owner or tenant * * * with respect to any such

agricultural * * * commodity; 

(The regulations under section 1402(a)(1), and we, refer to the

farm rental income that is included under that section in the

definition of net earnings from self-employment as includible

farm rental income.) 

The regulations under section 1402(a)(1) elaborate on the

meaning of includible farm rental income, as follows:

(b) Special rule for “includible farm rental

income”--(1) In general. * * * there shall be included

in determining net earnings from self-employment for

taxable years ending after 1955 any income derived by

an owner or tenant of land, if the following requirements are met with respect to such income:

(i) The income is derived under an arrangement

between the owner or tenant of land and another person

which provides that such other person shall produce

agricultural * * * commodities on such land, and that

there shall be material participation by the owner or

tenant in the production or the management of the

production of such agricultural * * * commodities; and 

(ii) There is material participation by the owner

or tenant with respect to any such agricultural * * *

commodity.
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Income so derived shall be referred to in this section

as “includible farm rental income”.

(2) Requirement that income be derived under an

arrangement. In order for rental income received by an

owner or tenant of land to be treated as includible

farm rental income, such income must be derived pursuant to a sharefarming or other rental arrangement which

contemplates material participation by the owner or

tenant in the production or management of production of

agricultural * * * commodities.

(3) Nature of arrangement. (i) The arrangement

between the owner or tenant and the person referred to

in subparagraph (1) of this paragraph may be either

oral or written. The arrangement must impose upon such

other person the obligation to produce one or more

agricultural * * * commodities * * * on the land of the

owner or tenant. In addition, it must be within the

contemplation of the parties that the owner or tenant

will participate in the production or the management of

the production of the agricultural * * * commodities

required to be produced by the other person under such

arrangement to an extent which is material with respect

either to the production or to the management of production of such commodities or is material with respect

to the production and management of production when the

total required participation in connection with both is

considered. 

* * * * * * *

(4) Actual participation. In order for the rental

income received by the owner or tenant of land to be

treated as includible farm rental income, not only must

it be derived pursuant to the arrangement described in

subparagraph (1) of this paragraph, but also the owner

or tenant must actually participate to a material

degree in the production or in the management of the

production of any of the commodities required to be

produced under the arrangement, or he must actually

participate in both the production and the management

of the production to an extent that his participation

in the one when combined with his participation in the

other will be considered participation to a material

degree. * * *

Sec. 1.1402(a)-4(b), Income Tax Regs.
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The parties agree that during 1995 petitioners were to, and

did, participate materially within the meaning of section

1402(a)(1) in the production by JJ & P Farms, Inc., of agricultural commodities by performing petitioners’ farm-related activities with respect to, inter alia, processing hogs through petitioners’ 800-head capacity hog barn. They disagree over whether

the 1995 claimed rent for that barn was derived under an arrangement within the meaning of section 1402(a)(1)(A) and section

1.1402(a)-4(b)(2), Income Tax Regs., between petitioners and JJ &

P Farms, Inc., which provided or contemplated, inter alia, that

JJ & P Farms, Inc., was to produce agricultural commodities in

that barn and that petitioners were to participate materially in

the production of such commodities by processing hogs through

that barn.

It is petitioners’ position that the 1995 claimed rent for

petitioners’ 800-head capacity hog barn was not derived under

such an arrangement and that consequently such claimed rent,

reduced by the deductions attributable to such rent, is not

subject to self-employment tax because it does not constitute

includible farm rental income under section 1402(a)(1) and the

regulations thereunder. In support of their position, petitioners rely on the opinion of the Court of Appeals for the Eighth

Circuit in McNamara v. Commissioner, 236 F.3d 410 (8th Cir.

2000), revg. and remanding Bot v. Commissioner, T.C. Memo. 1999-
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19We shall refer to our respective opinions that the Court

of Appeals for the Eighth Circuit reversed and remanded as Bot I,

Hennen I, and McNamara I and to the opinion of that Court as

McNamara II.

256, Hennen v. Commissioner, T.C. Memo. 1999-306, and McNamara v.

Commissioner, T.C. Memo. 1999-333.19 In reliance on McNamara II,

petitioners contend that 

the Solvies are receiving fair market value rental

payments. The Solvies are also receiving other compensation for the services they provide to the corporation. The simple fact that they are participating in

the farming operation does not establish the required

nexus between the rental payments and the material

participation necessary to trigger the inclusion of the

payments within the definition of self-employment

income. To the contrary, adoption of the Commissioner’s position would compel the conclusion that the

Solvies, as landlords, are required to rent property to

the corporation at below fair market value and below

the rates paid to third parties. The “missing link” in

the Commissioner’s argument is the same as in the

McNamara case: the corporation’s obligation to make

the rental payments is separate and distinct from the

taxpayers’ participation in the farming operation.

Respondent counters that McNamara II does not require the

result advocated by petitioners in the instant case. Respondent

argues that 

The Eighth Circuit in McNamara * * * created a

judicial exception for fair rental value when the

landlord has two independent arrangements with the

lessee for rent and wages and there is no nexus between

the two arrangements.

Petitioners fail to meet the Eighth Circuit’s

standard because they failed to establish the fair

rental value of the new facilities used by the corporation in 1995 or that a separate employment agreement

existed for petitioners’ services related to the additional activities carried on in the new facilities. 
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Petitioners’ classification of all funds from the

corporation for use of the new facilities in 1995 as

rent, and none as wages, demonstrates that there were

not independent arrangements with respect to real

estate rentals and compensation for services. Moreover, the transaction does not pass muster given the

strict scrutiny apple [sic] to such related-party

transactions, and given that exceptions from selfemployment tax under § 1402(a)(1) are narrowly construed.

Bot I, Hennen I, and McNamara I involved taxpayers who,

pursuant to certain agreements or arrangements, were to, and did,

participate materially in the production of agricultural commodities involved in those respective cases. In Bot I and Hennen I,

the taxpayer-owners of the farmland in question entered into 

(1) employment agreements or arrangements with their respective

taxpayer-spouses and (2) rental agreements or arrangements with

those spouses. In McNamara I, the taxpayer-owners of the farmland in question entered into (1) an employment agreement or

arrangement with their wholly owned corporation and (2) a rental

agreement or arrangement with that corporation. 

In Bot I and Hennen I, the taxpayer-owners of the farmland

in question contended that the respective rental agreements or

arrangements involved in those cases did not require their

material participation in the production of the agricultural

commodities in question. We found that the respective taxpayerowners in Bot I and Hennen I played a material role in the

production of such commodities under an agreement or arrangement

with their taxpayer-spouses. We further found in Bot I and
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Hennen I that the income received from the rental of the respective taxpayer-owners’ farmland in question was derived under an

arrangement between the taxpayer-owners of the farmland and their

taxpayer-spouses, which provided that those spouses were to

produce agricultural commodities on that land and that the

taxpayer-owners were to participate materially in the production

of such commodities. We held in Bot I and Hennen I that the

rents at issue in those cases, reduced by the deductions attributable to such respective rents, were subject to self-employment

tax because they constituted includible farm rental income under

section 1402(a)(1).

In McNamara I, the taxpayer-owners of the farmland in

question contended that the rental agreement or arrangement

involved in that case did not require their material participation in the production of the agricultural commodities in question. We found that the taxpayer-owners played a material role

in production of such commodities under an agreement or arrangement with their wholly owned corporation. We further found in

McNamara I that the income received from the rental of the

taxpayers’ farmland in question was derived under an arrangement

between the taxpayer-owners and their wholly owned corporation,

which provided that that corporation was to produce agricultural

commodities on that land and that the taxpayer-owners were to

participate materially in the production of such commodities. We
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held in McNamara I that the rent at issue in that case, reduced

by the deductions attributable to such rent, was subject to selfemployment tax because it constituted includible farm rental

income under section 1402(a)(1).

The taxpayers in Bot I, Hennen I, and McNamara I appealed

our respective decisions in those cases to the Court of Appeals

for the Eighth Circuit. That Court decided those appeals in one

opinion in McNamara II. In McNamara II, the Court of Appeals for

the Eighth Circuit concluded: 

we cannot say the Tax Court clearly erred in concluding, as a factual matter, that Mrs. McNamara, Mrs. Bot,

and Mrs. Hennen were required–-by their respective

employment agreements or by more informal “arrangements”–-to materially participate in agricultural

production and management, and that all three did in

fact materially participate in those activities. See

Treas. Reg. § 1.1402(a)-4(b) (as amended in 1980).

More promising, however, is taxpayers’ argument

that the lessor-lessee relationships should stand on

their own apart from the employer-employee relationships. To this end, taxpayers insist that the rents in

question were consistent with market rates for agricultural land. In fact, the transcripts of each trial

contain uncontradicted testimony that the rents were at

or slightly below fair market value. * * * The Tax

Court’s decision, however, contains no factual finding

in this regard. Moreover, the Commissioner apparently

did not pursue the issue at trial because, as it contended at oral argument, the amount of the rent is

irrelevant. We disagree. 

What is missing from both the Commissioner’s and

the Tax Court’s analyses is any mention of a nexus

between the rents received by Taxpayers and the “arrangement” that requires the landlords’ material participation. We believe this omission overlooks §

1402(a)(1)’s requirement that rents be “derived under”

such an arrangement. That is to say, the mere exis-
- 20 -

tence of an arrangement requiring and resulting in

material participation in agricultural production does

not automatically transform rents received by the

landowner into self-employment income. It is only

where the payment of those rents comprise part of such

an arrangement that such rents can be said to derive

from the arrangement.

Rents that are consistent with market rates very

strongly suggest that the rental arrangement stands on

its own as an independent transaction and cannot be

said to be part of an “arrangement” for participation

in agricultural production. Although the Commissioner

is correct that, unlike other provisions in the Code, 

§ 1402(a)(1) contains no explicit safe-harbor provision

for fair market value transactions, we conclude that

this is the practical effect of the “derived under”

language. 

McNamara v. Commissioner, 236 F.3d at 412-413.

The Court of Appeals for the Eighth Circuit remanded Bot I,

Hennen I, and McNamara I in order to provide the Commissioner of

Internal Revenue the opportunity to show that a connection

existed between the respective rents and the respective employment agreements or arrangements involved in those cases. On

remand, the respective parties in Bot I, Hennen I, and McNamara I

declined our invitation to conduct additional trials. As a

result, we found that the rent at issue in each of those cases

was at or below market rates and decided that no deficiency in

self-employment tax existed in any of those cases. 

In Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd.

445 F.2d 985 (10th Cir. 1971), we concluded that we would follow

a Court of Appeals opinion which is squarely in point where

appeal from our decision would lie to that Court of Appeals and
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to that court alone. In the instant case, during 1995 petitioners had two arrangements with JJ & P Farms, Inc.: (1) An oral

employment arrangement under which petitioners were to, and did,

participate materially in the production by JJ & P Farms, Inc.,

of agricultural commodities by performing petitioners’ farmrelated activities with respect to, inter alia, processing hogs

through petitioners’ 800-head capacity hog barn; and (2) a

modified oral rental arrangement under which petitioners leased

to JJ & P Farms, Inc., inter alia, that barn. There were two

identical types of arrangements involved in McNamara II. The

issue presented here is whether the 1995 claimed rent at issue,

reduced by the deductions attributable to such rent, is subject

to self-employment tax because it constitutes includible farm

rental income under section 1402(a)(1). That was the identical

issue presented in McNamara II. We conclude that McNamara II is

squarely in point. Moreover, the court to which an appeal in

this case would normally lie is the Court of Appeals for the

Eighth Circuit. We shall follow McNamara II. Golsen v. Commissioner, supra. 

As required by McNamara II, we must determine whether there

was a nexus between (1) the 1995 claimed rent for petitioners’

800-head capacity hog barn that petitioners received pursuant to

the modified oral rental arrangement and (2) the oral employment

arrangement under which petitioners were to, and did, participate
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20We note that in McNamara I there is no indication that the

parties advanced, and the Court did not address, any argument

that, because the taxpayer-owners of the farmland in that case

materially participated within the meaning of sec. 1402(a)(1) in

the production of agricultural commodities as employees of their

wholly owned corporation and not in their individual capacities,

the analysis under sec. 1402(a)(1) should be different from the

analysis in Bot I and Hennen I, where the taxpayer-owners of the

farmland involved in those two cases materially participated

within the meaning of sec. 1402(a)(1) in the production of

agricultural commodities in their individual capacities. In

McNamara II, there is no indication that the taxpayers appealing

McNamara I advanced, and the Court of Appeals for the Eighth

Circuit did not address, any argument that the analysis under

sec. 1402(a)(1) with respect to such taxpayers should be any

different from the analysis with respect to the taxpayers appealing Bot I and Hennen I. 

In the instant case, neither petitioners nor respondent

advances any argument that the analysis under sec. 1402(a)(1)

should be different from the analysis in McNamara II because

petitioners materially participated within the meaning of sec.

1402(a)(1) in the production by JJ & P Farms, Inc., of agricultural commodities as employees of JJ & P Farms, Inc., and not in

their individual capacities. Indeed, petitioners rely solely on

the analysis in McNamara II to support their position in the

instant case. Consequently, we shall not address whether our

analysis would be different in the instant case because petitioners materially participated within the meaning of sec. 1402(a)(1)

in the production of agricultural commodities by JJ & P Farms,

Inc., as employees of JJ & P Farms, Inc., and not in their

individual capacities.

materially in the production by JJ & P Farms, Inc., of agricultural commodities by performing petitioners’ farm-related activities with respect to, inter alia, processing hogs through that

barn.20 As we understand their position, petitioners contend 

(1) that the 1995 claimed rent for petitioners’ 800-head capacity

hog barn represented fair market rent and (2) that petitioners

received compensation, which did not include such rent, for
- 23 -

21In addition to relying on Mr. Solvie’s testimony to support their position that the 1995 claimed rent for petitioners’

800-head capacity hog barn represented fair market rent, petitioners contend that respondent stipulated that that rent represented fair market rent. That contention is wrong. Respondent

did not stipulate that that rent represented fair market rent.

petitioners’ farm-related activities in the production by JJ & P

Farms, Inc., of agricultural commodities with respect to processing hogs through that barn. Consequently, according to petitioners, no nexus existed between (1) the 1995 claimed rent for

petitioners’ 800-head capacity hog barn that petitioners received

pursuant to the modified oral rental arrangement and (2) the oral

employment arrangement under which petitioners were to, and did,

participate materially in the production by JJ & P Farms, Inc.,

of agricultural commodities by performing petitioners’ farmrelated activities with respect to, inter alia, processing hogs

through that barn. 

We turn to petitioners’ contention that the 1995 claimed

rent for petitioners’ 800-head capacity hog barn represented fair

market rent. In support of that contention, petitioners rely on

the following testimony of Mr. Solvie in response to the following question by petitioners’ counsel on direct examination of Mr.

Solvie:21

Q Okay. The rent that you [acting on behalf of

JJ & P Farms, Inc.] paid for the new hog barn, was it

above, below, or at fair market value for your area?

A About fair market value. Fair market value. 
- 24 -

22Assuming arguendo that it were proper for the colloquy

between petitioners’ counsel and Mr. Solvie to have focused on

the total rent that JJ & P Farms, Inc., paid to petitioners

during 1995 with respect to petitioners’ 800-head capacity hog

barn (i.e., $44,500), instead of on the rent of $21 per head, per

rotation of hogs that petitioners processed through that barn, we

are not persuaded by Mr. Solvie’s testimony, which we found to be

vague and ambiguous, that such total rent paid represented fair

market rent. Mr. Solvie’s use of the word “about” as a qualifier

to the phrase “fair market value” raises a serious question in

our mind as to whether Mr. Solvie was testifying that the total

rent that JJ & P Farms, Inc., paid to petitioners during 1995 was

below, at, or above fair market rent. Mr. Solvie’s repeating the

phrase “fair market value” does not clarify but instead compounds

the vagueness and ambiguity of his testimony that such total rent

paid was “about fair market value.” Moreover, we found Mr.

Solvie’s testimony to be general, vague, ambiguous, self-serving,

uncorroborated, and/or internally inconsistent in certain other

material respects. For example, the following exchange took

place during the cross-examination by respondent’s counsel of Mr.

Solvie:

Q But the rent that you received for the new 

facility was wholly dependent upon the number of pigs

(continued...)

We understand the foregoing question by petitioners’ counsel to

be asking whether the total rent that JJ & P Farms, Inc., paid to

petitioners during 1995 with respect to petitioners’ 800-head

capacity hog barn (i.e., $44,500) was above, below, or at fair

market value. However, the rent that that company was required

to, and did, pay to petitioners during 1995 with respect to that

barn was not $44,500, but was $21 per head, per rotation of hogs

that petitioners processed through that barn. There is nothing

in the record establishing that $21 per head, per rotation of

hogs that petitioners processed through petitioners’ 800-head

capacity hog barn represented fair market rent for such barn.22
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22(...continued)

that went through the barn.

A No. Not–-yes. I suppose it would.

Q And so if the new facility sat empty, you

would receive no rent.

A No. We were going to get rent whether we

were using it or not.

Q Well, you leased it to the corporation for

$21 per head per rotation. If the corporation put no

hogs through that barn, you would receive no rent from

the corporation.

A No. We were–-[the] number of pigs or anything were not tied to the corporation. We were going

to get money for that, regardless of if the pigs went

through or not.

Q The parties have stipulated that the lease

agreement was $21 per head, per rotation. If there was

no pigs that went through and no rotations, how would

you get any rent?

A I don’t know.

We shall not rely on Mr. Solvie’s testimony to establish petitioners’ position in this case.

Assuming arguendo that it were proper for the question posed

to Mr. Solvie by petitioners’ counsel to have focused on the

total rent that JJ & P Farms, Inc., paid to petitioners during

1995 with respect to petitioners’ 800-head capacity hog barn

(i.e., $44,500) and that Mr. Solvie had clearly and unambiguously

testified that such rent paid represented fair market rent, on

the instant record we would not rely on such testimony. The

record establishes that, after petitioners incorporated JJ & P

Farms, Inc., in 1991 and before petitioners built petitioners’
- 26 -

800-head capacity hog barn in 1995, the farming operation had the

capacity to process 1,000 head of hogs. During each of the years

1993, 1994, and 1995, JJ & P Farms, Inc., was required to, and

did, pay to petitioners fair market rent of $21,000 for the

buildings, exclusive of that barn, located on petitioners’

farmland that had the capacity to process 1,000 head of hogs. 

Although not entirely clear from the record, it appears that,

after petitioners built petitioners’ 800-head capacity hog barn

in 1995, the farming operation of JJ & P Farms, Inc., had the

capacity to process not only 1,000 head of hogs in those buildings but also an additional 800 head of hogs in that barn. We

find it difficult to believe that during 1995 buildings, with the

capacity to process 1,000 head of hogs, would have generated

annual fair market rent of $21,000 while petitioners’ 800-head

capacity hog barn, with the capacity to process 800 head of hogs

and with rent for such barn calculated as $21 per head, per

rotation of hogs that petitioners processed through that barn,

would have generated annual fair market rent of $44,500--the

amount of the 1995 claimed rent for petitioners’ 800-head capacity hog barn that petitioners received from JJ & P Farms, Inc.,

during 1995. 

In this connection, at the trial in this case in June 2003

Mr. Solvie, apparently in an attempt to justify having received
- 27 -

annual rent for petitioners’ 800-head capacity hog barn during

1995 that was more than twice as much as the annual fair market

rent that petitioners received during that year for petitioners’

other buildings, testified during direct examination as follows

in response to the following question by petitioners’ counsel:

Q Can you tell me a little bit about the environment for construction of hog barns in your area?

A It’s–-in our area, we’re–-it’s–-right now,

they’ve been under a building moratorium, because there

has been a lot of construction going on, and until the

last couple–-until probably about the last three years,

so people have pigs, and they want to get their pigs

into these newer facilities, but they’ve been unable to

build, so people are really scrambling to try and use

or rent these facilities that are already existing. 

You can’t get permits anymore to build, so it’s kind

of–-you know, people are really scrambling to get

buildings that are already in existence.

We understand the foregoing testimony of Mr. Solvie to be addressing the availability in June 2003 at the time of trial, and

not in 1995, of new hog barns situated around the geographic

location of petitioners’ 800-head capacity hog barn. We are not

persuaded by that testimony that a shortage of new hog barns

existed in 1995, which would have resulted in petitioners’ having

received rent in that year for petitioners’ 800-head capacity hog

barn (i.e., $44,500) that was over twice the fair market rent

that petitioners received in that year for the other buildings on

petitioners’ farmland (i.e., $21,000). 

On the record before us, we find that petitioners have

failed to establish that the 1995 claimed rent for petitioners’
- 28 -

23Having found that petitioners have failed to establish

that the 1995 claimed rent for petitioners’ 800-head capacity hog

barn represented fair market rent, we reject petitioners’ argument that 

adoption of the Commissioner’s position would compel

the conclusion that the Solvies, as landlords, are

required to rent property to the corporation at below

fair market value and below the rates paid to third

parties. * * *

800-head capacity hog barn represented fair market rent. Consequently, petitioners’ reliance on the following conclusions of

the Court of Appeals for the Eighth Circuit in McNamara II is

misplaced:23

Rents that are consistent with market rates very

strongly suggest that the rental arrangement stands on

its own as an independent transaction and cannot be

said to be part of an “arrangement” for participation

in agricultural production. Although the Commissioner

is correct that, unlike other provisions in the Code, 

§ 1402(a)(1) contains no explicit safe-harbor provision

for fair market value transactions, we conclude that

this is the practical effect of the “derived under”

language. 

McNamara v. Commissioner, 236 F.3d at 413. 

We turn now to petitioners’ contention that petitioners

received compensation for petitioners’ farm-related activities in

the production by JJ & P Farms, Inc., of agricultural commodities

with respect to processing hogs through petitioners’ 800-head

capacity hog barn, which did not include the 1995 claimed rent

for such barn. Petitioners do not point to any evidence in

support of that contention. That is because there is none. The

record establishes, indeed Mr. Solvie testified, and we have
- 29 -

found that during 1995 the wages that JJ & P Farms, Inc., paid to

petitioners for petitioners’ farm-related activities in the

production of agricultural commodities were calculated without

regard to the activities that petitioners performed with respect

to processing hogs through petitioners’ 800-head capacity hog

barn.

We have rejected the two reasons that petitioners advance in

support of their position that there was no nexus between (1) the

1995 claimed rent for petitioners’ 800-head capacity hog barn

that petitioners received pursuant to the modified oral rental

arrangement and (2) the oral employment arrangement under which

petitioners were to, and did, participate materially in the

production by JJ & P Farms, Inc., of agricultural commodities by

performing petitioners’ farm-related activities with respect to,

inter alia, processing hogs through that barn. On the record

before us, we find no other reason that would support petitioners’ position that there was no such nexus. 

Pursuant to the modified oral rental arrangement, the rent

that JJ & P Farms, Inc., was required to, and did, pay to petitioners during 1995 with respect to petitioners’ 800-head capacity hog barn depended on the number of hogs that petitioners 

processed through that barn. During 1995, as a condition to JJ &

P Farms, Inc.’s, being obligated pursuant to that modified rental

arrangement to pay rent to petitioners for that barn, petitioners
- 30 -

were obligated or compelled to perform petitioners’ farm-related

activities in the production by that company of agricultural

commodities by processing hogs through that barn. If during 1995

petitioners had not performed any of petitioners’ farm-related

activities in the production by JJ & P Farms, Inc., of agricultural commodities with respect to petitioners’ 800-head capacity

hog barn and therefore did not process any hogs through that

barn, under the modified oral rental arrangement they would not

have received any rent from that company with respect to that

barn. To the extent that during 1995 petitioners performed such

activities by processing hogs through petitioners’ 800-head

capacity hog barn, they would have received from JJ & P Farms,

Inc., with respect to that barn $21 per head, per rotation of

hogs processed through that barn. During 1995, petitioners

processed approximately three rotations of hogs through petitioners’ 800-head capacity hog barn as a result of petitioners’ farmrelated activities, and consequently petitioners received $44,500

from JJ & P Farms, Inc., with respect to that barn, which is the

amount of the 1995 claimed rent for petitioners’ 800-head capacity hog barn. 

Based upon our examination of the entire record in this

case, we find that petitioners have failed to establish that

during 1995 there was no nexus between (1) the 1995 claimed rent

for petitioners’ 800-head capacity hog barn that petitioners
- 31 -

received pursuant to the modified oral rental arrangement and 

(2) the oral employment arrangement under which petitioners were

to, and did, participate materially in the production by JJ & P

Farms, Inc., of agricultural commodities by performing petitioners’ farm-related activities with respect to, inter alia, processing hogs through that barn. On that record, we further find

that petitioners have failed to show that the 1995 claimed rent

for petitioners’ 800-head capacity hog barn was not derived under

an arrangement within the meaning of section 1402(a)(1)(A) and

section 1.1402(a)-4(b)(2), Income Tax Regs., between petitioners

and JJ & P Farms, Inc., which provided or contemplated, inter

alia, that that company was to produce agricultural commodities

in that barn and that petitioners were to participate materially

in the production of such commodities by processing hogs through

that barn. On the record before us, we hold that petitioners

have failed to establish that the 1995 claimed rent for petitioners’ 800-head capacity hog barn, reduced by the deductions

attributable to such rent, is not subject to self-employment tax

because it does not constitute includible farm rental income and

therefore is not net earnings from self-employment under section

1402(a)(1).

We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.
- 32 -

To reflect the foregoing and the concessions of respondent, 

Decision will be entered

under Rule 155.