Source: https://www.currentfederaltaxdevelopments.com/blog/2018/12/19/pmta-holds-payments-to-farmers-under-mfp-program-to-compensate-for-tariff-issues-is-taxable-income-and-part-of-self-employment-income
Timestamp: 2019-04-21 12:45:24+00:00

Document:
The IRS has addressed the taxation of payments made to farmers under a trade aid package (the Market Facilitation Program or MFP) in PMTA 2018-021. The MFP program gives direct payment to producers of certain crops that have been adversely affected by tariffs.
The memo deals with both the issue of whether such payments are part of gross income under IRC §61 and as self-employment income under IRC §1402.
Our main concern is taxation of the MFP payments; this program will receive the bulk of the funding ($4.7 billion for the first round of payments, and can receive approximately $10 billion of the total $12 billion allotted for the package), the greatest share of which is expected to be paid to soybean farmers, who have been most affected by the tariffs. The purpose of the MFP payments is to make up for the depressed prices of certain commodities caused by the tariffs, and payments are tied to actual 2018 production (i.e. the amounts actually produced in 2018), so producers experiencing drought or other natural disasters will actually receive less than those who are not experiencing these problems and have a normal production level for 2018, Schnepf et al. at 4-5.
Section 61(a) of the Internal Revenue Code and section 1.61-1 of the Income Tax Regulations generally provide that, except as otherwise excluded by law, gross income means all income from whatever source derived. The term “income” is broadly defined as “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955). Section 1.61-4(a)(4) and (b)(4) of the Income Tax Regulations states that farmers must include in gross income “[a]ny subsidy or conservation payments which must be considered as income”.2 The scope of section 61(a) is broad, and exclusions from income are narrowly construed. See Commissioner v. Schleier, 515 U.S. 323, 328 (1995); United States v. Burke, 504 U.S. 229, 248 (1992); Commissioner v, Glenshaw Glass Co., 348 U.S. at 429-430.
The Service has also adhered to this principle, issuing a number of revenue rulings requiring the inclusion in gross income of subsidy or conservation payments received by farmers, including those payments intended to compensate for lost profits. See Rev. Rul. 73-408, 1973-2 C.B. 15 (cancellation of an assistance loan to farmer who suffered uninsured crop damage is includible in gross income as a substitute for lost income); Rev. Rul. 68-44,1968-1 C.B. 191 (payments to farmers to encourage them to divert land to nonagricultural uses is substitute for farm income and includible in gross income).
The term “trade or business” when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 (relating to trade or business expenses), with certain listed exceptions. I.R.C. § 1402(c). Earnings derived from an individual taxpayer’s trade or business, including agricultural program payments, are generally includible in self-employment income and subject to SECA tax. Ray v. Commissioner, T.C. Memo. 1996-436, 1996 WL 540112 at *2.
Here, the MFP payments are government subsidies paid for the purpose of compensating farmers of specified crops for lost profits. There is currently no legislation excluding these payments from gross income. Thus, under the caselaw and guidance discussed above, the MFP payments are includible in gross income under section 61(a). These payments are also generally includible in net earnings from self-employment and subject to SECA tax.

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