The Conservation Reserve Program is a federal program originally intended to remove highly erodible croplands from production for periods of 10 to 15 years. Participants in the program agree to remove the land from production and follow an approved conservation plan. The program was established by the Food Security Act of 1985. Originally enacted to be in effect through 1990, it has been extended repeatedly. The most recent extension was through the end of 2007, but legislation proposed in the 110 th Congress would extend it through 2012. Participants in the program receive annual payments based on the acreage they have enrolled in the program. Early termination of the CRP contract requires repayment of all amounts the participant has received. The applicable statute refers to the annual payments as "rental payments." Rental real estate income is generally not subject to self-employment tax even when received in connection with a trade or business. However, early in the program, using a revenue ruling written regarding a prior agricultural program, the Internal Revenue Service took the position that CRP annual payments received by farmers were to be included as self-employment income along with other farm income and, therefore, subject to self-employment tax. The payments were treated by the IRS as rental income when received by non-farmers. Over the years, the IRS has expanded its position regarding CRP payments and self-employment taxes. In December 2006, the IRS issued a notice of a proposed revenue ruling that takes the position that virtually all CRP annual rental payments are subject to self-employment taxes. The notice has been responded to by Congress, as well as by others. This report outlines the evolution of the IRS's position along with relevant case law and legislative history. It also provides comparisons to treatment of income from other sources where that income has some similarity to CRP payments. Taxpayers and the Internal Revenue Service have generally agreed that CRP payments must be included in gross income and are subject to income tax. However, there has been conflict regarding whether the payments should be considered income from farming and, therefore, subject to self-employment tax. The self-employment tax rate is 15.3%. Many participants would prefer that their CRP payments be excluded from self-employment tax treatment. Other individuals may want to increase their eligibility for Social Security benefits by including the payments in self-employment income. The IRS, to varying degrees, has treated the payments as includible self-employment income. Until 1996, the IRS treated CRP payments as self-employment income for those who were otherwise engaged in the trade or business of farming. For all others, the payments were treated as rental payments and were not subject to self-employment tax. This treatment was similar to that in an earlier revenue ruling for payments received under the Soil Bank Act. In distinguishing between those who were engaged in the trade or business of farming and all others, it appears that the IRS looked at the participant's activities just before enrolling land in the program. A participant who had leased his land to a tenant from March 1, 1984, to March 1, 1985, then farmed it himself for a year, and subsequently leased it again from March 1, 1986, to March 1, 1987, was considered retired from the business of farming when he enrolled his land in the CRP in 1987. At the time the participant was 71 years old. Since he had previously farmed the land personally, it is possible that the IRS's position might have been different had he been younger and, therefore, not of retirement age. In 1996, the IRS changed its position regarding CRP payments received by those not otherwise engaged in the trade or business of farming. Initially, this shift was signaled by the IRS's concession, in Hasbrouck v. Commissioner , to taxpayers who had no traditional farming activity either before or after acquiring the CRP land. The taxpayers had reported the CRP payments on Schedule F and, after deducting expenses, claimed a loss from farming. The IRS attributed its concession to the Tax Court's ruling in another case, Ray v. Commissioner ; however, since Ray involved a taxpayer who was involved in farming and ranching outside of his CRP involvement, it is unclear why the results in Ray led to the concession in Hasbrouck . Generally, participants pay less in total taxes if their CRP payments are treated as rental income rather than as farm income because they do not have to pay self-employment tax on rental income. However, when taxpayers have expenses connected to the land that exceed their CRP income, their tax burden may be lower if they treat the CRP payments as farm income; this was the case in Hasbrouck . In Hasbrouck , a couple purchased land in 1987 that had been enrolled in the CRP by the previous owner. The taxpayers chose to continue that enrollment. They incurred significant expenses, which they maintained were related to the conservation plan for the CRP land. They then reported their annual CRP payments on Schedule F, even though they were not otherwise engaged in the trade or business of farming. On Schedule F, they deducted expenses they incurred, which exceeded the income from the CRP. In 1995, the couple's tax returns were examined by the IRS. The examination report denied the losses claimed on Schedule F. The report explained, "Because the amount of income you receive each year is fixed by the federal government, no amount of effort or management skill on your part can increase it. Therefore it has been determined that, at this point in your operation, you are not yet in business." The report went on to say that because the taxpayers were not in the business of farming, use of the Schedule F was inappropriate. The couple appealed the IRS determination, providing copies of letters received each year from the Agricultural Stabilization and Conservation Service office for their county. These letters stated that their farm operating plan for each year had been reviewed and it had been determined that they were actively engaged in a farming operation. After receiving a notice of deficiency, the Hasbroucks petitioned the U.S. Tax Court. Just before filing their petition, the couple received a letter from an IRS Problems Resolution Officer who advised them that "Title 16 of the U.S. Code specifically designates [CRP] payments as rental payments." Before the case was heard by the Tax Court, the IRS conceded the case, allowing the losses the couple had claimed on their tax returns. It proceeded as a claim for attorney's fees and costs, thus providing a public record of the underlying facts in the tax controversy. In Ray , as in Hasbrouck , the taxpayers purchased land that had been enrolled in the CRP by the previous owner, and they chose to continue in the program. However, unlike the Hasbroucks, who arguably had no current farming activity, Mr. Ray was a farmer and a rancher who already owned and operated other farmland. The Tax Court found that "the CRP acreage was added to his existing farmland and since [he] was already in the business of farming and ranching, this was a payment to him in connection with his ongoing trade or business." Since neither tax returns nor IRS examination reports are generally available to the public, there is no way to know for certain whether the IRS began, after Ray and Hasbrouck , to treat CRP payments as self-employment income for those who were not otherwise engaged in the trade or business of farming. However, a 1997 Market Segment Specialization Audit Technique Guide for Farming indicated that proper treatment of CRP payments could only be determined on a case-by-case basis. An example was provided for a situation in which the payments would not be subject to self-employment tax: a retired farmer who would have rented the land out had it not been enrolled in the Conservation Reserve Program. Nothing about proposed alternative uses for the land was mentioned, however, in the Farmer's Tax Guide for 1996. That IRS publication indicated that "[t]he annual CRP payment is farm income, ... [reported on] Schedule F. However, if you do not materially participate in farming operations on the land, the annual payment is rental income, which you report on Form 4835." In contrast, the same guide for tax year 1995 stated, The annual CRP payment is a receipt from farm operations, ... [reported on] Schedule F. However, if you do not materially participate in production or management of production of the farm products on your land, the annual payment is rental income, which you report on Form 4835. The change in the IRS publication for taxpayers seems to indicate that the IRS adopted the view that simply having land enrolled in the CRP was itself a farming operation, which would be self-employment income so long as the taxpayer materially participated in that operation—essentially the taxpayers' view in Hasbrouck . In 1998, in Wuebker v. Commissioner , the U.S. Tax Court held that CRP payments were rental income and, therefore, excluded from self-employment income. The case was heard by a Special Trial Judge, but the opinion was agreed to and adopted by the Tax Court. In Wuebker , the taxpayer had been farming for about 20 years before enrolling all of his tillable land in the Conservation Reserve Program. The contract provided for rent at $85 per acre. The taxpayer had previously grown crops on the hilly, erosion-prone land and thought that the land would benefit from participation in the CRP. He had an additional 44.67 acres not enrolled in the program. This land consisted of "woods, waterways, and land containing improvements." He had been raising laying hens on this additional land and continued to do so after enrolling the previous cropland in the program. He also farmed separate land under a sharecrop agreement. The first year of the CRP contract, the taxpayer established a ground cover as required by the contract. This involved first disking the 214 acres and then planting seed. According to the court, little or no upkeep was performed in later years.