Opinion ID: 767901
Heading Depth: 3
Heading Rank: 2

Heading: The CRP payments constitute self-employment income

Text: 13 The decision in this case hinges on whether the CRP payments are determined to be farm income or rental income. Although the Wuebkers' additional tax liability in the range of $1,600 to $1,700 for each tax year might appear to be relatively small, the implications of this decision loom large. The Commissioner in his brief asserts that the Department of Agriculture pays approximately $1.8 billion per year to farmers under the CRP. With the self-employment tax currently set at the rate of 15.3%, see 26 U.S.C. § 1401(a), (b), the cumulative amount of tax dollars at stake--even after giving effect to the relevant caps and deductions--is obviously substantial. 14 In order to finance Social Security and Medicare benefits for the self-employed and their dependents, the government taxes the self-employment income of every individual. See 26 U.S.C. § 1401; Patterson v. Commissioner, 740 F.2d 927, 929 (11th Cir. 1984). '[S]elf-employment income' means the net earnings from self-employment derived by an individual.... 26 U.S.C. § 1402(b). '[N]et earnings from self-employment' means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle.... Id. § 1402(a). Thus, [t]o be taxable as self-employment income, an individual's income must be (1) derived, (2) from a trade or business, (3) carried on by that individual. Milligan v. Commissioner, 38 F.3d 1094, 1097 (9th Cir. 1994). 15 Despite setting forth the definition of self-employment income and the general rules for determining whether monies received by a taxpayer should be included as such, the Tax Court did not expressly conclude in its opinion whether the CRP payments in this case constitute--in the first instance--self-employment income. Although we would normally remand for such a preliminary conclusion, a remand is not necessary where the lower court has implicitly made such a finding. See Brown v. Baltimore & Ohio R.R. Co., 805 F.2d 1133, 1141 (4th Cir. 1986) (The ordinarily preferred course... is to remand for first instance determination of the issue by the district court.... Nevertheless, where... the issue is narrow and specific, and the implicit determination clear beyond any doubt, we may yet review to avoid the expensive alternative of a remand for a practically assured pro forma express determination conforming to that one necessarily implicit in the judgment.). In proceeding directly to an analysis of whether the CRP payments fell within the rentals-from-real-estate exclusion, the Tax Court implicitly found that, should the exclusion not apply, thepayments would be taxable as self-employment income. Based on this conclusion, and in light of the fact the parties have briefed the question on appeal, the issue is ripe for review. 16 In response to the Commissioner's appeal, the Wuebkers do not assert that the trade or business or carried on requirements are lacking in this case. Rather, they argue that the CRP payments do not constitute self-employment income because they do not derive from their farming business. The Commissioner contends, in reply, that a sufficient nexus exists between the CRP payments and the Wuebkers' farming operations. As explained below, we believe that the Commissioner's contention represents the stronger argument. 17 The term 'derive' requires 'a nexus between the income received and a trade or business that is, or was, actually carried on.' Milligan, 38 F.3d at 1098 (quoting Newberry v. Commissioner, 76 T.C. 441, 444 (1981)). Similarly, the income must arise from some actual (whether present, past, or future) income-producing activity of the taxpayer.... Newberry, 76 T.C. at 446. 18 In Ray v. Commissioner, 72 T.C.M. (CCH) 780, 1996 Tax Ct. Memo LEXIS 453 (1996), the Tax Court considered the nature of CRP payments such as those involved in this case. Connie Ray, the taxpayer, was engaged in the business of farming and cattle grazing. He eventually purchased additional property that had previously been enrolled in the CRP by the seller. Ray became a party to a new contract with the CCC, requiring him to assume obligations similar to those undertaken by the Wuebkers in this case. During the years in question, Ray and his wife did not report the CRP payments as self-employment income. After the IRS assessed a deficiency, Ray filed a petition challenging the Commissioner's characterization of the payments. The Tax Court, in holding that the payments constituted self-employment income, focused on the relationship between the CRP payments and Ray's farming and ranching business: 19 Petitioner Connie Ray was a farmer and rancher and had apparently been so for some years. He owned and operated farmlands in Texas. As an addition to his holdings, he acquired the CRP tract and, by agreement with the CCC, he continued in effect the existing contractual relationship under the CRP program. Under this program, he was required to tend and nourish the land, fight diseases, and control soil erosion. What he could not do is to farm or graze the land. In other words, in return for nurturing and conserving the CRP acreage, but not farming or grazing it, he would and did receive a fee from CCC. Since the CRP acreage was added to his existing farmland, and since petitioner Connie Ray was already in the business of farming and ranching, this was a payment to him in connection with his ongoing trade or business. 20 Id. at . In conclusion, the Tax Court stated that Ray was an active farmer/rancher with respect to additional acreage [enrolled in the CRP], and the payments... had a direct nexus to his trade or business. Id. at . 21 The facts of Ray are almost identical to those in the case before us, and the decision's reasoning is sound. Like Ray, the Wuebkers were engaged in the business of farming prior to and during the term of their CRP contract. Their agreement with the CCC required them to perform several ongoing tasks with respect to the land enrolled in the CRP, the very land they already owned and had previously farmed. As the Tax Court concluded in Ray, the CRP payments to the Wuebkers were in connection with and had a direct nexus to their ongoing trade or business. 22 Revenue Ruling 60-32, 1960-1 C.B. 23, further supports the above conclusion. Issued in connection with the CRP's predecessor agricultural plan, the Soil Bank Program, 7 U.S.C. §§ 1801-37 (repealed1965), the ruling expressed the IRS's opinion that [p]ayments 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. Although not binding on this court, a revenue ruling constitutes the studied view of the IRS and is entitled to some deference unless 'it conflicts with the statute it supposedly interprets or with that statute's legislative history or if it is otherwise unreasonable.' CenTra, Inc. v. United States, 953 F.2d 1051, 1056 (6th Cir. 1992) (quoting Threlkeld v. Commissioner, 848 F.2d 81, 84 (6th Cir. 1988)). Because the Soil Bank Program was substantially the same as the CRP, see Peterson v. Chater, 72 F.3d 675, 677 (8th Cir. 1995) (CRP has been called'son of Soil Bank.'), and because the judgment expressed in Revenue Ruling 60-32 is not an unreasonable interpretation, we find it persuasive. 23 The Tax Court's decision under review expressly distinguishes Ray and Revenue Ruling 60-32. For the reasons set forth in Part II.C. below, we find that the Tax Court's disregard of these prior decisions is unwarranted. 24 In support of their argument, the Wuebkers rely primarily on Milligan v. Commissioner, 38 F.3d 1094 (9th Cir. 1994), and Gump v. United States, 86 F.3d 1126 (Fed. Cir. 1996). The Milligan court held that termination payments received by an insurance agent under a non-competition agreement did not derive from the taxpayer's business activity of insurance sales because they were not tied to the quantity or quality of the taxpayer's prior labor.... Milligan, 38 F.3d at 1098. In Gump, the court followed Milligan and ruled that monthly payments received by the taxpayer from his former employer did not derive from his insurance trade because they arose from the cessation of said business. Gump, 86 F.3d at 1128-29. 25 Both decisions, however, are factually distinguishable from the instant action. First, neither case involves the unique aspects of the CRP and the maintenance obligations attendant to the program. Second, unlike the situations in Milligan and Gump, the Wuebkers continued to engage in their business while they were receiving their CRP payments. Furthermore, although the Wuebkers argue that the CRP payments were not conditioned upon any farming activity, their position is weakened by the fact that they were required to perform tasks that are intrinsic to the farming trade or business (e.g., tilling, seeding, fertilizing, and weed control) that required the use of their farming equipment. 26