Opinion ID: 771596
Heading Depth: 2
Heading Rank: 2

Heading: The McNamaras

Text: 5 Michael McNamara began farming in Minnesota in 1977. He operated the farm as a joint venture with his wife Nancy McNamara until 1992, when he incorporated the farm under the name McNamara Farms. Mr. McNamara is the sole shareholder, officer, and director. McNamara Farms operates on approximately 1,250 acres, a portion of which is rented from the McNamaras. During 1993, 1994, and 1995--the tax years at issue--McNamara Farms rented under a written lease 460 acres of land and a house that was owned by the McNamaras. Pursuant to the lease, in the years 1993, 1994, and 1995, McNamara Farms paid the McNamaras between approximately $45,000 and $57,000. 6 In February 1992, Mr. McNamara entered into an employment agreement with McNamara farms. The agreement provided that Mr. McNamara was to serve as general manager, responsible for field work and marketing, security of machinery and inventory, management of other employees, and other usual and customary duties associated with agricultural production. In essence, the agreement memorialized the duties Mr. McNamara had performed since he began farming. At the same time, Mrs. McNamara also entered into an employment agreement with McNamara Farms. The agreement provided that Mrs. McNamara would be responsible for bookkeeping, employee meal preparation, field work, assistance with machinery and inventory, and other duties as assigned. Mrs. McNamara's employment agreement also memorialized the duties she had been performing since she began farming with Mr. McNamara. 7 For each tax year at issue, the McNamaras filed a Form 1040 as married persons filing jointly, identifying their occupations as farmer (Mr. McNamara) and bookkeeper (Mrs. McNamara). For 1993, 1994, and 1995, they reported on Schedule E (Suppplemental Income and Loss), that they received net rental income between approximately $19,000 and $23,000. Each year, the McNamaras also reported wages of roughly $30,000. Each year, Mr. McNamara reported earnings from McNamara Farms of roughly $28,000, and Mrs. McNamara indicated earnings from McNamara Farms of roughly $2,500. 8 The Commissioner determined the real estate rental payments the McNamaras received from McNamara Farms were includible in their net earnings from self- employment under 1402(a)(1), and as a result the McNamaras owed self-employment taxes for 1993, 1994, and 1995. The McNamaras contested the Commissioner's determination in the Tax Court, which ruled in the Commissioner's favor. Looking beyond the terms of the lease to the McNamaras' obligations within the overall scheme of their farming operation, the Tax Court determined that the arrangement between [the McNamaras] and McNamara farms provided, or contemplated, that [the McNamaras] materially participate in the production of agricultural commodities on the farmland. McNamara v. Comm'r, 78 T.C.M. (CCH) 530, 532-33 (1999). Further, the court ruled that both the McNamaras had, pursuant to that scheme, materially participated in agricultural production. The court concluded that the rental income was therefore includible farm rental income subject to taxation as self-employment earnings. See id.