Court Opinion

ID: 4339589
Source: CourtListenerOpinion
Date Created: 2018-11-14 04:34:41.585101+00
Date Added: 2024-06-11T13:29:48.649573
License: Public Domain

ROLLIN J. MOREHOUSE AND MAUREEN B. MOREHOUSE,
                                             PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE,
                                                               RESPONDENT
                                                        Docket No. 823–11.                         Filed June 18, 2013.

                                                 During 2006 and 2007 P–H received payments under the
                                               U.S. Department of Agriculture Conservation Reserve Pro-
                                               gram (CRP). Respondent determined that P–H was liable for
                                               self-employment tax under I.R.C. sec. 1401 on the CRP pay-
                                               ments. P–H claims that the CRP payments are not includible
                                               in his self-employment income because he was neither
                                               engaged in nor derived the CRP payments from operation of
                                               a trade or business. Alternatively, P–H claims that the CRP
                                               payments are excluded from the calculation of his net
                                               earnings from self-employment under I.R.C. sec. 1402(a)(1)
                                               because the CRP payments constituted ‘‘rentals from real
                                               estate’’. Held: P–H’s CRP payments are includible in his self-
                                               employment income under I.R.C. sec. 1401 because he was
                                               engaged in a trade or business during the years in issue and
                                               there was a nexus between his trade or business and the CRP
                                               payments he received. Held, further, P–H’s CRP payments are
                                               not ‘‘rentals from real estate’’ within the meaning of I.R.C.

                                      350

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     351

                                               sec. 1402(a)(1). Wuebker v. Commissioner, 110 T.C. 431 (1998),
                                               rev’d, 205 F.3d 897 (6th Cir. 2000), is overruled.

                                           Paul J. Quast and Neal J. Shapiro, for petitioners.
                                           Blaine C. Holiday, for respondent.
                                        MARVEL, Judge: In a notice of deficiency dated October 14,
                                      2010, respondent determined deficiencies with respect to
                                      petitioners’ Federal income tax of $3,341 and $3,664 for 2006
                                      and 2007, respectively. After concessions, 1 the sole issue for
                                      decision is whether petitioners are liable for self-employment
                                      tax under section 1401 2 on payments they received under
                                      the U.S. Department of Agriculture (USDA) Conservation
                                      Reserve Program (CRP).

                                                                          FINDINGS OF FACT

                                        Some of the facts have been stipulated and are so found.
                                      The stipulation of facts is incorporated herein by this ref-
                                      erence. Petitioners resided in Minnesota when they filed
                                      their petition.
                                      I. Background
                                         Mr. Morehouse (hereinafter, petitioner) holds a bachelor’s
                                      degree in business from the University of Minnesota. Fol-
                                      lowing graduation he worked as a regional sales manager
                                      and as an associate publisher. In 1987 petitioner began pro-
                                      viding marketing and fundraising services for the University
                                      of Texas at Austin.
                                         In 1994 petitioner acquired 503 acres of land in Grant
                                      County, South Dakota (Grant County property), 320 acres of
                                      land in Roberts County, South Dakota (Roberts County prop-
                                      erty), and 400 acres of land in Day County, South Dakota
                                      (Day County property) (collectively, South Dakota prop-
                                        1 On their 2006 Schedule E, Supplemental Income and Loss, petitioners

                                      reported that they paid management fees of $2,001 with respect to prop-
                                      erty in Grant County, South Dakota, that Rollin J. Morehouse owned. See
                                      infra pp. 351–352. Petitioners concede that their tax return preparer erro-
                                      neously entered $2,001 and that they actually paid management fees of
                                      $201 with respect to the property.
                                        2 Unless otherwise indicated, all section references are to the Internal

                                      Revenue Code, as amended and in effect for the years in issue, and all
                                      Rule references are to the Tax Court Rules of Practice and Procedure.
                                      Some amounts have been rounded to the nearest whole number.

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                                      352                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      erties). He acquired the South Dakota properties through
                                      inheritance and by purchasing various undivided interests in
                                      the properties from his relatives. All of the land was tillable
                                      cropland, with the exception of: (1) a gravel pit on the Grant
                                      County property; and (2) 129 acres of the Roberts County
                                      property, which petitioner’s father had placed in the CRP
                                      program. 3
                                        Petitioner, who lived in Texas at the time he acquired the
                                      South Dakota properties, did not personally farm any of the
                                      land. Instead, he rented the tillable portions of the South
                                      Dakota properties to various individuals who farmed their
                                      rented portions. 4
                                        In 2003 petitioner left his position at the University of
                                      Texas and moved with his family to Minnesota. Upon moving
                                      to Minnesota petitioner became the primary caregiver for his
                                      four sons. Although petitioner retired from the corporate
                                      sphere, he continued to manage his various investments and
                                      property interests, including his interests in the South
                                      Dakota properties.
                                      II. Petitioner’s Participation in the CRP
                                           A. The CRP in General
                                         The CRP was established pursuant to the Food Security
                                      Act of 1985. See Food Security Act of 1985, Pub. L. No. 99–
                                      198, secs. 1231–1236, 99 Stat. at 1509–1514 (codified as
                                      amended at 16 U.S.C. secs. 3831–3835 (2012)); see also 7
                                      C.F.R. pt. 1410 (2011). Under the CRP, the USDA may enter
                                      into contracts with owners and operators of land ‘‘to conserve
                                      and improve the soil, water, and wildlife resources of such
                                      land and to address issues raised by State, regional, and
                                      national conservation initiatives.’’ 16 U.S.C. sec. 3831(a).
                                      Owners and operators of land agree to implement a conserva-
                                      tion plan and refrain from using the land for agricultural
                                           3 The
                                               CRP contract with respect to the 129-acre parcel in Roberts County
                                      was conveyed with the land to petitioner in 1994. In 1999 petitioner in his
                                      capacity as owner of the Roberts County property entered into a new CRP
                                      contract with respect to the 129-acre parcel. See infra pp. 354–355.
                                        4 Petitioner rented the Grant County property and the remaining 191

                                      acres of the Roberts County property until 1997, when he placed that land
                                      in the CRP. See infra pp. 353–354. He rented the Day County property
                                      from the time of his acquisition through the years in issue.

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     353

                                      purposes. Id. sec. 3832(a). In return, the USDA shares the
                                      cost of carrying out the conservation plan and pays to the
                                      owner or operator an ‘‘annual rental payment’’. 5 Id. sec.
                                      3833.
                                           B. Petitioner’s Enrollment in the CRP and the CRP
                                              Contracts
                                         In 1997 petitioner submitted applications to the USDA,
                                      offering for enrollment in the CRP the tillable land on the
                                      Grant County property as well as the remaining 191 acres of
                                      the Roberts County property.
                                         In 1997 the Grant County and Roberts County Farm
                                      Service Agency (FSA) offices approved petitioner’s applica-
                                      tions and accepted his land into the CRP. Subsequently, the
                                      Commodity Credit Corporation (CCC) executed the resulting
                                      CRP contracts with respect to the Grant County and Roberts
                                      County properties. Petitioner personally assumed all obliga-
                                      tions and responsibilities of compliance under the CRP con-
                                      tracts.
                                         With respect to the Grant County property, petitioner and
                                      the CCC executed two contracts: (1) contract No. 262, cov-
                                      ering 180 acres of land (contract 262); and (2) contract No.
                                      263, covering 251 acres of land (contract 263). Both Grant
                                      County CRP contracts listed petitioner as the owner of the
                                      land and did not identify anyone as the operator of the land.
                                      Contract 262 provided that the CCC would pay to petitioner
                                      a first-year payment of $8,609 and an annual contract pay-
                                      ment of $9,391. 6 Contract 263 provided that the CCC would
                                      pay to petitioner a first-year payment of $12,405 and an
                                      annual contract payment of $13,533. 7
                                         Pursuant to a conservation plan attached to the Grant
                                      County CRP contracts, petitioner agreed to: (1) maintain
                                      already established grass and legume cover for the life of the
                                      contract; (2) ‘‘[e]stablish perennial vegetative cover on land
                                           5 Tit.
                                              16 U.S.C. sec. 3833(2) (2012) provides that the annual ‘‘rental’’ pay-
                                      ment is intended to compensate owners and operators for ‘‘(A) the conver-
                                      sion of highly erodible cropland normally devoted to the production of an
                                      agricultural commodity on a farm or ranch to a less intensive use; and (B)
                                      the retirement of any cropland base and allotment history that the owner
                                      or operator agrees to retire permanently.’’
                                        6 The ‘‘rental rate’’ under contract 262 was set at $52.26 per acre.
                                        7 The ‘‘rental rate’’ under contract 263 was set at $53.83 per acre.

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                                      354                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      temporarily removed from agricultural production’’, including
                                      pubescent or intermediate wheatgrass, alfalfa, and sweet
                                      clover; and (3) engage in ‘‘pest control and pesticide manage-
                                      ment’’ for the life of the contract. The CCC agreed to share
                                      with petitioner the cost of establishing these conservation
                                      plans.
                                          The Roberts County CRP contract covered 191 acres of
                                      petitioner’s land. The Roberts County CRP contract listed
                                      petitioner as the owner of the land and did not identify any-
                                      one as the operator of the land. The Roberts County CRP
                                      contract provided that the CCC would make an annual con-
                                      tract payment of $9,666. 8
                                          Pursuant to a conservation plan attached to the Roberts
                                      County CRP contract, petitioner agreed to: (1) ‘‘[c]ontrol pests
                                      such as weeds, livestock, insects and disease’’ and (2)
                                      ‘‘[e]stablish adapted native perenial [sic] vegetative cover’’
                                      including Western wheatgrass, green needlegrass, and
                                      alfalfa. The conservation plan also provided an estimated
                                      cost share for the plan. Once the work was completed, peti-
                                      tioner was required to provide to the CCC ‘‘a report of
                                      performance’’ and ‘‘submit receipts and seed tags affiliated
                                      with practice establishment’’. The CCC agreed to share with
                                      petitioner the costs of establishing the conservation plan. 9
                                          In June 1999 petitioner and the CCC executed a new CRP
                                      contract (1999 Roberts County CRP contract) with respect to
                                      the 129-acre parcel in Roberts County that petitioner had
                                      acquired in 1994 already subject to a CRP contract. The 1999
                                      Roberts County CRP contract listed petitioner as the owner
                                      of the land and did not identify any operator of the land. The
                                      1999 Roberts County CRP contract provided that the CCC
                                      would make an annual contract payment of $5,757. 10 Under
                                      the 1999 Roberts County CRP contract, petitioner agreed to:
                                      (1) maintain already established grass and legume cover for
                                      the life of the contract; (2) ‘‘establish native perennial vegeta-
                                      tive cover on land temporarily removed from agricultural
                                        8 The ‘‘rental rate’’ under the Roberts County CRP contract was set at

                                      $50.50 per acre.
                                        9 In September 2006 the CCC agreed to modify the Roberts County CRP

                                      contract and extend the expiration date of that contract to September 30,
                                      2012.
                                        10 The ‘‘rental rate’’ under the 1999 Roberts County CRP contract was

                                      set at $44.63 per acre.

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     355

                                      production’’; (3) engage in ‘‘pest control and pesticide
                                      management’’ for the life of the contract; and (4) control
                                      weeds by either mowing or chemical means. The 1999 Rob-
                                      erts County CRP contract prohibited petitioner from haying
                                      or grazing the enrolled land.
                                           C. Implementation of the Conservation Plans
                                         Petitioner hired Wallace Redlin to carry out some of peti-
                                      tioner’s obligations under the CRP contracts. 11 Mr. Redlin
                                      was a retired farmer who had placed all of his land in the
                                      CRP. Mr. Redlin previously had rented the Grant County
                                      and Roberts County properties from petitioner for use in Mr.
                                      Redlin’s farming operations.
                                         In 1998 petitioner purchased the required seeding mate-
                                      rials and shipped the materials to Mr. Redlin. Mr. Redlin
                                      then performed the initial seedbed preparation and seeding.
                                      In 2000, pursuant to the 1999 Roberts County CRP contract,
                                      Mr. Redlin plowed a portion of the land and reseeded it with
                                      various grasses.
                                           D. Termination of CRP Contract 262
                                         In 2001 Grant County FSA employees discovered that peti-
                                      tioner was engaging in gravel quarry activity on the Grant
                                      County property and had been using part of the property for
                                      a road. The Grant County FSA, acting on behalf of the
                                      USDA, terminated petitioner’s participation in the CRP with
                                      respect to nine acres of the Grant County property and
                                      required him to refund $2,540, an amount equal to all prior
                                      payments with respect to that portion of the property, plus
                                      interest and liquidated damages. The Grant County FSA also
                                      provided for the implementation of CRP contract No. 262–A,
                                         11 On July 30, 1997, petitioner mailed to the Grant County FSA a letter,

                                      titled as an addendum. In the letter petitioner indicated that he will ‘‘as-
                                      sume all obligations and responsibilities of contractual compliance as may
                                      be administered by and through FSA or otherwise pertaining to subject
                                      lands by independent contract with WALLACE L. REDLIN, Jr. for ma-
                                      chine hire, monitoring and supervision as essential and necessary on all
                                      land identified in the CRP contract’’. Petitioner testified that he sent the
                                      addendum to the Grant County FSA to clarify how he planned to comply
                                      with the CRP contract considering the fact that he resided in Texas at the
                                      time.

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                                      356                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      covering the remaining 171 acres of the Grant County prop-
                                      erty, which continued to be enrolled in the CRP program.
                                      III. Petitioner’s Activities With Respect to the South Dakota
                                           Properties
                                         Although Mr. Redlin performed some of petitioner’s obliga-
                                      tions under the CRP contracts at petitioner’s request and
                                      direction, petitioner fulfilled other obligations, including the
                                      making of annual certifications that he was implementing
                                      the conservation plans in accordance with the CRP contracts.
                                      Between 1997 and 2007 petitioner participated in three CRP
                                      haying programs with respect to the South Dakota prop-
                                      erties. In July 2002 petitioner requested authority for emer-
                                      gency haying or grazing. 12 Petitioner signed the necessary
                                      forms and made donations to ranchers and farmers as pro-
                                      vided for by the CRP.
                                         Petitioner also personally purchased materials needed to
                                      implement the conservation plans, which he then shipped to
                                      Mr. Redlin. Petitioner paid Mr. Redlin for the work he per-
                                      formed to satisfy some of petitioner’s obligations under the
                                      CRP contracts. Petitioner also sought and received from the
                                      USDA cost-sharing payments for the seeding and weeding
                                      activities on the Grant County and Roberts County prop-
                                      erties. Petitioner gathered various documents, including
                                      receipts and invoices, and submitted these documents along
                                      with official applications in order to receive the cost-sharing
                                      payments.
                                         In addition to his activities with respect the CRP contracts,
                                      petitioner engaged in various other activities with respect to
                                      the South Dakota properties. Petitioner allowed individuals
                                      to hunt on portions of the South Dakota properties. He trav-
                                      eled to meetings with various parties with the express pur-
                                      pose of negotiating agreements with people interested in
                                      hunting on the South Dakota properties. Petitioner also oper-
                                      ated a gravel pit on the Grant County property. During the
                                      years at issue petitioner sold gravel to the Grant County
                                      Highway Department and Lura Township, the local town-
                                      ship. Petitioner also rented the Day County property.
                                        12 Petitioner donated the hay and/or the haying or grazing privileges to

                                      a livestock producer and accordingly was not required to reduce the
                                      amount of his CRP payment with respect to that land.

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                       357

                                         Between 1994 and 2007 petitioner visited the South
                                      Dakota properties several times each year. In 2006 petitioner
                                      visited the South Dakota properties four times. In 2007 peti-
                                      tioner visited the South Dakota properties two times. He
                                      typically visited the South Dakota properties for two to three
                                      days at a time. On such trips petitioner would visit the
                                      gravel pit to ensure that there had been no unauthorized
                                      excavation or removal of gravel, drive to each of the South
                                      Dakota properties, and meet with officials at the FSA and
                                      the Grant County Highway Department. He also would meet
                                      with individuals who had an interest in renting one of his
                                      properties or in hunting on the properties.
                                      IV. Petitioner’s Income With Respect to the South Dakota
                                          Properties
                                        In 2006 petitioner received CRP payments of $22,449 and
                                      $15,423 with respect to the Grant County and Roberts
                                      County properties, respectively.
                                        In 2007 petitioner received income of $25,869 with respect
                                      to the Grant County property as follows: (1) CRP payments
                                      of $22,449; (2) a payment of $2,515 from Mr. Redlin for
                                      hunting privileges; and (3) a payment of $905 from Mike
                                      Krakow for the right to cut hay on the land. He received
                                      income of $17,281 with respect to the Roberts County prop-
                                      erty as follows: (1) CRP payments of $15,423; and (2) a pay-
                                      ment of $1,858 from the South Dakota Game and Fish
                                      Department for participation in a walk-in hunting program.
                                      V. Petitioners’ Tax Reporting and the Notice of Deficiency
                                        Petitioners timely filed Forms 1040, U.S. Individual
                                      Income Tax Return, for 2006 and 2007. On their returns
                                      petitioners identified their occupations as ‘‘self-employed’’. On
                                      attached Schedules E petitioners reported income and
                                      expenses with respect to their three properties as follows:
                                           2006 Schedule E

                                                                               Day County         Grant County        Roberts County
                                                                               property            property             property

                                           Rents received                      $22,478                 $22,449           $15,423
                                           Total expenses                        3,287                   7,606             4,662
                                           Net income                           19,191                  14,843            10,761

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                                      358                 140 UNITED STATES TAX COURT REPORTS                                      (350)

                                           2007 Schedule E

                                                                               Day County         Grant County        Roberts County
                                                                               property            property             property

                                           Rents received                      $37,962                 $25,869           $17,281
                                           Total expenses                        3,017                   5,194             4,287
                                           Net income                           34,945                  20,675            12,994

                                        On October 14, 2010, respondent mailed to petitioners the
                                      notice of deficiency for 2006 and 2007 determining that: (1)
                                      petitioners erroneously reported their CRP payments as farm
                                      rental income on their returns; (2) petitioners should have
                                      reported the CRP payments as income on a Schedule F,
                                      Profit or Loss From Farming, for each year. Respondent also
                                      determined that the CRP payments constituted self-employ-
                                      ment income and therefore determined that petitioners had
                                      unreported self-employment income of $25,604 13 and
                                      $28,391 14 for 2006 and 2007, respectively. 15 Respondent
                                      allowed petitioners additional deductions with respect to the
                                      self-employment tax liabilities.
                                                                                   OPINION

                                        A taxpayer’s self-employment income is subject to self-
                                      employment tax. Sec. 1401(a) and (b). Self-employment tax is
                                      assessed and collected as part of the income tax, must be
                                      included in computing any income tax deficiency or overpay-
                                      ment for the applicable tax period, and must be taken into
                                      account for estimated tax purposes. Sec. 1401; see also sec.
                                      1.1401–1(a), Income Tax Regs. Self-employment income gen-
                                      erally is defined as ‘‘the net earnings from self-employment
                                         13 This figure represents the net income petitioner received in 2006 with

                                      respect to the Grant County and Roberts County properties. As stated
                                      supra p. 357, in 2006 petitioner’s only income with respect to the Grant
                                      County and Roberts County properties consisted of CRP payments.
                                         14 This figure represents the net CRP payments petitioner received in

                                      2007 with respect to the Grant County and Roberts County properties. As
                                      discussed supra p. 357, in 2007 petitioner received additional income of
                                      $5,278 with respect to these properties. Respondent did not include this
                                      additional income in calculating petitioners’ unreported self-employment
                                      income.
                                         15 Respondent appears to have accepted that the income generated by pe-

                                      titioner’s rental activity with respect to the Day County property is not
                                      subject to self-employment tax, presumably because of the provisions of
                                      sec. 1402(a)(1). See also Henderson v. Flemming, 283 F.2d 882, 888 (5th
                                      Cir. 1960).

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     359

                                      derived by an individual’’. Sec. 1402(b). Section 1402(a)
                                      defines ‘‘[n]et earnings from self-employment’’ as ‘‘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 busi-
                                      ness’’. See also sec. 1.1402(a)–1, Income Tax Regs. In com-
                                      puting a taxpayer’s net earnings from self-employment, sec-
                                      tion 1402(a)(1) provides:
                                           [T]here shall be excluded rentals from real estate and from personal
                                           property leased with the real estate (including such rentals paid in crop
                                           shares)[16] together with the deductions attributable thereto, unless such
                                           rentals are received in the course of a trade or business as a real estate
                                           dealer; 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 or horticultural commodities (including livestock,
                                           bees, poultry, and fur-bearing animals and wildlife) on such land, and
                                           that there shall be material participation by the owner or tenant (as
                                           determined without regard to any activities of an agent of such owner
                                           or tenant) in the production or the management of the production of
                                           such agricultural or horticultural commodities, and (B) there is material
                                           participation by the owner or tenant (as determined without regard to

                                           16 In
                                              2008 Congress amended sec. 1402(a) to read: ‘‘[T]here shall be ex-
                                      cluded rentals from real estate and from personal property leased with the
                                      real estate (including such rentals paid in crop shares, and including pay-
                                      ments under section 1233(2) of the Food Security Act of 1985 (16 U.S.C.
                                      3833(2)) to individuals receiving benefits under section 202 or 223 of the
                                      Social Security Act)’’. Under sec. 1402(a) as amended, payments made
                                      under 16 U.S.C. sec. 3833(2) to individuals who were receiving benefits
                                      under sec. 202 or sec. 223 of the Social Security Act (SSA) are excluded
                                      from the calculation of net earnings from self-employment. Tit. 16 U.S.C.
                                      sec. 3833(2) (2012) refers to payments received from the USDA under the
                                      CRP. See supra p. 352. The amendment applies to CRP payments made
                                      after December 31, 2007. Food, Conservation, and Energy Act of 2008,
                                      Pub. L. No. 110–246, sec. 15301(c), 122 Stat. at 2263. SSA sec. 202 pro-
                                      vides for the payment of old-age and survivors insurance benefits. 42
                                      U.S.C. sec. 402 (2012). SSA sec. 223 provides for the payment of disability
                                      insurance benefits. 42 U.S.C. sec. 423 (2012).
                                        Petitioner received the payments at issue before December 31, 2007.
                                      Furthermore, petitioner does not contend, and he has not introduced any
                                      evidence to show, that he was receiving benefits under the SSA. Accord-
                                      ingly, the 2008 amendment to sec. 1402(a) is inapplicable to our analysis
                                      herein.

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                                      360                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                           any activities of an agent of such owner or tenant) with respect to any
                                           such agricultural or horticultural commodity.[17] * * *

                                      The self-employment tax provisions are construed broadly in
                                      favor of treating income as earnings from self-employment.
                                      Braddock v. Commissioner, 95 T.C. 639, 644 (1990);
                                      Hornaday v. Commissioner, 81 T.C. 830, 834 (1983); Hennen
                                      v. Commissioner, T.C. Memo. 1999–306; S. Rept. No. 81–1669
                                      (1950), 1950–2 C.B. 302, 354.
                                         Respondent contends that the CRP payments are taxable
                                      as self-employment income because petitioner derived the
                                      CRP payments from his trade or business of conducting an
                                      environmentally friendly farming operation. 18
                                         Petitioner contends that the CRP payments are not income
                                      from a trade or business and therefore are not includible in
                                      his self-employment income. Petitioner contends that he was
                                      not involved in the trade or business of farming, that his
                                      minimal activities with respect to the CRP land did not cause
                                      him to become active in the trade or business of farming, and
                                      that there was no nexus between the CRP payments received
                                      and his business activities. In the alternative, petitioner con-
                                      tends that the CRP payments are excluded from the calcula-
                                      tion of net earnings from self-employment under the ‘‘rentals
                                      from real estate’’ exclusion in section 1402(a)(1).
                                         We examine the parties’ contentions below, taking into
                                      account the burden of proof, which rests upon petitioners.
                                      See Rule 142(a)(1). Respondent’s determinations are pre-
                                      sumed to be correct; petitioners must prove that respondent’s
                                           17 Theregulations under sec. 1402(a)(1) refer to the farm rental income
                                      that is included in a taxpayer’s net earnings from self-employment as in-
                                      cludible farm rental income. See, e.g., sec. 1.1402(a)–4(b), Income Tax Regs.
                                      In this Opinion we will refer to such income as includible farm rental in-
                                      come.
                                         18 In arguing that petitioner was engaged in an active trade or business,

                                      respondent relies on determinations made by the Grant County FSA that
                                      petitioner was ‘‘actively engaged in a farming operation’’. This Court pre-
                                      viously has held that a determination by the USDA that an individual was
                                      actively engaged in farming ‘‘is not a determination for Federal income tax
                                      purposes that * * * [the individual was] actively engaged in a trade or
                                      business for purposes of section 162(a).’’ Hasbrouck v. Commissioner, T.C.
                                      Memo. 1998–249, 1998 WL 373337, at *12, aff ’d without published opin-
                                      ion, 189 F.3d 473 (9th Cir. 1999). Accordingly, the Grant County FSA de-
                                      termination does not control our decision as to whether petitioner was ac-
                                      tively engaged in a trade or business for purposes of sec. 162(a).

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     361

                                      determinations are erroneous in order to rebut the presump-
                                      tion and satisfy their burden of proof. See id.; Welch v.
                                      Helvering, 290 U.S. 111, 115 (1933).
                                      I. Self-Employment Income
                                         A taxpayer’s net earnings from self-employment include
                                      the gross income derived from any trade or business carried
                                      on by the taxpayer. Sec. 1402(a)(1). The term ‘‘derived from’’
                                      ‘‘necessitates a nexus between the income and the trade or
                                      business actually carried on by the taxpayer.’’ Bot v. Commis-
                                      sioner, 353 F.3d 595, 599 (8th Cir. 2003), aff ’g 118 T.C. 138
                                      (2002); see also McNamara v. Commissioner, 236 F.3d 410,
                                      413 (8th Cir. 2000), rev’g T.C. Memo. 1999–333. The term
                                      ‘‘trade or business’’ ‘‘shall have the same meaning as when
                                      used in section 162 (relating to trade or business expenses)’’.
                                      Sec. 1402(c). The applicable regulations provide that ‘‘[t]he
                                      trade or business must be carried on by the individual, either
                                      personally or through agents or employees.’’ Sec. 1.1402(a)–
                                      2(b), Income Tax Regs. Under these principles, payments
                                      constitute self-employment income if they: ‘‘(1) are derived (2)
                                      from a trade or business (3) carried on by * * * [the tax-
                                      payer or his] agents.’’ Bot v. Commissioner, 353 F.3d at 599;
                                      see also Wuebker v. Commissioner, 205 F.3d 897, 901 (6th
                                      Cir. 2000), rev’g 110 T.C. 431 (1998). Accordingly, we must
                                      decide: (1) whether petitioner carried on a trade or business
                                      during the years in issue, whether personally or through an
                                      agent; and (2) if so, whether there was a nexus between the
                                      trade or business conducted and the income petitioner
                                      received.
                                           A. Existence of a Trade or Business
                                           1. Analysis
                                         To be engaged in a trade or business with respect to which
                                      deductions are allowable under section 162, the taxpayer
                                      must be involved in the activity with continuity and regu-
                                      larity, and the taxpayer’s primary purpose for engaging in
                                      the activity must be for income or profit. Commissioner v.
                                      Groetzinger, 480 U.S. 23, 35 (1987). Additionally, the tax-
                                      payer’s business operations must have commenced. Goodwin
                                      v. Commissioner, 75 T.C. 424, 433 (1980), aff ’d without pub-
                                      lished opinion, 691 F.2d 490 (3d Cir. 1982). Whether a tax-

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                                      362                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      payer is engaged in a trade or business must be ascertained
                                      from a review of all relevant facts and circumstances.
                                      Commissioner v. Groetzinger, 480 U.S. at 35.
                                         The record establishes that petitioner expanded his partici-
                                      pation in the CRP over the years and that he participated in
                                      the CRP with continuity and regularity during 2006 and
                                      2007. The record further establishes that petitioner did so
                                      with the primary purpose of making a profit. After his initial
                                      experience with the CRP petitioner decided to enroll the
                                      Grant County and Roberts County properties in the CRP
                                      because he could get a higher rate of return from partici-
                                      pating in the CRP than from leasing the properties for
                                      farming. He negotiated and executed the CRP contracts and,
                                      by doing so, obligated himself as the owner of the properties
                                      to satisfy significant contractual obligations regarding
                                      planting, maintenance, and use of the properties enrolled in
                                      the CRP and compliance with CRP requirements. Although
                                      petitioner did not actually perform the planting and mainte-
                                      nance work required by the CRP, he hired an individual, Mr.
                                      Redlin, to perform the work according to CRP specifications,
                                      purchased necessary materials, such as seed, and provided
                                      them to Mr. Redlin, and regularly inspected the properties to
                                      ensure that they were being maintained and used in accord-
                                      ance with the CRP contractual obligations. On these facts we
                                      find that petitioner engaged in the business of participating
                                      in the CRP and managing his CRP properties with the pri-
                                      mary intent of making a profit.
                                         Petitioner contends that his actual participation in the
                                      CRP and his work complying with the CRP contract require-
                                      ments were de minimis and did not constitute farming. He
                                      maintains that all physical labor necessary to plant, seed,
                                      weed, mow, and maintain the properties (property mainte-
                                      nance activities) in accordance with the CRP contracts was
                                      performed by his contractor and should not be attributed to
                                      him. It is immaterial, however, that the property mainte-
                                      nance activities were carried out by someone other than peti-
                                      tioner. As noted supra, for purposes of section 1402 a tax-
                                      payer may conduct his trade or business personally or
                                      through an agent. Sec. 1.1402(a)–2(b), Income Tax Regs.;
                                      Rev. Rul. 60–32, 1960–1 C.B. 23 (stating that similar pay-
                                      ments made to individuals under the Soil Bank Act were
                                      includible in the individual’s net earnings from self-employ-

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     363

                                      ment if the individual operated his farm either personally or
                                      through agents or employees). 19 A taxpayer who hires
                                      another ‘‘to render the services necessary to fulfill’’ the tax-
                                      payer’s obligations under a contract is nonetheless liable for
                                      self-employment tax with respect to the income the taxpayer
                                      receives pursuant to that contract. Moorhead v. Commis-
                                      sioner, T.C. Memo. 1993–314, 1993 WL 267200, at *6.
                                        As a participant in the CRP, petitioner, either directly or
                                      through Mr. Redlin as his agent, 20 regularly and continu-
                                           19 Rev.   Rul. 60–32, 1960–1 C.B. 23, 26, states in pertinent part:
                                                Payments and benefits attributable to the acreage reserve program
                                             are includible in determining the recipient’s net earnings from self-em-
                                             ployment if he operates his farm personally or through agents or em-
                                             ployees. This is also true if his farm is operated by others and he par-
                                             ticipates materially in the production of commodities, or management
                                             of such production, within the meaning of section 1402(a)(1) * * *.
                                             * * * If he does not so operate or materially participate, payments re-
                                             ceived are not to be included in determining net earnings from self-
                                             employment.

                                      The Internal Revenue Service (IRS) has stated that Notice 2006–108,
                                      2006–2 C.B. 1118, discussed infra pp. 368–370, would render Rev. Rul. 60–
                                      32, supra, obsolete.
                                        20 Neither party addresses whether, under applicable State law, Mr.

                                      Redlin was petitioner’s agent. Because South Dakota has the most signifi-
                                      cant relationship to petitioner and Mr. Redlin and the transaction at issue,
                                      whether Mr. Redlin was petitioner’s agent is governed by South Dakota
                                      law. See Stockmen’s Livestock Exch. v. Thompson, 520 N.W.2d 255, 257–
                                      258, 258 n.1 (S.D. 1994). Under South Dakota law, the elements required
                                      to create an agency relationship are ‘‘ ‘manifestation by the principal that
                                      the agent shall act for him, the agent’s acceptance of the undertaking, and
                                      the understanding of the parties that the principal is to be in control of
                                      the undertaking.’ ’’ Tisdall v. Tisdall, 422 N.W.2d 105, 107–108 (S.D. 1988)
                                      (quoting Southard v. Hansen, 376 N.W.2d 56, 58 (S.D. 1985)). In Tisdall,
                                      the Supreme Court of South Dakota found that a principal-agent relation-
                                      ship existed when the principal directed the agent to distribute revenue ac-
                                      cording to applicable statutory guidelines.
                                         Petitioner hired Mr. Redlin to perform all of the physical farming duties
                                      required under the CRP contracts. Mr. Redlin apparently accepted peti-
                                      tioner’s offer, as indicated by Mr. Redlin’s completion of the seeding, weed-
                                      ing, mowing, and maintenance activities required under the CRP con-
                                      tracts. Although petitioner testified that he never directed Mr. Redlin’s ac-
                                      tivities, we reject the testimony as it is apparent from the record that peti-
                                      tioner initially directed Mr. Redlin to perform the property maintenance
                                      activities required by the CRP contracts and retained the ability to direct
                                                                                                      Continued

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                                      364                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      ously: (1) satisfied seeding and weed control obligations with
                                      respect to the Grant County and Roberts County properties
                                      as required under the CRP contracts; (2) visited the Grant
                                      County and Roberts County properties to ensure that the
                                      properties maintained their status as CRP properties; (3)
                                      filed annual certifications; (4) participated in emergency
                                      haying programs; (5) requested cost-sharing payments; and
                                      (6) made decisions regarding the profitability of keeping the
                                      Grant County and Roberts County properties enrolled in the
                                      CRP. Regardless of whether some or all of these activities
                                      qualify as farming, we find that petitioner was engaged in
                                      the business of participating in the CRP and that he
                                      enrolled, maintained, and managed multiple properties sub-
                                      ject to CRP contracts with the primary intent of making a
                                      profit.
                                           2. Additional Support
                                        Our conclusion is supported by and is consistent with
                                      existing caselaw and the administrative position of the IRS
                                      set forth in Notice 2006–108, 2006–2 C.B. 1118, which was
                                      released on December 5, 2006. It is also consistent with Con-
                                      gress’ enactment in 2008 of a limited exclusion for CRP pay-
                                      ments made to taxpayers receiving Social Security retire-
                                      ment or disability benefits. We explain below.

                                      and control the work that Mr. Redlin was to perform to comply with the
                                      CRP contracts. See id. Accordingly, we find that Mr. Redlin was peti-
                                      tioner’s agent.
                                         We note that Notice 2006–108, supra, states that ‘‘[p]articipation in a
                                      CRP contract meets the criteria to be a trade or business irrespective of
                                      whether the participant performs the required activities personally or ar-
                                      ranges for his obligations to be satisfied by a third party.’’ Notice 2006–
                                      108, supra, does not discuss the apparent requirement under sec.
                                      1.1402(a)–2(b), Income Tax Regs., that the trade or business be carried on
                                      by the individual either personally, or through the individual’s employee,
                                      as that term is defined in sec. 1402(d), or agent, as that term is defined
                                      under applicable State law. Because we find that Mr. Redlin was peti-
                                      tioner’s agent, we need not decide whether an individual’s participation in
                                      a CRP contract constitutes a trade or business under sec. 1402(a) where
                                      the individual arranges for a third party to perform the obligations re-
                                      quired by the CRP contract and the third party is neither an employee nor
                                      an agent of the individual.

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     365

                                           a. Caselaw
                                        This Court previously has addressed the proper treatment
                                      of CRP payments for self-employment tax purposes. Wuebker
                                      v. Commissioner, 110 T.C. 431; 21 Ray v. Commissioner, T.C.
                                      Memo. 1996–436. However, we are unable to find any case
                                      other than Ray that addresses whether and to what extent
                                      a taxpayer who receives CRP payments is engaged in a trade
                                      or business. While there is very little law focusing on
                                      whether and to what extent participation in the CRP con-
                                      stitutes a trade or business, Bot v. Commissioner, 118 T.C.
138, provides guidance regarding the proper treatment of
                                      analogous payments for self-employment tax purposes.
                                      Accordingly, we examine each of these decisions and their
                                      application to the case at bar.
                                        In Ray v. Commissioner, T.C. Memo. 1996–436, the tax-
                                      payer was engaged in the trade or business of farming. He
                                      then purchased land that had been placed in the CRP by the
                                      previous owner. The taxpayer fulfilled the previous owner’s
                                      obligations under the CRP contract and received CRP pay-
                                      ments in exchange. This Court concluded that the taxpayer
                                      received the CRP payments in connection with his ongoing
                                      trade or business of farming. See also Hasbrouck v. Commis-
                                      sioner, T.C. Memo. 1998–249, aff ’d, 189 F.3d 473 (9th Cir.
                                      1999), in which the Commissioner, on the basis of this
                                      Court’s decision in Ray, conceded that the taxpayers were
                                      involved in the trade or business of farming and therefore
                                      entitled to the deductions claimed on their Schedules F. In
                                      so conceding, the Commissioner noted that the only dif-
                                      ference between the two factual scenarios was that the tax-
                                      payer in Ray was a farmer when he acquired the CRP land,
                                           21 In
                                              Wuebker v. Commissioner, 110 T.C. 431 (1998), rev’d, 205 F.3d 897
                                      (6th Cir. 2000), this Court considered whether the taxpayers were liable
                                      for self-employment tax on CRP payments they had received. However, in
                                      that Opinion this Court did not address whether the taxpayers were en-
                                      gaged in a trade or business but instead addressed only whether the CRP
                                      payments were excluded from the taxpayers’ net earnings from self-em-
                                      ployment as ‘‘rentals from real estate’’ under sec. 1402(a)(1). In Wuebker
                                      v. Commissioner, 205 F.3d 897, the U.S. Court of Appeals for the Sixth
                                      Circuit addressed whether the CRP payments derived from the taxpayers’
                                      farming business but did not decide whether the taxpayers were in the
                                      trade or business of farming. We discuss both of the Wuebker decisions
                                      later in this Opinion. See infra pp. 372–374.

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                                      366                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      whereas the taxpayers in Hasbrouck had no prior farming
                                      experience.
                                         In Bot v. Commissioner, 118 T.C. at 141, this Court
                                      addressed the treatment for self-employment tax purposes of
                                      payments taxpayers received from an agricultural coopera-
                                      tive (MCP). The taxpayers were retired farmers who pur-
                                      chased MCP cooperative stock and units of equity participa-
                                      tion, which ‘‘specified the maximum number of bushels of
                                      corn the member could be required to produce and deliver to’’
                                      MCP each year. Id. at 141–142. The taxpayers also entered
                                      into uniform marketing agreements (UMAs) with MCP. Id.
                                      at 141. In return, MCP was required under the UMAs to
                                      process the corn its members produced and make payments
                                      to each individual member equal to at least 80% of the loan
                                      value of each bushel of corn delivered by the individual plus
                                      a value-added payment, representing ‘‘[the] value added to
                                      the corn as a result of its processing’’, a payment from MCP’s
                                      earnings in accordance with its bylaws, and, in some
                                      instances, a storage fee and interest. Id. at 143. The tax-
                                      payers satisfied their production and delivery obligations
                                      using corn that MCP held in its option pool, rather than corn
                                      they personally had grown on their farm, and accordingly
                                      received only the value-added payments. Id. at 142, 144. The
                                      Commissioner determined that the value-added payments
                                      were includible in the calculation of the taxpayers’ net
                                      earnings from self-employment. Id. at 144.
                                         In deciding whether the taxpayers’ actions constituted a
                                      trade or business, this Court acknowledged that although the
                                      taxpayers had retired from farming, they continued to
                                      participate in MCP and their participation constituted a
                                      trade or business. Id. at 147. In particular, this Court stated:
                                             Although petitioners retired from daily farming in 1987 and turned
                                           over their farm operation to the sons, petitioners nevertheless continued
                                           to maintain their membership in MCP from 1987 through at least 1995.
                                           As active members of MCP during 1994 and 1995 [the years in issue,]
                                           petitioners, either directly or through the sons as their agents, regularly
                                           and continuously (1) maintained their status as producers under the
                                           UMAs, (2) made decisions regarding how to satisfy their production and
                                           delivery obligations * * * under the UMAs, (3) acquired option pool corn
                                           which they used to satisfy their production and delivery obligations to
                                           MCP several times each year, and (4) sold corn and corn products for
                                           profit through MCP. [Id. at 147–148; fn. ref. omitted.]

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     367

                                      In rejecting the taxpayers’ contention that their involvement
                                      was too minimal to constitute a trade or business, this Court
                                      relied on the fact that the taxpayers ‘‘regularly and continu-
                                      ously purchased and sold corn with the intention of making
                                      a profit’’ and purchased additional units of equity over time.
                                      Id. at 149.
                                         The U.S. Court of Appeals for the Eighth Circuit affirmed
                                      the decision of the Tax Court. Bot v. Commissioner, 353 F.3d
595. While the Court of Appeals emphasized the unique
                                      nature of the cooperative arrangement, the court also distin-
                                      guished the taxpayers’ participation in the cooperative, which
                                      constituted a trade or business, from an individual’s invest-
                                      ment in a corporation or gas well, which was merely a pas-
                                      sive investment. Id. at 599–600. Unlike a passive invest-
                                      ment, the investment in MCP required the taxpayers ‘‘to do
                                      more than hold the stock or equity units’’ in order to receive
                                      payment. Id. at 600.
                                         In Ray v. Commissioner, T.C. Memo. 1996–436, this Court
                                      relied on the fact that the taxpayer was engaged in the trade
                                      or business of farming before and during his participation in
                                      the CRP in finding that the CRP payments were includible
                                      in his self-employment income. However, we do not read Ray
                                      to make the taxpayer’s engagement in the business of
                                      farming before enrolling property in the CRP determinative
                                      of whether CRP payments constitute income from self-
                                      employment. A taxpayer is not required to have prior experi-
                                      ence in a particular trade or business to be permitted deduc-
                                      tions under section 162; what is required is that the taxpayer
                                      have commenced an activity that qualifies as a trade or busi-
                                      ness. Goodwin v. Commissioner, 75 T.C. at 433.
                                         Like the taxpayers in Bot v. Commissioner, 118 T.C. 138,
                                      petitioner was an active participant in a payment program
                                      (in this case the CRP) who regularly and continuously main-
                                      tained his status as a participant, maintained the eligibility
                                      status of his properties, made decisions regarding how to sat-
                                      isfy his obligations under the CRP contracts, including hiring
                                      Mr. Redlin, entering into the 1999 Roberts County CRP,
                                      removing a portion of the Grant County property from the
                                      CRP, and participating in the emergency haying programs,
                                      and he engaged in such activities for profit. Furthermore,
                                      because the receipt of CRP payments depended on peti-
                                      tioner’s continued maintenance of his land in accordance

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                                      368                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      with the CRP contracts, his participation in the CRP was not
                                      merely a passive investment. Whether petitioner’s activities
                                      with respect to the CRP constituted farming or simply
                                      continuous and regular participation in an activity for profit,
                                      we are convinced that petitioner was engaged in a trade or
                                      business as defined by section 162. 22
                                           b. Notice 2006–108
                                         On December 5, 2006, the IRS released Notice 2006–108,
                                      supra, which contained a proposed revenue ruling regarding
                                      whether CRP payments were includible in net income from
                                      self-employment for purposes of calculating a taxpayer’s
                                      liability for self-employment tax, and solicited comments con-
                                      cerning the conclusions reached in the proposed revenue
                                      ruling. The IRS in Notice 2006–108, supra, explained that it
                                      had previously issued an announcement, Announcement 83–
                                      43, Q&A–3, 1983–10 I.R.B. 29, regarding the self-employment
                                      tax treatment of payments made by the USDA under land
                                      diversion programs in which it stated that a farmer who
                                      receives cash or a payment in kind from the USDA for
                                      participation in a land diversion program is liable for self-
                                      employment tax on the payments, a conclusion that was con-
                                      sistent with guidance provided in Rev. Rul. 60–32, supra,
                                      with respect to two earlier land diversion programs. The IRS
                                      also noted, however, that Rev. Rul. 60–32, supra, states that
                                      participants in land diversion programs are not subject to
                                      self-employment tax on the payments if the participants do
                                      not operate a farm or materially participate in the farming
                                      activities. The IRS explained that the conclusion in Rev. Rul.
                                      60–32, supra, is relevant only with respect to the exception
                                           22 In
                                              deciding whether a full-time gambler who made wagers solely for
                                      his own account was engaged in a trade or business for Federal income tax
                                      purposes, the Supreme Court in Commissioner v. Groetzinger, 480 U.S. 23,
                                      27 n.7 (1987), stated as follows: ‘‘Judge Friendly some time ago observed
                                      that ‘the courts have properly assumed that the term [trade or business]
                                      includes all means of gaining a livelihood by work, even those which would
                                      scarcely be so characterized in common speech.’ Trent v. Commissioner,
                                      291 F.2d 669, 671 (CA2 1961).’’ (Emphasis added.)

                                      The concept of work that the term ‘‘trade or business’’ embodies is incor-
                                      porated into the CRP contracts, which impose meaningful obligations and
                                      duties on petitioner that he had to perform with continuity and regularity
                                      in order to receive the CRP payments.

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     369

                                      from net income from self-employment provided in section
                                      1402(a)(1) for ‘‘rentals from real estate’’. It cited with
                                      approval and relied on the opinion of the U.S. Court of
                                      Appeals for the Sixth Circuit in Wuebker v. Commissioner,
                                      205 F.3d 897, for the proposition that CRP payments do not
                                      fall within the rental income exclusion but pointed out that
                                      the taxpayer in Wuebker was engaged in the business of
                                      farming when he received the CRP payments. Because the
                                      IRS had received questions regarding whether CRP pay-
                                      ments received by a recipient who is retired or not otherwise
                                      actively engaged in farming are subject to self-employment
                                      tax, it issued the proposed revenue ruling to respond to those
                                      questions.
                                         In Notice 2006–108, 2006–2 C.B. at 119, the proposed rev-
                                      enue ruling holds that CRP rental payments (including
                                      incentive payments) from the USDA to (1) ‘‘a farmer actively
                                      engaged in the trade or business of farming who enrolls land
                                      in CRP and fulfills the CRP contractual obligations person-
                                      ally’’ (taxpayer A) and (2) ‘‘an individual not otherwise
                                      actively engaged in the trade or business of farming who
                                      enrolls land in CRP and fulfills the CRP contractual obliga-
                                      tions by arranging for a third party to perform the required
                                      activities’’ (taxpayer B) are both includible in net income
                                      from self-employment and are not excluded from net income
                                      from self-employment as ‘‘rentals from real estate’’ under sec-
                                      tion 1402(a)(1). The IRS explained the holdings of the pro-
                                      posed revenue procedure as follows:
                                           Participation in a CRP contract is a trade or business for both A and
                                           B. The participant is obligated to perform a number of activities,
                                           including but not limited to tilling, seeding, fertilizing, and weed control.
                                           Although more extensive activities are required at the beginning of the
                                           contract term than later, the obligation to perform activities extends
                                           throughout the ten-year period, giving participation in CRP the con-
                                           tinuity and regularity necessary to be considered a trade or business.
                                           Also, both A and B enrolled land in the CRP program to earn a profit.
                                           Participation in a CRP contract meets the criteria to be a trade or busi-
                                           ness irrespective of whether the participant performs the required activi-
                                           ties personally or arranges for his obligations to be satisfied by a third
                                           party. Thus, the trade or business treatment is the same for A and B
                                           even though A meets the CRP requirements for maintenance of the land
                                           himself whereas B arranges for someone else to do it. Furthermore, the
                                           CRP meets the criteria to be a trade or business based on the activities
                                           required directly under the program and without being affected by
                                           whether the participant is otherwise engaged in farming or any other

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                                      370                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                           trade or business. * * * Thus, for both A and B, the CRP rental pay-
                                           ments are includible in their net income from self-employment. [Id.,
                                           2006–2 C.B. at 1120.]

                                        Although we are not obligated to defer to the IRS’
                                      interpretation of a statute as reflected in administrative
                                      pronouncements such as Notice 2006–108, supra, see, e.g.,
                                      Tax Analysts v. IRS, 416 F. Supp. 2d 119, 125–126 (D.D.C.
                                      2006), the notice sets forth the IRS’ interpretation of the
                                      statute and, consequently, ‘‘may provide evidence of the
                                      proper construction of the statute’’, Wells Fargo & Co. &
                                      Subs. v. Commissioner, 224 F.3d 875, 886 (8th Cir. 2000)
                                      (discussing the precedential value of private rulings), aff ’g in
                                      part, rev’g in part Norwest Corp. & Subs. v. Commissioner,
                                      112 T.C. 89 (1999); see Nelson v. Commissioner, 568 F.3d
662, 665 (8th Cir. 2009) (adopting the framework set forth in
                                      Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944), in consid-
                                      ering what weight to give revenue rulings), aff ’g 130 T.C. 70
                                      (2008); see also Berger v. Xerox Corp. Ret. Income Guar. Plan,
                                      338 F.3d 755, 762 (7th Cir. 2003) (discussing the precedential
                                      value of IRS notices); Esden v. Bank of Boston, 229 F.3d 154,
                                      168–169 (2d Cir. 2000) (discussing the precedential value of
                                      IRS notices). In this instance, we conclude that the IRS’ anal-
                                      ysis of the CRP and the payments made thereunder and the
                                      classification of the CRP payments for self-employment tax
                                      purposes as set forth in Notice 2006–108, supra, while not
                                      controlling, are nevertheless well grounded and consistent
                                      with the analysis set forth herein.
                                           c. Congressional Intent Regarding CRP Payments
                                        Several attempts have been made to convince Congress to
                                      enact a blanket exclusion for self-employment tax purposes
                                      with respect to CRP payments, but Congress did not enact
                                      proposed legislation amending section 1402 to exclude CRP
                                      payments from self-employment tax entirely. See 153 Cong.
                                      Rec. 9170–9171 (2007); 149 Cong. Rec. 15950–15951 (2003);
                                      147 Cong. Rec. 1776–1783 (2001); 133 Cong. Rec. 8557
                                      (1987). Congress did, however, enact a partial exclusion. Fol-
                                      lowing the issuance of Notice 2006–108, supra, Congress in
                                      2008 amended section 1402(a)(1) to exclude CRP payments
                                      from the calculation of a taxpayer’s net earnings from self-
                                      employment where the taxpayer is receiving Social Security

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     371

                                      retirement or disability payments. 23 Food, Conservation, and
                                      Energy Act of 2008, Pub. L. No. 110–246, sec. 15301(a), 122
                                      Stat. at 2263. If we were to interpret section 1402 to exclude
                                      entirely CRP payments from the calculation of net earnings
                                      from self-employment as petitioners contend we should, such
                                      an interpretation would render the enactment of the 2008
                                      exclusion meaningless. By enacting only a limited exclusion
                                      with respect to taxpayers receiving Social Security retire-
                                      ment or disability payments who are also receiving CRP pay-
                                      ments, Congress has evidenced an intent not to exclude all
                                      CRP payments in calculating a taxpayer’s net earnings from
                                      self-employment under section 1402.
                                        Having found that petitioner, either individually or
                                      through his agent, was engaged in a trade or business during
                                      the years at issue, we examine what would appear to be self-
                                      evident—whether there was a nexus between the CRP pay-
                                      ments petitioner received and his business activity.
                                           B. ‘‘Derived From’’ Requirement
                                         Petitioner received the CRP payments as consideration for
                                      fulfilling his obligations under the CRP contracts for the
                                      years in issue. Such consideration provides the required
                                      nexus between the CRP payments and his trade or business
                                      of participating in the CRP during the years in issue. See Bot
                                      v. Commissioner, 353 F.3d at 600; see also Wuebker v.
                                      Commissioner, 205 F.3d at 902–903 (holding that CRP pay-
                                      ments had a direct nexus to the taxpayers’ trade or business
                                      of farming); Ray v. Commissioner, T.C. Memo. 1996–436.
                                      II. Petitioner’s Alternative Argument Under Section 1402(a)(1)
                                        Section 1402(a)(1) provides that ‘‘rentals from real estate’’
                                      shall be excluded from the calculation of net earnings from
                                      self-employment. Petitioner alternatively contends that the
                                      CRP payments are excluded from his net earnings from self-
                                      employment under section 1402(a)(1) because the payments

                                           23 The
                                                Staff of the Joint Committee on Taxation has noted that CRP pay-
                                      ments generally constitute self-employment income, except in the case of
                                      taxpayers who receive Social Security retirement or disability benefits. See
                                      Staff of J. Comm. on Taxation, Description of the Social Security Tax Base
                                      22 (J. Comm. Print 2011).

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                                      372                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      constituted rental income. 24 Respondent contends that peti-
                                      tioner is not eligible for the ‘‘rentals from real estate’’ excep-
                                      tion under section 1402(a)(1) because petitioner did not
                                      receive the CRP payments in exchange for the USDA’s occu-
                                      pancy or use of the South Dakota properties but instead
                                      received the payments as compensation for conducting his
                                      farming operation in an environmentally friendly manner.
                                      Accordingly, we must decide whether the CRP payments con-
                                      stituted ‘‘rentals from real estate’’ within the meaning of sec-
                                      tion 1402(a)(1).
                                         Neither section 1402 nor any other self-employment tax
                                      provision of the Code defines the term ‘‘rentals from real
                                      estate’’. See also Wuebker v. Commissioner, 205 F.3d at 903.
                                      However, this Court has stated that the exception for
                                      ‘‘rentals from real estate’’ must be ‘‘narrowly construed.’’
                                      Johnson v. Commissioner, 60 T.C. 829, 833 (1973); see also
                                      Delno v. Celebrezze, 347 F.2d 159, 165 (9th Cir. 1965). Ordi-
                                      narily, rent is defined as compensation ‘‘for the use or occu-
                                      pancy of property’’. Wuebker v. Commissioner, 205 F.3d at
                                      904.
                                         In Wuebker v. Commissioner, 110 T.C. at 437, the tax-
                                      payers argued that the CRP payments they received con-
                                      stituted ‘‘rentals from real estate’’. In addressing the tax-
                                      payers’ contention, this Court first noted that rent ordinarily
                                      is defined ‘‘as compensation for the occupancy or use of prop-
                                      erty.’’ Id. at 436. The Court went on to find that the CRP
                                      statute, the applicable regulations, and the CRP contract
                                      identified the payments as rental payments. Id. at 438. After
                                      briefly discussing the taxpayers’ obligations under the CRP
                                      contracts, this Court concluded that
                                             [i]n imposing the above-described restrictions on the use of the land,
                                           the primary purpose of the CRP contract was to effectuate the statutory
                                           intention of converting highly erodible croplands to soil conserving uses.
                                           The services that petitioner was required to perform over the contract
                                           term included maintaining the vegetative cover, controlling weeds,
                                           insects, and pests on the land, and fulfilling certain reporting require-
                                           ments. These service obligations were not substantial and were inci-
                                           dental to the primary purpose of the contract. Thus, the CRP payments
                                           represented compensation for the use restrictions on the land, rather
                                           than remuneration for petitioner’s labor. * * * [Id.]

                                        24 In so arguing, petitioner relies, in part, on the fact that the CRP con-

                                      tracts identified the payments as ‘‘rental payments’’.

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     373

                                      Accordingly, the Court held that the CRP payments qualified
                                      as ‘‘rentals from real estate’’ under section 1402(a)(1). Id.
                                         The U.S. Court of Appeals for the Sixth Circuit reversed
                                      this Court’s decision, holding that the CRP payments were
                                      not ‘‘rentals from real estate’’ within the meaning of section
                                      1402(a). Wuebker v. Commissioner, 205 F.3d at 903–905. The
                                      Court of Appeals began its analysis by stating that generally,
                                      rental payments constitute consideration paid for either the
                                      use or occupancy of property. Id. at 904. The Court of
                                      Appeals quickly dispensed with the issue of whether the CRP
                                      payments constituted consideration for the occupancy of the
                                      taxpayers’ property, noting that the USDA’s access was lim-
                                      ited to inspections of the property to determine whether the
                                      taxpayers were in compliance with their CRP contract. Id.
                                         The Court of Appeals acknowledged that the second issue,
                                      i.e., whether the CRP payments constituted consideration for
                                      the use of the taxpayers’ property, presented a much closer
                                      question. Id. However, the Court of Appeals ultimately
                                      decided that the USDA did not make the CRP payments in
                                      exchange for the use of the taxpayers’ property:
                                           Citing the many objectives of the CRP, such as the reduction of soil ero-
                                           sion and the protection of the nation’s long-term food production
                                           capabilities, the * * * [taxpayers] assert, and the dissent agrees, that
                                           the government is ‘‘using’’ the land in question. We believe, however,
                                           that such an argument impermissibly stretches the plain meaning of the
                                           term ‘‘use,’’ especially in light of the narrow construction required of the
                                           rentals-from-real-estate exclusion. * * * Although it is true that the
                                           * * * [USDA] is seeking, and receiving, a public benefit by conserving
                                           lands enrolled in the CRP, the * * * [taxpayers] continue to maintain
                                           control over and free access to their premises. The dissent reasons that,
                                           because the government ‘‘greatly reduced the range of uses to which the
                                           * * * [taxpayers] could put their property,’’ it exercised a level of control
                                           akin to ‘‘use.’’ We remain unpersuaded, however, that the restrictions
                                           imposed by the * * * [USDA] on a farmer’s use of his own land
                                           somehow translate into ‘‘use’’ by the * * * [USDA] itself.
                                              The essence of the program is to prevent participants from farming
                                           the property and to require them to perform various activities in connec-
                                           tion with the land, both at the start of the program and continuously
                                           throughout the life of the contract, with the government’s access limited
                                           to compliance inspections. Given this arrangement, we disagree with the
                                           Tax Court’s determination that the * * * [taxpayers’] maintenance
                                           obligations were legally insignificant.
                                              [Id. at 903–905.]

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                                      374                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      In so holding, the Court of Appeals also stated that although
                                      the CRP statute, the applicable regulations, and the contract
                                      referred to the amounts as rental payments, such references
                                      did not dictate a conclusion that the CRP payments fell
                                      within the ‘‘rentals from real estate’’ exclusion. Id. at 904.
                                         Following the decision in Wuebker, the IRS issued Notice
                                      2006–108, supra, proposing a revenue procedure holding that
                                      ‘‘CRP rental payments are not payments for the right to use
                                      or occupy real property. CRP rental payments are made in
                                      exchange for conducting activities that meet the commit-
                                      ments of a CRP contract. Therefore, CRP rental payments
                                      are not * * * rentals from real estate.’’ Following the
                                      issuance of Notice 2006–108, supra, in 2008 Congress
                                      amended the section 1402(a)(1) exclusion for ‘‘rentals from
                                      real estate’’, effective for CRP payments received after
                                      December 31, 2007, to exclude from the calculation of net
                                      earnings from self-employment CRP payments made to tax-
                                      payers who are receiving Social Security retirement or dis-
                                      ability payments. However, Congress neither enacted a
                                      blanket exclusion with respect to CRP payments nor evi-
                                      denced any disagreement with the analysis of the Court of
                                      Appeals for the Sixth Circuit in Wuebker v. Commissioner,
                                      205 F.3d 897.
                                         Given the history recited above and our obligation to
                                      reconsider our position following the reversal of our decision
                                      in Wuebker by the Court of Appeals for the Sixth Circuit, we
                                      agree with and adopt the analysis of the Court of Appeals in
                                      Wuebker v. Commissioner, 205 F.3d at 903–905, regarding
                                      whether, under section 1402(a)(1), CRP payments are
                                      excluded from the calculation of net earnings from self-
                                      employment as ‘‘rentals from real estate’’. Under the CRP, a
                                      participating owner who enrolls land in the program does not
                                      relinquish control of the land to the USDA, and the USDA
                                      does not engage in any activities with respect to the land
                                      that constitute ‘‘use’’ of the land by the USDA, applying a
                                      commonsense definition of the term. See, e.g., Merriam Web-
                                      ster’s Collegiate Dictionary 1297 (10th ed. 2002) (‘‘to put into
                                      action or service: avail oneself of: EMPLOY’’). Taxpayers
                                      participating in the CRP ‘‘maintain control over and free
                                      access to their premises’’. Wuebker v. Commissioner, 205 F.3d
                                      at 904. Although the CRP restricts the taxpayer’s use of the
                                      property, i.e., the taxpayer’s ability to plant certain crops and

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     375

                                      engage in certain activities with respect to the enrolled prop-
                                      erty, which the taxpayer agrees to in exchange for consider-
                                      ation, the Government does not take possession of the prop-
                                      erty or acquire the right to use the property for its own pur-
                                      poses.
                                         Furthermore, we agree with the finding of the Court of
                                      Appeals for the Sixth Circuit in Wuebker, that a taxpayer’s
                                      activities with respect to the CRP contract are legally signifi-
                                      cant. Id. As discussed supra pp. 363–364, a taxpayer who
                                      participates in a CRP contract, either individually or through
                                      an agent or employee, must engage in property maintenance
                                      activities for the benefit of the enrolled properties with regu-
                                      larity and perform periodic administrative and reporting
                                      duties to satisfy his obligations under the contract and
                                      receive CRP payments. The contractual obligations are
                                      substantial and require more than de minimis action by the
                                      taxpayer or his agent to satisfy them.
                                         Additionally, we note that the activities required of peti-
                                      tioner under the CRP contracts were not limited to mainte-
                                      nance activities and instead included the performance of
                                      duties not ‘‘usually or customarily rendered in connection
                                      with’’ the mere rental of farmland. Johnson v. Commissioner,
                                      60 T.C. at 831–832 (holding that boat stall rental payments
                                      did not constitute ‘‘rentals from real estate’’ where the tax-
                                      payer also provided various services at no additional charge,
                                      including providing gas and oils, selling sundry items,
                                      making arrangements for boat repairs, recharging batteries,
                                      loaning boating equipment, providing fishing tips, and
                                      checking for overdue boats); see also Delno, 347 F.2d at 165
                                      (interpreting an identical provision of the SSA and finding
                                      that the individual’s activities with respect to the property
                                      were not those usually rendered in connection with the
                                      rental of property).
                                         Although the CRP statute, the regulations, and the con-
                                      tracts refer to the payments as rental payments, we do not
                                      find that the use of the term ‘‘rental’’ dictates a conclusion
                                      that the payments constituted ‘‘rentals from real estate’’. See,
                                      e.g., Wuebker v. Commissioner, 205 F.3d at 904 (noting that
                                      Congress qualified the use of the term ‘‘rent’’ with respect to
                                      CRP payments by providing that the CRP payments would
                                      be made ‘‘in the form of rental payments’’). We are not
                                      required to treat as rental payments all payments labeled

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                                      376                 140 UNITED STATES TAX COURT REPORTS                                   (350)

                                      ‘‘rent’’. Instead we may examine the substance of so-called
                                      rent payments to decide whether the payments actually con-
                                      stituted rent or some other type of income. See Opine Timber
                                      Co. v. Commissioner, 64 T.C. 700, 709–711 (1975), aff ’d with-
                                      out published opinion, 552 F.2d 368 (5th Cir. 1977). The CRP
                                      payments petitioner received appear to be proceeds from his
                                      own use of the land rather than rent he received for permit-
                                      ting another entity to use his land. See, e.g., Webster Corp.
                                      v. Commissioner, 25 T.C. 55, 61 (1955), aff ’d, 240 F.2d 164
                                      (2d Cir. 1957); Harding v. Commissioner, T.C. Memo. 1970–
                                      179 (holding that conservation reserve program payments
                                      ‘‘are in the nature of receipts from farm operations in that
                                      they replace income which producers could have expected to
                                      realize from the normal use of the land devoted to the pro-
                                      gram’’); Rev. Rul. 60–32, supra. Such a conclusion is con-
                                      sistent with our holding that the ‘‘rentals from real estate’’
                                      exception should be narrowly construed. Johnson v. Commis-
                                      sioner, 60 T.C. at 833.
                                         We hold that the CRP payments at issue do not constitute
                                      ‘‘rentals from real estate’’ within the meaning of section
                                      1402(a)(1) and are not excluded from the calculation of peti-
                                      tioner’s net earnings from self-employment for 2006 and
                                      2007. In so doing, we overrule our holding in Wuebker v.
                                      Commissioner, 110 T.C. 431.
                                      III. Conclusion
                                         We sustain respondent’s determination that the CRP pay-
                                      ments petitioner received in 2006 and 2007 must be included
                                      in the calculation of his net earnings from self-employment
                                      under section 1401 and hence are subject to self-employment
                                      tax. The CRP payments are not excluded from this calcula-
                                      tion by virtue of section 1402(a)(1) because the CRP pay-
                                      ments do not constitute ‘‘rentals from real estate’’. Because
                                      we find that the CRP payments are not ‘‘rentals from real
                                      estate’’, we need not reach the issue of whether the CRP pay-
                                      ments constituted includible farm income.
                                         We have considered all of the parties’ arguments. To the
                                      extent not discussed above, we find those arguments to be
                                      irrelevant, moot, or without merit.
                                         To reflect the foregoing,
                                                                          Decision will be entered under Rule 155.

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                                      (350)                        MOREHOUSE v. COMMISSIONER                                     377

                                         Reviewed by the Court.
                                         COLVIN, HALPERN, FOLEY, VASQUEZ, GALE, GOEKE,
                                      WHERRY, KROUPA, HOLMES, GUSTAFSON, MORRISON,
                                      KERRIGAN, BUCH, and LAUBER, JJ., agree with this opinion
                                      of the Court.
                                         PARIS, J., did not participate in the consideration of this
                                      opinion.

                                                                               f

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