Morehouse v. Comm'r

• Decision Date: 18 June 2013
• Docket Number: 140 T.C. No. 16,Docket No. 823-11
• Parties: ROLLIN J. MOREHOUSE AND MAUREEN B. MOREHOUSE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

ROLLIN J. MOREHOUSE AND MAUREEN B. MOREHOUSE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

140 T.C. No. 16

Docket No. 823-11

UNITED STATES TAX COURT

Filed June 18, 2013

During 2006 and 2007 P-H received payments under the U.S. Department of Agriculture Conservation Reserve Program (CRP). Respondent determined that P-H was liable for self-employment tax under I.R.C. sec. 1401 on the CRP payments. 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. 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 1401² 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 reference. 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. Following graduation he worked as a regional sales manager and as an associate publisher. In 1987 petitioner began providing 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 property), and 400 acres of land in Day County, South Dakota (Day County property) (collectively, South Dakota properties). 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 Countyproperty; 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 conservation plan and refrain from using the land for agricultural 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 applications 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 obligations and responsibilities of compliance under the CRP contracts.

With respect to the Grant County property, petitioner and the CCC executed two contracts: (1) contract No. 262, covering 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 contractpayment 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 temporarily removed from agricultural production", including pubescent or intermediate wheatgrass, alfalfa, and sweet clover; and (3) engage in "pest control and pesticide management" 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 anyone as the operator of the land. The Roberts County CRP contract provided that the CCC would make an annual contract 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, petitioner 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 vegetative cover on land temporarily removed from agricultural 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 Roberts 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 petitioner's obligations under the CRP contracts.¹¹ Mr. Redlin was a retired farmer who had placed all ofhis 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 materials 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 petitioner 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, covering the remaining 171 acres of the Grant County property, 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 obligations 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...