Tax Court Ruling Could Change
How CRP Payments Are Treated

WASHINGTON —(AP)— A tax break could be due landowners with acreage idled under the government's largest farmland conservation program if a judge's ruling withstands a likely IRS appeal.

Based on previous court decisions, the Internal Revenue Service has always required most active farmers to pay 15.3 percent self-employment taxes on acreage in the Conservation Reserve Program, even though it is set aside to reduce erosion, promote wildlife habitat and improve water quality.

Late last month, a U.S. Tax Court judge ruled in an Ohio case that the government payments are comparable to rent and should no longer be subject to the self-employment levy. They would still be taxed as regular income.

Although IRS officials had no estimate of the government's potential revenue loss, the program is the largest farmland conservation scheme with almost 30 million acres expected to be enrolled in 10-year contracts as of Oct. 1.

For individual farmers, "you're talking about substantial dollars," said Chris Hesse of the accounting firm LeMaster & Daniels in Moses Lake, Wash. "In some cases, it may make up a farmer's total self-employment tax payment."

The Internal Revenue Service has 90 days in which to appeal and has not yet decided whether to do so, spokeswoman Michelle Lamishaw said last week.

The case was brought by Frederick J. Wuebker, who for 20 years had farmed about 260 acres near the west-central Ohio town of Fort Recovery. In 1991, he enrolled 214 of his erosion-prone acres in the Conservation Reserve Program in return for annual payments of $85 an acre.

Wuebker raised thousands of egg-laying hens on acreage adjacent to the idled ground and continued to farm other land. The program land was planted with a cover crop and left fallow.

In 1992 and 1993, Wuebker's tax returns were cited by the IRS as deficient because he failed to pay $3325 in self-employment taxes on the reserve program income. Wuebker had reported the money as rent subject only to income taxes.

Relying on previous rulings, the IRS argued that because Wuebker was actively engaged in farming, the payments for his idled land "had a direct nexus with that operation" and were "inextricably intertwined" with his overall business, according to court documents.

Such linkage, the IRS said, made the reserve land subject to self-employment taxes.

(Reminds us of the land grabber who insisted he wasn’t greedy; he just wanted all the country that bordered his and everything that touched that. — Ed.)

Tax Court Judge Stanley J. Goldberg ruled that the earlier cases had not focused on the word "rent," which is included in the law Congress passed to set up the Conservation Reserve Program and in Agriculture Department documents used in the contracts.

Normally, rental income is excluded from self-employment tax. Goldberg agreed that the wording was the crucial point and compared the payments to money a landlord gets from real estate.

"The CRP payments represented compensation for the use restrictions on the land, rather than remuneration for (Wuebker's) labor," Goldberg wrote in his June 23 decision.

The judge noted that self-employment taxes would come into play only when the landowner performs "substantial services" that are an integral part of the value of the rent he is paid. In this case, Wuebker only had to maintain a plant cover, control weeds and insects and fill out forms periodically.

"These service obligations were not substantial and were incidental to the primary purpose of the contract," Goldberg wrote.

Neil Harl, an Iowa State University economics professor, said the judge's new interpretation of "rent" as it relates to government payments could have broad impact on many other programs if it is upheld.

"The focus is on whether there's a reference in federal law to rent," Harl said. "The really significant question is, how far does this case go?"

For farmers, however, the question is what to do about tax returns. Hesse and other accountants recommend they file amended returns for this year and claim a refund for self-employment taxes.

Even if the ruling is appealed and the IRS rejects the claim, the action would keep a farmer's case open beyond the normal three-year statute of limitations should the courts ultimately decide in their favor, Hesse said.

Barring a court reversal, Harl said the ruling could have a major impact on next April's tax filings.

"The big thing will be, when people file their 1998 tax returns, they will follow this case,"he said.