Court Ruling May Expand Self-Employment Tax

Under USDA’s Conservation Reserve Program, a landowner is paid by the federal government for retiring farmland.

Currently the Eighth Circuit court of appeals is determining whether or not those payments are subject to self-employment tax, after the U.S. tax court decided last year that they were.

In Morehouse-v-Commissioner of Internal Revenue, Roger McEowen with Iowa State University’s Center for Ag Law and Taxation says the IRS appeal took a different route.

“Mr. Morehouse’s situation is different, he’s not a farmer. So this is really kind of the first time that they litigated and actually won the case in the tax court last summer. Or the tax court agreed with them saying, yes Mr. Morehouse was engaged in the trader business of creating an environmentally friendly farm, which is what the tax court says, whatever that means.” He says, “It’s a bad case, and Mr. Morehouse decided to take it on to the eight circuit court of appeals.”

McEowen says a ruling in favor of the IRS would affect a lot more than just the Conservation Reserve Program.

“If the IRS is able to prevail in this case and hit all types of passive income. Cash rents, royalty income, oil and gas income, wind energy lease income with self-employment tax that’s an additional 15.3 percent tax.” He says, “Any time you have a profit intent, you buy stock with the intent to make profit but you’re not engaged in the trade business or running the company you bought stock in but the IRS position would be, you’ve got to pay additional 15.3 tax on top of the income tax that income would generate.”

Conservation groups also worry a ruling in favor of the IRS would result in cancellations of CRP contracts; roughly one third of landowners with 27 million CRP acres through the Great Plains and Midwest are not active farmers. McEowen says a decision is likely later this year.

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