Taxlink by Andy Biebl

Editor's Note: Andy Biebl is a CPA and principal with the firm of CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minn., and a national authority on ag taxation. He writes a monthly column for our sister magazine, The Progressive Farmer. To pose questions for future tax columns, e-mail AskAndy@dtn.com. To attend Andy's DTN University, "Over 55: Make Retirement Less Taxing" workshop in Chicago Dec. 7, go to http://goo.gl/… or www.dtnagsummit.com.

Over my 40-year tax career, I've had countless situations representing taxpayers in IRS exams. Most are resolved at various levels within the IRS, but I've had three get to litigation. Fortunately, all were taxpayer victories. Two of those, however, took two rounds. We lost initially at the Tax Court, and had to go on to the Eighth Circuit Court of Appeals to get a reversal and the taxpayer victory.

Both of the Appeals decisions involved farm issues, with the IRS asserting self-employment tax (SE tax) on rents. The first (McNamara v. IRS, decided in 2000) involved a farmer leasing land to his own corporation. And in October, we won the Morehouse v. IRS case, holding that a landlord is not subject to SE tax on Conservation Reserve Program rents.

We'll save the long journey of the Morehouse case for another day; there was no small amount of melodrama in the twists and turns of battling the IRS. But what matters for our readers is the end result. We now have three clear categories of taxpayers regarding CRP payments and paying SE Social Security tax: (1) Those collecting Social Security benefits are exempt from paying any SE tax by reason of a statute enacted in 2008; (2) Active farmers with a portion of their ground in CRP are subject to SE tax based on the Wuebker and Ray court decisions (the CRP income is considered to have nexus to their active business income); and (3) All other non-farming landlords and investors are exempt from SE tax on CRP thanks to the Morehouse decision and IRS Rev. Rul. 60-32.

There's a common theme to the two cases that went to the Appellate court for resolution. In both, we had IRS examiners and litigators, in my view, attempting to rewrite the rules to create more tax. It's been apparent to me for decades that there are pockets within the IRS that detest the tax privileges Congress has granted to the farm sector. Never mind that the Internal Revenue Code, as well as case and ruling precedent, is not supportive of their position. So it takes a resolute taxpayer, who sees the big picture and recognizes that the issue goes beyond their own 1040, to make it a matter of principle and resist this form of bullying.

The barrier, of course, is the cost to take on the IRS. How does Mr. Morehouse, with only $6,000 of tax on the table, conclude to fight on behalf of a national group of taxpayers in a similar position? It takes a convergence of positives: A taxpayer with a strong sense of justice, combined with a team effort of attorneys, other tax professionals, and donors who step up to assist. The funding in this effort isn't over; we won, but still need to properly compensate the litigators.

Next month's column recognize the heroes: Who dug deep in terms of time or money and made this happen while others ducked for cover?

(MZT/CZ)

Copyright 2014 DTN/The Progressive Farmer. All rights reserved.