Taxlink by Andy Biebl

Taking on the IRS (Part 2)

The Morehouse case established that non-farmer landowners who aren't receiving Social Security could still treat their CRP payments as cash rent, free of the 15.3% self-employment tax. (DTN/The Progressive Farmer file photo by Jim Patrico)

In my December 2014 column, I recounted the story of our recent taxpayer victory in the Morehouse case. This landmark Eighth Circuit Court of Appeals decision holds that a landlord/investor is not subject to the 15.3% self-employment tax (SE tax) on Conservation Reserve Program (CRP) rents.

[Legal scholars and farm management firms had worried an IRS win would affect about a third of the acreage enrolled in the 27-million-acre CRP and set a damaging precedent affecting conservation easements and other types of passive landowner contracts normally treated as cash rent. For details go to http://goo.gl/…

THE END RESULT

After the Morehouse case, we have three categories of taxpayers with respect to CRP payments and SE tax liability:

1. Those collecting Social Security benefits are exempt by reason of a farm bill statute enacted in 2008;

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2. Active farmers with some ground in CRP (and not collecting Social Security benefits) are subject to SE tax based on past court decisions (Wuebker and Ray) because the CRP income is considered to have nexus to their active business;

3. All other non-farming landlords and investors are exempt from SE tax on CRP, thanks to the Morehouse decision.

THE ORIGIN OF CRP DISPUTE

Mr. Morehouse didn't draw a routine IRS exam that opened the SE tax issue; rather, he was part of system-wide IRS initiative that started in the Dakotas, pursuing anyone with CRP who hadn't reported SE tax. The only authority the IRS had for SE tax on CRP involved active farmers. But that didn't stop an exam group from initiating a widespread attack on hundreds of taxpayers with CRP, mostly passive landlords.

Thankfully, Mr. Morehouse understood the bigger picture, and had the courage to stand up to this IRS aggression. Mr. Morehouse only had $6,000 of SE tax in play. That makes it almost impossible to contest the IRS position without funding assistance.

THE HEROS

CRP has friends, most notably the conservation organizations. Pheasants Forever took the lead with a major contribution, and rounded up similar support from Ducks Unlimited, the National Wild Turkey Federation and Delta Waterfowl. Several farm management organizations and CPAs also stepped up. Our firm went pro bono in assisting the attorneys with the briefs and tax positions for our client, and for that I am grateful to my CLA partners. There was also very capable help from Roger McEowen, professor of agricultural law and policy at Iowa State University.

But the farm membership organizations have been notably absent in their support. When it comes to tax litigation, they seem to have trouble recognizing that not all cases are just one taxpayer's issue. Most are, of course. But from time to time, especially in ag, we get IRS systemic mischief. I've had to slug through two of these (first in 2000 with the McNamara case and the IRS telling hundreds of farmers they owed SE tax on renting land to their farm corporation and now Morehouse on CRP).

The biggest obstacle is always finding the dollars to combat the IRS bullying. We've been fortunate to this point. However, until we get better farm organization representation, the IRS will continue to attempt to chip away at the farm tax privileges that Congress has enacted.

Editor's Note: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minn., former president of the Minnesota Society of CPAs 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.

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