Conservation Reserve Payment checks have been called "rent" for nearly 30 years, treated much like similar payments during the 1950s Soil Bank and free from self-employment taxes. But unless a 2013 Tax Court case is overturned by the 8th Circuit Court of Appeals later this year, non-farmers could owe whopping new 15.3% self-employment income tax on their contract proceeds. At stake is not only SE tax treatment of about a third of the acreage enrolled in the 27-million-acre CRP, but a damaging precedent that could affect conservation easements and other types of USDA-landowner contracts, legal scholars and wildlife groups maintain.
It might not stop there: The vast majority of the cropland leased in the U.S. also is cash rented, and its income tax status could ultimately be affected by this ruling, Farmers National Co. Senior Vice President Dave Englund says. The nation's largest farm management firm executive thinks the outcome of the legal appeal could have a ripple effect on land values, both CRP ground and otherwise.
Oral arguments in the legal appeal of Morehouse v. Commissioner were held last week, as DTN reported June 16 (see story on Farm Business page). Wildlife organizations are particularly disturbed by IRS's change of heart on what constitutes legitimate business income and what constitutes a passive investment, such as rent. They can't understand why IRS has chosen to crack down on landowners after decades of case law to the contrary. ("Active" farmers already owe SE taxes on CRP rents, but the case involves an out-of-state farm heir who contracted all CRP maintenance so did not meet the classic "material participation" test for self employment.)
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"The CRP was already struggling to offer competitive rental rates for landowners, based on local rental markets," Pheasants Forever President Howard Vincent tells me. His organization and its partner, Quail Forever, concentrate its dollars in building wildlife habitat through prairie and wetland restoration, with the CRP "one of its biggest and best tools." But because corn prices have driven up cash rents in recent years, even $150/acre CRP payments are 30% to 50% lower than comparable cash rent .
"In regards to the Morehouse case, to throw another 15.3% tax on that income creates distance for those who want to do the right thing by creating wildlife and wetland habits," he adds. He worries more landowners will let their long-term contracts expire rather than renew at the next CRP signup.
"Farmers and ranchers are our number one conservationists. They shouldn't be put in an economic situation that discourages them from doing the right things on their land," Vincent says.
Roger McEowen, director of Iowa State University's Center for Agricultural Law, worries that unless the 8th Circuit overturns the case, it could set a damaging precedent for other types of leases. "It could pretty much nab all cash rental arrangements, because you enter into a contract with the intent to make money," he says. "That's how sweeping this ruling is."
Pheasants Forever has launched a legal defense fund for the taxpayer's $40,000 trial expenses, with other financial support from Ducks Unlimited, Quail Forever and the National Wild Turkey Federation. To donate, contact Pheasants Forever, CRP Defense Fund, 1783 Buerkle Circle, St. Paul., Minn. 55110.
To read McEowen's updates of the case, go to http://www.calt.iastate.edu/…
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