Congressional Research Service Issues Report on Proposed Farm Bill CRP Tax Provisions

You are here: Home > Taxation > Current Issues > Federal Taxation

Congressional Research Service Issues Report on Proposed Farm Bill CRP Tax Provisions

- by Roger McEowen

April 8, 2008

The Congressional Research Service (CRS), in the first of two Reports involving the Conservation Reserve Program (CRP), has addressed the proposed Farm Bill provisions that would change the taxation of CRP payments. The Report gives some background of the history involving the current controversy over the self-employment tax treatment of CRP payments, and notes that the IRS has changed its position on the issue over the years. The Report also notes that the current IRS position of subjecting all CRP payments to self-employment tax (regardless of whether the recipient is an active farmer) is in spite of the fact that they are called “rental payments” and that rental income from real property is generally excluded from self-employment income.

The Report doesn’t simply assume that the current IRS position on the self-employment tax treatment of CRP payments is correct, but instead notes that the current IRS position of treating CRP payments in the hands of any taxpayer is not only contrary to the initial IRS position that CRP payments were only subject to self-employment tax (by reference to the 1988 IRS Private Letter Ruling on the matter) if the taxpayer was materially participating in an existing farming operation, but that there remains an argument that CRP payments can be excluded from self-employment tax on current income tax returns. The Report notes that the Congress has made several attempts to statutorily exclude CRP payments from self-employment tax, but none of the attempts has become law.

But, the main point of the analysis is to explain the proposals in the pending Farm Bill legislation. The Report notes that the Farm Bill would exclude CRP payments from self-employment tax for some taxpayers, and would provide a tax credit as an optional alternative to receiving rental payments.

The CRS will issue a second Report in the near future dealing specifically with the controversy over self-employment tax treatment of CRP payments. We will have that Report when it is released.

Download report on the Farm Bill CRP Provisions. (pdf)

Update: On April 22, CRS issued an updated Report concerning the Farm Bill CRP proposals. Download updated Report. (pdf)

Congressional Research Service Issues Report on Self-Employment Tax Treatment of CRP Payments

April 25, 2008

In the second of the Reports, issued on April 14, the CRS examined the tax treatment of CRP payments, including whether such payments should be treated as farming income subject to self-employment tax, rents from real estate, or neither. The Report notes that the historic position of the IRS was to subject CRP payments to self-employment tax only upon receipt by someone engaged in the trade or business of farming. However, the Report notes that the IRS position has changed such that the present IRS position is to always treat CRP payments as subject to self-employment tax irrespective of whether the recipient is engaged in the trade or business of farming. While the report notes the U.S. Supreme Court’s 1987 opinion in Groetzinger - the case that established the rule that a determination of whether a particular taxpayer is engaged in a trade or business depends on the facts and circumstances of each situation – the Report refers to it merely as “case law” and does not provide any analysis of the case as applied to the CRP setting.

The Report also fails to note that IRS Announcements and Notices are not substantial authority (indeed, even IRS is not bound by them let alone taxpayers – see Schering Plough Corp. v. United States, No. 2:05-cv-02575, 2007 U.S. Dist. LEXIS 88387 (D. N.J. Dec. 3, 2007)(IRS Field Service Advice not binding on taxpayers or on IRS; rationale of court likely applicable to other IRS correspondence issued without taxpayer request of right to a conference – such as Notices and Announcements). Accordingly, the Report falls short in its analysis for not pointing out that the test for determining whether a taxpayer is engaged in a trade or business has been established by the U.S. Supreme Court. For an administrative agency to attempt to redraw the line in the face of contrary Supreme Court authority is preposterous.

Download Report. (pdf)

Congressional Research Service Issues Report on Farm Bill CRP Provision

July 9, 2008

In yet another Congressional Research Service (CRS) report on the Conservation Reserve Program (CRP), the CRS focuses on the final CRP provision include in the recently enacted Farm Bill (P.L. No. 110-246). The Report notes that over the past several sessions of the Congress, numerous bills have been introduced which would exclude CRP payments from self-employment tax by defining CRP payments in a manner such that they would not be included in self-employment income. While most of those bills were referred to committee, no hearings were held. But, the Congress took a different approach with the issue as the Farm Bill began to be formulated – exclusion of CRP payments for select taxpayers only, and a tax credit in lieu of CRP payments. The tax credit approach was not included in the final version of the Farm Bill, but the partial exclusion provision was included. That provision excludes CRP payments from self-employment income for taxpayers receiving regular retirement benefits from Social Security as well as those receiving Social Security disability benefits. The CRS Report notes that the provision is silent as to the treatment of CRP payments in the hands of other taxpayers. In other words, the Congress did not address the core issue – when is a taxpayer conducting a trade or business such that the CRP payments would be subject to self-employment tax.

The Report notes the current position of the IRS is that all CRP payments (except those that are now statutorily excluded) are to be reported as self-employment income, and also notes that the IRS position may not be correct insomuch as the IRS has blurred the lines concerning the trade or business issue and that taxpayers have substantive arguments available for the exclusion of CRP payments from self-employment income.

In explaining the Farm Bill CRP provision, the Report notes that the exclusion of CRP payments from the definition of income subject to self-employment tax for those receiving regular Social Security retirement benefits not only excludes CRP payments from self-employment tax, but also does not create additional income that could reduce the recipient’s Social Security benefits. As for Social Security disability benefit recipients, the Report notes that not only will CRP payments not be subject to self-employment tax, the income will likely not be considered evidence of an ability to engage in substantial gainful activity (which would disqualify the recipient from disability benefits).

Importantly, the Report notes that the exclusion of CRP payments from self-employment income for Social Security beneficiaries is consistent with the notion that retired persons do not become engaged in the trade or business of farming simply by enrolling land in the CRP. Thus, as the Report notes, the provision does not appear to place a limit on the exclusion of CRP rents from self-employment income for retired persons receiving Social Security retirement benefits. Such a person could receive retirement benefits and return to being actively engaged in farming and still exclude CRP payments from self-employment income. "The 2008 Farm Bill: Analysis of Tax-Related Conservation Reserve Program Proposals," RS 22910, Jul. 3, 2008.