                          T.C. Memo. 1999-306



                     UNITED STATES TAX COURT



             JOHN P. & TERESA HENNEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7535-98.                Filed September 16, 1999.



     Garry A. Pearson and Jon J. Jensen, for petitioners.

     Blaine C. Holiday, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PAJAK, Special Trial Judge:     Respondent determined

deficiencies in petitioners' 1994, 1995, and 1996 Federal income

taxes in the amounts of $1,583, $1,562, and $1,551, respectively.

All section references are to the Internal Revenue Code in effect

for the years in issue.    All Rule references are to the Tax Court

Rules of Practice and Procedure.
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     The sole issue for decision is whether rental payments

received by petitioner Teresa Hennen (Mrs. Hennen) from

petitioner John P. Hennen (Mr. Hennen) are includable in Mrs.

Hennen's net earnings from self-employment under section

1402(a)(1) and thus subject to self-employment taxes.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

Petitioners resided in Minnesota at the time the petition was

filed.

     Mr. and Mrs. Hennen have farmed for 38 years since they have

been married.   During the taxable years at issue, Mr. Hennen

conducted farming operations in Lyon County, Minnesota.    He had a

diversified farm and raised cattle, hogs, corn, soybeans,

alfalfa, and wheat.   Mr. Hennen operated the farm as a sole

proprietorship, but he actually farmed with his and Mrs. Hennen's

two sons.   The farm was 1100 acres in area.   Their house and a

house occupied by a son and his wife were on the farm premises.

     Mr. Hennen owned about 320 acres, and Mrs. Hennen owned 200

acres.   The other acreage is rented from others.   Mr. Hennen

rented the 200 acres of farmland from Mrs. Hennen for $16,000 per

year under an oral agreement.   Mr. Hennen paid her $80 an acre,

which is comparable to the amount he paid to others.    Mr. Hennen

used the land rented from Mrs. Hennen in the farming operations

to produce agricultural commodities such as livestock and crops.
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     Mrs. Hennen owned the 200 acres in her own name.   She

purchased the 200 acres from her Uncle in 1972.   Mr. Hennen then

entered into an oral arrangement to lease the acreage from Mrs.

Hennen.   Mrs. Hennen deposits the rent received from her husband

in her farm account which is separate from his account.   When

petitioners entered into the oral agreement, petitioners expected

that Mrs. Hennen would perform the duties she had been performing

in the farming operations.

     Since Mr. and Mrs. Hennen began farming, Mrs. Hennen has

provided general farming services to the endeavor.   She bought

cattle, loaded cattle, and vaccinated cattle.   She cleaned shop.

She also sprayed weeds, picked up parts, unloaded grain, and

drove a tractor.   In addition, Mrs. Hennen performed the farm

bookkeeping.   Mrs. Hennen carried on these duties prior to

renting the land to her husband.   Mrs. Hennen did whatever it

took to make the farm run more smoothly and had done so ever

since Mr. Hennen and Mrs. Hennen were married 38 years ago.    Mrs.

Hennen worked on the farm approximately 1,000 hours per year.

     Mrs. Hennen did not participate in making decisions as to

the type of crop to plant, nor did she participate in other

management decisions.   Mr. Hennen made the management decisions.

     In each of the years in issue, Mrs. Hennen entered into a

purported Employment Agreement (Agreement) with Mr. Hennen.    The

Agreement said that with respect to Mr. Hennen's business of
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farming, Mrs. Hennen was to perform bookkeeping, run errands for

the business, and help with livestock chores and field work.    In

essence, the Agreement memorialized almost the same duties that

Mrs. Hennen had been performing since Mr. and Mrs. Hennen began

farming together.   The Agreement also said Mrs. Hennen could

participate in her husband's Health and Accident Insurance Plan,

according to the terms and provisions of that plan.   Mrs. Hennen

would have continued to do the same farming jobs even if there

had been no Agreement.

     For all 3 years in issue, petitioners filed their Forms 1040

income tax returns on a married, filing jointly basis.    On their

Schedules E, Supplemental Income and Loss, petitioners reported

that they received net rental income for 1994, 1995, and 1996,

from "FARM AND HOUSE", "FARMS", and "FARMS", respectively, in the

amounts of $14,322, $12,940, and $12,766, respectively.   On line

7, Wages, salaries, tips, etc., of their Forms 1040, petitioners

reported that Mrs. Hennen received wages from Mr. Hennen in the

amounts of $3,137.11, $3,250, and $3,487 for 1994, 1995, and

1996, respectively, and, in 1994, petitioners also reported that

Mrs. Hennen received wages from World Book, Inc. in the amount of

$221.45.   The amounts deducted as labor hired on the respective

Schedules F, Profit or Loss From Farming, for the 3 years in

issue exceeded the amounts purportedly paid to Mrs. Hennen.     Mr.

Hennen failed to withhold Federal income taxes, State income
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taxes, Federal Insurance Contribution Act taxes, and Medicare tax

for all 3 years.

       In the notice of deficiency, respondent, inter alia,

determined that the real estate rental payments Mrs. Hennen

received from Mr. Hennen during the taxable years at issue are

includable in Mrs. Hennen's net earnings from self-employment

under section 1402(a)(1), and thus subject to self-employment

tax.    Respondent also allowed petitioners a deduction for one-

half of the self-employment taxes imposed for the taxable years

at issue.

       On the Forms 4797, Sales of Business Property, attached to

their returns, Mr. and Mrs. Hennen reported gains of $24,046 from

a sale of 78 acres in 1994, and "0" gains from the sale of a

sprayer in 1995.

                               OPINION

       Section 1401 provides that a tax shall be imposed on the

self-employment income of every individual.    Generally, rentals

from real estate are excluded from the computation of net

earnings from self-employment.    Sec. 1402(a)(1).   However,

section 1402(a)(1) also provides that rentals derived by the

owner or tenant of land are not excluded from the computation of

net earnings from self-employment if:

       (A) such income is derived under an arrangement, between the
       owner or tenant and another individual, which provides that
       such other individual shall produce agricultural * * *
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     commodities (including livestock * * *) on such land, and
     that there shall be material participation by the owner or
     tenant * * * in the production or the management of the
     production of such agricultural * * * commodities, and (B)
     there is material participation by the owner or tenant * * *
     with respect to any such agricultural * * * commodity;

     In other words, as the regulations provide in pertinent

part, if the rental income is derived under an arrangement

between the owner of land (owner) and another person which

provides that such other person shall produce agricultural

commodities on such land, and that there shall be material

participation by the owner in the production of such agricultural

commodities, and there is such material participation by the

owner, then the rental income received by the owner pursuant to

the arrangement is considered earnings from self-employment.

Sec. 1.1402(a)-4(b), Income Tax Regs.   Such income is

characterized as "includible farm rental income".   Id.

     In determining whether compensation is includable in

self-employment income under sections 1401-1403 such provisions

are to be broadly construed to favor coverage for Social Security

purposes.   Braddock v. Commissioner, 95 T.C. 639, 644 (1990).

The rental exclusion in section 1402(a)(1) is to be strictly

construed to prevent this exclusion from interfering with the

congressional purpose of effectuating maximum coverage under the

Social Security umbrella.   Johnson v. Commissioner, 60 T.C. 829,

832 (1973).
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     Petitioners contend that the oral lease agreement does not

require material participation by Mrs. Hennen in the farming

operations.   Petitioners further contend that the rental income

that Mrs. Hennen received from Mr. Hennen was rental from real

estate, and therefore should be excluded in determining whether

Mrs. Hennen had any net earnings from self-employment as that

term is used in section 1402(a)(1).

     In light of all the facts and circumstances, we must decide

whether Mrs. Hennen received rental income from Mr. Hennen

pursuant to an "arrangement" between the parties to produce

agricultural commodities on the farm within the meaning of

section 1402(a)(1)(A).

     In Mizell v. Commissioner, T.C. Memo. 1995-571, this Court

explained that:

     The word "arrangement" is defined as an agreement.
     Webster's Third New International Dictionary 120 (1993).
     While the concept of an agreement certainly includes a
     contractual agreement, it is a broader concept that would
     also include other forms of agreements not necessarily
     arising from strict contractual relationships. Consistent
     with its dictionary definition, in most of the instances
     where it is used in the Internal Revenue Code, the word
     "arrangement" refers to some general relationship or overall
     understanding between or among parties in connection with a
     specific activity or situation. Generally, it is not
     limited only to contractual relationships, or used in a way
     that suggests that its terms and conditions must be included
     in a single agreement, contractual or otherwise. Congress
     obviously recognized a distinction between a contract and
     the broader concept of an "arrangement", as is evident from
     those sections of the Internal Revenue Code that make
     reference to both. * * *
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       The parties stipulated that Mr. Hennen used the land rented

from Mrs. Hennen in the farming operations to produce

agricultural commodities such as livestock and crops.     With

respect to whether under the arrangement Mrs. Hennen was to

materially participate in the farming operations, we look not

only to the obligations imposed upon Mrs. Hennen by the oral

lease, "but to those obligations that existed within the overall

scheme of the farming operations which were to take place" on

Mrs. Hennen's property.     Mizell v. Commissioner, T.C. Memo. 1995-

571.    (Emphasis supplied.)   These include Mrs. Hennen's

obligations as a longstanding participant in the farming business

as well as the "general understanding between * * * [Mr. Hennen

and Mrs. Hennen] with respect to the production of agricultural

products".    Id.   Viewed in this light, the arrangement between

Mr. and Mrs. Hennen provided, or contemplated, that Mrs. Hennen

materially participate in the production of agricultural

commodities on the farmland.

       Mr. Hennen claimed he made all the management decisions.     He

acknowledged that he had farmed with his wife for 38 years.      Mr.

Hennen candidly stated in the answer to the following question:

       Respondent: Q     And in fact, she does materially
       participate and help out and pull her share.

       Mr. Hennen: A     If you are familiar with the farm, sir,
       that's what makes a farm successful. Everybody carries
       their weight.
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Although petitioners contend that the purported oral lease

agreement did not require Mrs. Hennen to participate materially

in the farming operations, the record supports a finding that

Mrs. Hennen played a material role in the production of

agricultural commodities under an arrangement with her husband.

     For 38 years through the taxable years at issue, Mrs. Hennen

performed general farming services on the farm on a regular and

intermittent basis, as we detailed in the findings of fact.

Petitioners admitted that Mrs. Hennen purchased cattle, loaded

cattle, vaccinated cattle, cleaned shop, picked up parts, and

unloaded grain.     In addition, they acknowledged that Mrs. Hennen

drove a tractor and performed the farm bookkeeping.     As noted,

Mrs. Hennen worked on the farm approximately 1,000 hours per

year.     We deem it immaterial that Mrs. Hennen also purportedly

was paid a salary for her services with a corresponding deduction

taken on their tax returns.     In our view, these "regularly

performed services are material to the production of an

agricultural commodity, and the intermittent services performed

are material to the production operations to which they relate."

Sec. 1.1402(a)-4(b)(6) Example (1), Income Tax Regs.

        The regulations provide in pertinent part, that if the

rental income is derived under an arrangement between the owner

of land and another person which provides that such other person

shall produce agricultural commodities on such land, and that
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there shall be material participation by the owner in the

production or the management of the production of such

agricultural commodities, and there is such material

participation by the owner, then the rental income received by

the owner pursuant to the arrangement is considered earnings from

self-employment.   Sec. 1.1402(a)-4(b), Income Tax Regs.

Accordingly, we find that the rental income is includable farm

rental income that is part of Mrs. Hennen's net earnings from

self-employment under section 1402(a)(1) for each of the taxable

years at issue.    This is the same conclusion we reached in a

similar case, decided after this case was heard.    Bot v.

Commissioner, T.C. Memo. 1999-256.

     We have considered all of the arguments presented by the

parties, and, to the extent not discussed above, they are without

merit or not relevant.

     To reflect the foregoing,

                                          Decision will be entered

                                     for respondent.
