                              140 T.C. No. 16



                     UNITED STATES TAX COURT



ROLLIN J. MOREHOUSE AND MAUREEN B. MOREHOUSE, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket No. 823-11.                            Filed June 18, 2013.



         During 2006 and 2007 P-H received payments under the U.S.
   Department of Agriculture Conservation Reserve Program (CRP).
   Respondent determined that P-H was liable for self-employment tax
   under I.R.C. sec. 1401 on the CRP payments. P-H claims that the
   CRP payments are not includible in his self-employment income
   because he was neither engaged in nor derived the CRP payments
   from operation of a trade or business. Alternatively, P-H claims that
   the CRP payments are excluded from the calculation of his net
   earnings from self-employment under I.R.C. sec. 1402(a)(1) because
   the CRP payments constituted “rentals from real estate”.

           Held: P-H’s CRP payments are includible in his self-
   employment income under I.R.C. sec. 1401 because he was engaged
   in a trade or business during the years in issue and there was a nexus
   between his trade or business and the CRP payments he received.
                                        -2-

             Held, further, P-H’s CRP payments are not “rentals from real
      estate” within the meaning of I.R.C. sec. 1402(a)(1). Wuebker v.
      Commissioner, 110 T.C. 431 (1998), rev’d, 205 F.3d 897 (6th Cir.
      2000), is overruled.



      Paul J. Quast and Neal J. Shapiro, for petitioners.

      Blaine C. Holiday, for respondent.



      MARVEL, Judge: In a notice of deficiency dated October 14, 2010,

respondent determined deficiencies with respect to petitioners’ Federal income tax

of $3,341 and $3,664 for 2006 and 2007, respectively. After concessions,1 the

sole issue for decision is whether petitioners are liable for self-employment tax

under section 14012 on payments they received under the U.S. Department of

Agriculture (USDA) Conservation Reserve Program (CRP).




      1
        On their 2006 Schedule E, Supplemental Income and Loss, petitioners
reported that they paid management fees of $2,001 with respect to property in
Grant County, South Dakota, that Rollin J. Morehouse owned. See infra p. 3.
Petitioners concede that their tax return preparer erroneously entered $2,001 and
that they actually paid management fees of $201 with respect to the property.
      2
       Unless otherwise indicated, all section references are to the Internal
Revenue Code, as amended and in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure. Some amounts
have been rounded to the nearest whole number.
                                        -3-

                                  FINDINGS OF FACT

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

facts is incorporated herein by this reference. Petitioners resided in Minnesota

when they filed their petition.

I.    Background

      Mr. Morehouse (hereinafter, petitioner) holds a bachelor’s degree in

business from the University of Minnesota. Following graduation he worked as a

regional sales manager and as an associate publisher. In 1987 petitioner began

providing marketing and fundraising services for the University of Texas at

Austin.

      In 1994 petitioner acquired 503 acres of land in Grant County, South

Dakota (Grant County property), 320 acres of land in Roberts County, South

Dakota (Roberts County property), and 400 acres of land in Day County, South

Dakota (Day County property) (collectively, South Dakota properties). He

acquired the South Dakota properties through inheritance and by purchasing

various undivided interests in the properties from his relatives. All of the land was

tillable cropland, with the exception of: (1) a gravel pit on the Grant County
                                         -4-

property; and (2) 129 acres of the Roberts County property, which petitioner’s

father had placed in the CRP program.3

      Petitioner, who lived in Texas at the time he acquired the South Dakota

properties, did not personally farm any of the land. Instead, he rented the tillable

portions of the South Dakota properties to various individuals who farmed their

rented portions.4

      In 2003 petitioner left his position at the University of Texas and moved

with his family to Minnesota. Upon moving to Minnesota petitioner became the

primary caregiver for his four sons. Although petitioner retired from the corporate

sphere, he continued to manage his various investments and property interests,

including his interests in the South Dakota properties.




      3
       The CRP contract with respect to the 129-acre parcel in Roberts County
was conveyed with the land to petitioner in 1994. In 1999 petitioner in his
capacity as owner of the Roberts County property entered into a new CRP contract
with respect to the 129-acre parcel. See infra p. 8.
      4
        Petitioner rented the Grant County property and the remaining 191 acres of
the Roberts County property until 1997, when he placed that land in the CRP. See
infra p. 6. He rented the Day County property from the time of his acquisition
through the years in issue.
                                        -5-

II.   Petitioner’s Participation in the CRP

      A.     The CRP in General

      The CRP was established pursuant to the Food Security Act of 1985. See

Food Security Act of 1985, Pub. L. No. 99-198, secs. 1231-1236, 99 Stat. at 1509-

1514 (codified as amended at 16 U.S.C. secs. 3831-3835 (2012)); see also 7

C.F.R. pt. 1410 (2011). Under the CRP, the USDA may enter into contracts with

owners and operators of land “to conserve and improve the soil, water, and

wildlife resources of such land and to address issues raised by State, regional, and

national conservation initiatives.” 16 U.S.C. sec. 3831(a). Owners and operators

of land agree to implement a conservation plan and refrain from using the land for

agricultural purposes. Id. sec. 3832(a). In return, the USDA shares the cost of

carrying out the conservation plan and pays to the owner or operator an “annual

rental payment”.5 Id. sec. 3833.




      5
       Tit. 16 U.S.C. sec. 3833(2) (2012) provides that the annual “rental”
payment is intended to compensate owners and operators for “(A) the conversion
of highly erodible cropland normally devoted to the production of an agricultural
commodity on a farm or ranch to a less intensive use; and (B) the retirement of any
cropland base and allotment history that the owner or operator agrees to retire
permanently.”
                                       -6-

      B.    Petitioner’s Enrollment in the CRP and the CRP Contracts

      In 1997 petitioner submitted applications to the USDA, offering for

enrollment in the CRP the tillable land on the Grant County property as well as the

remaining 191 acres of the Roberts County property.

      In 1997 the Grant County and Roberts County Farm Service Agency (FSA)

offices approved petitioner’s applications and accepted his land into the CRP.

Subsequently, the Commodity Credit Corporation (CCC) executed the resulting

CRP contracts with respect to the Grant County and Roberts County properties.

Petitioner personally assumed all obligations and responsibilities of compliance

under the CRP contracts.

      With respect to the Grant County property, petitioner and the CCC executed

two contracts: (1) contract No. 262, covering 180 acres of land (contract 262);

and (2) contract No. 263, covering 251 acres of land (contract 263). Both Grant

County CRP contracts listed petitioner as the owner of the land and did not

identify anyone as the operator of the land. Contract 262 provided that the CCC

would pay to petitioner a first-year payment of $8,609 and an annual contract
                                          -7-

payment of $9,391.6 Contract 263 provided that the CCC would pay to petitioner

a first year payment of $12,405 and an annual contract payment of $13,533.7

      Pursuant to a conservation plan attached to the Grant County CRP contracts,

petitioner agreed to: (1) maintain already established grass and legume cover for

the life of the contract; (2) “[e]stablish perennial vegetative cover on land

temporarily removed from agricultural production”, including pubescent or

intermediate wheatgrass, alfalfa, and sweet clover; and (3) engage in “pest control

and pesticide management” for the life of the contract. The CCC agreed to share

with petitioner the cost of establishing these conservation plans.

      The Roberts County CRP contract covered 191 acres of petitioner’s land.

The Roberts County CRP contract listed petitioner as the owner of the land and

did not identify anyone as the operator of the land. The Roberts County CRP

contract provided that the CCC would make an annual contract payment of

$9,666.8




      6
          The “rental rate” under contract 262 was set at $52.26 per acre.
      7
          The “rental rate” under contract 263 was set at $53.83 per acre.
      8
       The “rental rate” under the Roberts County CRP contract was set at $50.50
per acre.
                                        -8-

      Pursuant to a conservation plan attached to the Roberts County CRP

contract, petitioner agreed to: (1) “[c]ontrol pests such as weeds, livestock, insects

and disease” and (2) “[e]stablish adapted native perenial [sic] vegetative cover”

including Western wheatgrass, green needlegrass, and alfalfa. The conservation

plan also provided an estimated cost share for the plan. Once the work was

completed, petitioner was required to provide to the CCC “a report of

performance” and “submit receipts and seed tags affiliated with practice

establishment”. The CCC agreed to share with petitioner the costs of establishing

the conservation plan.9

      In June 1999 petitioner and the CCC executed a new CRP contract (1999

Roberts County CRP contract) with respect to the 129-acre parcel in Roberts

County that petitioner had acquired in 1994 already subject to a CRP contract.

The 1999 Roberts County CRP contract listed petitioner as the owner of the land

and did not identify any operator of the land. The 1999 Roberts County CRP

contract provided that the CCC would make an annual contract payment of




      9
       In September 2006 the CCC agreed to modify the Roberts County CRP
contract and extend the expiration date of that contract to September 30, 2012.
                                        -9-

$5,757.10 Under the 1999 Roberts County CRP contract, petitioner agreed to: (1)

maintain already established grass and legume cover for the life of the contract;

(2) “establish native perennial vegetative cover on land temporarily removed from

agricultural production”; (3) engage in “pest control and pesticide management”

for the life of the contract; and (4) control weeds by either mowing or chemical

means. The 1999 Roberts County CRP contract prohibited petitioner from haying

or grazing the enrolled land.

      C.     Implementation of the Conservation Plans

      Petitioner hired Wallace Redlin to carry out some of petitioner’s obligations

under the CRP contracts.11 Mr. Redlin was a retired farmer who had placed all of




      10
       The “rental rate” under the 1999 Roberts County CRP contract was set at
$44.63 per acre.
      11
        On July 30, 1997, petitioner mailed to the Grant County FSA a letter, titled
as an addendum. In the letter petitioner indicated that he will “assume all
obligations and responsibilities of contractual compliance as may be administered
by and through FSA or otherwise pertaining to subject lands by independent
contract with WALLACE L. REDLIN, Jr. for machine hire, monitoring and
supervision as essential and necessary on all land identified in the CRP contract”.
Petitioner testified that he sent the addendum to the Grant County FSA to clarify
how he planned to comply with the CRP contract considering the fact that he
resided in Texas at the time.
                                        - 10 -

his land in the CRP. Mr. Redlin previously had rented the Grant County and

Roberts County properties from petitioner for use in Mr. Redlin’s farming

operations.

      In 1998 petitioner purchased the required seeding materials and shipped the

materials to Mr. Redlin. Mr. Redlin then performed the initial seedbed preparation

and seeding. In 2000, pursuant to the 1999 Roberts County CRP contract, Mr.

Redlin plowed a portion of the land and reseeded it with various grasses.

      D.      Termination of CRP Contract 262

      In 2001 Grant County FSA employees discovered that petitioner was

engaging in gravel quarry activity on the Grant County property and had been

using part of the property for a road. The Grant County FSA, acting on behalf of

the USDA, terminated petitioner’s participation in the CRP with respect to nine

acres of the Grant County property and required him to refund $2,540, an amount

equal to all prior payments with respect to that portion of the property, plus

interest and liquidated damages. The Grant County FSA also provided for the

implementation of CRP contract No. 262-A, covering the remaining 171 acres of

the Grant County property, which continued to be enrolled in the CRP program.
                                        - 11 -

III.   Petitioner’s Activities With Respect to the South Dakota Properties

       Although Mr. Redlin performed some of petitioner’s obligations under the

CRP contracts at petitioner’s request and direction, petitioner fulfilled other

obligations, including the making of annual certifications that he was

implementing the conservation plans in accordance with the CRP contracts.

Between 1997 and 2007 petitioner participated in three CRP haying programs with

respect to the South Dakota properties. In July 2002 petitioner requested authority

for emergency haying or grazing.12 Petitioner signed the necessary forms and

made donations to ranchers and farmers as provided for by the CRP.

       Petitioner also personally purchased materials needed to implement the

conservation plans, which he then shipped to Mr. Redlin. Petitioner paid Mr.

Redlin for the work he performed to satisfy some of petitioner’s obligations under

the CRP contracts. Petitioner also sought and received from the USDA cost-

sharing payments for the seeding and weeding activities on the Grant County and

Roberts County properties. Petitioner gathered various documents, including




       12
        Petitioner donated the hay and/or the haying or grazing privileges to a
livestock producer and accordingly was not required to reduce the amount of his
CRP payment with respect to that land.
                                        - 12 -

receipts and invoices, and submitted these documents along with official

applications in order to receive the cost-sharing payments.

      In addition to his activities with respect the CRP contracts, petitioner

engaged in various other activities with respect to the South Dakota properties.

Petitioner allowed individuals to hunt on portions of the South Dakota properties.

He traveled to meetings with various parties with the express purpose of

negotiating agreements with people interested in hunting on the South Dakota

properties. Petitioner also operated a gravel pit on the Grant County property.

During the years at issue petitioner sold gravel to the Grant County Highway

Department and Lura Township, the local township. Petitioner also rented the

Day County property.

      Between 1994 and 2007 petitioner visited the South Dakota properties

several times each year. In 2006 petitioner visited the South Dakota properties

four times. In 2007 petitioner visited the South Dakota properties two times. He

typically visited the South Dakota properties for two to three days at a time. On

such trips petitioner would visit the gravel pit to ensure that there had been no

unauthorized excavation or removal of gravel, drive to each of the South Dakota

properties, and meet with officials at the FSA and the Grant County Highway
                                        - 13 -

Department. He also would meet with individuals who had an interest in renting

one of his properties or in hunting on the properties.

IV.   Petitioner’s Income With Respect to the South Dakota Properties

      In 2006 petitioner received CRP payments of $22,449 and $15,423 with

respect to the Grant County and Roberts County properties, respectively.

      In 2007 petitioner received income of $25,869 with respect to the Grant

County property as follows: (1) CRP payments of $22,449; (2) a payment of

$2,515 from Mr. Redlin for hunting privileges; and (3) a payment of $905 from

Mike Krakow for the right to cut hay on the land. He received income of $17,281

with respect to the Roberts County property as follows: (1) CRP payments of

$15,423; and (2) a payment of $1,858 from the South Dakota Game and Fish

Department for participation in a walk-in hunting program.

V.    Petitioners’ Tax Reporting and the Notice of Deficiency

      Petitioners timely filed Forms 1040, U.S. Individual Income Tax Return, for

2006 and 2007. On their returns petitioners identified their occupations as “self-

employed”. On attached Schedules E petitioners reported income and expenses

with respect to their three properties as follows:
                                         - 14 -

2006 Schedule E
                            Day County            Grant County    Roberts County
                             property               property        property

Rents received                $22,478               $22,449          $15,423
Total expenses                  3,287                 7,606            4,662
Net income                     19,191                14,843           10,761

2007 Schedule E
                            Day County            Grant County    Roberts County
                             property               property        property

Rents received                $37,962               $25,869          $17,281
Total expenses                  3,017                 5,194            4,287
Net income                     34,945                20,675           12,994

      On October 14, 2010, respondent mailed to petitioners the notice of

deficiency for 2006 and 2007 determining that: (1) petitioners erroneously

reported their CRP payments as farm rental income on their returns; (2) petitioners

should have reported the CRP payments as income on a Schedule F, Profit or Loss

From Farming, for each year. Respondent also determined that the CRP payments

constituted self-employment income and therefore determined that petitioners had

unreported self-employment income of $25,60413 and $28,39114 for 2006 and


      13
         This figure represents the net income petitioner received in 2006 with
respect to the Grant County and Roberts County properties. As stated supra
p. 13, in 2006 petitioner’s only income with respect to the Grant County and
Roberts County properties consisted of CRP payments.
      14
           This figure represents the net CRP payments petitioner received in 2007
                                                                        (continued...)
                                        - 15 -

2007, respectively.15 Respondent allowed petitioners additional deductions with

respect to the self-employment tax liabilities.

                                     OPINION

      A taxpayer’s self-employment income is subject to self-employment tax.

Sec. 1401(a) and (b). Self-employment tax is assessed and collected as part of the

income tax, must be included in computing any income tax deficiency or

overpayment for the applicable tax period, and must be taken into account for

estimated tax purposes. Sec. 1401; see also sec. 1.1401-1(a), Income Tax Regs.

Self-employment income generally is defined as “the net earnings from self-

employment derived by an individual”. Sec. 1402(b). Section 1402(a) defines

“[n]et earnings from self-employment” as “the gross income derived by an

individual from any trade or business carried on by such individual, less the

deductions allowed by this subtitle which are attributable to such trade or



      14
        (...continued)
with respect to the Grant County and Roberts County properties. As discussed
supra p. 13, in 2007 petitioner received additional income of $5,278 with respect
to these properties. Respondent did not include this additional income in
calculating petitioners’ unreported self-employment income.
      15
         Respondent appears to have accepted that the income generated by
petitioner’s rental activity with respect to the Day County property is not subject
to self-employment tax, presumably because of the provisions of sec. 1402(a)(1).
See also Henderson v. Flemming, 283 F.2d 882, 888 (5th Cir. 1960).
                                       - 16 -

business”. See also sec. 1.1402(a)-1, Income Tax Regs. In computing a

taxpayer’s net earnings from self-employment, section 1402(a)(1) provides:

      [T]here shall be excluded rentals from real estate and from personal
      property leased with the real estate (including such rentals paid in
      crop shares)[16] together with the deductions attributable thereto,
      unless such rentals are received in the course of a trade or business as
      a real estate dealer; except that the preceding provisions of this
      paragraph shall not apply to any income derived by the owner or
      tenant of land 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 or horticultural
      commodities (including livestock, bees, poultry, and fur-bearing
      animals and wildlife) on such land, and that there shall be material
      participation by the owner or tenant (as determined without regard to

      16
         In 2008 Congress amended sec. 1402(a) to read: “[T]here shall be
excluded rentals from real estate and from personal property leased with the real
estate (including such rentals paid in crop shares, and including payments under
section 1233(2) of the Food Security Act of 1985 (16 U.S.C. 3833(2)) to
individuals receiving benefits under section 202 or 223 of the Social Security
Act)”. Under sec. 1402(a) as amended, payments made under 16 U.S.C. sec.
3833(2) to individuals who were receiving benefits under sec. 202 or sec. 223 of
the Social Security Act (SSA) are excluded from the calculation of net earnings
from self-employment. Tit. 16 U.S.C. sec. 3833(2) (2012) refers to payments
received from the USDA under the CRP. See supra p. 5. The amendment applies
to CRP payments made after December 31, 2007. Food, Conservation, and
Energy Act of 2008, Pub. L. No. 110-246, sec. 15301(c), 122 Stat. at 2263. SSA
sec. 202 provides for the payment of old-age and survivors insurance benefits. 42
U.S.C. sec. 402 (2012). SSA sec. 223 provides for the payment of disability
insurance benefits. 42 U.S.C. sec. 423 (2012).

      Petitioner received the payments at issue before December 31, 2007.
Furthermore, petitioner does not contend, and he has not introduced any evidence
to show, that he was receiving benefits under the SSA. Accordingly, the 2008
amendment to sec. 1402(a) is inapplicable to our analysis herein.
                                       - 17 -

      any activities of an agent of such owner or tenant) in the production
      or the management of the production of such agricultural or
      horticultural commodities, and (B) there is material participation by
      the owner or tenant (as determined without regard to any activities of
      an agent of such owner or tenant) with respect to any such
      agricultural or horticultural commodity.[17] * * *

The self-employment tax provisions are construed broadly in favor of treating

income as earnings from self-employment. Braddock v. Commissioner, 95 T.C.

639, 644 (1990); Hornaday v. Commissioner, 81 T.C. 830, 834 (1983); Hennen v.

Commissioner, T.C. Memo. 1999-306; S. Rept. No. 81-1669 (1950), 1950-2 C.B.

302, 354.

      Respondent contends that the CRP payments are taxable as self-employment

income because petitioner derived the CRP payments from his trade or business of

conducting an environmentally friendly farming operation.18


      17
         The regulations under sec. 1402(a)(1) refer to the farm rental income that
is included in a taxpayer’s net earnings from self-employment as includible farm
rental income. See, e.g., sec. 1.1402(a)-4(b), Income Tax Regs. In this Opinion
we will refer to such income as includible farm rental income.
      18
        In arguing that petitioner was engaged in an active trade or business,
respondent relies on determinations made by the Grant County FSA that petitioner
was “actively engaged in a farming operation”. This Court previously has held
that a determination by the USDA that an individual was actively engaged in
farming “is not a determination for Federal income tax purposes that * * * [the
individual was] actively engaged in a trade or business for purposes of section
162(a).” Hasbrouck v. Commissioner, T.C. Memo. 1998-249, 1998 WL 373337,
at *12, aff’d without published opinion, 189 F.3d 473 (9th Cir. 1999).
                                                                       (continued...)
                                       - 18 -

      Petitioner contends that the CRP payments are not income from a trade or

business and therefore are not includible in his self-employment income.

Petitioner contends that he was not involved in the trade or business of farming,

that his minimal activities with respect to the CRP land did not cause him to

become active in the trade or business of farming, and that there was no nexus

between the CRP payments received and his business activities. In the alternative,

petitioner contends that the CRP payments are excluded from the calculation of

net earnings from self-employment under the “rentals from real estate” exclusion

in section 1402(a)(1).

      We examine the parties’ contentions below, taking into account the burden

of proof, which rests upon petitioners. See Rule 142(a)(1). Respondent’s

determinations are presumed to be correct; petitioners must prove that

respondent’s determinations are erroneous in order to rebut the presumption and

satisfy their burden of proof. See id.; Welch v. Helvering, 290 U.S. 111, 115

(1933).




      18
         (...continued)
Accordingly, the Grant County FSA determination does not control our decision
as to whether petitioner was actively engaged in a trade or business for purposes
of sec. 162(a).
                                       - 19 -

I.    Self-Employment Income

      A taxpayer’s net earnings from self-employment include the gross income

derived from any trade or business carried on by the taxpayer. Sec. 1402(a)(1).

The term “derived from” “necessitates a nexus between the income and the trade

or business actually carried on by the taxpayer.” Bot v. Commissioner, 353 F.3d

595, 599 (8th Cir. 2003), aff’g 118 T.C. 138 (2002); see also McNamara v.

Commissioner, 236 F.3d 410, 413 (8th Cir. 2000), rev’g T.C. Memo. 1999-333.

The term “trade or business” “shall have the same meaning as when used in

section 162 (relating to trade or business expenses)”. Sec. 1402(c). The

applicable regulations provide that “[t]he trade or business must be carried on by

the individual, either personally or through agents or employees.” Sec. 1.1402(a)-

2(b), Income Tax Regs. Under these principles, payments constitute self-

employment income if they: “(1) are derived (2) from a trade or business (3)

carried on by * * * [the taxpayer or his] agents.” Bot v. Commissioner, 353 F.3d

at 599; see also Wuebker v. Commissioner, 205 F.3d 897, 901 (6th Cir. 2000),

rev’g 110 T.C. 431 (1998). Accordingly, we must decide: (1) whether petitioner

carried on a trade or business during the years in issue, whether personally or

through an agent; and (2) if so, whether there was a nexus between the trade or

business conducted and the income petitioner received.
                                       - 20 -

      A.     Existence of a Trade or Business

             1.    Analysis

      To be engaged in a trade or business with respect to which deductions are

allowable under section 162, the taxpayer must be involved in the activity with

continuity and regularity, and the taxpayer’s primary purpose for engaging in the

activity must be for income or profit. Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987). Additionally, the taxpayer’s business operations must have

commenced. Goodwin v. Commissioner, 75 T.C. 424, 433 (1980), aff’d without

published opinion, 691 F.2d 490 (3d Cir. 1982). Whether a taxpayer is engaged in

a trade or business must be ascertained from a review of all relevant facts and

circumstances. Commissioner v. Groetzinger, 480 U.S. at 35.

      The record establishes that petitioner expanded his participation in the CRP

over the years and that he participated in the CRP with continuity and regularity

during 2006 and 2007. The record further establishes that petitioner did so with

the primary purpose of making a profit. After his initial experience with the CRP

petitioner decided to enroll the Grant County and Roberts County properties in the

CRP because he could get a higher rate of return from participating in the CRP

than from leasing the properties for farming. He negotiated and executed the CRP

contracts and, by doing so, obligated himself, as the owner of the properties to
                                       - 21 -

satisfy significant contractual obligations regarding planting, maintenance, and use

of the properties enrolled in the CRP and compliance with CRP requirements.

Although petitioner did not actually perform the planting and maintenance work

required by the CRP, he hired an individual, Mr. Redlin, to perform the work

according to CRP specifications, purchased necessary materials, such as seed, and

provided them to Mr. Redlin, and regularly inspected the properties to ensure that

they were being maintained and used in accordance with the CRP contractual

obligations. On these facts we find that petitioner engaged in the business of

participating in the CRP and managing his CRP properties with the primary intent

of making a profit.

      Petitioner contends that his actual participation in the CRP and his work

complying with the CRP contract requirements were de minimis and did not

constitute farming. He maintains that all physical labor necessary to plant, seed,

weed, mow, and maintain the properties (property maintenance activities) in

accordance with the CRP contracts was performed by his contractor and should

not be attributed to him. It is immaterial, however, that the property maintenance

activities were carried out by someone other than petitioner. As noted supra, for

purposes of section 1402 a taxpayer may conduct his trade or business personally

or through an agent. Sec. 1.1402(a)-2(b), Income Tax Regs.; Rev. Rul. 60-32,
                                             - 22 -

1960-1 C.B. 23 (stating that similar payments made to individuals under the Soil

Bank Act were includible in the individual’s net earnings from self-employment if

the individual operated his farm either personally or through agents or

employees).19 A taxpayer who hires another “to render the services necessary to

fulfill” the taxpayer’s obligations under a contract is nonetheless liable for self-

employment tax with respect to the income the taxpayer receives pursuant to that

contract. Moorhead v. Commissioner, T.C. Memo. 1993-314, 1993 WL 267200,

at *6.




         19
              Rev. Rul. 60-32, 1960-1 C.B. 23, 26, states in pertinent part:

                Payments and benefits attributable to the acreage reserve
         program are includible in determining the recipient’s net earnings
         from self-employment if he operates his farm personally or through
         agents or employees. This is also true if his farm is operated by
         others and he participates materially in the production of
         commodities, or management of such production, within the meaning
         of section 1402(a)(1) * * *. * * * If he does not so operate or
         materially participate, payments received are not to be included in
         determining net earnings from self-employment.

The Internal Revenue Service (IRS) has stated that Notice 2006-108, 2006-2 C.B.
1118, discussed infra pp. 30-34, would render Rev. Rul. 60-32, supra, obsolete.
                                        - 23 -

      As a participant in the CRP, petitioner, either directly or through Mr. Redlin

as his agent,20 regularly and continuously: (1) satisfied seeding and weed control

      20
        Neither party addresses whether, under applicable State law, Mr. Redlin
was petitioner’s agent. Because South Dakota has the most significant
relationship to petitioner and Mr. Redlin and the transaction at issue, whether Mr.
Redlin was petitioner’s agent is governed by South Dakota law. See Stockmen’s
Livestock Exch. v. Thompson, 520 N.W.2d 255, 257-258, 258 n.1 (S.D. 1994).
Under South Dakota law, the elements required to create an agency relationship
are “‘manifestation by the principal that the agent shall act for him, the agent’s
acceptance of the undertaking, and the understanding of the parties that the
principal is to be in control of the undertaking.’” Tisdall v. Tisdall, 422 N.W.2d
105, 107-108 (S.D. 1988) (quoting Southard v. Hansen, 376 N.W.2d 56, 58 (S.D.
1985)). In Tisdall, the Supreme Court of South Dakota found that a principal-
agent relationship existed when the principal directed the agent to distribute
revenue according to applicable statutory guidelines.

        Petitioner hired Mr. Redlin to perform all of the physical farming duties
required under the CRP contracts. Mr. Redlin apparently accepted petitioner’s
offer, as indicated by Mr. Redlin’s completion of the seeding, weeding, mowing
and maintenance activities required under the CRP contracts. Although petitioner
testified that he never directed Mr. Redlin’s activities, we reject the testimony as it
is apparent from the record that petitioner initially directed Mr. Redlin to perform
the property maintenance activities required by the CRP contracts and retained the
ability to direct and control the work that Mr. Redlin was to perform to comply
with the CRP contracts. See id. Accordingly, we find that Mr. Redlin was
petitioner’s agent.

       We note that Notice 2006-108, supra, states that “[p]articipation in a CRP
contract meets the criteria to be a trade or business irrespective of whether the
participant performs the required activities personally or arranges for his
obligations to be satisfied by a third party.” Notice 2006-108, supra, does not
discuss the apparent requirement under sec. 1.1402(a)-2(b), Income Tax Regs.,
that the trade or business be carried on by the individual either personally, or
through the individual’s employee, as that term is defined in sec. 1402(d), or
                                                                        (continued...)
                                        - 24 -

obligations with respect to the Grant County and Roberts County properties as

required under the CRP contracts; (2) visited the Grant County and Roberts

County properties to ensure that the properties maintained their status as CRP

properties; (3) filed annual certifications; (4) participated in emergency haying

programs; (5) requested cost-sharing payments; and (6) made decisions regarding

the profitability of keeping the Grant County and Roberts County properties

enrolled in the CRP. Regardless of whether some or all of these activities qualify

as farming, we find that petitioner was engaged in the business of participating in

the CRP and that he enrolled, maintained, and managed multiple properties subject

to CRP contracts with the primary intent of making a profit.

             2.    Additional Support

      Our conclusion is supported by and is consistent with existing caselaw and

the administrative position of the IRS set forth in Notice 2006-108, 2006-2 C.B.

1118, which was released on December 5, 2006. It is also consistent with

Congress’ enactment in 2008 of a limited exclusion for CRP payments made to

      20
        (...continued)
agent, as that term is defined under applicable State law. Because we find that Mr.
Redlin was petitioner’s agent, we need not decide whether an individual’s
participation in a CRP contract constitutes a trade or business under sec. 1402(a)
where the individual arranges for a third party to perform the obligations required
by the CRP contract and the third party is neither an employee nor an agent of the
individual.
                                       - 25 -

taxpayers receiving Social Security retirement or disability benefits. We explain

below.

                      a.   Caselaw

      This Court previously has addressed the proper treatment of CRP payments

for self-employment tax purposes. Wuebker v. Commissioner, 110 T.C. 431;21

Ray v. Commissioner, T.C. Memo. 1996-436. However, we are unable to find any

case other than Ray that addresses whether and to what extent a taxpayer who

receives CRP payments is engaged in a trade or business. While there is very little

law focusing on whether and to what extent participation in the CRP constitutes a

trade or business, Bot v. Commissioner, 118 T.C. 138, provides guidance

regarding the proper treatment of analogous payments for self-employment tax

purposes. Accordingly, we examine each of these decisions and their application

to the case at bar.

      21
        In Wuebker v. Commissioner, 110 T.C. 431 (1998), rev’d, 205 F.3d 897
(6th Cir. 2000), this Court considered whether the taxpayers were liable for self-
employment tax on CRP payments they had received. However, in that Opinion
this Court did not address whether the taxpayers were engaged in a trade or
business but instead addressed only whether the CRP payments were excluded
from the taxpayers’ net earnings from self-employment as “rentals from real
estate” under sec. 1402(a)(1). In Wuebker v. Commissioner, 205 F.3d 897, the
U.S. Court of Appeals for the Sixth Circuit addressed whether the CRP payments
derived from the taxpayers’ farming business but did not decide whether the
taxpayers were in the trade or business of farming. We discuss both of the
Wuebker decisions later in this Opinion. See infra pp. 37-39.
                                       - 26 -

      In Ray v. Commissioner, T.C. Memo. 1996-436, the taxpayer was engaged

in the trade or business of farming. He then purchased land that had been placed

in the CRP by the previous owner. The taxpayer fulfilled the previous owner’s

obligations under the CRP contract and received CRP payments in exchange. This

Court concluded that the taxpayer received the CRP payments in connection with

his ongoing trade or business of farming. See also Hasbrouck v. Commissioner,

T.C. Memo. 1998-249, aff’d, 189 F.3d 473 (9th Cir. 1999), in which the

Commissioner, on the basis of this Court’s decision in Ray, conceded that the

taxpayers were involved in the trade or business of farming and therefore entitled

to the deductions claimed on their Schedules F. In so conceding, the

Commissioner noted that the only difference between the two factual scenarios

was that the taxpayer in Ray was a farmer when he acquired the CRP land,

whereas the taxpayers in Hasbrouck had no prior farming experience.

      In Bot v. Commissioner, 118 T.C. at 141, this Court addressed the treatment

for self-employment tax purposes of payments taxpayers received from an

agricultural cooperative (MCP). The taxpayers were retired farmers who

purchased MCP cooperative stock and units of equity participation, which

“specified the maximum number of bushels of corn the member could be required

to produce and deliver to” MCP each year. Id. at 141-142. The taxpayers also
                                        - 27 -

entered into uniform marketing agreements (UMAs) with MCP. Id. at 141. In

return, MCP was required under the UMAs to process the corn its members

produced and make payments to each individual member equal to at least 80% of

the loan value of each bushel of corn delivered by the individual plus a value-

added payment, representing “[the] value added to the corn as a result of its

processing”, a payment from MCP’s earnings in accordance with its bylaws, and,

in some instances, a storage fee and interest. Id. at 143. The taxpayers satisfied

their production and delivery obligations using corn that MCP held in its option

pool, rather than corn they personally had grown on their farm, and accordingly

received only the value-added payments. Id. at 142, 144. The Commissioner

determined that the value-added payments were includible in the calculation of the

taxpayers’ net earnings from self-employment. Id. at 144.

      In deciding whether the taxpayers’ actions constituted a trade or business,

this Court acknowledged that although the taxpayers had retired from farming,

they continued to participate in MCP and their participation constituted a trade or

business. Id. at 147. In particular, this Court stated:

             Although petitioners retired from daily farming in 1987 and
      turned over their farm operation to the sons, petitioners nevertheless
      continued to maintain their membership in MCP from 1987 through
      at least 1995. As active members of MCP during 1994 and 1995 [the
      years in issue,] petitioners, either directly or through the sons as their
                                        - 28 -

      agents, regularly and continuously (1) maintained their status as
      producers under the UMAs, (2) made decisions regarding how to
      satisfy their production and delivery obligations * * * under the
      UMAs, (3) acquired option pool corn which they used to satisfy their
      production and delivery obligations to MCP several times each year,
      and (4) sold corn and corn products for profit through MCP.

Id. at 147-148 (fn. ref. omitted). In rejecting the taxpayers’ contention that their

involvement was too minimal to constitute a trade or business, this Court relied on

the fact that the taxpayers “regularly and continuously purchased and sold corn

with the intention of making a profit” and purchased additional units of equity

over time. Id. at 149.

      The U.S. Court of Appeals for the Eighth Circuit affirmed the decision of

the Tax Court. Bot v. Commissioner, 353 F.3d 595. While the Court of Appeals

emphasized the unique nature of the cooperative arrangement, the court also

distinguished the taxpayers’ participation in the cooperative, which constituted a

trade or business, from an individual’s investment in a corporation or gas well,

which was merely a passive investment. Id. at 599-600. Unlike a passive

investment, the investment in MCP required the taxpayers “to do more than hold

the stock or equity units” in order to receive payment. Id. at 600.

      In Ray v. Commissioner, T.C. Memo. 1996-436, this Court relied on the fact

that the taxpayer was engaged in the trade or business of farming before and
                                       - 29 -

during his participation in the CRP in finding that the CRP payments were

includible in his self-employment income. However, we do not read Ray to make

the taxpayer’s engagement in the business of farming before enrolling property in

the CRP determinative of whether CRP payments constitute income from self-

employment. A taxpayer is not required to have prior experience in a particular

trade or business to be permitted deductions under section 162; what is required is

that the taxpayer have commenced an activity that qualifies as a trade or business.

Goodwin v. Commissioner, 75 T.C. at 433.

      Like the taxpayers in Bot v. Commissioner, 118 T.C. 138, petitioner was an

active participant in a payment program (in this case the CRP) who regularly and

continuously maintained his status as a participant, maintained the eligibility

status of his properties, made decisions regarding how to satisfy his obligations

under the CRP contracts, including hiring Mr. Redlin, entering into the 1999

Roberts County CRP, removing a portion of the Grant County property from the

CRP, and participating in the emergency haying programs, and he engaged in such

activities for profit. Furthermore, because the receipt of CRP payments depended

on petitioner’s continued maintenance of his land in accordance with the CRP

contracts, his participation in the CRP was not merely a passive investment.

Whether petitioner’s activities with respect to the CRP constituted farming or
                                       - 30 -

simply continuous and regular participation in an activity for profit, we are

convinced that petitioner was engaged in a trade or business as defined by section

162.22

                     b.    Notice 2006-108

         On December 5, 2006, the IRS released Notice 2006-108, supra, which

contained a proposed revenue ruling regarding whether CRP payments were

includible in net income from self-employment for purposes of calculating a

taxpayer’s liability for self-employment tax, and solicited comments concerning

the conclusions reached in the proposed revenue ruling. The IRS in Notice 2006-

108, supra, explained that it had previously issued an announcement,

Announcement 83-43, Q&A-3, 1983-10 I.R.B. 29, regarding the self-employment

tax treatment of payments made by the USDA under land diversion programs in

         22
        In deciding whether a full-time gambler who made wagers solely for his
own account was engaged in a trade or business for Federal income tax purposes,
the Supreme Court in Commissioner v. Groetzinger, 480 U.S. 23, 27 n.7 (1987),
stated as follows: “Judge Friendly some time ago observed that ‘the courts have
properly assumed that the term [trade or business] includes all means of gaining a
livelihood by work, even those which would scarcely be so characterized in
common speech.’ Trent v. Commissioner, 291 F.2d 669, 671 (CA2 1961).”
(Emphasis added.)

The concept of work that the term “trade or business” embodies is incorporated
into the CRP contracts, which impose meaningful obligations and duties on
petitioner that he had to perform with continuity and regularity in order to receive
the CRP payments.
                                        - 31 -

which it stated that a farmer who receives cash or a payment in kind from the

USDA for participation in a land diversion program is liable for self-employment

tax on the payments, a conclusion that was consistent with guidance provided in

Rev. Rul. 60-32, supra, with respect to two earlier land diversion programs. The

IRS also noted, however, that Rev. Rul. 60-32, supra, states that participants in

land diversion programs are not subject to self-employment tax on the payments if

the participants do not operate a farm or materially participate in the farming

activities. The IRS explained that the conclusion in Rev. Rul. 60-32, supra, is

relevant only with respect to the exception from net income from self-employment

provided in section 1402(a)(1) for “rentals from real estate”. It cited with approval

and relied on the opinion of the U.S. Court of Appeals for the Sixth Circuit in

Wuebker v. Commissioner, 205 F.3d 897, for the proposition that CRP payments

do not fall within the rental income exclusion but pointed out that the taxpayer in

Wuebker was engaged in the business of farming when he received the CRP

payments. Because the IRS had received questions regarding whether CRP

payments received by a recipient who is retired or not otherwise actively engaged

in farming are subject to self-employment tax, it issued the proposed revenue

ruling to respond to those questions.
                                        - 32 -

      In Notice 2006-108, 2006-2 C.B. at 119, the proposed revenue ruling holds

that CRP rental payments (including incentive payments) from the USDA to (1)

“a farmer actively engaged in the trade or business of farming who enrolls land in

CRP and fulfills the CRP contractual obligations personally” (taxpayer A) and (2)

“an individual not otherwise actively engaged in the trade or business of farming

who enrolls land in CRP and fulfills the CRP contractual obligations by arranging

for a third party to perform the required activities” (taxpayer B) are both includible

in net income from self-employment and are not excluded from net income from

self-employment as “rentals from real estate” under section 1402(a)(1). The IRS

explained the holdings of the proposed revenue procedure as follows:

      Participation in a CRP contract is a trade or business for both A and
      B. The participant is obligated to perform a number of activities,
      including but not limited to tilling, seeding, fertilizing, and weed
      control. Although more extensive activities are required at the
      beginning of the contract term than later, the obligation to perform
      activities extends throughout the ten-year period, giving participation
      in CRP the continuity and regularity necessary to be considered a
      trade or business. Also, both A and B enrolled land in the CRP
      program to earn a profit. Participation in a CRP contract meets the
      criteria to be a trade or business irrespective of whether the
      participant performs the required activities personally or arranges for
      his obligations to be satisfied by a third party. Thus, the trade or
      business treatment is the same for A and B even though A meets the
      CRP requirements for maintenance of the land himself whereas B
      arranges for someone else to do it. Furthermore, the CRP meets the
      criteria to be a trade or business based on the activities required
      directly under the program and without being affected by whether the
                                       - 33 -

      participant is otherwise engaged in farming or any other trade or
      business. * * * Thus, for both A and B, the CRP rental payments are
      includible in their net income from self-employment.

Id., 2006-2 C.B. at 1120.

      Although we are not obligated to defer to the IRS’ interpretation of a statute

as reflected in administrative pronouncements such as Notice 2006-108, supra,

see, e.g., Tax Analysts v. IRS, 416 F. Supp. 2d 119, 125-126 (D.D.C. 2006), the

notice sets forth the IRS’ interpretation of the statute and, consequently, “may

provide evidence of the proper construction of the statute”, Wells Fargo & Co. &

Subs. v. Commissioner, 224 F.3d 875, 886 (8th Cir. 2000) (discussing the

precedential value of private rulings), aff’g in part, rev’g in part Norwest Corp. &

Subs. v. Commissioner, 112 T.C. 89 (1999); see Nelson v. Commissioner, 568

F.3d 662, 665 (8th Cir. 2009) (adopting the framework set forth in Skidmore v.

Swift & Co., 323 U.S. 134, 140 (1944), in considering what weight to give

revenue rulings), aff’g 130 T.C. 70 (2008); see also Berger v. Xerox Corp. Ret.

Income Guar. Plan, 338 F.3d 755, 762 (7th Cir. 2003) (discussing the precedential

value of IRS notices); Esden v. Bank of Boston, 229 F.3d 154, 168-169 (2d Cir.

2000) (discussing the precedential value of IRS notices). In this instance, we

conclude that the IRS’ analysis of the CRP and the payments made thereunder and

the classification of the CRP payments for self-employment tax purposes as set
                                       - 34 -

forth in Notice 2006-108, supra, while not controlling, are nevertheless well-

grounded and consistent with the analysis set forth herein.

                   c.    Congressional Intent Regarding CRP Payments

      Several attempts have been made to convince Congress to enact a blanket

exclusion for self-employment tax purposes with respect to CRP payments, but

Congress did not enact proposed legislation amending section 1402 to exclude

CRP payments from self-employment tax entirely. See 153 Cong. Rec. 9170-9171

(2007); 149 Cong. Rec. 15950-15951 (2003); 147 Cong. Rec. 1776-1783 (2001);

133 Cong. Rec. 8557 (1987). Congress did, however, enact a partial exclusion.

Following the issuance of Notice 2006-108, supra, Congress in 2008 amended

section 1402(a)(1) to exclude CRP payments from the calculation of a taxpayer’s

net earnings from self-employment where the taxpayer is receiving Social Security

retirement or disability payments.23 Food, Conservation, and Energy Act of 2008,

Pub. L. No. 110-246, sec. 15301(a), 122 Stat. at 2263. If we were to interpret

section 1402 to exclude entirely CRP payments from the calculation of net

earnings from self-employment as petitioners contend we should, such an

      23
        The Staff of the Joint Committee on Taxation has noted that CRP
payments generally constitute self-employment income, except in the case of
taxpayers who receive Social Security retirement or disability benefits. See Staff
of J. Comm. on Taxation, Description of the Social Security Tax Base, at 22 (J.
Comm. Print 2011).
                                        - 35 -

interpretation would render the enactment of the 2008 exclusion meaningless. By

enacting only a limited exclusion with respect to taxpayers receiving Social

Security retirement or disability payments who are also receiving CRP payments,

Congress has evidenced an intent not to exclude all CRP payments in calculating a

taxpayer’s net earnings from self-employment under section 1402.

      Having found that petitioner, either individually or through his agent, was

engaged in a trade or business during the years at issue, we examine what would

appear to be self-evident--whether there was a nexus between the CRP payments

petitioner received and his business activity.

      B.     “Derived From” Requirement

      Petitioner received the CRP payments as consideration for fulfilling his

obligations under the CRP contracts for the years in issue. Such consideration

provides the required nexus between the CRP payments and his trade or business

of participating in the CRP during the years in issue. See Bot v. Commissioner,

353 F.3d at 600; see also Wuebker v. Commissioner, 205 F.3d at 902-903 (holding

that CRP payments had a direct nexus to the taxpayers’ trade or business of

farming); Ray v. Commissioner, T.C. Memo. 1996-436.
                                         - 36 -

II.   Petitioner’s Alternative Argument Under Section 1402(a)(1)

      Section 1402(a)(1) provides that “rentals from real estate” shall be excluded

from the calculation of net earnings from self-employment. Petitioner

alternatively contends that the CRP payments are excluded from his net earnings

from self-employment under section 1402(a)(1) because the payments constituted

rental income.24 Respondent contends that petitioner is not eligible for the “rentals

from real estate” exception under section 1402(a)(1) because petitioner did not

receive the CRP payments in exchange for the USDA’s occupancy or use of the

South Dakota properties but instead received the payments as compensation for

conducting his farming operation in an environmentally friendly manner.

Accordingly, we must decide whether the CRP payments constituted “rentals from

real estate” within the meaning of section 1402(a)(1).

      Neither section 1402 nor any other self-employment tax provision of the

Code defines the term “rentals from real estate”. See also Wuebker v.

Commissioner, 205 F.3d at 903. However, this Court has stated that the exception

for “rentals from real estate” must be “narrowly construed.” Johnson v.

Commissioner, 60 T.C. 829, 833 (1973); see also Delno v. Celebrezze, 347 F.2d


      24
         In so arguing, petitioner relies, in part, on the fact that the CRP contracts
identified the payments as “rental payments”.
                                        - 37 -

159, 165 (9th Cir. 1965). Ordinarily, rent is defined as compensation “for the use

or occupancy of property”. Wuebker v. Commissioner, 205 F.3d at 904.

      In Wuebker v. Commissioner, 110 T.C. at 437, the taxpayers argued that the

CRP payments they received constituted “rentals from real estate”. In addressing

the taxpayers’ contention, this Court first noted that rent ordinarily is defined “as

compensation for the occupancy or use of property.” Id. at 436. The Court went

on to find that the CRP statute, the applicable regulations, and the CRP contract

identified the payments as rental payments. Id. at 438. After briefly discussing

the taxpayers’ obligations under the CRP contracts, this Court concluded that

             In imposing the above-described restrictions on the use of the
      land, the primary purpose of the CRP contract was to effectuate the
      statutory intention of converting highly erodible croplands to soil
      conserving uses. The services that petitioner was required to perform
      over the contract term included maintaining the vegetative cover,
      controlling weeds, insects, and pests on the land, and fulfilling certain
      reporting requirements. These service obligations were not
      substantial and were incidental to the primary purpose of the contract.
      Thus, the CRP payments represented compensation for the use
      restrictions on the land, rather than remuneration for petitioner’s
      labor. * * *

Id. Accordingly, the Court held that the CRP payments qualified as “rentals from

real estate” under section 1402(a)(1). Id.

      The U.S. Court of Appeals for the Sixth Circuit reversed this Court’s

decision, holding that the CRP payments were not “rentals from real estate” within
                                       - 38 -

the meaning of section 1402(a). Wuebker v. Commissioner, 205 F.3d at 903-905.

The Court of Appeals began its analysis by stating that generally, rental payments

constitute consideration paid for either the use or occupancy of property. Id. at

904. The Court of Appeals quickly dispensed with the issue of whether the CRP

payments constituted consideration for the occupancy of the taxpayers’ property,

noting that the USDA’s access was limited to inspections of the property to

determine whether the taxpayers were in compliance with their CRP contract. Id.

      The Court of Appeals acknowledged that the second issue, i.e., whether the

CRP payments constituted consideration for the use of the taxpayers’ property,

presented a much closer question. Id. However, the Court of Appeals ultimately

decided that the USDA did not make the CRP payments in exchange for the use of

the taxpayers’ property:

      Citing the many objectives of the CRP, such as the reduction of soil
      erosion and the protection of the nation’s long-term food production
      capabilities, the * * * [taxpayers] assert, and the dissent agrees, that
      the government is “using” the land in question. We believe, however,
      that such an argument impermissibly stretches the plain meaning of
      the term “use,” especially in light of the narrow construction required
      of the rentals-from-real-estate exclusion. * * * Although it is true that
      the * * * [USDA] is seeking, and receiving, a public benefit by
      conserving lands enrolled in the CRP, the * * * [taxpayers] continue
      to maintain control over and free access to their premises. The
      dissent reasons that, because the government “greatly reduced the
      range of uses to which the * * * [taxpayers] could put their property,”
      it exercised a level of control akin to “use.” We remain unpersuaded,
                                       - 39 -

      however, that the restrictions imposed by the * * * [USDA] on a
      farmer’s use of his own land somehow translate into “use” by the
      * * * [USDA] itself.

             The essence of the program is to prevent participants from
      farming the property and to require them to perform various activities
      in connection with the land, both at the start of the program and
      continuously throughout the life of the contract, with the
      government’s access limited to compliance inspections. Given this
      arrangement, we disagree with the Tax Court’s determination that the
      * * * [taxpayers’] maintenance obligations were legally insignificant.

Id. at 903-905. In so holding, the Court of Appeals also stated that although the

CRP statute, the applicable regulations, and the contract referred to the amounts as

rental payments, such references did not dictate a conclusion that the CRP

payments fell within the “rentals from real estate” exclusion. Id. at 904.

      Following the decision in Wuebker, the IRS issued Notice 2006-108, supra,

proposing a revenue procedure holding that “CRP rental payments are not

payments for the right to use or occupy real property. CRP rental payments are

made in exchange for conducting activities that meet the commitments of a CRP

contract. Therefore, CRP rental payments are not * * * rentals from real estate.”

Following the issuance of Notice 2006-108, supra, in 2008 Congress amended the

section 1402(a)(1) exclusion for “rentals from real estate”, effective for CRP

payments received after December 31, 2007, to exclude from the calculation of net

earnings from self-employment CRP payments made to taxpayers who are
                                         - 40 -

receiving Social Security retirement or disability payments. However, Congress

neither enacted a blanket exclusion with respect to CRP payments nor evidenced

any disagreement with the analysis of the Court of Appeals for the Sixth Circuit in

Wuebker v. Commissioner, 205 F.3d 897.

      Given the history recited above and our obligation to reconsider our

position following the reversal of our decision in Wuebker by the Court of

Appeals for the Sixth Circuit, we agree with and adopt the analysis of the Court of

Appeals in Wuebker v. Commissioner, 205 F.3d at 903-905, regarding whether,

under section 1402(a)(1), CRP payments are excluded from the calculation of net

earnings from self-employment as “rentals from real estate”. Under the CRP, a

participating owner who enrolls land in the program does not relinquish control of

the land to the USDA, and the USDA does not engage in any activities with

respect to the land that constitute “use” of the land by the USDA, applying a

commonsense definition of the term. See, e.g., Merriam Webster’s Collegiate

Dictionary 1297 (10th ed. 2002) (“to put into action or service: avail oneself of:

EMPLOY”). Taxpayers participating in the CRP “maintain control over and free

access to their premises”. Wuebker v. Commissioner, 205 F.3d at 904. Although

the CRP restricts the taxpayer’s use of the property, i.e., the taxpayer’s ability to

plant certain crops and engage in certain activities with respect to the enrolled
                                        - 41 -

property, which the taxpayer agrees to in exchange for consideration, the

Government does not take possession of the property or acquire the right to use

the property for its own purposes.

      Furthermore, we agree with the finding of the Court of Appeals for the Sixth

Circuit in Wuebker, that a taxpayer’s activities with respect to the CRP contract

are legally significant. Id. As discussed supra pp. 23-24, a taxpayer who

participates in a CRP contract, either individually or through an agent or

employee, must engage in property maintenance activities for the benefit of the

enrolled properties with regularity and perform periodic administrative and

reporting duties to satisfy his obligations under the contract and receive CRP

payments. The contractual obligations are substantial and require more than de

minimis action by the taxpayer or his agent to satisfy them.

      Additionally, we note that the activities required of petitioner under the

CRP contracts were not limited to maintenance activities and instead included the

performance of duties not “usually or customarily rendered in connection with”

the mere rental of farmland. Johnson v. Commissioner, 60 T.C. at 831-832

(holding that boat stall rental payments did not constitute “rentals from real estate”

where the taxpayer also provided various services at no additional charge,

including the providing gas and oils, selling sundry items, making arrangements
                                       - 42 -

for boat repairs, recharging batteries, loaning boating equipment, providing fishing

tips, and checking for overdue boats); see also Delno, 347 F.2d at 165

(interpreting an identical provision of the SSA and finding that the individual’s

activities with respect to the property were not those usually rendered in

connection with the rental of property).

      Although the CRP statute, the regulations, and the contracts refer to the

payments as rental payments, we do not find that the use of the term “rental”

dictates a conclusion that the payments constituted “rentals from real estate”. See,

e.g., Wuebker v. Commissioner, 205 F.3d at 904 (noting that Congress qualified

the use of the term “rent” with respect to CRP payments by providing that the CRP

payments would be made “in the form of rental payments”). We are not required

to treat as rental payments all payments labeled “rent”. Instead we may examine

the substance of so-called rent payments to decide whether the payments actually

constituted rent or some other type of income. See Opine Timber Co. v.

Commissioner, 64 T.C. 700, 709-711 (1975), aff’d without published opinion, 552

F.2d 368 (5th Cir. 1977). The CRP payments petitioner received appear to be

proceeds from his own use of the land rather than rent he received for permitting

another entity to use his land. See, e.g., Webster Corp. v. Commissioner, 25 T.C.

55, 61 (1955), aff’d, 240 F.2d 164 (2d Cir. 1957); Harding v. Commissioner, T.C.
                                       - 43 -

Memo. 1970-179 (holding that conservation reserve program payments “are in the

nature of receipts from farm operations in that they replace income which

producers could have expected to realize from the normal use of the land devoted

to the program”); Rev. Rul. 60-32, supra. Such a conclusion is consistent with our

holding that the “rentals from real estate” exception should be narrowly construed.

Johnson v. Commissioner, 60 T.C. at 833.

       We hold that the CRP payments at issue do not constitute “rentals from real

estate” within the meaning of section 1402(a)(1) and are not excluded from the

calculation of petitioner’s net earnings from self-employment for 2006 and 2007.

In so doing, we overrule our holding in Wuebker v. Commissioner, 110 T.C. 431.

III.   Conclusion

       We sustain respondent’s determination that the CRP payments petitioner

received in 2006 and 2007 must be included in the calculation of his net earnings

from self-employment under section 1401 and hence are subject to self-

employment tax. The CRP payments are not excluded from this calculation by

virtue of section 1402(a)(1) because the CRP payments do not constitute “rentals

from real estate”. Because we find that the CRP payments are not “rentals from

real estate”, we need not reach the issue of whether the CRP payments constituted

includible farm income.
                                       - 44 -

      We have considered all of the parties’ arguments. To the extent not

discussed above, we find those arguments to be irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                     Decision will be entered under

                                                Rule 155.

      Reviewed by the Court.

    COLVIN, HALPERN, FOLEY, VASQUEZ, GALE, GOEKE, WHERRY,
KROUPA, HOLMES, GUSTAFSON, MORRISON, KERRIGAN, BUCH, and
LAUBER, JJ., agree with this opinion of the Court.

      PARIS, J., did not participate in the consideration of this opinion.
