                          T.C. Memo. 1995-571



                        UNITED STATES TAX COURT



            LEE MIZELL AND PEARLENE MIZELL, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 18516-93.             Filed November 29, 1995.



        Jeffrey H. Dixon, for petitioners.

        Lloyd E. Mueller, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

        CARLUZZO, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1


        1
      Unless otherwise indicated, 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.
                               - 2 -

     Respondent determined deficiencies in petitioners' 1988,

1989, and 1990 Federal income taxes in the amounts of $160,

$3,624, and $3,343, respectively.   After concessions,2 the issue

for decision is whether rental income derived from certain

agricultural leases constitutes net earnings from self-

employment.

                         FINDINGS OF FACT

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.    During the years in

issue, petitioners were husband and wife and filed joint Federal

income tax returns.   At the time the petition was filed,

petitioners resided in Gould, Arkansas.     References to petitioner

are to Lee Mizell.

     Petitioner listed his occupation as "farmer" on his 1988,

1989, and 1990 Federal income tax returns.    He has been engaged

in the production of agricultural commodities as a farmer most of

his adult life.

     Over a period of years, petitioner purchased agricultural

land in Lincoln County, Arkansas.   Specifically, petitioner

purchased 55 acres in 1978, 50 acres in 1979, 500 acres in 1986,

and 35 acres in 1988.   Additionally, petitioner leased


     2
      Petitioners conceded the correctness of adjustments for
auto depreciation in the amounts of $10,310, $496, and $298 for
the years 1988, 1989, and 1990, respectively.
                                 - 3 -

agricultural land from third parties.    Petitioner was the owner

or lessee of 731 acres of cultivated acreage in Lincoln County

(the property) during the years in issue.    Prior to the years in

issue, petitioner farmed the property as a sole proprietor

producing cotton, rice, and soybeans, and included the income

from his farming activities in the computation of his net

earnings from self-employment.

     In 1986, petitioner formed a partnership (Mizell Farm) with

his three sons.   The purpose of Mizell Farm was to conduct

farming operations.   Petitioner held a 25-percent ownership

interest in the partnership.   The partnership agreement provided

that each of the partners would have an equal voice in the

management and conduct of the partnership business, and required

that each partner devote his full time and attention to the

business.   In accordance with the partnership agreement,

petitioner made management decisions, acquired operating capital,

and contributed physical labor to the farming operation during

the years 1988, 1989, and 1990.    Petitioner included his

distributive share of the partnership's income in his income on

his Federal income tax returns for each of the years in issue and

treated such income as net earnings from self-employment.

     On January 1, 1988, petitioner entered into a series of

agricultural leases (leases) wherein petitioner leased the 731

acres of property to Mizell Farm in return for a one-quarter crop

share.   During the years in issue, petitioner and his three sons
                                 - 4 -

farmed the property and produced cotton, rice, and soybeans as

partners in Mizell Farm pursuant to the leases that Mizell Farm

had entered into with petitioner.    Mizell Farm was responsible

for all of the expenses related to raising and harvesting the

crops.   Petitioner derived rental income for each of the years in

issue pursuant to the leases.    The actual amount of the rental

income received was based upon the level of sales of the

agricultural products by the partnership.    Although petitioner

included in his income the rents received pursuant to the leases,

he did not treat such income as earnings from self-employment.

     As of the date of trial, petitioner had not leased the

property to a non-related entity or person.

                                OPINION

     Section 1401 provides that, in addition to other taxes, 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).   There is an exception to the exclusion, however,

with respect 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 * * * 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
                               - 5 -

     any such * * * commodity * * *    [Sec. 1402(a)(1); emphasis
     added.]

     In other words, if the rental income is derived under an

arrangement which provides for the production of agricultural

products on the land of the owner or tenant (the owner) and

further obligates the owner to materially participate in the

production or the management of the production of agricultural

commodities, and the owner actually materially participates in

the production or the management of the production of

agricultural commodities, then the rental income received by the

owner pursuant to the arrangement is considered earnings from

self-employment.   See sec. 1.1402(a)-4(b)(3)(i), Income Tax Regs.

The parties do not dispute this proposition.   They further agree

if one or more of the above elements is missing, the rental

income would be excluded from the definition of self-employment

income.

     In this case, the parties have stipulated that the leases

provide for the production of agricultural products on the

property by the partnership, that agricultural products were

produced on the property by the partnership during the years in

issue, and that petitioner materially participated in the

production of the agricultural products.   Further, petitioner

agrees that as a partner in Mizell Farm, he was obligated to

materially participate in the production of agricultural products

on his property.   Notwithstanding the above, petitioners take the
                               - 6 -

position that the arrangement with respect to the production of

agricultural products did not provide for material participation

by petitioner, and therefore, the rental income cannot be

considered self-employment income.     Respondent disagrees and

argues that the arrangement did provide for petitioner's material

participation.

     There apparently is no dispute between the parties that

petitioner's conduct in connection with the production of

agricultural products on his property constituted material

participation within the meaning of the statute and regulations.

There is also apparently no dispute that as a result of the

partnership agreement and the general understanding with his

sons, petitioner was obligated and expected to "materially

participate" in the production of agricultural products on his

property.   It seems that the dispute between the parties focuses

upon the construction of the word "arrangement" as used in

section 1402(a)(1) and the corresponding regulations, and further

upon the extent of the obligations imposed upon petitioner

pursuant to the leases.

       Petitioners argue that the leases provide the exclusive

basis for determining the terms of the arrangement regarding the

production of agricultural products on petitioner's property.

Petitioners further argue that the leases impose no obligation on

petitioner to materially participate in the production of

agricultural products on the property.     Although not expressly
                                - 7 -

stated as such, the thrust of petitioners' position is that the

word "arrangement" connotes some form of contractual

relationship, the terms and conditions of which must be set forth

in a single contract.    Respondent takes the position that the

word "arrangement" should be construed to take into account the

entire understanding between petitioner and his sons (operating

through Mizell Farm) with respect to the farming operations

conducted on the property.    According to respondent, the

partnership agreement, which petitioner agrees obligates him to

materially participate in the production of agricultural products

on the property, must be considered along with the leases in

establishing the terms of the arrangement.    Respondent further

argues that even if the arrangement is limited to the leases, the

leases provide for the material participation of petitioner as a

partner in Mizell Farm.

     Although nowhere defined in the Internal Revenue Code, the

word "arrangement" appears in more than 90 sections.    Where a

word used in a statute is not specifically defined, we apply the

language's plain, obvious, and rational meaning.    American

Tobacco Co. v. Patterson, 456 U.S. 63, 68 (1982); United States

v. Merriam, 263 U.S. 179, 187-188 (1923).    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
                              - 8 -

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.3     In those

sections where only a contractual relationship is contemplated,

"arrangement" is modified by the word "contractual".4

     3
        See, e.g., sec. 401(a)(30) (dealing with employee benefit
plans), which includes the following language: "all other plans,
contracts, or arrangements"; sec. 4003(d) (dealing with excise
taxes on vehicles, parts and accessories), which includes the
following language: "In the case of a contract, sale, or
arrangement"; sec. 4975(d)(2) (dealing with excise taxes on
prohibited transactions), which includes the following language:
"any contract, or reasonable arrangement"; and sec. 7701(e)(3)
(a definitional section), which includes the following language:
"Special rules for contracts or arrangements involving solid
waste disposal, energy, and clean water facilities."
     4
        See, e.g., sec. 465(c)(6)(B) (pertaining to the rules
applicable with respect to accounting periods), which includes
the following language: "The term 'equipment leasing' does not
include the leasing of master sound recordings, and other similar
contractual arrangements"; and sec. 4216(b)(5)(B) (dealing with
excise taxes on containers), which includes the following
language: "the lowest price shall be determined * * * without
                                                   (continued...)
                               - 9 -

     In examining the arrangement with respect to the production

of agricultural products on petitioner's property, therefore, we

look not only to the obligations imposed upon petitioner by the

leases, but to those obligations that existed within the overall

scheme of the farming operations which were to take place on

petitioner's property.   These include petitioner's obligations as

a partner in Mizell Farm pursuant to the partnership agreement,

as well as the general understanding between petitioner and his

sons with respect to the production of agricultural products on

his property.   Viewed in this manner, the arrangement provided,

or contemplated, that petitioner was to materially participate in

the production of agricultural products on the property.

     Based upon the record as a whole, we find that petitioner

and his sons understood and contemplated that petitioner was to

"engage to a material degree in the physical work related to the

production of * * * [agricultural] commodities" on his property.

Sec. 1.1402(a)-4(b)(3)(ii), Income Tax Regs.   The partnership

agreement required him to do so, as he concedes, and the leases

in turn contemplated that he, as a member of the partnership,

would materially participate in such production.   We further

find, taking into consideration the leases, the partnership

agreement and the general understanding between the petitioner

     4
      (...continued)
including any fixed amount to which the purchaser has a right as
a result of contractual arrangements existing at the time of
sale."
                              - 10 -

and his sons, that the rents were received by petitioner in

connection with an arrangement that provided for petitioner's

material participation in the production of agricultural products

on his property.   Accordingly, the rental income from the

agricultural leases is included in petitioner's net earnings from

self-employment pursuant to section 1402(a)(1) for each of the

years in issue.

     Because of our construction of the word "arrangement" as

used in section 1402(a)(1), we need not consider whether the

leases, in and of themselves, provided for petitioner's material

participation in the production of agricultural products on the

property.

     To reflect the foregoing,



                                         Decision will be entered

                                    for respondent.
