                         T.C. Memo. 2004-55



                       UNITED STATES TAX COURT



         JERE J. AND PAULETTE M. SOLVIE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9525-98.              Filed March 9, 2004.



     Garry A. Pearson, Jon J. Jensen, and Alexander F. Reichert,

for petitioners.

     Blaine C. Holiday, for respondent.




             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined deficiencies of

$3,248, $3,577, and $5,817 in petitioners’ Federal income tax

(tax) for 1993, 1994, and 1995, respectively.
                               - 2 -

     We must decide1 whether certain amounts (reduced by the

deductions attributable to such amounts) that petitioners re-

ceived during 1995 and that they characterized as rent are

subject to self-employment tax under section 1402(a)(1).2    We

hold that they are.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found

except as discussed below.

     At the time petitioners filed the petition in this case,

they resided in Hancock, Minnesota.

     In 1968, Jere J. Solvie (Mr. Solvie) began farming.    In

1970, Paulette M. Solvie (Ms. Solvie) began farming with Mr.

Solvie.   Prior to 1991, petitioners farmed 928 acres of land, 415

acres of which they owned.   Third parties owned the remaining 513

acres.3


     1
      In addition to the issue that we address herein, there is
another determination in the notice of deficiency (notice) for
1995 that is computational in that its resolution flows automati-
cally from our resolution of that issue.
     2
      All section references are to the Internal Revenue Code in
effect for 1995. All Rule references are to the Tax Court Rules
of Practice and Procedure.
     3
      The parties stipulated that petitioners farmed 928 acres of
land, 415 acres of which they owned and 531 acres of which third
parties owned. That stipulation insofar as it pertains to the
number of acres that third parties owned is clearly contrary to
the record in the instant case, and we shall disregard that
stipulation to that extent. See Cal-Maine Foods, Inc. v. Commis-
sioner, 93 T.C. 181, 195 (1989). On brief, respondent acknowl-
                                                   (continued...)
                               - 3 -

     Prior to 1991, Mr. Solvie participated in the management of,

and in all phases of, crop production and animal production by

performing, inter alia, the following farm-related activities in

the production of agricultural commodities (i.e., hogs):   Loading

of the hogs; washing the facilities; checking the feed lines and

water levels; refilling the feed lines when necessary; and

observing hogs for disease.   Prior to 1991, Ms. Solvie performed

the following farm-related activities in the production of

agricultural commodities:   Entering data into the bookkeeping

system; accounting; conferring with accountants about bookkeeping

and return preparation; picking up orders and spare parts; and

running errands.   Prior to 1991, the farming operation had the

capacity to process 1,000 head of hogs.

     In December 1991, petitioners formed JJ & P Farms, Inc.

Petitioners each owned 50 percent of the stock of JJ & P Farms,

Inc., and they comprised the board of directors (board) of that

company.   At all relevant times, JJ & P Farms, Inc., engaged in

the farming business, specifically raising hogs for the produc-

tion of pork.   During 1993, 1994, and 1995, JJ & P Farms, Inc.,

farmed the same 928 acres of land that petitioners had farmed

prior to 1991, 415 acres of which petitioners owned.   Third




     3
      (...continued)
edges that that stipulation is not accurate and that third
parties owned 513 acres.
                               - 4 -

parties owned the remaining 513 acres.4

     After the formation of JJ & P Farms, Inc., that company

hired Mr. Solvie and Ms. Solvie pursuant to an oral arrangement

(oral employment arrangement)5 under which Mr. Solvie was to

serve as its chief executive officer (CEO), its chief financial

officer (CFO), and a member of its board and Ms. Solvie was to

serve as a member of its board.   Under that arrangement, Mr.

Solvie and Ms. Solvie were to perform in their respective capaci-

ties the same farm-related activities in the production of

agricultural commodities that they had been performing prior to

1991 (petitioners’ farm-related activities).   Pursuant to the

oral employment arrangement, at all relevant times, including

during 1993, 1994, and 1995, Mr. Solvie,6 as CEO, CFO, and a

board member, and Ms. Solvie,7 as a board member, performed those

activities.   After petitioners incorporated JJ & P, Farms, Inc.,

in 1991 and before petitioners built an 800-head capacity hog

barn in 1995 (discussed below), the farming operation had the

capacity to process 1,000 head of hogs.



     4
      See supra note 3.
     5
      During 1993, 1994, and 1995, petitioners had no written
employment agreement with JJ & P Farms, Inc.
     6
      At all relevant times, Mr. Solvie spent 100 percent of his
time working for JJ & P Farms, Inc.
     7
      At all relevant times, Ms. Solvie spent virtually 100
percent of her time working for JJ & P Farms, Inc.
                              - 5 -

     During 1993, 1994, and 1995, JJ & P Farms, Inc., paid wages

to petitioners in exchange for petitioners’ farm-related activi-

ties in the production of agricultural commodities.   During 1995,

the wages that that company paid to petitioners for such farm-

related activities were calculated without regard to such activi-

ties that petitioners performed with respect to processing hogs

through the 800-head capacity hog barn that petitioners built in

1995.

     During 1993 and 1994, petitioners leased to JJ & P Farms,

Inc., pursuant to an oral arrangement (oral rental arrangement)

farmland,8 including existing buildings on that land (petition-

ers’ farmland), and certain personal property (petitioners’

personal property) that they owned.9   Pursuant to the oral rental

arrangement, during each of the years 1993 and 1994, JJ & P

Farms, Inc., was required to, and did, pay to petitioners rent of

$29,400 for petitioners’ farmland, exclusive of existing build-

ings on that land, and rent of $21,000 for the buildings on that




     8
      JJ & P Farms, Inc., also leased certain other farmland from
third-party landlords pursuant to oral rental arrangements with
those third-party landlords.
     9
      During 1993 and 1994, petitioners had no written rental
agreement with JJ & P Farms, Inc., with respect to the lease of
petitioners’ farmland and petitioners’ personal property.
                                    - 6 -

land,10 or total rent of $50,400.11

     In 1995, petitioners built an 800-head capacity hog barn

(petitioners’ 800-head capacity hog barn) on petitioners’ farm-

land.        During that year, petitioners and JJ & P Farms, Inc.,

orally modified the oral rental arrangement (modified oral rental

arrangement) to reflect that, after the completion of that barn,

petitioners were leasing to JJ & P Farms, Inc., petitioners’

farmland,12 including petitioners’ 800-head capacity hog barn

located on that land, as well as petitioners’ personal prop-

erty.13       Pursuant to the modified oral rental arrangement, during

1995 JJ & P, Farms, Inc., was required to, and did, pay to

petitioners (1) for petitioners’ farmland and petitioners’


        10
      It is not clear from the record whether in 1993 and 1994
the rent for petitioners’ farmland, exclusive of existing build-
ings on that land (i.e., $29,400) or the rent for the buildings
(i.e., $21,000) on that land included rent for petitioners’
personal property.
        11
      As discussed below, petitioners reported in their 1993 tax
return $52,050 in rent received from the lease of petitioners’
farmland and petitioners’ personal property. The record does not
disclose the reason for the discrepancy between the total amount
of rent that petitioners received during 1993 from such lease
(i.e., $50,400) and the total amount of rent (i.e., $52,050) that
petitioners reported in their 1993 tax return.
        12
      For convenience, unless otherwise indicated, we shall
hereinafter refer to petitioners’ farmland, exclusive of peti-
tioners’ 800-head capacity hog barn located on that land, as
petitioners’ farmland.
        13
      During 1995, petitioners had no written rental agreement
with JJ & P Farms, Inc., with respect to the lease of petition-
ers’ farmland, including petitioners’ 800-head capacity hog barn
located on that land, and petitioners’ personal property.
                                 - 7 -

personal property the same annual rent that that company paid to

them in each of the years 1993 and 1994 (i.e., $29,400 for

petitioners’ farmland, exclusive of existing buildings on that

land, and $21,000 for the buildings on that land) and (2) for

petitioners’ 800-head capacity hog barn $21 per head, per rota-

tion of hogs that petitioners processed through that barn.

Pursuant to that modified rental arrangement, the rent that that

company was required to, and did, pay to petitioners during 1995

with respect to petitioners’ 800-head capacity hog barn depended

on the number of hogs that petitioners processed through that

barn.     During 1995, as a condition to JJ & P Farms, Inc.’s being

obligated pursuant to the modified oral rental arrangement to pay

rent to petitioners for petitioners’ 800-head capacity hog barn,

petitioners were obligated or compelled to perform petitioners’

farm-related activities in the production by that company of

agricultural commodities by processing hogs through that barn.14

If during 1995 petitioners had not performed any of petitioners’

farm-related activities in the production by JJ & P Farms, Inc.,

of agricultural commodities with respect to petitioners’ 800-head

capacity hog barn and therefore did not process any hogs through


     14
      If during 1995 petitioners became sick or incapacitated or
otherwise were unable to perform for JJ & P Farms, Inc., peti-
tioners’ farm-related activities in the production of agricul-
tural commodities by processing hogs through petitioners’ 800-
head capacity hog barn, that company was not obligated pursuant
to the modified oral rental arrangement to pay rent to them for
petitioners’ 800-head capacity hog barn.
                                 - 8 -

that barn, under the modified oral rental arrangement they would

not have received any rent from that company with respect to that

barn.     To the extent that during 1995 petitioners performed such

activities by processing hogs through petitioners’ 800-head

capacity hog barn, they would have received from JJ & P Farms,

Inc., with respect to that barn $21 per head, per rotation of

hogs processed through that barn.     During 1995, petitioners

processed approximately three rotations of hogs through petition-

ers’ 800-head capacity hog barn as a result of petitioners’ farm-

related activities, and consequently petitioners received $44,500

from JJ & P Farms, Inc., with respect to that barn.

     Petitioners jointly filed Form 1040, U.S. Individual Income

Tax Return, for each of their taxable years 1993 (petitioners’

1993 return), 1994 (petitioners’ 1994 return), and 1995 (peti-

tioners’ 1995 return).     In petitioners’ 1993 return, petitioners

reported that Mr. Solvie received $18,423.6215 of wages from JJ &

P Farms, Inc.     In that return, petitioners reported that Ms.

Solvie received $80 of “Wages, salaries, tips, etc.” from “MORRIS

PUBLIC SCHOOLS”, $24 of “Wages, salaries, tips, etc.” from “IND.


     15
      The parties stipulated that petitioners reported in peti-
tioners’ 1993 return that Mr. Solvie received $18,432.62 of wages
from JJ & P, Farms, Inc. That stipulation is clearly contrary to
petitioners’ 1993 return. That return shows that petitioners
reported that for 1993 Mr. Solvie received $18,423.62 of wages
from JJ & P Farms, Inc. We shall disregard the parties’ stipula-
tion regarding the amount of wages that petitioners reported in
petitioners’ 1993 return Mr. Solvie received from JJ & P Farms,
Inc. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. at 195.
                                - 9 -

SCHOOL DIST. # 611”, and $13,122.3816 of wages from JJ & P Farms,

Inc.    In Schedule E, Supplemental Income and Loss (Schedule E),

included as part of petitioners’ 1993 return, petitioners re-

ported $52,050 in rent received from the rental of petitioners’

farmland and petitioners’ personal property (1993 claimed rent),

$27,212 in expenses, and $24,838 in total rental real estate

income.

       In petitioners’ 1994 return, petitioners reported that Mr.

Solvie and Ms. Solvie received $16,356.29 and $5,808.86,17 re-



       16
      The parties stipulated that petitioners reported in peti-
tioners’ 1993 return that Ms. Solvie received $13,122.21 of wages
from JJ & P, Farms, Inc. That stipulation is clearly contrary to
petitioners’ 1993 return. That return shows that petitioners
reported that for 1993 they received a total of $31,650 of
“Wages, salaries, tips, etc.”, $18,423.62 of which Mr. Solvie
reported as wages from JJ & P Farms, Inc., and $104 of which Ms.
Solvie reported as wages from sources other than JJ & P Farms,
Inc. The difference between (1) the total of the wages (i.e.,
$31,650) reported from all sources and (2) the total of the wages
(i.e., $18,527.62) that Mr. Solvie reported from JJ & P Farms,
Inc., (i.e., $18,423.62) and the total of the wages that Ms.
Solvie reported from sources other than that company (i.e., $104)
is $13,122.38. We shall disregard the parties’ stipulation
regarding the amount of wages that petitioners reported in
petitioners’ 1993 return Ms. Solvie received from JJ & P Farms,
Inc. See Cal-Maine Foods, Inc. v. Commissioner, supra.
       17
      The parties stipulated that petitioners reported in peti-
tioners’ 1994 return that Ms. Solvie received $5,808 of wages
from JJ & P, Farms, Inc. Petitioners’ 1994 return shows that
petitioners reported that for 1994 Ms. Solvie received $5,808.86
of wages from JJ & P Farms, Inc. The parties erroneously stipu-
lated down to the nearest dollar instead of up to the nearest
dollar. We shall disregard the parties’ stipulation regarding
the amount of wages that petitioners reported in petitioners’
1994 return Ms. Solvie received from JJ & P Farms, Inc. See Cal-
Maine Foods, Inc. v. Commissioner, supra.
                             - 10 -

spectively, of wages from JJ & P Farms, Inc.   In Schedule E

included as part of petitioners’ 1994 return, petitioners re-

ported $50,400 in rent received from the rental of petitioners’

farmland and petitioners’ personal property (1994 claimed rent),

$23,015 in expenses, and $27,385 in total rental real estate

income.

     In petitioners’ 1995 return, petitioners reported that Mr.

Solvie received $17,439 of wages from JJ & P Farms, Inc.   In that

return, petitioners reported that Ms. Solvie received $95 of

“Wages, salaries, tips, etc.” from “MORRIS PUBLIC SCHOOLS” and

$3,410 of wages from JJ & P Farms, Inc.   In Schedule E included

as part of petitioners’ 1995 return, petitioners reported a total

of $94,900 in rent received from the rental of petitioners’

farmland, including petitioners’ 800-head capacity hog barn

located on that land, as well as petitioners’ personal property

(1995 total claimed rent), $50,384 in expenses, and $44,516 in

total rental real estate income.   Of the $94,900 of 1995 total

claimed rent that petitioners reported in petitioners’ 1995

return, $50,400 was attributable to petitioners’ farmland and

petitioners’ personal property (1995 claimed rent for petition-

ers’ farmland and petitioners’ personal property) and $44,500 was

attributable to petitioners’ 800-head capacity hog barn (1995

claimed rent for petitioners’ 800-head capacity hog barn).

     The 1993 claimed rent and the 1994 claimed rent that peti-
                              - 11 -

tioners received from JJ & P Farms, Inc., pursuant to the oral

rental arrangement and the 1995 claimed rent for petitioners’

farmland and petitioners’ personal property that petitioners

received from that company pursuant to the modified oral rental

arrangement represented fair market rents.

     JJ & P Farms, Inc., filed Form 1120, U.S. Corporation Income

Tax Return, for its taxable year 1995 (JJ & P Farms, Inc.’s 1995

return).   In JJ & P Farms, Inc.’s 1995 return, JJ & P Farms,

Inc., reported that it paid $17,439 of compensation to Mr. Solvie

as an officer of that company and $3,410 of compensation to Ms.

Solvie as an officer.   In that return, JJ & P Farms, Inc.,

reported that it paid $6,989 of salaries and wages, although it

did not identify in that return the person or persons to whom it

paid those wages.   In JJ & P Farms, Inc.’s 1995 return, JJ & P

Farms, Inc., reported that it paid $142,634 in rent, although it

did not specify in that return the amount of such rent that it

paid to petitioners during its taxable year 1995.

     On March 20, 1998, respondent issued a notice to petitioners

with respect to their taxable years 1993, 1994, and 1995.     In

that notice, respondent determined that the 1993 claimed rent,

the 1994 claimed rent, and the 1995 total claimed rent, reduced

by the deductions attributable to such respective rents, are

subject to self-employment tax because they constitute net

earnings from self-employment under section 1402(a)(1).
                             - 12 -

                             OPINION

     Petitioners bear the burden of proving that the determina-

tions in the notice that remain at issue are erroneous.18    See

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Respondent no longer maintains, as respondent did in the

notice, that the 1993 claimed rent, the 1994 claimed rent, and

the 1995 claimed rent for petitioners’ farmland and petitioners’

personal property that petitioners received from JJ & P Farms,

Inc., are subject to self-employment tax.   The only dispute

remaining between the parties that we must resolve is whether the

1995 claimed rent for petitioners’ 800-head capacity hog barn,

reduced by the deductions attributable to such rent, is subject

to self-employment tax because it constitutes net earnings from

self-employment under section 1402(a)(1).

     As applicable here, section 1402(a)(l) defines the term “net

earnings from self-employment” to mean

     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 business * * * except
     that in computing such gross income and deductions
     * * *--

               (1) there shall be excluded rentals from real


     18
      Sec. 7491(a) is not applicable in the instant case. That
is because respondent issued the notice to petitioners on Mar.
20, 1998, and a fortiori the examination of the years involved
here would have commenced before July 23, 1998. See Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, sec. 3001(c), 112 Stat. 727.
                             - 13 -

          estate and from personal property leased with the
          real estate * * * together with the deductions
          attributable thereto * * * except that the preced-
          ing 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 ar-
          rangement, between the owner or tenant and another
          individual, which provides that such other indi-
          vidual shall produce agricultural * * * commodi-
          ties * * * 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;

(The regulations under section 1402(a)(1), and we, refer to the

farm rental income that is included under that section in the

definition of net earnings from self-employment as includible

farm rental income.)

     The regulations under section 1402(a)(1) elaborate on the

meaning of includible farm rental income, as follows:

          (b) Special rule for “includible farm rental
     income”--(1) In general. * * * there shall be included
     in determining net earnings from self-employment for
     taxable years ending after 1955 any income derived by
     an owner or tenant of land, if the following require-
     ments are met with respect to such income:

          (i) The income is derived under an arrangement
     between the owner or tenant of land 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 or
     tenant in the production or the management of the
     production of such agricultural * * * commodities; and

          (ii) There is material participation by the owner
     or tenant with respect to any such agricultural * * *
     commodity.
                             - 14 -

     Income so derived shall be referred to in this section
     as “includible farm rental income”.

          (2) Requirement that income be derived under an
     arrangement. In order for rental income received by an
     owner or tenant of land to be treated as includible
     farm rental income, such income must be derived pursu-
     ant to a sharefarming or other rental arrangement which
     contemplates material participation by the owner or
     tenant in the production or management of production of
     agricultural * * * commodities.

          (3) Nature of arrangement. (i) The arrangement
     between the owner or tenant and the person referred to
     in subparagraph (1) of this paragraph may be either
     oral or written. The arrangement must impose upon such
     other person the obligation to produce one or more
     agricultural * * * commodities * * * on the land of the
     owner or tenant. In addition, it must be within the
     contemplation of the parties that the owner or tenant
     will participate in the production or the management of
     the production of the agricultural * * * commodities
     required to be produced by the other person under such
     arrangement to an extent which is material with respect
     either to the production or to the management of pro-
     duction of such commodities or is material with respect
     to the production and management of production when the
     total required participation in connection with both is
     considered.

        *       *       *       *       *       *       *

          (4) Actual participation. In order for the rental
     income received by the owner or tenant of land to be
     treated as includible farm rental income, not only must
     it be derived pursuant to the arrangement described in
     subparagraph (1) of this paragraph, but also the owner
     or tenant must actually participate to a material
     degree in the production or in the management of the
     production of any of the commodities required to be
     produced under the arrangement, or he must actually
     participate in both the production and the management
     of the production to an extent that his participation
     in the one when combined with his participation in the
     other will be considered participation to a material
     degree. * * *

Sec. 1.1402(a)-4(b), Income Tax Regs.
                              - 15 -

     The parties agree that during 1995 petitioners were to, and

did, participate materially within the meaning of section

1402(a)(1) in the production by JJ & P Farms, Inc., of agricul-

tural commodities by performing petitioners’ farm-related activi-

ties with respect to, inter alia, processing hogs through peti-

tioners’ 800-head capacity hog barn.   They disagree over whether

the 1995 claimed rent for that barn was derived under an arrange-

ment within the meaning of section 1402(a)(1)(A) and section

1.1402(a)-4(b)(2), Income Tax Regs., between petitioners and JJ &

P Farms, Inc., which provided or contemplated, inter alia, that

JJ & P Farms, Inc., was to produce agricultural commodities in

that barn and that petitioners were to participate materially in

the production of such commodities by processing hogs through

that barn.

     It is petitioners’ position that the 1995 claimed rent for

petitioners’ 800-head capacity hog barn was not derived under

such an arrangement and that consequently such claimed rent,

reduced by the deductions attributable to such rent, is not

subject to self-employment tax because it does not constitute

includible farm rental income under section 1402(a)(1) and the

regulations thereunder.   In support of their position, petition-

ers rely on the opinion of the Court of Appeals for the Eighth

Circuit in McNamara v. Commissioner, 236 F.3d 410 (8th Cir.

2000), revg. and remanding Bot v. Commissioner, T.C. Memo. 1999-
                              - 16 -

256, Hennen v. Commissioner, T.C. Memo. 1999-306, and McNamara v.

Commissioner, T.C. Memo. 1999-333.19   In reliance on McNamara II,

petitioners contend that

     the Solvies are receiving fair market value rental
     payments. The Solvies are also receiving other compen-
     sation for the services they provide to the corpora-
     tion. The simple fact that they are participating in
     the farming operation does not establish the required
     nexus between the rental payments and the material
     participation necessary to trigger the inclusion of the
     payments within the definition of self-employment
     income. To the contrary, adoption of the Commis-
     sioner’s position would compel the conclusion that the
     Solvies, as landlords, are required to rent property to
     the corporation at below fair market value and below
     the rates paid to third parties. The “missing link” in
     the Commissioner’s argument is the same as in the
     McNamara case: the corporation’s obligation to make
     the rental payments is separate and distinct from the
     taxpayers’ participation in the farming operation.

     Respondent counters that McNamara II does not require the

result advocated by petitioners in the instant case.   Respondent

argues that

          The Eighth Circuit in McNamara * * * created a
     judicial exception for fair rental value when the
     landlord has two independent arrangements with the
     lessee for rent and wages and there is no nexus between
     the two arrangements.

          Petitioners fail to meet the Eighth Circuit’s
     standard because they failed to establish the fair
     rental value of the new facilities used by the corpora-
     tion in 1995 or that a separate employment agreement
     existed for petitioners’ services related to the addi-
     tional activities carried on in the new facilities.


     19
      We shall refer to our respective opinions that the Court
of Appeals for the Eighth Circuit reversed and remanded as Bot I,
Hennen I, and McNamara I and to the opinion of that Court as
McNamara II.
                               - 17 -

     Petitioners’ classification of all funds from the
     corporation for use of the new facilities in 1995 as
     rent, and none as wages, demonstrates that there were
     not independent arrangements with respect to real
     estate rentals and compensation for services. More-
     over, the transaction does not pass muster given the
     strict scrutiny apple [sic] to such related-party
     transactions, and given that exceptions from self-
     employment tax under § 1402(a)(1) are narrowly con-
     strued.

     Bot I, Hennen I, and McNamara I involved taxpayers who,

pursuant to certain agreements or arrangements, were to, and did,

participate materially in the production of agricultural commodi-

ties involved in those respective cases.   In Bot I and Hennen I,

the taxpayer-owners of the farmland in question entered into

(1) employment agreements or arrangements with their respective

taxpayer-spouses and (2) rental agreements or arrangements with

those spouses.   In McNamara I, the taxpayer-owners of the farm-

land in question entered into (1) an employment agreement or

arrangement with their wholly owned corporation and (2) a rental

agreement or arrangement with that corporation.

     In Bot I and Hennen I, the taxpayer-owners of the farmland

in question contended that the respective rental agreements or

arrangements involved in those cases did not require their

material participation in the production of the agricultural

commodities in question.   We found that the respective taxpayer-

owners in Bot I and Hennen I played a material role in the

production of such commodities under an agreement or arrangement

with their taxpayer-spouses.   We further found in Bot I and
                              - 18 -

Hennen I that the income received from the rental of the respec-

tive taxpayer-owners’ farmland in question was derived under an

arrangement between the taxpayer-owners of the farmland and their

taxpayer-spouses, which provided that those spouses were to

produce agricultural commodities on that land and that the

taxpayer-owners were to participate materially in the production

of such commodities.   We held in Bot I and Hennen I that the

rents at issue in those cases, reduced by the deductions attrib-

utable to such respective rents, were subject to self-employment

tax because they constituted includible farm rental income under

section 1402(a)(1).

     In McNamara I, the taxpayer-owners of the farmland in

question contended that the rental agreement or arrangement

involved in that case did not require their material participa-

tion in the production of the agricultural commodities in ques-

tion.   We found that the taxpayer-owners played a material role

in production of such commodities under an agreement or arrange-

ment with their wholly owned corporation.   We further found in

McNamara I that the income received from the rental of the

taxpayers’ farmland in question was derived under an arrangement

between the taxpayer-owners and their wholly owned corporation,

which provided that that corporation was to produce agricultural

commodities on that land and that the taxpayer-owners were to

participate materially in the production of such commodities.     We
                                - 19 -

held in McNamara I that the rent at issue in that case, reduced

by the deductions attributable to such rent, was subject to self-

employment tax because it constituted includible farm rental

income under section 1402(a)(1).

     The taxpayers in Bot I, Hennen I, and McNamara I appealed

our respective decisions in those cases to the Court of Appeals

for the Eighth Circuit.   That Court decided those appeals in one

opinion in McNamara II.   In McNamara II, the Court of Appeals for

the Eighth Circuit concluded:

     we cannot say the Tax Court clearly erred in conclud-
     ing, as a factual matter, that Mrs. McNamara, Mrs. Bot,
     and Mrs. Hennen were required–-by their respective
     employment agreements or by more informal “arrange-
     ments”–-to materially participate in agricultural
     production and management, and that all three did in
     fact materially participate in those activities. See
     Treas. Reg. § 1.1402(a)-4(b) (as amended in 1980).

          More promising, however, is taxpayers’ argument
     that the lessor-lessee relationships should stand on
     their own apart from the employer-employee relation-
     ships. To this end, taxpayers insist that the rents in
     question were consistent with market rates for agricul-
     tural land. In fact, the transcripts of each trial
     contain uncontradicted testimony that the rents were at
     or slightly below fair market value. * * * The Tax
     Court’s decision, however, contains no factual finding
     in this regard. Moreover, the Commissioner apparently
     did not pursue the issue at trial because, as it con-
     tended at oral argument, the amount of the rent is
     irrelevant. We disagree.

          What is missing from both the Commissioner’s and
     the Tax Court’s analyses is any mention of a nexus
     between the rents received by Taxpayers and the “ar-
     rangement” that requires the landlords’ material par-
     ticipation. We believe this omission overlooks §
     1402(a)(1)’s requirement that rents be “derived under”
     such an arrangement. That is to say, the mere exis-
                             - 20 -

     tence of an arrangement requiring and resulting in
     material participation in agricultural production does
     not automatically transform rents received by the
     landowner into self-employment income. It is only
     where the payment of those rents comprise part of such
     an arrangement that such rents can be said to derive
     from the arrangement.

          Rents that are consistent with market rates very
     strongly suggest that the rental arrangement stands on
     its own as an independent transaction and cannot be
     said to be part of an “arrangement” for participation
     in agricultural production. Although the Commissioner
     is correct that, unlike other provisions in the Code,
     § 1402(a)(1) contains no explicit safe-harbor provision
     for fair market value transactions, we conclude that
     this is the practical effect of the “derived under”
     language.

McNamara v. Commissioner, 236 F.3d at 412-413.

     The Court of Appeals for the Eighth Circuit remanded Bot I,

Hennen I, and McNamara I in order to provide the Commissioner of

Internal Revenue the opportunity to show that a connection

existed between the respective rents and the respective employ-

ment agreements or arrangements involved in those cases.   On

remand, the respective parties in Bot I, Hennen I, and McNamara I

declined our invitation to conduct additional trials.   As a

result, we found that the rent at issue in each of those cases

was at or below market rates and decided that no deficiency in

self-employment tax existed in any of those cases.

     In Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd.

445 F.2d 985 (10th Cir. 1971), we concluded that we would follow

a Court of Appeals opinion which is squarely in point where

appeal from our decision would lie to that Court of Appeals and
                              - 21 -

to that court alone.   In the instant case, during 1995 petition-

ers had two arrangements with JJ & P Farms, Inc.:    (1) An oral

employment arrangement under which petitioners were to, and did,

participate materially in the production by JJ & P Farms, Inc.,

of agricultural commodities by performing petitioners’ farm-

related activities with respect to, inter alia, processing hogs

through petitioners’ 800-head capacity hog barn; and (2) a

modified oral rental arrangement under which petitioners leased

to JJ & P Farms, Inc., inter alia, that barn.    There were two

identical types of arrangements involved in McNamara II.    The

issue presented here is whether the 1995 claimed rent at issue,

reduced by the deductions attributable to such rent, is subject

to self-employment tax because it constitutes includible farm

rental income under section 1402(a)(1).   That was the identical

issue presented in McNamara II.   We conclude that McNamara II is

squarely in point.   Moreover, the court to which an appeal in

this case would normally lie is the Court of Appeals for the

Eighth Circuit.   We shall follow McNamara II.   Golsen v. Commis-

sioner, supra.

     As required by McNamara II, we must determine whether there

was a nexus between (1) the 1995 claimed rent for petitioners’

800-head capacity hog barn that petitioners received pursuant to

the modified oral rental arrangement and (2) the oral employment

arrangement under which petitioners were to, and did, participate
                               - 22 -

materially in the production by JJ & P Farms, Inc., of agricul-

tural commodities by performing petitioners’ farm-related activi-

ties with respect to, inter alia, processing hogs through that

barn.20   As we understand their position, petitioners contend

(1) that the 1995 claimed rent for petitioners’ 800-head capacity

hog barn represented fair market rent and (2) that petitioners

received compensation, which did not include such rent, for



     20
      We note that in McNamara I there is no indication that the
parties advanced, and the Court did not address, any argument
that, because the taxpayer-owners of the farmland in that case
materially participated within the meaning of sec. 1402(a)(1) in
the production of agricultural commodities as employees of their
wholly owned corporation and not in their individual capacities,
the analysis under sec. 1402(a)(1) should be different from the
analysis in Bot I and Hennen I, where the taxpayer-owners of the
farmland involved in those two cases materially participated
within the meaning of sec. 1402(a)(1) in the production of
agricultural commodities in their individual capacities. In
McNamara II, there is no indication that the taxpayers appealing
McNamara I advanced, and the Court of Appeals for the Eighth
Circuit did not address, any argument that the analysis under
sec. 1402(a)(1) with respect to such taxpayers should be any
different from the analysis with respect to the taxpayers appeal-
ing Bot I and Hennen I.

     In the instant case, neither petitioners nor respondent
advances any argument that the analysis under sec. 1402(a)(1)
should be different from the analysis in McNamara II because
petitioners materially participated within the meaning of sec.
1402(a)(1) in the production by JJ & P Farms, Inc., of agricul-
tural commodities as employees of JJ & P Farms, Inc., and not in
their individual capacities. Indeed, petitioners rely solely on
the analysis in McNamara II to support their position in the
instant case. Consequently, we shall not address whether our
analysis would be different in the instant case because petition-
ers materially participated within the meaning of sec. 1402(a)(1)
in the production of agricultural commodities by JJ & P Farms,
Inc., as employees of JJ & P Farms, Inc., and not in their
individual capacities.
                               - 23 -

petitioners’ farm-related activities in the production by JJ & P

Farms, Inc., of agricultural commodities with respect to process-

ing hogs through that barn.   Consequently, according to petition-

ers, no nexus existed between (1) the 1995 claimed rent for

petitioners’ 800-head capacity hog barn that petitioners received

pursuant to the modified oral rental arrangement and (2) the oral

employment arrangement under which petitioners were to, and did,

participate materially in the production by JJ & P Farms, Inc.,

of agricultural commodities by performing petitioners’ farm-

related activities with respect to, inter alia, processing hogs

through that barn.

     We turn to petitioners’ contention that the 1995 claimed

rent for petitioners’ 800-head capacity hog barn represented fair

market rent.    In support of that contention, petitioners rely on

the following testimony of Mr. Solvie in response to the follow-

ing question by petitioners’ counsel on direct examination of Mr.

Solvie:21

          Q    Okay. The rent that you [acting on behalf of
     JJ & P Farms, Inc.] paid for the new hog barn, was it
     above, below, or at fair market value for your area?

            A    About fair market value.   Fair market value.



     21
      In addition to relying on Mr. Solvie’s testimony to sup-
port their position that the 1995 claimed rent for petitioners’
800-head capacity hog barn represented fair market rent, peti-
tioners contend that respondent stipulated that that rent repre-
sented fair market rent. That contention is wrong. Respondent
did not stipulate that that rent represented fair market rent.
                              - 24 -

We understand the foregoing question by petitioners’ counsel to

be asking whether the total rent that JJ & P Farms, Inc., paid to

petitioners during 1995 with respect to petitioners’ 800-head

capacity hog barn (i.e., $44,500) was above, below, or at fair

market value.   However, the rent that that company was required

to, and did, pay to petitioners during 1995 with respect to that

barn was not $44,500, but was $21 per head, per rotation of hogs

that petitioners processed through that barn.   There is nothing

in the record establishing that $21 per head, per rotation of

hogs that petitioners processed through petitioners’ 800-head

capacity hog barn represented fair market rent for such barn.22


     22
      Assuming arguendo that it were proper for the colloquy
between petitioners’ counsel and Mr. Solvie to have focused on
the total rent that JJ & P Farms, Inc., paid to petitioners
during 1995 with respect to petitioners’ 800-head capacity hog
barn (i.e., $44,500), instead of on the rent of $21 per head, per
rotation of hogs that petitioners processed through that barn, we
are not persuaded by Mr. Solvie’s testimony, which we found to be
vague and ambiguous, that such total rent paid represented fair
market rent. Mr. Solvie’s use of the word “about” as a qualifier
to the phrase “fair market value” raises a serious question in
our mind as to whether Mr. Solvie was testifying that the total
rent that JJ & P Farms, Inc., paid to petitioners during 1995 was
below, at, or above fair market rent. Mr. Solvie’s repeating the
phrase “fair market value” does not clarify but instead compounds
the vagueness and ambiguity of his testimony that such total rent
paid was “about fair market value.” Moreover, we found Mr.
Solvie’s testimony to be general, vague, ambiguous, self-serving,
uncorroborated, and/or internally inconsistent in certain other
material respects. For example, the following exchange took
place during the cross-examination by respondent’s counsel of Mr.
Solvie:

          Q    But the rent that you received for the new
     facility was wholly dependent upon the number of pigs
                                                   (continued...)
                                 - 25 -

     Assuming arguendo that it were proper for the question posed

to Mr. Solvie by petitioners’ counsel to have focused on the

total rent that JJ & P Farms, Inc., paid to petitioners during

1995 with respect to petitioners’ 800-head capacity hog barn

(i.e., $44,500) and that Mr. Solvie had clearly and unambiguously

testified that such rent paid represented fair market rent, on

the instant record we would not rely on such testimony.    The

record establishes that, after petitioners incorporated JJ & P

Farms, Inc., in 1991 and before petitioners built petitioners’

     22
      (...continued)
     that went through the barn.

          A    No.   Not–-yes.    I suppose it would.

          Q    And so if the new facility sat empty, you
     would receive no rent.

          A    No. We were going to get rent whether we
     were using it or not.

          Q    Well, you leased it to the corporation for
     $21 per head per rotation. If the corporation put no
     hogs through that barn, you would receive no rent from
     the corporation.

          A    No. We were–-[the] number of pigs or any-
     thing were not tied to the corporation. We were going
     to get money for that, regardless of if the pigs went
     through or not.

          Q    The parties have stipulated that the lease
     agreement was $21 per head, per rotation. If there was
     no pigs that went through and no rotations, how would
     you get any rent?

          A    I don’t know.

We shall not rely on Mr. Solvie’s testimony to establish peti-
tioners’ position in this case.
                             - 26 -

800-head capacity hog barn in 1995, the farming operation had the

capacity to process 1,000 head of hogs.   During each of the years

1993, 1994, and 1995, JJ & P Farms, Inc., was required to, and

did, pay to petitioners fair market rent of $21,000 for the

buildings, exclusive of that barn, located on petitioners’

farmland that had the capacity to process 1,000 head of hogs.

Although not entirely clear from the record, it appears that,

after petitioners built petitioners’ 800-head capacity hog barn

in 1995, the farming operation of JJ & P Farms, Inc., had the

capacity to process not only 1,000 head of hogs in those build-

ings but also an additional 800 head of hogs in that barn.    We

find it difficult to believe that during 1995 buildings, with the

capacity to process 1,000 head of hogs, would have generated

annual fair market rent of $21,000 while petitioners’ 800-head

capacity hog barn, with the capacity to process 800 head of hogs

and with rent for such barn calculated as $21 per head, per

rotation of hogs that petitioners processed through that barn,

would have generated annual fair market rent of $44,500--the

amount of the 1995 claimed rent for petitioners’ 800-head capac-

ity hog barn that petitioners received from JJ & P Farms, Inc.,

during 1995.

     In this connection, at the trial in this case in June 2003

Mr. Solvie, apparently in an attempt to justify having received
                             - 27 -

annual rent for petitioners’ 800-head capacity hog barn during

1995 that was more than twice as much as the annual fair market

rent that petitioners received during that year for petitioners’

other buildings, testified during direct examination as follows

in response to the following question by petitioners’ counsel:

          Q    Can you tell me a little bit about the envi-
     ronment for construction of hog barns in your area?

          A    It’s–-in our area, we’re–-it’s–-right now,
     they’ve been under a building moratorium, because there
     has been a lot of construction going on, and until the
     last couple–-until probably about the last three years,
     so people have pigs, and they want to get their pigs
     into these newer facilities, but they’ve been unable to
     build, so people are really scrambling to try and use
     or rent these facilities that are already existing.
     You can’t get permits anymore to build, so it’s kind
     of–-you know, people are really scrambling to get
     buildings that are already in existence.

We understand the foregoing testimony of Mr. Solvie to be ad-

dressing the availability in June 2003 at the time of trial, and

not in 1995, of new hog barns situated around the geographic

location of petitioners’ 800-head capacity hog barn.   We are not

persuaded by that testimony that a shortage of new hog barns

existed in 1995, which would have resulted in petitioners’ having

received rent in that year for petitioners’ 800-head capacity hog

barn (i.e., $44,500) that was over twice the fair market rent

that petitioners received in that year for the other buildings on

petitioners’ farmland (i.e., $21,000).

     On the record before us, we find that petitioners have

failed to establish that the 1995 claimed rent for petitioners’
                              - 28 -

800-head capacity hog barn represented fair market rent.   Conse-

quently, petitioners’ reliance on the following conclusions of

the Court of Appeals for the Eighth Circuit in McNamara II is

misplaced:23

          Rents that are consistent with market rates very
     strongly suggest that the rental arrangement stands on
     its own as an independent transaction and cannot be
     said to be part of an “arrangement” for participation
     in agricultural production. Although the Commissioner
     is correct that, unlike other provisions in the Code,
     § 1402(a)(1) contains no explicit safe-harbor provision
     for fair market value transactions, we conclude that
     this is the practical effect of the “derived under”
     language.

McNamara v. Commissioner, 236 F.3d at 413.

     We turn now to petitioners’ contention that petitioners

received compensation for petitioners’ farm-related activities in

the production by JJ & P Farms, Inc., of agricultural commodities

with respect to processing hogs through petitioners’ 800-head

capacity hog barn, which did not include the 1995 claimed rent

for such barn.   Petitioners do not point to any evidence in

support of that contention.   That is because there is none.   The

record establishes, indeed Mr. Solvie testified, and we have


     23
      Having found that petitioners have failed to establish
that the 1995 claimed rent for petitioners’ 800-head capacity hog
barn represented fair market rent, we reject petitioners’ argu-
ment that

     adoption of the Commissioner’s position would compel
     the conclusion that the Solvies, as landlords, are
     required to rent property to the corporation at below
     fair market value and below the rates paid to third
     parties. * * *
                               - 29 -

found that during 1995 the wages that JJ & P Farms, Inc., paid to

petitioners for petitioners’ farm-related activities in the

production of agricultural commodities were calculated without

regard to the activities that petitioners performed with respect

to processing hogs through petitioners’ 800-head capacity hog

barn.

     We have rejected the two reasons that petitioners advance in

support of their position that there was no nexus between (1) the

1995 claimed rent for petitioners’ 800-head capacity hog barn

that petitioners received pursuant to the modified oral rental

arrangement and (2) the oral employment arrangement under which

petitioners were to, and did, participate materially in the

production by JJ & P Farms, Inc., of agricultural commodities by

performing petitioners’ farm-related activities with respect to,

inter alia, processing hogs through that barn.   On the record

before us, we find no other reason that would support petition-

ers’ position that there was no such nexus.

     Pursuant to the modified oral rental arrangement, the rent

that JJ & P Farms, Inc., was required to, and did, pay to peti-

tioners during 1995 with respect to petitioners’ 800-head capac-

ity hog barn depended on the number of hogs that petitioners

processed through that barn.   During 1995, as a condition to JJ &

P Farms, Inc.’s, being obligated pursuant to that modified rental

arrangement to pay rent to petitioners for that barn, petitioners
                              - 30 -

were obligated or compelled to perform petitioners’ farm-related

activities in the production by that company of agricultural

commodities by processing hogs through that barn.   If during 1995

petitioners had not performed any of petitioners’ farm-related

activities in the production by JJ & P Farms, Inc., of agricul-

tural commodities with respect to petitioners’ 800-head capacity

hog barn and therefore did not process any hogs through that

barn, under the modified oral rental arrangement they would not

have received any rent from that company with respect to that

barn.   To the extent that during 1995 petitioners performed such

activities by processing hogs through petitioners’ 800-head

capacity hog barn, they would have received from JJ & P Farms,

Inc., with respect to that barn $21 per head, per rotation of

hogs processed through that barn.   During 1995, petitioners

processed approximately three rotations of hogs through petition-

ers’ 800-head capacity hog barn as a result of petitioners’ farm-

related activities, and consequently petitioners received $44,500

from JJ & P Farms, Inc., with respect to that barn, which is the

amount of the 1995 claimed rent for petitioners’ 800-head capac-

ity hog barn.

     Based upon our examination of the entire record in this

case, we find that petitioners have failed to establish that

during 1995 there was no nexus between (1) the 1995 claimed rent

for petitioners’ 800-head capacity hog barn that petitioners
                               - 31 -

received pursuant to the modified oral rental arrangement and

(2) the oral employment arrangement under which petitioners were

to, and did, participate materially in the production by JJ & P

Farms, Inc., of agricultural commodities by performing petition-

ers’ farm-related activities with respect to, inter alia, pro-

cessing hogs through that barn.    On that record, we further find

that petitioners have failed to show that the 1995 claimed rent

for petitioners’ 800-head capacity hog barn was not derived under

an arrangement within the meaning of section 1402(a)(1)(A) and

section 1.1402(a)-4(b)(2), Income Tax Regs., between petitioners

and JJ & P Farms, Inc., which provided or contemplated, inter

alia, that that company was to produce agricultural commodities

in that barn and that petitioners were to participate materially

in the production of such commodities by processing hogs through

that barn.    On the record before us, we hold that petitioners

have failed to establish that the 1995 claimed rent for petition-

ers’ 800-head capacity hog barn, reduced by the deductions

attributable to such rent, is not subject to self-employment tax

because it does not constitute includible farm rental income and

therefore is not net earnings from self-employment under section

1402(a)(1).

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.
                        - 32 -

To reflect the foregoing and the concessions of respondent,


                              Decision will be entered

                         under Rule 155.
