Federal Court Rules That CRP Rents Paid To Non-Farmer Are Not Subject To Self-Employment Tax

For several decades, the IRS and the courts have issued various rulings and opinions concerning whether Conservation Reserve Program (CRP) payments are subject to self-employment tax. Until 2003, the IRS (and the courts) took the position that a taxpayer had to be "materially participating" in a farming operation for CRP payments to be subject to self-employment tax. In 2003, however, the IRS took the position that simply signing a CRP contract resulted in the signing taxpayer being "engaged in farming." This resulted in CRP payments being subject to self-employment tax.

In 2013, the U.S. Tax Court concurred with the IRS. The impact of the Tax Court's decision could have been extensive by making "passive investors" in farmland and "non-farming heirs" subject to self-employment tax on CRP rental income. 

However, on October 10, 2014, the Eighth Circuit Court of Appeals reversed the Tax Court's opinion and ruled that CRP payments to a non-farmer are rents from real estate, not subject to self-employment tax.

The Iowa State University Center for Agricultural Law & Taxation has an excellent article discussing this case and its impact on South Dakota farmers.