Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 64-32

1964-1 C.B. 319

Sec. 1402

IRS Headnote

A landlord, whose farm is being operated by a tenant on a cropshare basis, engages an individual to manage and supervise the operation of his farm. The landlord pays a significant part of the costs of production and retains the right to approve crop and management plans. The manager consults regularly and frequently with the tenant regarding the production and management of the production of the crops. Held , services performed by the manager are considered to be services performed by the landlord. Held further , farm rental income received by the landlord is to be considered in computing net earnings from self-employment.

Full Text

Rev. Rul. 64-32

Advice has been requested whether a landlord, whose farm is being operated by a tenant on a crop-share basis, but who engages an individual to manage and supervise the operation of his farm, meets the so-called `material participation' tests under section 1402(a)(1) of the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954).

A , a landlord living in Illinois, has a farm located in Iowa, which is being operated by a tenant on a crop-share basis. A visits the farm personally at least once a year, but he has engaged B to manage and supervise the operation of his farm, and he pays B a fixed annual fee for this service.

A pays for all limestones, the cost of spreading it, and one-half of the hauling costs. He pays for all phosphate at the time of purchase, but over a period of ten years the tenant reimburses him for one-half of this cost. A pays for one-half of the other fertilizer and one-half of the corn-shelling and crop-combining costs, and he pays for the maintenance of all farm buildings, fences, drainage tile, etc. The tenant furnishes all labor, tools, equipment, and livestock.

B and the tenant consult regularly and frequently with respect to such matters as crop planning, harvesting and rotation, field arrangement, selection of seed, and the testing treatment, and conservation of the soil, but A reserves the right to examine and approve their crop plans and those relating to drainage problems, maintenance and repair of the farm buildings, fences, etc. A also controls the farm budget, and he pays all previously authorized bills over X dollars and all bills under X dollars after they have been approved by B . The manager arranges for the sale of A's share of the crops and forwards the proceeds to him. A keeps a complete set of books concerning the farming operation.

In the instant case the income derived by A from the sale of his share of the crops constitutes `rentals from real estate' within the meaning of section 1.1402(a)-4 of the Income Tax Regulations.

Section 1402(a)(1) of the Act provides, in part, that `rentals from real estate' (including rentals paid in crop shares) shall be excluded in computing net earnings from self-employment unless-

* * * (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 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 with respect to any such agricultural or horticultural commodity; * * *

Revenue Ruling 57-58, C.B. 1957-1, 270, sets forth the guides to be used in determining when income derived by a landlord under a sharefarming or other rental arrangement with another person for the production of agricultural or horticultural commodities, by that person on the landlord's land, should be considered in computing net earnings from self-employment.

An evaluation of the factual situation in this case in the light of the guides set forth in Revenue Ruling 57-58, above, discloses that the combined activities of A and B are sufficient to establish `material participation.' The question then is whether the services performed by B , acting as agent for A , can be considered to be services performed by A .

Section 1.1402(a)-4(b)(5) of the regulations provides that any arrangement entered into by an employee or agent of a landlord and another person shall be considered an arrangement entered into by the landlord for purposes of satisfying the requirement of paragraph (A) of section 1402(a)(1) of the Act, supra, that the income must be derived under an arrangement between the landlord and another person.

For purposes of determining whether the arrangement satisfies the requirement that the parties contemplate that the landlord will materially participate in the production or management of production of a commodity, services which will be performed by an employee or agent of the landlord are considered to be services which the arrangement contemplates will be performed by the landlord. Services performed by such an employee or agent are considered services performed by the landlord in determining the extent to which the landlord has participated in the production or management of production of a commodity.

Pursuant to the foregoing, it is held that A meets the `material participation' tests of section 1402(a)(1) of the Act. It is held, further, that the farm rental income A receives is to be considered in computing net earnings from self-employment.

The conclusion in this case is consistent with the decisions in the cases of Harper v. Flemming , 288 Fed.(2d) 61 (1961), and Henderson-Poole v. Flemming , 283 Fed.(2d) 882 (1960).