April 7, 2000

A recent court decision that farmers must pay a self-employment tax if they receive federal conservation reserve program payments could translate into farmers owing thousands of dollars and being forced to adjust tax returns as far back as 1996.

This issue of CRP income status arose from a 1996 Internal Revenue Service audit of an Ohio couple who filed 1992 and 1993 tax returns indicating $17,000 worth of CRP payments as rental income, which is exempt from the self-employment tax. However, the IRS audit showed that the couple owed a 15.3 percent self-employment tax on the CRP revenue because they had other land they farmed for income.

The couple took the case, Wuebker vs. IRS, to the U.S. Tax Court and won. Although prior court decisions supported the IRS requirement that most active farmers pay self-employment tax on CRP acreage, in 1998, the Tax Court agreed with the Wuebkers. The court ruled that the money was real estate rental income and not subject to self-employment tax.

However, the IRS appealed and the ruling was recently overturned by the 6th U.S. Circuit Court of Appeals. Now the IRS is expected to try to collect self-employment taxes on returns filed as far back as the 1996 tax year.

Tax experts were surprised by the appellate court’s decision.

"It just seemed that the law was so clear there was no other way to go," said Roger McEowen, a professor of agricultural tax law at Kansas State University.

Russell Cunningham, an attorney with the firm handling the case, said he was disappointed with the ruling.