Rev. Rul. 61-112

Advice has been requested whether a corporation receives `rents' within the meaning of section 1372(e)(5) of the Internal Revenue Code of 1954 under the share-farming arrangement described below.

A corporation owns farms which are leased to tenants on a share-farming arrangement. The tenants and the corporation both share in the furnishing of supplies and services. The corporation receives one-fourth of the proceeds from sales of cotton and one-third of the proceeds from sales of all other crops.

The president of the corporation, who lives in the area of the farms, devotes most of his time to supervising the operations of the farms. He makes all decisions concerning the kind, acrease and location of crops to be planted; the time for planting, cultivating and harvesting; the kind and use of supplies and equipment; and the types of records to be kept.

Section 1372(a) of the Code allows a small business corporation, as defined in section 1371 of the Code, to elect not to be subject to the taxes imposed by Chapter 1 of the Code, but to have all its income taxed directly to its shareholders whether or not such income is distributed to its shareholders. This election, however, is terminated under the provisions of section 1372(e)(5) of the Code if, for any taxable year of the corporation for which the election is in effect, more than 20 percent of the gross receipts of the corporation is derived from rents and certain other types of income.

For the purposes of section 1372(e)(5) of the Code, the term `rents' does not include income realized by a landowner under a share-farming arrangement where the landowner participates to a material degree in the production of farm commodities through physical work or management decisions, or a combination of both. Compare Rev. Rul. 57-58, C.B. 1957-1, 270.

Under the facts stated in this instance, it is held that amounts received by the corporation under the share-farming arrangement described are not `rents' within the meaning of section 1372(e)(5) of the Code.