Soil Bank Payments to Participants in Acreage Reserve Program for Taking Some Acreage Out of Production

The issue is whether Soil Bank payments to participants in the Secretary of Agricultural's acreage reserve program for taking some or all of their acreage out of production when received by a corporation in lieu of customary crop shares constitute rental income within the meaning of section 543(a)(7) of the Internal Revenue Code of 1954.

Section 543(a)(7) provides in pertinent part that personal holding company income means the portion of gross income which consists of rent, unless constituting 50% or more of the gross income, and that the term "rents" means compensation, however designated, for the use of, or the right to use, property of the corporation. The proposed ruling letter takes the position that the payments in question do not represent compensation for the use of, or right to use, the land involved and that accordingly they are not "rents" within the meaning of section 543(a)(7) of the Code.

Further, in reply to a statement in the request for ruling that paragraph 1386.1145 of Commerce Clearing House "indicates that Soil Bank payments to farmers fall into the same income tax categories for income tax purposes as the former income which it replaces," the proposed ruling letter states that:

We do not mean here to imply or suggest that the term "rents" within the context used in the several provisions above noted (and perhaps even other provisions of the Code) requires uniform characterization. Indeed, the legislative history of the respective statutory provisions as well as the regulations issued thereunder suggest, if not declare, the possibility of distinctions in treatment of items common to the cited areas. Compare, for example, the broad definition of "rents" in section 543(a)(7) and its implementing regulations relating to personal holding companies with the far more detailed definition of "rents," TOGETHER WITH SPECIFIED EXCEPTIONS THEREFROM, provided in the other above-mentioned Code sections and their implementing regulations. But as we have already indicated we do believe that it is most likely the courts will be inclined to give a uniform characterization to Soil Bank payments because of the limited application of the question and the special and peculiar nature of such payments. Therefore, we believe the positions the Service has already publicly taken regarding the nature of Soil Bank and crop share payments are not to be overlooked. Our reasons for this conclusion are briefly summarized here.

In Rev. Rul. 60-32, supra, it was stated that:

Once the Service had reached the conclusion in Rev. Rul. 60-32 that Soil Bank payments should receive treatment as if they were rents under section 1402, there was, of course, no further problem under that section since there is specific statutory authorization for the application of a material participation test to such payments by reason of the amendment added in 1956 to the Self-Employment Contributions Act by P.L. 880, 84th Cong., 2d Sess., reported in C.B. 1956-2, at p. 1188. And for the pertinent publication following this amendment see Rev. Rul. 57-58, cited in the quotation from Rev. Rul. 60-32, above.

Following the same reasoning and applying the same tests as were applied in the self-employment tax rulings, in Rev. Rul. 61-112, I.R.B. 1961-24, 7. (In re: * * * not reviewed in this office) it was held, without benefit of either specific statutory or regulatory authorization, that amounts received by a corporation from farms which it owned and leased to individuals under a share-farming arrangement are not rents without the meaning of section 1372(e)(5) of the 1954 Code where the corporation participates to a material degree in the production of farm commodities through physical work or management decisions or a combination of both. The Revenue Ruling is its only citation of precedent invites comparison of its position with the principle stated in Rev. Rul. 57-58, which as has been noted reached a similar conclusion under section 1402.

It is true that none of the aforementioned rulings were concerned with the definition of "rents" for personal holding company purposes. Yet, prior to the publication of these rulings in Webster Corporation (1955) 25 T.C. 55, aff'd per curiam (C.A. 2d 1957) 240 F.2d 164, it was held that because of the supervision and control exercised by a personal holding company and its agents over a crop sharing farm operation, the crop shares received by the personal holding company were not "rents" within the meaning of section 502(g) of the 1939 Code which is now section 543(a)(7) of the 1954 Code. Nonacquiescence in the Tax Court decision was published in C.B. 1956-2 at p. 11 but was withdrawn and acquiescence substituted in C.B. 1960-2, 7. Thus, the court applied a material participation test in considering whether crop shares were "rents" FOR PERSONAL HOLDING COMPANY PURPOSES, which is the same test we have applied in our published rulings with respect to the treatment of Soil Bank payments for self-employment tax purposes (Rev. Rul. 60-32 as well as to the treatment of crop shares for Subchapter S purposes (Rev. Rul. 61-112) and we have acquiesced in this decision. The clear inference from Webster is that, if there had been no material participation in the management and operation of the farm by the taxpayer, the crop shares would have been "rents".

Since the provisions of subparagraph (e)(5) of section 1372 would appear from the face of the statute (note the heading) to be geared to a personal holding company income concept, the conclusion reached in Rev. Rul. 61-112 would seem more logically to follow as the result of the Commissioner's acquiescence in the Webster decision, although in fact the administrative file of the underlying case indicates that it was based instead upon an analogy to a similar conclusion reached under section 1402(a)(1).

In any event, from the above it would seem clear that our announced public position is that a material participation test for determining whether CROP SHARES are "rents" will be applied for purposes of the self-employment tax provisions, the Subchapter S provisions and the personal holding company provisions. This being the case, our having applied the material participation test to Soil Bank payments for purposes of the self-employment tax provisions would suggest, we believe, a strong inference that Soil Bank payments will or should likewise be treated in the same manner for personal holding company and Subchapter S purposes unless there is some really compelling statutory reason for making a distinction.

As indicated above, we are aware, and we believe the courts might be made aware in an appropriate case, that the term "rents" may have different meaning within the context of the different statutory provisions in which the term is used. However, we seriously doubt that the limited, peculiar and special nature of Soil Bank payments, which are so directly related to the land from which crop shares are or may be derived, would justify or encourage support for distinction in treatment. In this connection, it is noteworthy that both section 122 of the Soil Bank Act of 1956 which is involved in the subject case and paragraph L of Part IX of the Soil Bank Acreage Reserve Agreement contract forms make provision for sharing the payments between the owner of the land and his tenants or sharecroppers thus implicitly recognizing that the Soil Bank payments made thereunder are substitutes for the crop shares hitherto produced on the land involved.

For the foregoing reasons, we believe that Soil Bank payments for purposes of the personal holding company provisions should be treated in the same manner as crop share payments. See Webster Corporation, supra.

The administrative file is herewith returned to you with the thought that you may wish to give further study to the proposed ruling in the instant case with the foregoing considerations in mind. We have informally discussed the position hereinabove expressed with representatives of your office and it was agreed that any difference of opinion can be better discussed and resolved after you have had an opportunity to consider the views expressed here. This is especially so since we believe, from what has been said above, that you may wish to coordinate consideration of the question raised here with the several different branches of your office that will be concerned.

This is in reply to a letter from * * * inquiring whether Soil Bank payments constitute rental income within the meaning of section 543(a)(7) of the 1954 Code.

The additional information submitted in your letter of March 30, 1961, is incorporated herein by reference.

Under the Soil Bank Act, Title I of the Agriculture Act of 1956, as amended, the Secretary of Agriculture is authorized to assist farmers to divert a portion of their croplands from the production of excessive supplies of agricultural commodities, and to carry out a program of soil, water, forest and wildlife conservation.

Under section 103(a) of the Soil Bank Act, supra, the Secretary of Agriculture is authorized and directed to carry out an acreage reserve program for the crops of specified commodities. Producers participating in the program will be compensated for reducing their acreage of commodity where their farm acreage allotments or their farm base acreage whichever may be applicable.

To be eligible for compensation, a producer must enter into a contract with the Secretary of Agriculture under which the producer agrees (1) to reduce his acreage of the commodity below his farm acreage allotments or farm base acreage, whichever may be applicable, within limits prescribed by the Secretary; (2) to specifically designate the reserve acreage so withdrawn from the production of the commodity; and (3) not to harvest any crop from, or graze, the reserve acreage unless the Secretary determines it is necessary to graze the acreage for emergency reasons and consents thereto.

Under section 107(a) of the Act, the Secretary of Agriculture is authorized to enter into conservation reserve contracts, for periods of not less than three years, with producers determined by him to have control for the contract period of the term covered by the contract. Producers are required to establish and maintain for the contract period the specified conservation positions. In return for this agreement by the producer, the Secretary agrees (1) to * * * of the cost (including those of establishing and maintaining vegetative cover or water storage facilities, or soil, water, wildlife, or forest conserving * * * on the designated acreage, and (2) to make annual payments to the producer for the term of the contract upon a determination when he has fulfilled the provisions of the contract entitling him to such payment.

Section 122 of the Act requires the Secretary of Agriculture to provide adequate safeguards to protect the interests of tenants and sharecroppers, including provision for sharing, on a fair and equitable basis, in payments or compensation and include such provisions as may be necessary to prevent them from being forced off the farm. Applications to participants in such program specify the basis on which the landlord, tenants, and sharecroppers are to share in such payments or compensation, and no contract under any such program is entered into unless such basis is approved by an authorized representative of the Secretary and incorporated in the contract.

Section 185.101(m) of the regulations governing the acreage reserve part of the Soil Bank Program defines the term "producer" to mean "any person who is an owner or a landlord, cash tenant, standing-rent tenant, fixed rent tenant, share tenant, or sharecropper." Thus, under that Act, compensation is authorized to all persons who have an interest in the crop which could have been raised.

Section 543(a)(7) of the 1954 Code provides in part that the term "personal holding company income" means the portion of the gross income which consists of rents, unless constituting 50 percent or more of the gross income. For purposes of this paragraph, the term "rents" means compensation, however designated, for the use of, or right to use, property of the corporation.

Herein, the payments are received by those designated in the contract who have agreed to comply with or who have fulfilled the provisions of the contract entitling them to such payments. The payments are designed to compensate such persons, in part, for the loss of income during the period of the contract for amounts which they could have been expected to receive from the normal use of the land. The payments do not represent compensation for the use, or right to use the land.

As indicated above, it is the compensation received for the use or right to use, property which is includable as rent. Accordingly, it is concluded that compensation received by a participant for the subject programs does not constitute "rents" within the meaning of section 543(a)(7) of the Code.

The Commerce Clearing House explanation referred to in your letter which implies that Soil Bank payments to farmers fall into the same income tax categories as the former income replaced apparently refers to the conclusion reached in Revenue Ruling 60-32, C.B. 1960-1, page 23. This ruling, however, has reference to individuals who must determine gross income from self-employment in order to compute the self-employment tax. There is no relationship between the self-employment regulations and the personal holding company regulations.

In accordance with your request, we are returning the Soil Bank contracts.

This letter is being addressed to you since there is no record in this office of a power of attorney authorizing anyone in the * * * to represent you.