The U.S. Tax Court today released a “reviewed opinion” in which the court majority held that rent that the taxpayers received with respect to farming operations was at or below fair market value, and that the IRS had failed to show a sufficient nexus between that rental income and taxpayers’ obligations to participate in the production or management of the production of agricultural commodities. Thus, the court concluded that the rent received by the taxpayers pursuant to a lease agreement was not includible in their net self-employment income.
The case is: Martin v. Commissioner, 149 T.C. No. 12 (September 27, 2017). Read the Tax Court’s opinion [PDF 144 KB] that includes dissenting opinions.
The taxpayers, a married couple, owned a farm and rented a portion of the land to a wholly owned S corporation that contracted with an unrelated entity to raise chickens (according to that entity’s specifications). The taxpayers followed the unrelated entity’s “exacting specifications” to build structures designed only to raise the entity’s chickens. The S corporation paid the taxpayers’ wages for their labor and rent for the use of the farm and structures.
The IRS asserted that the rent was subject to self-employment tax pursuant to section 1402(a)(1).
The Tax Court majority found that the facts in this case were not materially distinguishable from the facts of McNamara v. Commissioner, T.C. Memo 1999-333, rev’d, 236 F.3d 410 (8th Cir. 2000). In that case, the Eighth Circuit reversed two other Tax Court memorandum opinions. The Tax Court, thus, reconsidered the holdings in those cases. In concluding, the Tax Court found:
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