T.C. Memo. 1996-436
UNITED STATES TAX COURT
CONNIE D. RAY AND ROMA KAY RAY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21636-94. Filed September 25, 1996.
Ron Lewis, for petitioners.
Candace M. Williams, for respondent.
MEMORANDUM OPINION
KÖRNER, Judge: Respondent determined deficiencies in and
accuracy-related penalties on petitioners' Federal income taxes
for the years and in the amounts as follows:
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Penalty
Year Deficiency Sec. 6662
1990 $1,859 $372
1991 6,891 1,378
1992 1,157 231
All statutory references are to the Internal Revenue Code
in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure, except as
otherwise noted.
By stipulation of the parties, this case was submitted under
Rule 122. By further stipulation, petitioners have conceded the
deficiencies in tax that were determined by respondent for the
years 1991 and 1992. As to the year 1990, petitioners have
conceded all respondent's adjustments to income except
respondent's determination that petitioners' receipt of $43,469
of income in that year constituted income subject to self-
employment tax, rather than rental income as claimed by
petitioners. As to the penalties, petitioners have explicitly
not conceded the determined penalties for the years 1991 and
1992; the determined penalties for the year 1990 are not
mentioned in the parties' stipulation of settled issues, and we
therefore consider this item still to be in dispute.
Petitioners Connie D. Ray and Roma Kay Ray, husband and
wife, filed joint income tax returns for the years 1989, 1990,
1991, and 1992. At the time the petition herein was filed,
petitioners were residents of Texas.
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In the years in question, petitioner Connie Ray was engaged
in the active trade or business of farming and/or cattle grazing.
In addition to the land that he already owned and used for these
purposes, petitioners purchased an additional 1,022 acres of land
in the years 1987 and 1989. This land, known hereafter as the
CRP land, had been placed under contract by the prior owner with
the Commodity Credit Corp. (CCC) in the Federal Conservation
Reserve Program (CRP) for a 10-year period. Upon acquisition of
this tract, petitioner executed an agreement with the CCC to
continue the contract that existed with respect to these tracts
of land. The CRP contract required petitioner to maintain
vegetative ground cover, to undertake conservation practices to
reduce soil erosion, and to carry on other activities to sustain
the productive capacity of the land. The contract also provided
the following: (1) Petitioners were not permitted to graze,
harvest, and/or use the land for any other commercial reasons;
and (2) the CCC was required to pay petitioners an annual fee per
acre. In 1990, apparently in accordance with the contract with
CCC, petitioner did not farm the property, but he did apply
herbicide and shredded natural grasses to the CRP tract. For
1989, 1991, and 1992, petitioners reported income from CRP (CCC)
on Schedule F of their tax returns as self-employment income.
However, for the year 1990, petitioners reported such income from
CRP as farm rental income not subject to self-employment tax.
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They did, however, apparently deduct the expenses incurred on the
CRP land as expenses incurred in a trade or business on Schedule
F of their return; i.e., taxes, interest, shredding, spraying,
and depreciation.
Initially, we note that there is no dispute as to the
taxability of the CRP receipts to petitioners in 1990 as being
ordinary taxable income. Petitioners concede that this is so,
and so reported it in their 1990 return. The dispute is rather
whether such income received by petitioners is income from self-
employment and subject to the tax thereon.
Section 1401 imposes taxes on the self-employment income of
every individual, and this is in addition to the ordinary income
tax. Section 1402(a) defines an individual's net earnings from
self-employment as the "gross income derived by an individual
from any trade or business carried on by any such individual",
and, in turn, section 1402(b) defines self-employment income as
the "net earnings from self-employment derived by an individual".
In considering the application of this tax, this Court has
stated that the income in question must derive from a trade or
business carried on by an individual, and that there must be a
nexus between such trade or business and the income that the
individual has received. In Newberry v. Commissioner, 76 T.C.
441, 444 (1981), the taxpayers received insurance proceeds
intended to compensate them for lost income after their grocery
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business was destroyed by fire. The Court found that these
"business interruption proceeds" did not constitute self-
employment income because the taxpayers' failure (inability) to
operate the grocery store business after the fire was what gave
rise to the payment of the proceeds: that event caused the
complete cessation of business activity. The Court thus deemed
that the insurance proceeds did not come from self-employment.
The situation presented in Newberry is not present in the
instant case. Petitioner Connie Ray was a farmer and rancher and
had apparently been so for some years. He owned and operated
farmlands in Texas. As an addition to his holdings, he acquired
the CRP tract and, by agreement with the CCC, he continued in
effect the existing contractual relationship under the CRP
program. Under this program, he was required to tend and nourish
the land, fight diseases, and control soil erosion. What he
could not do is to farm or graze the land. In other words, in
return for nurturing and conserving the CRP acreage, but not
farming or grazing it, he would and did receive a fee from CCC.
Since the CRP acreage was added to his existing farmland, and
since petitioner Connie Ray was already in the business of
farming and ranching, this was a payment to him in connection
with his ongoing trade or business. There is no evidence in the
record that the CCC would have included the acreage here in
question in the CRP program, and would have paid petitioners
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money for not farming it, if the land were not appropriate for
farming in the first place.
Supporting our conclusion herein, we consider the provisions
of Rev. Rul. 60-32, 1960-1 C.B. 23. In this ruling, it was
emphasized that there should exist a connection or nexus between
the payments received by the taxpayer and some trade or business
from which they were derived. Rev. Rul 60-32, supra, specifically
concludes that earnings are from self-employment if the taxpayer
derives them from his operation of a farm. While we recognize
that respondent's revenue rulings do not have the force or effect
of law, they can still be helpful in interpreting the statute, as
is Rev. Rul. 60-32, supra, in the present case. See Stubbs,
Overbeck & Association, Inc. v. United States, 445 F.2d 1142 (5th
Cir. 1971). In this case, we are satisfied that the payments
that petitioner Connie Ray received from the CRP program were in
return for caring for the farmland that he owned, as required by
the contract with CCC. Petitioner Connie Ray was an active
farmer/rancher with respect to additional acreage, and the
payments received here had a direct nexus to his trade or
business. We think that these payments were income that was
subject to the self-employment tax of section 1401, and we decide
this issue in favor of respondent.
We have left for consideration the imposition of penalties
under section 6662, which were determined by respondent for each
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of the years in issue. This case was submitted to the Court on a
basis of a brief stipulation of facts, and no trial was held. In
this limited and scanty record that we have before us, there is
no evidence to show any error on the part of respondent in
determining the penalties that are in issue here. In cases such
as this, where respondent has determined additions to the tax or
penalties under section 6662, the burden of proof to show error
by respondent is placed upon petitioner. Rule 142(a); Neely v.
Commissioner, 85 T.C. 934 (1985); Bixby v. Commissioner, 58 T.C.
757 (1972); Enoch v. Commissioner, 57 T.C. 781 (1972). Except
for the one substantive issue that we have decided, petitioner
conceded all other adjustments to income for the years in issue.
We cannot tell what attempts, if any, petitioners made to report
their income tax in a proper and accurate manner. This being
true, we cannot hold that respondent was in error in making the
determinations of penalties under section 6662.
Decision will be entered
for respondent.