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:
For more information, contact KPMG’s National Director of Cooperative Tax Services:
David Antoni | +1 (267) 256-1627 | email@example.com
Or Associate National Director of KPMG’s Cooperative Tax Services:
Brett Huston | +1 (916) 554-1654 | firstname.lastname@example.org
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.