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Morehouse v. Commissioner of Internal Revenue

United States Court of Appeals, Eighth Circuit

October 10, 2014

Rollin J. Morehouse; Maureen B. Morehouse, Appellants
v.
Commissioner of Internal Revenue, Appellee

Submitted June 11, 2014

Appeal from The United States Tax Court.

For Rollin J. Morehouse, Maureen B. Morehouse, Appellants: Paul Jansen Quast, Ryan W. Wahlund, Natalie Ingraham Wyatt-Brown, Halleland & Habicht, Minneapolis, MN.

For Commissioner of Internal Revenue, Appellee: Thomas J. Clark, Marion E.M. Erickson, Gilbert Steven Rothenberg, Deputy Assistant Attorney General, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; William Wilkins, Internal Revenue Service, Washington, DC.

Before LOKEN, BEAM, and GRUENDER, Circuit Judges. GRUENDER, Circuit Judge, dissenting.

OPINION

Page 617

BEAM, Circuit Judge.

The Tax Court determined that payments received by Rollin and Maureen Morehouse under the United States Department of Agriculture's Conservation Reserve Program (CRP), 16 U.S.C. § § 3801, 3831-35, constituted income from self-employment for purposes of 26 U.S.C. § 1401. We reverse.

I. BACKGROUND

Morehouse[1] holds a bachelor's degree in business from the University of Minnesota.

Page 618

Following graduation he worked as a regional sales manager and as an associate publisher. From 1987 through 2003, Morehouse provided marketing and fundraising services for the University of Texas at Austin. In 2003, he moved his family to Minnesota and became the primary caretaker for his four sons.

In 1994, Morehouse inherited 503 acres of land in Grant County, South Dakota (Grant County Property), 320 acres in Roberts County, South Dakota (Roberts County Property), and 400 acres in Day County, South Dakota (Day County Property). All of the land was tillable cropland, with the exception of a gravel pit on the Grant County Property and 129 acres of the Roberts County Property, which Morehouse's father had placed in the CRP program. Morehouse never farmed any of the land, but instead rented portions of the properties to individuals who farmed their rented portions.

In 1997, Morehouse enrolled the tillable land on the Grant County Property and the remaining 191 acres of the Roberts County Property (collectively the " CRP Properties" ) in the CRP.[2] The Commodity Credit Corporation (CCC) executed the CRP contracts with respect to the CRP Properties. These contracts expressly forbade Morehouse from, among other things, producing agricultural commodities on the CRP Properties or undertaking " any action on the land . . . which tends to defeat the purposes of this CRP contract, as determined by the CCC."

The CRP contracts also required Morehouse to implement conservation plans for the CRP Properties. These plans generally required Morehouse to establish and maintain specific types of grass and legume or perennial vegetative cover on portions of the CRP Properties and periodically engage in weed and pest control.[3] Morehouse was also required to fulfill certain annual paperwork obligations and he visited the CRP Properties approximately three times each year to ensure the properties complied with the CRP contracts. In return for Morehouse's compliance with the CRP contracts, the CCC agreed to pay part of his costs for implementing the conservation plans, along with an " annual rental payment."

Morehouse received CRP payments of $37,872 in both 2006 and 2007. The Morehouses timely filed tax return forms for both years and identified their occupations as " self-employed." On Schedules E of their tax returns, the Morehouses listed the CRP payments for both years as " rents received," and thus the CRP payments

Page 619

were not taxed as self-employment income. On October 14, 2010, the Internal Revenue Service Commissioner (Commissioner) mailed to the Morehouses a notice of deficiency for 2006 and 2007. The notice stated the CRP payments should have been reported as income on a Schedule F, Profit or Loss From Farming, ...


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