Averaging Does Not Alter 

 Self-employment Tax [IRC §1301] 



Andy's self-employment tax in 1998 in the 

 example above would be $11,535. [92.35% of 

 $114,000 = $105,279. The first $68,400 is taxed at 

 15.3% = $10,465. The balance. $105,279 - $68,400 = 

 $36,879 IS taxed at 2.9% = $1070.] Income averaging 

 does not change the self-employment tax amount. 



Conservation Reserve Payments Are 

 Rent Not Farm Income, Are Not Subject to 

 Self-employment Tax, and Are Reportable on 

 Schedule E [Wuebker vs Commissioner, 1 10 

 T.C. No. 31 (June 23, 1998); IRC §1402] 



For several years the IRS has taken the position 

 that Conservation Reserve Program (CRP) payments 

 to materially participating farmers are subject to 

 self-employment tax. (If you do not fall under the 

 material participation rules, see below, you were not 

 and still are not subject to SE tax on CRP payments.) . 

 The Tax Court in the Wuebker case determined that 

 CRP payments are rent; however, CRP agreements 

 prevent the land from being used for agricultural 

 production. Therefore, the language in IRC § 1402 that 

 called for the payment of SE tax on rent by a materially 

 participating farmer does not apply. The IRS may 

 appeal the Court's decision. 



Note: There are reasons why you might not wish to 

 treat CRP payments as rent. Some estate tax benefits 

 might be lost. For example, to get the favorable 

 valuation as farmland rather than fair market value (in 

 highest and best use), the deceased owner must have 

 materially participated in using the land for farming 

 purposes. In this situation, you would want to report 

 the CRP payments on Schedule F and pay SE tax on 

 them. If taking this position, filing the disclosure form, 

 Form 8275, is probably wise, relying on the past IRS 

 position and its likely appeal of the Wuebker decision. 

 [IRC § 1402(a)(1)] 



Material Participation 



There are two sets of material participation rules. 

 A taxpayer who is materially participating for the 

 purposes of self-employment tax may or may not be 

 materially participating for the puqjo.ses of passive 



activity loss rules. The reverse is true: a taxpayer who 

 materially participates for the purposes of passive 

 activity loss rules may not be materially participating 

 for the purposes of self-employment tax. 



The Farmer's Tax Guide (IRS Publication 225) 

 lists the tests of material participation of a farm- 

 landlord to determine whether or not self-employment 

 tax must be paid. You are materially participating if 

 you have an arrangement with your tenant and you 

 meet one of the following tests: 



Test No. 1 . You do any three of the following: ( 1 ) pay 

 or stand good (e.g. sign for materials bought on credit) 

 for at least half the direct costs of producing the crop; 

 (2) furnish at least half the tools, equipment, and 

 livestock used in producing the crop; (3) consult with 

 your tenant; and (4) inspect the production activities 

 periodically. 



Test No. 2. You regularly and frequently make, or take 

 an important part in making, management decisions 

 substantially contributing to or affecting the success of 

 the enterprise. 



Test No. 3. You work 1 00 hours or more spread over a 

 period of 5 weeks or more in activities connected with 

 crop production. (Note: these numbers do not appear in 

 either the tax code or the regulations.) 



Test No. 4. You do things which, considered in their 

 total effect, show that you are materially and 

 significantly involved in the production of the farm 

 commodities. 



If you pass the test for material participation you file 

 Schedule F and are subject to self-employment tax on 

 the income. [I.R.C. §1402. Treas. Reg. §1. 1402(a)- 

 4(b)(6) gives six examples] 



Capital Gains Changes 



TRA97 set up three rate groups of assets: 



1 . 28%. Short-term gains and losses, assets held not 

 more than 1 2 months; all collectibles (coins, paintings, 

 stamps, wine, etc.); long-term capital loss carryovers. 

 (Note: Excess depreciation (above straight-line 

 amounts) recaptured from the sale of § 1 250 property 

 (basically, buildings) is ordinary income, does not 

 appear on Schedule D.) 



2. 25% Long-term gains (no losses in this group) from 



Fruit Notes, Volume 63 (Number 2), Spring, 1998 



