Rev. Rul. 54-170

Advice is requested regarding the nature for Federal employment and self-employment tax purposes of income derived by an individual from the operation of a farm under the circumstances described below.

The farm in question descended by will to an individual and six other heirs as cotenants. By agreement among the cotenants such individual (hereafter called the operator) operates the farm for the joint profit of all the cotenants and devotes his full time and attention thereto. For his services in this connection the operator receives a stated sum per year in addition to his pro rata share of the profits from the farming operation. At the end of each year he accounts to each of the cotenants with respect to income, expenses, and profits for such year. The operation of the farm consists principally of the cultivation of the soil, the raising and harvesting of fruit and field crops, the care and maintenance of a dairy herd, and the care and maintenance of farm buildings and equipment. All the crops produced on the farm are sold. No milk produced by others is received or processed on the farm.

Under the facts of the instant case the cotenants are partners within the meaning of section 3797(a)(2) of the Internal Revenue Code. It follows that the amounts received by the operator for his work relating to the operation of the farm cannot be regarded as wages for Federal employment tax purposes. Being a partner, he is not an employee of the partnership for Federal employment tax purposes. See S.S.T. 23, C.B. XV-2, 405 (1936).

Amounts received by the operator do not constitute `net earnings from self-employment' for self-employment tax purposes. As defined in section 481(a) of the Code, the term `net earnings from self-employment' means `the gross income derived by an individual from any trade or business carried on by such individual, less the deduction * * * attributable to such trade or business, plus his distributive share (whether or not distributed) of the ordinary net income or loss, * * * from any trade or business carried on by a partnership of which he is a member.' But that section further provides that in computing such gross income and deductions and such distributive share of the partnership's ordinary net income or loss there shall be excluded, among other things, `income derived from any trade or business in which, if the trade or business were carried on exclusively by employees, the major portion of the services would constitute agricultural labor as defined in section 1426(h).'

It appears that the major portion of the services rendered in connection with the operation of the instant farm would, if performed exclusively by employees, constitute `agricultural labor' as defined in section 1426(h) of the Code. See Regulations 128, section 408.208. Accordingly, the income derived by the operator from the operation of the farm does not constitute net earnings from self-employment for purposes of the tax on self-employment income.