Rev. Rul. 60-32

Advice has been requested (1) whether payments to farmers under the Soil Bank Act, Title I of the Agricultural Act of 1956, 7 U.S.C. 1801, are subject to the Federal income tax and (2) whether such payments will be treated as self-employment income under the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954).

Under section 103(a) of the Soil Bank Act, supra , the Secretary of Agriculture is authorized and directed to carry out an acreage reserve program for the crops of specified commodities for the years 1956 to 1959, inclusive. Producers participating in the program will be compensated for reducing their acreage of a commodity below their farm acreage allotments or their farm base acreages, whichever may be applicable. The compensation may be in terms of cash, in grains, or in amounts applied against outstanding Commodity Credit Corporation loans of the producer.

To be eligible for compensation, a producer must enter into a contract with the Secretary of Agriculture under which the producer agrees (1) to reduce his acreage of the commodity below his farm acreage allotment or farm base acreage, whichever may be applicable, within limits prescribed by the Secretary; (2) to specifically designate the reserve acreage so withdrawn from the production of the commodity; and (3) not to harvest any crop from, or graze, the reserve acreage unless the Secretary determines it is necessary to graze the acreage for emergency reasons and consents thereto.

Section 105(a) of the Act provides for compensation of the participant producers through issuance of negotiable certificates which the Commodity Credit Corporation is required to redeem (1) in cash, upon presentation by the producer, or by any holder in due course or, (2) at the option of the producer, in the case of certificates issued with respect to grains and upon presentation by him, in grains. Such grains are to be valued by the Secretary at such levels as he determines will not materially impair the market price for such grain, yet will to the maximum extent practicable encourage acceptance of payment in grains in lieu of cash.

Under optional rights provided with respect to 1956 soil bank certificates, the producer is entitled to redeem his certificate (1) in grains owned by the Commodity Credit Corporation, at 105 percent of its face amount applied to the Commodity Credit Corporation loan support price per bushel, or (2) by discharge of a previously obtained Commodity Credit Corporation loan at 105 percent of the face amount of the certificate.

Under section 107(a) of the Act, the Secretary of Agriculture is authorized to enter into conservation reserve contracts with producers for periods of not less than three years. Producers are required to establish and maintain for the contract period the specified conservation practices. In return for such agreement by the producer, the Secretary agrees (1) to bear part of the cost (including labor) of establishing and maintaining vegetative cover or water storage facilities, or soil, water, wildlife, or forest conserving uses on the designated acreage, and (2) to make annual payments to the producer for the term of the contract upon a determination that he has fulfilled the provisions of the contract entitling him to such payment. Acreage reserve and the cost-sharing and annual conservation reserve payments, whether in cash or, at the option of the producer, in grain, are in the nature of receipts from farm operations in that they replace income which producers could have expected to realize from the normal use of the land devoted to the program. As such, they are includible in gross income. See I.T. 2767, C.B. XIII-1, 35 (1934); I.T. 2992, C.B. XV-2, 75 (1936); I.T. 3379, C.B. 1940-1, 16; and Baboquivari Cattle Co. v. Commissioner , 135 Fed.(2d) 114, Ct. D. 1588, C.B. 1943, 1013.

Section 122 of the Act requires the Secretary of Agriculture to provide adequate safeguards to protect the interest of tenants and sharecroppers, including provision for sharing, on a fair and equitable basis, in payments or compensation. Under regulations issued by the Secretary, it is contemplated that tenants and sharecroppers shall share equitably with landlords, or the operator if a landlord is not the operator, in the compensation paid under the program; and that the share of the landlord, or operator, in the compensation paid for the land assigned to a tenant or sharecropper shall not exceed the return he would have received for furnishing the land and farm management, less any savings in cost to him which result from not producing a crop on the acreage diverted from production and less the amount of any enhancement in value of the land diverted from production.

Section 485.101(m) of the regulations governing the 1956 acreage reserve part of the Soil Bank Program defines the term ` producer' to mean `any person who is an owner or a landlord, cash tenant, standing-rent tenant, fixed-rent tenant, share tenant, or sharecropper.' Thus, under that Act, compensation is authorized to all persons who have an interest in the crop which could have been raised, without particular regard to the extent to which any of such recipients physically participated in the actual operation or management of the property.

Accordingly, it is held that there shall be included in the recipients' gross incomes the payments and benefits, whether paid in cash, reduction of Commodity Credit Corporation loans, or in grains, received by persons who, as landlords, tenants or sharecroppers, comply with the requirements as to the reduction in acreage of specified commodities in accordance with the acreage reserve program set out in the Soil Bank Act, supra .

If the producer uses his certificate at 105 percent of its face value in payment of grain purchased from the Commodity Credit Corporation, no additional income will result from such transaction at that time. Gain or loss on such transaction results when the grain is sold or when the grain is used for feed or seed. However, if such certificate is credited against an indebtedness due to the Commodity Credit Corporation in an amount in excess of the face amount of the certificate, such excess constitutes income within the meaning of section 61 of the Code, in the year in which the credit occurs. The recipients shall also include in their cost-sharing payments received by them for participation under a soil conservation contract for diversion of acreage in accordance with the conservation reserve program.

Payments made under the Soil Bank Act supra , constitute income within the meaning of section 61 of the Code, reportable during the period indicated above, as provided for in section 451 of the Code. They are in no way analogous to Commodity Credit Corporation loans which are not income within the meaning of section 61 of the Code but which may, under the provisions of section 77 of the Code, be considered income at the election of the taxpayer.

Payments and benefits attributable to the acreage reserve program are includible in determining the recipient's net earnings from self-employment if he operates his farm personally or through agents or employees. This is also true if his farm is operated by others and he participates materially in the production of commodities, or management of such production, within the meaning of section 1402(a)(1) of the Self-Employment Contributions Act of 1954, as amended. See Rev. Rul. 57-58, C.B. 1957-1, 270. If he does not so operate or materially participate, payments received are not to be included in determining net earnings from self-employment.