Gerald E. Johnson and Dorothy Johnson - Page 17

                                       - 17 -                                         
          rental income under section 1402(a)(1).                                     
               The taxpayers in Bot I, Hennen I, and McNamara I appealed              
          our respective decisions in those cases to the Court of Appeals             
          for the Eighth Circuit.  That Court decided those appeals in one            
          opinion in McNamara II.  In McNamara II, the Court of Appeals for           
          the Eighth Circuit concluded:                                               
               we cannot say the Tax Court clearly erred in conclud-                  
               ing, as a factual matter, that Mrs. McNamara, Mrs. Bot,                
               and Mrs. Hennen were required–-by their respective                     
               employment agreements or by more informal “arrange-                    
               ments”–-to materially participate in agricultural                      
               production and management, and that all three did in                   
               fact materially participate in those activities.  See                  
               Treas. Reg. � 1.1402(a)-4(b) (as amended in 1980).                     
                    More promising, however, is taxpayers’ argument                   
               that the lessor-lessee relationships should stand on                   
               their own apart from the employer-employee relation-                   
               ships.  To this end, taxpayers insist that the rents in                
               question were consistent with market rates for agricul-                
               tural land.  In fact, the transcripts of each trial                    
               contain uncontradicted testimony that the rents were at                
               or slightly below fair market value. * * * The Tax                     
               Court’s decision, however, contains no factual finding                 
               in this regard.  Moreover, the Commissioner apparently                 
               did not pursue the issue at trial because, as it con-                  
               tended at oral argument, the amount of the rent is                     
               irrelevant.  We disagree.                                              
                    What is missing from both the Commissioner’s and                  
               the Tax Court’s analyses is any mention of a nexus                     
               between the rents received by Taxpayers and the “ar-                   
               rangement” that requires the landlords’ material par-                  
               ticipation.  We believe this omission overlooks �                      
               1402(a)(1)’s requirement that rents be “derived under”                 
               such an arrangement.  That is to say, the mere exis-                   
               tence of an arrangement requiring and resulting in                     
               material participation in agricultural production does                 
               not automatically transform rents received by the                      
               landowner into self-employment income.  It is only                     
               where the payment of those rents comprise part of such                 
               an arrangement that such rents can be said to derive                   





Page:  Previous  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  Next

Last modified: May 25, 2011