- 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 derivePage: 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