SSR 61-7. FARM RENTAL INCOME -- MATERIAL PARTICIPATION

Where a person undertakes to produce a crop or livestock on another person's land for a share of the crop or livestock or the proceeds therefrom and the amount of the share each receives depends on the total produced, the first person is self-employed and his income is creditable for social security purposes; the other person's income is rentals from real estate, and is creditable for social security purposes only if, pursuant to the provisions of the rental arrangement, he materially participates in the production or management of production of the farm commodities raised on the rented land.

A claim for benefits raises the questions whether income from crops produced under a crop-sharing arrangement is rental income to the owner or tenant of the land (hereinafter referred to as the "landowner") and, if rental income, under what circumstances it can be credited as net earnings from self-employment for social security purposes.

In deciding these questions, it is necessary to consider first whether the share farmer is an employee or whether he is self-employed. This was clarified by the Social Security Amendments of 1956 and the report of the Committee on Ways and Means, House Report No. 1189, 84th Cong., 1st Sess. Section 210(a)(16) of the Act, as amended in 1956 (effective with respect to service performed after 1954), excepts from the term employment:

Service performed by an individual under an arrangement with the owner or tenant of land pursuant to which --

(A) such individual undertakes to produce agricultural or horticultural commodities (including livestock, bees, poultry, and fur-bearing animals and wildlife) on such land,

(B) the agricultural or horticultural commodities produced by such individual, or the proceeds therefrom, are to be divided between such individual and such owner or tenant, and

(C) the amount of such individual's share depends on the amount of the agricultural or horticultural commodities produced * * *.

The following quotation, relative to the above amendment of the Act, is from page 9 of the House Report:

The bill [H.R. 7225] clarifies the status under old-age and survivors insurance of individuals who operate farms with the owners or tenants of those farms, under share-farming arrangements. (Such farmers may be known locally by a variety of names such as "sharecroppers," "croppers," "renters," "tenants," and "lessees.") In specifying that these individuals are not employees but are self-employed for purposes of coverage by old-age and survivors insurance, the bill is declaratory of present law.

Your committee believes that these declaratory provisions are necessary because share farmers have some characteristics of employees and some characteristics of self-employed persons. For example, in some instances the land-owner may direct share farmers to nearly the same extent, on an overall basis, as he does individuals who clearly are employees. On the other hand, share farmers participate directly in the risk of farming in that their return from the undertaking is dependent upon the amount of the crop or livestock produced. The provisions of the bill would tend to remove any doubt as to whether services are rendered as an employee or as a self-employed person in certain borderline cases; they would resolve any such doubt in favor of a determination that the services are rendered by a self-employed person. Such a determination is believed to be representative of the intent of such arrangement sin the vast majority of cases.

The 1954 amendments to the Social Security Act, which extended coverage to farmers, modified section 211(a)(1) of the Act which excludes rentals from real estate, by including the parenthetical statement "including such rentals paid in crop shares." Section 1.1402(a)-1(c)(1) of the Self-Employment Tax Regulations (relative to section 1402(a)(1) of the Internal Revenue Code, which is identical to section 211(a)(1) of the Social Security Act), defines "rentals paid in crop shares" as follows:

Rentals paid in crop shares include income derived by an individual as the owner or lessee of land under an agreement entered into with another person pursuant to which such other person undertakes to produce a crop or livestock on such land and pursuant to which (a) the crop or livestock, or the proceeds thereof, are to be divided between such individual and such other person, and (b) the amount of such individual's share depends on the amount of the crop or livestock produced.

As is apparent from the above quotations, the criteria for determining whether the share farmer is a self-employed person are identical to those used to determine whether the landowner's income is rentals from real estate. Thus, farm rental income received by the landowner under typical crop-sharing arrangements is rentals from real estate.

Congress recognized that many farm owners whose farms were operated under crop-sharing arrangements were active in the work on or management of their farms. It was for this reason that section 211(a)(1) of the Social Security Act was amended in 1956 to provide that the exclusion of rental income would not apply to:

* * * any income derived by the owner or tenant of land if (A) such income is derived under an arrangement, between the owner or tenant and another individual, which provides that such other individual shall produce agricultural or horticultural commodities (including livestock, bees, poultry, and fur-bearing animals and wildlife) on such land, and that there shall be material participation by the owner or tenant in the production or the management of the production of such agricultural or horticultural commodities, and (B) there is material participation by the owner or tenant with respect to any such agricultural or horticultural commodity * * *.

Thus, there are two pertinent requirements which must be met in order for farm rental income to be counted for social security purposes, i.e., an agreement for material participation in the production or the management of the production of crops or livestock by the landowner and actual material participation by such landowner. In some localities the right of the landowner to significantly direct and control the share farmer nearly always exists. If this is true in the particular case, the requirement that there be an agreement to participate is usually met. However, the degree to which a landowner will actually participate varies greatly because of such factors, among others, as the ability and reliability of the share farmer and the age and physical condition of the landowner. In other words, even though the landowner has the right under the arrangement to participate in the operation of the enterprise, if he does not exercise his right to a sufficient extent he will fail to meet the requirements of "material participation."

Although the law doe snot define material participation, the reports of the Senate Committee on Finance, Senate Report No. 2133, 84th Cong., 2d Sess., and the Report of the Committee on Ways and Means, House Report No. 1189, 84th Cong., 1st Sess., indicate that the purpose of the congress in enacting the material participation provision was to cover income from actual work. This purpose is expressed on page 8 of the Senate Report:

The bill thus would extend coverage under old-age and survivors insurance to certain farmers who, though not covered under the present law, have income from work and therefore are exposed to the type of income loss against which the program is designed to afford protection. [Emphasis added]

The following statement, from page 38 of the Senate Report, contains certain criteria to be considered in determinations of material participation:

Under this amendment it is contemplated that the owner or tenant of land which is used in connection with the production of agricultural or horticultural commodities must participate to a material degree in the management decisions or physical work relating to such production in order for the income derived therefrom to be classified as "net earnings from self-employment." The committee is of the opinion that in any case in which the owner or tenant establishes the fact that he periodically advises or consults with such other individual as to the production of the commodities and also establishes the fact that he periodically inspects the production activities on the land he will have presented strong evidence of the existence of the degree of participation contemplated by the amendment. If the owner or tenant also establishes the fact that he furnishes a substantial portion of the machinery, implements, and livestock used in the production of the commodities or that he furnishes or advances, or assumes financial responsibility for, a substantial part of the expense (other than labor expense) involved in the production of the commodities, the committee feels that he will have established the existence of the degree of participation contemplated by the amendment.

The elements of participation set forth in the Senate Report are the factors considered by the Social Security Administration in making decisions as to a landowner's participation in individual cases. Activities which relate to the protection of property or investment as distinguished from those more directly affecting crop production are not considered in deciding whether a landowner materially participated.

The decision as to whether or not a landowner's income from a crop-sharing arrangement is excludable from net earnings from self-employment as rentals from real estate must be made under Federal law rather than under the laws of the individual States. Although under the laws of several States it is not considered that a landlord-tenant relationship is created by certain crop-sharing arrangements, the intent of Congress is clear that the requirements of section 210(a)(16) of the Act is rental income and is creditable as net earnings from self-employment for social security purposes only if the landowner meets the requirement of material participation set out above.

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