SSR 63-43: SECTION 211(a)(1). -- NET EARNINGS FROM SELF-EMPLOYMENT -- RENTALS FROM REAL ESTATE -- MATERIAL PARTICIPATION
- In each of the three cases discussed in this ruling the claimant owns a farm which he leased to a tenant under a share-farming agreement. The issue in each case is whether, in accordance with the agreement with his tenant, the claimant materially participated in the production or the management of the production of the commodities produced on the farm. If he did thus materially participate, the rental income he received from the farm is includible in computing the net earnings from self-employment which can be credited for social security purposes.
This ruling discusses three claims for old-age insurance benefits which are similar in the following respects: Each of the claimants is over age 65 and owns a farm which, when application was filed, had for 2 or more years been leased to and operated by a tenant. In each case, entitlement to benefits depends upon whether the net rental income received by the claimant can be credited as net earnings from self-employment. If so, he has enough quarters of coverage to be fully insured and is entitled to benefits. If not, he is not fully insured, and his claim for old-age insurance benefits must be disallowed.
Section 211(a)(1) of the Social Security Act provides, in pertinent part, that "rentals from real estate" (including rentals paid in corp shares) shall be excluded in computing net earnings from self-employment (and thus are not creditable as earnings for social security purposes), unless:
- * * * (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; * * *
Under section 211(a)(1), the farm rental income of the owner or tenant of land (who will be referred to as the "landowner," for convenience) is includible in net earnings from self-employment only if there was (A) an agreement between the landowner and the tenant for material participation by the landowner in the production or management of production of crops or livestock, and (B) actual material participation by the landowner. As was set forth in SSR 62-16, C.B. 1962, p.54, the material participation requirements in (A) and (B) may be met by the landowner either personally or through an agent.
Although the law does not 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. (See SSR 61-7, C.B. 1960-61, p.67, for a discussion of these reports.)
A landowner may participate in production, or in the management of production, in a number of different ways. The most direct forms of participation are physical work and management activities; the latter activities include the making of decisions which significantly affect the success of the enterprise, periodic advice and consultation with the tenant as to production of commodities, and periodic inspection of the various production activities. Other factors to be considered in determining participation would be: the furnishing by the landowner of a significant part of the machinery, implements, and livestock used in the production activities, or the furnishing of funds or the assuming of financial responsibility for a significant part of the expenses involved in the production of a commodity. However, these last mentioned factors are not sufficient by themselves to establish the material participation contemplated by the Act.
No hard and fast rules can be laid down for determining in all cases whether the necessary degree of participation has been established; each case must be decided on the basis of all pertinent facts and circumstances.
The following cases, which are the subject of this ruling, illustrate the application of the law to the facts involved.
Case 1. F owned a 190-acre farm on which he raised corn and soybeans since 1930. F rented his farm to G, his grandson, under a share-farming agreement in the years 1959 and 1960. Under the terms of the agreement, F was to pay part of the cost of the seed corn, fertilizer, and spray, and to assist in the harvesting; and G, the tenant, was to furnish the cost of all other expenses as well as all machinery used in the farm operation. F reserved the right to designate what portions of the farm were to be cultivated each year and what crops were to be raised upon each portion. F was to be consulted by G on all important matters relating to the planting, cultivation, and harvesting of the crop, and was to have the final decision in such matters. F also had the right to enter upon the land to observe the farm operations. F was to receive one-half of the corn crop and two-fifths of the soybean crop.
Pursuant to the agreement, F and G planned the crops they would raise each year and F designated where they would be planted. F also inspected the farm several times during the planting, growing, and harvesting seasons each year and consulted with G on every aspect of the farm operation -- how the soil should be prepared, how deep the seeds should be planted, when and how the planting should be done, when the crops should be sprayed, and when they should be harvested. In all these matters, F made the final decision. F also worked in the fields about 20 hours each year during the soybean harvest and furnished a small share of the production expenses.
The agreement between F and G clearly provides for F's material participation in the production and the management of the production of the crops. He exercised his right, under the agreement, to make the important decisions, and periodically inspected the production activities and consulted with G as necessary. These activities are sufficient to constitute material participation, since F made all the decisions upon which depended the success of the farm enterprise. Therefore, the facts that F did not furnish a substantial part of the equipment or of the production expenses, and this his physical labor each year was limited, are not determinative of the issue. Accordingly, it is held that F materially participated in the production or management of the production of the commodities produced on his farm, and the income therefrom is includible in computing his net earnings from self-employment. In consequence, F is fully insured and entitled to old-age insurance benefits.
Case 2. M owned a farm of 147 acres which she rented to her son, T, under an oral agreement in 1958, when she moved into town. In accordance with the agreement, M contributed one-third of the expenses and T contributed two-thirds. M was also part owner of the machinery, implements, and livestock used in the farm operation. The agreement contemplated that T would live on the farm, operate it, and receive two-thirds of the net proceeds, and that M would receive one-third. There has been no change in the agreement since 1958.
As was contemplated by the parties, M took no part in the farm activities other than to contribute one-third of the expenses and the use of her interest in the livestock, implements, and machinery. Although M has often visited the farm since 1958 to see T and his family, she neither inspected the crops nor advised and consulted with her son about the farm's operations.
In accordance with the agreement, M's only participation in the farm operation was the sharing of operating expenses and the contribution of livestock and equipment. such activity is not sufficient to constitute material participation within the meaning of section 211(a)(1) of the Act. She did not periodically inspect or consult with T, participate in management decisions, or perform any physical labor in connection with the production or the management of the production of the crop. Furthermore, consideration of the total of her activities and contributions does not show M to be significantly involved in the production or the management of the production of farm commodities. Accordingly, it is held that M did not materially participate in the production or the management of the production of farm commodities produced on her farm, and her rental income from the farm operation is excluded from net earnings from self-employment as rentals from real estate. She is therefore not fully insured and her claim for old-age insurance benefits must be disallowed.
Case 3. L owned a 340-acre farm about 30 miles from her home. L's farm was operated in 1959 and 1960 by B under a rental agreement providing that L and B were to share equally the direct costs of production and that L was to supply the machinery and equipment for the farm operation. The agreement also provided that B was to perform all physical work on the farm and have complete charge of the farming operations as to planting, cultivation, and harvesting. It was further agreed between L and B that they would jointly decide as to sale of the entire crop with respect to the time, price, and buyer; and that the profits from the sale would be divided equally. The agreement between L and B was strictly adhered to; and, other than her contributions of money and equipment, L's only activity was the decision she made jointly with B on where and when to market the crops.
As provided in her agreement with B, the only activity by L -- other than her sharing expenses and supplying equipment for the operation -- was her decision with B on marketing the crops. Such an isolated yearly action, even when coupled with the paying of a substantial part of the operating expenses and the supplying of all the equipment for production, does not constitute activity of such import as to show B to be significantly involved in the production or the management of the production of farm commodities.
Accordingly, it is held that L did not materially participate in the production or management of the production of the agricultural or horticultural commodities produced on her farm during 1959 and 1960, and her income therefrom is excluded from net earnings from self-employment as rentals from real estate. Since she is not fully insured, she is not entitled to old-age insurance benefits.