SSR 65-8: SECTION 211(a)(1). -- NET EARNINGS FROM SELF-EMPLOYMENT -- MATERIAL PARTICIPATION BY AGENT -- ALLOCATION OF FARM INCOME
20 CFR 404.1051(b)
- The claimant and her brother owned and operated, as partners, a farm which they then leased to a tenant farmer on a share basis. The brother, on behalf of the partnership and pursuant to agreement, consulted with the tenant as to all phases of crop production, hired extra workers when necessary, and made all the important decisions affecting production and sale of the farm commodities. Held, the claimant materially participated in the production or management of production of the farm commodities, within the meaning of section 211(a)(1), and her net farm rental income may be credited as net earnings from self-employment.
The claimant filed application in May 1962 for old-age insurance benefits. She alleged that she had net earnings from self-employment of $2,075 in 1959 and $2,134 in 1960, by reason of rental income from a farm which she and her brother had owned and operated as partners and then leased to a tenant farmer. Such income, if creditable as net earnings from self-employment, would affect her benefit rights, since the amount of an old-age insurance benefit depends upon the average amount of the worker's creditable earnings.
Whether her net rental income from the farm can be credited as net earnings from self-employment depends on whether she met the "material participation" requirements of section 211(a)(1) of the Act. This section provides, in pertinent part, that rentals from real estate (including such rentals paid in crop shares) are excluded in computing net earnings from self-employment 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 . . . commodities (including livestock . . .) 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 . . . commodities, and (B) there is material participation by the owner or tenant with respect to any such agricultural . . . commodity.
The pertinent facts with regard to the claimant's interest in the farm, and the operation of the farm, are as follows: The claimant and her brother, in 1954, pooled their funds and purchased, as partners, 500 acres of farm land. The brother, an experienced farmer, was the only active member of the partnership; the claimant rendered no services on the farm. They operated the farm as a partnership during the 5 years 1954-1958, and divided the profits in accordance with the partnership agreement.
The partners leased this farm to a tenant under a written agreement executed in December 1958 and effective January 1, 1959. Pursuant to the express terms of the written agreement, the claimant and her brother (as partners) furnished all seed necessary for the small grains and corn crops; they also furnished all necessary fertilizer and the machinery and equipment for the farming operation. The combining costs were equally shared; the tenant, however, performed the physical labor required in the other phases of crop production and the care of the livestock.
Most of the hay and grains were fed to the livestock; the surplus was sold. The partnership received 70% of the income derived from the grain sales and 50% of the hay sales; the tenant received 30% and 50% respectively. The income and expenses from the livestock were divided equally between the partnership and the tenant. The net income of the partnership from the farm was divided equally between the claimant and her brother, in accordance with the terms of their partnership agreement.
The claimant herself did not personally participate in the farming operation. Although the written lease agreement contained no express provisions as to the responsibilities of the parties in the operation and management of the farm, the claimant's brother (and partner) consulted with the tenant as to all phases of the crop production; he made the arrangements for, and hired "custom" workers to bale the hay and combine the grain. The brother determined when and where to sell the commodities and negotiated sales of both the grain and the livestock, such sales having been made in his name. The brother was responsible for keeping the farm books and records; the operational expenses were paid by him from the partnership bank account. In the year 1959 it was necessary to secure a loan for the purpose of financing the farming operation; such loan was obtained by the brother and repaid from the partnership income. Aside from furnishing his labor the tenant assumed little or no management responsibility in the operation of the farm; the partnership, through the brother, exercised a high degree of management, made practically all the important decisions, and financed the operation to a large extent.
The issues in this case, upon which depends the amount of the claimant's old-age benefit, are whether there was an agreement providing for her material participation, and whether in 1959 and 1960 she materially participated in the production or management of production of farm commodities, as required by section 211(a)(1)(A) and (B) for crediting of her share of the net rental income from the farm as net earnings from self-employment.
The facts set forth above show that the brother, acting for the partnership consisting of the claimant and himself, materially participated in the production or management of production of agricultural commodities on the farm in question. The very nature, extent, and acceptance of the brother's activities in connection with the management of production show that the tenant agreed to and expected the performance of such activities by the landlord, thus reflecting complete agreement between the parties.
Since the claimant's brother (and partner) participated materially on behalf of the partnership, the fact that she personally did not participate in the production or management of production is not material. Inasmuch as mutual agency is a characteristic of a partnership, the distributive share of the rental income derived by each partner who is a co-owner is includible in net earnings from self-employment if one partner, in behalf of the partnership, and in accordance with the rental agreement, participates to a material degree in the commodity production on the rented farm. (See SSR 62-16, C.B. 1962, p. 54.)
Accordingly, it is held that the claimant meets the requirements of section 211(a)(1) for crediting of her net rental income from the farm toward net earnings from self-employment for 1959 and 1960. Therefore, such income is includible in computing the amount of her old-age insurance benefits.