20 CFR 404.1050(a)

SSR 72-47

Where a farm owner enters into a sharecropping arrangement whereby a tenant agrees to produce a crop on the farm's tobacco acreage for a 3/4 share of the crop proceeds with the remaining 1/4 share to the landowner, and the tenant commences farming activities and incurs expenses for supplies, but early in the season the farm is purchased by a utility corporation which pays the tenant a lump sum and directs him not to produce a crop, held, lump sum is includible in gross earnings from self-employment of tenant farmer as income derived from a trade or business even though farmer is not engaged in business at time payment received.

R, a self-employed tenant farmer, had entered into a sharecropping arrangement whereby the landowner permitted him, an experienced tobacco farmer, to produce the 1970 crop on the landowner's tobacco acreage, free from any direction or control. R had for a number of years worked the same farm and furnished all seed, fertilizer and tools, which ordinarily are provided by the landlord. As in past years, he was to receive a share of the crop proceeds, with the remaining ¬ share retained by the landowner.

Pursuant to the agreement, R sowed the tobacco plant beds in January or February 1970. Shortly thereafter a public utility company purchased the farm from the landowner with whom R had made his sharecropping arrangement for 1970 and instructed the tenant farmer not to produce a crop. R accepted the instruction, thereby terminating the sharecropping arrangement. A crop settlement was made with the landowner and the sharecropper. The tenant farmer was paid by the utility company an amount based on his share of the proceeds from the sale of tobacco during 1969 from the plot he was to work in 1970. Thus, R received $3,000 in August 1970 as the equivalent of a share of the tobacco crop produced on the farm in 1969.

In February 1971, R filed a Federal income tax return for 1970. On his Schedule F, Farm Income and Expenses, he listed income of $3,000 received from the utility company. Farming expenses of $828.95 were also listed, mainly for repairs, seed, fertilizers, gasoline, and depreciation, leaving a net income from self-employment of $2,171.05.

At issue is whether the $3,000 crop settlement received by R as a farm operator when he was required to discontinue his tobacco growing activities on the farm, pursuant to a sharecropping agreement made with the landowner, in includable in computing his gross earnings from self-employment.

R is a self-employed farmer under his arrangement with the landowner within the meaning of section 404.1070(c)(3) of Social Security Administration Regulations No. 4 (20 CFR 404.1070(c)(3)). This section provides in effect that the performance of service by an individual pursuant to sharecropping arrangement with the owner of land is deemed to constitute a trade or business.

Section 211(a) of the Social Security Act provides in pertinent part that the term "net earnings from self-employment" means the gross income as computed under Subtitle A of the Internal Revenue Code of 1954, derived by an individual from any trade or business carried on by the individual, less the deductions allowed under such subtitle which are attributable to such trade or business.

R had continued to engage in his usual trade or business of farming in 1970 until purchase of the farm by the utility company. The $3,000 payment is in the nature of receipts from farm operations in that it replaces income from carrying on his trade or business. As such, the payment represents income derived by the individual from carrying on that trade or business, even though he was not so engaged when he received the payment.

Accordingly, it is held that the $3,000 payment received by R in August 1970 constituted gross income from a trade or business. Subtracting therefrom his expenses of $828.95, net earnings from self-employment of $2,171.05 are established for 1970.

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