The IRS has addressed the taxation of payments made to farmers under a trade aid package (the Market Facilitation Program or MFP) in PMTA 2018-021. The MFP program gives direct payment to producers of certain crops that have been adversely affected by tariffs.
The memo deals with both the issue of whether such payments are part of gross income under IRC §61 and as self-employment income under IRC §1402.
The memorandum notes:
Our main concern is taxation of the MFP payments; this program will receive the bulk of the funding ($4.7 billion for the first round of payments, and can receive approximately $10 billion of the total $12 billion allotted for the package), the greatest share of which is expected to be paid to soybean farmers, who have been most affected by the tariffs. The purpose of the MFP payments is to make up for the depressed prices of certain commodities caused by the tariffs, and payments are tied to actual 2018 production (i.e. the amounts actually produced in 2018), so producers experiencing drought or other natural disasters will actually receive less than those who are not experiencing these problems and have a normal production level for 2018, Schnepf et al. at 4-5.
The memorandum notes that the scope of IRC §61 is very broad when determining if an item is included in gross income:
Section 61(a) of the Internal Revenue Code and section 1.61-1 of the Income Tax Regulations generally provide that, except as otherwise excluded by law, gross income means all income from whatever source derived. The term “income” is broadly defined as “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955). Section 1.61-4(a)(4) and (b)(4) of the Income Tax Regulations states that farmers must include in gross income “[a]ny subsidy or conservation payments which must be considered as income”.2 The scope of section 61(a) is broad, and exclusions from income are narrowly construed. See Commissioner v. Schleier, 515 U.S. 323, 328 (1995); United States v. Burke, 504 U.S. 229, 248 (1992); Commissioner v, Glenshaw Glass Co., 348 U.S. at 429-430.
The memorandum goes on to note that both the courts and the IRS have viewed payments to replace lost profits must be included in gross income. Specifically, the memorandum notes that the IRS has held such payments to farmers under previously programs have been includable in gross income:
The Service has also adhered to this principle, issuing a number of revenue rulings requiring the inclusion in gross income of subsidy or conservation payments received by farmers, including those payments intended to compensate for lost profits. See Rev. Rul. 73-408, 1973-2 C.B. 15 (cancellation of an assistance loan to farmer who suffered uninsured crop damage is includible in gross income as a substitute for lost income); Rev. Rul. 68-44,1968-1 C.B. 191 (payments to farmers to encourage them to divert land to nonagricultural uses is substitute for farm income and includible in gross income).
The memorandum goes on to note that self-employment income under IRC §1402 generally includes income from a §162 trade or business:
The term “trade or business” when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 (relating to trade or business expenses), with certain listed exceptions. I.R.C. § 1402(c). Earnings derived from an individual taxpayer’s trade or business, including agricultural program payments, are generally includible in self-employment income and subject to SECA tax. Ray v. Commissioner, T.C. Memo. 1996-436, 1996 WL 540112 at *2.
The memorandum goes on to note that the MFP payments are similar in nature to prior agriculture payments meant to compensate farmers for lost income. The memorandum goes on to describe IRS guidance on such previous programs:
The Service has previously provided guidance about the taxability of counter-cyclical and price loss payments on the Schedule F, Profit or Loss From Farming, and in Publication 225, Farmer's Tax Guide. The Service previously stated in the Instructions for Schedule F and Publication 225 that counter-cyclical payments and price loss payments are includible in gross income, similar to other agricultural program payments. For example, the 2003 Publication 225 states in the section “Agricultural Program Payments” that taxpayers “must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates . . . The Farm Security and Rural Investment Act of 2002 created two new types of payments — direct and counter-cyclical payments. You must include these payments on Schedule F, lines 6a and 6b.”
Based on this analysis, the IRS concludes MFP payments are both includable in gross income and are part of self-employment income:
Here, the MFP payments are government subsidies paid for the purpose of compensating farmers of specified crops for lost profits. There is currently no legislation excluding these payments from gross income. Thus, under the caselaw and guidance discussed above, the MFP payments are includible in gross income under section 61(a). These payments are also generally includible in net earnings from self-employment and subject to SECA tax.