The applicable statute refers to the annual payments as "rental payments." The payments were treated by the IRS as rental income when received by non-farmers. This report outlines the evolution of the IRS's position along with relevant case law and legislative history. Tax Treatment by the Internal Revenue Service and the Courts

Taxpayers and the Internal Revenue Service have generally agreed that CRP payments must be included in gross income and are subject to income tax. In Hasbrouck , a couple purchased land in 1987 that had been enrolled in the CRP by the previous owner. Therefore, the payments qualified as rent that was excludible from self-employment income. The finding appears to be based only on what the court deemed to be the program's essence—"to prevent participants from farming the property and to require them to perform various activities in connection with the land, both at the start of the program and continuously throughout the life of the contract...." Although the Tax Court had cited both a Senate and a House report to support its conclusion that "[t]he primary purpose of the CRP is to achieve specified environmental benefits," the appeals court cited no support for its conclusion as to the "essence of the program." Although in 1997, the taxpayer's material participation in the farm operations was cited in IRS publications as determining whether the CRP payments were subject to self-employment tax, the IRS seems to now take the position that material participation in providing required services under the CRP is irrelevant in determining whether the payments are subject to self-employment tax. Despite this, in issuing Notice 2006-108, the IRS has publicly indicated its intention to adopt the position that entering into the CRP contract means that one is in the trade or business of farming and that the payments are self-employment income. Each proposed excluding CRP payments from self-employment income. It would clearly exclude the income from self-employment income for certain participants and would allow all participants the option of receiving non-taxable tax credits rather than annual rental payments, thus shielding CRP payments from both income and self-employment taxes. In this case, the easement holder may be an adjacent land owner or may be some other third party. Soil Bank Program Payments

Revenue Ruling 60-32 addressed payments received under the Soil Bank Act and concluded that they were to be included in self-employment income when received by those who were otherwise engaged in the trade or business of farming because they replaced income the recipients would have generated from farming the land. In so doing, neither has looked at the requirement that all payments received by participants, whether as annual rental payments or as cost-share payments for the conservation plan, generally must be repaid if the contract is terminated before it expires. As evidenced by bills repeatedly introduced in Congress, some Members of Congress have been aware that the IRS was treating some CRP payments as self-employment income, but, thus far, Congress has not chosen to act to change that. The Conservation Reserve Program

The Food Security Act of 1985
Under the Food Security Act of 1985, the Secretary of Agriculture was to "enter into contracts with owners and operators of farms and ranches containing highly erodible cropland." The 2007 "Farm Bill"
H.R. This act, if passed, would extend the Conservation Reserve Program through 2012.
Under the Conservation Reserve Program (CRP), owners and operators of eligible land may enter into a contract with the Secretary of Agriculture to enroll land in the program and convert it to less intensive use under an approved conservation plan. In return, participants receive an annual payment that the statute refers to as "rent." Legislation establishing and extending the program has been silent as to the appropriate tax treatment of these payments. For many years, the Internal Revenue Service (IRS) generally treated the payments as farming income when received by someone who was engaged in the trade or business of farming, but as rental income when received by others.
The IRS's position appears to have changed to one that would treat all Conservation Reserve Program payments as farming income and, thus, subject to self-employment tax. Recently, the IRS published a proposed revenue ruling that explains its treatment of CRP payments as income from the trade or business of farming and, thus, subject to self-employment tax.
Currently, case law provides some support for the IRS's position that the CRP's annual rental payments are not rent that is excludible from self-employment tax. This case law has not, however, considered CRP payments received by individuals who were not previously engaged in farming and who have purchased property and immediately enrolled it in the CRP (or agreed to continue the enrollment begun by the previous owner/operator). Neither have courts considered CRP payments to those who hire third parties to perform activities required by the CRP contract.
The possibility that the payments may not constitute self-employment income even if they do not qualify as excludible rent has not been considered by either the courts or the IRS. Neither has yet considered the statutory requirement that all payments must be returned if the contract is terminated.
The Heartland, Habitat, Harvest, and Horticulture Act of 2007 (S. 2242), introduced in the 110th Congress, contained provisions that would exclude CRP payments from self-employment income for some taxpayers and would allow all recipients to choose to receive a tax credit in lieu of the payments. These provisions were incorporated into the 2007 Farm Bill (H.R. 2419), which is in conference.
This report outlines the history of the program, the changing positions of the IRS, pertinent case law, and other provisions of the Internal Revenue Code (IRC). Several possible approaches to the taxation of CRP payments are discussed.