Rev. Rul. 55-538

The Internal Revenue Service has been requested to determine the status, for purposes of the Federal Insurance Contributions Act and the Self-Employment Contributions Act of 1954 (chapter 21, subtitle C, and chapter 2, subtitle A, Internal Revenue Code of 1954), as respectively amended by the Social Security Amendments of 1954, of X , an individual owner and lessee of farm lands, and of other individuals, commonly known as share-farmers, who enter into agreements with him to produce crops on land owned or leased by X in return for a share of the crops produced or of the proceeds from their sale. X raises crops on tracts of land other than those assigned to the share-farmers and hires regular employees whose status is not in question to carry on such operations for him.

The share-farmers are engaged under oral contracts for a crop year and each is allowed to select his tract from those available, with due consideration being given to such factors as the number of workers in his family, the size of the house available for use as a residence, etc. Each share-farmer is offered the use of a garden plot and is allowed to keep livestock and poultry on his premises.

Under the terms of each contract, X agrees to furnish and plant the seed and to furnish the equipment and livestock needed for the planting and cultivating operations. Each share-farmer agrees to pay a proportionate share of the costs of the fertilizer and insecticides used on his tract, and to perform, or pay for, the labor necessary for cultivating, raising, and harvesting the crops. X and the share-farmers also agree as to the type of crops to be grown; the location of areas to be planted; the duties of, or services to be rendered by, each party; and the amount to be advanced to the share-farmer during the planting, growing, and harvesting seasons, and the interest to be paid thereon.

X determines the time for planting. A foreman or other representative of X periodically inspects the area assigned to each share-farmer for the purpose of determining whether he is properly caring for the area and discharging his duties. Upon mutual agreement, cultivating or harvesting, or both, may be done by X's regular employees, in which case appropriate charges are made against the share-farmer's account. The crops grown by the share-farmer are sold by X , the advances and other charges are deducted from the share-farmer's share of the proceeds, and the remainder is paid to him in cash.

In addition, some of the share-farmers work for X for a daily or hourly were when there is little or no work to be done under their share agreements.

The Internal Revenue Code of 1954, as amended by the Social Security Amendments of 1954, extended the application of the tax on self-employment income to farm operators effective with respect to taxable years ending after December 31, 1954. Section 1402(a)(1) was also amended to provide specifically that there shall be excluded from net earnings from self-employment `rentals paid in crop shares' unless such rentals are received in the course of a trade or business as a real estate dealer.

It is the position of the Service that an individual who enters into a crop-sharing agreement with another person is an independent contractor and not an employee if (1) he undertakes to produce a crop or livestock on land owned or leased by such other person; (2) the crop or livestock produced, or the proceeds thereof, are to be divided between the individual and such other person; and (3) the amount of such individual's share depends on the amount of the crop or livestock produced. In connection with the treatment of the respective shares of the landowner and the share-farmer under such an agreement, it is the position of the Service (1) that the share received by the share-farmer is includible in determining his `net earnings from self-employment'; and (2) that the share received by the landowner constitutes rentals from real estate and, as such, is excluded from net earnings from self-employment under section 1402(a)(1) of the Self-Employment Contributions Act of 1954, as amended.

In accordance with the above-stated interpretation, it is held that the individuals engaged in producing crops pursuant to the agreements between them and X considered herein are, with respect to such undertakings, not employees of X but independent contractors and self-employed individuals. The amount received by the share-farmer for producing the crops under his share agreement with X is includible in determining his `net earnings from self-employment' and is subject to the provisions of the Self-Employment Contributions Act of 1954, as amended.

It is further held that, with respect to the services performed by the individuals for X for a daily or hourly wage, X exercises or has the right to exercise over such individuals the control necessary to establish the relationship of employer and employee for Federal employment tax purposes.

Insofar as X's self-employment tax liability is concerned, the amounts received by him under his share arrangements with his share-farmers are considered to be rentals from real estate and consequently are to be excluded by him in computing his `net earnings from self-employment.' However, the proceeds of the crops produced by X on the land farmed for him by his regular employees are includible in determining his `net earnings from self-employment and are subject to the provisions of the Self-Employment Contributions Act of 1954, as amended.

The rules stated above as to the status of share-farmers under the Federal Insurance Contributions Act, as amended by the Social Security Amendments of 1954, also are applicable for determining the status of such individuals under the Federal Insurance Contributions Act, as amended by the Social Security Act Amendments of 1950