Rev. Rul. 63-66

Advice has been requested whether an individual is taxable with respect to crop shares received by him as rent for the use of his farm land where, by gift to his children, he transferred the crop shares prior to their sale under the circumstances described below.

The taxpayer is the owner of a parcel of farm land which was farmed in 1961 by other parties under a crop-share arrangement. The taxpayer's crop share for 1961 amounted to x bushels of wheat which was harvested and delivered in 1961, in the taxpayer's name, to an elevator company. Prior to selling any of this wheat, the taxpayer instructed the company to cancel his warehouse receipt for the wheat and to make out new warehouse receipts in equal amounts of wheat in the names of his children. The children sold the wheat during 1961 and 1962, and payments therefor were made directly to them by the company.

Section 61 of the Internal Revenue Code of 1954, provides that, except as otherwise provided, gross income means all income from whatever source derived, including, among other things, rents.

Section 1.61-4 of the Income Tax Regulations provides, in effect, that a farmer shall include crop shares received for the use of his land in his gross income as of the year in which they are reduced to money or the equivalent of money, irrespective of whether he employs the cash receipts and disbursements or the accrual method of accounting.

Revenue Ruling 55-531, C.B. 1955-2, 520, holds, in part, that the fair market value of agricultural or manufactured products or property held for sale in the ordinary course of business, which is made the subject of a gift, is not includible in the gross income of the donor for Federal income tax purposes. This holding is based upon the decisions in Mamie F. Farrier v. Commissioner , 15 T.C. 277 (1950), acquiescence, C.B. 1955-1, 4, and Elsie SoRelle et al. v. Commissioner , 22 T.C. 459 (1954), acquiescence, C.B. 1955-1, 6.

In the Farrier case, the court held that the fair market value of cattle given by the taxpayer to her daughter did not represent taxable income to the taxpayer. In that case, there had been no sale of the cattle and no income realized either by the donor or anyone else. The taxpayer had simply made a gift of the property itself before the realization of any income thereon.

In the SoRelle case, the court held that the taxpayer, who prior to harvest, had given a parcel of land with its mature wheat crop to each of his four children, did not realize income to the extent of the fair market value of the wheat. The court stated, in effect, that the transaction under consideration constituted an actual completed and bona fide gift of income producing property carrying with it the unharvested wheat crop and, therefore, that the income resulting from the sale of the wheat belonged to the children and was taxable to them.

The facts in the instant case, however, except that the gift involved an agricultural product, are analogous to the facts in the case of Helvering v. Paul R. G. Horst , 311 U.S. 112 (1940), Ct. D. 1472, C.B. 1940-2, 206, which was held inapplicable to the facts in the Farrier and SoRelle cases.

In Horst , the owner of bonds detached interest coupons therefrom and delivered them as a gift to his son, who procured payment. The Supreme Court of the United States stated that the question was `whether because one who in fact receives payment for services or interest payments is taxable only on his receipt of the payments, he can escape all tax by giving away his right to income in advance of payment.

In holding the donor of the coupons taxable on the amount of interest received by his son, the Court pointed out that the donor had two independent and separate kinds of property rights in the bonds, one the right to receive the principal at maturity and the other to receive interest payments. It was the power to command the payment of interest to others which constituted an economic gain to the taxpayer. The Court stated further, `The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment, and hence the realization, of the income by him who exercises it.'

The taxpayer in the instant case entered into an agreement whereby other parties farmed his land and paid him rent in the form of crop shares. Therefore, the gift of crop shares in the instant case actually constituted a gift of rental income and not a gift of the mere unrealized appreciation of an asset as was the situation in Revenue Ruling 55-531. Moreover, the taxpayer continued to own the land upon which the wheat was produced. In view of these factual differences, the instant case is distinguishable from Revenue Ruling 55-531 and the Farrier and SoRelle cases cited therein.

Under the principle of the Horst case set forth above, the taxpayer, as the result of exercising the power to procure the payment of the rental income to his children, realized an economic gain.

Accordingly, based on the foregoing, it is held that the instant taxpayer must include in his gross income the amounts received by the children for the crop shares in the taxable years in which they reduced the crop shares to money or the equivalent of money. Compare Ralph Romine v. Commissioner , 25 T.C. 859, at 876 (1956).