Rev. Rul. 75-11

Advice has been requested concerning the Federal income tax treatment of the disposition of crop shares received as rent under the circumstances described below.

Situation (1). During 1972 a farmer-landlord who files his returns on the calendar year basis contributed crop shares received by him as rent to a charitable organization described in section 170(c) of the Internal Revenue Code of 1954. In 1973 the crop shares received by the charitable organization in 1972 were sold by it for cash.

Situation (2). During 1972 the farmer-landlord used crop shares received by him as rent as feed in his farming operation.

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

Section 1.61-1(a) of the Income Tax Regulations provides that gross income includes income realized in any form, whether in money, property, or services.

Section 1.61-4 of the regulations provides, in part, that crop shares (whether or not considered rent under state law) shall be included in gross income as of the year in which they are reduced to money or its equivalent under both the cash and accrual methods of accounting.

The case of Tatum v. Commissioner, 400 F. 2d 242 (1968), aff'g 46 T.C. 736 (1966), concerns the contribution to charities of crop shares received as rent. The court held that crop shares are potential income assets, not property, and that a landlord may not avoid taxation by assigning his rights to such income prior to its reduction to money or its equivalent. The court also stated that there is no distinction in the essential income nature of crop rents as against rent in any other form, but that section 1.61-4(a) of the regulations grants a special privilege to sharecrop landlords of deferring recognition of the rental income until the sharecrops are converted to money or its equivalent. The court described the regulation as "a rule of administrative convenience, made necessary by the absence of cash with which to pay the tax prior to a sale."

When crop shares are given away, the continuation of this deferral privilege does not serve the purpose of providing cash with which to pay the farmer-landlord's tax, since it is the donee, not the farmer-landlord, who eventually will convert the crops to cash. Thus, there is no reason to continue the preferential treatment accorded crop shares beyond their disposition.

Rev. Rul. 63-66, 1963-1 C.B. 13, holds that when a taxpayer makes a gift of crop shares, he must include in his gross income the amounts received by the donee for the crop shares in the taxable year in which the donee reduced such crop shares to money or the equivalent of money. This holding is based on Helvering v. Horst, 311 U.S. 112 (1940), 1940-2 C.B. 260, which concludes that if a donor makes a gift of unrealized income, he must recognize the income at the time he would have realized it (upon receipt) had he not given it away. However, in the case of a gift of crop shares the donor makes a gift of realized income, which by virtue of a rule of administrative convenience he has not yet been required to recognize. Thus, Horst is distinguishable from the present case on the question of the timing of income recognition.

Accordingly, in situation (1), it is held that in 1972 the farmer-landlord must recognize gross rental income in an amount equal to the fair market value of the crop shares at the time they are contributed to the charitable organization, and not when the charitable organization converts them to cash. Furthermore, the farmer-landlord is considered to have made a charitable contribution subject to the provisions of section 170 of the Code at the same time and in the same amount as the income recognized.

To the extent that Rev. Rul. 63-66 holds that the taxable year in which the donee reduces crop shares to cash or its equivalent determines the taxable year of its inclusion in the gross income of the donor, it is hereby modified.

When a farmer uses crop shares received as rent, as feed for his livestock, he has, in effect, converted the crop shares into cash or its equivalent by defraying the cost of procuring feed from other sources.

Accordingly, in situation (2), it is held that in 1972 the farmer-landlord must include as gross rental income an amount equal to the fair market value of the crop shares at the time they are used as feed for his livestock. Further, the farmer-landlord is entitled to a trade or business deduction for livestock feed under section 162 of the Code and the regulations thereunder at the same time and in the same amount as the gross rental income that is includible by him. Since the income that must be recognized equals the expense that may be deducted, ordinarily it is not essential to determine the amounts thereof for purposes of arriving at taxable income as defined in section 63, or in determining net earnings from self-employment as defined in section 1402(a). However, a determination of recognized gross income from crop share rentals may be necessary for purposes of determining net earnings from self-employment under the optional gross income method described in section 1402(a), and the retirement income credit allowed by section 37, when applicable.

Rev. Rul. 56-496, 1956-2 C.B. 17, provides rules for the treatment of crop shares received as rent, for the purpose of computing the retirement income credit, or other Federal income tax purposes, and for the purpose of computing net earnings from self-employment under the Self-Employment Contributions Act of 1954.

To the extent that Rev. Rul. 56-496 holds that when a farmer feeds his crop shares, received as rent, to his livestock, the value of the crop shares does not represent rental income, it is also modified.

Pursuant to the authority contained in section 7805(b) of the Code, to the extent that the modification of Rev. Rul. 63-66 by this Revenue Ruling produces an adverse tax effect on any taxpayer who has made a charitable contribution or other gift of crop shares received as rent, this Revenue Ruling will be applied without retroactive effect to such charitable contributions or gifts made on or before January 13, 1975, the date on which this Revenue Ruling is published in the Internal Revenue Bulletin.