[Congressional Record Volume 145, Number 37 (Tuesday, March 9, 1999)]
[Senate]
[Page S2457]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself, Mr. Conrad, and Mr. Grams):
  S. 569. A bill to amend the Internal Revenue Code of 1986 to exclude 
certain farm rental income from net earnings from self-employment if 
the taxpayer enters into a lease agreement relating to such income; to 
the Committee on Finance.


                   The Farm Independence Act of 1999

  Mr. GRASSLEY. Mr. President, today, along with Senators Conrad and 
Grams of Minnesota, I am introducing a bill to exempt certain farm 
rental income from the self-employment tax.
  The self-employment tax has been applied equally to farmers and other 
business people for the last 40 years. Our bill would ensure equality 
in the future. It states that farm landlords should be treated the same 
as small business people and other commercial landlords, and they 
should not have to pay self-employment tax on cash rent income.
  The current law is drafted to ensure that self-employment tax applies 
to income from labor or employment. Farm landlords were only taxed when 
they participated in the operation of the farm. Income from cash rent 
represents the value of ownership or equity in land, not labor or 
employment. Therefore, the self-employment tax should not apply to 
income from cash rent. Yet, this is not they way that the Internal 
Revenue Service drafted its technical advice memorandum on this matter. 
This has resulted in farmers and retired farmers now paying a 15.3 
percent self-employment tax on cash rent.
  The IRS has gone too far. The law should be what people have counted 
on for 40 years. Unless there is an act of Congress, history should be 
respected. The test of time will prove that the taxpayer was right and 
that the IRS was wrong, particularly now that there is a difference 
between the farm and city sector. Therefore, we are introducing this 
bill so that farmers and retired farmers will not be singled out 
unfairly by the IRS.
  Specifically, this legislation would remove the code's ambiguity and 
recapture its original intent. The legislation would clarify that when 
the IRS is applying the self-employment tax to cash rent farm leases, 
it would limit its applicability to the lease agreement. This is not an 
expansion of the law of taxpayers. Rather, it would limit the anti 
taxpayer expansion initiated by the Internal Revenue Service. The tax 
law does not require cash rent landlords in cities to pay the self-
employment tax. Indeed cash rent farm landlords are the only ones 
required to pay the tax. This is due to a 40-year-old exception that 
allowed the retired farmers of the late 1950's to become vested in the 
Social Security system.
  The law originally imposed the tax on farm landlords only when their 
lease agreements with the renters required them to participate in the 
operation of the farm and in the farming of the land.
  Forty years later, the IRS has expanded the application of self-
employment tax for farmland owners. The tax court told the IRS that in 
one particular instant they could look beyond the lease agreement. On 
this very limited authority, the IRS has expanded one tax court case 
into national tax policy.
  Our legislation will bring fairness between farmer landlords and 
urban landlords. It will clarify that the IRS should examine only the 
lease agreement. It would preserve the pre-1996 status quo. It would 
preserve the historical self-employment tax treatment of farm rental 
agreements, equating them with landlords in small businesses and 
commercial properties. The 1957 tax law was designed to benefit retired 
farmers of that generation so they would qualify for Social Security.
  Congress does not intend that farm owners be treated differently from 
other real estate owners, other than they have been historically. We 
need clarity provided in our legislation in order to turn back an 
improper, unilateral, and targeted IRS expansion of settled tax law.
  I urge my colleagues to join us in addressing this unfair position 
taken by the Internal Revenue Service.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record. 
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 569

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1, SHORT TITLE.

       This Act may be cited as the ``Farm Independence Act of 
     1999''.

     SEC. 2. WRITTEN AGREEMENT RELATING TO EXCLUSION OF CERTAIN 
                   FARM RENTAL INCOME FROM NET EARNINGS FROM SELF-
                   EMPLOYMENT.

       (a) Internal Revenue Code.--Section 1402(a)(1)(A) of the 
     Internal Revenue Code of 1986 (relating to net earnings from 
     self-employment) is amended by striking ``an arrangement'' 
     and inserting ``a lease agreement''.
       (b) Social Security Act.--Section 211(a)(1)(A) of the 
     Social Security Act is amended by striking ``an arrangement'' 
     and inserting ``a lease agreement''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

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