SSR 63-45c: SECTION 211(a)(1). -- NET EARNINGS FROM SELF-EMPLOYMENT -- FARM RENTAL INCOME -- MATERIAL PARTICIPATION

SSR 63-45c

HOFFMAN v. RIBICOFF, 305 F.2d 1 (8th Cir., 1962)

Claimant owned two farms located 400 miles from his home which he leased to tenants on a share crop basis. He prepared and mailed to each of his tenants a map or chart of his farms showing what crop was to be planted in each field, what fences were to be moved or to remain, and what ground should remain undisturbed so as to avoid washouts. He paid over half of the production expenses. He visited the farm sometimes once a year, sometimes more often depending on the need. he hired his brother-in-law to observe claimant's farms and to keep him informed, and the latter was the major source of communication for tenants with the claimant. The brother-in-law made no management decisions, give no advice to the tenants, and did no physical work. Held, claimant did not materially participate in the production or management of the production of the crops under an arrangement which provided for such participation and his income from the farms is not includible in computing his net earnings from self-employment for social security purposes.

In this case, the United States Court of Appeals for the Eighth circuit upheld the Secretary's decision that the appellant had not "materially participated" in the production or management of the production of the crops raised on his farms in the year 1956, and therefore the income he derived from the rental of his farms during that year could not be credited to his earnings record for social security purposes.

Claimant was born January 25, 1886. During 1956 he owned two farms in Iowa, one of 219 acres and one of 160 acres located approximately 400 miles from his home in Missouri. Claimant visited his farms sometimes once during a year, sometimes more often, depending upon the need.

Each year the claimant prepared a map or chart of each of his farms which he mailed to each of his tenants and on which he designated the places where fences were to be moved or to remain, what was to be planted in each field, the location of terraces, and the places where the ground should be undisturbed so as not to contribute to washout.

Claimant's brother-in-law, a farmer, lived near claimant's farm, and was paid by claimant to observe claimant's farms and keep him informed, primarily of matters involving repair, maintenance, and improvement. Claimant's tenants if they wanted anything done communicated with the brother-in-law and he relayed the information to the claimant either by telephone or by letter. Claimant's brother-in-law had no authority to make any decision for claimant and if the tenants asked him anything he got in touch with the claimant and before answering them. Claimant always selected his own tenants.

The cash expenses paid by the claimant for such purchases as seed, combining, baling, and lime, but not including such expenses as insurance, taxes, or building repairs, exceeded 60 percent of the total expenses paid by the claimant and his tenants for the year 1956.

Claimant specified the price at which his share of each crop was to be sold, but left it to his brother-in-law to find a purchaser or purchasers and make the actual sale.

If affirming the decision of the Secretary that "the claimant did not materially participate in the production or management of production of agricultural commodities under an arrangement which provided for such participation," the court stated in part:

"* * * [In its decision in this case] the Appeals Council noted that Section 211(a)(1) supra, provides that rental from farm land and from personal property leased with the land were not applicable as self-employment income, unless it is established that:

`(A) Such income is derived under an arrangement, between the owner or tenant and another individual, which provides that such other individual shall produce agricultural * * * commodities (including livestock * * *) on such land, and that there shall be material participation by the owner or tenant in the production or the management of the production of such agricultural * * * commodities, and
`(B) there is material participation by the owner or tenant with respect to any such agricultural * * * commodity,' Emphases are those of the Appeals Council.)

"In connection with its interpretation of the material participation provision contained in Section 211(a)(1) supra, the Appeals Council noted that Senate Report No. 2133 (U.S. Cong. & Adm. News, 84 Cong. 2d Session 1956, p. 3915) in pertinent part states:

`Under both the committee-approved bill and the House bill, the present exclusion from self-employment earnings of rentals from real estate would not apply to income derived by an owner or tenant of a farm from its operation by another individual if there is material participation by the owner or tenant in the farm production under an arrangement which provides for such participation. The bill thus would extend coverage under old-age and survivors insurance to certain farmers who, though not covered under the present law, have income from work and therefore are exposed to the type of income loss against which the program is designed to afford protection.
`Under this amendment it is contemplated that the owner or tenant of land which is used in connection with the production of agricultural or horticultural commodities must participate to a material degree in the management decisions or physical work relating to such production in order for the income derived therefrom to be classified as "net earnings from self-employment," The committee is of the opinion that in any case in which the owner or tenant establishes the fact that he periodically advises or consults with such other individual as to the production of the commodities and also establishes the fact that he periodically inspects the production activities on the land he will have presented strong evidence of the existence of the degree of participation contemplated by the amendment.
`If the owner or tenant also establishes the fact that he furnished a substantial portion of the machinery, implements, and livestock used in the production of the commodities or that he furnishes, or advances or assumes financial responsibility for, a substantial part of the expense (other than labor expense) involved in the production of the commodities, the committee feels that he will have established the existence of the degree of participation contemplated by the amendment.' (Emphases by Appeals Council.) [See also SSR 61-7, C.B. 1960-61, p.67.]

"After taking notice of that legislative history, the Appeals Council proceed to apply the concrete factual situation in the case at bar to the general statutory provisions of Section 211(a)(1), as follows:

`In the application of the above legislation to the facts as stated by the referee, it can be readily seen that the claimant's activities are primarily identified with his investment, rather than with the production. The Appeals Council is of the opinion that claimant's activities, set forth in paragraphs numbered one through eleven of the referee's decision, primarily involve management decisions relating to the improvement and maintenance of the farms rather than to the production. The claimant visits the farms approximately once each year, provides for the tenants a map and chart of the various tracts and the crops to be planted, the position and removal of fences in determining such tracts, the location of terraces and exclusion of certain land to minimize erosion the engagement of the services of Mr. Denney who relays certain information and requests by the tenants -- which according to the record reflect matters primarily involving repair, maintenance and improvement -- and collects and utilizes information from the universities and colleges, admittedly beneficial, but not directly related to the production. All of these, including the charts, provide a means through which the claimant is able to practice up to date methods, which over the years, will result in an investment accrual. However, the landlord-claimant is merely exercising a right that flows from an ordinary farm lease in the selection of plots and crops, the designation of land to be untilled, and from general activity which by the long-range view enhances his investment. The management making decisions that must be established to constitute material participation are much more closely related to the actual operation of the farm in connection with the actual production of the commodities than is existent here.'

* * * * * * * * * * * *

"We have carefully reviewed the record on which the Appeals Council rendered its final decision in the case at bar. It is thereby established that the facts as stated by the Referee * * * and adopted by the Appeals Council are substantially sustained by the evidence. Seemingly, it is because the Appeals Council referred only to some such facts in the concoction of its decision that appellant asserts the same `should be reversed because it' is thereby revealed that it `was based on a fallacy of reasoning.' Such fallacy, as appellant views it, is that the final decision of the Appeals Council is premised in reasoning `that those acts which operate toward the improvement and maintenance of the soil of a farm cannot likewise be acts which enhance the production of the crops on the farm.' The ultimate decision of the Appeals Council in the case at bar is not so premised. Its decision is that under the facts as found by the Referee it is thereby established that appellant `did not materially participate in the production or management of production of agricultural commodities' on the farm `under an arrangement which provided for such production' That such conclusion is a reasonably proper one to be gleaned from the record, is established by a consideration of the following matter.

"At no place in the statement of facts as found by the Referee is there a specific finding of any `arrangement' between appellant and the tenant existing finding of any `arrangement' between appellant and the tenant existing in respect to his farm in the year 1956, which provided for `material participation' by appellant `in the production or management of production of agricultural commodities' on his farm. The written lease appellant had with his tenant in 1956 was a Standard From FHA-81 Lease. It contained no agreement for `material participation' by appellant relating to `production' of crops grown on his farms. it is not necessary that such an agreement be in writing. It may be an oral one. But, aside from appellant's statement that he had an understanding with his tenant in 1956 to that effect, there is no other testimony in this record from which that matter is established as a fact. There is other evidence contra. Appellant's tenant for that year was an experienced farmer. A statement made by the wife of that tenant appearing in the record, is to the effect that the tenant did not seek, nor did appellant give, any advice, or consult with that tenant as to the actual farm operations in 1956.[1] A reasonable inference from that and other testimony is that after the `share crop' lease was executed, if the tenant followed the `crop may' prepared by appellant for that year, the tenant was then on his own so far as all other operations of the farm were performed.

"The Referee found in 1956 appellant did prepare a map or chart of his farms designating what crops were to be planted where, what fences were to be removed, or were to remain, and what ground should be undisturbed so as not to contribute to washouts. The only other evidence establishing appellant's connections with his farms in that year is that he employed his brother-in-law, a Mr. Denney, who admittedly was not a farm manager, to look over his farms from time to time and communicate with appellant as to what he observed. Mr. Denney was merely a medium of communication between appellant and the tenant on his farm. Mr. Denney's testimony is: `I don't tell the tenants how to farm. if the tenants are in need of anything, they notify me and I notify Ivan (appellant) and wait for his instructions.' When contacted by a field representative of the Bureau, Mr. Denney stated that he does not inform the tenant in any way, through advice or consultation, does no physical work to assist the tenant, and does not inspect the tenant's production activities, and that the only time the tenants contacted him was when they wee in need of items to be provided by the landlord as, for example, repairs needed for the houses or fences or other farm property. In a questionnaire filed by appellant he affirmed that, `Mr. Denney (was hired) to look after (my) interests and to see that the work is carried on as I direct it to be done. He (Mr. Denney) does not make any management decisions and renders no service in an advisory capacity to the tenants. He does report regularly to me either by phone or letter, if something needs my attention.'[2]

* * * * * * * * * * * * *

"From the above facts and our review of the record as a whole, we believe there was substantial evidence from which the Secretary could reasonably conclude that appellant did not in 1956 have an `arrangement' whereby he would `periodically' advise with the tenant on his farm, or `periodically' inspect production activities thereon; nor did he, with any degree of regularity or frequency `take any important part in making management decisions substantially contributing' to the promotion of production on his farms. Manifestly, the making of a farm plan at the beginning of the season is not sufficient in itself to establish the `periodical' . . . `material participation' which the Congress had in mind before income derived from farm operations should be considered as self-employment income. `Periodically' suggests some fixedness; it implies regular intervals, definitely prescribed to some time schedule. It is something more than `intermittent' or once a year. (Cf. Webster's New International Dictionary, Second Edition.)

`Mere ownership of property let out to another on some basis by which the amount payable for use (rent) might come from crops produced was not an activity which Congress regarded as an employment or as generating income from employment.' Henderson v. Flemming, 283 F.2d 882, 888 (5 Cir. 1960),

The Act requires something more than the letting of farm land on a share-crop basis and the payment of part of the seed and fertilizer for which the owner receives a portion of the crops produced by his tenant farmer. It is common knowledge that throughout the United States farm lands have been and are now leased where the landowner pays a part of the seed and fertilizer and receives a portion of the products as payment for rent, while the tenant performs the labor. From the legislative history of Section 211(a)(1) supra, it seems obvious that the Congress has knowledge that such common agreements were not intended to be within the ambit of Section 211(a)(1) supra. That much is clear from the requirement that there be `material participation by the owner * * * in the production of management of the production' and an `arrangement which provided for such participation' before `self-employment' income derived from farm lands can be counted in granting Social Security benefits under the Act.

"In light of the specific provisions and legislative history of Section 211(a)(1) supra, it is clear that whether there is `material participation' as therein provided is a factual determination that can only be made on a case-to-case consideration. We cannot say that the factual situation here considered by the Secretary results in an erroneous application of evidentiary facts to a proper interpretation of Section 211(a)(1) of the Act supra as appellant contends.

"The judgment appealed from is, therefore, affirmed."


[1] "After the effective date of the Amendment to ยง 211(a)(1), leases executed by appellant in 1957 and subsequent years provide that he was to have the `complete managerial policy of the crop-share-lease,' and that the tenant had `the right to consult with and make suggestions to' appellant relative thereto."

[2] "In light of that situation and other facts appearing in the record here, we do not have before us various material participation by a landowner, as considered in Henderson v. Flemming, 283 F.2d 882 (Cir. 5); and Harper v. Flemming, 288 F.2d 61 (Cir. 4). We consider the factual situation in those cases to be distinguishable from those appearing in the case at bar."


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