Internal Revenue Bulletin:  2006-39 

September 25, 2006 

Rev. Rul. 2006-46


Conservation Security Program (CSP). This ruling holds that the Conservation Security Program is substantially similar to the type of programs described in section 126(a)(1) through (8) of the Code within the meaning of section 126(a)(9). As a result, all or a portion of cost-share payments received under the CSP is eligible for exclusion from gross income to the extent permitted by section 126.

ISSUE

Is the Conservation Security Program (CSP) within the scope of § 126(a)(9) so that cost-share payments received under the CSP are eligible for exclusion from gross income to the extent permitted by § 126?

FACTS

The CSP, authorized under the provisions of §§ 1238-1238C of the Food Security Act of 1985, Pub. L. No. 99-198, 99 Stat. 1354, as amended by the Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-171, 116 Stat. 134, 16 U.S.C. §§ 3838-3838c, is a voluntary program that supports ongoing conservation stewardship of agricultural lands by providing financial assistance to agricultural producers who maintain and enhance natural resources. The CSP is administered by the U.S. Department of Agriculture (USDA). An agricultural producer who wishes to participate in the CSP must enter into a long-term conservation security contract with the USDA’s Natural Resources Conservation Service (NRCS). The CSP is available to agricultural producers owning private agricultural land (including cropland, grassland, prairie land, improved pasture land, rangeland, land under the jurisdiction of an Indian tribe, or forested land that is an incidental part of an agricultural operation). The NRCS, using the USDA’s Commodity Credit Corporation, provides contract payments that may include (1) an annual stewardship component for the existing base level conservation treatment; (2) an annual existing practice component for maintaining existing conservation practices; (3) a one-time new practice component for additional needed practices; and (4) an enhancement component for exceptional conservation effort and additional conservation practices or activities that provide increased resource benefits beyond the prescribed level. Payments for practices included in the existing practice and new practice components are limited, under 16 U.S.C. § 3838c, to 75 percent (or, in the case of a beginning farmer or rancher, 90 percent) of the average county costs of the practices for the 2001 crop year. Payments under the stewardship component are not limited to the taxpayer’s costs but are instead a percentage of the rental rate applicable to the land, as determined by the NRCS. Payments under the enhancement component may be based either on an activity’s cost or on its expected conservation benefits.

The Secretary of Agriculture has determined that payments under the CSP are primarily for the purpose of conserving soil and water resources or protecting and restoring the environment. In addition, the Secretary of Agriculture has informed the Treasury Department that USDA believes the CSP is a small watershed program.

LAW AND ANALYSIS

Under § 126(a), gross income does not include the excludable portion of payments received under certain conservation programs set forth in § 126(a)(1) through (8). Section 126(a)(9) provides that a small watershed program administered by the Secretary of Agriculture also is eligible for § 126 treatment if the Secretary of the Treasury determines that the program is substantially similar to the type of programs described in § 126(a)(1) through (8). See § 16A.126-1(d) of the Temporary Income Regulations Relating To The Partial Exclusion For Certain Cost-Sharing Payments for rules permitting the Commissioner to make these determinations and announce them in the Internal Revenue Bulletin and for the definition of “small watershed.”

If the Commissioner has determined that a program is substantially similar to the types of programs described in § 126(a)(1) through (8), taxpayers receiving cost-share payments under that program must determine what portion of the cost-share payments is excludable from gross income under § 126. Under § 126(b), the excludable portion of a payment is limited to the portion that (1) is determined by the Secretary of Agriculture to be made primarily for the purpose of conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife, (2) does not substantially increase the income derived from the property, and (3) is not properly associated with a deductible expense. Payments in the nature of rent or compensation for services do not qualify for the exclusion. See § 126(b) and § 16A.126-1, relating to the partial exclusion of certain cost-share payments, to determine what portion of the cost-share payments is excludable from gross income under § 126.

HOLDING

The Internal Revenue Service accepts USDA’s conclusion that the CSP is a small watershed program. Accordingly, the CSP will be treated for purposes of § 126 as a small watershed program administered by the Secretary of Agriculture. In addition, the Commissioner has determined that the CSP is substantially similar to the type of programs described in § 126(a)(1) through (8).

Payments for practices included in the existing practice and new practice components are limited to a percentage of the average county costs of the practices and qualify as cost-share payments. The cost-share payments received under the existing practice and new practice components of the CSP are eligible for exclusion from gross income to the extent permitted by § 126.

Payments under the stewardship component are based on the rental rate applicable to the land and are not cost-share payments that are excludable from gross income.

Payments under the enhancement component qualify as cost-share payments if they are based on an activity’s cost rather than on its expected conservation benefits. The cost-share payments received under the enhancement component are eligible for exclusion from gross income to the extent permitted by § 126. Payments under the enhancement component based on the activity’s expected conservation benefits rather than on its cost are not cost-share payments and are not excludable from gross income.

See § 126(b) and § 16A.126-1 to determine the extent to which cost-share payments under the existing practice, new practice, and enhancement components are excludable from gross income under § 126.

DRAFTING INFORMATION

The principal author of this revenue ruling is Jennifer C. Bernardini of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Jennifer C. Bernardini at (202) 622-3120 (not a toll-free call).


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