The opinion of the court was delivered by: Baker, District Judge.
This matter is before the court on cross-motions for summary
judgment. The plaintiff, Harlan E. Moore Charitable Trust, is
a qualified tax exempt organization and has filed this suit
seeking a refund of $19,824.71 ($16,033.66 plus interest) on
assessed income tax deficiencies it paid for the years 1986
The tax was assessed on rent from a farm the plaintiff owns
in Piatt county as an unrelated business income tax (UBIT)
under 26 U.S.C. § 512. The legal issue in this case is narrow:
whether the rent, in the form of 50% of the farm's production
under a crop-share lease, is non-taxable as a fixed percentage
of receipts or sales, or is taxable as an amount dependent on
the income or profits of the lessee.
The plaintiff argues the income falls within the
parenthetical exclusion of § 512(b)(3)(B)(ii)*fn1 as a rent
based on a fixed percentage of receipts, that is 50% of the
crop production. Alternatively, the plaintiff claims the crops
are excludable rent from real property under § 512(b)(3)(A)(i).
The government contends that the relationship between the
Trust and the farmer is not landlord-tenant but a partnership
or joint venture and the crops are not true rents. The
government asserts that, under 26 C.F.R. 1.512(b)-1, the farm
operation generates income, not true rents, that is not within
the modifications for rents. Alternatively, the government
maintains that the rent from the crop-share agreement is
dependent on the income or profits of the lessee, not on a
percentage of receipts or sales, and therefore the exception
in § 512(b)(3)(B)(ii) governs.
The Harlan E. Moore Charitable Trust was founded in 1976 and
has tax-exempt status under § 501(c)(3). The Trust owns a
400-acre farm in Piatt County, Illinois that is managed by
Daryl Mealiff of the farm management department at the Bank of
Illinois. Steven Dodge farms the land. Dodge and his
father-in-law entered into a crop share agreement with the
Trust in 1979.
According to the terms of the agreement, Dodge lives in the
farm house and works the land but does not pay any cash rent
to the Trust; instead, Dodge's rent is 50% of farm production
after the crop is divided at the grain elevator. The Trust and
Dodge have signed two leases, with essentially similar terms,
the first in 1979 and the second in 1989.*fn2
The lease refers to the plaintiff as "Owner" and Steven
Dodge as "Tenant." Dodge has possession and control of the
farmhouse and farm. The lease specifies the division of
responsibilities: the Trust pays the property taxes and
building maintenance expense and the tenant supplies all of
the labor, machinery, fuel and hauling expenses. The cost of
seed, fertilizer, limestone, herbicides, insecticides, soil
tests and grain drying are split equally between the Trust and
Dodge decides what seed to plant, when to apply fertilizer,
herbicides and insecticides, when to harvest the crop and when
to sell his half of the production. Deposition of Mealiff at
22-27; Deposition of Dodge at 12-17. Dodge and the Trust each
carry hail insurance for their half of the crop. Mealiff at
30-31; Dodge at 32. The Trust and Dodge are billed separately
for their portion of the shared costs. Dodge at 18. Mealiff
and Dodge intend the lease to create a landlord-tenant
relationship. Mealiff at 12; Dodge at 37. Neither party holds
itself out as the other's partner, nor has one paid the
other's expenses or undertaken the other's responsibilities.
Mealiff at 64.
A. Relationship between the Trust and Dodge
The government contends that the parties are not actually
landlord and tenant but in fact are partners or joint
venturers. The government points to the shared cost of seed,
fertilizer, herbicides and drying as evidence of the joint
venture. The most important element in determining whether a
landlord-tenant relationship or joint venture exists is the
intention of the parties. Petry v. Chicago Title & Trust Co.,
51 Ill. App.3d 1053, 1057, 9 Ill.Dec. 951, 367 N.E.2d 385 (2d
Dist. 1977). The burden of proving the existence of a joint
venture is on the party who claims the relationship exists. Id.
Landowners and farmers have undertaken crop-share
arrangements in Illinois for well over a hundred years.
Alwood v. Ruckman, 21 Ill. 200 (1859). Illinois courts find it
obvious that farming on shares creates a landlord-tenant
relationship. Baker Farmers Co. v. ASF Corp., 28 Ill. App.3d 393,
395, 328 N.E.2d 369 (3d Dist. 1975). However, an agreement
to carry on farming ...