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January 19, 1993


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 through 1989.

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.

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 ...

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