Taxpayers earn self-employment income which is net income “from any trade or business carried on by such individual” under I.R.C. §1402. The meaning of “trade or business” is the same as it is under I.R.C. §162. The Supreme Court has “defined a trade or business as an activity engaged in for income or profit and performed with continuity and regularity. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).”
There is an exclusion from inclusion of income from the sale of property in self-employment income under IRC §1402(a)(3)(C) which provides:
(3) there shall be excluded any gain or loss—
… (C) from the sale, exchange, involuntary conversion, or other disposition of property if such property is neither—
(i) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, nor
(ii) property held primarily for sale to customers in the ordinary course of the trade or business;
This test is crucial in that if property qualifies as either of the types of property listed in IRC §1402(a)(3)(C)(i) or (ii), then the income is properly taxable as self-employment income. However, if it does not fit into either category, then it is not considered self-employment income. Thus, the question is whether it is either inventory or property held for sale to customers in the regular course of business?
The case of Williford v. Commissioner, 64 T.C.M. 422 (1992) offers an eight factor test that tax courts have held should be applied to determine if property qualifies as “inventory” or “held for sale to customers” under §1402:
- Frequency and regularity of sales;
- Substantiality of sales;
- Length of time the property was held;
- Segregation of property from business property;
- Purpose of acquisition;
- Sales and advertising effort;
- Time and effort spent on sales; and
- How the proceeds of the sales were used.
Also, despite these factors, courts must also consider whether the taxpayer is engaged in a trade or business; whether the property is held primarily for sale in that business; and whether the sales are “ordinary” in the course of that business. Paullus v. Commissioner, 72 T.C.M. (1996).
If the property isn’t primarily held for sale to customers in the ordinary course of a trade or business because the sales weren’t part of a trade or business, sales from such do not constitute self-employment income. “Carrying on a business * * * implies an occupational undertaking to which one habitually devotes time, attention, or effort with substantial regularity. Merely disposing of * * * assets at intermittent intervals, without more, is not engaging in business. . . .” Austin v. Commissioner, 263 F.2d 460, 464 (1959).
Thus, the key phrase here seems to be “habitually devotes time…or effort with substantial regularity.” A taxpayer’s random disposition of property is not, without more, an act of engaging in business. In such cases, any monies received will not be considered “self-employment income” by the IRS.
If you are self-employed in the New York, New Jersey area and have any questions relating to whether certain transactions constitute self-employment income, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
