20 CFR 404.804(c), 404.806(f), 404.807(b)(2) and 404.1054(b)
R, the worker, applied for disability insurance benefits in May 1971 alleging that as of July 1970, he was unable to work. His application was initially denied because he had only 16 of 20 quarters of coverage required within the 40 quarter period ending September 30, 1970 (the quarter of alleged disability), for the special insured status for disability benefits.
Federal income tax returns for 1966 and 1967 had been filed timely. The 1966 return contained a Schedule C and a Form 1040 which showed a net loss for the year from his occupation as a house builder and a small capital gain from the sale of a house. There was no indication in the tax return as to whether the property sold was a rental house or if it was property from which he collected interest income as a builder. The 1967 return reported all income and expense items from rents and sale of houses on a Schedule B "Supplemental Schedule of Income," and again showed a net loss. No self-employment tax was paid for either year and no quarters of coverage were credited to R's earnings record.
After filing for benefits, R amended his tax returns for both years; however, both amended returns were filed after the time limitations of 3 years, 3 months, 15 days, provided in section 205(c)(1)(B) of the Social Security Act. The 1966 amended return reallocated the income originally reported on the timely filed Schedule C, separating out the income derived from contracts of sale for houses sold by R as a "builder" in the purported course of his business. R also separated out business expenses, charging all but minor expenses against the rental income, other income and a gain from interest income, referred to in his return as "Additional on Building Contracts," and which R alleges is net earnings from self-employment. R paid the self-employment tax on such net profit.
The amended Schedule C for 1967 showed net earnings from "interest received on contracts being collected from building business." R paid the self-employment tax computed on these amounts.
The establishment of quarters of coverage for either year would enable R to meet the special insured status provisions of the Act for entitlement to disability insurance benefits. The issue thus to be resolved is whether for the years 1966 and 1967 the interest income derived by R from notes held by him on houses he constructed and sold under a contract of sale were received by him in the regular course of doing business as a builder and not for investment purposes or as a speculation. However, even if such income constitutes net income from self-employment, it could not be credited to R's record unless reported in accordance with statutory standards.
Section 211(a) of the Act provides, in pertinent part:
Regulations No. 4, section 1054(b), which implements section 211(a) of the Act, states in pertinent part that:
Section 205(c)(4)(C) of the Act provides:
In the present case, if R disposed of his houses for speculative or investment reasons, the income therefrom would be excludable from self-employment income. On the other hand, if such houses were sold pursuant to an income-generating contract of sale because conventional financing could not be obtained due to the financial circumstances of the buyer, this would support a finding that these houses were sold in the regular course of doing business as a builder and therefore not excludable since this might be the only way a builder could sell his property. The question become moot, however, for another reason because, even if the interest income could, in a proper case, be considered net income from self-employment, it could not be credited to R's earnings record unless R's timely filed income tax returns for 1966 and/or 1967 meet the statutory standards of record keeping and reporting established by the Social Security Act. (Section 205(c)(5) of the Act provides a number of specified exceptions which would permit revision of an earnings record after the time limitation: however, none of these exceptions is applicable here.)
In Martlew v. Celebrezze, 320 F.2d 887 (5 Cir., 1963), the U.S. Court of Appeals affirmed the determination that claimant's timely filed tax return did not constitute a tax return of self-employment income for social security purposes because such return did not provide complete and direct information which, on its face, indicated that he had self-employment income. The court made the following pertinent statement:
With respect to the report of a capital gain from sale of real estate on R's timely filed 1966 tax return, there is a lack of evidence as to whether the property was a rental house or whether it was property from which he collected interest income. The Social Security Administration has previously determined in similar situations that the mere reporting on Form 1040 of income from the sale of real estate as capital gains does not (at least where there is no basis indicated on that form or accessory schedules to question the "capital gains" label on income) constitute a "tax return of self-employment income" for purposes of section 211(a) of the Act since information contained on the return itself does not indicate that such income was derived from a covered trade or business.
Thus, even if it were determined that R's interest income was net earnings from self-employment, no additional quarters of coverage could be credited for the taxable years 1966 and/or 1967 since he did not file a "tax return of his self-employment income," i.e., a Form 1040 with a completed Schedule C or its substantial equivalent for those years within the statutory period. Although a purported "tax return" was filed for taxable year 1966, no additional quarters of coverage for that year may be credited to R's earnings record since the Form 1040 and Schedule C failed to show sufficient information to permit the computation of the tax due on net income from self-employment.
Accordingly, it is held that R's failure to properly complete and timely file a Form 1040 and Schedule C (or its equivalent), containing sufficient information to show self-employment income and thus liability for a particular amount of tax, constituted failure to file a "tax return of self-employment income" for social security purposes, and, since R lacked the insured status for disability insurance benefits, his application for such benefit was properly denied.
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