N, a self-employed real estate salesman, became entitled to old-age insurance benefits of $108.50 per month beginning October 1958 when he was 66 years old. The mount of his benefit was based in part on earnings of $4,200 reported for 1958. In 1961, it was ascertained that the earnings N had reported for 1958 included $2,200 as his share of commissions received for the sale of an apartment house. The commission was received in the form of title to another parcel of land, subject to a mortgage of $6,000, N's equity being worth $2,200, at the time. This was the only transaction of this type which N had ever entered into. N retained this parcel of land until it was condemned by the city in 1960. Only enough was realized from the transfer of the property to pay off the mortgage.
N used the cash basis method of accounting in determining his net earnings from self-employment. In figuring his earnings for 1960, he deducted the amount of $2,200 as a bad debt from the $2,284 which he realized from commissions received that year, reporting only $84 as his net earnings from self-employment in 1960. N then contended that since his earnings were less than $1,200 in 1960 no deductions should be made from his benefits notwithstanding that he worked full time in all months of that year.
Section 211(a) of the Social Security Act provides, in pertinent part that the term "net earnings from self-employment" means gross income, as computed under Subtitle A of the Internal Revenue Code of 1954, derived by an individual from any trade or business carried on by such individual, less the deductions allowed under such subtitle which are attributable to such trade or business.
Under section 61 of the Internal Revenue Code of 1954, gross income includes income realized in form, whether in money, property, or services. Section 451 of the Code provides that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.
The first question to be resolved is whether N properly included the $2,200 in computing his net earnings for 1958. If this amount is not includible, the amount of his old-age insurance benefit (which was based in part on his earnings for 1958) must be reduced.
Under the base basis method of accounting, income is accounted for in the year in which it is received whether in cash or in property. Therefore, N was required to include in his earnings for 1958 the amount of $2,200 representing the current value of the equity in the parcel of real estate which he received as a commission. The fact that he decided to retain the real estate as an investment which in later years declined in value does not lessen the value of the property when he received it in 1958. Accordingly, it is held that the $2,200 which N derived as commissions from the sale of real estate in 1958 is properly includible in figuring his net earnings from self-employment for that year. His benefit amount, therefore, need not be reduced by reason of the subsequent loss of this $2,200 suffered in 1960.
The next question to be decided is whether N could in 1960 properly deduct from his earnings for 1960 the loss occasioned by the condemnation of the property which he had received as commissions from the sale of the apartment house in 1958.
Under section 203 of the Social Security Act, no deductions from benefits are required because of the beneficiary's earnings if such earnings do not exceed $1,200 in a year. One or more deductions may be required if his earnings in a 12-month taxable year exceed $1,200, and in that year there are one or more months of entitlement in which he was under age 72 and either rendered substantial services in self-employment or rendered services for wages of over $100.
N may not deduct in 1960 the loss of his equity in the property which he had received as a commission. He chose to retain the property as an investment rather than realize in cash the $2,200 which his equity was worth at the time he received the property. Section 211(a)(3) of the Act and Regulations No. 4, § 404.1052(d), exclude from net earnings from self-employment any gain or loss from the sale or exchange of a capital asset of "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." Since N's property was not held primarily for sale to customers in the ordinary course of his trade or business, any loss sustained upon the condemnation of the property is specifically excluded by section 211(a)(3) in computing net earnings from self-employment. This is true even though the loss may be deducted in computing N's taxable income for Federal income tax purposes.
Accordingly, it is held that N's net earnings from self-employment for 1960 are $2,284 and, therefore, that deductions must be imposed against his benefits for months in 1960 in accordance with section 203 of the Act.
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