In October 1958, R filed application for and became entitled to old-age insurance benefits of $80 per month. In November 1961, R filed application under section 215(f)(2) for a recomputation of her benefit, alleging net earnings from self- employment of $4,638 in 1959 and $4,800 in 1960. Such earnings if creditable under the Act would permit recomputation under section 215(f)(2) and would materially increase the amount of her benefit. The sole basis for the alleged earnings in both years was net earnings from self-employment which R claimed to have derived under the following circumstances.
In 1958 R assigned to the X Oil Company the right to drill and extract oil on certain lands on which she held leases. The X Oil Company was engaged in the business of drilling for and producing oil on the lands of many owners and maintained an inventory of supplies and equipment which it used where and when it deemed most advantageous. The express terms of the agreement, as executed and complied with by R and the company, were as follows: The oil company agreed to drill a test well at its expense. If satisfied with the result of the test, the company was to drill and operate producing wells. The right to decide how to conduct operations and how long to continue them was exclusively with the company, as was the right to sell and dispose of the oil removed. R was entitled to an amount equal to one-fourth the net proceeds of oil sold. However, the company retained the exclusive ownership and right to control of the profits, subject to an obligation to pay her an amount equal to one-fourth of such profits. If an operating loss occurred during any period, R received no payment until such time as a profit was realized. The oil company had full charge and control over the operations, and was required to provide workmen's compensation for employees as well as liability insurance. R retained a proprietary interest in the land and had the right of access to the land for purposes of inspecting the operation. The Agreement also provided that the parties thereto did not intend to create a partnership.
Section 211(a) of the Social Security Act provides, in pertinent part, that in computing a person's net earnings from self-employment there shall be included the distributive share of his income from a trade or business carried on by a partnership of which he is a member. However, section 211(a)(1) further provides that rentals from real estate (subject to certain exceptions not pertinent here) shall be excluded in computing a person's net earnings from self-employment. It is well established that a lessee of property may execute a sublease in consideration of rents due under the sublease.
The question is whether the net income received by R under her agreement with the X Oil Company is net earnings from self- employment or is excluded as rentals from real estate. If R was a partner of the company, her net income from the company in 1959 and 1960 would be net earnings from self-employment and she would qualify for a recomputation of her benefit. On the other hand, if she was not a partner of the company, her income would be rentals from real estate and not creditable under the Act for any purposes; entitlement to benefits, imposition of deductions, or the computation or recomputation of benefits. In this latter event, her application for a recomputation would be disallowed.
In determining whether a partnership exists, the question is whether the parties actually intended to join together for the purpose of carrying on the business and sharing in the profits and losses or both. Their intention in the respect is a question of fact, to be determined from their agreement, considered as a whole, and their conduct in execution of its provisions,.
In the present case, the express terms of agreement between R and the X Oil Company, as well as their conduct, show that R and the company did not intent to form a partnership. The agreement expressly provided that they did not intend to form a partnership; R took no part in the actual operation of the enterprise; she had no right to participate in business decisions; and she was not responsible for any of the losses from the enterprise. The fact that her income under the arrangement depended upon the profits from the enterprise is not, by itself, sufficient to justify a finding that a partnership existed. Such lack of intent to form a partnership is inferable also from the fact that the oil company was simultaneously engaged in numerous similar operations on the lands of other persons, and maintained extensive stocks of supplies and equipment which it used in the conduct of these enterprises. Under such circumstances, it would not be reasonable to find that the oil company intended to form a partnership with R and to assume the restrictions and responsibilities inherent in such a relationship.
Accordingly, it is held that the income received by R under her agreement with the X Oil Company was not derived by her as a partner of the company in carrying on a trade or business but was rentals from real estate in payment for the right to occupy and use the land. Therefore, such income is not includible in computing her net earnings from self-employment for 1959 and 1960, and R's application for a recomputation must be disallowed.
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