SSR 72-24: SECTION 211 (42 U.S.C. 411). -- NET EARNINGS FROM SELF-EMPLOYMENT -- INCOME FROM INVESTMENT WITH LIMITED PARTNER OF PARTNERSHIP ENGAGED IN TRADE OR BUSINESS
20 CFR 404.1050
SSR 72-24
- Where individuals invested in a limited partner's interest in a partnership (formed for land development and sale), performed no services, neither controlled nor operated anything, and had no right to do either in connection with their investment with the limited partner or in connection with the partnership, held, such individuals were not members of a partnership or joint venture and were not engaged in a trade or business, and income derived from such investment with the limited partner did not constitute net earnings from self-employment.
W filed a claim for widow's benefits based on earnings derived by her deceased husband, D, from self-employment as a barber. In connection with her application, W stated that D had additional self-employment income, in the amount of $1,058.73, from an investment in the X Development Company with L, a limited partner in the firm. To support her statement, W submitted the last income tax return filed by D, which showed this amount under Schedule H, Income from Partnerships, as income from a "joint venture of L et al." Establishment of this amount as creditable net earnings from D's self-employment would affect the computation of the benefit amount payable to W.
The X Development Company (XDC) is a limited partnership, composed of three general partners and nine limited partners, which is engaged in the active conduct of the business of buying and selling land. To acquire funds for investment in this partnership, each limited partner, including L, became a party to a joint agreement with a number of other persons, with respect to their contribution to the capital of the partnership. Each of these other persons, of whom D was one, paid over to the limited partner, L, a sum certain for a contribution to the capital of the XDC, under L's name. L became obligated to pay over to each investor that portion of the income he receives from his share of the profits attributable to his contribution, as well as the principal of his contribution upon dissolution and liquidation of the XDC. The limited partner had no authority, discretion, or power to invest this sum of money in any other business enterprise, or make any other use of it. The contributors had no similar arrangements with other partners of XDC, nor with partners of any other partnerships. The contributors were not designated as partners in the certificate filed by XDC and performed no managerial or physical services in connection with the company's real estate activities. They made their investment without any obligation or right to render services, control the investment with the limited partner or otherwise take any active part in the business conducted by the company.
The question to be decided in this case is whether the income received by D which is attributable to his investment with L, and which had been reported as self-employment income from a partnership, constitutes "net earnings from self-employment" within the meaning of section 211 of the Social Security Act, and thus creditable to D's earnings record for benefit computation purposes.
Section 211 provides in pertinent part that:
-
(a) The term 'net earnings from self-employment' means the 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, plus his distributive share (whether or not
distributed) of income or loss * * * from any trade or business carried on
by a partnership of which he is a member; (Underscoring supplied) *
* *.
* * * * * * *
- (c) The term 'trade or business,' when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 of the Internal Revenue Code of 1954 * * *.
- (d) The term 'partnership' and 'partner' shall have the same meaning as when used in subchapter K of chapter 1 of the Internal Revenue Code of 1954.
For purposes of determining net earnings from self-employment under section 211, a partnership is one which is recognized as such for income tax purposes, and, for these purposes "partnership" includes not only a partnership known at common law, but also a syndicate, group, pool, joint venture, or other unincorporated organization which carries on any trade or business, financial operation, or venture, and which is not, within the meaning of the Internal Revenue Code, a trust, estate, or corporation.
In order for an individual to have net earnings from self-employment under these provisions of law, he must carry on a trade or business, either as an individual or as a member of a partnership which is carrying on a trade or business. Whether an individual carries on a trade or business depends on the factual situation. It results from some degree of activity carried on by the individual in operating and managing property as distinguished from bare ownership of investment property. Factors which are considered in determining the existence of nonexistence of a trade or business include: (1) whether the activity was initiated and performed with a profit motive; (2) whether it was regular and continuous; (3) whether it was engaged in as a regular occupation or calling; and (4) whether the individual held himself out to others as being engaged in carrying on a trade or business. No single factor is controlling and each case must be resolved on its own merits.
With regard to the income reported as partnership income received from D's investment with L, the facts show that it was not derived by D as a member of a partnership which was carrying on a trade or business. The contributors (including D) have never performed managerial or physical services in connection with the XDC's real estate activities. L, the limited partner, acts as a common agent for the contributors; there is no mutual agreement among the individuals insofar as their respective rights, duties and obligations to each other are concerned; and the XDC is accountable only to the limited partner. The contributors do not render services for the investment group and are not staff members or officers of the group; their interest and rights are limited solely to financial participation with the limited partner to share pro rata gains and losses of the limited partner's interest in the company; and they cannot become members of the XDC by reason of any arrangement they may make with the limited partner.
D's arrangement with L was akin to placing a simple investment, and in no way did D participate in the control or management of the investment venture. Therefore, D's arrangement with L did not constitute membership in a partnership engaged in a "trade or business" (within the meaning of section 211 of the Act.) It is the XDC partnership which actively conducts the trade or business from which D's income was derived, and not the group of investors associated with the limited partner. Each contributor received, in return for his investment, personal contract rights to share in whatever profits inured to the limited partner from the XDC partnership. The contributors neither perform services, nor control or operate anything. They have no right to do either in connection with their investment with the limited partner. They merely have the right to hold the limited partner accountable to them for their pro rata share of such income as the limited partner derives from the firm. Thus, the contributors, of whom D is one, whose participation is merely a single instance of investment, are not engaged in a trade or business vis-a-vis the limited partner or the object of their investment, the XDC.
It is, accordingly, held that, since D, as a contributor, did not engage in a trade or business with respect to his investment with a limited partner in the X Development Company, the income he derived therefrom does not constitute "net earnings from self-employment" within the meaning of section 211 of the Social Security Act.