SSR 86-12: SECTIONS 211(a)(1) AND 211(b) OF THE SOCIAL SECURITY ACT (42 U.S.C. 411(a)(1) AND 411(b)) NET EARNINGS FROM SELF-EMPLOYMENT -- RENTALS FROM REAL ESTATE -- SERVICES TO TENANTS OF MOBILE HOME PARKS
20 CFR 404.1082(d)
SSR 86-12
- The claimants, a husband and wife, were in partnership operating a mobile home park. They contended that the income they derived from the partnership was rentals from real estate and thus, was not includable in determining their net earnings from self-employment. The evidence of record showed that the claimants were not real estate dealers. The services they performed while operating the mobile home park consisted solely of maintaining roadways and parking spaces and providing electrical, water, and sewage hookups, well water, and garbage dumpsters. The claimants did not provide community recreational facilities or laundry facilities. Held, since the claimants provided only those services required to maintain the rented space in condition for occupancy and provided no additional services for the occupants, the income they derived from the partnership was rentals from real estate and thus, under section 211(a)(1) of the Social Security Act, was not includable in determining their net earnings from self-employment.
The general issue to be decided was whether the income derived by the claimants, a husband and wife, from a mobile home park constituted self-employment income under section 211(b) of the Social Security Act (the Act). The specific issue was whether the income in question was excludable from net earnings from self-employment as rentals from real estate under section 211(a) of the Act.
In a special determination, the Social Security Administration (SSA) concluded that the net income the claimants received from a mobile home park they had run as partners since May 1973 did not constitute rentals from real estate, but rather was self-employment income pursuant to Social Security Ruling (SSR) 64-39. The claimants were subsequently assessed with a tax deficiency by the Internal Revenue Service. Because they disagreed with the tax assessment and with SSA's special determination, the claimants appealed.
A hearing was held before an administrative law judge (ALJ), at which the claimants appeared and testified. The claimants were accompanied by their representative who acknowledged that the facts set forth in SSA's special determination were correct. To those facts, the claimants added, in testimony at the hearing, that they lived in the mobile home park during the period of time in which they owned it and that they sold the mobile home park in June 1983.
In oral argument during the hearing, the claimants' representative contended that, where the services performed by the claimants during the period in which they owned and operated the mobile home park consisted solely of maintaining roadways and parking spaces and providing electrical, water, and sewage hookups, well water, and garbage dumpsters, and where the claimants did not provide community recreational facilities or laundry facilities, the income derived by the claimants from the mobile home park should be excluded from net earnings from self-employment as rentals from real estate under section 1402(a)(1) of the Internal Revenue Code and section 1.1402(a)-4(c) of the Income Tax Regulations and thus excluded from self-employment income under section 1402(b) of the Internal Revenue Code. The claimants' representative further argued that the facts in this case were well within the limits of Fabian Bobo v. Commissioner, 70 T.C. 706 (1978), and Situation 1 of Rev. Rul. 83-139, I.R.B. 1983-38, 6, in which the income received from a mobile home park was held to be rentals from real estate and thus was not includable in computing net earnings from self-employment under section 1402(a) of the Internal Revenue Code and self-employment income under section 1402(b) of the Internal Revenue Code. The claimants' representative explained that the income from the mobile home park was reported by the claimants, in years when they had sufficient net earnings, as self-employment income until 1978, when as a result of the Tax Court ruling in Fabian Bobo, the claimants began reporting such income as rentals from real estate.
Section 211(a) of the Act provides, in pertinent part, that --
"The term 'net earnings from self-employment' means the gross income, as computed under chapter 1 of the Internal Revenue Code, derived by an individual from any trade or business carried on by such individual, less the deductions allowed under such chapter which are attributable to such trade or business, plus his distributive share (whether or not distributed) of the ordinary net income or less, as computed under section 183 of such code, from any trade or business carried on by a partnership of which he is a member; except that in computing such gross income and deductions and such distributive share of partnership ordinary net income or loss --
- (1) There shall be excluded rentals from real estate and from personal property leased with the real estate (including such rentals paid in crop shares), together with the deductions attributable thereto, unless such rentals are received in the course of a trade or business as a real estate dealer . . . . "
Section 211(b)(2) of the Act, as pertinent here, provides that the term "self-employment income" means the net earnings from self-employment derived by an individual during any taxable year beginning after 1950, except that such term shall not include the net earnings from self-employment, if such net earnings for the taxable year are less than $400.
Section 404.1082(d) of Regulations No. 4 provides, in pertinent part, that --
"(1) No services provided for occupants. Payments you receive for renting living quarters in a private residence, duplex, or multiple-housing unit are generally rental income from real estate. Except in the case of real estate dealers, these payments are excluded in determining net earnings from self-employment, even in the payments are in part attributable to personal property furnished under the lease.
(2) Services provided for occupants.
(i) Payments you receive for renting living quarters where services are also provided to the occupant, as in hotels, boarding houses, or apartment houses furnishing hotel services, or in tourist camps or tourist homes, are included in determining your net earnings from self-employment. Any payments you receive for the use of space in parking lots, warehouses, or storage garages are also included in determining your net earnings from self-employment.
(ii) Generally, we consider services to be provided to the occupant if they are primarily for the occupant's convenience and are other than those usually provided in connection with the rental of rooms or other space or occupancy only. We consider the supplying of maid service to be a service provided to the occupant. However, we do not consider the furnishing of heat and light, the cleaning of public entrances, exits, stairways, and lobbies and the collection of trash, as services provided to the occupant . . . ."
Reviewing the applicable provisions of the Act and the regulations, it is first noted that rentals from real estate are excluded from the term "net earnings from self-employment" under section 211(a)(1) of the Act and are thus excluded from the term "self-employment income" under section 211(b) of the Act, unless such rentals are received in the course of a trade or business as a real estate dealer. It is clear that the claimants were not "real estate dealers," as defined in § 404.1082(b) of Regulations No. 4. Therefore, the question in this case was whether the income derived by the claimants from the mobile home park constituted rentals from real estate.
It is noted that SSR 64-39, cited as authority for the conclusion reached by SSA in its special determination, was obsoleted without replacement in the July 1984 edition of the SSR. However, guidance for applying the provisions of section 211(a)(1) of the Act and § 404.1082(d) of Regulations No. 4 is found in Delno v. Celebrezze, 347 F.2d 159, 163 (9th Cir. 1965), where it was stated: "The apparent intent of Congress was that Section 211(a)(1) should be applied to exclude only payments for use of space and, by implication, such services as are required to maintain the space in condition for occupancy. If the owner performs additional services of such substantial nature that compensation for them can be said to constitute a material part of the payment made by the tenant, the 'rent' received then consists in part of income attributable to the performance of labor which is not incidental to the realization of return from passive investment. In such circumstances, the entire payment is to be included in computing the recipient's net earnings from self-employment." It was further stated that where Congress intended the rental exclusion to be narrowly restricted to payments for occupancy only, and where the language of the Act is to be interpreted in favor of coverage, any services not clearly required to maintain the property for the tenant and not for the conservation of invested capital.
The authority cited by the claimants' representative consisted primarily of applications by the United States Tax Court and the Internal Revenue Service of sections 1402(a) and (b) of the Internal Revenue Code and section 1.1402(a)-4(c) of the Income Tax Regulations. It must be noted, however, that revenue rulings by the Internal Revenue Service do not have the authority of law. See Confederated Tribes of Warm Springs Reservation of Oregon v. Kurtz, 691 F.2d 878 (9th Cir. 1982). Also, decisions of the United States Tax Court are not binding authority. See Grogan v. United States, 346 F.Supp. 564 (N.D. Ga. 1972), reversed on other grounds, 475 F.2d 15 (5th Cir. 1973). Furthermore, this case involved a determination of SSA under section 211(a) and (b) of the Act and § 404.1082(d) of Regulations No. 4.
As noted in § 404.1001(c) of Regulations No. 4, the Act and the Internal Revenue Code have similar provisions on coverage of earnings because the one law specified the earnings for which credit for benefit purposes is received and the other the earnings on which Social Security taxes must be paid. Therefore, referral is indicated for complete information to the Internal Revenue Code and the Income Tax Regulations. Additionally, as noted in Fabian Bobo, at 709, footnote 2, the provisions of the Act and the regulations involved here are substantially identical to the provisions of the Internal Revenue Code and the Income Tax Regulations cited by the claimants' representative. Furthermore, in Johnson v. C.I.R., 60 T.C. 829 (1973), the United States Tax Court recognized the need for uniform construction of the Social Security coverage provisions for self-employed persons (sections 211 of the Act, et seq.) and the income tax provisions for taxing self-employed persons for Social Security purposes (section 1401 of the Internal Revenue Code, et seq.). Thus, the United States Tax Court in Fabian Bobo followed the rule of law laid down by the United States Court of Appeals for the 9th Circuit in Delno in concluding that income from a mobile home park was considered rentals from real estate, unless the services provided for the convenience of the tenants were of such substantial nature that compensation for them could be said to constitute a material part of the payments made by the tenants. Consequently, for the aforementioned reasons, the ALJ, in applying sections 211(a) and (b) of the Act and § 404.1082(d) of Regulations No. 4, although not bound, found persuasive the holding of the United States Tax Court in Fabian Bobo and the position of the Internal Revenue Service expressed in Rev. Rul. 83-139, in applying sections 1402(a) and (b) of the Internal Revenue Code and section 1.1402(a)-4(c) of the Income Tax Regulations.
In this case, similar to the taxpayer in Fabian Bobo and the taxpayer in Situation 1 of Rev. Rul. 83-139, the claimants, in connection with the mobile home park, maintained roadways and parking places and provided electrical, water, and sewage hookups, well water, and garbage dumpsters. Moreover, the claimants did not provide laundry services, as did the taxpayer in Fabian Bobo and in Situation 1 of Rev. Rul. 83-139. Therefore, applying sections 211(a) and (b) of the Act and § 404.1082(d) of Regulations No. 4, in a parallel manner and in harmony with the application by the United States Tax Court in Fabian Bobo and the Internal Revenue Service in Rev. Rul. 83-139 of sections 1402(a) and (b) of the Internal Revenue Code and section 1.1402(a)-4(c) of the Income Tax Regulations, the ALJ found that the claimants in this case, in connection with the mobile home park, provided only those services required to maintain the spaces rented in condition for occupancy and provided no additional services for the occupants. Therefore, it was concluded that the income from the mobile home park was excludable from net earnings from self-employment as rentals from real estate under section 211(a)(1) of the Act and thus did not constitute self-employment income under section 211(b) of the Act.