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trade or business activity when the business activity
is its source. Id. at 446 ("Any income must arise from
some actual ... income-producing activity of the
taxpayer before such income becomes subject to ...
self-employment taxes...."). [Id.]
The Ninth Circuit found it unnecessary to characterize the
precise relationship between the termination payments and the
taxpayer’s prior business activity because it was obvious to the
court that the termination payments did not “‘derive’ from
Milligan’s prior business activity within the meaning of the
self-employment tax.” Id. The Ninth Circuit laid down the
following general rule: “To be taxable as self-employment
income, earnings must be tied to the quantity or quality of the
taxpayer’s prior labor, rather than the mere fact that the
taxpayer worked or works for the payor.” Id.
Because Milligan already had been fully compensated for his
services, the Ninth Circuit concluded that the termination
payments were linked only to Milligan’s previous status as a
2-year plus independent contractor for State Farm, and, thus,
“none of his business activity was the ‘source’ of the
Termination Payments.” Id. at 1098-1099. The Ninth Circuit
supported its holding that previous independent contractor status
alone was not a sufficient nexus by analogizing to a wage tax
situation in which employer-provided supplemental unemployment
benefits were held not to be wages because the benefits, although
the result of employment status at some previous time, were
“‘[I]n no way * * * a function of the employee’s providing
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