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their farm during 1994 and 1995 although they testified at trial
that they had made a mistake in doing so.
Notice of Deficiency
In the notice of deficiency, respondent reduced petitioners’
capital gain income for 1994 and 1995 by the reported capital
gains of $64,305 and $121,180, respectively, resulting from
petitioners’ receipt of the value-added payments. Respondent
reclassified the capital gain as Schedule C, Profit or Loss From
Business, income, treated that income as net earnings from self-
employment, and determined that petitioners were liable for self-
employment tax on that income. Respondent did not determine that
the income petitioners reported as net farm rental income must be
included in calculating petitioners’ net earnings from self-
employment for 1994 and 1995.
OPINION
Self-employment tax is imposed on the “self-employment
income” of every individual. Sec. 1401(a). “Self-employment
income” is defined as “the net earnings from self-employment
derived by an individual * * * during any taxable year”. Sec.
1402(b). “Net earnings from self-employment” is “the gross
income derived by an individual from any trade or business
carried on by such individual, less the deductions allowed by
this subtitle which are attributable to such trade or business”.
Sec. 1402(a). For purposes of section 1402, “The trade or
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Last modified: May 25, 2011