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We sustain respondent’s determination denying petitioners
any reduction in income attributable to Mr. Farnsworth’s claimed
basis in the DMAA. Petitioners have established neither the
amount of the retentions nor that any such retentions would
bestow on Mr. Farnsworth a basis in the DMAA.
Issue 2. Are the DMAA Payments Subject to Self-Employment Tax?
The self-employment tax was enacted in 1950 to finance the
extension of Social Security benefits to self-employed
individuals. Social Security Act Amendments of 1950, ch. 809, 64
Stat. 477; S. Rept. 1669, 81st Cong., 2d Sess. (1950), 1950-2
C.B. 302, 307-308, 352-353.
Section 1402(a) defines self-employment earnings as “gross
income derived by an individual from any trade or business
carried on by such individual”.
The seminal case considering the meaning of the “carried on”
requirement is Newberry v. Commissioner, 76 T.C. 441 (1981), in
which this Court held that business interruption insurance
proceeds paid to the owner of a grocery store destroyed by fire
were not subject to self-employment tax. The Commissioner argued
in Newberry that business interruption insurance proceeds were a
substitute for the business income that would have been earned
but for the fire that destroyed the grocery store. The income
that would have been earned but for the fire would have been
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