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have repaid his debt, and that increased amount would be subject
to self-employment tax. Petitioners argue that petitioner’s
activities in the litigation do not meet the criteria of section
1401 requiring an active trade or business.
Section 1401(a) imposes a tax on self-employment income
consisting of the earnings of a trade or business carried on by
the individual. See sec. 1402(a) and (b). An individual is
engaged in a trade or business if such individual’s activities
are conducted with continuity and regularity and primarily for
income or profit. Sec. 1402(c).
Petitioner was an independent contractor engaged in the
trade or business of research. The settlement amount he received
was to settle a contract dispute and represented compensation for
the research services he rendered to ProGuard as an independent
contractor.
There is no reasonable dispute that the $65,000 cash payment
was for petitioner’s services and is subject to self-employment
tax. Petitioner’s complaint against ProGuard alleged that he
“reasonably believed” that each of the loans from the defendants
represented advances against future compensation. Thus the
forgiveness of this debt also represented compensation to
petitioner. Petitioners did not distinguish between the cash
payment and the debt forgiveness on their return, during trial,
or in their briefs. The total consideration received by
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Last modified: May 25, 2011