Ralph W. Emerson and Suzanne O. Emerson - Page 18

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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             
               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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