TN 9 (05-90)
RS 02505.155 Typical Applications of the SEI Exclusion Provision
A self-employed farmer sold his farm and retired at the end of November 1988. He filed for and became entitled to benefits in November 1988. During the period of April 1988 through November 1988 he raised, harvested and stored a grain crop. The crop was sold in 1989 making the net profit from the sale of the grain reportable as NESE for 1989. If the beneficiary requests the income be excluded, his request can be approved since the income was received in a taxable year following the year of entitlement and the income is not attributable to services performed after the initial month of entitlement. Any activities performed after the month of entitlement solely in connection with the sale of the stored crop; e.g., arranging the sale of the crop or delivering the crop to market, are not considered services attributable to the income received.
Note that the income from self-employment which is excluded from 1989 total yearly earnings is not counted as earnings for 1988 for deductions. Also, the full amount of NESE subject to SE tax for the year is used for computation purposes.
A self-employed farmer became entitled to benefits in May 1987. He cultivated, harvested and stored a grain crop in the period July through November 1987. He did not work after November 1987. In March 1988 he sold the 1987 holdover crop for $30,000.
In this case, if the beneficiary requests the $30,000 be excluded from his gross income, he will be advised the self-employment income exclusion does not apply because, while the income was received in a year following the initial year of entitlement, it is attributable to his services performed after the month of entitlement.
In 1987, a farmer signed a FAPP agreement to limit production of wheat by placing one-half of the farm's acreage in the Conservation Reserve Program for 10 years on condition that a cover crop be planted to prevent erosion. Periodic payments were to be made by check and in the form of agricultural lime. The farmer then became entitled to Social Security benefits in June 1988 but continued to farm the remaining acreage full time. The farmer's Annual Report for 1988 listed $15,000 in SEI for that year and estimated the same amount for 1989. He requested that $10,000 be excluded each year for ET purposes as FAPP payments. The farmer submitted a copy of a 1988 Form 1099G (statement for recipients of certain Government Payments) from the Dept. of Agriculture, showing $10,000 in FAPP payments. A copy of schedule F (Form 1040) - Farm Income and Expenses, for 1988 also, was submitted. It listed $10,000 in item 7a (total agricultural program payments) in Part I; also, $40,000 of gross income in item 12. In Part II, Farm Deductions, under item 15 (Conservation expenses) it listed $10,000. Items 20 (Fertilizers and lime) and 22 (Gasoline, fuel, oil), each listed $2,000.
Under the instructions in RS 02505.115D.2., the $10,000 in FAPP payments is counted for ET purposes in 1988 (the initial year of entitlement) but not for 1989, pursuant to the SEI exclusion rule. Also, as provided in RS 02505.115D.2.b., no development regarding offsetting expenses, such as those listed above, is ordinarily required, since the only SEI to be excluded is the FAPP payments.
By the time Farmer Jakes attained age 65 in October 1980, he has already raised, harvested, and stored his grain crop for 1980. He filed for Social Security benefits and became entitled beginning October 1980. He advised the DO he would not work from October 1980 through April 1981 but would return to work in May 1981. 1980 becomes his initial grace year. Since he has indicated he will not exceed the exempt amount for 1981, his benefits continue. When he files his 1981 annual report, he indicates all months are service months and he has NESE of $10,000. He advises this income was for the partial sale of his 1980 crop, raised and stored before his initial month of entitlement. Since the $10,000 can be excluded, for deduction purposes he has no income for 1981. (His crop for 1981 was raised and stored but not sold.) In each of the years from 1982 through 1984, he again raises and stores crops. To meet his needs each year he sells off $10,000 in grain from the crop raised and stored in 1980, before his initial month of entitlement. Therefore, each year he can exclude $10,000 from his gross income from self-employment.
Although he has performed services each year after his month of entitlement, he received no income attributable to these services. The income he does receive is the result of his 1980 carryover crop, which was raised, harvested, and stored before his initial month of entitlement. In January 1986, Farmer Jakes sells all of his stored grain (raised in 1981-1984) for $240,000. However, since he attained age 70 in October 1985, the earnings test no longer applies and no deductions will be imposed based on his earnings in 1986.
If Farmer Jakes had sold his stored grain in 1985, the year he attained age 70, and requested the $240,000 be excluded from his 1985 income, his request would be denied. Since all this income is attributable to a source for which significant services were performed after the month of entitlement, even though the services (other than the sale of the crop) were not performed in the year in which the income was received, it may not be excluded from income from self-employment for deduction purposes. His total earnings for deductions for 1985 are $180,000. This is arrived at by dividing the $240,000 by 12 and multiplying the result by 9 (the number of months he was under age 70). Deductions could be imposed for January 1985 through September 1985.
2. Self-employed Insurance Salesmen
Allen, a self-employed insurance salesman over age 65, was entitled to benefits in January 1978, and retired from full-time work in November 1978. In 1978, he received $8,000 in renewal commissions on policies sold prior to 1978 and $6,000 in original commissions on policies sold in 1978 for a total SEI of $14,000. If the beneficiary inquires about the exclusion provision, he should be advised that none of the income can be excluded because it was received in the year of entitlement. For the exclusion provision to apply, the income must be received in a taxable year after the year of entitlement. If the beneficiary insists on filing a formal request for the exclusion of his income, the DO will take his signed statement. In this case, the beneficiary's excess earnings for 1978 are $5,000. Since he had a NS month, 1978 is his initial grace year.
Same circumstances as in Example 1, but in 1979 Allen received $10,000 in renewal commissions for policies sold prior to 1978, $1,000 renewal commissions for policies sold in 1978 (after January) and $3,500 from original commissions for policies he sold working part-time in 1979. His total SEI for 1979 was $14,500. However, because of the exclusion provision, his NESE for deduction purposes are reduced to $4,500 ($10,000 is excluded because it represents earnings attributable to services performed prior to his month of entitlement). Since $4,500 does not exceed the exempt amount for 1979, he has no deductions because of excess earnings.
Same circumstances as in Example 1, but in 1980, Allen received renewal commission of $14,000 and original commissions of $5,000 from working part-time for a total of $19,000 in 1980. However, before the exclusion can be applied again, it will be necessary to determine what income is attributable to services before and what income is attributable to services after his month of entitlement. In this case, $10,000 represents earnings for services performed before the month of entitlement and $9,000 represents income from services performed after entitlement (1978, 1979 and 1980).
Allen requests his total SEI received in 1980 be excluded because he did not render substantial services in 1978, 1979, and 1980. His request will be approved in part and denied in part. A determination will be made that $10,000 of the total income of $19,000 can be excluded since it is not attributable to services performed after the month of entitlement. However, the exclusion of the $9,000 will be denied since it is attributable to significant services performed after the month of entitlement; i.e., Allen performed all of the activities in the actual selling of insurance. Note the term “services” as used in the income exclusion provision does not have the same meaning as “substantial services” used in the earnings test. For the exclusion provision to apply, the services must be occasional, irregular, or insignificant and have no bearing on the income received. Therefore, even though Allen did not perform substantial services, he performed significant services on which the $9,000 income was based. Since Allen's initial grace year was 1978, deductions for 1980 will be imposed based on the total yearly earnings of $9,000.
NOTE: If the payments a partner receives from a partnership do not meet the requirements of the Internal Revenue Code and Section 211(a)(9) of the Social Security Act to be classed as a pension, then such payments are reported as NESE subject to SECA taxes and to the earnings test whether or not the individual does any work in the partnership. However, a partner can exclude such payments received in a taxable year after the first year of entitlement if the income is not attributable to services performed after the initial month of entitlement.
In 1968, John and Bill formed a partnership and each contributed a specific amount of capital. Bill, age 65, became entitled to social security benefits beginning September 1978, retired August 31, 1978, and moved to Florida. John was not able to return Bill's capital investment nor buy out his share of the partnership so the payments made to Bill after retirement did not meet the requirements of section (211(a)(9) of the Act to be reported as a pension. Bill continued to receive a percentage of the partnership's profits each year but provided no services to the partnership for his payment.
When Bill filed his annual report for 1978 he showed $30,000 SEI with no substantial services for September through December 1978. He received benefits for September through December 1978 since 1978 was his initial grace year. He did not receive any payment for 1979 or 1980 because of his NESE. In 1981, Bill inquires about the SEI exclusion provision of the law. He signs a statement explaining he no longer works in the partnership and has provided no services after his month of entitlement. The DO determines that, since he performed no services after his month of entitlement, all of his self-employment earnings for 1979 and 1980 may be excluded. Therefore, Bill has no excess earnings for deduction purposes and may be paid benefits for all months of 1979 and 1980. In addition, since Bill's only income for 1981 will be the payment from the partnership, the DO can also approve the income exclusion for 1981 and benefits may be paid for all months.
Mary is a partner in a law firm to which she initially contributed a specific amount of capital. In 1979, at age 65, she retired from the partnership and withdrew a portion of her initial capital investment. However, in return for leaving the balance of her capital investment in the partnership, the other partners agreed to pay her $45,000 per year. She filed for and was entitled to benefits beginning April 1979. Since she had NS months in that year, 1979 was her initial grace period.
In September 1980, the partnership contacted her and indicated an old and valued client had specifically requested she be consulted regarding a legal matter. She provided the requested advice. The client paid all fees to the firm. Mary received no remuneration from the firm or the client for the advice she provided. When she filed her 1980 annual report, she requested the $45,000 be excluded from her SEI. She provided the DO with all of the details concerning the service she performed in September 1980.
In this case, a determination will be made that the income can be excluded since the service she performed was an irregular and occasional service and had no bearing on the income she received. In other words, whether or not she had advised the client, she would still have received $45,000 from the law firm based on her capital investment.
NOTE: Income from SE derived solely from the ownership of income producing business, land, property, or capital can be excluded from earnings for purposes of the ET if none of the income received in a TY after the year of entitlement is attributable to the beneficiary's services after the MOE.
Citrus grove owners who hire an agent to operate the grove; land owners who receive income from the land in the form of payments for not working or using the land, such as soil bank, water bank payments, or PIK payments (payments in kind).