Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 54-75

1954-1 C.B. 169

Sec. 1402

Sec. 7701

IRS Headnote

The term `net earnings from self-employment' as defined in section 481(a) of the Internal Revenue Code may include the income derived by a wife from a trade or business carried on by a husband and wife partnership, even though such a partnership is not recognized as valid under the law of the State in which organized and operated.

Full Text

Rev. Rul. 54-75

Advice is requested whether the term `net earnings from self-employment' as defined in section 481(a) of the Internal Revenue Code may include partnership income of wives who are members of a husband and wife partnership where such a partnership is not recognized as valid under the law of the State in which it operates, but is recognized for Federal income tax purposes. In the instant case the partnerships under consideration operate in Louisiana and Texas.

In Louisiana and in Texas in some circumstances husband and wife partnerships are not recognized for many purposes. See for example, Fairbanks, Morse & Co. v. Bordelon et al. , 198 So. 391; Monroe Grocery Co., Ltd. v. T. L. & M. Davis et al. , 116 So. 546; 13 Tex. Civ. Stat. Art. 4626; Dillard et al. v. Smith, Chief Justice et al. , 205 S.W.(2d) 366. The question presented is whether State law is controlling in determining the existence of a partnership for self-employment tax purposes.

Under sections 481(a) of the Internal Revenue Code the term `net earnings from self-employment' includes an individual's distributive share of the ordinary net income or loss `as computed under section 183,' from any trade or business carried on by a partnership of which he is a member, with certain exceptions not here material. Thus, for purposes of determining net earnings from self-employment a partnership is one which is recognized as such for income tax purposes. See section 39.481-1 of Regulations 118.

Section 3797(a)(2) of the Internal Revenue Code provides a definition of the words `partnership' and `partner' for purposes of the Internal Revenue Code. Section 39.3797-1 of Regulations 118 provides that the term `partnership' within the meaning of the Code is not limited to the common law meaning of partnership, but is broader in its scope and includes groups not commonly called partnerships. It follows that the term `partner' is not restricted to one who has the capacity to become a member of a partnership under local law. The Code prescribes its own standards of classification of business organizations and local law is not controlling.

Where a wife who is a member of the same partnership as her husband is regarded as a partner within the meaning of the Code, her distributive share of the `ordinary net income * * * from any trade or business carried on' by the partnership may constitute `net earnings from self-employment' as defined in section 481(a) of the Code for purposes of the tax on self-employment income even though such partnership is not recognized for some purposes under the law of the State in which it operates.