Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 55-49

1955-1 C.B. 431

Sec. 1402

IRS Headnote

Income derived by an individual from the sale of real estate originally purchased as unimproved land and subsequently divided into lots and turned over to a real estate firm to sell constitutes income from a `trade or business' and should be included in computing net earnings from self-employment for purposes of the Self-Employment Contributions Act.

Full Text

Rev. Rul. 55-49

The question has been presented whether income received by an individual from the sale, through a real estate agency, of subdivided and improved real estate originally purchased as unimproved land, is subject to the tax imposed under the Self-Employment Contributions Act (subchapter E, chapter 1, Internal Revenue Code of 1939.)

The taxpayer in the instant case purchased a large tract of land which, at the time of purchase, he had no intention of subdividing. A few years later, however, he subdivided the tract and spent considerable sums of money to improve the tract, involving clearing the land, paving streets, installing street lights, water mains, fire hydrants, etc. He constructed and sold several homes on the property but, in view of the expenses incurred in connection with the subdivision of the tract, these sales were at a loss to him. Accordingly, he discontinued the building project. Since 1950, his interest in the real estate project has been confined to sales of the remaining lots in the tract. These sales are conducted exclusively by a real estate firm and the taxpayer devotes none of his time to the actual selling of the lots, neither does he make frequent visits to the location of the tract.

Section 481 of the Self-Employment Contributions Act provides in part as follows:

(a) NET EARNINGS FROM SELF-EMPLOYMENT.-The term `net earnings from self-employment' means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this chapter chapter 1  which are attributable to such trade or business, * * *

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(c) TRADE OR BUSINESS.-The term `trade or business,' when used with reference to self-employment income of net earnings from self-employment, shall have the same meaning as when used in section 23 Internal Revenue Code of 1939  except that such term shall not include-* * * (the exceptions are not here material).

Section 39.481-1(b)(2), Regulations 118, provides, among other things, that the trade or business must be carried on by the individual, either personally or through agents or employees.

Whether an individual is engaged in a `trade or business' is dependent upon all the facts and circumstances in the particular case. As a general rule, a person who is engaged in an occupation or profession for profit and who is not regarded as an employee for purposes of the Federal Insurance Contributions Act taxes is engaged in a `trade or business.'

In the instant case, there are several factors which lead to the conclusion that the taxpayer is engaged in the business of selling property. He personally subdivided the tract of land and spent considerable sums of money in doing so. Even though he discontinued the part of his venture related to the building of homes, he never abandoned his intention of selling the remaining lots. The fact that he chose to conduct those sales through a real estate agency is not sufficient to exclude his income from those sales from the term `net earnings from self-employment.'

Accordingly, it is held that the income derived by the individual from the sale of real estate originally purchased as unimproved land and subsequently divided into lots and turned over to a real estate firm to sell constitutes income from a `trade or business' and should be included in computing net earnings from self-employment for purposes of the Self-Employment Contributions Act