Internal Revenue Service
Revenue Ruling
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smRev. Rul. 60-77
1960-1 C.B. 386
Sec. 1402
IRS Headnote
The taxing provisions of the Federal Insurance Contributions Act and the Self-Employment Contributions Act of 1954 are applicable to individuals engaged in illegal activities where they perform services as employees or qualify as self-employed individuals carrying on a trade or business within the contemplation of such Acts, respectively.
Full Text
Rev. Rul. 60-77
Advice has been requested relative to the status, for Federal employment tax purposes and for purposes of the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954), of individuals, engaged in illegal activities.
Section 3121(b) of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954) provides, in part, as follows:
EMPLOYMENT.-For purposes of this chapter, the term `employment' means * * * any service, of whatever nature, performed * * * by an employee for the person employing him, * * *.
Under section 3121(d)(2) of the above Act, the term `employee' means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. Whether an individual is an employee under such rules depends upon the facts in each case. The guides for determining, under such rules, whether an employer-employee relationship exists are found in section 31.3121(d)-1(c) of the Employment Tax Regulations.
Section 1402 of the Self-Employment Contributions Act of 1954 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 subtitle subtitle A which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in section 702(a)(9) from any trade or business carried on by a partnership of which he is a member; * * *
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(c) TRADE OR BUSINESS.-The term `trade or business,' when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 * * *.
In Commissioner v. Neil Sullivan, et al , 356 U.S. 27, Ct. D. 1821, C.B. 1958-1, 506, the Supreme Court of the United States held that rents and wages paid in the operation of bookmaking establishments are deductible as ordinary and necessary business expenses, under section 23(a) of the 1939 Code corresponding to section 162(a) of the 1954 Code), in computing net income for Federal income tax purposes even though such enterprises are illegal under State law.
In the case of Marvin K. Kobey v. United States , 208 Fed.(2d) 583, the United States Court of Appeals for the Ninth Circuit stated as follows:
There is no suggestion here that the employment must be lawful. As we have seen, to be taxable, wages need not be derived from legitimate employment.
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It is the holding of this Court that illegal businesses come within the ambit of the Social Security Act.
On the basis of the foregoing, it is held that any individual engaged in an illegal activity is subject to the same laws and regulations, in determining whether he is an employee under the Federal Insurance Contributions Act or self-employed under the Self-Employment Contributions Act of 1954, as individuals engaged in legal occupations and pursuits. This is true regardless of the nature of the activity, whether the activity is actually legalized in certain States, or whether some States have provisions in the unemployment compensation laws covering individuals engaged in such activity.
Thus, an individual performing services in an illegal activity is to be considered an employee for Federal employment tax purposes and for purposes of the withholding of income tax at source on wages, if, under the usual common law rules referred to above, the relationship existing between such individual and the person for whom the services are performed is that of employee and employer. As in any other situation, a determination is to be based on all the facts and circumstances in each case. No general rule can be adopted which would be applicable in all cases.
In the event it is found that the employer-employee relationship does not exist under the common law rules in a particular case, it then becomes necessary to determine whether the individual, as an independent contractor, incurs liability for the tax imposed under the Self-Employment Contributions Act of 1954. An individual incurs such liability when he engages in a `trade or business.' See section 1402(c) of the above Act. The illegal nature of the activity is immaterial in determining whether the individual pursuing such activity is engaged in a `trade or business' with respect thereto.