Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 64-64

1964-1 C.B. 320

Sec. 1402

IRS Headnote

The occupant of business premises provides space for coin-operated amusement or gaming devices. He supervises play, makes change for customers, and pays out any prizes or winnings. The owner of the machines pays the occupant a percentage of the receipts under the arrangement. Held , the remuneration received by the occupant of the premises does not constitute `rentals from real estate,' and the remuneration is includible in computing net earnings from self-employment for purposes of the Self-employment Contributions Act of 1954.

Revenue Ruling 57-7, C.B. 1957-1, 435, amplified and Revenue Ruling 60-112, C.B. 1960-1, 354, distinguished.

Full Text

Rev. Rul. 64-64

Advice has been requested as to the treatment, for purposes of the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954), of amounts received under certain so-called leases of space for the placement of coin-operated amusement devices.

An individual, who is the occupant of business premises, entered into an agreement with M corporation, the owner of slot machines, juke boxes, and pinball machines, as well as other amusement and gaming devices, whereby the occupant will receive a stipulated percentage of the receipts from the machines, after deduction of certain expenses, as remuneration for permitting the machines to occupy space in his establishment. Although the machines are owned by M corporation, the tax stamps are properly purchased by the occupant of the premises in his own name and he is reimbursed therefor by M corporation.

Under the arrangement, the occupant of the premises also makes change for customers, pays out any prizes or winnings, and otherwise supervises play.

Section 1402(a)(1) of the Self-Employment Contributions Act of 1954 provides, in part, that in computing net earnings from self-employment, rentals from real estate and from personal property leased with the real estate, together with deductions attributable thereto, shall be excluded unless such rentals are received in the course of a trade or business as a real-estate dealer.

Section 1.1402(a)-1(c)(1)(iii) of the Self-Employment Tax Regulations provides, generally, that payments for the use or occupancy of rooms or other space where services are also rendered to the occupant do not constitute rentals from real estate and that services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only.

It is concluded that the services provided for under the agreement which are to be performed by the occupant of the premises are primarily for the convenience of the owner of the machines and that the services are other than those usually or customarily rendered in connection with the rental of rooms or other space only for occupancy.

Accordingly, it is held that the remuneration received by the occupant of the premises does not constitute `rentals from real estate' within the meaning of section 1402(a) of the Self-Employment Contributions Act of 1954 and is includible in computing the `net earnings from self-employment' of the occupant.

Revenue Ruling 57-7, C.B. 1957-1, 435, which relates to the filing of information returns on Forms 1096 and 1099, is amplified to make clear that a rental of space under the circumstances set forth therein will not be considered to result in the payment of `rentals from real estate' for purposes of the Self-Employment Contributions Act.

The facts in this case are distinguishable from the facts in Revenue Ruling 60-112, C.B. 1960-1, 354, involving the owner of a gasoline filling station who leased his property and improvements to a petroleum company and then entered into an agreement whereby the station was leased back to him. Under that arrangement, the petroleum company obtained exclusive possession of the property and the right to use it for its own purposes, including the right to sublease to a tenant  of its own choosing.