Internal Revenue Service
Revenue Ruling
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smRev. Rul. 79-78
1979-1 C.B. 9
Section 43
IRS Headnote
Earned income credit; income exempt from SECA tax. Earned income for purposes of the earned income credit provided by section 43 of the Code does not include income exempt from SECA tax pursuant to an election under section 1402(e) or (g) unless such income is wages, salaries, tips, or other employee compensation.
Full Text
Rev. Rul. 79-78
ISSUE
For purposes of the earned income credit provided by section 43 of the Internal Revenue Code of 1954, does the term "earned income" include income that is exempt from the Self Employment Contributions Act (SECA) tax pursuant to an election made by an individual under section 1402(e) or 1402(g)?
FACTS
Situation 1.--During 1978, an ordained minister of the gospel, who otherwise qualifies for the earned income credit provided by section 43 of the Code, was part-time pastor of a church from which the minister, as a common law employee of the congregation, received a salary of $2,400 and a housing and utility allowance of $600. The housing and utility allowance is excludable from the minister's gross income under section 107. During that year the minister received directly from individuals fees totaling $500 for performing marriages, baptisms, and other personal services. The minister also received $2,000 of farming income. In an earlier year the minister had elected pursuant to section 1402(e) to be exempt from the SECA tax with respect to amounts received for services performed in the exercise of ministerial duties. This election was made by filing a Form 4361, Application for Exemption from Self-employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners. Thus, the $2,400 of salary, the housing and utility allowance of $600, and the $500 of fees, all of which would otherwise be includible in net earnings from self-employment, were exempt from the SECA tax. The $2,000 of income from farming was not exempt from the SECA tax. The gross income of $4,900 was also the minister's adjusted gross income for the year.
Situation 2.--Same as Situation 1, except that the taxable year begins after December 31, 1978.
Situation 3.--During 1978, a farmer who otherwise qualifies for the earned income credit provided by section 43 of the Code and who is a member of a religious sect, the tenets and teachings of which are opposed to the acceptance of the benefits of any private or public insurance that makes payments in the event of death, disability, old age, or retirement, or makes payment toward the cost of medical care, received net earnings from self employment of $2,600 from farming activities. During that year, the farmer also received a salary of $2,000 as a part-time employee of a nearby business. In an earlier year, the farmer had elected to be exempt from the SECA tax pursuant to section 1402(g) by filing a Form 4029, Application for Exemption from Tax on Self-Employment Income and Waiver of Benefits. Thus, the $2,600 from farming activities was exempt from the SECA tax. The $2,000 of salary was not self-employment income but was subject to taxes imposed by the Federal Insurance Contributions Act. The total income of $4,600 was also the farmer's adjusted gross income for that year.
Situation 4.--Same as Situation 3, except that the taxable year begins after December 31, 1978.
LAW AND ANALYSIS
Section 43 of the Code provides that an eligible individual shall be allowed a refundable credit against tax of an amount equal to ten percent of so much of the individual's earned income for the year as does not exceed $4,000, for taxable years beginning before January 1, 1979 ($5,000 for taxable years beginning after December 31, 1978). The amount of the credit allowable to an eligible individual shall be reduced (but not below zero) by an amount equal to ten percent of so much of the individual's adjusted gross income (or, if greater, the earned income) for the taxable year as exceeds $4,000, for taxable years beginning before January 1, 1979. (For taxable years beginning after December 31, 1978, the amount of the credit allowable to a taxpayer shall not exceed the excess, if any, of (1) $500, over (2) 12.5 percent of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the taxable year as exceeds $6,000.)
Section 43(c)(2)(A) of the Code provides that the term "earned income" means (i) wages, salaries, tips, and other employee compensation, plus (ii) the amount of the taxpayer's net earnings from self-employment for the taxable year (within the meaning of section 1402(a)).
For taxable years beginning before January 1, 1979, section 43(c)(2)(B)(i) of the Code provides, in part, that for purposes of section 43(c)(2)(A), any amount shall be taken into account only if such amount is includible in the gross income of the taxpayer for the taxable year. (This provision was stricken from the law for taxable years beginning after December 31, 1978. Revenue Act of 1978, section 104(d).)
Section 1402(a) provides, in part, that 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 that are attributable to such trade or business.
Sections 1402(c)(4) and (5) provide that the term "trade or business" does not include the performance of services by a duly ordained, commissioned, or licensed minister of a church in the exercise of such ministry, or by a member of a religious order in the exercise of duties required by such order, or by an individual in the exercise of the profession of a Christian Science practitioner, provided an exemption under section 1402(e) is in effect with respect to the individual.
Likewise, section 1402(c)(6) of the Code excludes from the term "trade or business" the performance of services by an individual while an exemption under section 1402(g) is in effect with respect to the individual.
Both sections 1402(e) and (g) of the Code provide for the voluntary election by the individuals covered to be exempt from the SECA tax on certain income received.
Therefore, if an individual makes an election to be exempt from the SECA tax pursuant to either section 1402(e) or (g) of the Code, the income exempted from SECA tax is not net earnings from self-employment within the meaning of section 1402(a) for purposes of section 43(c)(2)(A)(ii). However, the income exempted from SECA tax is, nevertheless, earned income for purposes of the earned income credit if it is "wages, salaries, tips, and other employee compensation" within the meaning of section 43(c)(2)(A)(i). For example, if a minister is employed by a congregation on a salaried basis and is a common law employee, the salary paid to the individual by the congregation is earned income within the meaning of section 43(c)(2)(A)(i), even though the salary is exempt from the SECA tax by reason of the minister's voluntary election under section 1402(e).
HOLDINGS
An individual who has income exempt from SECA tax pursuant to an election made under section 1402(e) of the Code will have "earned income" with respect to such income for purposes of section 43 only if such income qualifies as "wages, salaries, tips, and other employee compensation" under section 43(c)(2)(A)(i).
Therefore, in Situations 1 and 2, the salary of $2,400 received by the minister is earned income under section 43(c)(2)(A)(i) of the Code. The housing and utility allowance received in 1978 (Situation 1) is not earned income for that year pursuant to section 43(c)(2)(B)(i) because it is not includible in the minister's gross income. Since section 43(c)(2)(B)(i) was stricken from the law for taxable year beginning after December 31, 1978, the $600 housing and utility allowance received in 1979 (Situation 2) as part of the minister's salary is earned income under section 43(c)(2)(A)(i). The $500 of fees received from individuals for performing marriages, etc., is not received by the minister as an employee and thus is not "wages, salaries, tips, and other employee compensation" within the meaning of section 43(c)(2)(A)(i). Further, since the $500 of fees was made exempt from the SECA by the minister's voluntary election under section 1402(e), it is not net earnings from self-employment within the meaning of sections 1402(a) and 43(c)(2)(A)(ii). Therefore, the $500 of fees is not earned income for purposes of the earned income credit. The $2,000 from farming is earned income under section 43(c)(2)(A)(ii) because the election to be exempt from SECA tax pursuant to section 1402(e) does not apply to services not performed in the exercise of the ministry.
Accordingly, the minister's earned income credit for 1978 (Situation 1) was $310, computed as follows:
$4,000--Earned income of $2,400 salary plus $2,000 from
farming, limited to $4,000 by section 43(a).
X 10%
________
$ 400
- 90--10% X $900, which is the excess of adjusted gross
income ($4,900) over $4,000.
________
$ 310
The minister's earned income credit for 1979 (Situation 2) was $500, computed as follows:
$5,000--Earned income of $2,400 salary, plus housing and
utility allowance of $600, plus $2,000 from farming.
X 10%
________
$ 500 (This amount is not reduced because neither the ad-
justed gross income nor the earned income exceeds
$6,000.)
An individual who has income exempt from SECA tax pursuant to an election made under section 1402(g) of the Code will not have "earned income" with respect to such income for purposes of section 43 since such amounts are not net earnings from self-employment within the meaning of section 1402(a).
Therefore, in Situations 3 and 4, the $2,600 from farming activities is not received as an employee and thus is not "wages, salaries, tips, and other employee compensation" under section 43(c)(2)(A)(i) of the Code. Since the $2,600 from farming activities was made exempt from the SECA tax by the farmer's voluntary election under section 1402(g), it is not net earnings from self-employment within the meaning of section 1402(a) and 43(c)(2)(A)(ii). Therefore, the $2,600 is not earned income for purposes of the earned income credit. The salary of $2,000 that the farmer received by working part-time as an employee is earned income within the meaning of section 43(c)(2)(A)(i).
Accordingly, the farmer's earned income credit for 1978 (Situation 3) was $140, computed pursuant to section 43(a) of the Code as follows:
$2,000--Earned income from working part-time as an employee.
X 10%
________
$ 200
- 60--10% X $600, which is the excess of adjusted gross
income ($4,600) over $4,000.
________
$ 140.
The farmer's earned income credit for 1979 (Situation 4) was $200, computed, pursuant to section 43(a) of the Code, as follows:
$2,000--Earned income from working part-time as an employee.
X 10%
________
$ 200 (This amount is not reduced because neither the adjusted
gross income nor the earned income exceeds $6,000.)