Rev. Rul. 59-176

Advice has been requested whether a lump-sum payment received by an officer of a real estate firm for 20 years' service as manager of an office building leased by the firm comes within the income tax limitation provisions of section 1301 of the Internal Revenue Code of 1954.

The taxpayer in the instant case was the principal officer of M company, a real estate firm. In 1937, N company leased part of a building to M for a 20-year period in consideration of an annual rental and an agreement that M would operate and maintain the building, pay all taxes and assessments, water rent and charges made by any public authority against the property, maintain fire and other insurance and, at its own cost, keep in good order and repair the premises including all alterations, additions and improvements, as well as complying with and executing all laws, ordinances and orders of public authorities relating to the leased premises or the fixtures. M entered into a 20-year contract with the taxpayer for him to manage the building, under which the company would pay him, in addition to his regular yearly salary, a lump-sum amount payable at the end of the 20 years upon the termination of the contract for his management services. In 1957, the taxpayer received the lump-sum payment for his services under the contract.

Section 1301 of the Code provides for a limitation on tax if an individual (1) engages in an employment as defined in subsection (b) of that section, (2) the employment covers a period of 36 months or more, and (3) the gross compensation from the employment received or accrued in the taxable year of the individual is not less than 80 percent of the total compensation from such employment.

The term `an employment' in section 1301(b) of the Code means an arrangement of series of arrangements for the performance of personal services by an individual to effect a particular result. An employment exists because of a definite project undertaken to effect a particular result as distinguished from an agreement for the general performance of personal services or for the rendering of such services with respect to casual and unrelated results not confined to a continuing particular project.

The principal business of the M company was the real estate business, and the taxpayer derived a salary from his employment as an officer of that firm. In performing additional management services under the management agreement he did not undertaken a special task separate and distinct from all other tasks and duties as an officer of the real estate firm. See Moe A. Lesser et ux. v. Commissioner , 17 T.C. 1479. The services he rendered to the M company under the management agreement are not separable from other services rendered that company for which he received compensation. The amount received under the management contract may not be treated separately from the other amounts received during the 20-year duration of the agreement for the purpose of determining whether he received 80 percent or more for such services in 1957. Furthermore, the services performed in connection with the management of the property were in the nature of a general performance of personal services rather than an arrangement for the performance of personal services to effect a particular result as required by section 1301(b) of the Code. Unless the services themselves are divisible, the compensation therefor, regardless of the sources, must be lumped together. See George J. Hoffman, Jr., et al. , v. Commissioner , 11 T.C. 1057.

Accordingly, it is held that the services rendered by an officer of a real estate firm in the management of a building, for which he was paid at the expiration of 20 years according to an agreement with the firm, are not separable from other services rendered the firm for which he received compensation, and the amount paid at the expiration of 20 years may not be treated separately from other amounts received by the officer during the 20-year duration of the agreement for the purpose of determining whether he received 80 percent or more for such services in the taxable year as required by section 1301(a)(3) of the Code. Furthermore, the services rendered were in the nature of a general performance of personal services inseparable from his regular duties as an officer rather than an arrangement for the performance of personal services to effect a particular result, as required by section 1301(a) of the Code. Therefore, the tax limitation provisions of section 1301 are not applicable to the lump-sum payment received upon termination of the contract.