Rev. Rul. 68-458

Advice has been requested relative to the treatment, for purposes of the tax imposed under the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954), of income received from a medical practice under the circumstances set forth below.

A physician, who ordinarily filed a joint Federal income tax return with his wife on a calendar year basis, died on November 27, 1965. A joint return was filed by his surviving spouse for the calendar year 1965. A fiduciary return was filed for the short period beginning November 27, 1965, and ending December 31, 1965. The physician's income from his medical practice for the period beginning January 1 and ending November 27, 1965, was reported on the joint return.

The question to be decided in this case is whether the physician's income from his medical practice for the period beginning January 1 and ending November 27, 1965, the date of his death, is includible in computing his net earnings from self-employment on the 1965 joint return as income from a `trade or business.' The answer to that question depends on whether the physician's `taxable year,' for purposes of computing the tax imposed under the Act, ended on November 27, the date of his death, or whether it ended on December 31, 1965, the closing date of the calendar year covered by the joint return.

Section 1402 of the Self-Employment Contributions Act, applicable for taxable years ending before December 31, 1965, provides in part:

(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 (relating to trade or business expenses), except that such term shall not include-

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(5) the performance of service by an individual in the exercise of his profession as a doctor of medicine * * *.

However, under the provisions of section 1402(c)(5) of the Act, formed by the Social Security Amendments of 1965, services performed in the exercise of the profession of doctor of medicine are not excluded from the term `trade or business' with respect to taxable years ending on or after December 31, 1965.

Section 7701 of the Code reads, in part:

(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof-

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(23) TAXABLE YEAR.-The term `taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the taxable income is computed under subtitle A. `Taxable year' means, in the case of a return made for a fractional part of a year under the provisions of subtitle A or under regulations prescribed by the Secretary or his delegate, the period for which such return is made.

Pursuant to section 1.443-1(a)(2) of the Income Tax Regulations, the return of a decedent is a return for the short period beginning with the first day of his last taxable year and ending with the date of his death, even though the filing of a return and the payment of tax for a decedent may be made as though the decedent had lived throughout his last taxable year.

Under section 1.6017-1(b)(1) of the regulations, in the case of a husband and wife filing a joint return under section 6013 of the Code, the tax on self-employment income is computed on the separate self-employment income of each spouse. Furthermore, under section 1.6013-1(d) of the regulations, one of the conditions that must exist before a joint return may be made for a survivor and the deceased spouse is that the taxable years of such spouses begin on the same day and end on different days only because of the death of either. Thus, if a husband and wife make their returns on a calendar year basis, and the husband dies during the year, a joint return may be made with respect to the calendar year of the wife and the `taxable year' of the husband beginning on January 1 and ending with the date of his death.

Therefore, since the physician's final `taxable year' for purposes of computing net earnings from self-employment ended with the date of his death on November 27, 1965, and since the Social Security Amendments of 1965, in effect, extended social security coverage with respect to services performed in the exercise of the profession of a doctor of medicine only to taxable years ending on or after December 31, 1965, the physician could not be considered as carrying on an included `trade or business' for self-employment tax purposes during a taxable year ending on or after December 31, 1965.

Accordingly, none of the physician's income from the exercise of his profession as doctor of medicine may be included in computing his net earnings from self-employment on the joint tax return for the calendar year 1965.