Rev. Rul. 59-1

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, under the circumstances set forth below, from an accounting practice.

A certified public accountant who is a partner in an accounting firm filed his individual Federal income tax return on a fiscal year basis as of September 1, 1954, through August 31, 1955. The fiscal year of the partnership was from December 1, 1953 through November 30, 1954.

Section 1402 of the Self-Employment Contributions Act, applicable for taxable years ending before 1955, provides in part as follows:

(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 * * * certified public accountant, accountant registered or licensed as an accountant under State or municipal law, full-time practicing public accountant * * * or the performance of such service by a partnership.

Under the provisions of section 1402(c)(5) of the Act, as amended by the Social Security Amendments of 1954, services performed in the exercise of the profession of accountancy are not excluded from the term `trade or business' with respect to taxable years ending after 1954.

The question to be decided in this case is whether the accountant's distributive share of income or loss described in section 702(a)(9) from the accounting practice carried on by the partnership for the partnership taxable year ending November 30, 1954, is includible in computing net earnings from self-employment on his 1954-1955 return as income from a `trade or business.'

Section 1.1402(c)-1(f)(5) of the Income Tax Regulations (adopted August 13, 1956 by Treasury Decision 6196) provides, in part, that in case of a partnership engaged in the practice of any of the designated excluded professions, the partnership shall not be considered as carrying on a trade or business for the purpose of the tax on self-employment income, and none of the distributive shares of the income or loss, described in section 702(a)(9) of the code, of such partnership shall be included in computing net earnings from self-employment of any member of the partnership.

The fact that the partnership's taxable year in question ended on November 30, 1954, is determinative of the question of whether the partnership was engaged in a `trade or business' for self-employment tax purposes. The Social Security Amendments of 1954 which, in effect, extended social security coverage with respect to services performed in the practice of accountancy are applicable only to taxable years ending after 1954. Since the partnership year in question did not end after 1954 and since the partnership was engaged in the profession of accountancy, the partnership itself could not be considered as carrying on an included `trade or business' for self-employment tax purposes during the year in question.

Consequently, in accordance with the regulations referred to above, it is held that none of the distributive shares of the income of the partnership may be included in computing the net earnings from self-employment of a member of the partnership for the year in question, irrespective of the termination date of the individual partner's fiscal year.

The above conclusion is also applicable in like situations involving other professions which, prior to the Social Security Amendments of 1954 and/or 1956, were excluded from the term `trade or business' for self-employment tax purposes for taxable years ending prior to 1955 and 1956, respectively, but which were not thereafter excluded.