G, an attorney and notary public practicing in Puerto Rico, filed application for old-age insurance benefits in March 1962 and became entitled to such benefits beginning that month. For 1961 G reported net earnings from self-employment of $4,600, based on gross income of $5,840 and business expenses of $1,240. His gross income, as reported, included $292 in fees for services as a notary public and $5,548 for services as an attorney. however, it was found that the latter amount included fees for services involving both legal and notarial services.
The question is whether G's fees for services as a notary public may be included and the expenses attributable to such services may be deducted in computing his net earnings from self-employment for 1961. The resolution of this question is necessary since the amount of his net earnings from self-employment for 1961 will affect the amount of his old-age insurance benefit.
Section 211(a) provides, as pertinent here, that the term "net earnings from self-employment" means gross income, as computed under subtitle A of the Internal Revenue Code of 1954, derived by an individual from any trade or business carried on by him, less any deductions allowed under such subtitle which are attributable to such trade or business.
When self-employed persons were initially covered by the 1950 Amendments to the Social Security Act, most professional services, including the practice of law, wee excluded from the term "trade or business," as were services as a public officer. The Social Security Amendments of 1956 extended coverage for taxable years ending after 1955 to several professional groups, including lawyers. Section 211(c)(1), however, continues to exclude from the term "trade or business" the performance of the functions of a public office. Regulations No. 4, § 404.1057(b) in defining the term "public office" includes a notary public among the examples of persons performing the functions of a public office.
Income from notarial services int he 50 States and the District of Columbia is uniformly excluded from net earnings from self-employment as being derived from the performance of the functions of a public office. This rule applies whether or not the notary is an attorney. However, in Puerto Rico the relationship between the practice of law and notarial practice is in certain respects closer than in the 50 States and the District of Columbia. Under Puerto Rican law notaries are required to be attorneys admitted to practice. They draw up original instruments, issue copies thereof, and keep their own records. In practice, a single fee is usually charged by an attorney-notary for a transaction involving both legal and notarial services.
Because of this close relationship, the question was raised whether services as a notary public in Puerto Rico were an integral part of the practice of law, and not the performance of the functions of a public office, as they are in the 50 States and the District of Columbia. If notarial services were considered to be an integral part of the practice of law, the fees attributable to them would be includible in computing net earnings from self-employment, and any corresponding expenses would be deductible. On the other hand, if such services were considered to be the performance of the functions of a public office, such fees would be excluded in computing net earnings from self-employment, and the corresponding expenses would not be deductible.
Although there is a close relationship between the practice of law and notarial practice in Puerto Rico, the nature and functions of the two types of practice are clearly separable. The formalities followed in notarizing an instrument are prescribed by law, and the statutory provisions governing the practice of law and notarial practice are set forth in separate chapters of the Puerto Rican laws. Although an attorney-notary may, in practice, make a single charge for a transaction involving both legal and notarial services, the fees that may be charged for notarial services are set out specifically under the heading "Notarial Tariff" at Section 1040, Chapter 73, Laws of Puerto Rico Annotated (1954 Edition). A notary is required to take an oath provided by law and furnish a bond in favor of the Commonwealth of Puerto Rico to answer for the faithful discharge of the duties of office and for any damages he may cause in the discharge of the duties of his office. Further, the records of a Puerto Rican notary are public records and requirements for keeping such records and reporting weekly to appropriate courts are set forth by law. Also, in Soto v. Treasurer, 53 P.R.R. 940 (1938), it was stated by the court that it is improper for attorneys representing some of the parties to suit to exercise their powers as notaries for the purpose of taking the oaths of their clients, although it was added that oaths so taken are not void. Puerto Rican practice in this respect appears to be identical with that of the 50 States.
In view of the above considerations, it is held that notarial services in Puerto Rico by an attorney-notary are distinct from his practice of law and are the performance of the functions of a public office. Such services are therefore excluded from social security coverage under section 211(c)(1) of the Act and § 404.1057(b) of Regulations No. 4. Thus, all fees received by a Puerto Rican notary public under the "Notarial Tariff" are excluded from computation of net earnings from self-employment. Where a fee received for a transaction covers both legal and notarial services, the amount permitted for the latter services by the Notarial Tariff is so excluded. Also, expenses attributable to the notary practice are not deductible in computing net earnings from self-employment. expenses incurred under both activities, e.g., rent, lights, etc., should be proportionately allocated between the two activities.
In the present case G included in the computation of his net earnings an amount of $292 as income from notary fees. His records also reveal that his reported gross income from the legal practice includes fees received for transactions involving both legal and notarial services. By application of the fee rates set forth in the "Notarial Tariff" it was found that of the $5,548 reported as income from legal services, $584 was for notarial services and thus excluded income. thus, $876 (i.e., $584 plus $292) must be excluded from the $5,840 reported by G as gross income. This results in a correct gross income of $4,964.
G's records reveal that his expenses attributable to his notarial services, including a proportionate share of expenses attributable to both legal and notarial services, were $167. Therefore, since expenses attributable to notarial services are not deductible in computing his net earnings from self-employment, his reported expenses must be reduced by that amount, making his deductible expenses $1,073 instead of $1,240 as reported.
Accordingly, it is held that G's net earnings from self-employment for 1961 are $3,891 (i.e., $4,964 minus $1,073).
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