SSR 64-10: SECTION 211(c). -- TRADE OR BUSINESS -- LENDING MONEY
20 CFR 404.1057
- An individual made loans on occasion to purchasers of real estate referred to him by friends and real estate dealers. His lending activities were not regular, he did not maintain an office, and he did not hold himself out to the public as being in the business of making loans. Held, such individual was not engaged in a trade or business and the amounts he received as interest were not includible in computing net earnings from self-employment.
R was born September 20, 1893, and filed application for old-age insurance benefits in October 1958. Under section 214(a) of the Social Security Act in effect at that time, R needed 15 quarters of coverage to be fully insured and thus entitled to such benefits. He alleged that during the years 1955 through 1958, he was engaged in the business of making loans to purchasers of real estate and that his net earnings from such business were in excess of $00 for each year. This income, if creditable as self-employment income, would give R the necessary quarters of coverage to be fully insured.
During the years 1955 through 1958, R's income consisted of interest received on loans made by him to various individuals. He had been making such loans for about 9 years. Generally, the loans were secured by real estate. R did no advertising and had no business office. His only business expenses were the fees charged by his bank for the collection of the interest payments from borrowers to whom he had loaned money. Generally before making a loan, R would investigate the property that was to secure the loan and ascertain what the borrower did for a living, what chance he had of paying the loan, and so forth.
R engaged in no occupation other than the making of these loans. R did not know exactly how prospective borrowers were referred to him, but, from time to time, he told friends about his loan activities. Various real estate dealers on occasion referred prospective borrowers to him, as did also some attorneys. He never paid a commission to anyone for referring such individuals to him.
Factors which are considered in determining the existence or non-existence of a trade or business include: (1) whether the activity was initiated and performed with a profit motive; (2) whether it was regular and continuous; (3) whether it was engaged in as a regular occupation or calling; and (4) whether the individual held himself out to others as being engaged in carrying on a trade or business. No single factor is controlling, and each case must be resolved on its own merits with due consideration of the entire factual situation.
Interest payments such as those received by R from individuals to whom he had made loans on private property are not excluded from the computation of net earnings under section 211(a) of the Act. Therefore, if the interest income received by R was received in the course of a trade or business, it may be included in computing his net earnings from self-employment.
In analyzing R's activities, it is apparent that he operated with a profit motive in mind. However, his activities do not appear to have been regular and continuous. In a 3-year period he made only seven loans and in 2 years of those 3, he made only one loan. In almost any business, particularly a commercial or industrial enterprise, there may be periods of inactivity which do not negate the continued existence of the business. However, it is difficult to regard the business of dealing in real estate under subtitle A of the Internal Revenue Code of 1954, derived by an individual from any trade or business carried on by such individual, less the deductions allowed under that subtitle which are attributable to such trade or business with exceptions not here pertinent.
- Section 211(c) of the Act provides in pertinent part:
- 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 of the Internal Revenue Code of 1954, * * *
R generally had 12 to 18 loans outstanding at a time. The normal loan he made was between $3,000 and $5,000, was generally made to an individual in the lower income brackets, and usually ran for about 5 years. In 1956 he made six loans to private individuals and in the 2-year period, 1957 and 1958, he made only one loan.
Section 211(a) of the Social Security Act provides that the term "net earnings from self-employment" means the gross income, as computed, mortgages or loans as having a similar continuity when over a period of several years the person supposedly engaged in it does very little in that line. An interval of a few weeks when the individual is inactive would not necessarily be significant, but many months of inactivity would seem to be quite significant and indicate the likelihood that no trade or business in fact existed.
It appears that in making mortgage loans R merely intended to place some of his capital in high interest bearing, relatively safe investments. His actions appear to have been directed at protecting and conserving his capital and not directed at carrying on a trade or business by an active solicitation of business. The record establishes that the claimant was not a real estate dealer, has never been a real estate dealer, has never been active in real estate circles, had no business office or other business establishment, did not advertise for business, and did not hold himself out as a loan broker. In view of the foregoing, the factors associated with the normal operation of a trade or business, such as regularity or continuity of operations, business purpose, or holding out to the public, are not present in this case.
Accordingly, it is held that R was not engaged in a trade or business during the taxable years 1955 through 1958, that the interest income he derived from his lending activities cannot be included in computing his net earnings from self-employment for those years, that he is not fully insured, and, therefore, he is not entitled to the old-age insurance benefits for which he applied.