20 CFR 404.1050(a)

SSR 73-14

Where self-employed real estate salesman listed his own real estate for sale with a broker and after the broker sold such real estate, the salesman paid the broker his customary commission from the proceeds of the sale and in turn received from the broker a listing commission as the listing salesman, held, amount of salesman's commission must be included in determining his net earnings from self-employment for purposes of title II of the Social Security Act.

R, a self-employed real estate salesman, listed with a broker certain property for sale which he personally owned. In January 1972, R sold this property through the broker, and from the proceeds realized from the sale paid a commission to the broker. The broker, in turn, paid to the listing salesman, R (the person who owned the property in the first instance) a listing commission.

The issue to be resolved is whether the commission realized by a real estate salesman, who by virtue of his occupation sells his own property through a broker, would be considered net earnings from self-employment for social security purposes.

Section 211(a) of the Social Security Act read, in pertinent part:

(a) The term "net earnings from self-employment" means the 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 such individual * * *.

Section 61(a) of Subtitle A of the Internal Revenue Code of 1954 (26 U.S.C. 61(a)) provides, in pertinent part:

. . . General definition -- Except as otherwise provided . . ., gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, and similar items; * * *.

Two United States Court of Appeals decisions have dealt with sales commission situations which appear applicable to R's case. The court, in Commissioner of Internal Revenue v. Daehler, 281 F.2d 823 (5 Cir., 1960), was faced with a legal issue analogous to that presented here in which a real estate salesman received a commission on the sale of a house he purchased for himself through a broker. The court held that such commission was taxable income under section 22(a) of the Internal Revenue Code of 1939 (the predecessor of section 61 of the Internal Revenue Code of 1954). There is no indication that the court would have reached a different result merely because the salesman involved here sold, rather than purchased, the property for which he received a commission.

In Commissioner of Internal Revenue v. Minzer, 279 F.2d 338 (5 Cir., 1960), the taxpayer was an insurance agent and broker. He purchased and kept in force policies of insurance upon his own life. As a representative of the insurance companies which had issued the policies, he became entitled to commissions on the policies to the same extent he would have received commissions on insurance on the life of a third party.

In reversing a lower court decision (Minzer v. CIR, 31 TC 1130), the Court of Appeals held that the commissions received by the agent on the insurance policies written on his own life were compensation for services and as such taxable income. The court reasoned:

It cannot be said that the insurance had a value less than the amount of the premiums. It must then be said that a benefit inured to the taxpayer to the extent of his commissions. The benefit is neither diminished nor eliminated by referring, as does the Tax Court, to the word 'commission' as a verbal trap. The commissions were . . . income within the meaning of 26 U.S.C.A. (I.R.C. 1954). See 61(a)(1).

See also Bailey v. Commissioner of Internal Revenue, 41 TC 663 1964); Ostheimer v. United States, 264 F.2d 789, 793 (3 Cir., 1959).

The court in the Minzer decision, supra, further indicated that this result would have been the same whether the salesman was an employee or independent contractor. Thus, the fact that the salesman in this case is self-employed rather than an employee would not require a different result.

Accordingly, it is held that the commission received by R is net earnings from self-employment.

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