SE earnings reduced social security benefits.

• Author: Mason, Max M.
• Position: Self-employment

M owned and operated real estate development company C, an S corporation. He entered into a consulting agreement with C, under which he was to receive $100,000 on signing the agreement and $5,000 per month through 2000. M did not receive payment under the contract, but in 1997 reported $264,398 income on Schedule C, Profit or Loss From Business, pursuant to a Form 1099 issued to him by C. C, an accrual-method taxpayer, deducted $264,398 in consulting fees paid to M in 1997 to minimize the tax on $283,000 of earned but uncollected 1997 income.

C did not actually pay M the $264,398, but issued him a "promise" to pay it on selling some lots in the future. M borrowed more than $20,000 to pay the resulting 1997 income and self-employment (SE) taxes. He admitted making the conscious decision to handle the consulting fees in this manner.

Social Security Reduction

M was 62 and receiving Social Security retirement benefits in 1997. The issue is whether the SE earnings reported on M's 1997 Form 1040, for which he received no cash in 1997, are earnings in determining whether he had excess earnings that would reduce his Social Security retirement benefits.

In 1999, the Social Security Administration issued M a notice that it had overpaid his benefits in 1997 by nearly $10,000, because the SE earnings reported on his 1997 return reduced his Social Security benefits to zero for that year. M argued that he had "prepaid" the income taxes on the reported income that he had yet to receive. As a cash-basis taxpayer, he argued that the reported income was not earnings that reduced his Social Security benefits. The district court granted summary judgment to the IRS; M appealed.

Analysis

The Social Security Act (SSA) permits a retired person to engage in some work activity without losing retirement benefits; see 42 USC Section 403(b) and (f). Once the individual's earnings exceed the applicable exempt amount ($13,500 in 1997), the benefits are reduced $1 for each $3 earned above the exempt amount; see Section 403(b) and (f); and 20 CFR Sections 404.415(a) and 404.430. The Social Security regulations define earnings as an individual's earnings for a tax year, including both wages and net SE earnings; see 20 CFR Section 404.429(a). Further, net SE earnings are includible as earnings in the year they are reportable for Federal income tax purposes; see 20 CFR Sections 404.428(b) and 404.1080(d)(3).The SSA and the Code are to be construed similarly to determine the...