Trailer Park Operation Constitutes 'Rentals from Real Estate'

You state therein that the proposed revenue ruling is based on G.C.M. 31442, dated November 16, 1959, to the effect that income derived from the operation of a trailer park does not constitute excluded "rentals from real estate" within the meaning of section 1402(a)(1) of the Self-Employment Contributions Act, but rather that such income should be treated as net earnings from self-employment for such tax purposes.

You say consideration by this office of the proposed revenue ruling is deemed essential because:

(1) The case is closely analogous to, and not readily distinguishable from the case on which Rev. Rul. 55-559, C.B. 1955-2, 315 is based, and the case of Mullen v. Folsom (C.A. 1st 1956) 230 F.2d 611, aff'g the decision of the United States District Court for Massachusetts, unreported.

(2) The proposed revenue ruling is inconsistent with and contrary to the position taken by Tax Rulings Division in determining whether amounts received by trailer park operators constitute "rents" for purposes of section 1372(e)(5) of the 1954 Code.

If this office concurs in the proposed revenue ruling, you request our advice whether the position therein taken also is applicable to cases arising under sections 512(b)(3) and 1372(e)(5) of the 1954 Code.

You will recall that subsequent to your memorandum of May 19, 1960, Mr. Blumenthal of the General Counsel's office of the Department of Health, Education and Welfare requested that no further action be taken on this case until the court's decision was rendered in another trailer camp case which H.E.W. was then litigating. The subject case was thereupon placed in our suspense file pending further notification from H.E.W. Then, on October 21, 1960, Mr. Schumaker of your Employment Tax Branch telephoned us to suggest that this office might give its views on the questions above set out but, in view of H.E.W.'s request, suggest that nothing be published pending the outcome of the litigation.

Accordingly, further study of the case was undertaken and, in the meantime, we were advised by H.E.W. on December 15, 1960, that the United States District Court for the Eastern District of Virginia had decided the case in litigation for the Government. The name of the case is Heretick v. Flemming, Civil No. 3064, decided November 23, 1960.

With respect to the questions posed in your memorandum of May 19, 1960 in this case, the following comments are offered for your consideration.

Firstly and generally speaking, we would point out that G.C.M. 31442 merely holds that "if services and facilities specifically designed for the use of trailer occupants are made available by a trailer park operator in the normal trailer park operation, they MAY very well be considered services rendered to the occupants within the ambit of the cited provision (section 1.1402(a)-1(c)(1)(iii)) of the regulations." (emphasis added). The G.C.M. went on to conclude that in the circumstances of the * * * case income from the trailer park constituted not earnings from self-employment. However, this is not necessarily tantamount to saying that income derived from every trailer park operation will qualify as earnings from self-employment instead of rent. Essentially, it is the position of this office that each case must be decided on its own facts but that, of course, given a case in which the facts are substantially the same as those which exist in the subject case, the same rule would apply.

More specifically, in our view, the fact that the regulations pertaining to the definition of the words "rents" and "rentals" for purposes of sections 512(b)(3), 1372(e)(5) and 1402(a)(1) of the Code are almost identical requires a uniform interpretation of the quoted terms under all three Code sections. With this position as a basic premise, the balance of this memorandum will be devoted to an expression of opinion on the specific issues raised in your memorandum of May 19, 1960 to this office.

1. You say that the position taken in G.C.M. 31442 is closely analogous to, and not readily distinguishable from the situations in Rev. Rul. 55-559, C.B. 1955-2, 315 and in Mullen v. Folsom (C.A. 1st 1956) 230 F. 2d 611, cert. den. (1956) 352 U.S. 899. It is believed that there are a number of distinctions between those two cases and the instant case which would justify a different result in the latter.

First, Rev. Rul. 55-559, was concerned with an office building and the Mullen case involved apartment units. The regulations specify certain types of services which will not affect the classification of the income from either of these types of operation as rents. On the facts in each case it was found that sufficient services to the occupants of the office suites and apartment units respectively were not provided to take the income therefrom out of the category of rents. Furthermore, in Rev. Rul. 55-559 there appears to have been no showing that the services, even the janitorial services, were performed anywhere except in the public areas of the office building or that they were other than those usually undertaken for maintenance purposes or, in other words, that they were other than the type which the regulations specifically provide will not affect the characterization of the income received as rents.

Similarly, in the Mullen case, the district court appears to have found that only customary maintenance was supplied and no particular services were rendered to tenants.

It is concededly a close question whether a trailer park operation is more like a hotel or motel operation, for example, than it is like an office or apartment building operation and it is believed that before deciding which of the criteria in the regulations are especially applicable to a trailer park operation, it is necessary to decide into which classification the trailer park operation most appropriately fits. We incline to the view that it is more nearly like a hotel or motel operation, although there are certain factors which point the other way, such as, for example, the frequently semi-permanent nature of the occupancy of spaces in trailer parks. We are also somewhat persuaded by the "service industries" summary of the 1954 U.S. Census of Business contained on page 853 of the Statistical Abstract of the United States, 1958, to which reference is made in G.C.M. 31442, this case. In that summary trailer parks are listed under the heading "Hotels, motels, tourist courts, camps."

In the light of the foregoing factors, we are of the opinion that Rev. Rul. 55-559 and the case of Mullen v. Folsom are distinguishable from the instant case.

2. Your memorandum invites our attention to a memorandum (T:R:C- RN) dated April 20, 1960, prepared in your Corporation Tax Branch and to the ruling letters issued in the cases of Air Base Motor Court, John E. Meeks and Lawrence A. Adams, the administrative files of which cases you have transmitted for our information in connection with our consideration of the subject case. In those ruling letters, the Corporation Tax Branch of the Tax Rulings Division takes a strict view of the kinds of services to occupants of trailer parks considered significant enough to support a ruling that the income therefrom is not rents for purposes of section 1372(e)(5) of the Code. Section 1372(e)(5) provides that an election to be taxable as a partnership by a small business corporation shall terminate if, for any taxable year of the corporation for which the election is in effect, such corporation has gross receipts more than 20 percent of which is derived from royalties, rents, dividends, interest, etc. The pertinent regulations define rents in terms almost identical to those used in the regulations under sections 512(b)(3) and 1402(a)(1).

It appears clear that some of the services offered in the trailer park operations concerning which the Corporation Tax Branch of Tax Rulings Division has issued the rulings above referred to would be sufficient to take the income there in question out of the rental category not only under the Service's ruling position in the 1402(a)(1) area but also under the case authorities construing the counterpart thereof in the Social Security Act. See G.C.M. 31442; Thorbus v. Hobby (D.C.Cal. 1954) 124 F. Supp. 868, aff'd., sub nom. Folsom v. Poteet (C.A. 9th 1956) 235 F.(2d) 937; Mullen v. Folsom supra; Heretick v. Flemming, supra. As indicated hereinabove, we think there should be a uniform interpretation of the term rents under the three Code sections, 512(b)(3), 1372(e)(5) and 1402(a)(1), in view of their almost identical regulations. We agree with the view expressed in T:R:C's memorandum dated April 20, 1960, to T:R:E that the fact that in the regulations applicable to section 1372(e)(5), but not in the 512(b)(3) or 1402(a)(1) regulations, the word "services" is modified by the word "significant", is a "distinction * * * without a difference" in the light of the otherwise identical character of the three regulations.

Although this office did not review the rulings under Subchapter S concerning trailer parks, we did have occasion to consider the question of whether income from the operation of a MOTEL constituted rents for purposes of section 1372(e)(5). The view was expressed in G.C.M. 31002, unpublished, dated November 19, 1958, in re: * * * "that charges of the usual type for lodging in motels do not represent rents for the purposes of section 1372(e)(5)." See also TIR 113 dated November 26, 1958. It is believed we would reach a similar conclusion as to the particular trailer park operations involved in the T:R:C rulings.

As indicated in the administrative file representatives of the Exempt Organizations Branch have expressed the opinion that income from a trailer park operation of the kind involved in the * * * case would not constitute rent for purposes of section 512(b)(3). Accordingly, it is concluded that although there is no apparent conflict of views in the section 512(b)(3) area, a conflict exists between our two offices in the section 1372(e)(5) area. It is therefore recommended that consideration be given to scheduling a conference between representatives of T:R:E, T:R:C, T:R:EO and CC for purpose of coordinating our views.

A word about the recent decision in the SECA area -- As indicated early in this memorandum, H.E.W. General Counsel's office had requested that this office take no further action with respect to the instant case pending the outcome of certain litigation. As noted, the court decided the case in question in favor of the Secretary, H.E.W. See Heretick v. Flemming (U.S.D.C. E.D.Va. 11-23-60) Civil No. 3064. The opinion does not recite the findings of fact upon which the court based its decision that the plaintiff's income from a trailer camp was net earnings from self-employment. However, it is understood that the facts are substantially similar to those in * * *. If this is true, we think the decision further supports the conclusion reached in G.C.M. 31442 under section 1402(a)(1).

In this connection your attention is invited to G.C.M. 31442 wherein it is pointed out that at least since 1952 the Social Security Administration has steadfastly maintained that income from a trailer park operation of the kind involved in the * * * case is not rental income but constitutes net earnings from self-employment for social security benefits purposes. As you know, the Internal Revenue Service and the Social Security Administration are administering a taxation and a social security benefit program under statutes and regulations which are substantially the same in almost all material respects. By Presidential directive dated February 24, 1949 addressed to the Secretary of the Treasury which is implemented by I.R.Mim. 58-48 dated July 8, 1958, the Internal Revenue Service is required to maintain a high degree of coordination with the Social Security Administration regarding the tax determinations and benefit determinations made by the two agencies. Thus in the administration of the taxing and benefits provisions and the regulations with respect thereto the two agencies are to employ the same criteria and attempt to reach the same results at all levels of administration.

After careful consideration of the matters discussed in your memorandum of May 19, 1960 it is the opinion of this office that the conclusions reached in G.C.M. 31442 and in the proposed revenue ruling are sound and that Rev. Rul. 55-559 as well as Mullen v. Folsom are distinguishable. Further, it is believed that uniformity of criteria for determining what is rent should prevail in sections 512(b)(3), 1372(e)(5) and 1402(a)(1) because the applicable regulations are so nearly identical. It is accordingly believed that a conference looking to a resolution of our differences of opinion in the section 1372(e)(5) area between appropriate representatives from your office and this office would be helpful.

It is collaterally noted that this office now has before it a case submitted by your office (T:R:C-RN) titled * * *, A-635075, which involves the definition of rents under the personal holding company income provisions of the Code. However, the regulations pertaining to the definition of rents in this area of the Code are quite different from those which are here under consideration and therefore we would reiterate the position taken in G.C.M. 31002, supra, to the effect that this office does not here pass on the question of whether the income in question would represent rents for the purpose of the personal holding company provisions.

The administrative file is herewith returned.

SWGarrett/emf/2/17/61

CC:I:A-628142

The matter of the classification of income from the operation of trailer parks has been carefully reconsidered in light of the comments contained in your memorandum and the expression of views at the meeting therein referred to.

First, in the opinion of this office it is unlikely that the Social Security Administration will consider reversal of its position in view of its long-standing administrative practice and its litigation experience in the area. In this connection we note from the supplemental factual information which you kindly obtained for our information in the case of Heretick v. Flemming (U.S.D.C. E.D. Va., 11/23/60) Civil No. 3064, unreported, that the services rendered by Mr. Heretick in his trailer park operation were, if anything, less substantial than those in the * * * case, and nevertheless the court upheld the Government's contention that the income therefrom constituted net earnings from self-employment. If, however, it is your final conclusion that it is essential in the interests of the best administration of the revenue laws that a different view be adopted, this office will be willing to cooperate with you in an effort to persuade the Social Security Administration to such view. Since both agencies are already agreed that the determination in these cases will depend on the facts, it might only be necessary to persuade the Social Security Administration of the desirability of adopting a stricter standard of evaluation of the kinds of services which will be considered substantial enough to take income out of the rental category. However in this regard your attention is called to Section 403(e)(3)(B)(i) of Title 42 of the United States Code relating to Social Security, which indicates that the Social Security Administration proceeds initially on the presumption that income is from self-employment until it is shown to the satisfaction of the Secretary of the Health, Education and Welfare Department that the individual involved rendered no substantial services with respect to any trade or business. Accordingly, it is believed that ordinarily that agency will approach this type of question from a point of view opposite to that of the Service. That is to say, the Social Security Administration will presumably assume substantial services until the contrary is shown by the taxpayer, whereas the Internal Revenue Service will assume there are no services until the contrary is shown by the taxpayer. This difference could complicate the process of reaching an accord.

The belief expressed in G.C.M. 31895 that there should be a uniform interpretation of the substantially identical regulations implementing Sections 512(b)(3), 1372(e)(5), and 1402(a)(1) is affirmed. See Sections 1.512(b)-1(c), 1.1372-4(b)(5)(iv) and 1.1402(a)-1(c)(1) of the regulations.

We would also reiterate the view that the determination in all of these cases depends not upon a legal principle but upon an evaluation of the facts in each case, and that on the given facts we think the holding in the * * * case is reasonable and does not appear to reach a result contrary to the statutory provision involved nor the legislative intent which prompted its enactment.

By the foregoing standard it is our informal opinion that four out of the five rulings issued under Section 1372(e)(5) which related to trailer park operations, the administrative files of which you have submitted for our information, should have gone the other way. The exception is the case of * * * (ruling letter dated 1/28/59), since there is no indication in that case that any services were performed by the taxpayer.

If the Tax Rulings Division is unable to resolve the difficulties in achieving a consistent evaluation of similar facts under the several Code sections here involved within the framework of existing regulations, it may wish to give consideration to requesting the Technical Planning Division to undertake a study of whether the regulations may be to some extent at least outmoded. In this connection you will recall the discussion at the March 21, 1961 meeting above referred to, concerning kinds of services to tenants which are known to be offered in connection with rentals in many modern apartment and office buildings. Such a study might well result in helpful recommendations which would reflect more accurately current practices in connection with the rental of rooms or other space for use or occupancy. It could also help us to achieve a more realistic evaluation of facts and to determine whether the services in question are "other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only."

The further cooperation of this office in helping to resolve the foregoing problems is, of course, available if it is desired.

The administrative file, with enclosures, is herewith returned.

SWGarrett:(unreadable) 7-21-61