Rev. Rul. 83-139

ISSUE

Is the income received by a trailer park owner in the situations described below includible in computing "net income from self- employment" under section 1402(a) of the Internal Revenue Code?

FACTS

Situation (1). A trailer park owner and operator provides trailer lots, services, and facilities to trailer owners for a monthly fee. The park owner allots a parcel of land to each trailer and maintains a laundry facility, city sewerage and electrical connections and a roadway into the trailer park. The owner cleans and maintains the premises daily and furnishes hot water for the laundry facility. The trailer owners maintain shower, toilet, and water heating facilities inside their trailers and pay for their own water and electricity.

Situation (2). The facts are the same as in Situation I except that the trailer park owner provides additional services. The park contains a recreation hall, consisting of a card area, pool room, kitchen, auditorium, stage, and library. Employees of the owner supervise and maintain these areas. The owner also provides numerous recreational events, distributes a monthly newsletter to the tenants, and helps the tenants buy or sell their trailers. Employees of the owner also will connect and disconnect water, sewerage, and electrical lines for the trailer owners.

LAW AND ANALYSIS

Section 1402(a) of the Code provides that the term "net earnings from self-employment" means the gross income derived by individuals from any trade or business they carry on, less the deductions that are attributable to such trade or business. In computing net earnings from self-employment, rentals from real estate, together with the deductions that are attributable thereto, are excluded, unless such rentals are received in the course of a trade or business as a real estate dealer under section 1402(a)(1).

Section 1.1402(a)-4(c)(2) of the Income Tax Regulations provides that payments for the use or occupancy of rooms or space where services are also rendered to the occupant are not rentals from real estate. Services are considered rendered to the occupant if they are primarily for the occupant's convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only. The furnishing of heat and light, the cleaning of public entrances, exits, stairways, and lobbies, the collection of trash, and so forth, are not considered as services rendered to the occupant.

In Bobo v. Commissioner, 70 T.C. 706 (1978), acq. page 1, this Bulletin, the court considered the operation of a mobile home park and held that payments received by the mobile home park owners from tenants were "rentals from real estate" and, therefore, were not includible in computing the owners' net earnings from self- employment. The owners provided a number of services, including sewerage, vacant mobile home maintenance (for those mobile homes belonging to the mobile home park owners and held for rental), trash collection, grounds maintenance, and a laundry facility with equipment owned by a concessionaire.

The court, citing Detno v. Celebrezze, 347 F.2d 159, 163 (9th Cir. 1965), stated, generally, that whether services are considered as rendered to the occupant within the meaning of section 1.1402(a)-4(c)(2) of the regulations raises a question of fact to be resolved by determining whether the services are rendered for the convenience of the tenants or are required to maintain the space in condition for occupancy. Further following Delno, the court concluded that income is considered "rentals from real estate" unless the services provided for the convenience of the tenants are of such substantial nature that compensation for them can be said to constitute a material part of the payments made by the tenants of the park.

The court in Bobo held that sewerage, vacant trailer maintenance, and other services, such as utilities, trash collection, and grounds maintenance, were services required to maintain the space in condition for occupancy within the meaning of section 1. 1402(a)-4(c)(2) of the regulations. It then held that although the operation and maintenance of the laundry facility was a service rendered for the convenience of the tenants rather than as a condition for occupancy, the portion of the rent paid for this service was not a material portion. Therefore, the services rendered by the park operator in Bobo were not substantial and his income was "rentals from real estate" for purposes of section 1402 of the Code.

The Service agrees with the court in Bobo that each case turns upon the facts presented and whether the services provided by the trailer park owner are services rendered for the convenience of the tenants as opposed to services required to maintain the space rented to tenants in condition for occupancy. When determining whether service is for the maintenance of property, the courts have emphasized that the rental exclusion must be read narrowly and that any service not clearly required to maintain the property in condition for occupancy is considered work performed for the tenant. Delno v. Celebrezze; Johnson v. Commissioner, 60 T.C. 829 (1973). The services specified in section 1. 1402(a)-4(c)(2) of the regulations are illustrative of the types of services that are required to maintain space in condition for occupancy.

The court in Bobo further pointed out that, once the services that are considered to be for the convenience of the tenants have been determined, it is necessary to determine whether the compensation for these services constitutes a material portion of the payments made by the tenants of the trailer park. If it does, the services are substantial and the income received by the trailer park owner will not be considered "rentals from real estate," but will be "net earnings from self-employment" under section 1402(a) of the Code.

The services provided in Situation (1) are similar to those provided in Bobo. Therefore, those services rendered by the owner for the convenience of the tenants are not substantial.

In Situation (2), the owner provides many services beyond those required for occupancy. These services are of such substantial nature that compensation for them can clearly be said to constitute a material part of the payments made by the tenants of the trailer park.

HOLDING

Situation (1). The income received by the trailer park is "rentals from real estate" and is not includible in computing "net earnings from self-employment" under section 1402(a) of the Code.

Situation (2). The income received by the trailer park owner is includible in computing "net earnings from self-employment" under section 1402(a) of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 72-331, 1972-2 C.B. 513, which holds that the earnings from the operation of a particular trailer park are includible in computing "net earnings from self-employment," does not use the "substantial services" test that the Service has now accepted. Rev. Rul. 72-331 is obsoleted.