Rev. Rul. 68-498

Advice is requested whether royalties received by an individual from books written and published during the years 1931 through 1966 are includible in computing net earnings from self-employment for purposes of determining whether he had self-employment income under the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954).

During the years 1931 through 1966, an individual wrote and had published 28 books, from which he has received royalties in excess of $400 for each year. During the years 1951 through 1961, the individual performed teaching services in a private school as an employee within the meaning of the Federal Insurance Contributions Act, and the employee tax imposed by that Act was deducted from his `wages' for each such year. He retired from all activities as an employee on December 31, 1961.

As originally enacted, the Self-Employment Contributions Act imposed a tax for each taxable year beginning after December 31, 1950, upon the self-employment income of every individual. For purposes of section 1402(b) of the Act as amended in 1954, the term `self-employment income' means the net earnings from self-employment of $400 or more derived by an individual (other than a nonresident alien individual) during any taxable year up to a specified maximum dollar amount for each year, minus the amount of the `wages' paid to such individual during the taxable year.

Section 1402(a) of the Act provides, in part, that the term `net earnings from self-employment' means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by subtitle A of the Code which are attributable to such trade or business.

Section 1402(c) of the Act provides, in part, that 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 Code (relating to trade or business expenses), with certain exceptions. The only exception pertinent here is the performance of service by an individual as an `employee.' Under section 1402(d) of the Act, the terms `employee' and `wages' have the same meaning as when used in the Federal Insurance Contributions Act (chapter 21, subtitle C, of the Code).

Section 1.1402(a)-1(c) of the Income Tax Regulations relating to the Self-Employment Contributions Act, as amended, provides, in part, that gross income derived by an individual from a trade or business includes gross income received or accrued in the taxable year from a trade or business even though such income may be attributable in whole or in part to services rendered or other acts performed in a prior taxable year as to which the individual was not subject to the tax on self-employment income.

Whether or not an individual is engaged in a trade or business depends upon the facts in the particular case. As a general rule, a person who is regularly engaged in an occupation or profession for profit which constitutes his livelihood, in whole or in part, and who is not regarded as an employee for Federal Insurance Contributions Act purposes, is engaged in a trade or business for self-employment tax purposes. If an individual writes only one book as a sideline and never revises it, he would not be considered to be `regularly engaged' in an occupation or profession and his royalties therefrom would not be considered net earnings from self-employment. However, where an individual prepares new editions of the book from time to time, and writes other books and materials, such activities reflect the conduct of a trade or business, and, if it is not one of the excluded professions of section 1402(c) of the Self-Employment Contributions Act, the income from it is includible in computing net earnings from self-employment, subject to the limitations of section 1402(b) of the Act. See Rev. Rul. 55-385, C.B. 1955-1, 100.

With respect to his book-writing activity during the years 1931 through 1966, the individual was engaged in a `trade or business' within the meaning of that term as it is used for self-employment tax purposes. The fact that a portion of his trade or business was conducted during years beginning prior to January 1, 1951, is not material in determining whether the royalty income attributable to those years, but received in taxable years beginning after December 31, 1950, is includible in computing his net earnings from self-employment (section 1.1402(a)-1(c) of the regulations). The requirement for includibility is that the income be derived during any taxable year beginning after December 31, 1950, without specification as to when the trade or business actually is carried on.

Accordingly, royalties received by the individual during any taxable year beginning after December 31, 1950, from his trade or business of writing books during the years 1931 through 1966 are includible in computing his net earnings from self-employment within the meaning of section 1402(a) of the Self-Employment Contributions Act of 1954. These net earnings from self-employment must be considered in determining whether he has had self-employment income within the meaning of section 1402(b) of the Act for each taxable year after 1950.

See Revenue Ruling 68-499, page 421, this Bulletin, for the treatment under different facts of royalty payments for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages.