McCullough Tool Co....

Mesirov, Leon I., executor of estate of Ethel R.

Scammell, Matthew J., Jr., administrator of estate of

Thriftimart, Inc. (formerly Fitzsimmons Stores, Ltd.)__

79272

Tobias, Max N., et ux..

88979

Tomec, Mary Fownes, estate of 1.

93635

39

231

38

707

40

238

40

330

40

134

35

1102

37

897

27

638

38

46

40

84

The Commissioner does NOT ACQUIESCE in the following decisions:

Mudge, Leonard S., et al., executors of estate of Ed

mund W. Mudge 14.

Tannenbaum, Charles J., et al., executors of estate of

Arthur Klauber 1

65875

Teschner, Paul A., et ux.

90023

1 Estate Tax decision.

2 Gift Tax decision.

Acquiescence in result only in the issue whether payments made by the parent corporation to reimburse its subsidiary for net operating losses sustained in supplying the parent corporation in 1949 and 1950 are deductible by the parent as a business expense. Acquiescence "in result only" means acceptance of the decision of the Court but disagreement with some or all of the reasons assigned for the decision.

The Court decided that the proceeds of life insurance policies placed in trust by the decedent were not includible in his gross estate. To the extent that this decision was based on a finding that the policies were not purchased with premiums paid by the decedent, the acquiescence published in C.B. 1957-1, 3, and C.B. 1957-2, 3, is withdrawn and nonacquiescence is substituted therefor.

PART I

RULINGS AND DECISIONS UNDER THE INTERNAL REVENUE CODE OF 1954, EXCEPT THOSE PERTAINING TO ALCOHOL, TOBACCO, AND FIREARMS TAXES

SUBTITLE A.-INCOME TAXES

CHAPTER 1.-NORMAL TAXES AND SURTAXES

SUBCHAPTER A.-DETERMINATION OF TAX LIABILITY

PART IV.-CREDITS AGAINST TAX

Subpart A-Credits Allowable

SECTION 37.-RETIREMENT INCOME

26 CFR 1.37: Statutory provisions; retirement income.

Inclusion in retirement income of distributions to self-employed individuals by pension and annuity plans and bond purchase plans. See T.D. 6722, page 144.

26 CFR 1.37-3: Retirement income.

Rev. Rul. 64-1

Amounts received for the use or occupancy of rooms or other space in the operation of a motel, generally, constitute rentals for the purpose of the retirement income credit to an individual who has attained the age of 65 before the close of the taxable year, even though some services are rendered for the benefit of the occupants thereof. However, in the case of an individual operating a motel where both personal services and capital are material incomeproducing factors, the gross rentals must be reduced by a reasonable allowance for earned income, not to exceed 30 percent of the net rental income, for the purpose of computing the retirement income credit.

Advice has been requested whether, in view of section 1.1402(a)-1 (c) (1) (iii) of the Income Tax Regulations, any portion of the income from the operation of a motel, where the owner renders services for the benefit of the occupants thereof, constitutes "retirement income" for

the purpose of computing the retirement income credit under section 37 of the Internal Revenue Code of 1954.

Section 37 of the Code provides, in part, as follows:

"(c) *** the term 'retirement income' means

(1) in the case of an individual who has attained the age of 65 before the close of the taxable year, income from

(C) rents

to the extent included in gross income without reference to this section, but only to the extent such income does not represent compensation for personal services rendered during the taxable year."

Revenue Ruling 56-416, C.B. 1956-2, 15, holds that, if a wife, who has attained the age of 65, has rental property and her personal services as well as capital are a material income-producing factor in the rental of such property, an amount not in excess of 30 percent of the net profits of such rental computed for each year represents earned income within the meaning of section 37 (g) of the Code for the purpose of determining her eligibility for the retirement income credit. Revenue Ruling 56-416 also holds that, in the case of an individual who has attained the age of 65 years, interest and rental income, reduced by the amount allocable to earned income under the 30-percent rule, constitutes retirement income.

Section 1402 (a) of the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954) defines the term "net earnings from self-employment" as 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 1.1402 (a)−1(c)(1) (iii) of the regulations relating to rentals from real estate provides, in part, as follows:

"Payments for the use or occupancy of rooms or other space where services are also rendered to the occupant, such as for the use or occupancy of rooms or other quarters in hotels, boarding houses, or apartment houses furnishing hotel services, or in tourist camps or tourist homes, or payments for the use or occupancy of space in parking lots, warehouses, or storage garages, do not constitute rentals from real estate; consequently, such payments are included in determining net earnings from self-employment. Generally, services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only. The supplying of maid service, for example, constitutes such service; whereas, 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."

Thus, where the various services rendered constitute services which are primarily for the convenience of the guests and are other than those usually rendered in connection with the rental of rooms or other space for occupancy, the rental income received by the individual does not constitute excluded rentals from real estate for self-employment tax purposes but is includible in net earnings from self-employment. See Rev. Rul. 57-108, C.B. 1957-1, 273.

However, section 1402 of the Code and the regulations promulgated thereunder, relating to net earnings from self-employment, have no application in determining retirement income or in determining what

constitutes earned income or compensation for personal services for the purpose of section 37 of the Code. See Rev. Rul. 58-257, C.B. 1958-1, 9, and Rev. Rul. 60-178, C.B. 1960-1, 14.

Section 37 (g) of the Code defines the term "earned income" for the purposes of section 37(b) and (d) (2) of the Code as having the same meaning assigned to such term in section 911(b) of the Code, except that such term does not include any amount received as a pension or annuity.

Section 911(b) of the Code provides, in general, that the term "earned income" means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered. In the case of an individual engaged in a trade or business in which both personal services and capital are material incomeproducing factors, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, is considered as earned income.

Although section 37(g) of the Code does not specifically deal with the meaning assigned to the term "compensation for personal services" as used in section 37 (c) of the Code, nevertheless, consistency requires that the amounts allocated to "earned income" under the 30-percent rule and in Revenue Ruling 56-416 also represent "compensation for personal services" as used in section 37 (c) of the Code.

Accordingly, it is held that amounts received for the use or occupancy of rooms or other space in the operation of a motel constitute rentals, for the purpose of the retirement income credit, to an individual who has attained the age of 65 before the close of the taxable year even though some services are rendered for the benefit of the occupants thereof. However, in the case of an individual operating a motel where both personal services and capital are material income-producing factors, the gross rentals must be reduced by a reasonable allowance for earned income, not to exceed 30 percent of the net rental income, for the purpose of computing the retirement income credit.

The determination of whether both personal services and capital are material income-producing factors in a trade or business is a question of fact in each case.

26 CFR 1.37-4: Limitation on amount

of retirement income.

(Also Section 104; 1.104-1.)

Rev. Rul. 64-10

In computing the retirement income credit allowable to a veteran of the Spanish-American War or World War I, the maximum retirement income of $1,524 provided in section 37 (d) of the Internal Revenue Code of 1954 must be reduced by the total amount of non-service-connected disability payments received from the Veterans Administration during the taxable year.

Advice has been requested whether non-service-connected disability payments made by the Veterans Administration to veterans of the Spanish-American War and World War I reduce retirement income