Rev. Rul. 56-416

Advice has been requested whether a wife who has attained the age of 65 would meet the ten-year earned income requirement of section 37(b) of the Internal Revenue Code of 1954 on the basis of having received rentals and interest for a period of more than 20 years, and whether such income is retirement income. Advice has also been requested whether a wife may treat her husband's earned income as her own for purposes of the retirement income credit provisions.

A husband and wife each has gross rental income of $5,000, each realizing $2,000 net profits therefrom, as well as interest income of $1,000. The wife has had no other source of income, but the husband has been employed by a corporation at a salary of more than $600 for 20 years.

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

(b) * * * For purposes of subsection (a) an individual shall be considered to have received earned income if he had received, in each of any 10 calendar years before the taxable year, earned income * * * in excess of $600. A widow or widower whose spouse had received such earned income shall be considered to have received earned income.

For the purposes of section 37(b) of the Code, earned income means, in general, wages, salaries, professional fees, and a taxpayer's share, not in excess of 30 percent, of the net profits of a trade or business in which both personal services and capital are material income-producing factors. Thus, the wife's interest income does not represent earned income for purposes of determining her eligibility for the retirement income credit. The operation of her rental property is considered a trade or business, and a part of her rental income may constitute earned income if her services are a material income-producing factor in the operation of the rental property. If her personal services are a material income-producing factor, a computation should be made for each year to determine a reasonable allowance, not do exceed 30 percent of her net profits (not gross rentals) from the rental property for each year, which may be treated as earned income for purposes of determining her eligibility for the retirement income credit. See sections 37(g) and 911(b) of the Code. Whether a taxpayer's personal services in connection with his or her rental activities are a `material income-producing factor' is a question of fact to be determined from the particular circumstances of each case.

The provisions of section 37(b) of the Code, which permit a widow to treat her deceased husband's earned income as her own earned income for the purposes of the retirement income credit, applies only to a widow and does not apply to a woman whose husband is still living.

Although interest does not represent earned income, it is retirement income in the case of an individual who has attained the age of 65 years before the close of the taxable year. Rents, reduced by the amount allocable to earned income under the 30 percent rule, are also retirement income in the case of such taxpayer. See section 37(c) of the Code.

Accordingly, it is held 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 for the purpose of determining her eligibility for the retirement income credit. She may not use her husband's earned income as her own earned income for such purposes. Further, 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, constitute retirement income.