Rev. Rul. 72-86

Advice has been requested whether fees received by a director of a corporation under the circumstances described below are includible in computing his net earnings from self-employment for purposes of the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954).

The director is elected to his position on the board of directors by the stockholders of the corporation. In accordance with its bylaws, its board has four meetings annually in order to manage the corporate affairs. The director is required to attend each meeting and he receives an annual fee for the performance of his duties as a director.

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 that he carries on, less the allowable deductions that are attributable to such trade or business.

Section 1402(c) provides that the term "trade or business", when used with reference to "net earnings from self-employment", shall, with certain exceptions not here material, have the same meaning as when used in section 162 of the Code, relating to trade or business expenses.

Whether or not a person is engaged in a trade or business is dependent upon all the facts and circumstances in a particular case.

Section 162(a) of the Code provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. A "trade or business" is generally defined as that branch of activities wherein an individual expends his usual everyday efforts to gain a livelihood. See Revenue Ruling 69-645, C.B. 1969-2, 37.

The case of Doggett v. Burnet, 65 F. 2d 191 (1933), concerned the question of whether the taxpayer was, in fact, engaged in a "trade or business". The court stated that the proper test was whether the activity was entered into and carried on in good faith and for the purpose of making a profit, or in the belief that a profit could be realized thereon, rather than being conducted merely for pleasure, exhibition, or social diversion.

Revenue Ruling 69-645, after discussing the Doggett case, points out that since the taxpayer referred to in the Revenue Ruling undertook his duties as a minister with no expectation of receiving compensation, he did not undertake the position for a profit or in the belief that a profit could be realized from it. However, when a taxpayer does expect to be paid for his work, it is assumed that he is in the business of earning his pay. See Noland v. Commissioner, 269 F. 2d 108 (1959), certiorari denied 361 U.S. 885 (1959).

In the instant case, the director works on a regular, habitual, and periodic basis in the expectation of receiving annual compensation for his work; he is elected to his position by the stockholders of the corporation on the basis of his special qualities which they feel will be of value to the corporation; he attempts to fulfill their expectations by devoting his energies to maintaining and improving the business of the corporation; he is entrusted with regular and continuing management responsibilities; and he protects not only his personal interests but those of the corporation and all its stockholders. Therefore, the director is engaged in a "trade or business" for purposes of section 162 of the Code.

Accordingly, it is held that the fees received by the director in the instant case are includible in computing his net earnings from self-employment for purposes of the Self-Employment Contributions Act of 1954.

Revenue Ruling 58-5, C.B. 1958-1, 322, which holds, in part, that a nonprofessional fiduciary, that is, ordinarily someone who serves only in isolated instances and generally is selected only because of a personal relationship rather than because of any special knowledge or expertise he may have, will not be treated as receiving income from a trade or business unless a number of special conditions are met, is distinguished since the instant case involves an individual who is engaged in a business rather that in the capacity of a nonprofessional fiduciary.

See also Revenue Ruling 68-595, C.B. 1968-2, 378, which holds that fees and other remuneration received by a director of a corporation for services performed on committees of its board of directors are self-employment income within the meaning of section 1402(b) of the Act.