Rev. Rul. 59-211

Advice has been requested whether a fee received by an individual upon completion of services performed under a prime contract which replaced a subcontractor contract for the same services qualifies as compensation from `an employment' within the meaning of section 1301 of the Internal Revenue Code of 1954.

A consulting engineer was engaged in engineering services in an individual capacity as an independent contractor. In 1954, he accepted a contract, offered by an engineering firm, whereby he undertook to carry out the engineering services which that firm had contracted to perform for an oil company which intended to construct a pipeline. The contract called for the surveys that were necessary in the preparation of data to be used for the application to the Federal Power Commission for authorization to construct the pipeline and to the Securities Exchange Commission in connection with approval for its financing. It also called for all the engineering data required up to and including the letting of the construction contract. The fee was a percentage of the estimated construction cost but was contingent upon the oil company's obtaining the authorization from the Federal Power Commission and the necessary financing to carry out the project.

The engineering firm later withdraw from its contract with the intent that the oil company would enter into a contract directly with the taxpayer for continuing the engineering services. In 1956, the taxpayer entered into an identical contract with the oil company. The new contract called for the performance of the same services on the same fee basis; however, no reference was made therein to the prior contract. In 1958, the taxpayer was paid by the oil company for services rendered during the period from 1954 to 1956, the period of the sub-contract, and from 1956 to the completion of the services under the new contract.

Section 1301(a) of the Code provides that if an individual or partnership engages in `an employment', as defined in section 1301(b), the employment covers a period of 36 months or more from the beginning to the completion of such employment, and the gross compensation from the employment received or accrued in the taxable year is not less than 80 percent of the total compensation from such employment, then the tax attributable to the compensation included in gross income for the taxable year shall be computed in accordance with that section.

Section 1301(b) of the Code provides as follows:

Definition of an Employment.-For the purpose of this section, the term `an employment' means an arrangement or series of arrangements for the performance of personal services by an individual or partnership to effect a particular result, regardless of the number of sources from which compensation therefor is obtained.

Section 1.1301-2(b) of the Income Tax Regulations further provides that there must be an understanding for the performance of services to accomplish a particular result. An arrangement to perform general services is not an employment within the meaning of section 1301 of the Code either as to any particular project on which services are performed or as to the general services since there is no understanding that the services are to accomplish a particular result. The individual steps performed by a taxpayer in connection with his project do not each constitute an employment. The services rendered by the taxpayer with respect to the entire project represent the employment.

The principal criterion used by the courts for determining the existence of a single employment is the divisibility of the personal services rendered rather than the divisibility of the source of the compensation. See George J. Hoffman, Jr. v. Commissioner , 11 T.C. 1057.

In the instant case, the arrangements for compensation under each contract were identical. No compensation was to be received until the project had been brought to the point where it had received the necessary authorization from the Federal Power Commission and the oil company had also received financing from the financing companies. When the taxpayer's status was changed from a subcontractor to prime contractor, his services were at the midpoint in the work required to obtain the necessary authorizations. This had no effect upon the performance of his services, and it did not alter in any way the services he was required to perform.

In Guy C. Myers v. Commissioner , 11 T.C. 447, acquiescence C.B. 1949-2, 3, it was established that a change in parties to a contract, or even a change in contract terms, would not interrupt a principal employment as long as personal services were directed to the attainment of a particular result.

Accordingly, it is held that the change in status of an individual from that of a sub-contractor performing services on a particular project to that of a prime contractor under a new contract where the terms of the contracts are identical does not interrupt a single employment carried on under both contracts so long as the services are rendered on a particular project and directed to the attainment of a particular result. Where the period covered from the beginning to the completion of the employment is more than 36 months and the gross compensation received therefor in a taxable year exceeds 80 percent of the total compensation from the employment, the entire amount of compensation received in the taxable year qualifies as income from `an employment' under section 1301(a) of the Code.