Rev. Rul. 82-185

ISSUE

May self-employment tax be assessed at any time under section 6501(c)(3) of the Internal Revenue Code when an individual files Form 1040, U.S. Individual Income Tax Return, and fully reports all income, but does not report self-employment tax on Schedule SE, Computation of Social Security Self-Employment Tax, or on the applicable line of the Form 1040?

FACTS

A actively operated a farm as a sole proprietorship before 1973 and paid income tax and self-employment tax on the earnings. On January 1, 1973, A leased the farm to B. Under the lease, A furnished all necessary equipment and advised B when to plant, spray, and pick the crop. B furnished all necessary labor. A made periodic inspections to determine whether B was properly taking care of the crop. A and B shared equally in the proceeds from the production.

A timely filed Form 1040 for the calendar years 1973 through 1980 and fully reported all income from the property, but did not attach Schedule SE to report self-employment tax and did not make notation on the applicable line on Form 1040. On October 1, 1981, the Internal Revenue Service proposed to assess self-employment tax against A.

LAW AND ANALYSIS

Section 1401 of the Code imposes, in addition to other taxes, a tax on the self-employment income of every individual.

Section 1.1401-1(a) of the Income Tax Regulations provides that the self-employment tax will be levied, assessed, and collected as part of the income tax imposed by subtitle A of the Code and, except as otherwise expressly provided, will be included with the tax imposed by Section 1 or 3 of the Code in computing any deficiency or overpayment and in computing the interest and additions to any deficiency, overpayment, or tax.

Section 6501(a) of the Code provides that tax must be assessed within three years after the return is filed.

Section 6501(c)(3) of the Code provides that, in the case of failure to file a return, the tax may be assessed at any time.

Section 6017 of the Code provides that every individual having net earnings from self-employment of $400 or more for the taxable year shall make a return with respect to the self-employment tax imposed by chapter 2.

Section 1.6017-1(a)(2) of the regulations provides that the return required by section 6017 of the Code shall be made on Form 1040.

Commissioner v. Lane-Wells Co., 321 U.S. 219 (1944), Ct. D. 1602,1944 C.B. 539; S-K Liquidating Co. v. Commissioner, 64 T.C. 713, 717-18 (1975); and Rev. Rul. 75-552, 1975-2 C.B. 476, establish the principle that the filing of a return for one type of tax will not start the running of the period of limitations for a separate and distinct type of tax.

The question is whether the self-employment tax imposed by section 1401 of the Code and the individual income tax imposed by section 1 are separate and distinct taxes or whether they are so closely connected that the filing of a return with respect to one of these taxes must be accepted as the filing of a return with respect to both taxes.

Individual income taxes and self-employment taxes are income taxes under subtitle A of the Code. Moreover, both of these taxes are on the taxpayer's own income and are required to be reported on the same form (Form 1040). The close connection between these two taxes is emphasized by section 1.1401-1(a) of the regulations and is supported by the legislative history of the self-employment tax. The Senate Finance Committee stressed the "close connection" between self-employment tax and income tax and noted that self-employment tax should be "handled in all particulars as an integral part of the income tax." S. Rep. No. 1669, 81st Cong., 2d Sess. 153 (1950), 1950-2 C.B. 302, 353. Thus, self-employment taxes are not separate and distinct from individual income taxes.

Because the self-employment tax is so closely related to the individual income tax, the filing of a Form 1040 that fully reports all income but contains no entry with respect to self-employment tax will be treated as the filing of a valid self-employment tax return.

Rev. Rul. 79-39, 1979-1 C.B. 435, which holds that an employee has not made a valid return for purposes of the social security tax imposed on tips by section 3101 of the Code if he or she files a Form 1040 and reports all salary income but fails to report tip income not reported to the employer, is distinguishable. In contrast to the self-employment tax (which is an income tax under Subtitle A), the social security tax on unreported tip income is an employment tax under Subtitle C. Furthermore, there is nothing in the regulations or the legislative history of the tax on unreported tip income that indicates it should be treated as an integral part of the individual income tax. Thus, the social security tax on unreported tip income is separate and distinct from the individual income tax even though both taxes may be reported on the same form.

HOLDING

Self-employment tax may not be assessed later than three years after the taxpayer files a Form 1040 and fully reports all income but makes no entry with respect to self-employment tax. Thus, as of October 1, 1981, the Service may not assess self-employment tax against A for the tax years 1973, 1974, 1975, 1976, and 1977. The Service may assess tax against A for 1978, 1979, and 1980.

EFFECTS ON OTHER DOCUMENTS

Rev. Rul. 79-39 is distinguished.