Miller v. Comm'r of Internal Revenue
| Decision Date | 17 February 1969 |
| Docket Number | 1529-67.,Docket Nos. 5332-66 |
| Citation | 51 T.C. 755 |
| Parties | WARREN R. MILLER, SR., AND HILDA B. MILLER, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Warren R. Miller Sr., pro se.
James F. Hart, for respondent.
Petitioners, during the years 1962 through 1965, were husband and wife domiciled in a community property State. In each year the husband received retirement community income and also received commissions as sole proprietor of a real estate brokerage business. Held, for the purpose of computing the retirement income credit provided by sec. 37 I.R.C. 1954, capital was not a material income-producing factor in petitioner's business; held, further, ‘earned income’ in such computation should be determined by reference to net profits from petitioner's business and sec. 1.37-2(a), Income Tax Regs., is not applicable to earned income from self-employment; held, further, the wife's community portion of the retirement income should be reduced by her community portion of the husband's earned income.
Respondent determined deficiencies in petitioners' Federal income tax for the taxable years 1962 and 1963 (docket No. 5332-66) in the amounts of $609.60 and $692.76, respectively, and for the taxable years 1964 and 1965 (docket No. 1529-67) in the amounts of $512.95 and $375.14, respectively. Certain issues have been settled by the parties. The issues remaining for decision all relate to computation of the amount of retirement income credit to which petitioners are entitled under section 37:1
(1) Whether capital was a material income-producing factor in petitioner's real estate brokerage business;
(2) Whether ‘earned income’ for the purpose of computing the limitation on the amount of retirement income should be determined by reference to the net profits or the gross commissions from petitioner's business; and
(3) Whether petitioner Hilda B. Miller's community portion of the retirement income should be reduced by her community share of the ‘earned income’ derived from the real estate brokerage business.
Petitioners Warren R. Miller, Sr., and Hilda B. Miller, husband and wife, were legal residents of Dallas, Tex., at the time their petition was filed. They filed joint Federal income tax returns for the taxable years 1962 to 1965, inclusive, with the district director of internal revenue at Dallas, Tex. Warren R. Miller, Sr. (hereinafter petitioner), was born on October 23, 1906, and Hilda B. Miller was born on June 29, 1962. They were married in August of 1937.
Petitioner served in the U.S. Air Force from June 1927 until August 31, 1947, at which time he was honorably discharged. He then became eligible for retirement income under the Air Force retirement system and received benefits therefrom during the years here in controversy as follows:
+------------------------------------------------+
¦ ¦ ¦Community half to each ¦
+------+----------------+------------------------¦
¦Year ¦Total received ¦spouse ¦
+------+----------------+------------------------¦
¦ ¦ ¦ ¦
+------+----------------+------------------------¦
¦1962 ¦$3,571.80 ¦$1,785.90 ¦
+------+----------------+------------------------¦
¦1963 ¦3,623.85 ¦1,811.92 ¦
+------+----------------+------------------------¦
¦1964 ¦3,780.00 ¦1,890.00 ¦
+------+----------------+------------------------¦
¦1965 ¦3,835.44 ¦1,917.72 ¦
+------------------------------------------------+
During petitioner's service in the Air Force his earned income exceeded $600 per year for a period of more than 10 years. Hilda worked as a civil service employee at Wright-Patterson Air Force Base (then Patterson Field), Dayton, Ohio, from July 1921 to July 1942 and her earned income also exceeded $600 per year for more than 10 years.
In 1947 petitioner entered the real estate brokerage business as a sole proprietor. During the years 1962 to 1965, inclusive, he regularly employed from two to six real estate salesmen who worked on a part-time basis. Petitioner retained 50 percent of all real estate commissions earned on transactions handled by them; in addition, he sold real estate for his own account and retained 100 percent of the commissions earned on such transactions. The commission rate was usually 5 percent of the sales price. The following table shows the gross commissions retained by petitioner after compensating his salesmen, the deductible business expenses incurred, and the net profit or loss from the business for each of the years in issue:
+-----------------------------------------------------------------------+
¦Year ¦Gross commissions ¦Deductible expenses ¦Net profit (or loss) ¦
+------+-------------------+---------------------+----------------------¦
¦ ¦ ¦ ¦ ¦
+------+-------------------+---------------------+----------------------¦
¦1962 ¦$10,820.00 ¦$6,983.40 ¦$3,836.60 ¦
+------+-------------------+---------------------+----------------------¦
¦1963 ¦14,490.00 ¦11,110.00 ¦3,380.00 ¦
+------+-------------------+---------------------+----------------------¦
¦1964 ¦10,713.75 ¦9,575.00 ¦1,138.75 ¦
+------+-------------------+---------------------+----------------------¦
¦1965 ¦5,274.00 ¦5,410.50 ¦(136.50) ¦
+-----------------------------------------------------------------------+
The expenses were incurred for such items as advertising, photographs, secretarial services, telephone and other utilities, telephone-answering service, automobile operation and depreciation, insurance, taxes, and other office expenses.
Petitioner owned a lot and building, used for his office, in which he had a total investment of $4,150, the fair market value of the property being approximately $11,000 in 1962 and $14,000 in 1965. He had also invested about $500 in his office furniture and equipment, and his 1962-model Chevrolet automobile had cost about $2,700. In addition, he owned a lot on a principal street with a cost of $2,975; by maintaining a ‘for sale’ sign on this lot, showing his name and telephone number, petitioner received incidental real estate business.
Petitioner's real estate business consisted of soliciting listings of property, locating potential buyers, persuading them to buy the properties, and handling the closings. Although the salesmen employed by him performed some of these services, petitioner closed the majority of the sales.
Petitioners claimed in their joint Federal income tax return retirement income credits under section 37 in the amounts of $609.60 for 1962, $609.60 for 1963, $485.52 for 1964, and $394.20 for 1965.
In his notices of deficiency, respondent determined that the retirement income credits claimed by petitioners for 1962 through 1965, inclusive, were not allowable (except to the extent of $19.05 in 1965) because their gross real estate brokerage commissions, without any adjustment for deductible expenses, constituted earned income and exceeded the maximum allowable retirement income.
OPINIONSection 372 grants to an individual receiving taxable retirement income a credit against his tax liability equal to a specified percentage of his retirement income. A person receiving military retirement benefits, regardless of age, may apply the credit against the tax on his income. To qualify for the credit an individual is required to have had earned income in excess of $600 in any 10 prior calendar years. Under section 37(d)(2), in the case of an individual who has not attained the age of 62 before the close of the taxable year, his ‘retirement income’ must be reduced by his ‘earned income’ in excess of $900 received in the taxable year; if he has attained the age of 62, his retirement income must be reduced by one-half of his earned income in excess of $1,200 but not in excess of $1,700 and the full amount of the earned income in excess of $1,700. Under section 37(g), the term ‘earned income’ is to have ‘the meaning assigned to such term in section 911(b), except that such term does not include any amount received as a pension or annuity.’
Section 911(b)3 defines ‘earned income’ to include ‘wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered.’ This section further provides that in the case of the taxpayer engaged in a trade or business ‘in which both personal services and capital are material income-producing factors,‘ an amount not in excess of 30 percent of the ‘net profits' of the business shall be considered ‘earned income.’
Petitioner advances three arguments to support his position that respondent's determination is erroneous: (1) That, for the purpose of applying the section 37(d)(2) limitation on the amount of retirement income, capital was a material income-producing factor in his real estate business, with the result that his earned income was only 30 percent of the net profits of such business; (2) alternatively, that, for the purposes of applying the section 37(d)(2) limitation, the net profits of his real estate business, rather than the gross commissions therefrom unadjusted for deductible expenses, constituted his earned income; and (3) that, in any event, in computing the retirement income credit the earned income should all be attributed to him, with the result that a credit would be allowed as to Hilda's community share of the retirement income even if a credit were denied as to his share.
Despite petitioner's investment in an office building, an automobile, and a vacant lot, and his substantial business expenses, capital was not a material income-producing factor in his real estate business within the...
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