CCA 200851047: Wedding fees a Puerto Rico judge takes on non-duty hours are self-employment income

Plain-English summary

Judges in Puerto Rico perform nuptial ceremonies outside their official hours and are paid a fee for doing so. The question put to the writer was whether those fees are subject to self-employment tax. The answer is yes, subject to a caveat about how the money reaches the judge.

The starting point looks like an obstacle. Self-employment tax under sections 1401(a) and (b) reaches net earnings from self-employment, which requires a trade or business, and section 1402(c)(1) says that performing the functions of a public office normally is not one. A judge holding public office would seem to fall outside the tax on that basis alone.

The same provision contains the exception that decides the case. Where an individual receives fees for performing the functions of a public office and is compensated solely on a fee basis, and the service is eligible for coverage under an agreement between the State and the Secretary of Health, Education, and Welfare under section 218 of the Social Security Act without having been made the subject of one, the service does count as a trade or business. Section 1402(c)(2)(E) extends that treatment even where the service is performed in an employee capacity. The writer notes the matching exclusion on the other side of the ledger: section 3121(b)(7)(F)(v) keeps payments to a public official compensated solely on a fee basis out of FICA. The two rules fit together, with fee-basis public officials taxed as self-employed rather than as employees.

Everything then turns on what "fee basis" means, and the release relies on Rev. Rul. 74-608, 1974-2 C.B. 275 for the line. Money paid directly to the official by the members of the public they deal with is a fee. Money paid out of a government fund, where no part of what the official collects belongs to them or may be retained as compensation, is not. Applied here, if the fee for the ceremony is paid directly to the judge as compensation for performing it, the judge is performing the functions of a public office solely on a fee basis and is carrying on a trade or business, so the fees are self-employment income.

Puerto Rico does not change the result. Section 1402(a)(6) requires residents of Puerto Rico to compute self-employment income the same way a United States citizen would, disregarding the section 933 exclusion for Puerto Rican source income, and Treas. Reg. 1.1402(a)-9 says the same thing from the other direction: the gross income of a Puerto Rico resident carrying on a trade or business there includes Puerto Rican source income for self-employment tax purposes even though income tax would exclude it. The section 933 exclusion is an income tax rule and does not carry over.

The writer is careful about the weight of what is being given. The response is informal, rests on very limited facts from the underlying email, and the answers are framed as what the judges appear to be doing. If the taxpayers want something definitive they are told to submit a ruling request on a full set of facts.

Ruling snapshot

• Question: Are fees paid to judges in Puerto Rico for performing nuptial ceremonies during non-duty hours subject to self-employment tax?
• Outcome: Advice given. Yes, on the limited facts presented. If the fee is paid directly to the judge as compensation for performing the ceremony, the judge is performing the functions of a public office solely on a fee basis and is conducting a trade or business within section 1402(c)(1), so the fees are self-employment income. Residence and performance in Puerto Rico do not alter the result. The response is expressly informal, and the taxpayers are invited to request a ruling on fuller facts.
• Key authorities: IRC sections 1401(a) and (b), 1402(a), 1402(a)(6), 1402(b), 1402(c)(1), 1402(c)(2)(E), 3121(b)(7)(F)(v) and 933; Treas. Reg. 1.1402(a)-9; section 218 of the Social Security Act; Rev. Rul. 74-608, 1974-2 C.B. 275.

Full text (IRS public release)

ID: CCA_2008102810293429 Number: 200851047
Office: ----------------------------- Release Date: 12/19/2008

UILC: 1402.03-00

From: -------------------
Sent: Tuesday, October 28, 2008 10:29:35 AM
To: --------------------
Cc: --------------------------------------------------------------------------------- Subject: RE: CONSULTA - request for technical advise of Self employment tax

Based on our understanding of the limited facts given to our office, we believe that these payments that the judges in Puerto Rico receive are subject to self- employment tax.

Sections 1401 (a) and (b) of the Code impose a tax on self employment income. Section 1402(b) defines “self employment income” as the net earnings from self employment derived by an individual. Section 1402(a) defines “net earnings from self employment” as the gross income derived by an individual from any trade or business carried on by an individual.

While section 1402(c)(1) states that the performance of functions of public office normally do not constitute a “trade or business”, section 1402(c)(1) also provides that if an individual receives fees for the performance of the functions of a public office for which he is compensated solely on a fee basis, and the service performed in such office is eligible (but is not made subject of) an agreement between the State and the Secretary of Health, Education, and Welfare pursuant to section 218 of the Social Security Act to extend social security coverage thereto, the service for which such fees are received constitutes a trade or business within the meaning of section 1402(c). As section 1402(c)(2)(E) provides, this inclusion of fee based services for self employment tax purposes applies even if the service is performed in their employee capacity. Additionally, section 3121(b)(7)(F)(v) excludes from FICA tax, the payments received by a public official for service compensated solely on a fee basis.

Revenue Ruling 74-608, 1974-2 C.B. 275, holds that when a public official receives remuneration in the form of fees directly from the members of the public with whom he does business, such remuneration is fees within the meaning of section 1402(c)(1). However, when a public official receives remuneration from a government fund and no portion of the monies collected by him belongs to or can be retained by him as compensation, the remuneration is not fees under section 1402(c)(1). I am attaching a copy of this Revenue Ruling as it is illustrative of the key issues presented in the case.

In the instant case, based on our understanding, the judges 2

perform duties of a public official at nuptial ceremonies on non-duty hours on a fee basis. If these fees are paid directly to the judge as compensation for the performance of the ceremony, then the judge appears to be performing functions of a public office solely on a fee basis, and therefore appears to conduct a trade or business within the meaning of section 1402(c)(1). As such, these fees would be self employment income and subject to self employment tax.

The fact that the judges are residents of Puerto Rico and the services take place in Puerto Rico does not alter the result. Section 1402(a)(6) explicitly mandates that residents of Puerto Rico calculate self employment income in the same manner as a United States citizen, without regard to the exclusion from gross income ins section 933, and section 1.1402(a)-9 states that for the purpose of the tax on also self-employment income, the gross income of a resident of Puerto Rico engaged in a trade or business in Puerto Rico also includes income from Puerto Rican sources despite the fact that this income would be excluded from income tax under section 933.

This informal response is given based on the very limited facts presented in the underlying email. Should the taxpayers desire a definitive ruling based on a more detailed set of facts, the taxpayers can submit a request for a ruling.

If you have any questions, feel free to contact me.

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