SSR 68-19: Section 211(a)(5)(A).—Net Earnings from Self-Employment—Community Property State—Exercise of Management and Control of Trade or Business
20 CFR 404.1052(f)(1)
Where the owner of a business in a community property State became inactive in the business and his wife, from whom he was legally separated, operated the business as her own, taking out the necessary business licenses, transferring the business banking and checking account to her own name and using her money to improve and enlarge the business, held the net income from such business was includable as her net earnings from self-employment, since she exercised all the management and control of the business within the meaning of section 404.1052(f)(1) of the Regulations No. 4 of the Social Security Administration.[*]
Held, further, unnecessary to determine the legal effect of separation agreement on such income, since it would be creditable to her whether it became her personal property by reason of the separation or remained community property from the business she managed and controlled.
R had been operating a retail food business in a community property State. He was awarded old-age insurance benefits effective July 1960 based on the net profits from the business reported by R and credited as his self-employment income.
Net earnings were reported from the business for 1964 and 1965 by R's wife, W, but they were allocated to R's earnings account, as in previous years, under the provision cited above. W objected, alleging that since she now managed and controlled the business, the amounts reported for those years should be allocated to her own earnings account as her self-employment income and not R's. Such income, if creditable to W's earnings account, would enable her to acquire an insured status.
The pertinent facts are as follows: R and W had entered into a separation agreement, under the terms of which the property and financial interest of each were to be separate and distinct as though they were unmarried. R continued to run the business, with assistance from W, as she was able. R gradually reduced the amount of his activity in the business, continuing to run only one part of it, the produce department. Thereafter, W's name appeared on the lease of the business premises together with R's, and both their names appeared on a few of the business licenses. The liquor license and other required permits appeared in W's name alone, and the business banking and checking accounts in her name only. R's name no longer appeared alone on any required license. W used her own funds to renovate the equipment and to enlarge and move the business to a new location. Statements in file from suppliers of the business identified W as the moving force in the business.
The question to be determined is whether, by virtue of the separation agreement between R and W, the net business income under State law became W's separate income, or whether it remained community property. If the former is true, then the business profits for 1964 and 1965 would be her net earnings from self-employment. If, however, the net profits remained community property, then the decision depends upon whether W did in fact exercise substantially all of the "management and control" of the business. Section 404.1052(f)(1) of Regulations No. 4 (20 CFR 404.1052(f)(1)) provides in pertinent part that for the purpose of the special rule in the law (cited in the footnote above) for the treatment of income from a trade or business in a community property State, the term "management and control" means management and control in fact, not the management and control imputed to the husband under the community property laws.
From the facts, it appears that even though R remained active in the business, he retained responsibility for only one department of the business, while W actually operated the business as a whole. W's name appeared on all the licenses, while his did not appear alone on any of them; all needed licenses were acquired in W's name; she had the business banking and checking account transferred to her name; and it was her money which went into renovation and improvements in the business. Since all these factors tend to show that W had substantial management and control of the business within the meaning of the regulation cited above, it is accordingly held that the net profits of the business for 1964 and 1965 are includable as W's net earnings from self-employment.
Generally, the community created by the marital relationship in a community property State can be dissolved only in accordance with the law of that State. Thus, State law would have to govern any decision as to whether the separation agreement between R and W had the effect of dissolving the community and making the income from the business W's separate property. However, in view of the above finding, it is further held unnecessary to determine the legal effect of the separation agreement on such income under the State's community property laws since it would be creditable to W regardless of whether it became her separate property or remained community property from the business she managed.
[*]Section 211(a)(5)(A) of the Social Security Act, pursuant to which the above regulation was issued, provides as follows:
"If any of the income derived by an individual from a trade or business (other than a trade or business carried on by a partnership) is community income under community property laws applicable to such income, all of the gross income and deductions of the husband unless the wife exercises substantially all of the management and control of such trade or business, in which case all of such gross income and deductions shall be treated as the gross income and deductions of the wife."