New client came in and prior preparer put his Executor Fee (for settling a relative's estate) on Schedule C and allowed a SEP contribution on that income. Client is not a professional Executor, just a one time thing. I believe the fee should go under other income line 21 of Form 1040 and certainly not eligible for a SEP contribution. Can anyone come up with ANY rationale for the Schedule C treatment?? thanks in advance.
>>Can anyone come up with ANY rationale for the Schedule C treatment?<<
Yes, I can think of at least two reasons. First of all, the return has already been filed. According to Circular 230, you just need to advise the client of the possible penalty if the position were not to be upheld. Then you can move on to the next year.
But what rationale could there be for Line 21 treatment? The IRS is far more likely to challenge that.
He does not have to be a "professional" for miscellaneous income to constitute a trade or business. What are all the facts and circumstances? If he worked in an ongoing and regular manner with a profit motive, it's a Schedule C activity. He can't avoid SE tax just because he only had one client even if it was a family matter.
The IRS, in their Publication 559, at page three, have this to say about SE tax and executor/trustee fees:
"Fees Received by Personal Representatives...
All personal representatives must include in their gross income fees paid to them from an estate. If paid to a professional executor or administrator, self-employment tax also applies to such fees. For a nonprofessional executor or administrator (a person serving in such capacity in an isolated instance, such as a friend or relative of the decedent), self-employment tax only applies if a trade or business is included in the estate's assets, the executor actively participates in the business, and the fees are related to operation of the business."
Interestingly, the IRS indicates that "professional" and "nonprofessional" executors would treat this differently. What's a "professional" in this context? Well, I don't know.
Also, I don't know what authority IRS has for their position on the SE tax question, but I faintly remember a ruling somewhere back in the 70s...
Maybe the Executor wanted the SEP contribution. Oh, that doesn't justify reporting the income as Self-employment, right, I get it. Maybe the taxpayer wanted to get his health care premiums deductible on page 1 of Form 1040....
Just found the revenue ruling: Rev. Rul. 58-5. Pretty much sums it up in that a executor is generally a nonprofessional unless all of the following are met: 1) business among estate's assets, 2) executor actively participates in this business; 3) the executor fee is related to the operation of this business. It also discusses instances where an excess fee can cause earnings from self-employment.
For this client none of this applies....should have been simply line 21 other income.
You have not provided us what this ruling calls "the complete facts." The position I suggested is entirely consistent with the example in the final paragraph, which explains that "an examination of the facts may show that such activities are sufficient in scope and duration to constitute the carrying on of a trade or business."
Also note that like any Revenue Ruling this one is only intended to "outline guides" and has little authority compared to the code and regulations that define SE income and hobby activities.
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