taxable year as income from sources other than patronage within the meaning of section 1.1382-3 (c) (2) of the Income Tax Regulations. When the cooperative attempted to pay out in cash the nonpatronage income (interest on bank deposits) realized in its final taxable year to its patrons, it discovered that a number of patrons could not be located. Under the provisions of the State escheat law the unclaimed money in the instant case reverts to the State as a result of the cooperative's liquidation. The cooperative paid over such unclaimed amounts to the State within eight and one-half months after the close of its final taxable year. The escheat law in the instant case is custodial in nature in that the rightful owner of the unclaimed property (cash) paid over to the State by the cooperative can at a later date obtain this money by presenting evidence that he is the rightful owner.

In order to obtain a deduction for an allocation and payment of nonpatronage income to its patrons, an "exempt" cooperative must adhere to the provisions of sections 1382(c) and (d) of the Code and the regulations promulgated thereunder.

Section 1382 (c) (2) of the Code provides that in determining the taxable income of an organization described in section 1381 (a) (1) of the Code there shall be allowed as a deduction (in addition to other deductions allowable under chapter 1 of the Code) amounts paid during the payment period for the taxable year in money, qualified written notices of allocation, or other property (except nonqualified written notices of allocation) on a patronage basis to patrons with respect to its earnings during such taxable year that are derived from business done for the United States or any of its agencies or from sources other than patronage.

Section 1382 (d) of the Code states that the payment period for any taxable year is the period beginning with the first day of such taxable year and ending with the fifteenth day of the ninth month following the close of such year.

The cooperative included the nonpatronage income realized (interest on bank deposits) during its final taxable year in its gross income for such year. A deduction would normally be permitted to the cooperative had it actually paid the amounts over to the patrons entitled to receive such amounts within eight and one-half months after the close of the cooperative's final taxable year and had the actual distribution of this nonpatronage income been paid to the patrons in cash.

Inasmuch as the escheat law in the instant case is custodial in nature, the State is in effect a custodian of the money for the patron. Accordingly, the cooperative in the instant case may deduct the unclaimed amounts (a patron's share of nonpatronage income) paid over to the State under the escheat law since the amounts have met the conditions prescribed in sections 1382 (c) and (d) of the Code as to form and timing.

Moreover, the cooperative must file information returns in accordance with section 6044 of the Code and the regulations thereunder. Such information returns should include the identifying numbers of the patrons and the data concerning the payees should indicate that the payments are made to the State on behalf of the patrons.

CHAPTER 2.-TAX ON SELF-EMPLOYMENT INCOME

SECTION 1401.-RATE OF TAX

26 CFR 1.1401-1: Tax on self-employment

income.

Minister's self-employment tax paid by a church. See Rev. Rul. 68-507, page 485.

"Employer contributions" of a church to an annuity plan are not taken into account in determining a minister's net earnings from self-employment to the extent that such amounts are excludable from his gross income under section 403(b) of the Code.

SECTION 1402.-DEFINITIONS

26 CFR 1.1402 (a)-2: Computation of net earnings from self-employment.

(Also 1.1402(a)-11.)

(Also Section 403; 1.403 (b)-1.)

Rev. Rul. 68-395

Advice has been requested whether and to what extent "employer contributions" made by a church on behalf of its minister toward the purchase of a nonforfeitable, nontransferable annuity contract should be taken into account, under the circumstances described herein, in determining the amount of the minister's net earnings from self-employment where he has effectively elected social security coverage under section 1402 (e) of the Self-Employment Contributions Act (chapter 2, subtitle A, Ínternal Revenue Code of 1954).

In the instant case a minister, the pastor of a church, who qualifies as an employee thereof, had effectively elected social security coverage under section 1042 (e) of the Self-Employment Contributions Act. Pursuant to a later agreement between the minister and the church, the minister's salary was reduced by a specified amount and the church, matching this amount, contributed twice the amount toward the purchase of a nonforfeitable, nontransferable annuity contract for the minister. The church, the minister's employer, is an organization exempt from income tax under section 501 (a) of the Code as an organization described in section 501 (c) (3) thereof. The agreement was legally binding and irrevocable as to amounts earned by the minister thereafter and no additional agreement was made during the taxable year in question. (The term "employer contributions" as used herein represents the church's total contribution, including the amount represented by the salary reduction, toward the purchase of the annuity contract.)

Section 1.1402(a)-2(a) of the Income Tax Regulations relating to the computation of net earnings from self-employment provides, in pertinent part, as follows:

** Income which is excludable from gross income under any provision of subtitle A of the Internal Revenue Code is not taken into account in determining net earnings from self-employment except as otherwise provided in tion 1.1402 (a)-11, relating to ministers or members of religious orders

sec

The exceptions set forth in section 1.1402 (a)-11 relate only to exclusions from gross income with respect to (1) parsonage allowances (section 107 of the Code), (2) meals and lodging furnished for the convenience of the employer (section 119 of the Code), (3) earned income from sources without the United States (section 911 of the Code) and (4) income from sources within possessions of the United States (section 931 of the Code). Income excludable from gross income under a provision of subtitle A, that is not one of these stated exceptions, is not to be taken into account in determining net earnings for self-employment under section 1402 (a) of the Code.

Section 403(b) of the Code (chapter 1, subtitle A), relating to the taxability of a beneficiary under an annuity contract purchased by a section 501(c)(3) organization or public school, provides for an exclusion from gross income of certain "employer contributions" toward the purchase of an annuity contract. More specifically, it provides, in part, that if an annuity contract is purchased for an employee by an employer exempt from income tax under section 501 (a) of the Code as an organization described in section 501 (c) (3) of the Code and the employee's rights under the contract are nonforfeitable, the employer contributions, within prescribed limits, shall be excluded from the gross income of the employee for the taxable year. (Furthermore, under section 401 (g) of the Code, such contract must be nontransferable.) For this purpose, the limit of excludability set forth in section 403(b) (1) of the Code is the extent to which "employer contributions" do not exceed the "exclusion allowance" for the taxable year which is defined and described in section 403 (b) (2) of the Code. Section 1.403(b)-1(b) (3) of the regulations states that the exclusion provided under section 403(b) of the Code is applicable to amounts contributed by an employer for an annuity contract as a result of an agreement with an employee to take a reduction in salary, or to forego an increase in salary, but only to the extent such amounts are earned by the employee after the agreement becomes effective. The agreement must be legally binding and irrevocable with respect to amounts earned while the agreement is in effect. The employee must not be permitted to make more than one agreement with the same employer during any taxable year.

Accordingly, in the instant case, that portion of the "employer contributions" by the church on behalf of its minister towards the purchase of the annuity contract described that does not exceed the "exclusion allowance" determined under section 403 (b) (2) of the Code is not to be taken into account in determining the minister's net earnings from self-employment since this portion is an amount excludable from his gross income under section 403(b) of the Code.

26 CFR 1.1402 (a)-11: Ministers and mem

bers of religious orders.

Computation of net earnings from self-employment of ministers and members of religious orders. See Rev. Rul. 68-395, page 375.

Royalties received after December 31, 1950, from the trade or business of writing books during the years 1931 through 1966 must be considered in determining self-employment income for each taxable year after 1950.

26 CFR 1.1402 (b)-1: Self-employment

income.

Rev. Rul. 68-498

Advice is requested whether royalties received by an individual from books written and published during the years 1931 through 1966 are includible in computing net earnings from self-employment for purposes of determining whether he had self-employment income under the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954).

During the years 1931 through 1966, an individual wrote and had published 28 books, from which he has received royalties in excess of $400 for each year. During the years 1951 through 1961, the individual performed teaching services in a private school as an employee within the meaning of the Federal Insurance Contributions Act, and the employee tax imposed by that Act was deducted from his "wages" for each such year. He retired from all activities as an employee on December 31, 1961.

As originally enacted, the Self-Employment Contributions Act imposed a tax for each taxable year beginning after December 31, 1950, upon the self-employment income of every individual. For purposes of section 1402 (b) of the Act as amended in 1954, the term "self-employment income" means the net earnings from self-employment of $400 or more derived by an individual (other than a nonresident alien individual) during any taxable year up to a specified maximum dollar amount for each year, minus the amount of the "wages" paid to such individual during the taxable year.

Section 1402 (a) of the Act provides, in part, that the term "net earnings from self-employment" means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by subtitle A of the Code which are attributable to such trade or business.

Section 1402 (c) of the Act provides, in part, that the term "trade or business," when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 of the Code (relating to trade or business expenses), with certain exceptions. The only exception pertinent here is the performance of service by an individual as an "employee." Under section 1402 (d) of the Act, the terms "employee" and "wages" have the same meaning as when used in the Federal Insurance Contributions Act (chapter 21, subtitle C, of the Code).

Section 1.1402(a)-1 (c) of the Income Tax Regulations relating to the Self-Employment Contributions Act, as amended, provides, in part, that gross income derived by an individual from a trade or business includes gross income received or accrued in the taxable year from a trade or business even though such income may be attributable in whole or in part to services rendered or other acts performed in a prior taxable year as to which the individual was not subject to the tax on self-employment income.

Whether or not an individual is engaged in a trade or business depends upon the facts in the particular case. As a general rule, a person

who is regularly engaged in an occupation or profession for profit which constitutes his livelihood, in whole or in part, and who is not regarded as an employee for Federal Insurance Contributions Act purposes, is engaged in a trade or business for self-employment tax purposes. If an individual writes only one book as a sideline and never revises it, he would not be considered to be "regularly engaged" in an occupation or profession and his royalties therefrom would not be considered net earnings from self-employment. However, where an individual prepares new editions of the book from time to time, and writes other books and materials, such activities reflect the conduct of a trade or business, and, if it is not one of the excluded professions of section 1402(c) of the Self-Employment Contributions Act, the income from it is includible in computing net earnings from self-employment, subject to the limitations of section 1402 (b) of the Act. See Rev. Rul. 55385, C.B. 1955-1, 100.

With respect to his book-writing activity during the years 1931 through 1966, the individual was engaged in a "trade or business" within the meaning of that term as it is used for self-employment tax purposes. The fact that a portion of his trade or business was conducted during years beginning prior to January 1, 1951, is not material in de termining whether the royalty income attributable to those years, but received in taxable years beginning after December 31, 1950, is includible in computing his net earnings from self-employment (section 1.1402(a)-1(c) of the regulations). The requirement for includibility is that the income be derived during any taxable year beginning after December 31, 1950, without specification as to when the trade or business actually is carried on.

Accordingly, royalties received by the individual during any taxable year beginning after December 31, 1950, from his trade or business of writing books during the years 1931 through 1966 are includible in computing his net earnings from self-employment within the meaning of section 1402 (a) of the Self-Employment Contributions Act of 1954. These net earnings from self-employment must be considered in determining whether he has had self-employment income within the meaning of section 1402 (b) of the Act for each taxable year after 1950.

See Revenue Ruling 68-499, page 421, this Bulletin, for the treatment under different facts of royalty payments for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages.

Fees and other remuneration received by a director of a corporation for services performed on committees of its board of directors are self-employment income; I.T. 4077 superseded.

26 CFR 1.1402 (b)-1: Self-employment income.

Rev. Rul. 68-5951

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 4077, C. B. 1952-1, 149.

The question presented is whether fees and other remuneration received by a director of a corporation for services performed on com

1 Prepared pursuant to Rev. Proc. 67-6, C. B. 1967-1, 576.