For purposes of computing selfemployment income, the term "possession of the United States," as used in section 931 of the Internal Revenue Code of 1954 (relating to income from sources within possessions of the United States) and section 932 of such code (relating to citizens of possessions of the United States) shall be deemed not to include the Virgin Islands, Guam, or American Samoa. The provisions of section 211(a) (8) of the Act and of this section insofar as they involve nonapplication of sections 931 and 932 of the Internal Revenue Code of 1954 to Guam or American Samoa, shall apply only in the case of taxable years beginning after 1960. [34 F.R. 66, Jan. 3, 1969]

(a) Agricultural trade or business. (1) An agricultural trade or business is one in which, if the trade or business were carried on exclusively by employees, the major portion of the services would constitute agricultural labor as defined in section 210(f) of the Act and § 404.1008. In case the services are in part agricultural and in part nonagricultural, the time devoted to the performance of each type of service is the test to be used to determine whether the major portion of the services would constitute agricultural labor. If more than half of the time spent in performing all the services is spent in performing services which would constitute agricultural labor under section 210 (f) of the Act, the trade or business is agricultural. If only half, or less, of the time spent in performing all the services is spent in performing services which would constitute agricultural labor under section 210 (f) of the Act, the trade or business is not agricultural. In every case the time spent in performing the services will be computed by adding the time spent in the trade or business during the taxable year by every individual (including the individual carrying on such trade or business and the members of his family) in performing such services. The operation of this special rule is not affected by sec

tion 210(b) of the Act relating to the included-excluded rule for determining employment.

(2) The rules prescribed in subparagraph (1) of this paragraph have no application where the nonagricultural services are performed in connection with an enterprise which constitutes a trade or business separate and distinct from the trade or business conducted as an agricultural enterprise. Thus, the operation of a roadside automobile service station on farm premises constitutes a trade or business separate and distinct from the agricultural enterprise, and the gross income derived from such service station, less the deductions attributable thereto, is to be taken into account in determining net earnings from self-employment.

(b) Farm operator's income for taxable years ending before 1955. Income derived in a taxable year ending before 1955 from any agricultural trade or business (see paragraph (a) of this section), and all deductions attributable to such income, are excluded in computing net earnings from self-employment.

(c) Farm operator's income for taxable years ending after 1954. Income derived in a taxable year ending after 1954 from an agricultural trade or business (see paragraph (a) of this section) is includible in computing net earnings from self-employment. Income derived from an agricultural trade or business includes income derived by an individual under an agreement entered into by such individual with another person pursuant to which such individual undertakes to produce agricultural or horticultural commodities (including livestock, bees, poultry, and fur-bearing animals and wildlife) on land owned or leased by such other person and pursuant to which the agricultural or horticultural commodities produced by such individual, or the proceeds therefrom, are to be divided between such individual and such other person, and the amount of such individual's share depends on the amount of the agricultural or horticultural commodities produced. However, except as provided in paragraph (d) of this section, relating to arrangements involving material participation, the income derived under such an agreement by the owner or lessee of the land is not includible in computing net earnings from self-employment. See § 404.1053. For options relating to the computation of net earnings from self-employment, see § 404.1065.

(d) Includible farm rental income for taxable years ending after 1955. For taxable years ending after 1955, income derived from an agricultural trade or business (see paragraph (a) of this section) includes also income derived by the owner or tenant of land under an arrangement between such owner or tenant and another person, if such arrangement provides that such other person shall produce agricultural or horticultural commodities (including livestock, bees, poultry, and fur-bearing animals and wildlife) on such land, and that there shall be material participation by the owner or tenant in the production or the management of the production of such agricultural or horticultural commodities, and if there is material participation by the owner or tenant with respect to any such agricultural or horticultural commodity. See paragraph (c) of § 404.1053. For options relating to the computation of net earnings from selfemployment, see § 404.1065.

(e) Income from service performed after 1956 as α crew leader. Income derived by a crew leader (see section 210(n) of the Act (designated section 210 (o) of the Act prior to Sept. 13, 1960) and § 404.1005a) from service performed after 1956 in furnishing individuals to perform agricultural labor for another person and from service performed after 1956 in agricultural labor as a member of the crew is considered to be income derived from a trade or business for purposes of § 404.1070. Whether such trade or business is an agricultural trade or business shall be determined by applying the rules set forth in this section.

[34 F.R. 66, Jan. 3, 1969]

§ 404.1065 Options available to farmers in computing net earnings from farm self-employment.

(a) Taxable years beginning after 1965. Net earnings from self-employment derived in a taxable year beginning after 1965 from a trade or business which is carried on by an individual or by a partnership and in which, if such trade or business were carried on exclusively by employees, the major portion of the services would constitute agricultural labor as defined in section 210(f) of the Act (see paragraph (a) of § 404.1064) may, at the option of the individual, be computed as follows:

(1) Individual having gross income of $2,400 or less. If the gross income,

computed as provided in paragraph (d) of this section, from such trade or business is $2,400 or less, the individual may, at his option, treat as net earnings from self-employment from such trade or business an amount equal to 66% percent of such gross income. If the individual so elects, the amount equal to 66% percent of such gross income shall be used in computing his self-employment income in lieu of his actual net earnings from such trade or business, if any.

Example. F is engaged in the business of farming and computes his income under the cash receipts and disbursements method. He files his income tax returns on the basis of the calendar year. During the year 1966, F's gross income from the business of farming (computed as provided in paragraph (d)(1) of this section) is $2,325. His actual net earnings from self-employment derived from such business are $1,250. As his net earnings from self-employment, F may report $1,250 or, by the optional computation method, he may report $1,550 (6623 percent of $2,325).

(2) Individual having gross income in excess of $2,400. If the gross income, computed as provided in paragraph (d) of this section, from such trade or business is more than $2,400, and the net earnings from self-employment from such trade or business (computed without regard to this section) are less than $1,600, the individual may, at his option, treat $1,600 as net earnings from selfemployment. If the individual so elects, $1,600 shall be used in computing his self-employment income in lieu of his actual net earnings from such trade or business, if any. However, if the individual's actual net earnings from such trade or business, as computed in accordance with the applicable provisions of §§ 404.1050 through 404.1064, inclusive, are $1,600 or more, such actual net earnings shall be used in computing his selfemployment income.

Example. G is engaged in the business of farming and computes his income under the accrual method. His income tax returns are filed on the calendar year basis. For the year 1966, G's gross income from the operation of his farm (computed as provided in paragraph (d) (2) of this section) is $2,800. He has actual net earnings from self-employment derived from such farm in the amount of $1,250. As his net earnings from selfemployment derived from his farm, G may report his actual net earnings of $1,250, or by the optional method he may report $1,600. If G's actual net earnings from self-employment from his farming activities for 1966

were in an amount of $1,600 or more, he would be required to report such amount in computing his self-employment income.

(3) Member of partnership whose distributive share of gross income is $2,400 or less. If an individual's distributive share of the gross income of a partnership (computed as provided in paragraph (d) of this section) derived from such trade or business (after such gross income has been reduced by the sum of all payments to which section 707 (c) of the Internal Revenue Code of 1954 applies) is $2,400 or less, the individual may, at his option, treat as his distributive share of income described in section 702(a) (9) of such code derived from such trade or business an amount equal to 66% percent of his distributive share of such gross income (after such gross income has been reduced by the sum of all payments to which section 707 (c) of such code applies). If the individual so elects, the amount equal to 66% percent of his distributive share of such gross income shall be used by him in the computation of his net earnings from self-employment in lieu of the actual amount of his distributive share of income described in section 702 (a) (9) of the Internal Revenue Code of 1954 from such trade or business, if any.

Example. M, who files his income tax returns on a calendar year basis, is one of the three partners of the XYZ Company, a partnership, engaged in the business of farming. The taxable year of the partnership is the calendar year, and its income is computed under the cash receipts and disbursements method. For M's services in connection with the planting, cultivating, and harvesting of the crops during the year 1966, the partnership agrees to pay him $500, the full amount of which is determined without regard to the income of the partnership and constitutes a guaranteed payment within the meaning of section 707(c) of the Internal Revenue Code of 1954. This guaranteed payment to M is the only such payment made during such year. The gross income derived from the business for the year 1966 (computed as provided in paragraph (d) of this section) and after being reduced by the guaranteed payment of $500 made to M, is $3,000. Onethird of the $3,000 ($1,000), is M's distributive share of such gross income. Under paragraph (e) of this section, the guaranteed payment ($500) received by M and his distributive share of the partnership gross income ($1,000) are deemed to have been derived from one trade or business, and such amounts must be aggregated for purposes of the optional method of computing net earnings from self-employment. Since M's combined gross income from his two agri

cultural businesses ($1,000 and $500) is not more than $2,400 and since such income is deemed to be derived from one trade or business, M's net earnings from self-employment derived from such farming business may, at his option, be deemed to be $1,000 (66% percent of $1,500).

(4) Member of partnership whose distributive share of gross income exceeds $2,400. If an individual's distributive share of the gross income of the partnership (computed as provided in paragraph (d) of this section) derived from such trade or business (after such gross income has been reduced by the sum of all payments to which section 707 (c) of the Internal Revenue Code of 1954 applies) is more than $2,400 and the actual amount of his distributive share (whether or not distributed) of income described in section 702(a) (9) of such code derived from such trade or business (computed without regard to this section) is less than $1,600, the individual may, at his option, treat $1,600 as his distributive share of income described in section 702(a) (9) of such code derived from such trade or business. If the individual so elects, $1,600 shall be used by him in the computation of his net earnings from self-employment in lieu of the actual amount of his distributive share of income described in section 702 (a) (9) of the Internal Revenue Code of 1954 from such trade or business, if any. However, if the actual amount of the individual's distributive share of income described in section 702(a) (9) of such code from such trade or business, as computed in accordance with the applicable provisions of §§ 404.1050 to 404.1064, inclusive, is $1,600 or more, such actual amount of the individual's distributive share shall be used in computing his net earnings from self-employment.

Example 1. A is one of the two partners of the AB partnership which is engaged in the business of farming. The taxable year of the partnership is the calendar year and its income is computed under the accrual method. A files his income tax returns on the calendar year basis. The partnership agreement provides for an equal sharing in the profits and losses of the partnership by the two partners. A is an experienced farmer and for his services as manager of the partnership's farm activities during the year 1966, he receives $6,000 which amount constitutes a guaranteed payment within the meaning of section 707(c) of the Internal Revenue Code of 1954. The gross income of the partnership derived from such business for the year 1966, computed as provided

in paragraph (d) (2) of this section and after being reduced by the guaranteed payment made to A, is $9,600. A's distributive share of such gross income is $4,800, and his distributive share of income described in section 702(a) (9) of the Internal Revenue Code of 1954 derived from the partnership's business is $1,900. Under paragraph (e) of this section, the guaranteed payment re'ceived by A and his distributive share of the partnership's gross income are deemed to have been derived from one trade or business, and such amounts must be aggregated for purposes of the optional method of computing his net earnings from self-employment. Since the aggregate of A's guaranteed payment ($6,000) and his distributive share of partnership gross income ($4,800) is more than $2,400 and since the aggregate of A's guaranteed payment ($6,000) and his distributive share ($1,900) of partnership income described in section 702(a) (9) of the Internal Revenue Code of 1954 is not less than $1,600, the optional method of computing net earnings from self-employment is not available to A.

Example 2. F is a member of the EFG partnership which is engaged in the business of farming. F files his income tax returns on the calendar year basis. The taxable year of the partnership is the calendar year, and its income is computed under a cash receipts and disbursements method. Under the partnership agreement the partners are to share equally the profits or losses of the business. The gross income derived from the partnership business for the year 1966, computed as provided in paragraph (d) (1) of this section is $7,500. F's share of such gross income is $2,500. Due to drought and an epidemic among the livestock, the partnership sustains a net loss of $7,800 for the year 1966 of which loss F's share is $2,600. Since F's distributive share of gross income derived from such business is in excess of $2,400 and since F does not receive income described in section 702 (a) (9) of the Internal Revenue Code of 1954 of $1,600 or more from such business, he may, at his option, be deemed to have received $1,600 as his distributive share of income described in section 702 (a) (9) of such code from such business.

(b) Taxable years beginning before 1966. Except as provided in paragraph (c) of this section, net earnings from self-employment derived in a taxable year beginning before 1966 from a trade or business which is carried on by an individual or by a partnership and in which, if such trade or business were carried on exclusively by employees, the major portion of the services would constitute agricultural labor as defined in section 210(f) of the Act (see paragraph (a) of § 404.1064), may, at the option of the individual, be computed follows:

as

(1) Individual having gross income of $1,800 or less. If the gross income, computed as provided in paragraph (d) of this section, from such trade or business is $1,800 or less, the individual may, at his option, treat as net earnings from self-employment from such trade or business an amount equal to 66% percent of such gross income. If the individual so elects, the amount equal to 66 percent of such gross income shall be used in computing his self-employment income in lieu of his actual net earnings from such trade or business, if any.

(2) Individual having gross income in excess of $1,800. If the gross income, computed as provided in paragraph (d) of this section, from such trade or business is more than $1,800, and the net earnings from self-employment from such trade or business (computed without regard to this section) are less than $1,200, the individual may, at his option, treat $1,200 as net earnings from selfemployment. If the individual so elects, $1,200 shall be used in computing his self-employment income in lieu of his actual net earnings from such trade or business, if any. However, if the individual's actual net earnings from such trade or business, as computed in accordance with the applicable provisions of §§ 404.1050 through 404.1064, inclusive, are $1,200 or more, such actual net earnings shall be used in computing his selfemployment income.

(3) Member of a partnership receiving distributive share of gross income of $1,800 or less. If an individual's distributive share of the gross income of a partnership (computed as provided in paragraph (d) of this section) derived from such trade or business (after such gross income has been reduced by the sum of all payments to which section 707 (c) of the Internal Revenue Code of 1954 applies) is $1,800 or less, the individual may, at his option, treat as his distributive share of income described in section 702(a) (9) of such code derived from such trade or business an amount equal to 663 percent of his distributive share of such gross income (after such gross income has been reduced by the sum of all payments to which section 707 (c) of such code applies). If the individual so elects, the amount equal to 663 percent of his distributive share of such gross income shall be used by him in the computation of his net earnings from selfemployment in lieu of the actual amount

of his distributive share of income described in section 702(a) (9) of the Internal Revenue Code of 1954 from such trade or business, if any.

(4) Member of partnership whose distributive share of gross income exceeds $1,800. If an individual's distributive share of the gross income of the partnership (computed as provided in paragraph (d) of this section) derived from such trade or business (after such gross income has been reduced by the sum of all payments to which section 707 (c) of the Internal Revenue Code of 1954 applies) is more than $1,800 and the actual amount of his distributive share (whether or not distributed) of income described in section 702(a) (9) of such code derived from such trade or business (computed without regard to this section) is less than $1,200, the individual may, at his option, treat $1,200 as his distributive share of income described in section 702(a) (9) of such code derived from such trade or business. If the individual so elects, $1,200 shall be used by him in the computation of his net earnings from self-employment in lieu of the actual amount of his distributive share of income described in section 702(a) (9) of the Internal Revenue Code of 1954 from such trade or business, if any. However, if the actual amount of the individual's distributive share of income described in section 702(a) (9) of such code from such trade or business, as computed in accordance with the applicable provisions of 88 404.1050 to 404.1064, inclusive, is $1,200 or more, such actual amount of the individual's distributive share shall be used in computing his net earnings from self-employment. (For a special rule in the case of certain deceased partners, see § 404.1058 (c).)

(c) Taxable years ending after 1954 and before December 31, 1956. Net earnings from self-employment derived in a taxable year ending after 1954 and before December 31, 1956, from a trade or business which is carried on by an individual who reports his income on the cash receipts and disbursements method, and in which, if it were carried on exclusively by employees, the major portion of the services would constitute agricultural labor as defined in section 210 (f) of the Act (see paragraph (a) of § 404.1064), may, at the option of the individual, be computed as follows:

(1) Gross income $1,800 or less. If the gross income, computed as provided in

paragraph (d)(1) of this section, from such trade or business is $1,800 or less, the individual may, at his option, treat as net earnings from self-employment from such trade or business an amount equal to 50 percent of such gross income. If the individual so elects, the amount equal to 50 percent of such gross income shall be used in computing his self-employment income in lieu of his actual net earnings from such trade or business, if any.

Example 1. F, a farmer, uses the cash receipts and disbursements method of accounting in making his income tax returns. F's books and records show that during the calendar year 1955 he received $1,200 from the sale of produce raised on the farm, $200 from the sale of livestock raised on the farm and not held for breeding or dairy purposes, and $600 from the sale of a tractor. The income from the sale of the tractor is excluded from net earnings from self-employment by section 211(a) of the Act. F's actual net earnings from self-employment, computed in accordance with the provisions of §§ 404.1050 through 404.1052, are $450. F may report $450 as his net earnings from self-employment or he may elect to report $700 (one-half of $1,400).

Example 2. C, a cattleman, uses the cash receipts and disbursements method of accounting in making his income tax returns. C had actual net earnings from self-employment, computed in accordance with the provisions of §§ 404.1050 through 404.1052, of $725. His gross receipts were $1,000 from the sale of produce raised on the farm and $1,200 from the sale of feeder cattle, which C bought for $500. The income from the sale of the feeder cattle is included in computing net earnings from self-employment. Therefore, C may report $725 as his net earnings from self-employment or he may elect to report $850, one-half of $1,700 ($2,200 minus $500).

(2) Gross income in excess of $1,800. If the gross income, computed as provided in paragraph (d) (1) of this section, from such trade or business is more than $1,800, and the actual net earnings from self-employment from such trade or business are less than $900, the individual may, at his option, treat $900 as net earnings from self-employment. If the individual so elects, $900 shall be used in computing his self-employment income in lieu of his actual net earnings from such trade or business, if any. However, if the individual's actual net earnings from such trade or business, as computed in accordance with §§ 404.1050 through 404.1052, are $900 or more, such actual net earnings shall be used in computing his self-employment income.