Tax Research Memo

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Facts: Terry Hutchison was a self-employed lawyer until two years ago when he retired. He had a cash basis business for tax purposes and paid self-employment taxes on all of his income. Five years ago, Terry represented ABC corporation in an antitrust lawsuit against XYZ corporation and won the lawsuit. At that time, Terry and ABC could not agree on the amount of compensation for legal services rendered. Currently, Terry and ABC have reached an agreement and Terry was paid $90,000 for services provided five years ago. Terry was already retired when compensation was paid.

Issue: Does Terry have to pay self-employment taxes on the $90,000 of income?

Authorities: Reg. §1.1402(a)-1(c)
Walker, Floyd L. v. U.S., (2000, CA10) 85 AFTR 2d 2000-742, 202 F3d 1290.

Conclusion: Terry must pay self-employment taxes on the $90,000 earned while he was self- employed.

Analysis: Reg. §1.1402(a)-1(c) provides 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. In Walker, Floyd L. v. U.S., (2000, CA10) 85 AFTR 2d 2000-742, 202 F3d 1290 the court ruled that the regulation stated above applied, so cash-basis taxpayers were liable for taxes on contingency fee settlement in year received, even though...
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