We revisit a situation with an employee of the International Monetary Fund and self-employment taxes in the case of Sisson v. Commissioner, TC Memo 2016-143—but in this case the employee is not facing confirmation of a nomination for U.S. Treasury Secretary.
Mr. Sission, like former Treasury Secretary Timothy Geither, was an employee of the International Monetary Fund—and even though he is an employee, his payments for services as subject to self-employment tax rather than FICA and Medicare tax. As the opinion explains:
The self-employment tax also has a special rule for services performed for international organizations in the United States by a United States citizen. Sec. 1402(c)(2)(C). Self-employment income is defined as the net earnings from self-employment derived by an individual. Sec. 1402(b). The net earnings from self-employment are defined as the gross income derived by an individual from any trade or business carried on by the individual, minus deductions. Sec. 1402(a). The term “trade or business” generally excludes the performance of service by an individual as an employee, but includes the performance of service in the United States by an individual United States citizen in the employ of an international organization. Sec. 1402(c), (c)(2). Because of this special rule of inclusion regarding service for international organizations, Charles Sisson's earnings from the IMF are considered self-employment income.
Mr. Sission was aware of this fact, but his issue involved a more general interaction of self-employment taxes, bankruptcy and provisions the Congress added to the IRC to clarify when the bankruptcy estate is liable for taxes.
Mr. Sission had filed for Chapter 11 bankruptcy and for the year in question his earnings were property of the bankruptcy estate. IRC §1398 governs the tax treatment of individuals in a Chapter 7 or Chapter 11 bankruptcy. IRC §1398(c)(1) provides that:
(1) Computation and payment of tax
Except as otherwise provided in this section, the taxable income of the estate shall be computed in the same manner as for an individual. The tax shall be computed on such taxable income and shall be paid by the trustee.
The Court goes on to explain other relevant parts of §§1398 and 1399 as follows:
Section 1398(e)(1) provides that the gross income of the estate includes the gross income of the debtor to which the estate is entitled under the Bankruptcy Code. Section 1398(e)(2) provides that the gross income of the debtor does not include any item to the extent the item is included in the gross income of the estate by reason of section 1398(e)(1). Section 1398(g) provides that the bankruptcy estate succeeds to and takes into account various tax attributes of the debtor, such as net operating loss carryovers. Section 1399 provides: “Except in any case to which section 1398 applies, no separate taxable entity shall result from the commencement of a case under title 11 of the United States Code.”
Mr. Sission concluded that this meant that he would owe no Form 1040 style taxes on the IMF income, as the estate was entitled to the entire income from the IMF for the year.
However the Tax Court notes that the references above are to taxes computed on “taxable income” of the individual. The regular income tax, found in Chapter 1 of Subtitle A of the Internal Revenue Code, is based on taxable income. But the self-employment tax is found in Chapter 2 and, as the Court notes, isn’t computed on taxable income:
By contrast to the tax under section 1, the self-employment tax is a tax on self-employment income. Sec. 1401(a). Self-employment income is defined as the net earnings from self-employment derived by an individual. Sec. 1402(b). The net earnings from self-employment are defined as the gross income derived by an individual from a trade or business, less deductions. Sec. 1402(a). Thus, the self-employment tax is not a tax on taxable income. It is therefore not the tax imposed on the bankruptcy estate by section 1398(c)(1). Section 1398 includes no other provision, apart from section 1398(c)(1), imposing tax liability on a bankruptcy estate. Because section 1398(c)(1) imposes the section 1 tax on the bankruptcy estate, but not the self-employment tax, we infer that Congress did not [*14] intend a bankruptcy estate to be subject to the self-employment tax. We conclude that a bankruptcy estate is not liable for the self-employment tax.
Thus, Mr. Sission is personally liable for payment of the self-employment taxes, and such payments would not be made out of the assets of the bankruptcy estate.