To Aaron:
I certainly think you gave a good and correct answer to the basic question asked in the original post. Your own follow-up question is more interesting.
The issue you present is whether a management fee paid by the wife to the husband would constitute earned income sufficient to enable funding of an IRA or other retirement plan. Specifically, would such a management fee (upon which the husband then pays the 15.4% self-employment tax) constitute ânet earnings from self-employmentâ under I.R.C. § 1402?
I assume this arises outside the context of an entity transaction, since your facts suggest the husband is simply going to manage the wifeâs brokerage account in exchange for a management fee. If it is an entity arrangement, then disregard what I am about to write.
To begin with, the husband needs to have a âtrade or businessâ in which he provides this "management-of-the-accountâ type service to others. If he has no other customers, you can see the IRS might challenge whether the husband actually has a bona fide business sufficient to support the definitional requirement in Code § 1402(a). This is really a threshold concern because if he doesnât have a business, he doesnât have self-employment income.
You can see the potential for complications here, Aaron. A trader has a trade or business in trading stock or securities for his OWN account. If he is trading for customers, then he is a âdealerâ under I.R.C. § 475(c)(1), which is a different business. So the fact that the husband might have a business as a trader does not mean he also has a business managing the accounts of other peopleâand it is the latter hurdle he has to clear in your hypothetical.
If he gets past that hurdle, I think there is a different concern that arises if the husband and wife are residents of a community property state, or even a state with tenancy by the entirety. The community property regime (and perhaps also tenancy by the entirety, with which I am less familiar) creates a presumption that both spouses have co-ownership of any property acquired during marriage. So if this occurs in a community property state, the husband would essentially be deemed to be managing his own account even though it might be held in the wifeâs name.
If he gets past all those hurdles, then I do not see any other technical prohibition that would prevent the husband from gaining âearned incomeâ in the manner you suggest. But we all know that any transaction that is one of self-dealing comes under much greater scrutiny than an armâs length transaction.
I havenât had the opportunity to do any further research on this question, and given my exploding inbox, I donât think I will have any such opportunity soon. So my conclusion is that your proposal is an aggressive strategy, and one should not be attempted unless (1) the trade or business requirement is met; and (2) there is no community property complication.
