Investment Cert Proceeds Subject to Self-Employment Tax?
For years I put money into multiple investment accounts owned by my son as a gift for the future. When he left home, he cashed them out. The total proceeds were under $4,000. Since I was contributing after-tax money, we didn't think there was a tax liability on the principle, it was a gift. Ultimately, he didn’t claim these funds as income on his 2013 tax return (AGI<$1,900).
However, he just received a letter from the IRS indicating they adjusted his return, accounting for the proceeds from these accounts as "self-employment income", and then applied the SE tax accordingly. The letter states that if he can provide documentation proving these funds are not liable for SE taxes, we can send that documentation in lieu of the tax payment.
Are these funds taxable as SE income? Assuming they are not taxable, what documentation does he need to send to the IRS to prove it?