                  T.C. Summary Opinion 2011-46



                      UNITED STATES TAX COURT



                BETTY L. KLEBANOFF, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9585-10S.                Filed April 7, 2011.



     William J. Curosh, for petitioner.

     Chris J. Sheldon, for respondent.




     GERBER, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined an $18,279 deficiency in petitioner’s

2007 Federal income tax and a $3,656 accuracy-related penalty

under section 6662(a).    Petitioner received $51,000 in payments

during 2007 which she did not report on her 2007 income tax

return.    She agrees that she received the $51,000 but contends

that it was a draw against future profits and not taxable.    In

the alternative, if the $51,000 is considered taxable, petitioner

argues that she received it as an employee and that it is not

subject to self-employment tax.    Accordingly, the questions we

consider are whether the $51,000 was a draw or a guaranteed

payment, and if a guaranteed payment, whether it was subject to

self-employment tax.    If the payment is taxable, we must also

consider whether petitioner is subject to the accuracy-related

penalty.

                             Background

     Petitioner resided in Arizona at the time her petition was

filed.    Mirus Development (Mirus) was an Arizona limited

liability company (LLC) with Rock Solid Ventures, LLC (Rock), and

the Hospice House, LLC (Hospice), as its only manager/members.

During 2007 Rock’s members were Frederico Buck and Keith A.

Colson (Rock Group), and Hospice’s members (Hospice Group) were

petitioner and Christine A. Boehler (Ms. Boehler).
                                - 3 -

     Mirus was treated as a partnership for Federal income tax

purposes and reported on a calendar year basis.    Petitioner held

a 25-percent interest in Mirus through her 50-percent interest in

Hospice.    After filing her 2007 income tax return, petitioner

received a Schedule K-1, Partner’s Share of Income, Deductions,

Credits, etc., from Mirus that reflected a $51,000 guaranteed

payment to petitioner.    Petitioner received the $51,000 from

Mirus during 2007 and admits that she did not report that amount

on her 2007 income tax return, which was filed on or about April

15, 2008.

     Petitioner and Ms. Boehler are registered nurses

specializing in hospice care.    Mr. Buck and Mr. Colson were in

the real estate development business and were interested in

developing and building hospice in-patient units.    Petitioner and

Ms. Boehler met with Messrs. Buck and Colson and agreed to

combine their expertise to develop, run, and sell hospice in-

patient units.    They merged their expertise by forming the LLCs

Hospice and Rock.

     Petitioner and Ms. Boehler were without capital or a source

of income, and initial discussions focused upon a flow of

payments to Hospice Group during the developmental stages of the

project.    An understanding was reached whereby petitioner and Ms.

Boehler would receive payments during development of the project

and the amounts received would reduce their shares of any profit
                               - 4 -

that resulted from the sale of the units.   As a result of the

negotiations, Mirus was formed with Hospice and Rock as equal

members and the four individuals with equal shares in Mirus,

essentially as partners through their LLCs.

     Petitioner and Ms. Boehler were involved in the venture with

Messrs. Buck and Colson, and during 2007 petitioner and Ms.

Boehler each received $51,000 pursuant to the understanding

reached by the parties.   An operating agreement for Mirus was not

finally executed by the parties.   Under the drafts of an

operating agreement, petitioner and Ms. Boehler were to receive

“an advance on distributions * * * [against their share of future

profits of Mirus] equal to Seventeen Thousand Dollars

($17,000.00) (the ‘Monthly Draw’).”    Petitioner and Ms. Boehler

understood from the discussions and drafts of operating

agreements that the payments received (they split six $17,000

monthly payments, thereby receiving $51,000 each during 2007)

were draws against any future profits of Mirus.

     In the preliminary discussions and after Mirus was

operational, the monthly amounts petitioner was receiving were

referred to as “draws”.   Petitioner did not receive a Form 1099-

DIV, Dividends and Distributions, or Schedule K-1 from Mirus

until after her 2007 return was due and filed.    At the time that

petitioner was attempting to prepare her 2007 tax return, she
                               - 5 -

tried to contact Mirus and Messrs. Buck and Colson but received

no response.

     When it was time to file her 2007 tax return, petitioner

decided to file the return without reporting the $51,000, because

of the confusion created by the lack of information from Mirus

and the understanding that an amended tax return could be filed

when the confusion was resolved.   Petitioner’s 2007 Federal

income tax return was filed on or about April 15, 2008.

Similarly, Ms. Boehler did not include her $51,000 on her 2007

tax return, taking the position that it was a draw or advance

against future profits from the project.    A 2007 Form 1065, U.S.

Return of Partnership Income, was filed by Messrs. Buck and

Colson for Mirus on or after September 30, 2008.    That

partnership return reflected that petitioner was a 25-percent

partner and that the $51,000 payment she received was a

“guaranteed payment” subject to self-employment tax.

Subsequently, petitioner consulted with a tax professional, and

an amended partnership return was prepared for Mirus, showing

Hospice and Rock as its partners rather than the four

individuals.   At the time petitioner filed her 2007 tax return,

the relationship with Messrs. Buck and Colson was strained, and

there was a lack of communication.     It was petitioner’s position

that she was not a partner in Mirus and that Hospice was.

Subsequently, petitioner filed an amended 2007 Form 1065 for
                                - 6 -

Mirus reflecting Hospice as a partner instead of petitioner and

Ms. Boehler.

     Hospice Group asked but was not permitted to see the

detailed financial information for Mirus.    At some point during

2007 things began to unravel in Hospice Group’s relationship with

Rock Group.    Rock Group offered Hospice Group a reduced

percentage of the enterprise (15 percent) coupled with the

elimination of their monthly payments.    Petitioner was unable to

proceed without the monthly payments, and she and Ms. Boehler

hired an attorney to represent their interests in the “parting of

ways” or dissolution of the Mirus enterprise.    By the end of 2007

the Mirus venture was without substance, and operations ceased.

In early 2008 Hospice Group’s attorney began negotiations with

Rock Group and, ultimately, their relationship with Hospice Group

was formally ended.    The Mirus venture was not continued by

Messrs. Buck and Colson, and it ceased operations during 2008.

                             Discussion

     The parties’ controversy over the $51,000 in payments

petitioner received is focused upon the question of the nature of

the payments.    Petitioner contends that the payments were draws

against her LLC’s percentage of future sales of hospice care

units.   Respondent contends that the payments were guaranteed

payments directly from Mirus to petitioner.    The major
                               - 7 -

differences between the two positions concern the type and amount

of tax that would result.

     Generally, payments received by a partner from a partnership

that are determined without regard to the income of the

partnership are classified as guaranteed payments under section

707(c) and are taxable as ordinary income under section 61(a).

Payments received by a partner that are determined with regard to

partnership income and/or are in the nature of current or

liquidating distributions may be taxable as capital gain to the

extent that they exceed a partner’s basis in the partnership.

See sec. 731(a).   Additionally, advances against distributive

shares are treated as current distributions at the end of the

year pursuant to section 1.731-1(a)(1)(ii), Income Tax Regs.

Other differences are that payments made to a partner for

services which are determined without regard to partnership

income may be deductible by the partnership provided they

otherwise satisfy the tests of section 162 and that such payments

may be subject to Social Security or self-employment tax.

     The record supports our holding that the $51,000 in payments

to petitioner was a draw against future earnings of the

partnerships.   Petitioner and Ms. Boehler brought their hospice

care expertise to a business venture with two other individuals

who were real estate entrepreneurs.    The business venture was

cast in an LLC (Mirus), and petitioner and Ms. Boehler formed
                                - 8 -

Hospice, a separate LLC, to be a 50-percent partner in Mirus.

Messrs. Buck and Colson brought their real estate

expertise and capital to the venture.   Their 50-percent interest

in Mirus was held through Rock, a separate LLC.

     Negotiations resulted in an understanding that petitioner

and Ms. Boehler would receive advances against future

distributions of profits.   The plan was to develop and sell five

hospice care units, and the partners would be entitled to their

percentages of the profits through their LLCs.    Messrs. Buck and

Colson had bases in their partnership interests, and petitioner

and Ms. Boehler did not.    It was therefore anticipated that the

amounts petitioner received were against her share, if any, of

the profits from the sale of hospice units.   The $51,000 in

payments was not paid from profits, and it was not based on her

performance of duties.

     Ultimately, the venture did not succeed, no income or

profits materialized, and Mirus, Rock, and Hospice were, for all

practical purposes, abandoned by the end of 2007.   These

circumstances resulted in petitioner’s receipt of payments

totaling $51,000 during 2007 which were intended as draws against

future sales of hospice units but, in effect, resulted in

liquidation of her partnership interest.   Section 731 governs

these circumstances.   Under section 731(a), in the case of the

payment of:   “a distribution by a partnership to a partner--(1)
                                   - 9 -

gain shall not be recognized to such partner, except to the

extent that any money distributed exceeds the adjusted basis of

such partner’s interest in the partnership immediately before the

distribution”.       Because petitioner had no basis in her

partnership interest, the $51,000 is taxable as capital gain to

petitioner and is not subject to self-employment tax.         See secs.

731, 1402.2

       Finally, we consider whether petitioner is liable for a

section 6662(a) accuracy-related penalty for negligence or

disregard of rules or regulations and/or a substantial

understatement of income tax under section 6662(b)(1) and (2) for

2007.       A taxpayer may be liable for a 20-percent penalty on any

underpayment of tax attributable to negligence or disregard of

rules or regulations or a substantial understatement of income

tax.       Sec. 6662(a) and (b)(1) and (2).   “Negligence” is any

failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code, and “disregard” means

any careless, reckless, or intentional disregard.        Sec. 6662(c).



       2
      Ultimately, it is irrelevant whether Hospice and Rock or
petitioner and the other venturers were the partners of Mirus.
The entire conglomeration of entities and the operation of the
venture was without vitality or substance and ceased to operate
as of the end of 2007. The parties, during 2008, attempted to
settle their interests, but no further activity directed toward
developing and selling hospice units occurred after 2007.
Because of our holding that the $51,000 was a draw and resulted
in capital gain, it is unnecessary to consider petitioner’s
alternative argument.
                              - 10 -

An underpayment is not attributable to negligence or disregard to

the extent that the taxpayer shows that the underpayment is due

to reasonable cause or good faith.     Neonatology Associates, P.A.

v. Commissioner, 115 T.C. 43, 98 (2000), affd. 299 F.3d 221 (3d

Cir. 2002); see also secs. 1.6662-3(a), 1.6664-4(a), Income Tax

Regs.   A substantial understatement of income tax is an

understatement that exceeds the greater of 10 percent of the tax

required to be shown on the tax return or $5,000.    Sec.

6662(d)(1)(A).

     Petitioner was aware that she received $51,000 in payments

from Mirus during 2007.   She did not understand the legal or

technical ramifications of those payments.    She made attempts to

contact Mirus and Messrs. Buck and Colson, but she did not

receive any response regarding the $51,000 in payments.

Petitioner did not receive any notification from Mirus before her

2007 income tax return was due and was filed.    At the time her

2007 income tax return was due and being filed in 2008,

petitioner’s lawyer was engaged in negotiations in an attempt to

work out some settlement of her interest in Mirus.    There was

uncertainty about whether petitioner would receive additional

amounts from Mirus and/or Messrs. Buck and Colson and as to the

nature of the payments already received.    Petitioner decided to

wait and file an amended return for 2007 after she was able to

better address the taxability of the $51,000 in payments.
                              - 11 -

     The events that culminated in the filing of the first Mirus

partnership return and petitioner’s income tax return were

followed in relatively short order by respondent’s audit of

petitioner’s return and the issuance of a notice of deficiency.

Petitioner consulted tax professionals who advised her and caused

her to file an amended partnership return for Mirus reflecting

that the $51,000 in payment was a draw and that Hospice and Rock

were the partners of Mirus.

     It was therefore reasonable for petitioner to take the

position that the $51,000 was not taxable in her 2007 tax year.

Under those circumstances, petitioner’s actions were reasonable

and she is not liable for an accuracy-related penalty.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.
