                               T.C. Memo. 2012-303



                         UNITED STATES TAX COURT



      LAUREN A. HOWELL AND MICHAEL H. HOWELL, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 5903-10.                          Filed November 1, 2012.



      Lauren A. Howell and Michael H. Howell, pro sese.

      Alexander D. DeVitis and Carolyn A. Schenck, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MARVEL, Judge: Respondent mailed to petitioners a notice of deficiency

dated December 1, 2009, in which respondent determined the following deficiencies

and additions to tax with respect to petitioners’ Federal income tax:
                                          -2-

[*2]                                               Additions to tax
   Year       Deficiency       Sec. 6651(a)(1)     Sec. 6651(a)(2)        Sec. 6654

   2000        $17,799             $4,005                $4,450              $957
   2001         35,385              6,612                 7,346               790

After concessions,1 the sole issue for decision is whether petitioners are liable for

self-employment tax under section 14012 on payments made to Lauren A. Howell by

Intelemed, LLC, in 2000 and 2001, which Intelemed deducted as guaranteed

payments on its 2000 and 2001 Forms 1065, U.S. Return of Partnership Income.




      1
        In their petition, petitioners assign error only to respondent’s determination
that they are liable for self-employment tax with respect to payments received from
Intelemed during the years at issue. Petitioners, however, also allege in their
petition that respondent failed to apply a $6,000 advance payment that they made
toward their 2001 deficiency.

       We deem any issue not raised in the assignments of error in the petition
conceded. See Rule 34(b)(4). Accordingly, we conclude that petitioners have
conceded their liability with respect to the secs. 6651(a)(1) and (2) and 6654
additions to tax. Respondent concedes that petitioners have made a $6,000 advance
payment toward their 2001 deficiency. The treatment of the advance payment and
any resulting adjustments with respect to the secs. 6651(a)(1) and (2) and 6654
additions to tax will be addressed in the Rule 155 computation.
      2
       Unless otherwise indicated, section references are to the Internal Revenue
Code in effect for the years in issue, and Rule references are to the Tax Court Rules
of Practice and Procedure.
                                         -3-

[*3]                           FINDINGS OF FACT

       Some of the facts have been stipulated and are so found. The stipulation of

facts is incorporated herein by this reference. Petitioners resided in California when

they filed their petition.

       Michael H. Howell is an engineer who, for the last 20 years, has worked in

information technology infrastructure. Mrs. Howell does not have any background

in computer technology.

Background

       In September 1999 petitioners and Harold Bruzee formed a California limited

liability company named Intelemed. Intelemed is a medical technology company

that provides software and hardware to hospitals. The software consists of a remote

access system that enables doctors to access hospital records from outside the

hospital.

       Mr. Howell and Mr. Bruzee came up with the concept that led to the

formation of Intelemed. Like Mr. Howell, Mr. Bruzee had a background in

computer networking. Mr. Bruzee also had the connection with the hospital to

make Intelemed a success.

       When Intelemed was first organized, Mr. Howell decided to make Mrs.

Howell a member of Intelemed rather than himself, ostensibly because she had
                                          -4-

[*4] better credit and petitioners intended to use her credit and credit card to secure

loans for Intelemed and/or to purchase items for the business. Consistent with that

decision, the limited liability company operating agreement for Intelemed provided

that Intelemed’s members were Mrs. Howell and Mr. Bruzee; Mrs. Howell held

60% of the membership units and Mr. Bruzee held 40%. Under the operating

agreement Mrs. Howell was the record owner of a 60% capital interest and could

dissolve Intelemed at any time and appoint the manager of Intelemed. Mrs. Howell

was entitled to receive an allocation of net profits or losses in proportion to her

capital interest. The operating agreement provided that “[t]he liability of the

Members shall be limited as provided under the laws of the California Limited

Liability statutes.”

       On October 1, 1999, Mr. Howell and Intelemed entered into an agreement

under which Mr. Howell would provide management services to Intelemed

(management agreement). Mrs. Howell signed the management agreement on

behalf of Intelemed. Under the management agreement Intelemed delegated to Mr.

Howell “the total and exclusive control of all management and operations” of

Intelemed.

       During the years at issue Intelemed’s principal place of business was at

petitioners’ personal residence. Mr. Howell met with clients, set up service
                                        -5-

[*5] agreements, and handled marketing. Mrs. Howell signed Intelemed documents

and discussed marketing strategies with Mr. Howell. She also allowed Mr. Howell

to use her personal credit card to make purchases on behalf of Intelemed.

Intelemed’s Tax Reporting

      Intelemed is a limited liability company treated as a partnership for Federal

income tax purposes. Intelemed filed Forms 1065 for 2000 and 2001.

      On its 2000 Form 1065 Intelemed reported gross receipts of $302,456, a

gross profit of $250,259, and ordinary income of $12,355. In calculating its

ordinary income, Intelemed deducted guaranteed payments to partners of $165,525.

On attached Schedules K-1, Partner’s Share of Income, Credits, Deductions, etc.,

Intelemed reported that the percentages of ownership, ordinary income, and

guaranteed payments were allocated to the partners as follows:

                             Percentage of      Ordinary         Guaranteed
            Partner           ownership         income            payments

      Michael Howell               21            $2,595           $34,861
      Lauren Howell                39             4,757            63,850
      Harold Bruzee                35             4,262            57,214
      Kevin Roberts1                6               741             9,600

        1
         There is no evidence in the record with regard to Mr. Roberts other
      than the Schedules K-1 Intelemed filed.
                                        -6-

[*6] Intelemed also reported on its 2000 Form 1065 that Mr. Howell was its tax

matters partner (TMP).3

      On its 2001 Form 1065 Intelemed reported gross receipts of $379,146, gross

profit of $342,865, and ordinary income of $18,794. In calculating its ordinary

income, Intelemed deducted guaranteed payments to partners of $259,500. On

attached Schedules K-1 Intelemed reported that the percentages of ownership,

ordinary income, and guaranteed payments were allocated to the partners as

follows:4

                              Percentage of     Ordinary       Guaranteed
            Partner             ownership       income          payments

       Lauren Howell               57           $10,713         $149,500
       Kevin Roberts               12             2,255           30,000
       Harold Bruzee               31             5,826           80,000


      3
        The unified audit and litigation procedures of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, sec. 402, 96 Stat. at 648,
do not apply to Intelemed. Intelemed qualifies as a small partnership under sec.
6231(a)(1)(B)(i) and did not elect, pursuant to sec. 6231(a)(1)(B)(ii), to have
TEFRA apply. See Wadsworth v. Commissioner, T.C. Memo. 2007-46 (holding
that the designation of a TMP on the partnership return, coupled with the absence of
any election statement, is not an election to be subject to TEFRA). The small
partnership exception allows this Court “to review in a deficiency suit items that
otherwise would be subject to partnership-level proceedings.” Id., slip op. at 6; see
also New Phoenix Sunrise Corp. v. Commissioner, 132 T.C. 161, 173 n.3 (2009),
aff’d, 408 Fed. Appx. 908 (6th Cir. 2010).
      4
      The record does not contain any evidence explaining why the percentage of
ownership varied from 2000 to 2001.
                                        -7-

[*7] Intelemed also reported on its 2001 Form 1065 that Mrs. Howell was its TMP.

Respondent’s Examination and the Notice of Deficiency

      During 2005 respondent began an examination for Intelemed’s 2003-05

taxable years. Respondent’s examination eventually expanded to include an

examination for petitioners’ 2000-2001 taxable years.5 Petitioners had failed to file

timely returns for those years. Respondent proposed adjustments with respect to

petitioners’ 2000-2001 taxable years, which petitioners protested to respondent’s

Appeals Office.

      While the Appeals Office review was pending, petitioners submitted to

respondent copies of delinquent joint Forms 1040, U.S. Individual Income Tax

Return, for 2000 and 2001. On their 2000 Form 1040 petitioners reported taxable

income of $41,968. On an attached Schedule C, Profit or Loss From Business,

Mr. Howell reported a net profit of $25,875 from his consulting business.6

Petitioners also attached a Schedule SE, Self-Employment Tax, for Mr. Howell.



      5
        Respondent’s examination also expanded to include examination for
petitioners’ 2003-05 taxable years. In response to respondent’s determinations with
respect to those years, petitioners filed a petition with the Court at docket No.
23779-08. The parties settled that case in October 2009.
      6
       On his 2000 Schedule C Mr. Howell reported gross receipts of $37,456.
This amount is the sum of the guaranteed payment of $34,861 and ordinary income
of $2,595 he received from Intelemed.
                                        -8-

[*8] On the Schedule SE they reported that Mr. Howell had net earnings from self-

employment of $23,896.7 On an attached Schedule E, Supplemental Income and

Loss, petitioners reported that they received partnership distributions of $68,607

from Intelemed.

      On their 2001 Form 1040 petitioners reported taxable income of $106,606.

On an attached Schedule C Mr. Howell reported a net profit of $1,375 from his

business “What-If”. On an attached Schedule SE petitioners reported that Mr.

Howell had net earnings from self-employment of $1,270.8 On an attached

Schedule E petitioners reported that they received partnership distributions of

$160,213 from Intelemed.

      On December 1, 2009, respondent issued to petitioners a notice of

deficiency for 2000-01. Respondent determined that Mrs. Howell received from

Intelemed guaranteed payments of $63,850 and $149,500 for 2000 and 2001,

respectively, and ordinary income of $4,757 and $10,713 for 2000 and 2001,

respectively. For 2000 respondent determined that Mr. and Mrs. Howell received

self-employment income of $25,875 and $63,850, respectively. For 2001


      7
      To calculate net earnings from self-employment, petitioners multiplied Mr.
Howell’s net profit by 92.35%, as directed by the Schedule SE.
      8
      To calculate net earnings from self-employment, petitioners multiplied Mr.
Howell’s net profit by 92.35%, as directed by the Schedule SE.
                                         -9-

[*9] respondent determined that Mr. and Mrs. Howell received self-employment

income of $1,679 and $149,500, respectively.

                                      OPINION

Introduction

      A taxpayer’s self-employment income is subject to self-employment tax. Sec.

1401(a) and (b). Self-employment tax is assessed and collected as part of the

income tax, must be included in computing any income tax deficiency or

overpayment for the applicable tax period, and must be taken into account for

estimated tax purposes. Sec. 1401; see also sec. 1.1401-1(a), Income Tax Regs.

Self-employment income generally is defined as “the net earnings from self-

employment derived by an individual”. Sec. 1402(b). Section 1402(a) defines

“[n]et earnings from self-employment” as follows:

             SEC. 1402(a). Net Earnings From Self-Employment.--The term
      ‘net earnings from self-employment’ means the gross income derived
      by an individual from any trade or business carried on by such
      individual, less the deductions allowed by this subtitle which are
      attributable to such trade or business, plus his distributive share
      (whether or not distributed) of income or loss described in section
      702(a)(8) from any trade or business carried on by a partnership of
      which he is a member * * *

See also sec. 1.1402(a)-1, Income Tax Regs. Section 702(a)(8) provides that, in

determining a partner’s income tax, “each partner shall take into account

separately his distributive share of the partnership’s * * * taxable income or loss,
                                        - 10 -

[*10] exclusive of items requiring separate computation under other paragraphs” of

section 702(a).

      While a partner generally must include his distributive share of income in his

net earnings from self-employment, section 1402(a)(13) provides that in certain

circumstances, a limited partner may exclude his distributive share of income from

net earnings from self-employment. Under section 1402(a)(13),

      [T]here shall be excluded the distributive share of any item of income
      or loss of a limited partner, as such, other than guaranteed payments
      described in section 707(c)[9] to that partner for services actually
      rendered to or on behalf of the partnership to the extent that those
      payments are established to be in the nature of remuneration for those
      services;

Section 1402(a)(13) does not define the term “limited partner”. In Renkemeyer,

Campbell & Weaver, LLP v. Commissioner, 136 T.C. 137, 149-150 (2011), we

applied accepted principles of statutory construction to decide whether the

taxpayers’ partnership interests in a law firm should be considered limited partner

interests for purposes of section 1402(a)(13), stating as follows:

      The insight provided reveals that the intent of section 1402(a)(13) was
      to ensure that individuals who merely invested in a partnership and
      who were not actively participating in the partnership’s business
      operations * * * would not receive credits toward Social Security


      9
       Sec. 707(c) provides that guaranteed payments are payments received by a
partner from a partnership that are calculated without regard to the partnership’s
income.
                                         - 11 -

       [*11] coverage. The legislative history of section 1402(a)(13) does
       not support a holding that Congress contemplated excluding partners
       who performed services for a partnership in their capacity as partners (i.e.,
       acting in the manner of self-employed persons), from liability for self-
       employment taxes.

This Court held that the taxpayers were not limited partners for purposes of section

1402(a)(13) because the distributive shares received “arose from legal services * * *

[the taxpayers] performed on behalf of the law firm” and “did not arise as a return on

the partners’ investment”. Id. at 150.

Parties’ Arguments

       Petitioners, who owned a majority interest in Intelemed and controlled it,

classified and reported certain payments made to Mrs. Howell and Mr. Bruzee as

guaranteed payments on Intelemed’s returns. Respondent contends that, in so

doing, petitioners admitted that the payments were guaranteed payments and may

not thereafter disavow their reporting position without demonstrating that they are

entitled to do so under cases such as Norwest Corp. v. Commissioner, 111 T.C.

105, 144 (1998), and Pinson v. Commissioner, T.C. Memo. 2000-208, slip op. at

26-27.10 See infra pp. 13-14. Respondent also contends that Mrs. Howell was not


       10
        In his brief respondent contends that petitioners should not be permitted to
disavow the form of the transaction as adopted on Intelemed’s 2000 and 2001
returns. Respondent appears to contend that if we accept this argument, Mrs.
Howell is liable for self-employment tax on the payments she received from
                                                                         (continued...)
                                       - 12 -

[*12] a true member of Intelemed but was merely a nominee11 for Mr. Howell and,

therefore, the payments must be included in his net earnings from self-employment.

Alternatively, respondent contends that Mrs. Howell was an active participant in

Intelemed, and consequently, she may not exclude the payments from her net

earnings from self-employment under section 1402(a)(13).

      Petitioners contend that Mrs. Howell is a limited partner of Intelemed and

that therefore her distributive share of income from Intelemed is excluded from

her net earnings from self-employment. Petitioners also appear to contend that

Mrs. Howell was not actively engaged in the business and imply that she did not

receive the payments as remuneration for services she rendered to Intelemed.



      10
         (...continued)
Intelemed. Under sec. 1402(a)(13), a limited partner is liable for self-employment
tax only on guaranteed payments for services actually rendered to or on behalf of
the partnership. Accordingly, even if we accept respondent’s argument that
petitioners may not disavow the form adopted on Intelemed’s returns, petitioners
could still argue that Mrs. Howell did not receive the payments as remuneration for
services she actually rendered to or on behalf of Intelemed. We construe
petitioners’ argument to include a contention that Mrs. Howell did not receive the
payments as remuneration for services she rendered to Intelemed, but rather as a
distribution made to her in her capacity as a limited partner. Petitioners have the
burden of proof on this inherently factual issue. See Rule 142(a).
      11
         “A nominee is an entity or individual who holds bare legal title to assets
owned by another entity or individual.” Lain v. Commissioner, T.C. Memo. 2012-
99, slip op. at 13; see also Oxford Capital Corp. v. United States, 211 F.3d 280, 284
(5th Cir. 2000).
                                        - 13 -

[*13] Whether Petitioners May Disavow Intelemed’s Return Treatment

      As a general rule, a taxpayer is bound by the form of the transaction that the

taxpayer has chosen. See Framatome Connectors USA, Inc. v. Commissioner, 118

T.C. 32, 47 (2002), aff’d, 108 Fed. Appx. 683 (2d Cir. 2004). A taxpayer may have

“less freedom than the Commissioner to ignore the transactional form that he has

adopted.” Bolger v. Commissioner, 59 T.C. 760, 767 n.4 (1973); see also

Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149

(1974) (“[W]hile a taxpayer is free to organize his affairs as he chooses,

nevertheless, once having done so, he must accept the tax consequences of his

choice, whether contemplated or not, * * * and may not enjoy the benefit of some

other route he might have chosen to follow but did not.” (Citations omitted.));

United States v. Asiru, 222 Fed. Appx. 584, 587 (9th Cir. 2007). If the taxpayer

seeks to abandon his own tax return treatment, the taxpayer’s freedom is further

curtailed. See Norwest Corp. v. Commissioner, 111 T.C. at 145.

      In deciding whether a taxpayer may disavow the form of a transaction, we

have considered:

      (1) Whether the taxpayer seeks to disavow his or her own tax return
      treatment for the transaction; (2) whether the taxpayer’s tax reporting
      and other actions show an honest and consistent respect for the alleged
      substance of the transaction; (3) whether the taxpayer is unilaterally
      attempting to have the transaction treated differently after
                                        - 14 -

       [14] it has been challenged; and (4) whether the taxpayer will be
       unjustly enriched if permitted to alter the transactional form.

Pinson v. Commissioner, slip op. at 27; see also Norwest Corp. v. Commissioner,

111 T.C. at 145. If the Court permits the taxpayer to disavow the form of the

transaction, the taxpayer must then introduce strong proof to establish the taxpayer’s

claimed substance of the transaction; a preponderance of credible evidence is not

sufficient. See Estate of Durkin v. Commissioner, 99 T.C. 561, 572-574 (1992); Ill.

Power Co. v. Commissioner, 87 T.C. 1417, 1434 (1986).

      On both its 2000 and 2001 returns Intelemed reported that it made guaranteed

payments to Mrs. Howell. Mr. Howell, acting as Intelemed’s TMP, signed

Intelemed’s 2000 return. Mrs. Howell, acting as Intelemed’s TMP, signed

Intelemed’s 2001 return.

      Mr. Howell testified that he provided the tax information that was used to

prepare Intelemed’s returns to Intelemed’s return preparer, Mitch Wallace.

Petitioners later filed untimely joint Federal income tax returns on which they

reported Intelemed’s payments to Mrs. Howell as distributive shares of partnership

income properly classified as passive income that is not subject to self-

employment tax. Petitioners did not file their joint Forms 1040 until after

respondent had begun an examination for their 2000-2001 and 2003-05 taxable
                                        - 15 -

[*15] years and had inquired about Mrs. Howell’s liability for self-employment tax

with respect to the guaranteed payments from Intelemed.

      Petitioners controlled Intelemed, Mr. Howell provided the return information

to Intelemed’s return preparer, and petitioners, acting as Intelemed’s TMPs, signed

Intelemed’s partnership returns for the years at issue. In arguing that the payments

were not guaranteed payments to Mrs. Howell, petitioners are attempting to

disavow the reporting position they took on Intelemed’s returns. Although

Intelemed reported the payments to Mrs. Howell as guaranteed payments,

petitioners now argue that the payments are partnership distributions rather than

guaranteed payments. Petitioners first took this inconsistent position on their

delinquently filed 2000 and 2001 Forms 1040. Therefore, they did not take an

inconsistent position until after respondent had raised the self-employment tax issue

during the examination of Intelemed’s 2000 and 2001 returns. Under these

circumstances, petitioners may not disavow the form of the transaction as reported

on Intelemed’s 2000 and 2001 returns. See Pinson v. Commissioner, T.C. Memo.

2000-208; Jacobellis v. Commissioner, T.C. Memo. 1988-315.

      Even if we permitted petitioners to disavow the form of the transaction

adopted on Intelemed’s returns, they still must offer strong proof to show that the

reporting by Intelemed was incorrect. They have failed to do so. The only
                                        - 16 -

[*16] evidence petitioners introduced regarding the status of the payments as

guaranteed payments was Mr. Howell’s testimony. Mr. Howell testified in a

conclusory fashion that Intelemed did not make any guaranteed payments to

members during the years at issue and that he informed Mr. Wallace of that fact

before the Intelemed returns were prepared and filed. We do not find this testimony

credible.

      In the absence of any corroborating evidence, we reject Mr. Howell’s

testimony as self-serving and unreliable. See Tokarski v. Commissioner, 87 T.C.

74, 77 (1986); see also Groetzinger v. Commissioner, 87 T.C. 533, 543-544 (1986).

Petitioners introduced no other evidence to prove that the payments to Mrs. Howell

were not in substance guaranteed payments under section 707(c) as reported on the

Intelemed returns.

Whether Mrs. Howell Received Payments for Services Rendered

      Under section 1402(a)(13), a limited partner must include guaranteed

payments from net earnings from self-employment in computing self-employment

tax if those payments were received “for services actually rendered to or on behalf

of the partnership to the extent that those payments are established to be in the

nature of remuneration for those services”. Petitioners bear the burden of proving

that Mrs. Howell did not receive the payments at issue in exchange for services
                                        - 17 -

[*17] she rendered to or on behalf of Intelemed. See Rule 142(a); INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115

(1933).

      Intelemed’s operating agreement states that Mrs. Howell contributed

intellectual property, a business plan, and organizational design at Intelemed’s

formation. In addition, Mrs. Howell signed the management agreement on behalf of

Intelemed. Although Mrs. Howell testified that she did not provide any services to

Intelemed during the years at issue, we do not find this testimony to be credible

when we consider other evidence in the record. For example, Mrs. Howell testified

that she provided marketing advice to Intelemed. Mr. Howell testified that, from

time to time, he discussed Intelemed marketing strategies with his wife. He also

testified that Intelemed used Mrs. Howell’s personal credit card to purchase

equipment. Furthermore, Mrs. Howell also executed documents on behalf of

Intelemed, including a management agreement conferring on Mr. Howell the right to

manage Intelemed’s operations, and she served as Intelemed’s TMP.

      The record establishes that Mrs. Howell provided marketing advice, signed

documents and entered into contracts on behalf of Intelemed, and allowed

Intelemed to use her credit card and credit rating. Intelemed’s operating

agreement recites that Mrs. Howell contributed a business plan and intellectual
                                        - 18 -

[*18] property to Intelemed at its formation. Mrs. Howell, the majority owner of

Intelemed, delegated management authority to her husband but still consulted with

him from time to time. We conclude, therefore, that Mrs. Howell performed

services for Intelemed and that she was not merely a passive investor in Intelemed.

We find that the payments to Mrs. Howell were, to some extent, payments for

services she rendered to Intelemed.

      Petitioners did not attempt to establish that only some portion of the payments

to Mrs. Howell was remuneration for services she rendered to Intelemed. Their

position was that no portion of the payments was for services Mrs. Howell rendered

to Intelemed.12 While the record shows that the services Mrs. Howell contributed to

Intelemed were relatively minimal in comparison to Mr. Howell’s, petitioners bear

the burden of proving the extent to which the payments to Mrs. Howell did not

constitute payments for services rendered. Petitioners did not carry that burden.

Accordingly, we sustain respondent’s determination.




      12
         It may well be that respondent has correctly contended that Mrs. Howell
was a nominee for Mr. Howell and that the guaranteed payments were in substance
guaranteed payments by Intelemed to Mr. Howell. However, in view of the failure
of petitioners’ proof here, we need not reach these issues.
                                         - 19 -

[*19] Conclusion

         We have considered all the other arguments made by the parties, and to the

extent not discussed above, find those arguments to be irrelevant, moot, or without

merit.

         To reflect the foregoing,


                                                        Decision will be entered

                                                  under Rule 155.
