                                      RENKEMEYER,    CAMPBELL   &   WEAVER,    LLP,   TROY
                                       RENKEMEYER, TAX MATTERS PARTNER, PETITIONER v. COM-
                                       MISSIONER OF INTERNAL REVENUE, RESPONDENT


                                      RENKEMEYER CAMPBELL GOSE & WEAVER LLP, TROY
                                       RENKEMEYER, TAX MATTERS PARTNER, PETITIONER v. COM-
                                       MISSIONER OF INTERNAL REVENUE, RESPONDENT

                                               Docket Nos. 18735–08, 3624–09.                         Filed February 9, 2011.

                                                  P is the tax matters partner of a Kansas limited liability
                                               partnership engaged in the practice of law. For the law firm’s
                                               tax year ended Apr. 30, 2004, three of the law firm’s partners
                                               were attorneys performing legal services. The fourth partner
                                               was an S corporation owned by a tax-exempt ESOP whose
                                               beneficiaries were the law firm’s three attorney partners. For
                                               tax year ended Apr. 30, 2005, the law firm’s only partners
                                               were the three attorneys. For tax year ended Apr. 30, 2004,
                                               the three attorney partners each had a one-third capital
                                               interest and a 30-percent profits and loss interest in the law
                                               firm. The S corporation had a 10-percent profits and loss
                                               interest in the law firm. Approximately 99 percent of the law
                                               firm’s net business income for its tax year ended Apr. 30,
                                               2004, was derived from legal services rendered by the three
                                               attorney partners. For tax year ended Apr. 30, 2004, the law
                                               firm allocated 87.557 percent of its net business income to the
                                               S corporation. R determined that the special allocation did not
                                               reflect economic reality and consequently reallocated the law
                                               firm’s net business income to its partners on the basis of each
                                               partner’s profits and loss interest. R further determined that
                                               the three attorney partners’ distributive shares of the law
                                               firm’s net business income for tax year ended Apr. 30, 2004,
                                               and tax year ended Apr. 30, 2005, were net earnings from
                                               self-employment subject to tax on self-employment income.
                                               Held: R’s reallocation of the law firm’s net business income for
                                               its tax year ended Apr. 30, 2004, is sustained. Held, further,
                                               the law firm’s three attorney partners’ distributive shares of
                                               the law firm’s net business income for its tax years ended
                                               Apr. 30, 2004 and 2005, are subject to the tax on self-employ-
                                               ment income.

                                           Troy Renkemeyer, pro se.
                                           Gregory J. Stull, for respondent.

                                                                                  OPINION

                                        JACOBS, Judge: The parties submitted these consolidated
                                      cases fully stipulated pursuant to Rule 122.
                                                                                                                                     137




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                                      138                136 UNITED STATES TAX COURT REPORTS                                        (137)


                                         During the years in question Troy Renkemeyer (sometimes
                                      referred to as petitioner) was the tax matters partner of
                                      Renkemeyer, Campbell & Weaver, LLP (the law firm), a lim-
                                      ited liability partnership (L.L.P.) registered under the laws of
                                      Kansas. Petitioner is a member of the bar of this Court.
                                      Respondent mailed petitioner two notices of final partnership
                                      administrative adjustment—one for the law firm’s tax year
                                      ended April 30, 2004 (the 2004 tax year), on May 23, 2008,
                                      and the second for the law firm’s tax year ended April 30,
                                      2005 (the 2005 tax year), on November 19, 2008. 1
                                         After concessions, the issues remaining are: (1) Whether a
                                      special allocation of the law firm’s net business income for
                                      the 2004 tax year should be disallowed, and (2) whether
                                      income generated from the law firm’s legal practice for the
                                      2004 and 2005 tax years, and allocated to the law firm’s
                                      attorney partners, is subject to self-employment tax.
                                         The law firm’s principal place of business, and petitioner’s
                                      residence, was Kansas when the petition was filed. Unless
                                      otherwise indicated, all section references are to the Internal
                                      Revenue Code in effect for the years at issue, and all Rule
                                      references are to the Tax Court Rules of Practice and Proce-
                                      dure.

                                                                               Background
                                      I. The Law Firm
                                         The law firm was organized on July 5, 2000. Its practice
                                      emphasizes Federal tax law. During the 2004 tax year the
                                      law firm’s partners consisted of Troy Renkemeyer, Todd
                                      Campbell, and Tracy Weaver, all lawyers, and RCGW Invest-
                                      ment Management, Inc. (RCGW), a Kansas corporation. In the
                                      2005 tax year the law firm’s partners were Messrs.
                                      Renkemeyer, Campbell, and Weaver. 2
                                         Although petitioner asserts that a written partnership
                                      agreement exists for the 2004 tax year, he was unable to
                                      produce a copy of the agreement. A partnership agreement
                                      effective for the 2005 tax year was entered into the record.
                                         1 Respondent issued the notice in docket No. 18735–08 to Renkemeyer, Campbell & Weaver,

                                      LLP, Troy Renkemeyer, Tax Matters Partner, and the notice in docket No. 3624–09 to
                                      Renkemeyer Campbell Gose & Weaver LLP, Troy Renkemeyer, Tax Matters Partner.
                                         2 Although listed in the caption in docket No. 3624–09, Gose was not a partner of the law

                                      firm in either year at issue.




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                                      (137)     RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR.                                                139


                                        RCGW’s business activities primarily involved the purchase,
                                      sale, and rental of real estate. RCGW filed an election to be
                                      taxed as an S corporation which was effective December 27,
                                      2000. RCGW was 100 percent owned by RCGW Investment
                                      Management, Inc., Employee Stock Ownership Plan and
                                      Trust (the ESOP). 3 Messrs. Renkemeyer, Campbell, and
                                      Weaver were the beneficiaries of the ESOP. 4
                                        During all relevant times, the law firm maintained its
                                      income tax records on the cash receipts and disbursements
                                      method of accounting and, as noted supra p. 138, it operated
                                      on a fiscal year ending April 30.
                                      II. The Law Firm’s 2004 Tax Year
                                        The law firm timely filed Form 1065, U.S. Return of Part-
                                      nership Income, for its 2004 tax year. Attached to the return
                                      was a Schedule K–1, Partner’s Share of Income, Credits,
                                      Deductions, etc., for each partner. According to the Schedules
                                      K–1, the four partners held the following profits and loss
                                      interests:
                                                        Partner                                                                  Percent
                                              Troy Renkemeyer ........................................................              30
                                              Todd Campbell .............................................................           30
                                              Tracy Weaver ...............................................................          30
                                              RCGW ...........................................................................      10

                                           The Schedules K–1 reported the following capital interests:
                                                     Partner                                                                     Percent
                                              Troy Renkemeyer ......................................................             33.3333
                                              Todd Campbell ...........................................................          33.3333
                                              Tracy Weaver .............................................................         33.3333
                                              RCGW .........................................................................      0.0000

                                        The parties stipulated that of the law firm’s gross revenues
                                      for the 2004 tax year, $1,634,992 was generated by the
                                      performance of legal services by petitioner and Messrs.
                                      Campbell and Weaver, and $5,335 was generated as a result
                                      of the recognition of passthrough income from RCGW. On
                                        3 The ESOP apparently was intended to be a qualified employee benefit plan pursuant to the

                                      provisions of sec. 401(a) in order that its trust would be exempt from income tax pursuant to
                                      sec. 501(a). The question of the tax-exempt qualification of the ESOP was not raised by either
                                      party. Consequently, we do not make a determination in this regard.
                                        4 On or about July 15, 2006, RCGW forfeited its authority to do business in Kansas for failure

                                      to timely file its annual report.




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                                      140                     136 UNITED STATES TAX COURT REPORTS                                        (137)


                                      Form 1065, the law firm reported ordinary income from busi-
                                      ness activities (net business income) of $1,165,770. The law
                                      firm allocated its net business income to its partners as fol-
                                      lows:

                                                                                                                     Percent
                                                             Partner                           Amount                of total
                                                       Troy Renkemeyer                          $74,227                6.367
                                                       Todd Campbell                             42,668                3.660
                                                       Tracy Weaver                              28,167                2.416
                                                       RCGW                                   1,020,708               87.557

                                        The law firm’s Form 1065, Statement 10, Partners’ Capital
                                      Account Summary, for the 2004 tax year disclosed the fol-
                                      lowing capital account information:
                                                               Beginning       Capital        Schedule M–2                         Ending
                                             Partner            capital      contributed       ll. 3, 4 & 7       Withdrawal       capital

                                           Renkemeyer          –$12,180        $32,218           $74,176           $108,512       –$14,298
                                           Campbell             –23,489         15,453            41,108             24,648           8,424
                                           Weaver                19,270         15,096            28,147             57,073           5,440
                                           RCGW                  60,000           -0-          1,019,999              -0-         1,079,999

                                         RCGW filed a Form 1120S, U.S. Income Tax Return for an
                                      S Corporation, on which it reported ‘‘other income’’ of
                                      $1,020,708, all of which was passed through from the law
                                      firm.
                                         Although the law firm’s Form 1065 for the 2004 tax year
                                      reported business revenues from its law practice, no portion
                                      of those revenues was included on the law firm’s tax return
                                      as net earnings from self-employment.
                                         Respondent examined the law firm’s tax return for the
                                      2004 tax year and concluded that the partners’ distributive
                                      shares of the law firm’s net business income should be reallo-
                                      cated to each partner consistent with the profits and loss
                                      sharing percentage as reported on the partners’ respective
                                      Schedules K–1. See supra p. 139. Further, respondent
                                      reduced the law firm’s gross business revenues by $905,000
                                      (and consequently reduced the law firm’s net business
                                      income) after determining that a legal fee in a like amount
                                      had not been received during the 2004 tax year. 5
                                         As a result of the examination, respondent determined
                                      each partner’s distributive share of the law firm’s net busi-
                                      ness income for the 2004 tax year to be:
                                           5 Petitioner   does not dispute this reduction.




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                                      (137)     RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR.                                        141


                                                                                                                Percent
                                                         Partner                           Amount               of total
                                                   Troy Renkemeyer                             $78,231              30
                                                   Todd Campbell                                78,231              30
                                                   Tracy Weaver                                 78,231              30
                                                   RCGW                                         26,077              10

                                        Respondent also determined that petitioner’s and Messrs.
                                      Campbell’s and Weaver’s distributive shares of the law firm’s
                                      net business income as redetermined by respondent were
                                      subject to self-employment tax under the Self-Employment
                                      Contributions Act of 1954, secs. 1401–1403.
                                      III. The Law Firm’s 2005 Tax Year
                                        On May 1, 2004, the law firm’s partnership agreement was
                                      amended, and RCGW’s interest was eliminated. The amended
                                      partnership agreement provided for two classes of ownership
                                      interests: ‘‘General Managing Partner Partnership Units’’
                                      and ‘‘Investing Partnership Units’’, with the general man-
                                      aging partner partnership units having full authority to act
                                      on behalf of the partnership. Pursuant to the amended part-
                                      nership agreement, each partner was required to contribute
                                      $10 for his general managing partner partnership units and
                                      $100 for his investing partnership units. The resulting
                                      interests in the law firm under the amended partnership
                                      agreement were as follows:

                                                                           General managing                 Investing partner
                                                 Partner                    partner interest                     interest
                                           Troy Renkemeyer                                1%                         32%
                                           Todd Campbell                                  1                          32
                                           Tracy Weaver                                   1                          32

                                      Thus, petitioner and Messrs. Campbell and Weaver shared
                                      equal authority in the law firm. With respect to the alloca-
                                      tion of the partners’ distributive shares, the partnership
                                      agreement provided that all profits and losses of the partner-
                                      ship, and all income, deductions, and credits, were to be allo-
                                      cated according to the partners’ ownership interests set forth
                                      supra except that
                                      the allocation of such profit and income items for any given calendar
                                      month to the capital account of any given Partner shall be limited in such
                                      calendar month to the Average Monthly Collections from such Partner’s




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                                      142                136 UNITED STATES TAX COURT REPORTS                                        (137)


                                      clients. For purposes of this Agreement, the term Average Monthly Collec-
                                      tions shall mean the average of the monthly collections of the current
                                      fiscal year. However, this Paragraph should not apply to the extent it
                                      would cause the profit allocation in any calendar month to be less than
                                      Five Thousand Dollars ($5,000). * * * Notwithstanding anything con-
                                      tained herein to the contrary, in the event the Limited Liability Partner-
                                      ship collects a fee in an amount over One Hundred Thousand Dollars
                                      ($100,000) pursuant to a single engagement, then the Partners, other than
                                      the Partner whose client pays such fee, shall collectively receive 30% of
                                      such fee, and shall share in such fee equally.

                                        The law firm timely filed Form 1065 for its 2005 tax year
                                      and reported net business income of $541,064. The law firm
                                      allocated its net business income to its partners on Schedules
                                      K–1 as follows:

                                                                                                                Percent
                                                         Partner                           Amount               of total

                                                   Troy Renkemeyer                        $195,066                  36
                                                   Todd Campbell                           219,741                  41
                                                   Tracy Weaver                            126,257                  23

                                      Respondent accepted this special allocation of net business
                                      income.
                                        Respondent determined that the net business income allo-
                                      cated to petitioner and Messrs. Campbell and Weaver was
                                      subject to self-employment tax.

                                                                                Discussion
                                      I. The Law Firm’s 2004 Tax Year Special Allocation
                                         We first address whether the special allocation of the law
                                      firm’s 2004 tax year net business income was proper. Peti-
                                      tioner bears the burden of proof. Rule 142(a); see Welch v.
                                      Helvering, 290 U.S. 111, 115 (1933).
                                         The law firm, an L.L.P., was for the tax years at issue an
                                      ‘‘eligible entity’’. See sec. 301.7701–3(a), Proced. & Admin.
                                      Regs. By not electing otherwise, the law firm was classified
                                      as a partnership. See sec. 301.7701–3(b)(1)(i), Proced. &
                                      Admin. Regs.
                                         A partnership is not subject to Federal income tax. Secs.
                                      701, 6031. Rather, the partners are liable for tax in their
                                      separate or individual capacities. Sec. 701. Each partner is
                                      required to take into account his distributive share of the




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                                      (137)     RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR.                                        143


                                      partnership’s income, gain, loss, deductions, and credits. Sec.
                                      702(a).
                                         A partner’s distributive share of income, gain, loss, deduc-
                                      tions, or credits generally is determined by the governing
                                      partnership agreement. Sec. 704(a). A partnership agreement
                                      may be either written or oral. Stern v. Commissioner, T.C.
                                      Memo. 1984–383; sec. 1.761–1(c), Income Tax Regs. If the
                                      partnership agreement does not provide how a partner’s
                                      distributive share is to be determined, or if the allocation
                                      provided in the partnership agreement does not have
                                      substantial economic effect, the partner’s distributive share
                                      is determined in accordance with the partner’s interest in the
                                      partnership. Sec. 704(b); Holdner v. Commissioner, T.C.
                                      Memo. 2010–175.
                                         A partner’s interest in a partnership refers to the manner
                                      ‘‘in which the partners have agreed to share the economic
                                      benefit or burden * * * corresponding to the income, gain,
                                      loss, deduction, or credit (or item thereof) that is allocated.’’
                                      Sec. 1.704–1(b)(3)(i), Income Tax Regs. A partner’s interest in
                                      a partnership is determined by taking into account all rel-
                                      evant facts and circumstances. Sec. 704(b); Vecchio v.
                                      Commissioner, 103 T.C. 170, 193 (1994); sec. 1.704–1(b)(3)(i),
                                      Income Tax Regs.
                                         For the tax years at issue the relevant regulations pro-
                                      vided that all partners’ interests in a partnership are pre-
                                      sumed to be equal on a per capita basis. Sec. 1.704–1(b)(3)(i),
                                      Income Tax Regs. This presumption may be rebutted if the
                                      facts and circumstances show otherwise. Id.
                                         Petitioner asserts that the special allocation of the net
                                      business income of the law firm for its 2004 tax year was
                                      proper because the allocation was made pursuant to the
                                      provisions of the partnership agreement. But as noted supra
                                      p. 138, the partnership agreement effective for the 2004 tax
                                      year is not in the record.
                                         Petitioner’s bald assertion that the missing partnership
                                      agreement provides for a special allocation is not sufficient to
                                      carry petitioner’s burden to establish the propriety of the
                                      special allocation of the net business income of the law firm
                                      for its 2004 tax year. Further, although petitioner asserts
                                      that the partnership agreement effective for the 2004 tax
                                      year is similar to the partnership agreement effective for the
                                      2005 tax year (the 2005 partnership agreement), and the




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                                      144                136 UNITED STATES TAX COURT REPORTS                                        (137)


                                      2005 partnership agreement is in the record, the 2005 part-
                                      nership agreement does not support petitioner’s claim that
                                      the special allocation of the net business income of the law
                                      firm for its 2004 tax year is proper.
                                         Petitioner alleges ‘‘that the only change made in the
                                      amended version * * * [of the partnership agreement] was to
                                      eliminate the corporate partner [RCGW] as a capital partner.’’
                                      However, the 2005 partnership agreement provides that the
                                      allocation of the partners’ distributive shares is to be made
                                      according to (1) the ownership interests of the partners,
                                      except that (2) the allocation to each partner is to be limited
                                      to the average monthly collection of fees from the partner’s
                                      clients, with the further exception that the allocation is not
                                      to be less than $5,000 per calendar month. Assuming
                                      arguendo that this provision was part of the partnership
                                      agreement effective for the 2004 tax year, we cannot see how
                                      the special allocation in which RCGW received 87.557 percent
                                      of the law firm’s net income was consistent with the partner-
                                      ship agreement. Of the amount of the law firm’s gross busi-
                                      ness revenues for the 2004 tax year, less than 1 percent of
                                      the revenue, computed after the reduction for the $905,000
                                      unpaid fee, was attributable to RCGW. 6 Hence, we look to the
                                      partners’ respective interests in the partnership (determined
                                      by taking into account all facts and circumstances) to deter-
                                      mine the proper allocation of the law firm’s net business
                                      income. See sec. 704(b).
                                         In determining the partners’ respective interests in a part-
                                      nership, the following factors are deemed relevant: (a) The
                                      partners’ relative capital contributions to the partnership; (b)
                                      the partners’ respective interests in partnership profits and
                                      losses; (c) the partners’ relative interests in cashflow and
                                      other nonliquidating distributions; and (d) the partners’
                                      rights to capital upon liquidation. Holdner v. Commissioner,
                                      supra; Estate of Ballantyne v. Commissioner, T.C. Memo.
                                      2002–160, affd. 341 F.3d 802 (8th Cir. 2003); sec. 1.704–
                                      1(b)(3)(ii), Income Tax Regs. By applying these factors to the
                                      specific facts of these cases, we conclude that the special
                                      allocation of the law firm’s net business income for the 2004
                                      tax year was improper.
                                        6 The law firm generated $729,992 in legal fees from the three attorney partners but only

                                      $5,335 from RCGW.




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                                      (137)     RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR.                                        145


                                        The first factor to be considered is the partners’ relative
                                      capital contributions. The only information with respect to
                                      the partners’ respective capital accounts consists of the
                                      information set forth on statement 10 of the law firm’s Form
                                      1065 and the partners’ respective Schedules K–1 for the 2004
                                      tax year, both of which indicate that RCGW made no capital
                                      contributions in the 2004 tax year to the partnership,
                                      whereas petitioner and Messrs. Campbell and Weaver each
                                      contributed capital to the partnership during the 2004 tax
                                      year. Indeed, the record does not reveal whether RCGW
                                      contributed capital to the partnership in any year. Con-
                                      sequently, this factor does not support the law firm’s special
                                      allocation for the 2004 tax year.
                                        The second factor we consider is the partners’ interests in
                                      the profits and losses of the partnership. As noted supra p.
                                      139, according to the Schedules K–1, petitioner and Messrs.
                                      Campbell and Weaver each held a 33.3333-percent capital
                                      interest and a 30-percent profits and loss interest, whereas
                                      RCGW held a 10-percent profits and loss interest. Con-
                                      sequently, this factor does not support the law firm’s special
                                      allocation for the 2004 tax year.
                                        The third factor we consider is the partners’ interests in
                                      cashflow and other nonliquidating distributions. Again, the
                                      record is unclear with respect to this factor, but statement 10
                                      of the law firm’s 2004 tax year’s Form 1065 and the partners’
                                      respective Schedules K–1 report that in the 2004 tax year
                                      RCGW received no distributions from the partnership,
                                      whereas petitioner and Messrs. Campbell and Weaver did
                                      receive distributions. Consequently, this factor does not sup-
                                      port the law firm’s special allocation for the 2004 tax year.
                                        The fourth and final factor to be considered is the partners’
                                      rights to distributions of capital upon liquidation of the part-
                                      nership. The record does not include information with respect
                                      to this factor for the 2004 tax year or earlier. Consequently,
                                      this factor does not support the law firm’s special allocation
                                      for the 2004 tax year.
                                        To conclude, the facts and circumstances support respond-
                                      ent’s reallocation of the law firm’s net business income for its
                                      2004 tax year consistent with the partners’ profits and loss
                                      interests.




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                                      146                136 UNITED STATES TAX COURT REPORTS                                        (137)


                                      II. Self-Employment Tax
                                        We now turn our attention to whether the attorney part-
                                      ners’ distributive shares of the law firm’s business income for
                                      the 2004 and 2005 tax years are subject to self-employment
                                      tax. Petitioner again bears the burden of proof with respect
                                      to this issue.
                                        Section 1401(a) imposes a tax on the self-employment
                                      income of every individual for a taxable year (the self-
                                      employment tax). Self-employment income is defined as ‘‘the
                                      net earnings from self-employment derived by an individual
                                      * * * during any taxable year’’ excluding (1) the portion in
                                      excess of the Social Security wage base limitation for the
                                      year as well as (2) all earnings from self-employment if the
                                      total amount of the individual’s net earnings from self-
                                      employment for the taxable year is less than $400. Sec.
                                      1402(b).
                                        Section 1402(a) defines net earnings from self-employment
                                      as:
                                      the gross income derived by an individual from any trade or business car-
                                      ried 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 * * *

                                      Section 702(a)(8) provides that in determining his income
                                      tax, each partner shall take into account separately his
                                      distributive share of the partnership’s taxable income or loss,
                                      exclusive of items requiring separate computation under
                                      other paragraphs of section 702(a). Therefore, in general, a
                                      partner must include his distributive share of partnership
                                      income in calculating his net earnings from self-employment.
                                      Fees for services, like those generated by a law partnership,
                                      are part of the partners’ distributive shares under section
                                      702(a)(8). Consequently, such fees are generally included in
                                      calculating net earnings from self-employment, unless an
                                      exclusion applies.
                                        Section 1402(a) provides several exclusions from the gen-
                                      eral self-employment tax rule. In particular, section
                                      1402(a)(13) provides:




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                                      (137)     RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR.                                           147


                                      there 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) 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;

                                         Petitioner posits that his and Messrs. Campbell’s and
                                      Weaver’s interests in the law firm (organized as a Kansas
                                      L.L.P.) each should be considered a limited partner’s interest
                                      in a limited partnership for purposes of section 1402(a)(13).
                                      Petitioner maintains that his and Messrs. Campbell’s and
                                      Weaver’s respective interests in the law firm share character-
                                      istics of those of a limited partner in a limited partnership
                                      because (a) their interests are designated as limited partner-
                                      ship interests in the law firm’s organizational documents,
                                      and (b) his and Messrs. Campbell’s and Weaver’s interests in
                                      the law firm enjoy limited liability pursuant to Kansas law. 7
                                      Hence, petitioner argues, his and Messrs. Campbell’s and
                                      Weaver’s distributive shares of the law firm’s business
                                      income qualify for the section 1402(a)(13) exception. We dis-
                                      agree with petitioner’s position.
                                         A limited partnership has two fundamental classes of part-
                                      ners, general and limited. General partners typically have
                                      management power and unlimited personal liability. On the
                                      other hand, limited partners lack management powers but
                                      enjoy immunity from liability for debts of the partnership. 1
                                      Bromberg & Ribstein, Partnership, sec. 1.01(b)(3) (2002–2
                                      Supp.). Indeed, it is generally understood that a limited
                                      partner could lose his limited liability protection were he to
                                      engage in the business operations of the partnership. 8 Con-
                                      sequently, the interest of a limited partner in a limited part-

                                         7 Petitioner, in his opening brief, refers to a chart allegedly attached to the brief as an exhibit

                                      that compares the characteristics of a partner in a general partnership, a limited partnership,
                                      and an L.L.P. under Kansas law, with the characteristics of the law firm’s investing partners’
                                      interests. No such chart was attached to petitioner’s brief.
                                         8 We are mindful that at the time of the statute’s enactment, the Revised Uniform Limited

                                      Partnership Act of 1976 provided that a ‘‘limited partner’’ would lose his limited liability protec-
                                      tion if:
                                      in addition to the exercise of his rights and powers as a limited partner, he takes part in the
                                      control of the business. However, if the limited partner’s participation in the control of the busi-
                                      ness is not substantially the same as the exercise of the powers of a general partner, he is liable
                                      only to persons who transact business with the limited partnership with actual knowledge of
                                      his participation in control. [Revised Unif. Ltd. Pship. Act (1976), sec. 303(a), 6B U.L.A. 180
                                      (2008).]




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                                      148                136 UNITED STATES TAX COURT REPORTS                                            (137)


                                      nership is generally akin to that of a passive investor. See
                                      3 id. sec. 12.01(a) (1988).
                                         In contrast, all partners of an L.L.P. enjoy limited liability
                                      protection and may have management powers. 1 id. sec.
                                      1.01(b)(5) (2005–1 Supp.). In essence, an L.L.P. is a general
                                      partnership that affords a form of limited liability protection
                                      for all its partners by filing a statement of qualification with
                                      the appropriate State authorities. See Garnett v. Commis-
                                      sioner, 132 T.C. 368, 375 (2009); 1 Bromberg & Ribstein,
                                      supra sec. 1.01(b)(5). In Kansas, an L.L.P. is formed under
                                      the Kansas Uniform Partnership Act, which governs general
                                      partnerships. See Kan. Stat. Ann. sec. 56a–1001 (2005). A
                                      Kansas partnership that elects to become an L.L.P. ‘‘con-
                                      tinues to be the same entity that existed before the filing of
                                      a statement of qualification under K.S.A. 56a–1001.’’ Kan.
                                      Stat. Ann. sec. 56a–201(b) (2005).
                                         Section 1402(a)(13) was originally enacted as section
                                      1402(a)(12) at a time (1977) before entities such as L.L.P.s
                                      were contemplated, 9 and the applicable statute did not, and
                                      still does not, define a ‘‘limited partner’’. When L.L.P.s (and
                                      limited liability companies) began to be frequently used, it
                                      was determined that there needed to be a definition of ‘‘lim-
                                      ited partner’’ for purposes of the self-employment tax. In
                                      1997 the Secretary issued proposed regulations which were
                                      intended to do just that. See sec. 1.1402(a)–2, Proposed
                                      Income Tax Regs., 62 Fed. Reg. 1704 (Jan. 13, 1997). The
                                      proposed regulations ignited controversy. As a result, Con-
                                      gress enacted legislation which provided that ‘‘No temporary
                                      or final regulation with respect to the definition of a limited
                                      partner under section 1402(a)(13) of the Internal Revenue
                                      Code of 1986 may be issued or made effective before July 1,
                                      1998.’’ Taxpayer Relief Act of 1997, Pub. L. 105–34, sec. 935,
                                      111 Stat. 882. Indeed, a Sense of the Senate resolution with
                                      respect to this provision stated:
                                      SEC. 734. SENSE OF THE SENATE WITH RESPECT TO SELF-
                                                EMPLOYMENT TAX OF LIMITED PARTNERS.
                                           (a) Findings.—The Senate finds that—

                                                                      *        *      *       *   *       *   *

                                        9 L.L.P.s did not exist until 1991. See 1 Bromberg & Ribstein, Partnership, sec. 1.01(b)(5)

                                      (2005–1 Supp.).




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                                      (137)     RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR.                                        149


                                         (4) certain types of entities, such as limited liability companies and lim-
                                      ited liability partnerships, were not widely used at the time the present
                                      rule relating to limited partners was enacted, and that the proposed regu-
                                      lations attempt to address owners of such entities;
                                         (5) the Senate is concerned that the proposed change in the treatment
                                      of individuals who are limited partners under applicable State law exceeds
                                      the regulatory authority of the Treasury Department and would effectively
                                      change the law administratively without congressional action; and
                                         (6) the proposed regulations address and raise significant policy issues
                                      and the proposed definition of a limited partner may have a substantial
                                      impact on the tax liability of certain individuals and may also affect
                                      individuals’ entitlement to social security benefits.
                                         (b) Sense of Senate.—It is the sense of the Senate that—
                                         (1) the Department of the Treasury and the Internal Revenue Service
                                      should withdraw Proposed Regulation 1.1402(a)–2 which imposes a tax on
                                      limited partners; and
                                         (2) Congress, not the Department of the Treasury or the Internal Rev-
                                      enue Service, should determine the tax law governing self-employment for
                                      limited partners.
                                         [143 Cong. Rec. 13297 (1997). 10]

                                        As of 2005 Congress had not issued any other pronounce-
                                      ments with respect to the definition of a limited partner for
                                      purposes of the self-employment tax, nor had the Secretary.
                                      We therefore are left to interpret the statute without elabo-
                                      ration.
                                        Since section 1402(a)(13) does not define ‘‘limited partner’’,
                                      we apply accepted principles of statutory construction to
                                      ascertain Congress’ intent. It is a well-established rule of
                                      construction that if a statute does not define a term, the
                                      term is to be given its ordinary meaning. Gates v. Commis-
                                      sioner, 135 T.C. 1, 6 (2010); see Perrin v. United States, 444
                                      U.S. 37, 42 (1979). And we look to the legislative history to
                                      ascertain Congress’ intent if the statutory purpose is
                                      obscured by ambiguity. See Burlington N. R.R. v. Okla. Tax
                                      Commn., 481 U.S. 454, 461 (1987).
                                        ‘‘Limited partner’’ is a technical term which has become
                                      obscured over time because of the increasing complexity of
                                      partnerships and other flowthrough entities as well as the
                                      history of section 1402(a)(13). We therefore must look to the
                                      legislative history for guidance.
                                        Section 1402(a)(13) was enacted by the Social Security
                                      Amendments of 1977, Pub. L. 95–216, sec. 313(b), 91 Stat.
                                       10 Although the moratorium has expired, the Secretary has not yet promulgated any replace-

                                      ment regulations.




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                                      150                136 UNITED STATES TAX COURT REPORTS                                        (137)


                                      1536. The relevant legislative history provides insight with
                                      respect to Congress’ intent:
                                         Under present law each partner’s share of partnership income is includ-
                                      able in his net earnings from self-employment for social security purposes,
                                      irrespective of the nature of his membership in the partnership. The bill
                                      would exclude from social security coverage, the distributive share of
                                      income or loss received by a limited partner from the trade or business of
                                      a limited partnership. This is to exclude for coverage purposes certain
                                      earnings which are basically of an investment nature. However, the exclu-
                                      sion from coverage would not extend to guaranteed payments (as described
                                      in 707(c) of the Internal Revenue Code), such as salary and professional
                                      fees, received for services actually performed by the limited partner for the
                                      partnership. [H. Rept. 95–702 (Part 1), at 11 (1977); emphasis added.]

                                         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 partici-
                                      pating in the partnership’s business operations (which was
                                      the archetype of limited partners at the time) would not
                                      receive credits toward Social Security coverage. The legisla-
                                      tive history of section 1402(a)(13) does not support a holding
                                      that Congress contemplated excluding partners who per-
                                      formed services for a partnership in their capacity as part-
                                      ners (i.e., acting in the manner of self-employed persons),
                                      from liability for self-employment taxes.
                                         Aside from a nominal amount of income arising from rec-
                                      ognition of certain pass-through income from RCGW, all of the
                                      law firm’s revenues were derived from legal services per-
                                      formed by petitioner and Messrs. Campbell and Weaver in
                                      their capacities as partners. Petitioner and Messrs. Campbell
                                      and Weaver each contributed a nominal amount ($110) for
                                      their respective partnership units. Thus it is clear that the
                                      partners’ distributive shares of the law firm’s income did not
                                      arise as a return on the partners’ investment and were not
                                      ‘‘earnings which are basically of an investment nature.’’
                                      Instead, the attorney partners’ distributive shares arose from
                                      legal services they performed on behalf of the law firm.
                                         To conclude, we hold that the respective distributive shares
                                      of petitioner and Messrs. Campbell and Weaver arising from
                                      the legal services they performed in their capacity as part-
                                      ners in the law firm are subject to self-employment taxes for
                                      the 2004 and 2005 tax years.




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                                      (137)     RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR.                                        151


                                        We have considered petitioner’s other arguments and con-
                                      clude they are irrelevant, moot, or meritless. To reflect the
                                      foregoing and the concessions of the parties,
                                                                        Decisions will be entered under Rule 155.

                                                                               f




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