                          T.C. Memo. 2005-45



                        UNITED STATES TAX COURT



        ERIC D. FULTZ AND SANDRA A. FULTZ, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4847-00.               Filed March 10, 2005.


     Jon J. Jensen, for petitioners.

     Blaine Holiday, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:     Petitioners petitioned the Court to

redetermine deficiencies respondent determined in their Federal

income taxes for 1994 and 1995 of $2,311 and $3,705,

respectively.    Some of the adjustments in respondent’s original
                                 - 2 -

determinations are no longer disputed.1     The issue remaining for

decision is whether petitioners are liable for self-employment

tax under section 14012 on value-added payments that Eric Fultz

(Mr. Fultz) received from an agricultural cooperative.     We hold

the value-added payments are subject to the self-employment tax.

                         FINDINGS OF FACT

     Some of the facts have been stipulated.     The stipulation of

facts and the attached exhibits are incorporated herein by this

reference.   Petitioners, husband and wife, resided in Tracy,

Minnesota, at the time their petition was filed.     During all

relevant years, Mr. Fultz was a farmer and ran a farm operation

involving grain and livestock.    Sandra Fultz (Mrs. Fultz) was a

store manager.

1.   Fultz Farms, Inc.

     Fultz Farms, Inc. (Fultz Farms), was incorporated in

December 1990 by Bernard Fultz, Mr. Fultz’s father.     During the

years at issue, petitioners owned approximately 470 acres of farm


     1
      Respondent has conceded an adjustment in “1.A. AG Rent-SE
Income” for 1994 and 1995, along with the corollary and
computational adjustments associated with that adjustment. In
addition, petitioners presented no argument nor provided any
evidence with regard to adjustments “1.B. Dividends” or “1.D.
Patronage Dividends” for either year and therefore have conceded
those adjustments.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. All dollar amounts are rounded.
                                 - 3 -

land which they leased to Fultz Farms.      Fultz Farms was involved

in growing crops, such as corn and soybeans, and hog farming.

The corn and grain grown on the farm also provided feed for

livestock.   During the years in issue, Dennis Fultz, Mr. Fultz’s

brother, was president of Fultz Farms, and Mr. Fultz was vice

president, secretary, and treasurer of Fultz Farms.      Dennis Fultz

and Mr. Fultz were also directors.3      During 1994 and 1995, Mr.

Fultz owned 33 percent of Fultz Farms.

2.   Minnesota Corn Processors

      In approximately 1982, Minnesota Corn Processors (MCP), an

agricultural cooperative, was formed under the laws of the State

of Minnesota, by a group of Minnesota farmers.

      MCP’s goal was to collectively provide a corn processing

capability to its members and to realize profits for the members

based upon the increased values of that processed corn.      Had MCP

not been created, petitioners and other farmers would have been

limited to selling their corn as raw corn, and the processing

profits would have been realized by others.

      MCP’s articles of incorporation authorized it to issue

30,000 shares of common stock at $50 per share and 100,000 shares

of nonvoting preferred stock at $50 per share.      The shares of

such stock could be held only by producers of agricultural

      3
      Bernard Fultz resigned as vice president of Fultz Farms in
January 1992 and as a director of Fultz Farms sometime between
January 1993 and January 1994.
                                - 4 -

products “who reside in the territory served”.    “Producers”

referred to persons “actually engaged in the production of one or

more of the agricultural products handled” by MCP.    Producers of

agricultural products eligible for membership and having acquired

a minimum of 5 shares of common stock of MCP were recognized as

members.

     a.    Units of Equity Participation

     Mr. Fultz purchased shares of stock in MCP in approximately

August 1982 when MCP was first organized.    Subsequently, before

June 1995, Mrs. Fultz also acquired stock in MCP.    Both

petitioners held enough shares of MCP stock in 1995 to qualify as

members of MCP.    As members, they were able to purchase

additional “units of equity participation” (units) in MCP.

Between July 1984 and June 1992, Mr. Fultz purchased a total of

20,000 units.    During the years in issue, Mr. Fultz purchased

10,000 units in June 1994 and 5,000 units in December 1995.     In

addition, Mr. Fultz executed a subscription agreement in January

1995 in which he agreed to pay for an additional 10,000 units

with a 10-percent downpayment immediately and the remainder due

in two later installments.    The record does not indicate whether

this transaction was completed.    Mrs. Fultz purchased 2,000 units

in June 1995 and 2,500 units in December 1995.    Each unit

represented one potential bushel of corn that the member might

agree to supply to MCP.
                                - 5 -

     In order to supply corn to MCP, a producer was required to

hold at least 5,000 units.    Corn producers who wished to supply

corn to MCP were also required annually to execute a uniform

marketing agreement (UMA).    The producer was obligated to deliver

to MCP the number of bushels provided in the UMA.    Although both

petitioners were members of MCP, the record contains only UMAs

executed by Mr. Fultz.

     b.   UMAs Between MCP and Mr. Fultz

     Mr. Fultz executed a UMA dated July 29, 1995, for the year

1995 and also executed a UMA for 1994, but that agreement is not

a part of the record.    Collectively, the units and the UMAs

defined the scope of Mr. Fultz’s obligation to MCP.

     Pursuant to the UMAs between Mr. Fultz and MCP, Mr. Fultz

was obligated to deliver to MCP a certain amount of corn during

each processing year.4   The UMAs outlined the terms with respect

to production, processing, and marketing of the corn.    The UMAs

Mr. Fultz executed in 1994 and 1995 obligated MCP to process the

grain each year in a manner it deemed to be in the best interests

of the cooperative and its members and to market the processed

corn products at the best price that could be obtained on the

open market.   Mr. Fultz was obligated to acquire and deliver the

corn to MCP.   In the UMAs, Mr. Fultz appointed MCP as his agent


     4
      MCP’s processing year started on the first day of October
of each year and ended on the last day of September of the
following year.
                                 - 6 -

in both the selling and marketing of the corn committed to MCP.

In addition, MCP had “sole and complete discretion in all phases

of the marketing activity”.   The 1994 and 1995 UMAs did not

obligate Fultz Farms; only Mr. Fultz and MCP were parties to the

agreements.

     The UMAs specified that MCP was obligated to pay Mr. Fultz

for delivered corn as follows:    (1) An initial payment of 80

percent of the loan value per bushel of corn delivered within 5

days of MCP’s acceptance of the corn; (2) storage and interest

payments for corn delivered after October 1 of each processing

year; (3) an additional payment (“value-added payment”) for the

value added to the corn during its processing by MCP, which was

to be based on a yearend determination of MCP’s “net proceeds

from all of its operations” which would further compensate Mr.

Fultz for his corn and still allow MCP to retain its financial

integrity; and (4) patronage dividends.

     Under the UMAs, Mr. Fultz was required to produce and

deliver corn to MCP for processing three times a year (October

through January; February through May; and June through

September), giving approximately a third of the total required

annual quantity at each delivery time.    Mr. Fultz was free to

satisfy his delivery obligations through several means.    He could

meet these obligations to MCP with corn that was grown on his own
                                - 7 -

farm or acquired on the open market, by hiring an outside grower,

or from pool corn.

     Pool corn was corn maintained by MCP and made available for

members to use in order to meet their production and delivery

obligations under the UMAs.   A member using pool corn completed a

“pool corn certificate” which required that member to check a box

on the certificate requesting that the obligation be fulfilled

through the pool and to charge the member’s account with an

acquisition fee of 5 cents per bushel or the going charge at that

time for this service.   Any check that was sent to Mr. Fultz in

payment for delivered corn would have been offset by whatever

charge he had incurred for the pool corn.   The pool corn

certificates were sent directly to Mr. Fultz, not Fultz Farms.

If Fultz Farms fell short of corn to satisfy Mr. Fultz’s

obligation to MCP, on some occasions corn was purchased by Fultz

Farms from a local elevator in lieu of using pool corn.

3.   Petitioners’ 1994 and 1995 Tax Years

           a.   Leases Between Petitioners and the Corporation

     In 1991, Mr. Fultz executed a lease agreement with Fultz

Farms.   This lease remained effective in 1994 and 1995 and

reflected petitioners as lessors and Fultz Farms as lessee.

     The lease provided that petitioners would receive rent from

Fultz Farms for a house, farm land, and MCP shares.   Because of

the parties’ partial settlement, only the MCP shares are relevant
                                - 8 -

to this opinion.    The lease rate on MCP shares rented from

petitioners was 50 cents per bushel of corn delivered to MCP.

MCP was not a party to the lease arrangement, and Fultz Farms was

neither a shareholder nor a member of MCP.

     In 1994 and 1995, Mr. Fultz personally received value-added

payments from MCP by check.    When Mr. Fultz received the checks

for value-added payments from MCP in his name, he deposited the

checks within a day or two, and he or Mrs. Fultz then wrote out

personal checks to Fultz Farms for the same amounts.

     b.    Petitioners’ Member Activity With MCP

     In 1994, Mr. Fultz received value-added payments from MCP of

$10,590, and in 1995 he received $15,718 in value-added payments.

For both years, processed corn had a higher fair market value

than raw corn.

     The amounts of the value-added payments had no impact on the

amount petitioners were to receive under the leases.    Fultz Farms

had no contractual relationship with MCP with respect to the

value-added payments.    For both 1994 and 1995, Fultz Farms

experienced shortfalls in the required bushels Mr. Fultz was to

produce.    As a result, Mr. Fultz had to purchase 26,000 bushels

of pool corn in 1994 to supplement the 9,600 bushels actually

delivered and 8,403 bushels of pool corn in 1995 to supplement

the 10,797 bushels actually delivered.
                                - 9 -

     c.    Petitioners’ Income Tax Returns and Respondent’s
           Determinations

     Petitioners timely filed their 1994 and 1995 Federal income

tax returns.    With respect to self-employment tax, petitioners

did not complete and attach to either return a Schedule SE,

Computation of Self-Employment Tax.

     Respondent made adjustments to Mr. Fultz’s self-employment

income of $9,618 for 1994 and $14,380 for 1995, which reflect the

amounts he ultimately received from Fultz Farms per the lease

related to the value-added payments, and in each year the

adjustment is less than the actual value-added payments to Mr.

Fultz.    We accept this as a partial concession by respondent, but

our holding is based upon the original payments from MCP to Mr.

Fultz, not petitioners’ relationship with Fultz Farms.

Respondent completed and attached to the notice of deficiency

Schedules SE for Mr. Fultz’s self-employment tax for the years at

issue.    No self-employment tax was determined for Mrs. Fultz for

1994 or 1995.    Respondent also determined that petitioners are

entitled to a deduction equal to one-half of the amount of Mr.

Fultz’s self-employment tax liability.

                               OPINION

     This case presents the question whether value-added payments

Mr. Fultz received from MCP, a Minnesota agricultural

cooperative, are subject to self-employment tax under section

1401(a).    Payments from MCP have previously been the subject of
                              - 10 -

decisions of this Court and the Court of Appeals for the Eighth

Circuit, where an appeal of this case would lie.   In Bot v.

Commissioner, 118 T.C. 138 (2002), affd. 353 F.3d 595 (8th Cir.

2003), this Court held, and the Court of Appeals affirmed, that

value-added payments received by members of MCP were subject to

self-employment tax, and that the self-employment income of a

member of MCP includes income that the member derives from the

business conducted by MCP as an agent of the member.

     It has been stipulated that before the period in dispute Mr.

Fultz purchased shares of stock in MCP and “units of equity

participation”.   Mr. Fultz entered into UMAs with MCP in which he

represented he was a producer or owner of the corn he would

deliver under the MCP program.   Corn was delivered to MCP to meet

his obligation on his accounts to MCP, and he received value-

added payments from MCP.   All these factors were present in Bot.

Nevertheless, petitioners maintain the present case should be

distinguished from Bot because they entered into a lease

agreement with Fultz Farms under which they purportedly assigned

to Fultz Farms all their responsibilities and duties as holders

of the units and all the value-added payments due from MCP.

Petitioners also assert that although Mr. Fultz received the

checks representing the value-added payments from MCP,

petitioners immediately wrote a check to Fultz Farms for the full

amount of each check issued to Mr. Fultz by MCP.   Petitioners
                               - 11 -

maintain that once Fultz Farms was incorporated, they no longer

had the assets and ability needed to grow the corn required by

Mr. Fultz’s equity participation in MCP.     Petitioners represent

that Fultz Farms assumed the obligation to produce the corn for

MCP pursuant to the lease, and the payments they personally

received from Fultz Farms were akin to the rent on the farm real

estate paid to them by Fultz Farms.     Accordingly, petitioners

argue they were not subject to self-employment tax.     See McNamara

v. Commissioner, 236 F.3d 410 (8th Cir. 2000), revg. T.C. Memo.

1999-333.

       This dispute is simply stated as whether the lease

arrangement with Fultz Farms precludes the inclusion of the MCP

value-added payments in Mr. Fultz’s self-employment income.

There are several aspects of the UMAs with MCP and the facts

regarding the MCP payments that present impediments to

petitioners’ position.

       To purchase units in MCP, the purchaser was required to own

stock in MCP.    Mr. Fultz owned the MCP stock; Fultz Farms did

not.    Mr. Fultz entered into the UMAs with MCP which appointed

MCP as his agent, and he agreed to deliver the requisite

quantities of corn to MCP each year.     Fultz Farms was not a party

to any agreement with MCP.    In his agreement with MCP, Mr. Fultz
                               - 12 -

represented himself as the grower or owner of corn.    Mr. Fultz

was personally obligated to MCP and personally benefited from his

agreements with MCP through the receipt of payments from MCP.

     Petitioners’ position presents an argument analogous to the

taxpayers’ argument in Bot v. Commissioner, supra.    The Bots

argued that their intent in purchasing the MCP equity units was

to make an investment; they reasoned that this subjective intent

prevented the application of the self-employment tax to the

proceeds received from MCP.    This Court and the Court of Appeals

for the Eighth Circuit rejected this argument.    The Court of

Appeals explained why the Bots’ argument failed:

     Despite their assertions that they bought the units of
     participation as an investment, the program operated on
     the basis that they were producers or owners of the
     corn delivered under the program and that MCP acted as
     their agent in further processing and marketing the
     corn. The Bots should be held to their
     representations. If they want the benefits of the coop
     program, they must bear the burdens as well. Cf.
     Estate of Bean v. Comm’r., 268 F.3d 553, 557 (8th Cir.
     2001) (“Once chosen, the taxpayers are bound by the
     consequences of the transaction as structured, even if
     hindsight reveals a more favorable tax treatment.”).

Bot v. Commissioner, 353 F.3d at 601-602.    This reasoning applies

to petitioners’ assertion that they assigned their rights under

the MCP agreements to Fultz Farms because petitioners’ purported

assignment did not bind MCP.   Fultz Farms did not own any stock

in MCP, was not a member of MCP, and would not have been able to

contract with MCP for the delivery of the corn.    MCP paid Mr.

Fultz, not Fultz Farms, as the grower or owner of the corn, and
                             - 13 -

MCP acted as Mr. Fultz’s agent in marketing the corn.

Accordingly, we find this case is controlled by Bot v.

Commissioner, 118 T.C. 138 (2002), and thus hold the payments

from MCP must be included in Mr. Fultz’s income from self-

employment.

     In light of the foregoing, and to reflect concessions by the

parties,


                                             Decision will be

                                        entered under Rule 155.
