                        T.C. Memo. 2008-24



                      UNITED STATES TAX COURT



          HAROLD D. AND JOAN E. EDWARDS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24277-05.             Filed February 7, 2008.



     Robert E. Kovacevich, for petitioners.

     Lisa M. Oshiro and Danae M. Rawson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency of $7,729

in petitioners’ Federal income tax for 2003.1   The issue for

decision is whether income Harold D. Edwards (Mr. Edwards)



     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended. Amounts are rounded to
the nearest dollar.
                                - 2 -

received from an insurance agency deemed a sole proprietorship is

subject to self-employment tax under sections 1401 and 1402.

                        FINDINGS OF FACT

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

The stipulation of facts, together with attached exhibits, is

incorporated herein by this reference.     At the time they filed

their petition, petitioners resided in Washington.

     Petitioners were married on April 15, 1972.     They lived in

Washington State at all times during their marriage and have no

separate property agreements.   Harold D. Edwards, L.L.C. (the

Edwards agency), is an insurance agency owned by Mr. Edwards.

Mr. Edwards established the business in 1963, and it has carried

his name throughout its existence.      The Edwards agency sells the

insurance policies of the Farmers Insurance Group (Farmers

Insurance).

     At some time before 2003, Mr. Edwards retired from the day-

to-day operation of the business.    After Mr. Edwards’s

retirement, petitioners traveled extensively, and Mr. Edwards

spent less than 2 hours per day in his office.     Lois Payne (Ms.

Payne), a member of the Edwards agency’s staff and a full-time

employee, assumed most of the managerial duties of the business.

Nevertheless, Mr. Edwards maintained an insurance license, as
                               - 3 -

required by the State of Washington.2   He continued to sign all

of the Edwards agency’s payroll checks, examined the books and

records of the business regularly, and paid bills for business

items such as paper and stamps.   Mr. Edwards also retained the

power to fire Ms. Payne, and he reviewed the “folios”, which

reported the Edwards agency’s commission income from premium

renewals.   At no time was petitioner Joan E. Edwards (Mrs.

Edwards) involved in the business operation of the Edwards

agency, nor did she hold an insurance license.

     In 2003, the Edwards agency maintained three full-time

employees and had gross receipts of $181,700.    Petitioners

received $62,483 in net income from the Edwards agency.    Premium

renewals from clients accounted for 85 percent of the net income

of the Edwards agency,3 and the additional 15 percent came from

clients purchasing additional insurance on new cars, homes, or

other property.   The Edwards agency did not solicit premium

renewals.   Instead, the regional or national Farmers Insurance

office sent Edwards agency clients renewal notices in the mail,

and the clients made their payments directly to the Farmers



     2
        In order to own an insurance agency in Washington, a
person must have an insurance license. Wash. Rev. Code Ann. sec.
48.17.060 (West Supp. 2008).
     3
        During 2003, Farmers Insurance made 12 monthly deposits
of such premium renewals into the NW Farmers Insurance Group
Federal Credit Union account of petitioners, and those deposits
totaled $154,179.
                                - 4 -

Insurance billing office.   Farmers Insurance then credited the

Edwards agency with the commissions from the premium renewals and

reported these credits every month in a “folio”.

     On petitioners’ 2003 Form 1040, U.S. Individual Income Tax

Return, filed jointly in April 2004, gross income and expenses

from the Edwards agency were listed on a Schedule C, Profit or

Loss From Business.   Mrs. Edwards was listed as the proprietor of

the Edwards agency.   Mr. Edwards also asserted that he materially

participated in the operation of the Edwards agency by checking

the “Yes” box in line G of Schedule C, and he listed his

occupation on page 2 of the return as “self-employed.”

     Respondent issued a notice of deficiency on September 19,

2005, determining that the amounts petitioners received from the

Edwards agency in 2003 constituted income from Mr. Edwards’s

self-employment within the meaning of section 1401 and,

therefore, were subject to self-employment tax.

                               OPINION

     Section 1401 imposes a tax on the self-employment income of

individuals.   Respondent determined that the net profit Mr.

Edwards received from the operation of the Edwards agency

constituted self-employment income from both past and present

business operations, and, consequently, petitioners were liable

for self-employment tax.    We need not decide whether the burden

of proof shifts to respondent under section 7491(a) because we
                               - 5 -

decide this case on the basis of the preponderance of evidence on

the record.

     Self-employment income means the net earnings from self-

employment derived by an individual.   Sec. 1402(b).   Net earnings

from self-employment are the gross income derived by an

individual from any trade or business carried on by such

individual, less the deductions allowed which are attributable to

such trade or business.   Sec. 1402(a).   The term “derive”

requires “a nexus between the income received and a trade or

business that is, or was, actually carried on.”    Newberry v.

Commissioner, 76 T.C. 441, 444 (1981).    The trade or business

must be carried on by the individual, either personally or

through agents or employees.   Sec. 1.1402(a)-2(b), Income Tax

Regs.   The self-employment tax provisions are broadly construed

in favor of treating income as earnings from self-employment.

Braddock v. Commissioner, 95 T.C. 639, 644 (1990); Hornaday v.

Commissioner, 81 T.C. 830, 834 (1983); S. Rept. 1669, 81st Cong.,

2d Sess. (1950), 1950-2 C.B. 302, 354.

     Petitioners contend that they do not owe self-employment tax

because Mr. Edwards had retired from the Edwards agency and thus

did not have a sufficient nexus with the agency’s income to

actually be carrying on a trade or business.

     Respondent first contends that because the gross income from

the Edwards agency’s renewal commissions was greater than
                                 - 6 -

petitioners’ net income from all of the agency’s revenues, the

entire amount of petitioners’ 2003 Schedule C net income is

derived from premium renewals.4    Respondent references Lencke v.

Commissioner, T.C. Memo. 1997-284, for the well-settled rule that

self-employment income includes commission payments to a former

insurance agent of previously earned commissions and asks us to

find that the principles of Lencke apply to this case.

     It is well established that renewal commissions received by

a retired insurance agent are subject to self-employment tax as a

form of deferred compensation.     Erickson v. Commissioner, 1 F.3d

1231 (1st Cir. 1993), affg. without published opinion T.C. Memo.

1992-585; Jackson v. Commissioner, 108 T.C. 130, 133-135 (1997);

sec. 1.1402(a)-1(c), Income Tax Regs.    However, income must arise

from some actual (whether present, past, or future) income-

producing activity of the taxpayer before it becomes subject to

self-employment tax.   Newberry v. Commissioner, supra at 446.

Earnings from past income-producing activities must be tied to

the quantity or quality of the taxpayer’s prior labor.    Schelble

v. Commissioner, 130 F.3d 1388 (10th Cir. 1997), affg. T.C. Memo.

1996-269.

     Although Mr. Edwards and Ms. Payne testified that Mr.

Edwards did not sell insurance in 2003 and had been retired from


     4
        Petitioners’ net income from the Edwards agency in 2003
was $62,483, whereas the agency’s gross receipts from renewals
were $154,179.
                               - 7 -

the day-to-day operations of the agency for several years, the

record does not indicate that the renewal commissions were earned

by other Edwards agency employees.     Mr. Edwards worked as a

principal agent for his insurance agency for decades, and the

Court has received no evidence that traces the Edwards agency’s

2003 renewal commissions to the work of other insurance agents.

Accordingly, we find that the Edwards agency’s renewal

commissions constitute self-employment income to Mr. Edwards.

     Respondent also alleges that the current business activities

of the Edwards agency constitute the carrying on of a trade or

business by Mr. Edwards.   We agree with respondent.

     A limited liability company with a single owner is

disregarded as an entity separate from its owner for Federal

income tax purposes unless the entity elects to be classified as

an association.   Sec. 301.7701-3(a) and (b), Proced. & Admin.

Regs.   If a business entity with only one owner is disregarded,

its activities are treated in the same manner as a sole

proprietorship, branch, or division of the owner.     Sec. 301.7701-

2(a), Proced. & Admin. Regs.

     Petitioners treated the Edwards agency as a disregarded

entity that was not separate from its owner, and they clearly

reported its income and expenses on their Schedule C.     Despite

listing herself as the proprietor of the Edwards agency on

petitioners’ return, Mrs. Edwards did not possess an insurance
                               - 8 -

license and could not own the agency under Washington law.

However, Mr. Edwards held an insurance license, and we find him

to be the true owner of the Edwards agency.    As the single owner

of a disregarded entity deemed a sole proprietorship, Mr. Edwards

is taxed on the Edwards agency’s income.   Sec. 301.7701-2(a),

Proced. & Admin. Regs.

     It is immaterial that the day-to-day business operations of

the Edwards agency were carried on by Ms. Payne and other

employees.   For purposes of income being included in an

individual’s net earnings from self-employment, a trade or

business can be “carried on” by an individual either personally

or through agents or employees.    Newberry v. Commissioner, supra

at 444; S. Rept. 1669, supra, 1950-2 C.B. at 306, 353-354; sec.

1.1402(a)-2(b), Income Tax Regs.   Petitioners do not contest that

Ms. Payne and other Edwards agency workers were employees of Mr.

Edwards’s deemed sole proprietorship.   Accordingly, this Court

finds that Edwards agency income constitutes gross income derived

from a trade or business carried on by Mr. Edwards under section

1402.

     In reaching these holdings, the Court has considered all

arguments made and, to the extent not mentioned, concludes that

they are moot, irrelevant, or without merit.
                            - 9 -

To reflect the foregoing,


                                        Decision will be

                                    entered for respondent.
