                         T.C. Memo. 2000-171



                       UNITED STATES TAX COURT



              VAN ROEKEL FARMS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20290–98R.                        Filed May 24, 2000.


     Paul F. Christoffers, for petitioner.

     Lawrence H. Ackerman, for respondent.



                         MEMORANDUM OPINION


     HAMBLEN, Judge:    This is an action for declaratory judgment

under section 74761 regarding the qualification of petitioner’s

employee stock ownership plan and trust.      Petitioner has



     1
      All section references are to the Internal Revenue Code,
all Rule references are to the Tax Court Rules of Practice and
Procedure, and dollar amounts are rounded to the nearest dollar,
unless otherwise noted.
                                - 2 -

satisfied all the jurisdictional requirements.    See sec. 7476(b);

Rule 210(c).    On September 24, 1998, respondent sent petitioner a

final revocation letter stating that the Van Roekel Farms, Inc.

Employee Stock Ownership Plan (ESOP) does not qualify under

section 401(a) for plan year ending July 31, 1993, and subsequent

years,2 and that, accordingly, its trust is not tax exempt under

section 501(a).    Under Rules 122 and 217, the parties submitted

this case without trial and on the basis of a jointly stipulated

administrative record, which we incorporate by this reference.

Hereinafter, we sometimes refer to the ESOP and trust as,

collectively, the plan.

     The issues are:   (1) Whether petitioner violated section

401(a)(16) for years beginning after July 31, 1993, by

contributing amounts to the plan that exceeded the allowable

limits of section 415(c); and (2) whether the plan is

disqualified for years ending July 31, 1995 and 1996, because it

was not timely amended to comply with section 401(a)(17) and

(31).    Since we agree with respondent’s first contention and

decide the case on that ground, we do not reach the second issue.




     2
      Respondent argues on brief that petitioner’s employee stock
ownership plan (ESOP) is disqualified for plan years beginning
after July 31, 1993. Although fiscal 1993 is the first year for
which respondent issued the revocation letter, respondent does
not challenge, and we therefore treat as conceded, the ESOP’s
qualified status for that year.
                                - 3 -

Background

     Petitioner, an Iowa corporation since 1977 with its

principal place of business in Orange City, Iowa, engages in

farming operations.    It uses the cash method of accounting with a

fiscal year ending July 31 to compute its income.    Effective

August 1, 1990, petitioner adopted the ESOP (a defined

contribution plan) and a trust to hold and invest the ESOP’s

assets.   The plan used a July 31 fiscal year end as its annual

accounting period.    Before fiscal 1996, petitioner never

requested a determination letter from the Internal Revenue

Service regarding the ESOP’s status.3

     Petitioner’s founder and president was Eugene Van Roekel.

He was also the only trustee and participant of the plan.

Petitioner twice purported to amend the ESOP--on December 29,

1994,4 effective for plan years beginning August 1, 1994, and

again on August 26, 1997.

     Under the plan, petitioner’s board of directors had sole

discretion to decide the amount, if any, that petitioner would

contribute each year from its profits, except in cases where

payments became due on an ESOP loan.    Moreover, petitioner was


     3
      The record is unclear as to whether petitioner has since
requested a determination letter from the Internal Revenue
Service.
     4
      Although the written amendment dated Dec. 29, 1994, is
unsigned, we do not address its validity, because the amendments
made therein do not affect the outcome of this case.
                                        - 4 -

   responsible for allocating its contributions among the

   participants’ accounts in proportion to their compensation.5

           For years ending July 31, 1994, 1995, and 1996, the plan

   filed Forms 5500–C/R, Return/Report of Employee Benefit Plan,

   showing contributions of $2,250, $2,700, and $2,550,

   respectively.         Similarly, for each of those years, petitioner

   deducted $2,250, $2,700, and $2,550, respectively, on Forms 1120,

   U.S. Corporation Income Tax Return, as payments to the plan on

   behalf of Mr. Van Roekel.         As shown below, petitioner reported no

   deduction for salaries, wages, or officers’ compensation but

   deducted management fees paid to Mr. Van Roekel as an independent

   contractor:

                                                   Pension,             Other
Tax year       Compensation of   Salaries and   profit sharing,       deductions1
 ending           officers           wages        etc., plans      (management fees)

 1994              –0–               –0–           $2,250               $15,000
                                                                        2
 1995              –0–               –0–            2,700                 18,000
 1996              –0–               –0–            2,550                 15,000
 1
   Petitioner claimed miscellaneous expenses as “Other deductions” on line 26 of Form
1120 and attached a schedule in which it separately stated each expense.
 2
   Petitioner included this amount on line 27 of Form 1120 titled “Total deductions”
and not on line 26.

           For calendar years 1994, 1995, and 1996, Mr. Van Roekel and

   his wife, Darlene, filed joint Federal income tax returns.               He

   worked as petitioner’s farm manager on an independent contractor

   basis, and, as reflected below, reported the management fees that


           5
         The ESOP defined compensation as “compensation paid by the
   Employer to the Participant during the taxable year ending with
   or within the Plan Year which is required to be reported as wages
   on the Participant’s Form W-2”.
                                         - 5 -

   petitioner paid him on a Schedule C, Profit or Loss From

   Business:

                         Wages,                    Business               Type of
                        salaries1                   income                business
    Year           (Line 7, Form 1040)           (Schedule C)          (Schedule C)

    1994                 $12,776                     $15,000           Farm management
    1995                  12,967                      18,000           Farming
    1996                  13,356                      15,000           Farm management
    1
     The wages are attributable solely to Darlene, a secretary at the Orange City
Municipal Hospital in Iowa.

           Respondent disqualified the plan for years beginning after

   July 31, 1993, because allocations to Mr. Van Roekel, an

   independent contractor, in fiscal 1994, 1995, and 1996 exceeded

   the limits of section 415(c).

   Discussion

           Section 401(a) lists the qualification requirements of a

   pension, profit-sharing, and stock bonus plan.               It provides in

   part:

                     SEC. 401(a). Requirements for
                Qualification.--A trust created or organized
                in the United States and forming part of a
                stock bonus, pension, or profit–sharing plan
                of an employer for the exclusive benefit of
                his employees or their beneficiaries shall
                constitute a qualified trust under this
                section--

                   *      *        *     *       *      *        *

                          (16) A trust shall not constitute a
                       qualified trust under this section if
                       the plan of which such trust is a part
                       provides for benefits or contributions
                       which exceed the limitations of section
                       415.
                               - 6 -

     Section 415(c) limits the annual addition to a participant’s

account to the lesser of a specific dollar amount or 25 percent

of the participant’s compensation.     “Annual addition” is defined

as the sum for any year of employer contributions, employee

contributions, and forfeitures, sec. 415(c)(2), and

“participant’s compensation” is simply “the compensation of the

participant from the employer for the year,” sec. 415(c)(3)(A).

     The parties disagree as to what is “participant’s

compensation” under section 415.   Respondent contends that

petitioner’s allocations to Mr. Van Roekel’s account for fiscal

1994, 1995, and 1996 exceeded the section 415(c) limits because

Mr. Van Roekel received no compensation for those years.

Petitioner maintains that it did not violate section 415 because

“participant’s compensation” includes the management fees that it

paid Mr. Van Roekel as an independent contractor.

     During fiscal 1994 through 1996, petitioner paid no

salaries, wages, or officers’ compensation.    Consequently, Mr.

Van Roekel received no compensation for his services as either an

officer or an employee.   Instead, petitioner and Mr. Van Roekel

arranged that the latter would be paid as an independent

contractor for his work in managing the farm.6    Consistent with

that arrangement, petitioner deducted the management fees as



     6
      Petitioner does not challenge Mr. Van Roekel’s status as an
independent contractor.
                                - 7 -

“other deductions” on Forms 1120, while Mr. Van Roekel reported

the fees as business income on Schedules C.7     Accordingly, the

amounts petitioner paid to Mr. Van Roekel are irrelevant in

calculating the allowable limits of section 415, because Mr. Van

Roekel received no employee compensation--a situation fatal to

the trust’s qualified status.

     Petitioner argues that Mr. Van Roekel’s compensation was his

earned income as a self–employed person.      A sole proprietor,

however, is considered to be his own employer.      See sec.

401(c)(4); sec. 1.401–10(e), Income Tax Regs.      Therefore, during

fiscal 1994, 1995, and 1996, Mr. Van Roekel had one employer;

i.e., himself.   Furthermore, only the income an employee earns

from the employer sponsoring the plan may be taken into account

for purposes of that employer’s plan.      See sec. 415(c)(3)(A);

sec. 1.401–10(b), Income Tax Regs.      If Mr. Van Roekel had

sponsored his own retirement plan as a self–employed individual,

then “participant’s compensation” would have been his earned

income.   Sec. 415(c)(3)(B).   Here, however, petitioner is Mr. Van

Roekel’s hirer, not his employer.    Accordingly, Mr. Van Roekel’s

earnings as an independent contractor are not “participant’s

compensation” with respect to petitioner’s plan.



     7
      We note that, in doing so, Mr. Van Roekel enjoyed the
ability to deduct business expenses under sec. 62(a)(1), rather
than under sec. 67(a), which imposes a 2-percent adjusted gross
income limitation on Schedule A deductions.
                               - 8 -

     Indeed, the Court has addressed this issue before.     See

Roblene, Inc. v. Commissioner, T.C. Memo. 1999–161.      Most

recently, the Court of Appeals for the Eighth Circuit, to which

this case is appealable, see Golsen v. Commissioner, 54 T.C. 742,

756–757 (1970), affd. 445 F.2d 985 (10th Cir. 1971), upheld a

decision of this Court excluding from “participant’s

compensation” the earnings of an independent contractor working

for the taxpayer, Howard E. Clendenen, Inc. v. Commissioner, 207

F.3d 1071 (8th Cir. 2000), affg. T.C. Memo. 1998-318.     We follow

that holding and conclude that the management fees paid to Mr.

Van Roekel as an independent contractor are not included in

“participant’s compensation”, and that, consequently, the annual

additions allocated to Mr. Van Roekel’s account for fiscal years

1994, 1995, and 1996 exceeded the section 415(c)(1) limits.

Petitioner failed to show that it took remedial action to correct

the excess allocations to Mr. Van Roekel’s account.      See Martin

Fireproofing Profit Sharing Plan & Trust v. Commissioner, 92 T.C.

1173 (1989).   Accordingly, we hold that the plan is disqualified

for fiscal years beginning after July 31, 1993.     Therefore, the

trust is not tax exempt under section 501(a).

                                            Decision will be entered

                                       for respondent.
