                              T.C. Memo. 2015-151



                        UNITED STATES TAX COURT



   SEISMIC SUPPORT SERVICES, LLC, SCOTT A. WHITTINGTON, TAX
                 MATTERS PARTNER, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 9414-14.                         Filed August 11, 2015.



      Scott A. Whittington, pro se.

      Lisa M. Oshiro, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      COHEN, Judge: In a notice of final partnership administrative adjustment

(FPAA) for 2010 and 2011, respondent determined that the amounts Seismic

Support Services, LLC (Seismic), paid Scott A. Whittington (petitioner) were

guaranteed payments for services under section 707(c) and determined an
                                        -2-

[*2] accuracy-related penalty under section 6662 for each year. 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.

                               FINDINGS OF FACT

      Some of the facts have been stipulated, and the stipulated facts are

incorporated in our findings by this reference. Petitioner resided in Washington

State when he filed the petition.

      Petitioner was a seismic design consultant. He performed services for

Tomarco Contractor Specialties, Inc. (Tomarco), as an employee for years before

2003. In 2003, petitioner formed Seismic so that he could provide services as a

contractor rather than as an employee. Petitioner owned 95% of Seismic, and

Management Partners, LLC, owned 5%.

      Seismic provided consultation services to Tomarco as a subcontractor

before and during 2010 and 2011. During the years in issue, petitioner and his

wife performed services on Seismic’s behalf. Tomarco paid Seismic, and Seismic

paid petitioner compensation for those services. Seismic paid petitioner $142,780

in 2010 and $121,220 in 2011. Seismic labeled the payments “distributions” on

the checks to petitioner.
                                       -3-

[*3] Seismic filed Forms 1065, U.S. Return of Partnership Income, for the years

in issue. Seismic claimed management fee deductions of $142,780 for 2010 and

$121,220 for 2011. Seismic also claimed deductions of $16,692 and $10,743 as

mileage reimbursement for 2010 and 2011, respectively. Seismic did not file

employment tax returns for any periods during the years at issue.

      The FPAA determined that the payments to petitioner were guaranteed

payments under section 707(c). The corresponding management fee deductions

claimed on the returns were disallowed, but the net income of Seismic was not

adjusted. A penalty for negligence was determined for each year because of the

mischaracterization of the payments.

                                    OPINION

      Section 707(c) provides:

             SEC. 707(c) Guaranteed Payments. -- To the extent
      determined without regard to the income of the partnership, payments
      to a partner for services or the use of capital shall be considered as
      made to one who is not a member of the partnership, but only for the
      purposes of section 61(a) (relating to gross income) and, subject to
      section 263, for purposes of section 162(a) (relating to trade or
      business expenses).

      Guaranteed payments are a partnership item that must be determined at the

partnership level in a proceeding brought under section 6226(f), such as this one.

Sec. 6221; secs. 301.6221-1, 301.6231(a)(3)-1(a)(2), Proced. & Admin. Regs.
                                        -4-

[*4] Once the partnership item is determined at the partnership level, each

partner’s affected items can be challenged in a subsequent partner-level

proceeding.

      Section 6662 imposes a penalty for negligence when the person responsible

for a tax return fails to make a reasonable attempt to comply with the provisions of

the Internal Revenue Code or to exercise ordinary and reasonable care in the

preparation of the return. Sec. 6662(a), (b)(1), and (c); sec. 1.6662-3(b)(1),

Income Tax Regs.

      Petitioner acknowledges that the payments received from Seismic during

2010 and 2011 were received for services he performed and were determined

without regard to the income of the partnership. He also acknowledges that he

was responsible for preparation of Seismic’s Federal tax returns and that they were

prepared without the benefit of consultation with a tax professional. He has

offered no evidence that contradicts the determinations in the FPAA, and the

stipulation and his testimony fully support the characterization of the payments as

guaranteed payments (and not management fees) and the appropriateness of the

penalties. Thus the FPAA is sustained on the merits. Because we reached the

same conclusions on the same facts for 2007, 2008, and 2009 in Seismic Support
                                         -5-

[*5] Servs., LLC v. Commissioner, T.C. Memo. 2014-78, no further discussion is

necessary.

      Petitioner’s entire position in this case has been predicated on his erroneous

beliefs and misunderstandings of the procedural aspects leading to the FPAA. In

his pretrial memorandum, he stated that he intended to call as witnesses “each and

every IRS employee identified in correspondence relating to the FPAA”,

identifying by name five such persons. However, he had not subpoenaed any

witnesses before trial, purporting to believe that the Court had to issue the

subpoenas under seal when the case was called. Apparently he had read only the

first sentence of Rule 147(a), which is followed by:

              A subpoena, including a subpoena for the production of
      documentary evidence or electronically stored information, signed
      and sealed but otherwise blank, shall be issued to a party requesting
      it, who shall fill it in before service. Subpoenas may be obtained at
      the Office of the Clerk in Washington, D.C., or from a trial clerk at a
      trial session.

      In any event, the persons whose names appeared in correspondence sent

before the issuance of the FPAA were not proper witnesses. This case is a

proceeding de novo, and our determinations are based on the merits and not on

any administrative proceedings before the FPAA was sent. See Bedrosian v.

Commissioner, 143 T.C. 83, 108 (2014); Greenberg’s Express, Inc. v.
                                      -6-

[*6] Commissioner, 62 T.C. 324, 327-328 (1974). Petitioner’s argument as to the

authority of the Internal Revenue Service to make the determinations in the FPAA

is similarly without merit. See Seismic Support Servs., LLC v. Commissioner, at

*6 n.7.

      For the reasons stated,


                                              Decision will be entered

                                        for respondent.
