                          T.C. Memo. 2005-46



                        UNITED STATES TAX COURT



       DENNIS O. FULTZ AND LINDA G. FULTZ, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4848-00.               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 1993, 1994, and 1995 of $5,883, $9,299, and

$9,833, respectively.    Some of the adjustments in respondent’s
                                - 2 -

original 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 they 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, Dennis Fultz (Mr. Fultz) was a farmer and ran a

farm operation involving grain and livestock.   Linda Fultz (Mrs.

Fultz) was also engaged in the farm operations in addition to

running their household.

1.   Fultz Farms, Inc.

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

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


     1
      Respondent has conceded an adjustment in “1.A. AG Rent-SE
Income” for 1993, 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.F.
Patronage Dividends” for any 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 -

years at issue, petitioners owned approximately 470 acres of farm

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, Mr. Fultz was president of

Fultz Farms, and Eric Fultz, Mr. Fultz’s brother, was vice

president, secretary, and treasurer of Fultz Farms.3      Mr. Fultz

and Eric Fultz were also directors.      During 1993, 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

      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 -

such stock could be held only by producers of agricultural

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. and Mrs. Fultz collectively purchased 30,000 shares of

stock in MCP in approximately August 1982 when MCP was first

organized.     Both petitioners held enough shares of MCP stock to

qualify as members of MCP.     As members, they were able to

purchase additional “units of equity participation” (units) in

MCP.    Petitioners collectively purchased an additional 5,000

units in December 1992.     From October 1983 to December 1995, Mr.

Fultz individually purchased a total of 40,000 units.     Mrs. Fultz

individually purchased 65,000 units in October 1983.     Each unit

represented one potential bushel of corn that the member might

agree to supply to MCP.

       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
                                 - 5 -

to MCP the number of bushels provided in the UMA.       Both Mr. Fultz

and Mrs. Fultz executed UMAs for 1993, 1994, and 1995.

     b.     UMAs Between MCP and Petitioners

     Mr. Fultz executed UMAs dated October 18, 1993, and October

1, 1996.     Mrs. Fultz executed a UMA dated October 18, 1993.

Petitioners jointly executed UMAs dated April 14, 1982, and

October 1, 1991.     Collectively, their units and the UMAs defined

the scope of petitioners’ obligation to MCP.

     Pursuant to the UMAs between petitioners and MCP,

petitioners were 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.     Specifically, the UMAs executed by petitioners 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.     Petitioners were obligated to

acquire and deliver the corn to MCP.       In the UMAs, petitioners

appointed MCP as their agent in both the selling and marketing of

the corn committed to MCP.     In addition, MCP had “sole and




     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 -

complete discretion in all phases of the marketing activity”.

The UMAs did not obligate Fultz Farms; only petitioners and MCP

were parties to the agreements.

     The UMAs specified that MCP was obligated to pay petitioners

as follows:   (1) An initial payment of 80 percent of the 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 petitioners for their corn and

still allow MCP to retain its financial integrity; and (4)

patronage dividends.

     Under the UMAs, petitioners were 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.   Petitioners were free to

satisfy their delivery obligations through several means.    They

could meet these obligations to MCP with corn that was grown on

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

grower, or from pool corn.
                                - 7 -

     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 petitioners

would have been offset by whatever charge they had incurred for

the pool corn.   The pool corn certificates were sent directly to

petitioners, not Fultz Farms.   If Fultz Farms fell short of corn

to satisfy petitioners’ obligation to MCP, on some occasions corn

was purchased by Fultz Farms from a local elevator in lieu of

using pool corn.

     For 1993, there were no production shortfalls experienced by

Fultz Farms in the required bushels to be produced by

petitioners, and no pool corn was purchased by petitioners.    For

both 1994 and 1995, there were shortfalls in the required bushels

petitioners were to produce, and as a result petitioners had to

purchase 89,300 bushels of pool corn in 1994 to supplement the

64,191 bushels actually delivered and 28,800 bushels of pool corn

to supplement the 15,300 bushels actually delivered in 1995.

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

than raw corn.
                                - 8 -

3.   Petitioners’ 1993, 1994 and 1995 Tax Years

     a.    Leases Between Petitioners and Fultz Farms

     For 1993, 1994, and 1995, petitioners both executed separate

lease agreements with Fultz Farms.      These leases reflected Mr.

Fultz and Mrs. Fultz in their individual capacities as lessors

and Fultz Farms as lessee.

     The leases collectively 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 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.

Fultz Farms had no contractual relationship with MCP with respect

to the value-added payments.

     In 1993, 1994, and 1995, petitioners received value-added

payments from MCP by check.    MCP issued the checks to petitioners

either jointly or individually.     When petitioners received the

checks for value-added payments from MCP in one or both of their

names, they deposited the checks within a day or two, and Mr.

Fultz then wrote out personal checks to Fultz Farms for the same

amounts.
                               - 9 -

     b.   Petitioners’ Member Activity With MCP

     In 1993, petitioners jointly received value-added payments

from MCP of $73,813.10; for 1994 petitioners received total

value-added payments of $50,302.50; for 1995 Mr. Fultz received

value-added payments of $23,652.   The record for Mrs. Fultz for

1995 is incomplete, but the amount she received is not disputed

by the parties.   The amounts of the value-added payments had no

impact on the amounts petitioners were to receive under the

leases.

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

     Petitioners timely filed their 1993, 1994, and 1995 Federal

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

petitioners completed and attached to their 1993, 1994, and 1995

Federal income tax returns Section B-Long Schedules SE,

Computation of Self-Employment Tax.    Petitioners reported self-

employment tax of $423, $220, and zero for 1993, 1994, and 1995,

respectively.

     In the notice of deficiency, respondent determined that

petitioners’ self-employment income from MCP was $49,500,

$53,225, and $72,325 for 1993, 1994, and 1995, respectively.

These amounts do not match the actual value-added payments to

petitioners because respondent made adjustments based on the

amount and timing of the net payments from Fultz Farms to

petitioners per the lease related to the value-added payments
                               - 10 -

from MCP.    The Fultz Farms payments were made after the issuance

of the MCP value-added checks to petitioners.    Netted across the

years, respondent’s adjustments appear to be lower than the

amounts petitioners received from MCP.    Petitioners do not

contest respondent’s adjustment calculations.    We accept these

adjustments as a partial concession by respondent.    However, our

holding is based upon the original payments from MCP to

petitioners, not petitioners’ relationship with Fultz Farms.

     Respondent also made an adjustment increasing petitioners’

income tax deduction equal to one-half of the amount of

petitioners’ self-employment tax for each of 1993, 1994, and

1995.

                               OPINION

     This case presents the question whether value-added payments

petitioners 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

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
                                - 11 -

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

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

participation”.    Petitioners entered into UMAs with MCP in which

they represented they were producers or owners of the corn they

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

to meet petitioners’ obligations to MCP, and they 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 they received the checks

representing the value-added payments from MCP, they immediately

wrote a check to Fultz Farms for the full amount of each check

issued to them by MCP.     Petitioners maintain that once Fultz

Farms was incorporated, they no longer had the assets and ability

needed to grow the corn required by their 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
                                - 12 -

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 petitioners’ 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.     Petitioners owned the MCP stock; Fultz Farms did

not.    Petitioners entered into UMAs with MCP that appointed MCP

as their agent, and they agreed to deliver the requisite

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

to any agreement with MCP.     In their agreements with MCP,

petitioners represented themselves as the growers or owners of

corn.    Petitioners were personally obligated to MCP and

personally benefited from their 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
                               - 13 -

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

petitioners, not Fultz Farms, as the growers or owners of the

corn, and MCP acted as petitioners’ 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 value-added

payments from MCP must be included in petitioners’ income from

self-employment.
                            - 14 -

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

parties,


                                            Decision will be

                                       entered under Rule 155.
