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
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[*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.
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[*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.
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[*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
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[*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.
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[*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.