T.C. Memo. 2000-84
UNITED STATES TAX COURT
MATTHEW W. NORWOOD & LINDA D. KRAMER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1332-99. Filed March 13, 2000.
Matthew W. Norwood, pro se.
Michael S. Hensley and Yvonne M. Peters, for respondent.
MEMORANDUM OPINION
PAJAK, Special Trial Judge: Respondent determined a
deficiency in petitioners' Federal income tax in the amount of
$7,606 for the taxable year 1995. Unless otherwise indicated,
section references are to the Internal Revenue Code in effect for
the year in issue.
- 2 -
After a concession by petitioners, the only issue which
this Court must decide is whether petitioners are liable for
self-employment tax under section 1401 on a distribution received
from a partnership.
Some of the facts in this case have been stipulated and are
so found. Petitioners resided in Coronado, California, at the
time they filed their petition.
In 1995, petitioners both worked in sales. Matthew Norwood
(petitioner) sold yachts. Linda Kramer was employed by Lasorda
Staff Leasing, LLC and by Designed Administrative Resources Tech.
During 1995, petitioner was also a general partner of Gallant
Medical Supply (Gallant), a partnership. Petitioner's percentage
of profit and loss sharing for Gallant was 50.95 percent.
Additionally, petitioner owned 50.95 percent of the capital of
Gallant.
Petitioner started Gallant a number of years ago. He had
worked at Gallant full time, but when the staff could operate the
business without him, petitioner stopped working there. During
1995, petitioner spent approximately 41 hours on partnership
matters. He conducted periodic walkthroughs of Gallant and was
consulted on major decisions of the firm. In 1995, petitioner
received $71,194 as his distributive share of Gallant's income.
Petitioners correctly included the $71,194 distribution as
taxable income on Schedule E, Supplemental Income and Loss, of
- 3 -
their 1995 Federal tax return. Petitioners did not report or pay
any self-employment tax on this amount.
In pertinent part, respondent determined that petitioner was
subject to self-employment tax of $7,928, which, after the
deduction for one-half of the self-employment tax under section
164(f), resulted in a net adjustment of $3,964.
Section 1401 imposes a tax upon a taxpayer's self-employment
income. Self-employment income includes the "net earnings from
self-employment" derived by an individual during the taxable
year. Sec. 1402(b). Section 1402(a) provides, subject to
exceptions, that "net earnings from self-employment" includes a
partner's distributive share of partnership trade or business
income. One of the exceptions to the general rule provides that
a limited partner's share of partnership income is not subject to
self-employment tax. Sec. 1402(a)(13). Neither party contends
that any of the other exceptions would be relevant in this case.
Petitioners argue that petitioner's interest in Gallant is
passive, and, therefore, any distributions from the partnership
should not be subject to self-employment tax. Respondent
contends that the distribution from Gallant is subject to self-
employment tax regardless of whether petitioner's involvement is
passive or active, because petitioner is a general partner.
We agree with respondent. It is undisputed that
petitioner's interest in Gallant was a general partnership
- 4 -
interest. Accordingly, his distributive share of the
partnership's trade or business income is, subject to the
limitations of section 1402(b), subject to the taxes imposed by
section 1401 on self-employment income. Cokes v. Commissioner,
91 T.C. 222, 229-230 (1988); Anderson v. Commissioner, T.C. Memo.
1992-130. That petitioner spent a minimal amount of time engaged
in the operations of Gallant is irrelevant to this determination.
Cokes v. Commissioner, supra at 233; Anderson v. Commissioner,
supra. The passive activity rules under section 469 have no
application in this case. Petitioner's lack of participation in
or control over the operations of Gallant does not turn his
general partnership interest into a limited partnership interest.
A limited partnership must be created in the form prescribed by
State law. Perry v. Commissioner, T.C. Memo. 1994-215; Johnson
v. Commissioner, T.C. Memo. 1990-461.
Accordingly, we find for respondent on this issue.
Decision will be entered
for respondent.