Methvin v. Commissioner ( 2016 )

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT June 24, 2016
_________________________________
Elisabeth A. Shumaker
Clerk of Court
DAVID H. METHVIN,
Petitioner - Appellant,
v. No. 15-9005
(CIR No. 28477-13)
COMMISSIONER OF INTERNAL (Tax Court)
REVENUE,
Respondent - Appellee.
_________________________________
ORDER AND JUDGMENT *
_________________________________
Before BRISCOE, BACHARACH, and McHUGH, Circuit Judges.
_________________________________
This appeal involves characterization of Mr. David H. Methvin’s
participation in certain oil and gas ventures. If Mr. Methvin’s participation
in those ventures constituted a partnership, he would have to pay a self-
employment tax on the income he received from the ventures. See I.R.C.
§ 1402(a); Treas. Reg. § 1.1402(a)-2(d). The Tax Court determined that
Mr. Methvin’s participation in the ventures qualified as a partnership. As a
*
The parties have not requested oral argument, and we do not believe
it would be helpful. As a result, we are deciding this appeal based on the
briefs. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G).
This order and judgment does not constitute binding precedent except
under the doctrines of law of the case, res judicata, and collateral estoppel.
But our order and judgment may be cited for its persuasive value under
Fed. R. App. P. 32.1(a) and 10th Cir. R. 32.1(A).
consequence, the Tax Court concluded that Mr. Methvin owed the Internal
Revenue Service $690 for self-employment tax based on his 2011 income.
Mr. Methvin appeals, and we affirm.
Mr. Methvin owns working interests of 2-3% in various oil and gas
ventures. For these ventures, Mr. Methvin entered into both a purchase
agreement and an operating agreement with the operator.
For the 2011 tax year, the operator designated Mr. Methvin’s income
as nonemployee compensation and did not send a Schedule K-1 (for partner
income) to Mr. Methvin. Mr. Methvin paid federal income taxes on his
2011 income, but he did not pay a self-employment tax on his income from
the oil and gas ventures. The Tax Court determined that Mr. Methvin’s
arrangement with the operator constituted a partnership under the Internal
Revenue Code. On that basis, the Tax Court concluded that Mr. Methvin
should have paid a self-employment tax based on his income from the oil
and gas ventures.
The existence of a partnership involves a factual finding, which we
review only for clear error. Bratton v. Comm’r, 193 F.2d 416, 418 (10th
Cir. 1951).
In determining whether the district court committed a clear error, we
are guided by the statutory definition of the term “partnership.” Under the
Internal Revenue Code, a partnership
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 “includes a syndicate, group, pool, joint venture, or other
unincorporated organization”
 through which business is carried on
 so long as the business does not constitute a trust, estate, or
corporation.
I.R.C. § 7701(a)(2). This definition extends beyond many states’
definitions of a “partnership.” See Madison Gas & Elec. Co. v. Comm’r,
633 F.2d 512, 515 (7th Cir. 1980); Treas. Reg. § 301.7701-1(a)(1), (2).
Mr. Methvin argues that his involvement with the operator does not
qualify as a partnership because (1) his working interests are not governed
by a separate organization and (2) he is merely a passive investor. The
district court could reasonably reject these arguments in light of the broad
statutory definition of the term “partnership.” Under this definition, the
Tax Court could justifiably characterize the arrangement between Mr.
Methvin and the operator as a partnership.
Under the purchase agreement, Mr. Methvin had a direct operating
interest in the ventures and enjoyed the rights to
 inspect receipts, vouchers, insurance policies, legal opinions,
drilling logs and reports, copies of drill stem tests, core
analyses, electrical surveys, geological reports, and other
records involving wells that had been drilled, and
 audit the books and records.
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Mr. Methvin not only shared these rights with the operator, but also
shared the costs. For example, Mr. Methvin bore responsibility for monthly
costs in proportion to his share of the working interests.
In addition, the operating agreement characterizes the venture as the
“development, operation and management” of the “[j]oint [p]roperty.” R.,
Doc. 9, Exh. 3-J at 11. Under the operating agreement, Mr. Methvin could
 enter the property to inspect the operations,
 obtain any information reasonably requested regarding
development and operation, and
 inspect the operator’s records.
A similar issue arose in Cokes v. Commissioner, 91 T.C. 222 (1988).
There, the working-interest owner argued that she owned only a minority
interest and that her income involved only passive participation as an
investment. 91 T.C. at 228. The Tax Court disagreed, concluding that the
arrangement between the operator and the working-interest owners
established a partnership. Id. at 232. The court reasoned that the
working-interest owners shared costs and proceeds, had a formal written
agreement, and carried on a business together. Id.Cokes is persuasive, as both parties appear to recognize. See Esgar v.
Comm’r, 744 F.3d 648, 652 (10th Cir. 2014) (“Rulings by the Tax Court on
matters of tax law are . . . persuasive authority, especially if consistently
followed.”). Like the working-interest owner in Cokes, Mr. Methvin lacks
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managerial responsibility. But the absence of managerial responsibility
was not controlling in Cokes. Id. at 233.
Mr. Methvin points out that his circumstances differ from many of
the circumstances in Cokes. For example, the working-interest owner in
Cokes enjoyed some decision-making rights that Mr. Methvin does not
have. These differences might have led the Tax Court to arrive at a
different factual finding here, for “each case must rest on its own facts.”
Jones v. Baker, 189 F.2d 842, 844 (10th Cir. 1951). But the Tax Court did
not clearly err by characterizing Mr. Methvin’s arrangement with the
operator as a partnership. 1 In the absence of clear error, we uphold the Tax
Court’s finding that the arrangement constituted a partnership.
1
The existence of a partnership depends on the parties’ intent, which
is discerned from all the facts. Comm’r v. Culbertson, 337 U.S. 733, 741-
42 (1949); Comm’r v. Tower, 327 U.S. 280, 286-87 (1946). The Tax Court
has recognized multiple considerations bearing on this issue, including
[t]he agreement of the parties and their conduct in executing its
terms; the contributions, if any, which each party has made to
the venture; the parties’ control over income and capital and
the right of each to make withdrawals; whether each party was
a principal and coproprietor, sharing a mutual proprietary
interest in the net profits and having an obligation to share
losses, or whether one party was the agent or employee of the
other, receiving for his services contingent compensation in the
form of a percentage of income; whether business was
conducted in the joint names of the parties; whether the parties
filed Federal partnership returns or otherwise represented to
respondent or to persons with whom they dealt that they were
joint venturers; whether separate books of account were
maintained for the venture; and whether the parties exercised
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Affirmed.
Entered for the Court
Robert E. Bacharach
Circuit Judge
mutual control over and assumed mutual responsibilities for the
enterprise.
Luna v. Comm’r, 42 T.C. 1067, 1077-78 (1964). Although the Tax Court
did not expressly apply each of these considerations, either in Cokes or
in this case, the Tax Court’s findings sufficiently encompassed the
required analysis. Mr. Methvin does not argue otherwise.
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