Oliver K. Robinson and Deborah L. Robinson v. Commissioner

117 T.C. No. 25UNITED STATES TAX COURT
OLIVER K. ROBINSON AND DEBORAH L. ROBINSON, ET AL.,1
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 4428-98, 4429-98, Filed December 19, 2001.
4435-98.
R determined that certain expenditures
made by P’s wholly owned subch. C corporation
(C) constituted constructive dividends to P.
At the time that R mailed a notice of
deficiency to P, the period for assessment of
1992 fiscal year tax with respect to C had
expired, whereas the period for assessment of
1992 tax for P had been extended and had not
expired. Because the adjustment to P derives
from C’s transactions, P contends that C’s
period for assessment should govern R’s
ability to make a determination and/or assess
tax with respect to P or C. Sec. 6501(a),
1
The following cases have been consolidated for purposes of
trial, briefing, and opinion: Pak West Airlines, Inc., docket
No. 4429-98; and Career Aviation Academy, Inc., docket No. 4435-
98.
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I.R.C., provides the general rule that R has
3 years after the “return” was filed to
assess. R contends that the “return”
referenced in sec. 6501(a), I.R.C., is the
return of the taxpayer for whom the
adjustment is being made. Conversely, P
contends that the “return” is that of the
entity from which the adjustment derives.
Held: In the factual context of this
case, the return referenced in sec. 6501(a),
I.R.C., is the return of the taxpayer for
whom the adjustment is determined and not the
return of the entity from or concerning whom
the taxpayer has realized an item of income.
Roger M. Schrimp, James F. Lewis, and Steven G. Pallios, for
petitioners.
Michael F. Steiner, Julie A. Howell, and Dale A. Zusi, for
respondent.
GERBER, Judge: In separate notices of deficiency,
respondent determined deficiencies in petitioners’ Federal income
tax and accuracy-related penalties under section 66622 for the
1992, 1993, and 1994 taxable years as follows:
2
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the taxable years under
consideration, and Rule references are to the Tax Court Rules of
Practice and Procedure.
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Penalty
Docket No. Year Deficiency Sec. 6662(a)
4428-98 1992 $31,319 $6,264
1993 84,739 16,948
4429-98 1994 79,031 15,806
4435-98 1993 186,991 37,398
1994 110,602 22,120
After concessions,3 the issues remaining for our
consideration are: (1) Whether respondent was barred from
determining constructive dividend income for the Robinsons from
their wholly owned corporation because the period for assessment
of a deficiency in the corporation’s income tax had expired; (2)
whether the Robinsons are liable for self-employment taxes of
$5,928 for 1992 and $4,383 for 1993; and (3) whether petitioners
are liable for section 6662 penalties.
FINDINGS OF FACT
At the time their petitions were filed, Oliver and Deborah
Robinson were married and resided in Oakdale, California. The
principal place of business of the corporate petitioners, Career
Aviation Academy, Inc. (Career), and Pak West Airlines, Inc. (Pak
West), was Oakdale, California, at the time their petitions were
filed. Career was wholly owned by Mr. Robinson, and Pak West was
wholly owned by Mrs. Robinson. Both corporations were entities
subject to tax (C corporations). Career reported income on the
3
The parties’ stipulations of facts and settled issues are
incorporated by this reference.
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basis of a fiscal year ending July 31, and Pak West used a fiscal
year ending September 30.
During the years at issue, Career’s business was divided
into two major segments: (1) Providing air freight, air charter
and aircraft leasing services; and (2) purchasing and selling
used aircraft and parts. Pak West came into existence in late
1992 as an air carrier providing air cargo services.
For its fiscal year ending July 31, 1992, Career timely
filed its Form 1120, U.S. Corporation Income Tax Return, on
October 15, 1992. The Robinsons also filed a timely Form 1040,
U.S. Individual Income Tax Return, for their 1992 calendar year
during March 1993.
Sometime during 1995, the Robinsons’ 1992 and 1993 returns
were selected for audit. Subsequently, the audit was expanded to
include Career and Pak West. During the audit the Robinsons
executed Forms 872, Consent to Extend the Time to Assess Tax,
consenting to the extension of the assessment period for their
1992 individual return until December 31, 1997. No consents to
extend were executed for Career with respect to its fiscal year
ended July 31, 1992, and the period for assessment for that year
expired on October 15, 1995.
Respondent did not issue a notice of deficiency with respect
to Career’s 1992 fiscal year and, accordingly, Career’s
questionable items of expense were not disallowed. On December
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9, 1997, respondent issued a notice of deficiency to the
Robinsons for their 1992 and 1993 individual income tax years.
In that notice, respondent determined that the Robinsons had
constructive dividend income of $115,888 and $216,685 that was
attributable to Career’s fiscal years ended July 31, 1992 and
1993. The constructive dividends were imputed to Mr. Robinson,
as 100-percent owner of Career, and derived from various
nonbusiness expenses of the Robinsons that were paid by the
corporation.4 Payment of these personal items of the Robinsons
was not reported as income by them or as loans to shareholders on
Career’s books.
Respondent also determined that the Robinsons were liable
for self-employment tax in the amounts of $5,928 and $4,383 for
1992 and 1993, respectively. Those adjustments were based on
respondent’s determination that Mr. Robinson received corporate
compensation during 1992 and 1993 ($31,015 in each year) which
had not been reported as self-employment income. The Robinsons
did report the $31,015 on each of their 1992 and 1993 returns,
but reported the amount as income from “forgiveness of debt”.
Career’s books and records do not reflect any specific
4
With the exception of the $39,824 constructive dividend
remaining in controversy (which involves payments of the
Robinsons’ expenses during the first half of Career’s fiscal year
ended July 31, 1992) the parties have reached agreement regarding
the remainder of the Robinsons’ constructive dividend issues for
1992 and 1993.
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information regarding any debt that might have generated
forgiveness of debt income as reported by the Robinsons.5
Mr. Robinson, an officer and the sole shareholder of Career,
and Mrs. Robinson performed services for Career, but they did not
report salary or wage income on their 1992 or 1993 return. Mr.
Robinson provided substantial services to the corporation in his
capacity as an officer. Because of his expertise as a certified
aircraft mechanic and pilot, he was involved in overseeing the
day-to-day operation of the aircraft brokerage segment of
Career’s business. He was personally involved in the inspection,
negotiation, and purchase of used aircraft and parts, and he
traveled extensively for this part of the business. Mr. Robinson
took part in the actual inspection of purchased aircraft and
parts. He worked a minimum of 60-70 hours a week for the
company.
Mrs. Robinson was involved in the day-to-day administrative
details of Career. Along with two others, Mrs. Robinson prepared
corporate checks and coded them for posting to the general
ledger. She was also responsible for marketing. Most
importantly, Mrs. Robinson was the primary dispatcher for the
freight and passenger charter activities, including the
coordination and readying of the planes and crew for the freight
and charter businesses. Although she was also the property
5
Petitioners, on brief, do not attempt to characterize the
$31,015 amounts reported for 1992 and 1993 as income from
forgiveness of debt. They agree that those amounts are income,
but disagree that it is income subject to self-employment tax.
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manager for the Robinsons’ relatively extensive real estate
activity, she nonetheless devoted significant time and effort to
her Career responsibilities.
The Robinsons, in their 1992 and 1993 returns, reported
income from property management, cancellation of indebtedness,
and, in 1992, $10,101 of net earnings from self employment. The
self-employment income was attributable to Mr. Robinson’s
management consulting income in the gross amount of $10,938.
Respondent also determined that the Robinsons were liable
for section 6662(a) accuracy-related penalties for their 1992 and
1993 tax years. In particular, the penalties were determined for
the substantial understatement of tax under section 6662(b)(2)
and (d).
Respondent also issued notices of deficiency to Career for
its fiscal years ended July 31, 1993 and 1994, and Pak West for
its fiscal year ended September 30, 1994. With respect to
Career, respondent determined adjustments regarding items of
business income, expenses, and net operating losses, and that the
corporation was liable for accuracy-related penalties under
section 6662(b) and (d). Similarly, as to Pak West, respondent
disallowed various business expenses and also determined that the
corporation was liable for the accuracy-related penalty under
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section 6662(b) and (d).6
OPINION
I. Whether the Period for Assessment Has Expired
A. Introduction
Respondent determined that the Robinsons had additional
income attributable to constructive dividends originating in
transactions of a separate taxable corporate entity (Career).7
Petitioners argue that Career’s period for assessment should
govern whether respondent may make a timely constructive dividend
adjustment. Petitioners contend that respondent is therefore
barred from determining that the Robinsons had a $39,824
constructive dividend for their 1992 tax year because Career’s
period for assessment had expired for its corresponding corporate
fiscal tax year. Respondent contends that the period for
assessment is controlled by the period for assessment determined
with regard to the return of the taxpayer under examination and
not with regard to the return of the entity from which the
adjustment may originate.
Generally, the Commissioner’s authority to determine income
6
Except for the accuracy-related penalties, the adjustments
for these corporate entities have been resolved by agreement of
the parties.
7
Respondent determined that certain of Career’s claimed
expenses were expended for the Robinsons’ nondeductible personal
expenses and constituted constructive dividends to the Robinsons.
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tax deficiencies for assessment is statutorily limited to a
period ending 3 years after the filing of a taxpayer’s return.
See sec. 6501(a).8 Under section 6501(c)(4), the 3-year period
can be extended by written agreement between the taxpayer and the
Government. The statute of limitations is an affirmative
defense, and the party interposing it must specifically plead it
and carry the burden of showing its applicability. Rule 142;
Adler v. Commissioner, 85 T.C. 535, 540 (1985). Generally,
statutes limiting the assessment and collection of tax are
strictly construed in the Government’s favor. Badaracco v.
Commissioner, 464 U.S. 386, 391 (1984); Tosello v. United States,
210 F.3d 1125 (9th Cir. 2000).
The dispute between the parties has as its focus the term
“return” as it is used in the section 6501(a) phrase “the amount
of * * * tax imposed by this title shall be assessed within 3
years after the return was filed”. In the setting of this case,
the question is whether the “return” referred to is that of the
shareholder or the C corporation.
This Court has consistently held that the relevant “return”
for determining whether the period for assessment expired under
section 6501(a) is that of the taxpayer with respect to whom the
Commissioner seeks to determine a deficiency. See Lardas v.
Commissioner, 99 T.C. 490, 492 (1992) (and cases cited therein).
8
Some of the exceptions to this general rule may be found
in sec. 6501(c) and (e).
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We have reached that conclusion irrespective of whether the
adjustment concerned the transactions of another entity and
irrespective of whether that entity was taxable.
Around 1989-90, a conflict arose amongst Federal Courts of
Appeals over whether a passthrough corporate entity’s or a
shareholder’s period for assessment controlled the Commissioner’s
ability to determine a deficiency for an item flowing from the
corporation to the shareholder. In Bufferd v. Commissioner, 506
U.S. 523 (1993), the Supreme Court addressed that conflict in the
context of a subchapter S corporation and its shareholder. In
Bufferd, it was held that adjustments to a shareholder’s income
are governed by the shareholder’s period for assessment.
B. Caselaw Development
Petitioners and respondent each focus on the Supreme Court’s
holding in Bufferd v. Commissioner, supra, to support their
positions. Respondent contends that Bufferd, even though it
involves a shareholder and an S corporation, stands for the
general principle that it is the taxpayer’s return that controls
the assessment period and not the return of the entity from which
the adjustment may be derived. Conversely, petitioners contend
that Bufferd is distinguishable and applies solely to S
corporations and, accordingly, does not control situations where
the adjustment involves a shareholder and a C corporation.
The Supreme Court in resolving the circuit conflict held
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that
The Commissioner can only determine whether the
taxpayer understated his tax obligation and should be
assessed a deficiency after examining * * * [his]
return. Plainly, then, “the” return referred to in
§6501(a) is the return of the taxpayer against whom a
deficiency is assessed. * * * [Id. at 527.]
To better understand the Supreme Court’s holding, we briefly
review pre-Bufferd case development.
Before the conflict amongst the Court of Appeals holdings on
this issue, courts generally followed the principle that a
corporation and its shareholders were separate taxpayers. See
Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).
That principle held true even where the adjustments to one
taxpayer’s income derived from the other taxpayer.
This Court, in the context of a transaction concerning a
beneficiary and a complex trust, held that the return of the
beneficiary, whose income was being adjusted, was the starting
point for deciding when the assessment period expired. Fendell
v. Commissioner, 92 T.C. 708 (1989), revd. 906 F.2d 362 (8th Cir.
1990). Fendell involved a trust with two partnership investments
that resulted in losses. The beneficiary reported a loss from
the trust. The beneficiary’s tax years were extended by
agreement. Extensions were obtained from the trust for some of
its years, but not for the loss year. After the expiration of
the assessment period for the trust’s loss year, the Commissioner
mailed a notice of deficiency to the beneficiary disallowing his
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claimed losses from the trust. The beneficiary contended that
the trust’s assessment period had expired and the Commissioner
was barred from making the adjustments to the beneficiary’s
claimed loss.
On those facts, this Court held that the expiration of the
trust’s assessment periods did not bar the deficiency
determinations for the beneficiary. That holding was based on
our reasoning that the entity which was the source for the
adjustment was a separate taxable entity (complex trust). The
Court of Appeals for the Eighth Circuit reversed that holding
using the rationale that the Commissioner can adjust the tax
liability only at the source of income; i.e., the trust. Fendell
v. Commissioner, 906 F.2d at 364.
Some Courts of Appeals distinguished Fendell, by limiting
its application to situations where: (1) The source entity is
recognized as a separate taxable entity, and (2) the Commissioner
is indirectly attempting to adjust the entity’s tax through the
equity or beneficial owner after the statute prohibits a direct
adjustment. See, e.g., Siben v. Commissioner, 930 F.2d 1034,
1038 (2d Cir. 1991), affg. T.C. Memo. 1990-435, where Fendell was
held to be inapplicable because a partnership is not an entity
taxable separately from the partners.
A similar holding by this Court concerning a passthrough
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entity was reversed by the Court of Appeals for the Ninth
Circuit. Kelley v. Commissioner, 877 F.2d 756 (9th Cir. 1989),
revg. and remanding T.C. Memo. 1986-405. In that case, the court
held that the Commissioner could not adjust a shareholder’s
return on the basis of an adjustment to an S corporation’s return
when the statute had run on the corporation’s tax year.9 The
rationale underlying that appellate opinion was that the section
6501(a) 3-year period for assessment was to be applied at the
“source entity” level (S corporation).
This Court and some Courts of Appeals agreed with the
Commissioner’s position that the relevant return for determining
whether the period for assessment had expired under section
6501(a) is that of a taxpayer against whom the Commissioner has
determined a deficiency. Fehlhaber v. Commissioner, 94 T.C. 863,
868 (1990) (S corporation), affd. 954 F.2d 653 (11th Cir. 1992);
Bufferd v. Commissioner, T.C. Memo. 1991-170 (S. corporation),
affd. 952 F.2d 675 (2d Cir. 1992), affd. 506 U.S. 523 (1993);
Siben v. Commissioner, T.C. Memo. 1990-435 (partnership), affd.
930 F.2d 1034 (2d Cir. 1991); Green v. Commissioner, 963 F.2d 783(5th Cir. 1992) (S corporation), affg. Brody v. Commissioner,
9
Kelly v. Commissioner, 877 F.2d 756 (9th Cir. 1989), revg.
and remanding T.C. Memo. 1986-405, was one in a line of cases in
which taxpayers claimed losses with respect to their passthrough
entity. These taxpayers had also extended the assessment period
as to their individual returns, but no extensions had been
obtained for the passthrough entities, whose assessment period(s)
would have expired.
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T.C. Memo. 1991-78; Lardas v. Commissioner, 99 T.C. at 492(grantor trust).
The rationale generally underlying those holdings was that
the assessment period of the beneficiary’s/shareholder’s/
partner’s return controlled, because: (1) The source entity was
of a passthrough nature; (2) the source entity was not subject to
income tax at the entity level; and (3) the return filed by the
source entity did not contain enough information to determine the
shareholder/taxpayer’s total individual tax liability.
In Lardas v. Commissioner, 99 T.C. 490 (1992), however, this
Court indicated disagreement with and an intention not to follow
the Court of Appeals for the Eighth Circuit’s holding in Fendell
v. Commissioner, 906 F.2d 362 (8th Cir. 1990). In Lardas, we
noted that we have consistently subscribed to the rationale that
the return of the taxpayer against whom the Commissioner has
determined a deficiency is the relevant return for purposes of
section 6501(a) without regard to the nature of the source entity
involved. Id. at 493.
C. Bufferd v. Commissioner
The Supreme Court specifically resolved the question of
whether the passthrough entity’s period for assessment controlled
the Commissioner’s ability to make determinations for individual
taxpayer/shareholders. Bufferd v. Commissioner, 506 U.S. 523- 15 -
(1993).10 As previously indicated, the Supreme Court also
interpreted the term “return” in section 6501(a) to be the return
of the taxpayer against whom the deficiency is determined or to
be assessed. Id. at 527.
Although the Bufferd opinion was not in the context of a
shareholder and a C corporation, the following comments appeared
in a footnote to that opinion:
Petitioner additionally asserts that the returns of
shareholders of a Subchapter C corporation cannot be
adjusted after the limitations period has run for
assessing the corporation’s return, and that therefore
S corporation shareholders are entitled to identical
treatment. * * * However, petitioner has not provided a
single authority in support of the premise of this
assertion. At oral argument, the Commissioner
maintained that the opposite is the case, * * * relying
mainly on Commissioner v. Munter , 331 U.S. 210, 67 S.
Ct. 1175, 91 L.Ed. 1441 (1947), which, without
addressing the limitations issue, allowed an adjustment
of shareholders’ 1940 taxes based upon the
Commissioner’s finding that, at the time of its
creation by merger in 1928, the corporation had
acquired the accumulated earnings and profits of its
predecessor corporations. A recent Tax Court decision
also provides indirect support for the Commissioner’s
view: “We have held that the relevant return for
determining whether, at the time a deficiency notice
was issued, the period for assessment had expired under
section 6501(a) ‘is that of petitioner against whom
respondent has determined a deficiency.’ [Citing
Fehlhaber, 94 T.C., at 868.] We have maintained that
position consistently, without regard to the nature of
the source entity. See [cases involving partnerships,
trusts, and S corporations].” Lardas v. Commissioner,
99 T.C. 490, 493 (1992). In any event, it is doubtful
10
The holding in Bufferd v. Commissioner, 506 U.S. 523(1993), also resolved any question about whether the use of the
term “return” in sec. 6037(a) and/or sec. 6012 results in the
application of the assessment period at the entity level with
respect to S corporations.
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that petitioner’s conclusion follows from his premise,
for the taxation of C corporations and their
stockholders is so markedly different from that of S
corporations. [Id. at 532 n.11.]
The rationale expressed in the Bufferd footnote was relied
upon in a memorandum opinion of this Court holding that the
expiration of a C corporation’s assessment period did not bar the
Commissioner from determining a deficiency based on a deemed
capital gain distribution to the shareholder. Manning v.
Commissioner, T.C. Memo. 1993-127. In addition, the Court in
Manning noted that Bufferd relied on Commissioner v. Munter, 331
U.S. 210 (1947), and Lardas v. Commissioner, 99 T.C. 490 (1992).
The Manning opinion did not provide any rationale in addition to
that contained in the cited cases.
Although prospective and not in effect for the tax year
under consideration (1992), the Taxpayer Relief Act of 1997, Pub.
L. 105-34, sec. 1284, 111 Stat. 1038, added the following
language to section 6501(a):
For purposes of this chapter, the term
“return” means the return required to be
filed by the taxpayer (and does not include a
return of any person from whom the taxpayer
has received an item of income, gain, loss,
deduction, or credit).
That legislation was enacted after Bufferd, and was specifically
intended to clarify this issue with respect to S corporations.
H. Rept. 105-148, at 609-610 (1997), 1997-4 C.B. (Vol.1) 323,
931-932; S. Rept. 105-33, at 277-278 (1997), 1997-4 C.B. (Vol. 2)
1067, 1357-1358; H. Conf. Rept. 105-220, at 702-703 (1997), 1997-
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4 C.B. (Vol. 2) 1457, 2172-2173. Under provisions entitled
“Clarify statute of limitations for items from pass-through
entities”, the legislative history contains the explanation that
the new language is intended to clarify that the return that
starts the running of the statute of limitations for a taxpayer
is the return of that taxpayer and not the return of another
“person” from whom the taxpayer has received an item of income,
gain, loss, deduction or credit. In that regard, section
7701(a)(1) defines “person” to mean and include “an individual, a
trust, estate, partnership, association, company or corporation.”
D. Petitioners’ Arguments
Petitioners, in addition to arguing that the Bufferd v.
Commissioner, supra, does not apply to situations involving C
corporations, also argue that constructive dividends are
analogous to section 6672 responsible person penalties. Under
section 6672, assessments are generally to be made within 3 years
of the filing of the return giving rise to the tax liability
(entity’s return).
We have held (in Manning v. Commissioner, supra) and hold
here that the principle expressed in Bufferd v. Commissioner,
supra, is not limited to S corporations or other flowthrough
entities. We recognize that section 6672 cases hold that the
assessment of responsible person penalties must be made within
3 years of the filing of the return giving rise to the
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responsible person liability11 but do not find that situation
analogous or controlling with respect to the assessment of a
shareholder’s income tax on constructive dividend income.
The section 6672 penalty is used as a collection device by
assessment of unpaid employment tax against an individual as a
“responsible person”. The particular employment taxes are those
that had been collected from employees and, as such, are trust
fund taxes in the employer’s hands. Stallard v. United States,
12 F.3d 489, 493 n.6 (5th Cir. 1994). Accordingly, while the
assessment of responsible person penalties is separate for
purposes of collection, the underlying tax liability for a
section 6672 assessment is the same liability as the employer’s.
Since the assessment is “based on” the underlying liability of
the employer, the filing of the employer’s employment tax return
triggers the period of limitation applicable to the penalty.
In contrast, a C corporation’s income tax liability on its
net income (i.e., income less deductions) is separate and
distinct from the shareholder’s income tax liability on dividend
income received from it. Secs. 1, 11, 301; see also InverWorld,
Ltd. v. Commissioner, 98 T.C. 70, 82 (1992); S-K Liquidating Co.
v. Commissioner, 64 T.C. 713, 716-718 (1975). It follows that
11
See Jones v. United States, 60 F.3d 584, 589 (9th Cir.
1995); Stallard v. United States, 12 F.3d 489, 493 (5th Cir.
1994); Howard v. United States, 868 F. Supp. 1197, 1200 (N.D.
Cal. 1994).
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the shareholder’s liability is not “based on” the underlying tax
liability of the corporation as is an assessment against a
responsible person under section 6672. Therefore, the
corporation’s return does not commence the section 6501 period of
assessment applicable to the dividend income received by the
shareholders.
Finally, adoption of a rule that the assessment period is
controlled by the return of the taxpayer against whom an
assessment may be made is a functional solution to the question
posed by the parties. That approach satisfies the need for
administrative economy and the goal of finality inherent in
section 6501(a). It is also in accord with the legislative
history to the post-1997 changes to section 6501(a). A
shareholder-level period for assessment relieves administrative
burdens and the difficulty taxpayers could encounter in not
knowing whether the return of another taxpayer might bear on the
period of limitations.12 Ratto v. Commissioner, 20 T.C. 785, 789-
790 (1953); Masterson v. Commissioner, 1 T.C. 315, 324 (1942),
revd. on other grounds 141 F.2d 391 (5th Cir. 1944). Uncertainty
12
To hold otherwise could result in situations where the
Commissioner would have less than the 3 years provided for in
sec. 6501(a) for a shareholder of a C corporation whose taxable
year ended earlier than the shareholder’s. It could also result
in a situation where a taxpayer’s exposure would be involuntarily
extended beyond the normal 3 year period, if the source entity
agreed to extend its assessment period for the parallel tax
period.
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regarding the correct period of limitations may hinder the
resolution of factual and legal issues and create needless
litigation over collateral matters. H. Rept. 105-148, supra at
609-610, 1997-4 C.B. (Vol. 1) at 931-932; S. Rept. 105-34, supra
at 277-278, 1997-4 C.B. (Vol. 2) at 1357-1358.
E. Conclusion
We hold that the Robinsons’ period for assessment controls
the question of whether respondent is barred from making a
determination that the Robinsons have constructive dividends.
Accordingly, respondent was not time barred from determining
constructive dividends for the Robinsons’ 1992 tax year.
Petitioners have offered no other evidence or defense with
respect to the disputed constructive dividends, and therefore
respondent is sustained on that adjustment.
II. Self-Employment Income
On their 1992 and 1993 returns, the Robinsons reported
$31,015 in each year as “other income” from discharge of
indebtedness. Respondent determined that the $31,015 reported in
1992 and in 1993 was income from self employment, resulting in
the determination of self-employment taxes of $5,928 and $4,383
for 1992 and 1993, respectively. On brief, the Robinsons contend
that the amounts represent compensation or wages which are not
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subject to self-employment tax.13 The Robinsons contend that they
were officers and employees of Career and, as such, were not
subject to self-employment tax.
Section 1401(a) imposes tax on a taxpayer’s self-employment
income. The tax is imposed on the gross income derived by an
individual from any trade or business carried on by the
individual, less deductions. The term “trade or business” in
section 1402 has the same meaning as it does for purposes of
section 162. Sec. 1402(c). The carrying on of a trade or
business for purposes of self-employment tax generally does not
include the performance of services as an employee. Sec.
1402(c)(2). Section 1402(d) references section 3121 (relating to
the Federal Insurance Contributions Act) for the definition of
the term “employee”, as follows: (1) Any officer of a
corporation; or (2) any individual who, under the usual common
law rules applicable in determining the employer-employee
13
We note that the Robinsons have not shown that there was
a factual predicate for reporting discharge of indebtedness
income; i.e., they have not shown the identity of the creditor,
the amount and terms of the indebtedness, or the cancellation
event. The existence of a debtor-creditor relationship is a
necessary predicate to a finding of cancellation of indebtedness
income. Millar v. Commissioner, 540 F.2d 184, 186 (3d Cir.
1976).
On brief, the Robinsons argue that they received the income
as employees of Career and not self-employed individuals. Even
though the Robinsons reported the income as being from discharge
of indebtedness, respondent does not argue that the Robinsons’
reporting position prohibits their now claiming the amounts to be
compensation. Respondent contends that the income is
compensation from self-employment.
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relationship, has the status of an employee. Sec. 3121(d)(1) and
(2). Applicable regulations concerning corporate officers
provide:
Generally, an officer of a corporation is an employee
of the corporation. However, an officer of a
corporation who as such does not perform any services
or performs only minor services and who neither
receives nor is entitled to receive, directly or
indirectly, any remuneration is considered not to be an
employee of the corporation. * * * [Sec. 31.3121(d)-
1(b), Employment Tax Regs.]
An officer who receives remuneration for substantial
services rendered to the corporation is considered an employee
within the meaning of section 3121(d). Van Camp & Bennion v.
United States, 251 F.3d 862 (9th Cir. 2001); Spicer Accounting,
Inc. v. United States, 918 F.2d 90, 93 (9th Cir. 1990). With
regard to the remuneration, it may be received directly or
indirectly, but the relevant factor is whether the payments are
received for services rendered. Spicer Accounting, Inc. v.
United States, supra at 93; Automated Typesetting, Inc. v. United
States, 527 F. Supp. 515, 522 (E.D. Wis. 1981).
Respondent argues that the Robinsons treated themselves as
self-employed by virtue of the following factors: (1) They were
not paid and did not report wages or other compensation from the
corporation; (2) Mr. Robinson reported self-employment income
from management services on a Schedule C, Profit or Loss From
Business, in 1992 which respondent attributes to his work for
Career; (3) the Robinsons managed the day-to-day operations and
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dedicated significant time to running the company; and (4) they
reported only small amounts of income from other sources. On
these bases, respondent asserts that the Robinsons were carrying
on a trade or business.
The fact that an individual did not receive remuneration in
the form of wages or that the individual reported self-employment
income (or other remuneration besides wages) on a Schedule C does
not prevent the individual from being classified as an employee.
Pariani v. Commissioner, T.C. Memo. 1997-427; Jacobs v.
Commissioner, T.C. Memo. 1993-570. In addition, many of the
facts upon which respondent relies in this case for the
determination that Mr. and/or Mrs. Robinson were engaged in an
independent trade or business also support the Robinsons’
argument that each of them, as an officer or common law employee,
provided significant services that were integral to the operation
of the company.
Mr. Robinson was an officer of the corporation and its sole
shareholder in 1992 and 1993. He provided substantial services
to the corporation in his capacity as an officer. Because of his
expertise as a certified aircraft mechanic and pilot, he was
involved in overseeing the day-to-day operation of the aircraft
brokerage segment of Career’s business. He was personally
involved in the inspection, negotiation, and purchase of used
aircraft and parts. He traveled extensively for this part of the
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business. He took part in the actual inspection of purchased
aircraft and parts. He worked a minimum of 60-70 hours a week
for the company. While he received no wages or other direct
compensation as an officer during these years, both parties
contend that the amounts reported on the returns as debt
cancellation income were actually compensation. Therefore, we
find that Mr. Robinson’s activities with the corporation come
within the definition of those of an “employee” as set forth in
section 3121(d)(1) and section 31.3121(d)-1(b), Employment Tax
Regs. See also Veterinary Surgical Consultants, P.C. v.
Commissioner, 117 T.C. ___, ___ (2001) (slip op. at 7-9).
In addition, Mr. and Mrs. Robinson fit within the definition
of common law employees under section 3121(d)(2). In determining
whether an individual is an employee, the Court of Appeals for
the Ninth Circuit has traditionally considered several factors,
including: Whether the business furnishes the worker with tools
and a place to work; whether the work is performed in the course
of the individual’s business rather than in some ancillary
capacity; and whether the services constituted an integral part
of the taxpayer’s business and are not incidental to the pursuit
of a separately established trade or business. Spicer
Accounting, Inc. v. United States, supra at 94. Other relevant
factors to which the courts have looked in determining the
substance of the employment relationship are the following: (1)
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The degree of control exercised by the principal over the details
of the work; (2) which parties invest in the facilities used in
the work; (3) the opportunity of the individual for profit or
loss; (4) whether the principal has the right to discharge the
individual; (5) whether the work is part of the principal’s
regular business; (6) the permanency of the relationship; and (7)
the relationship the parties believe they are creating. Simpson
v. Commissioner, 64 T.C. 974, 984-985 (1975) (and cases cited
therein); Steffens v. Commissioner, T.C. Memo. 1984-592. No one
factor is controlling. Where a sole shareholder controls and
provides services to the corporation the element of control
becomes less relevant. Jacobs v. Commissioner, supra; Rev. Rul.
71-86, 1971-1 C.B. 285.
As explained supra, Mr. Robinson was involved in the day-to
day operations of the aircraft brokerage business. Mrs. Robinson
was involved in the day-to-day administrative details of Career.
Mrs. Robinson, along with two others, prepared corporate checks
and coded them for posting to the general ledger. She was also
responsible for marketing. Significantly, Mrs. Robinson was the
primary dispatcher for the freight and passenger charter
activities, including the coordination and readying of the planes
and crew for the freight and charter businesses. Although Mrs.
Robinson was also the property manager for their significant real
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estate activity, she nonetheless devoted significant time and
effort to her Career responsibilities.
The Robinsons were provided with tools and work space by
Career, and both performed their services predominantly for the
company. The Robinsons were regularly involved in the day-to-day
business operations of Career. See Simpson v. Commissioner,
supra. In addition, the Robinsons were integral to the operation
of the company, and together they made fundamental decisions
regarding its operation. See Spicer Accounting, Inc. v. United
States, 918 F.2d at 94. Accordingly, we hold that the Robinsons
were employees of the corporation and not subject to self-
employment tax for their 1992 and 1993 tax years.
III. Accuracy-Related Penalties
Respondent determined accuracy-related penalties for the
substantial understatement of tax under section 6662(b)(2) and
(d) with respect to the Robinsons for years 1992 and 1993, Career
for its fiscal years ending July 31, 1993 and 1994, and Pak West
for its tax year ending September 30, 1994.
For the periods under consideration, petitioners must show
that respondent’s section 6662 determinations are erroneous.
Rule 142(a). Petitioners assert that many of the income and
expense adjustments respondent determined have been reduced by
agreement of the parties. Petitioners also argue that, to the
extent that their corporate records are inadequate, it was
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because of respondent’s agent’s advice that the period for
assessment of Career’s tax for its 1992 fiscal year had expired.
The testimony of petitioners’ certified public accountant does
not support petitioners’ claim that respondent’s agent is in any
way responsible for petitioners’ being subject to the determined
penalties. Other than those assertions, petitioners have not
presented any evidence or made any other showing as to why
respondent’s penalty determinations are in error. Although a
Rule 155 computation will be necessary to determine the penalty
amounts, if any, for each petitioner, we hold that petitioners
have failed to show that respondent erred in determining any of
the section 6662(a) penalties.
To reflect the foregoing,
Decisions will be entered
under Rule 155.