The opinion
RENKEMEYER, CAMPBELL & WEAVER, LLP, TROY
RENKEMEYER, TAX MATTERS PARTNER, PETITIONER v. COM-
MISSIONER OF INTERNAL REVENUE, RESPONDENT
RENKEMEYER CAMPBELL GOSE & WEAVER LLP, TROY
RENKEMEYER, TAX MATTERS PARTNER, PETITIONER v. COM-
MISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket Nos. 18735–08, 3624–09. Filed February 9, 2011.
P is the tax matters partner of a Kansas limited liability
partnership engaged in the practice of law. For the law firm’s
tax year ended Apr. 30, 2004, three of the law firm’s partners
were attorneys performing legal services. The fourth partner
was an S corporation owned by a tax-exempt ESOP whose
beneficiaries were the law firm’s three attorney partners. For
tax year ended Apr. 30, 2005, the law firm’s only partners
were the three attorneys. For tax year ended Apr. 30, 2004,
the three attorney partners each had a one-third capital
interest and a 30-percent profits and loss interest in the law
firm. The S corporation had a 10-percent profits and loss
interest in the law firm. Approximately 99 percent of the law
firm’s net business income for its tax year ended Apr. 30,
2004, was derived from legal services rendered by the three
attorney partners. For tax year ended Apr. 30, 2004, the law
firm allocated 87.557 percent of its net business income to the
S corporation. R determined that the special allocation did not
reflect economic reality and consequently reallocated the law
firm’s net business income to its partners on the basis of each
partner’s profits and loss interest. R further determined that
the three attorney partners’ distributive shares of the law
firm’s net business income for tax year ended Apr. 30, 2004,
and tax year ended Apr. 30, 2005, were net earnings from
self-employment subject to tax on self-employment income.
Held: R’s reallocation of the law firm’s net business income for
its tax year ended Apr. 30, 2004, is sustained. Held, further,
the law firm’s three attorney partners’ distributive shares of
the law firm’s net business income for its tax years ended
Apr. 30, 2004 and 2005, are subject to the tax on self-employ-
ment income.
Troy Renkemeyer, pro se.
Gregory J. Stull, for respondent.
OPINION
JACOBS, Judge: The parties submitted these consolidated
cases fully stipulated pursuant to Rule 122.
137
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138 136 UNITED STATES TAX COURT REPORTS (137)
During the years in question Troy Renkemeyer (sometimes
referred to as petitioner) was the tax matters partner of
Renkemeyer, Campbell & Weaver, LLP (the law firm), a lim-
ited liability partnership (L.L.P.) registered under the laws of
Kansas. Petitioner is a member of the bar of this Court.
Respondent mailed petitioner two notices of final partnership
administrative adjustment—one for the law firm’s tax year
ended April 30, 2004 (the 2004 tax year), on May 23, 2008,
and the second for the law firm’s tax year ended April 30,
2005 (the 2005 tax year), on November 19, 2008. 1
After concessions, the issues remaining are: (1) Whether a
special allocation of the law firm’s net business income for
the 2004 tax year should be disallowed, and (2) whether
income generated from the law firm’s legal practice for the
2004 and 2005 tax years, and allocated to the law firm’s
attorney partners, is subject to self-employment tax.
The law firm’s principal place of business, and petitioner’s
residence, was Kansas when the petition was filed. Unless
otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule
references are to the Tax Court Rules of Practice and Proce-
dure.
Background
I. The Law Firm
The law firm was organized on July 5, 2000. Its practice
emphasizes Federal tax law. During the 2004 tax year the
law firm’s partners consisted of Troy Renkemeyer, Todd
Campbell, and Tracy Weaver, all lawyers, and RCGW Invest-
ment Management, Inc. (RCGW), a Kansas corporation. In the
2005 tax year the law firm’s partners were Messrs.
Renkemeyer, Campbell, and Weaver. 2
Although petitioner asserts that a written partnership
agreement exists for the 2004 tax year, he was unable to
produce a copy of the agreement. A partnership agreement
effective for the 2005 tax year was entered into the record.
1 Respondent issued the notice in docket No. 18735–08 to Renkemeyer, Campbell & Weaver,
LLP, Troy Renkemeyer, Tax Matters Partner, and the notice in docket No. 3624–09 to
Renkemeyer Campbell Gose & Weaver LLP, Troy Renkemeyer, Tax Matters Partner.
2 Although listed in the caption in docket No. 3624–09, Gose was not a partner of the law
firm in either year at issue.
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(137) RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR. 139
RCGW’s business activities primarily involved the purchase,
sale, and rental of real estate. RCGW filed an election to be
taxed as an S corporation which was effective December 27,
2000. RCGW was 100 percent owned by RCGW Investment
Management, Inc., Employee Stock Ownership Plan and
Trust (the ESOP). 3 Messrs. Renkemeyer, Campbell, and
Weaver were the beneficiaries of the ESOP. 4
During all relevant times, the law firm maintained its
income tax records on the cash receipts and disbursements
method of accounting and, as noted supra p. 138, it operated
on a fiscal year ending April 30.
II. The Law Firm’s 2004 Tax Year
The law firm timely filed Form 1065, U.S. Return of Part-
nership Income, for its 2004 tax year. Attached to the return
was a Schedule K–1, Partner’s Share of Income, Credits,
Deductions, etc., for each partner. According to the Schedules
K–1, the four partners held the following profits and loss
interests:
Partner Percent
Troy Renkemeyer ........................................................ 30
Todd Campbell ............................................................. 30
Tracy Weaver ............................................................... 30
RCGW ........................................................................... 10
The Schedules K–1 reported the following capital interests:
Partner Percent
Troy Renkemeyer ...................................................... 33.3333
Todd Campbell ........................................................... 33.3333
Tracy Weaver ............................................................. 33.3333
RCGW ......................................................................... 0.0000
The parties stipulated that of the law firm’s gross revenues
for the 2004 tax year, $1,634,992 was generated by the
performance of legal services by petitioner and Messrs.
Campbell and Weaver, and $5,335 was generated as a result
of the recognition of passthrough income from RCGW. On
3 The ESOP apparently was intended to be a qualified employee benefit plan pursuant to the
provisions of sec. 401(a) in order that its trust would be exempt from income tax pursuant to
sec. 501(a). The question of the tax-exempt qualification of the ESOP was not raised by either
party. Consequently, we do not make a determination in this regard.
4 On or about July 15, 2006, RCGW forfeited its authority to do business in Kansas for failure
to timely file its annual report.
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140 136 UNITED STATES TAX COURT REPORTS (137)
Form 1065, the law firm reported ordinary income from busi-
ness activities (net business income) of $1,165,770. The law
firm allocated its net business income to its partners as fol-
lows:
Percent
Partner Amount of total
Troy Renkemeyer $74,227 6.367
Todd Campbell 42,668 3.660
Tracy Weaver 28,167 2.416
RCGW 1,020,708 87.557
The law firm’s Form 1065, Statement 10, Partners’ Capital
Account Summary, for the 2004 tax year disclosed the fol-
lowing capital account information:
Beginning Capital Schedule M–2 Ending
Partner capital contributed ll. 3, 4 & 7 Withdrawal capital
Renkemeyer –$12,180 $32,218 $74,176 $108,512 –$14,298
Campbell –23,489 15,453 41,108 24,648 8,424
Weaver 19,270 15,096 28,147 57,073 5,440
RCGW 60,000 -0- 1,019,999 -0- 1,079,999
RCGW filed a Form 1120S, U.S. Income Tax Return for an
S Corporation, on which it reported ‘‘other income’’ of
$1,020,708, all of which was passed through from the law
firm.
Although the law firm’s Form 1065 for the 2004 tax year
reported business revenues from its law practice, no portion
of those revenues was included on the law firm’s tax return
as net earnings from self-employment.
Respondent examined the law firm’s tax return for the
2004 tax year and concluded that the partners’ distributive
shares of the law firm’s net business income should be reallo-
cated to each partner consistent with the profits and loss
sharing percentage as reported on the partners’ respective
Schedules K–1. See supra p. 139. Further, respondent
reduced the law firm’s gross business revenues by $905,000
(and consequently reduced the law firm’s net business
income) after determining that a legal fee in a like amount
had not been received during the 2004 tax year. 5
As a result of the examination, respondent determined
each partner’s distributive share of the law firm’s net busi-
ness income for the 2004 tax year to be:
5 Petitioner does not dispute this reduction.
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(137) RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR. 141
Percent
Partner Amount of total
Troy Renkemeyer $78,231 30
Todd Campbell 78,231 30
Tracy Weaver 78,231 30
RCGW 26,077 10
Respondent also determined that petitioner’s and Messrs.
Campbell’s and Weaver’s distributive shares of the law firm’s
net business income as redetermined by respondent were
subject to self-employment tax under the Self-Employment
Contributions Act of 1954, secs. 1401–1403.
III. The Law Firm’s 2005 Tax Year
On May 1, 2004, the law firm’s partnership agreement was
amended, and RCGW’s interest was eliminated. The amended
partnership agreement provided for two classes of ownership
interests: ‘‘General Managing Partner Partnership Units’’
and ‘‘Investing Partnership Units’’, with the general man-
aging partner partnership units having full authority to act
on behalf of the partnership. Pursuant to the amended part-
nership agreement, each partner was required to contribute
$10 for his general managing partner partnership units and
$100 for his investing partnership units. The resulting
interests in the law firm under the amended partnership
agreement were as follows:
General managing Investing partner
Partner partner interest interest
Troy Renkemeyer 1% 32%
Todd Campbell 1 32
Tracy Weaver 1 32
Thus, petitioner and Messrs. Campbell and Weaver shared
equal authority in the law firm. With respect to the alloca-
tion of the partners’ distributive shares, the partnership
agreement provided that all profits and losses of the partner-
ship, and all income, deductions, and credits, were to be allo-
cated according to the partners’ ownership interests set forth
supra except that
the allocation of such profit and income items for any given calendar
month to the capital account of any given Partner shall be limited in such
calendar month to the Average Monthly Collections from such Partner’s
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142 136 UNITED STATES TAX COURT REPORTS (137)
clients. For purposes of this Agreement, the term Average Monthly Collec-
tions shall mean the average of the monthly collections of the current
fiscal year. However, this Paragraph should not apply to the extent it
would cause the profit allocation in any calendar month to be less than
Five Thousand Dollars ($5,000). * * * Notwithstanding anything con-
tained herein to the contrary, in the event the Limited Liability Partner-
ship collects a fee in an amount over One Hundred Thousand Dollars
($100,000) pursuant to a single engagement, then the Partners, other than
the Partner whose client pays such fee, shall collectively receive 30% of
such fee, and shall share in such fee equally.
The law firm timely filed Form 1065 for its 2005 tax year
and reported net business income of $541,064. The law firm
allocated its net business income to its partners on Schedules
K–1 as follows:
Percent
Partner Amount of total
Troy Renkemeyer $195,066 36
Todd Campbell 219,741 41
Tracy Weaver 126,257 23
Respondent accepted this special allocation of net business
income.
Respondent determined that the net business income allo-
cated to petitioner and Messrs. Campbell and Weaver was
subject to self-employment tax.
Discussion
I. The Law Firm’s 2004 Tax Year Special Allocation
We first address whether the special allocation of the law
firm’s 2004 tax year net business income was proper. Peti-
tioner bears the burden of proof. Rule 142(a); see Welch v.
Helvering, 290 U.S. 111, 115 (1933).
The law firm, an L.L.P., was for the tax years at issue an
‘‘eligible entity’’. See sec. 301.7701–3(a), Proced. & Admin.
Regs. By not electing otherwise, the law firm was classified
as a partnership. See sec. 301.7701–3(b)(1)(i), Proced. &
Admin. Regs.
A partnership is not subject to Federal income tax. Secs.
701, 6031. Rather, the partners are liable for tax in their
separate or individual capacities. Sec. 701. Each partner is
required to take into account his distributive share of the
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(137) RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR. 143
partnership’s income, gain, loss, deductions, and credits. Sec.
702(a).
A partner’s distributive share of income, gain, loss, deduc-
tions, or credits generally is determined by the governing
partnership agreement. Sec. 704(a). A partnership agreement
may be either written or oral. Stern v. Commissioner, T.C.
Memo. 1984–383; sec. 1.761–1(c), Income Tax Regs. If the
partnership agreement does not provide how a partner’s
distributive share is to be determined, or if the allocation
provided in the partnership agreement does not have
substantial economic effect, the partner’s distributive share
is determined in accordance with the partner’s interest in the
partnership. Sec. 704(b); Holdner v. Commissioner, T.C.
Memo. 2010–175.
A partner’s interest in a partnership refers to the manner
‘‘in which the partners have agreed to share the economic
benefit or burden * * * corresponding to the income, gain,
loss, deduction, or credit (or item thereof) that is allocated.’’
Sec. 1.704–1(b)(3)(i), Income Tax Regs. A partner’s interest in
a partnership is determined by taking into account all rel-
evant facts and circumstances. Sec. 704(b); Vecchio v.
Commissioner, 103 T.C. 170, 193 (1994); sec. 1.704–1(b)(3)(i),
Income Tax Regs.
For the tax years at issue the relevant regulations pro-
vided that all partners’ interests in a partnership are pre-
sumed to be equal on a per capita basis. Sec. 1.704–1(b)(3)(i),
Income Tax Regs. This presumption may be rebutted if the
facts and circumstances show otherwise. Id.
Petitioner asserts that the special allocation of the net
business income of the law firm for its 2004 tax year was
proper because the allocation was made pursuant to the
provisions of the partnership agreement. But as noted supra
p. 138, the partnership agreement effective for the 2004 tax
year is not in the record.
Petitioner’s bald assertion that the missing partnership
agreement provides for a special allocation is not sufficient to
carry petitioner’s burden to establish the propriety of the
special allocation of the net business income of the law firm
for its 2004 tax year. Further, although petitioner asserts
that the partnership agreement effective for the 2004 tax
year is similar to the partnership agreement effective for the
2005 tax year (the 2005 partnership agreement), and the
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144 136 UNITED STATES TAX COURT REPORTS (137)
2005 partnership agreement is in the record, the 2005 part-
nership agreement does not support petitioner’s claim that
the special allocation of the net business income of the law
firm for its 2004 tax year is proper.
Petitioner alleges ‘‘that the only change made in the
amended version * * * [of the partnership agreement] was to
eliminate the corporate partner [RCGW] as a capital partner.’’
However, the 2005 partnership agreement provides that the
allocation of the partners’ distributive shares is to be made
according to (1) the ownership interests of the partners,
except that (2) the allocation to each partner is to be limited
to the average monthly collection of fees from the partner’s
clients, with the further exception that the allocation is not
to be less than $5,000 per calendar month. Assuming
arguendo that this provision was part of the partnership
agreement effective for the 2004 tax year, we cannot see how
the special allocation in which RCGW received 87.557 percent
of the law firm’s net income was consistent with the partner-
ship agreement. Of the amount of the law firm’s gross busi-
ness revenues for the 2004 tax year, less than 1 percent of
the revenue, computed after the reduction for the $905,000
unpaid fee, was attributable to RCGW. 6 Hence, we look to the
partners’ respective interests in the partnership (determined
by taking into account all facts and circumstances) to deter-
mine the proper allocation of the law firm’s net business
income. See sec. 704(b).
In determining the partners’ respective interests in a part-
nership, the following factors are deemed relevant: (a) The
partners’ relative capital contributions to the partnership; (b)
the partners’ respective interests in partnership profits and
losses; (c) the partners’ relative interests in cashflow and
other nonliquidating distributions; and (d) the partners’
rights to capital upon liquidation. Holdner v. Commissioner,
supra; Estate of Ballantyne v. Commissioner, T.C. Memo.
2002–160, affd. 341 F.3d 802 (8th Cir. 2003); sec. 1.704–
1(b)(3)(ii), Income Tax Regs. By applying these factors to the
specific facts of these cases, we conclude that the special
allocation of the law firm’s net business income for the 2004
tax year was improper.
6 The law firm generated $729,992 in legal fees from the three attorney partners but only
$5,335 from RCGW.
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(137) RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR. 145
The first factor to be considered is the partners’ relative
capital contributions. The only information with respect to
the partners’ respective capital accounts consists of the
information set forth on statement 10 of the law firm’s Form
1065 and the partners’ respective Schedules K–1 for the 2004
tax year, both of which indicate that RCGW made no capital
contributions in the 2004 tax year to the partnership,
whereas petitioner and Messrs. Campbell and Weaver each
contributed capital to the partnership during the 2004 tax
year. Indeed, the record does not reveal whether RCGW
contributed capital to the partnership in any year. Con-
sequently, this factor does not support the law firm’s special
allocation for the 2004 tax year.
The second factor we consider is the partners’ interests in
the profits and losses of the partnership. As noted supra p.
139, according to the Schedules K–1, petitioner and Messrs.
Campbell and Weaver each held a 33.3333-percent capital
interest and a 30-percent profits and loss interest, whereas
RCGW held a 10-percent profits and loss interest. Con-
sequently, this factor does not support the law firm’s special
allocation for the 2004 tax year.
The third factor we consider is the partners’ interests in
cashflow and other nonliquidating distributions. Again, the
record is unclear with respect to this factor, but statement 10
of the law firm’s 2004 tax year’s Form 1065 and the partners’
respective Schedules K–1 report that in the 2004 tax year
RCGW received no distributions from the partnership,
whereas petitioner and Messrs. Campbell and Weaver did
receive distributions. Consequently, this factor does not sup-
port the law firm’s special allocation for the 2004 tax year.
The fourth and final factor to be considered is the partners’
rights to distributions of capital upon liquidation of the part-
nership. The record does not include information with respect
to this factor for the 2004 tax year or earlier. Consequently,
this factor does not support the law firm’s special allocation
for the 2004 tax year.
To conclude, the facts and circumstances support respond-
ent’s reallocation of the law firm’s net business income for its
2004 tax year consistent with the partners’ profits and loss
interests.
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146 136 UNITED STATES TAX COURT REPORTS (137)
II. Self-Employment Tax
We now turn our attention to whether the attorney part-
ners’ distributive shares of the law firm’s business income for
the 2004 and 2005 tax years are subject to self-employment
tax. Petitioner again bears the burden of proof with respect
to this issue.
Section 1401(a) imposes a tax on the self-employment
income of every individual for a taxable year (the self-
employment tax). Self-employment income is defined as ‘‘the
net earnings from self-employment derived by an individual
* * * during any taxable year’’ excluding (1) the portion in
excess of the Social Security wage base limitation for the
year as well as (2) all earnings from self-employment if the
total amount of the individual’s net earnings from self-
employment for the taxable year is less than $400. Sec.
1402(b).
Section 1402(a) defines net earnings from self-employment
as:
the gross income derived by an individual from any trade or business car-
ried on by such individual, less the deductions allowed by this subtitle
which are attributable to such trade or business, plus his distributive
share (whether or not distributed) of income or loss described in section
702(a)(8) from any trade or business carried on by a partnership of which
he is a member * * *
Section 702(a)(8) provides that in determining his income
tax, each partner shall take into account separately his
distributive share of the partnership’s taxable income or loss,
exclusive of items requiring separate computation under
other paragraphs of section 702(a). Therefore, in general, a
partner must include his distributive share of partnership
income in calculating his net earnings from self-employment.
Fees for services, like those generated by a law partnership,
are part of the partners’ distributive shares under section
702(a)(8). Consequently, such fees are generally included in
calculating net earnings from self-employment, unless an
exclusion applies.
Section 1402(a) provides several exclusions from the gen-
eral self-employment tax rule. In particular, section
1402(a)(13) provides:
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(137) RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR. 147
there shall be excluded the distributive share of any item of income or loss
of a limited partner, as such, other than guaranteed payments described
in section 707(c) to that partner for services actually rendered to or on
behalf of the partnership to the extent that those payments are established
to be in the nature of remuneration for those services;
Petitioner posits that his and Messrs. Campbell’s and
Weaver’s interests in the law firm (organized as a Kansas
L.L.P.) each should be considered a limited partner’s interest
in a limited partnership for purposes of section 1402(a)(13).
Petitioner maintains that his and Messrs. Campbell’s and
Weaver’s respective interests in the law firm share character-
istics of those of a limited partner in a limited partnership
because (a) their interests are designated as limited partner-
ship interests in the law firm’s organizational documents,
and (b) his and Messrs. Campbell’s and Weaver’s interests in
the law firm enjoy limited liability pursuant to Kansas law. 7
Hence, petitioner argues, his and Messrs. Campbell’s and
Weaver’s distributive shares of the law firm’s business
income qualify for the section 1402(a)(13) exception. We dis-
agree with petitioner’s position.
A limited partnership has two fundamental classes of part-
ners, general and limited. General partners typically have
management power and unlimited personal liability. On the
other hand, limited partners lack management powers but
enjoy immunity from liability for debts of the partnership. 1
Bromberg & Ribstein, Partnership, sec. 1.01(b)(3) (2002–2
Supp.). Indeed, it is generally understood that a limited
partner could lose his limited liability protection were he to
engage in the business operations of the partnership. 8 Con-
sequently, the interest of a limited partner in a limited part-
7 Petitioner, in his opening brief, refers to a chart allegedly attached to the brief as an exhibit
that compares the characteristics of a partner in a general partnership, a limited partnership,
and an L.L.P. under Kansas law, with the characteristics of the law firm’s investing partners’
interests. No such chart was attached to petitioner’s brief.
8 We are mindful that at the time of the statute’s enactment, the Revised Uniform Limited
Partnership Act of 1976 provided that a ‘‘limited partner’’ would lose his limited liability protec-
tion if:
in addition to the exercise of his rights and powers as a limited partner, he takes part in the
control of the business. However, if the limited partner’s participation in the control of the busi-
ness is not substantially the same as the exercise of the powers of a general partner, he is liable
only to persons who transact business with the limited partnership with actual knowledge of
his participation in control. [Revised Unif. Ltd. Pship. Act (1976), sec. 303(a), 6B U.L.A. 180
(2008).]
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148 136 UNITED STATES TAX COURT REPORTS (137)
nership is generally akin to that of a passive investor. See
3 id. sec. 12.01(a) (1988).
In contrast, all partners of an L.L.P. enjoy limited liability
protection and may have management powers. 1 id. sec.
1.01(b)(5) (2005–1 Supp.). In essence, an L.L.P. is a general
partnership that affords a form of limited liability protection
for all its partners by filing a statement of qualification with
the appropriate State authorities. See Garnett v. Commis-
sioner, 132 T.C. 368, 375 (2009); 1 Bromberg & Ribstein,
supra sec. 1.01(b)(5). In Kansas, an L.L.P. is formed under
the Kansas Uniform Partnership Act, which governs general
partnerships. See Kan. Stat. Ann. sec. 56a–1001 (2005). A
Kansas partnership that elects to become an L.L.P. ‘‘con-
tinues to be the same entity that existed before the filing of
a statement of qualification under K.S.A. 56a–1001.’’ Kan.
Stat. Ann. sec. 56a–201(b) (2005).
Section 1402(a)(13) was originally enacted as section
1402(a)(12) at a time (1977) before entities such as L.L.P.s
were contemplated, 9 and the applicable statute did not, and
still does not, define a ‘‘limited partner’’. When L.L.P.s (and
limited liability companies) began to be frequently used, it
was determined that there needed to be a definition of ‘‘lim-
ited partner’’ for purposes of the self-employment tax. In
1997 the Secretary issued proposed regulations which were
intended to do just that. See sec. 1.1402(a)–2, Proposed
Income Tax Regs., 62 Fed. Reg. 1704 (Jan. 13, 1997). The
proposed regulations ignited controversy. As a result, Con-
gress enacted legislation which provided that ‘‘No temporary
or final regulation with respect to the definition of a limited
partner under section 1402(a)(13) of the Internal Revenue
Code of 1986 may be issued or made effective before July 1,
1998.’’ Taxpayer Relief Act of 1997, Pub. L. 105–34, sec. 935,
111 Stat. 882. Indeed, a Sense of the Senate resolution with
respect to this provision stated:
SEC. 734. SENSE OF THE SENATE WITH RESPECT TO SELF-
EMPLOYMENT TAX OF LIMITED PARTNERS.
(a) Findings.—The Senate finds that—
* * * * * * *
9 L.L.P.s did not exist until 1991. See 1 Bromberg & Ribstein, Partnership, sec. 1.01(b)(5)
(2005–1 Supp.).
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(137) RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR. 149
(4) certain types of entities, such as limited liability companies and lim-
ited liability partnerships, were not widely used at the time the present
rule relating to limited partners was enacted, and that the proposed regu-
lations attempt to address owners of such entities;
(5) the Senate is concerned that the proposed change in the treatment
of individuals who are limited partners under applicable State law exceeds
the regulatory authority of the Treasury Department and would effectively
change the law administratively without congressional action; and
(6) the proposed regulations address and raise significant policy issues
and the proposed definition of a limited partner may have a substantial
impact on the tax liability of certain individuals and may also affect
individuals’ entitlement to social security benefits.
(b) Sense of Senate.—It is the sense of the Senate that—
(1) the Department of the Treasury and the Internal Revenue Service
should withdraw Proposed Regulation 1.1402(a)–2 which imposes a tax on
limited partners; and
(2) Congress, not the Department of the Treasury or the Internal Rev-
enue Service, should determine the tax law governing self-employment for
limited partners.
[143 Cong. Rec. 13297 (1997). 10]
As of 2005 Congress had not issued any other pronounce-
ments with respect to the definition of a limited partner for
purposes of the self-employment tax, nor had the Secretary.
We therefore are left to interpret the statute without elabo-
ration.
Since section 1402(a)(13) does not define ‘‘limited partner’’,
we apply accepted principles of statutory construction to
ascertain Congress’ intent. It is a well-established rule of
construction that if a statute does not define a term, the
term is to be given its ordinary meaning. Gates v. Commis-
sioner, 135 T.C. 1, 6 (2010); see Perrin v. United States, 444
U.S. 37, 42 (1979). And we look to the legislative history to
ascertain Congress’ intent if the statutory purpose is
obscured by ambiguity. See Burlington N. R.R. v. Okla. Tax
Commn., 481 U.S. 454, 461 (1987).
‘‘Limited partner’’ is a technical term which has become
obscured over time because of the increasing complexity of
partnerships and other flowthrough entities as well as the
history of section 1402(a)(13). We therefore must look to the
legislative history for guidance.
Section 1402(a)(13) was enacted by the Social Security
Amendments of 1977, Pub. L. 95–216, sec. 313(b), 91 Stat.
10 Although the moratorium has expired, the Secretary has not yet promulgated any replace-
ment regulations.
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150 136 UNITED STATES TAX COURT REPORTS (137)
1536. The relevant legislative history provides insight with
respect to Congress’ intent:
Under present law each partner’s share of partnership income is includ-
able in his net earnings from self-employment for social security purposes,
irrespective of the nature of his membership in the partnership. The bill
would exclude from social security coverage, the distributive share of
income or loss received by a limited partner from the trade or business of
a limited partnership. This is to exclude for coverage purposes certain
earnings which are basically of an investment nature. However, the exclu-
sion from coverage would not extend to guaranteed payments (as described
in 707(c) of the Internal Revenue Code), such as salary and professional
fees, received for services actually performed by the limited partner for the
partnership. [H. Rept. 95–702 (Part 1), at 11 (1977); emphasis added.]
The insight provided reveals that the intent of section
1402(a)(13) was to ensure that individuals who merely
invested in a partnership and who were not actively partici-
pating in the partnership’s business operations (which was
the archetype of limited partners at the time) would not
receive credits toward Social Security coverage. The legisla-
tive history of section 1402(a)(13) does not support a holding
that Congress contemplated excluding partners who per-
formed services for a partnership in their capacity as part-
ners (i.e., acting in the manner of self-employed persons),
from liability for self-employment taxes.
Aside from a nominal amount of income arising from rec-
ognition of certain pass-through income from RCGW, all of the
law firm’s revenues were derived from legal services per-
formed by petitioner and Messrs. Campbell and Weaver in
their capacities as partners. Petitioner and Messrs. Campbell
and Weaver each contributed a nominal amount ($110) for
their respective partnership units. Thus it is clear that the
partners’ distributive shares of the law firm’s income did not
arise as a return on the partners’ investment and were not
‘‘earnings which are basically of an investment nature.’’
Instead, the attorney partners’ distributive shares arose from
legal services they performed on behalf of the law firm.
To conclude, we hold that the respective distributive shares
of petitioner and Messrs. Campbell and Weaver arising from
the legal services they performed in their capacity as part-
ners in the law firm are subject to self-employment taxes for
the 2004 and 2005 tax years.
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(137) RENKEMEYER, CAMPBELL & WEAVER, LLP v. COMMR. 151
We have considered petitioner’s other arguments and con-
clude they are irrelevant, moot, or meritless. To reflect the
foregoing and the concessions of the parties,
Decisions will be entered under Rule 155.
f
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