T.C. Memo. 1996-173

UNITED STATES TAX COURT

LEON L. SICARD AND ELEANOR SICARD, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11870-93. Filed April 10, 1996

Jonathan B. Dubitzky and Jesse M. Fried, for petitioner.

David N. Brodsky and Madlyn B. Coyne, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WELLS, Judge: Respondent determined a deficiency in, and

additions to, petitioners’ Federal income tax as follows:

 Additions to Tax 

Year Deficiency Sec. 6653(a)(1)(A) Sec. 6653(a)(1)(B) Sec. 6661

1987 $73,150 $3,658 50% of the interest $18,288

 due on the deficiency
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Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

The issues to be decided in the instant case are: (1)

Whether petitioners must include in their income for taxable year

1987 a payment made to them during that year by the White-Sicard

Co. partnership (partnership); and (2) whether petitioners are

liable for the additions to tax provided by sections 6653(a)(1)

and 6661.

FINDINGS OF FACT

Some of the facts have been stipulated for trial pursuant to

Rule 91. The parties’ stipulations are incorporated herein by

reference and are found accordingly.

At the time the petition in the instant case was filed,

petitioners resided in Hampton, New Hampshire. 

During relevant periods, petitioner Leon Sicard (petitioner)

was in the real estate development business and was involved in a

number of partnerships. 

Petitioner and Charles White formed the partnership on or

about June 1, 1983. In general, petitioner and Mr. White formed

the partnership to build the Seabury Condominiums (condominiums),

a 54-unit condominium complex in Hampton, New Hampshire. All

profits, losses, expenses, and liabilities of the partnership

were to be shared equally by petitioner and Mr. White. At all
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times, the partnership used the calendar year as its tax year and

maintained its books and records and filed its Forms 1065, “U.S.

Partnership Return of Income,” under the accrual method of

accounting. 

Petitioner and Mr. White performed certain services prior to

1984 in order to determine whether it would be advantageous to

pursue the partnership venture. In late 1983 or early 1984,

petitioner and Mr. White orally agreed that the partnership would

pay petitioner $5,000 per month (management fees) as compensation

for providing various management services to the partnership

(compensation arrangement). Petitioner and Mr. White settled on

that amount because petitioner estimated his time was worth that

based on what he had earned performing services on behalf of

Palmer & Sicard, Inc., a plumbing and heating corporation which

he had partly owned. The amount of the management fee was

unaffected by the amount of partnership income. Petitioner and

Mr. White also agreed to accrue to petitioner $5,000 per month

for management services performed during the last seven months of

1983.

Petitioner and Mr. White also orally agreed that the

partnership would pay White Enterprises, a corporation wholly

owned by Mr. White, for various services it was to provide to the

partnership, including architectural, construction, bookkeeping,

and accounting services. 
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Petitioner and Mr. White further orally agreed that the

partnership would pay both petitioner and White Enterprises

approximately $1,000 per month for the partnership’s use of

equipment owned by each of them. The purpose of the foregoing

arrangement was to ensure that each partner would be paid

(directly or, in the case of Mr. White, indirectly) for services

provided to the partnership. If, for some reason, the services

were not provided, the partnership, if appropriate, would engage

a nonpartner to perform them and the accruals for the services

would cease. 

Petitioner and Mr. White executed a written partnership

agreement on March 1, 1984 (partnership agreement). With respect

to the management of the partnership, paragraph 7 of the

partnership agreement states:

The management of the Partnership shall be conducted by all

of the Partners, provided that no Partner shall obligate the

Partnership to any third party for an amount in excess of

Two Thousand Five Hundred ($2,500.00) Dollars, without the

consent of all of the Partners. The Partners shall be

entitled to such salary compensation for acting in the

Partnership business, as shall be agreed to. 

Construction of the condominiums commenced after petitioner

and Mr. White entered into the partnership agreement. As soon as

the partnership completed the first building, sales of individual

units in that building, as well as of units to be built in the

near future, commenced. The partnership completed construction

of all of the condominiums by the end of 1986. The cost of the
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entire project exceeded $3 million, with sales in excess of $6 million.

During the period that the management fees were accruing to

him, petitioner performed various services for the partnership,

consuming on average at least half of each work day. Petitioner

provided management services to the partnership during the

planning, construction, and sales phases of its operations. 

During the planning stage, petitioner met with attorneys to draw

up condominium documents and attended planning board meetings in

the town of Hampton, New Hampshire. Petitioner participated in

many meetings with financial institutions in an attempt to raise

the necessary financing for the project. He met numerous times

with representatives of the bank from which financing for the

project was ultimately obtained. Before construction commenced,

petitioner negotiated with utility companies to obtain temporary

service for construction, as well as permanent service to the

completed units. As construction commenced, petitioner was

involved in overseeing the project. Petitioner organized the

workmen’s (subcontractors’) schedules, reviewed work performed,

and approved bills for payment. He approved foundation

locations, directed deliveries to correct buildings, and,

generally, assured that the work that was contracted for had been

completed in a satisfactory manner. 

Following construction, petitioner initiated and oversaw the

marketing and sales promotion effort for the condominiums,

including on-site floor time. Since the complex was one of the
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first condominium complexes in the New Hampshire seacoast area,

petitioner educated real estate agents and potential buyers about

the benefits of condominium ownership. As units were completed,

petitioner was involved in negotiations with buyers regarding

additional features to be put into the units and approval of the

pricing structure of the features. Petitioner also arranged

customer financing, and attended most of the closings with the

buyers in order to handle any last-minute problems. Petitioner

acted as the liaison with the buyers following the sales. He

followed up to assure that all the features were completed to the

buyer’s satisfaction. He responded to buyers’ complaints, and,

when appropriate, called in subcontractors to redo work which

they guaranteed. If necessary, he negotiated settlements with

the buyers. The partnership sold most of the condominiums by

early 1987. Petitioner did not provide significant management

services to the partnership during 1987, and the partnership did

not accrue any management fees to petitioner after 1986. 

White Enterprises provided bookkeeping and accounting

services to the partnership from 1984 through 1987 through its

employee Darius (John) Davis. White Enterprises was compensated

for the arrangement. Initially, Mr. Davis prepared either cash

flow statements or income statements for the partnership

approximately three times per year; subsequently, he prepared

statements monthly. Once prepared, Mr. Davis sent copies of the

statements to petitioner. The statements did not separately list
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the management fees accruing to petitioner pursuant to the

compensation arrangement. 

During February 1984, Mr. White instructed Mr. Davis to

prepare an invoice for the fees earned by petitioner and White

Enterprises from June 1983 through February 1984 and thereafter

to prepare invoices for these fees and to record the fees in the

partnership’s books and records on a monthly basis. From

February 1984 through December 1986, Mr. Davis prepared an

invoice each month for the fees owed to petitioner and White

Enterprises. The fees earned by petitioner were recorded in the

partnership’s books and records as amounts payable and as

management fees added to the cost of goods sold. The management

fees that accrued to petitioner were capitalized into inventory

each year by Mr. Davis and expensed as the inventory was sold. 

The partnership’s records reflect the following management

fees that accrued to petitioner at the rate of $5,000 per month

pursuant to the compensation arrangement:

Year Amount 

1983 $35,000

1984 60,000

1985 60,000

1986 60,000

From June through December 1983, the partnership accrued

$5,000 per month to White Enterprises. From January 1984 through

December 1986, the partnership accrued or paid between $9,000 to

$10,000 per month in construction and other fees to White
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Enterprises. White Enterprises often drew on the accrued fees or

was paid contemporaneously for the services it provided. 

Prior to 1987, petitioner drew on the management fees

accrued to him only twice. On March 3, 1984, and April 23, 1984,

respectively, petitioner caused the partnership to pay him

accrued management fees in the amounts of $10,000 and $15,000. 

Because the partnership paid petitioner $25,000 in 1984, he was

owed $190,000 in accrued management fees by the end of December

1986. 

During 1987, the partnership paid petitioner the $190,000

outstanding balance of the management fees accrued pursuant to

the compensation arrangement. That sum was paid by five checks. 

The checks were deposited into petitioner’s business checking

account with Indian Head Bank and Trust Co. 

During 1987 and 1988, believing that it was required, Mr.

Davis and his assistant issued Forms 1099 to any noncorporate

recipient of payments from the partnership in 1987 of at least

$10 in interest or at least $600 for services. During 1987, the

partnership issued to petitioner two Forms 1099 for 1986: A Form

1099 in the amount of $460 for automobile-related fringe

benefits, and a Form 1099 in the amount of $12,000 for equipment

rental fees paid to petitioner. During 1988, the partnership

issued to petitioner Forms 1099 for the years 1984 and 1985 on

1987 Forms 1099 with the year changed to 1984 or 1985, as

appropriate. The Form 1099 for 1984 in the amount of $42,201.79,
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represents management fees in the amount of $25,000 and other

income in the amount of $17,202. The other income included

$6,400 of equipment rental fees which accrued in 1983, equipment

rental fees earned in 1984, and miscellaneous reimbursements. 

The Form 1099 for 1985 was in the amount of $12,000, representing

payment of equipment rental fees for that year. During 1988, the

partnership issued to petitioner, and sent to the Internal

Revenue Service, a 1987 Form 1099 reflecting $190,000 of

nonemployee compensation. 

The accrued management fees were not reported on Schedules

K-1 “Partner’s Share of Income, Credits, Deductions, etc.,” as

guaranteed payments to petitioner or otherwise reported to

petitioner on IRS informational forms as taxable income during

any of the years 1983 through 1986. The management fees accrued

were not reported on a 1987 Schedule K-1 “Partner’s Share of

Income, Credits, Deductions, etc.,” as guaranteed payments to

petitioner. Scott Beane, the accountant who prepared the

partnership’s returns and Schedules K-1 for 1986 and 1987, did

not treat the management fees as payments to petitioner because

he assumed that they accrued to a corporation owned by petitioner

and not to him personally. The partnership’s books, however,

indicate that the amounts accrued to petitioner accrued to him

personally and not to an entity related to him. Neither

petitioner nor Mr. White advised any of the persons who kept the

partnership’s books or prepared its tax returns that the
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compensation arrangement for petitioner constituted anything

other than nonemployee compensation. During 1990, Mr. Beane

concluded that the management fees accrued to petitioner

personally and that they constituted guaranteed payments. The

partnership did not issue corrective Forms 1099 or Schedules K-1

concerning the $190,000 of management fees accrued and paid to

petitioner in 1987 pursuant to the compensation arrangement. 

Petitioner employs bookkeepers to keep track of his receipts

and expenditures for purposes of computing his personal income

taxes. The bookkeepers recorded petitioner’s receipts and

expenditures using a “one-write sheet” bookkeeping system. 

Receipts also were recorded on bank deposit slips. Petitioner’s

bookkeepers recorded all of petitioner’s receipts and

expenditures in a checkbook for petitioner’s business checking

account with Indian Head Bank and Trust Co. and assembled the

information returns petitioner received from various entities,

including the partnership. Deposits in petitioner’s account with

Indian Head Bank and Trust Co. entered as receipts in 1987 in

petitioner’s general ledger totaled $1,500,000. Amounts entered

in petitioner’s general ledger as receipts from the partnership

in that year exceeded $190,000 because petitioner received other

distributions from the partnership in addition to that amount. 

During the years 1983 through 1987, petitioner deducted his

expenses on Schedules C in the taxable year that they were paid. 

During the years 1983 through 1987, petitioner included all
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income reported on his Schedules C in the taxable year that it

was received. 

During the years 1983 through 1987, petitioner reported as

income on his Schedules C, in the year that the income was

actually received, amounts paid to him from the partnership for

equipment rentals and property he sold to the partnership. On or

about the date petitioner received it, petitioner’s bookkeeper

entered the $25,000 in management fees paid to petitioner in 1984

in petitioner’s general ledger, as management fees received from

the partnership, and petitioner reported the $25,000 as income on

Schedule C of petitioners’ Federal income tax return for 1984. 

With the exception of that $25,000, petitioner did not report as

income the management fees accrued by the partnership during the

years 1983 through 1986 on petitioners’ Federal income tax

returns for those years or on their 1987 return. He did,

however, report on his returns the other income reflected in the

Forms 1099 issued to him during 1987 and 1988 by the partnership. 

The management fees accruing pursuant to the compensation

arrangement were not reflected in any of the records petitioner

provided to his accountant, Clifford Abelson, for the purpose of

preparing petitioners’ 1983 through 1986 Federal income tax

returns, and Mr. Abelson was unaware of the accruals during those

years. During 1988, during the preparation of petitioners’ 1987

return, Mr. Abelson came across the Forms 1099 issued to
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petitioner by the partnership during 1988, including the Form

1099 issued with respect to the $190,000 payment made by the

partnership to petitioner during 1987. Mr. Abelson spoke with

Mr. Beane concerning the matter, and, as result of their

conversations, Mr. Abelson believed that (1) the payment

represented the repayment of a loan by petitioner to the

partnership, (2) the Form 1099 had been issued in error, and (3)

the payment should not be reported as income to petitioner. Mr.

Abelson did not ask petitioner whether he had loaned money to the

partnership. Consequently, petitioner did not report the

$190,000 he received from the partnership during 1987 as income

during 1987 or any other year on petitioners’ Federal income tax

returns. 

During the audit of petitioners’ 1987 Federal income tax

return, Mr. Abelson was asked by the examining agent for an

explanation of, inter alia, the Form 1099 for $190,000. Mr.

Abelson contacted Mr. Beane for information, and following some

discussion and an exchange of letters, Mr. Abelson came to

believe that the $190,000 represented management fees that had

accrued to petitioner from 1983 through 1986. 

At the time respondent issued the statutory notice of

deficiency in the instant case, additional assessments of taxes

for petitioners’ 1983 through 1986 Federal income tax years were

barred by the statute of limitations. 
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1

We sometimes refer to a $190,000 payment and sometimes to

management fees. The term “190,000 payment” denotes the total of

the accrual management fees that were paid to petitioner during

1987.

OPINION

The principal issue presented for decision in the instant

case is whether petitioners must include in their income for

taxable year 1987 the $190,000 payment1 petitioner received from

the partnership during 1987. Petitioners bear the burden of

proof. Rule 142(a). 

Petitioners contend that the $190,000 payment represents a

guaranteed payment that is includable in their income in the

years that the partnership accrued the management fees payable to

petitioner. The period of limitations on assessment has expired

for the taxable years in which the accruals would have been

reportable by petitioners. Respondent contends that, even

assuming that the $190,000 payment represents a guaranteed

payment, petitioner had adopted the cash method of accounting to

report the payment, and, therefore, the payment is includable in

petitioners’ income in the year of receipt. We agree with

petitioners.

For purposes of respondent’s argument on brief, respondent

assumes that the $190,000 payment constitutes a guaranteed

payment and does not dispute petitioner’s contention that it is a

guaranteed payment. Although respondent has not expressly
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conceded that the payment constitutes a guaranteed payment,

because respondent did not raise any argument on brief as to the

nature of the payment, we consider the issue conceded. 

Turning to the question of the time at which the $190,000

guaranteed payment is properly includable in petitioners’ income,

we look to the provisions of section 706(a) and section 1.707-

1(c), Income Tax Regs. Section 706(a) provides:

(a) YEAR IN WHICH PARTNERSHIP INCOME IS

INCLUDIBLE--In computing the taxable income of a

partner for a taxable year, the inclusions required by

section 702 and 707(c) with respect to a partnership

shall be based on the income, gain, loss, deduction, or

credit of the partnership for any taxable year of the

partnership ending within or with the taxable year of

the partner.

The relevant portion of section 1.707-1(c), Income Tax Regs.,

provides:

(c) Guaranteed Payments. Payments made by a

partnership to a partner for services or for the use of

capital are considered as made to a person who is not a

partner, to the extent such payments are determined

without regard to the income of the partnership. 

However, a partner must include such payments as

ordinary income for his taxable year within or with

which ends the partnership taxable year in which the

partnership deducted such payments as paid or accrued

under its method of accounting. * * * 

The tax accounting treatment of a guaranteed payment is

determined at the partnership level regardless of the partner’s

method of accounting. Pratt v. Commissioner, 64 T.C. 203, 212-

214 (1975) (and cases cited therein), affd. in part and revd. in

part on another issue 550 F.2d 1023 (5th Cir. 1977); Cagle v.
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Commissioner, 63 T.C. 86, 95 (1974), affd. 539 F.2d 409 (5th Cir.

1976); S. Rept. 1622, 83d Cong., 2d Sess. 94, 385, 387 (1954). A

guaranteed payment is includable in a partner’s income in the

partner’s taxable year in which the payment’s tax accounting

treatment is determined at the partnership level. Cagle v.

Commissioner, supra at 95. 

On its books, the partnership accrued, on a monthly basis, 

petitioner’s management fees as amounts payable and as management

fees added to the cost of goods sold. The management fees

accruing to petitioner were capitalized into the partnership’s

inventory of condominiums each year and reduced the gross

receipts received by the partnership from the inventory’s sale. 

Accordingly, pursuant to section 706(a) and section 1.707-1(c),

Income Tax Regs., the management fees were includable in

petitioners’ income in the years that they were included in cost

of goods sold by the partnership. Pratt v. Commissioner, supra

at 212-214. 

Consequently, we hold that the $190,000 guaranteed payment

is not income to petitioner during 1987.

Respondent is concerned that petitioners will escape

taxation on the $190,000 guaranteed payment received from the

partnership during 1987 because the taxable years of petitioners

in which the management fees were included in cost of goods sold

by the partnership are now closed. Respondent seeks to avoid
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2

Although petitioners contend that respondent should not be

allowed to rely on the accounting method argument because it was

not timely raised, we need not consider the question because we

reject the argument. We also do not address petitioners’

argument that the management fees were constructively received by

them in the years that they were accrued by the partnership. 

that result by claiming that petitioner personally adopted a cash

method of accounting for the fees. However, as discussed above,

the tax accounting treatment of a guaranteed payment is

determined at the partnership level, and a partner’s method of

accounting does not control the time at which a guaranteed

payment is includable in the partner’s income.2 Pratt v.

Commissioner, supra at 212-214. The partnership accounted for

the management fees represented by the $190,000 guaranteed

payment using an accrual method, and petitioner was required to

include the fees in his income when they were included in cost of

goods sold by the partnership based upon the partnership’s method

for reporting the fees. Moreover, even if petitioner had adopted

a cash method of accounting for the fees, that method was

specifically proscribed pursuant to section 706(a) and section

1.707-1(c), Income Tax Regs., and petitioner was entitled to

abandon it without the Commissioner’s consent. North Carolina

Granite Corp. v. Commissioner, 43 T.C. 149, 168 (1964) and cases

cited therein. As was stated in Thomson-King-Tate, Inc. v.

United States, 296 F.2d 290, 294 (6th Cir. 1961):
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3

We note that generally it is held that, where a taxpayer

erroneously omits income in a year with respect to which

assessment is barred by the statute of limitations, the

Commissioner may not require it to be included in income in a

later year simply to prevent it from escaping tax. United States

v. Wilkins, 385 F.2d 465, 469 (4th Cir. 1967); Welp v. United

States, 201 F.2d 128, 131-133 (8th Cir. 1953); Commissioner v.

Frame, 195 F.2d 166, 167 (3d Cir. 1952) affg. 16 T.C. 600 (1951);

Commissioner v. Mnookin’s Estate, 184 F.2d 89, 92-93 (8th Cir.

1950) affg. 12 T.C. 744 (1949); Ross v. Commissioner, 169 F.2d

483, 492 (1st Cir. 1948), revg. and remanding a Memorandum

Opinion of this Court dated Feb. 10, 1947; Fruehauf Trailer Co.

v. Commissioner, 42 T.C. 83, 107 (1964), affd. 356 F.2d 975 (6th

Cir. 1966). “The courts hold that neither income nor deductions

may be taken out of the proper accounting period for the benefit

of the Government or the taxpayer.” Commissioner v. Mnookin’s

Estate, supra at 92.

If, under the statutes, income must be reported in a

certain way and the taxpayer erroneously reports it in

a different way, such treatment is not binding upon

either the taxpayer or the Commissioner. The taxpayer

has made an error * * * which error, in the absence of

estoppel, is subject to correction if timely challenged

by either the taxpayer or Commissioner * * *.[3]

Respondent does not argue that petitioners are bound to

report the $190,000 guaranteed payment in the year of receipt by

the “duty of consistency” doctrine, nor is it contended that the

mitigation provisions of sections 1311-1314 or the extended

period of limitations provided by section 6501(c) and (e), are

applicable. Petitioners’ mistaken omission of the management

fees from their returns for the years in which they were included

in cost of goods sold by the partnership does not prevent them

from obtaining the benefit of the bar of the statute of

limitations as applicable to the instant case.
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Because we resolve the substantive issue in the instant case

in favor of petitioners, they are not liable for respondent’s

determinations with respect to the additions to tax provided by

sections 6653(a)(1) and 6661.

To reflect the foregoing,

Decision will be entered

for petitioners.