Court Opinion

ID: 3216861
Source: CourtListenerOpinion
Date Created: 2016-06-24 16:01:09.152574+00
Date Added: 2024-06-11T14:30:15.136850
License: Public Domain

FILED
                                               United States Court of Appeals
                UNITED STATES COURT OF APPEALS         Tenth Circuit

                       FOR THE TENTH CIRCUIT                        June 24, 2016
                     _________________________________
                                                                 Elisabeth A. Shumaker
                                                                     Clerk of Court
DAVID H. METHVIN,

       Petitioner - Appellant,

v.                                                 No. 15-9005
                                                (CIR No. 28477-13)
COMMISSIONER OF INTERNAL                            (Tax Court)
REVENUE,

       Respondent - Appellee.
                    _________________________________

                        ORDER AND JUDGMENT *
                     _________________________________

Before BRISCOE, BACHARACH, and McHUGH, Circuit Judges.
                 _________________________________

      This appeal involves characterization of Mr. David H. Methvin’s

participation in certain oil and gas ventures. If Mr. Methvin’s participation

in those ventures constituted a partnership, he would have to pay a self-

employment tax on the income he received from the ventures. See I.R.C.

§ 1402(a); Treas. Reg. § 1.1402(a)-2(d). The Tax Court determined that

Mr. Methvin’s participation in the ventures qualified as a partnership. As a

*
      The parties have not requested oral argument, and we do not believe
it would be helpful. As a result, we are deciding this appeal based on the
briefs. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G).

      This order and judgment does not constitute binding precedent except
under the doctrines of law of the case, res judicata, and collateral estoppel.
But our order and judgment may be cited for its persuasive value under
Fed. R. App. P. 32.1(a) and 10th Cir. R. 32.1(A).
consequence, the Tax Court concluded that Mr. Methvin owed the Internal

Revenue Service $690 for self-employment tax based on his 2011 income.

Mr. Methvin appeals, and we affirm.

     Mr. Methvin owns working interests of 2-3% in various oil and gas

ventures. For these ventures, Mr. Methvin entered into both a purchase

agreement and an operating agreement with the operator.

     For the 2011 tax year, the operator designated Mr. Methvin’s income

as nonemployee compensation and did not send a Schedule K-1 (for partner

income) to Mr. Methvin. Mr. Methvin paid federal income taxes on his

2011 income, but he did not pay a self-employment tax on his income from

the oil and gas ventures. The Tax Court determined that Mr. Methvin’s

arrangement with the operator constituted a partnership under the Internal

Revenue Code. On that basis, the Tax Court concluded that Mr. Methvin

should have paid a self-employment tax based on his income from the oil

and gas ventures.

     The existence of a partnership involves a factual finding, which we

review only for clear error. Bratton v. Comm’r, 193 F.2d 416, 418 (10th

Cir. 1951).

     In determining whether the district court committed a clear error, we

are guided by the statutory definition of the term “partnership.” Under the

Internal Revenue Code, a partnership

                                       2
           “includes a syndicate, group, pool, joint venture, or other
            unincorporated organization”

           through which business is carried on

           so long as the business does not constitute a trust, estate, or
            corporation.

I.R.C. § 7701(a)(2). This definition extends beyond many states’

definitions of a “partnership.” See Madison Gas & Elec. Co. v. Comm’r,

633 F.2d 512, 515 (7th Cir. 1980); Treas. Reg. § 301.7701-1(a)(1), (2).

      Mr. Methvin argues that his involvement with the operator does not

qualify as a partnership because (1) his working interests are not governed

by a separate organization and (2) he is merely a passive investor. The

district court could reasonably reject these arguments in light of the broad

statutory definition of the term “partnership.” Under this definition, the

Tax Court could justifiably characterize the arrangement between Mr.

Methvin and the operator as a partnership.

      Under the purchase agreement, Mr. Methvin had a direct operating

interest in the ventures and enjoyed the rights to

           inspect receipts, vouchers, insurance policies, legal opinions,
            drilling logs and reports, copies of drill stem tests, core
            analyses, electrical surveys, geological reports, and other
            records involving wells that had been drilled, and

           audit the books and records.

                                       3
      Mr. Methvin not only shared these rights with the operator, but also

shared the costs. For example, Mr. Methvin bore responsibility for monthly

costs in proportion to his share of the working interests.

      In addition, the operating agreement characterizes the venture as the

“development, operation and management” of the “[j]oint [p]roperty.” R.,

Doc. 9, Exh. 3-J at 11. Under the operating agreement, Mr. Methvin could

           enter the property to inspect the operations,

           obtain any information reasonably requested regarding
            development and operation, and

           inspect the operator’s records.

      A similar issue arose in Cokes v. Commissioner, 91 T.C. 222 (1988).

There, the working-interest owner argued that she owned only a minority

interest and that her income involved only passive participation as an

investment. 91 T.C. at 228. The Tax Court disagreed, concluding that the

arrangement between the operator and the working-interest owners

established a partnership. Id. at 232. The court reasoned that the

working-interest owners shared costs and proceeds, had a formal written

agreement, and carried on a business together. Id.

      Cokes is persuasive, as both parties appear to recognize. See Esgar v.

Comm’r, 744 F.3d 648, 652 (10th Cir. 2014) (“Rulings by the Tax Court on

matters of tax law are . . . persuasive authority, especially if consistently

followed.”). Like the working-interest owner in Cokes, Mr. Methvin lacks

                                       4
managerial responsibility. But the absence of managerial responsibility

was not controlling in Cokes. Id. at 233.

      Mr. Methvin points out that his circumstances differ from many of

the circumstances in Cokes. For example, the working-interest owner in

Cokes enjoyed some decision-making rights that Mr. Methvin does not

have. These differences might have led the Tax Court to arrive at a

different factual finding here, for “each case must rest on its own facts.”

Jones v. Baker, 189 F.2d 842, 844 (10th Cir. 1951). But the Tax Court did

not clearly err by characterizing Mr. Methvin’s arrangement with the

operator as a partnership. 1 In the absence of clear error, we uphold the Tax

Court’s finding that the arrangement constituted a partnership.

1
      The existence of a partnership depends on the parties’ intent, which
is discerned from all the facts. Comm’r v. Culbertson, 337 U.S. 733, 741-
42 (1949); Comm’r v. Tower, 327 U.S. 280, 286-87 (1946). The Tax Court
has recognized multiple considerations bearing on this issue, including

      [t]he agreement of the parties and their conduct in executing its
      terms; the contributions, if any, which each party has made to
      the venture; the parties’ control over income and capital and
      the right of each to make withdrawals; whether each party was
      a principal and coproprietor, sharing a mutual proprietary
      interest in the net profits and having an obligation to share
      losses, or whether one party was the agent or employee of the
      other, receiving for his services contingent compensation in the
      form of a percentage of income; whether business was
      conducted in the joint names of the parties; whether the parties
      filed Federal partnership returns or otherwise represented to
      respondent or to persons with whom they dealt that they were
      joint venturers; whether separate books of account were
      maintained for the venture; and whether the parties exercised
                                      5
  Affirmed.

                               Entered for the Court

                               Robert E. Bacharach
                               Circuit Judge

  mutual control over and assumed mutual responsibilities for the
  enterprise.

Luna v. Comm’r, 42 T.C. 1067, 1077-78 (1964). Although the Tax Court
did not expressly apply each of these considerations, either in Cokes or
in this case, the Tax Court’s findings sufficiently encompassed the
required analysis. Mr. Methvin does not argue otherwise.
                                  6