Court Opinion

ID: 4333622
Source: CourtListenerOpinion
Date Created: 2018-11-14 01:17:09.785057+00
Date Added: 2024-06-11T14:47:19.983159
License: Public Domain

117 T.C. No. 25

                     UNITED 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.
                               - 2 -

          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.
                                 - 3 -

                                             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.
                                - 4 -

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
                                   - 5 -

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.
                                - 6 -

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.
                               - 7 -

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
                               - 8 -

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.
                                 - 9 -

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).
                                - 10 -

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
                               - 11 -

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
                              - 12 -

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
                              - 13 -

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.
                               - 14 -

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.
                               - 16 -

     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-
                              - 17 -

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
                              - 18 -

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).
                               - 19 -

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.
                               - 20 -

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
                               - 21 -

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.
                               - 22 -

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
                                - 23 -

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
                               - 24 -

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)
                               - 25 -

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
                               - 26 -

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
                              - 27 -

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.