T.C. Memo. 1999-140
UNITED STATES TAX COURT
PAULA M. KELLY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8983-97. Filed April 29, 1999.
Raymond B. Oothout, for petitioner.
Louise R. Forbes, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182. 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.
2
Respondent determined a deficiency in petitioner's Federal
income tax in the amount of $2,256 for the 1994 tax year.
After a concession,1 the remaining issues for decision are:
(1) Whether petitioner is entitled to claim Schedule C expenses
for the 1994 tax year, and (2) whether petitioner is entitled to
an earned income credit for 1994.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioner resided in Milton, Massachusetts.
FINDINGS OF FACT
In 1994, petitioner worked in the entertainment media
providing freelance makeup services for actors and models working
in film, television, theater, and still photography. During this
time petitioner was also a member of the Makeup and Hair Stylists
Local Union 798 I.T.S.E. of New York, New York.
Petitioner obtained work in the industry by reading various
trade publications and by contacting production companies
bringing theatrical productions to the Boston area. Petitioner
also apparently obtained some work by referral. Once petitioner
knew there would be work available on a certain date, petitioner
sent her resume to companies that might hire her. Parties
1
Respondent concedes that petitioner reported rental income
in the amount of $675 on Schedule C of petitioner's 1994 return.
3
interested in petitioner's services negotiated a "deal memo" with
petitioner which included the daily rate for her first 8 hours of
work, overtime pay, break time, and whether a "kit"2 would be
provided by the company where she was working. After being hired
and in order to receive remuneration, petitioner recorded her
time on a timesheet which she turned in to members of the
production staff. Petitioner was usually paid on a weekly basis.
Petitioner reported Schedule C income in the amount of
$23,519 on her 1994 income tax return. Of this amount,
petitioner reported Form W-2 income in the amount of $20,218,
Form 1099 income in the amount of $2,626, and income from kit
rentals in the amount of $675. Petitioner claimed 1994 Schedule
C deductions in the amount of $22,249.
Petitioner was required to move suddenly in January of 1997,
during a time at which petitioner was also suffering from
depression. As a result of both the unforeseen move and her
medical condition, petitioner's 1994 receipts for paid expenses,
among other items, were lost.
In a notice of deficiency dated February 5, 1997, respondent
determined that petitioner's Form W-2 income did not qualify as
Schedule C statutory employee income and respondent, therefore,
disallowed all of petitioner's offsetting Schedule C deductions.
2
Though it is unclear from the record, a "kit" apparently
refers to a makeup kit stocked with cosmetic supplies.
4
OPINION
1. Schedule C Expenses
At trial, petitioner argued that she earned her 1994 income
in her capacity as an independent contractor, or, in the
alternative, as a statutory employee, even though most of her
1994 income was reported as employee wages on Forms W-2.
Therefore, as an independent contractor or as a statutory
employee, she properly reported her income and deducted her
business expenses on Schedule C.
Deductions are a matter of legislative grace. See New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). A
taxpayer bears the burden of proving that she is entitled to her
claimed deductions. See Welch v. Helvering, 290 U.S. 111, 115
(1933).
Section 162(a) allows a taxpayer to deduct all ordinary and
necessary business expenses paid or incurred during the taxable
year in carrying on any trade or business. No deduction is
allowed for personal, living, or family expenses. See sec. 262.
Taxpayers are required to maintain adequate records
sufficient to enable the Commissioner to determine the taxpayer's
correct tax liability. See sec. 6001; see also Meneguzzo v.
Commissioner, 43 T.C. 824, 831-832 (1965); sec. 1.6001-1(a),
Income Tax Regs.
5
Generally, if a claimed business expense is deductible, but
the taxpayer is unable to substantiate it, the Court is permitted
to make as close an approximation as it can. See Cohan v.
Commissioner, 39 F.2d 540 (2d Cir. 1930). The estimate must have
a reasonable evidentiary basis. See Vanicek v. Commissioner, 85
T.C. 731, 743 (1985).
Section 274(d), however, requires strict substantiation of
certain expenses, including those incurred with respect to any
listed property as defined in section 280F(d)(4). Listed
property includes any passenger automobile. See sec.
280F(d)(4)(A)(i). Section 274 supersedes the doctrine in Cohan
v. Commissioner, supra. See sec. 1.274-5T(a)(4), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
A taxpayer is required to substantiate expenses for listed
property by establishing the amount, time, place, and business
purpose of the expense. See sec. 274(d). Even if such an
expense would otherwise be deductible, the deduction may still be
denied if there is insufficient substantiation to support it.
See sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.
46014 (Nov. 6, 1985).
A taxpayer must maintain adequate records with respect to
listed property. See sec. 1.274-5T(c)(2)(i), Temporary Income
Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). But where the
taxpayer establishes that the failure to produce adequate records
6
is due to the loss of such records through circumstances beyond
the taxpayer's control, such as destruction by fire, flood,
earthquake, or other casualty, the taxpayer shall have a right to
substantiate such a deduction by reasonable reconstruction of her
expenditures or use. See sec. 1.274-5T(c)(5), Temporary Income
Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985).
Petitioner was unable to remember many details regarding her
claimed deductions. Although both petitioner and her witnesses
testified that petitioner had once possessed receipts
substantiating her 1994 Schedule C deductions, neither
petitioner, her accountant, nor her attorney attempted to
reconstruct petitioner's claimed expenditures by contacting
businesses or financial institutions with which petitioner
conducted business in 1994.
On the basis of the record, we find that petitioner did not
substantiate her claimed Schedule C expenses. Therefore, we hold
that petitioner is not entitled to claim Schedule C deductions
for the 1994 tax year. Respondent is sustained on this issue.
In any event, the expenses incurred would not be allowable
on Schedule C because petitioner was not in business for herself,
as explained hereafter.
In considering whether petitioner was an independent
contractor or an employee, we apply common-law rules. Courts
consider various factors to determine whether an employment
7
relationship exists between the parties, including: (1) The
degree of control exercised by the principal; (2) which party
invests in work facilities used by the individual; (3) the
opportunity of the individual for profit or loss; (4) whether the
principal can 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 believed
they were creating. See Weber v. Commissioner, 103 T.C. 378, 387
(1994), affd. per curiam 60 F.3d 1104 (4th Cir. 1995). No single
factor dictates the outcome. All the facts and circumstances
should be considered. Id.
The right of control is ordinarily the crucial factor in
determining whether an employer-employee relationship exists.
See Matthews v. Commissioner, 92 T.C. 351, 361 (1989), affd. 907
F.2d 1173 (D.C. Cir. 1990). To retain the requisite control over
the details of an individual's work, the principal need not stand
over the individual and direct every move made by the individual.
See Weber v. Commissioner, supra at 388.
In this case, petitioner's services were fixed by a deal
memo which petitioner signed with each production company which
hired her. The deal memo also fixed petitioner's compensation.
Depending on the circumstances, petitioner was variously paid an
hourly rate which may or may not have included overtime, a flat
rate, or a rate based on union guidelines. The deal memo also
8
covered the timing and length of allowable break time.
Additionally, petitioner was required to submit timesheets in
order to be paid. The deal memo controlled where and when
petitioner reported for work and whether her principal would, or
would not, furnish petitioner's makeup kit.
With regard to the control exerted by the principal,
petitioner was required to remain on the set for as long as her
services were needed. Additionally, the company which hired
petitioner could require her to change an actor's makeup
according to the company's specifications.
Petitioner also was aware that the production companies she
worked for would report her compensation as wage income on a Form
W-2. At trial, petitioner submitted a document from FPS
Services, Inc., entitled: Crossroads Films - Crew Payroll -
Information & Instructions. The document contained the following
language:
Independent Contractors/Corporations We do not pay
Independent Contractors unless they are Incorporated.
In order to be paid as a corporation, copies of your
Articles of Incorporation or your Corporate Seal must
be submitted. Once on file, they do not need to be
resubmitted. Corporations can be paid on a timecard or
their own invoice. IMPORTANT: The name of the
Corporation, the Federal ID# AND the Name and Social
Security # of the employee must be indicated. As a
corporation you should have your own Worker's
Compensation Insurance. If you do, please provide
proof of it to FPS. If you don't FPS will provide it,
charging Crossroads Films. Crossroads Films may ask
that you reimburse them for this expense.
9
Petitioner was aware that she could have been treated as an
independent contractor if she had incorporated and that the
practice of requiring independent contractors to be incorporated
was common in the industry. Of course, if petitioner had
incorporated and been treated as an independent contractor,
petitioner would then have been required to pay for her own
worker's compensation insurance. Petitioner's testimony,
combined with the above document, clearly outlines the nature of
the relationship petitioner and her principal thought they had
created, that of employer/employee.
Petitioner contends, in the alternative, that she was a
"statutory employee" pursuant to section 3121(d)(3), and, thus,
that she is still entitled to deduct her expenses on Schedule C.
We disagree. Petitioner clearly does not meet the requirements
of section 3121(d)(3) as she was not engaged in work as an agent
driver, commission driver, insurance salesman, home worker, or
traveling salesman. Furthermore, none of the Forms W-2 indicated
that petitioner was a "statutory employee".
On the basis of the record, we find that petitioner was
hired as an employee in her profession as a makeup artist during
the 1994 tax year.
2. Earned Income Credit
An eligible individual is allowed an earned income credit
for the taxable year in an amount equal to the credit percentage
10
of so much of the taxpayer's earned income as does not exceed the
earned income amount. See sec. 32(a). Earned income includes
wages, salaries, tips, and other employee compensation plus net
earnings from self-employment. The amount of earned income
credit to which petitioner is entitled is a computational matter.
On the basis of the record, we find that petitioner earned
gross income in the amount of $23,519 for the 1994 tax year and
that petitioner had one qualifying child in 1994. Therefore,
based on statutory guidelines for the 1994 tax year, we find that
the earned income credit allowed would be $37. Respondent is
sustained on this issue.
To reflect the foregoing,
Decision will be entered
under Rule 155.