Milian v. Commissioner

T.C. Memo. 1999-366

UNITED STATES TAX COURT

TRACY LEE MILIAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3535-98. Filed November 4, 1999.

Lynn Ross, Jr., for petitioner.

Shelley T. Van Doran and Audrey M. Morris, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PAJAK, Special Trial Judge: Respondent determined a

deficiency in petitioner's Federal income tax in the amount of

$2,464 for the taxable year 1995. Unless otherwise indicated,

section references are to the Internal Revenue Code in effect for

the year in issue.

Petitioner conceded that he failed to report as income

$2,198 that he received from the Fort Worth Independent School

District. The only issue the Court must decide is whether
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petitioner is liable for self-employment tax under section 1401

on income received for the performance of off-duty security

services.

FINDINGS OF FACT

Some of the facts in this case have been stipulated and are

so found. Petitioner resided in Fort Worth, Texas, at the time

he filed his petition.

Since 1992, petitioner has been employed as a police officer

by the Fort Worth Police Department (Department). In 1995,

petitioner was working full-time as a patrol officer in a patrol

car. As a Fort Worth police officer, petitioner is required to

abide by the rules set forth in the Department's General Orders

Manual (manual) at all times, regardless of whether he is on or

off duty. An officer who at any time violates any of the rules

in the manual is subject to discipline.

The manual also contains detailed provisions that an officer

must follow to obtain off-duty employment outside of the

Department. Under these provisions, the Department allows its

officers to work both law enforcement or security jobs (off-duty

employment) and non-security related jobs after they receive

approval from the Department and pay a one-time $100

administrative fee for a permit.

The approval or denial of a request for off-duty work is

dependent upon the officer's work requirements and the type of
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entities requiring police services. Among other things, the

officer's personnel records are verified to see whether the

officer is on probation, whether he or she is off work because of

injuries, whether there are any violations, or whether the

officer is already working a substantial amount of overtime. The

entity requesting the services of an officer is also investigated

to see whether there is a conflict of interest or whether it is

in violation of any law.

The request for approval is reviewed by the officer's

supervisor, the division captain, the bureau deputy chief, and

the Chief of Police. The names of officers who have been

approved for off-duty work are placed on a list that operates on

a rotation system. A list of approved work locations is also

maintained.

All requests by the public for an off-duty officer must be

referred to the Department's Executive Services Bureau. As a

request is made, the next officer on the list may accept or

reject the specific off-duty job. Participation in off-duty

employment is strictly voluntary.

During 1995, petitioner provided security services for two

different entities (entities), the Fort Worth Independent School

District (school district) and the Fort Worth Housing Authority

(housing authority). Petitioner worked at the William James

Middle School (school) and the Lincoln Terrace Apartments
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(apartments), a property owned by the housing authority. The

parties stipulated that the school district is not a City of Fort

Worth agency. The housing authority is not a Fort Worth agency.

Petitioner voluntarily decided to accept employment at the

school and the apartments. The Department did not assign

petitioner to work at these sites. The Department was not

obligated to send any off-duty officers to work at the school or

the apartments. Each entity decided on its own to hire off-duty

police officers instead of private security. The entities had

the complete authority to hire any approved officer, and if

dissatisfied with an officer's performance, they could fire him

or her. When petitioner went to the school or the apartments, he

was required by the manual to wear his official uniform and carry

his police equipment.

Petitioner's off-duty work schedule was based upon the needs

of the school district and the housing authority, and took into

account petitioner's on-duty hours. When petitioner reported for

duty at the school and the apartments, he knew he was there to

perform security duties. Petitioner did not report to any

representative of the school district or the housing authority.

At the school, there was a liaison officer who was on duty

and was paid by the Department to be on duty there. If the

liaison officer had a problem with petitioner, he would tell the

school district representative and then the school district, if
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it so decided, would fire the petitioner. Petitioner could carry

out his duties as he saw fit in any given situation, as long as

he did not violate any of the rules in the manual.

In the manual, there are also rules regarding income from

off-duty employment. The manual clearly states that financial

arrangements are between the officer and the employer and that

all officers must be paid on an individual basis by the employer.

Petitioner did not negotiate the amount of pay with either the

school district or the housing authority. However, when

petitioner accepted employment, he knew what the pay rate was.

Petitioner received his pay from both entities in the form of

checks made out to him personally. The checks from the school

district were mailed to petitioner at his house.

Neither the school district nor the housing authority

reported to the Department the amounts earned by petitioner. The

housing authority and the school district considered petitioner

an independent contractor, and each issued petitioner a Form 1099

which reflected that no income taxes were withheld from

petitioner's earnings.

Petitioner's on-duty salary, paid by the City of Fort Worth,

was reported on a Form W-2, had Federal income taxes and Medicare

tax withheld, and was used in the computation of retirement

benefits. The off-duty payments were not included in

petitioner's pay from the Department for any purpose.
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In 1995, Petitioner earned $32,834.85 from the City of Fort

Worth, $12,860 from the housing authority, and $2,198 from the

school district. Petitioner included the $12,860 from the

housing authority as part of what he reported as wages on his

1995 return. He failed to report on his return the $2,198

received from the school district. At trial, petitioner conceded

that the $2,198 received from the school district should have

been included in his reportable income. Petitioner did not

report any amount of self-employment tax on his off-duty income.

Petitioner contends that he was an employee of the City of

Fort Worth when he worked off-duty jobs because he was under the

control of the Department at all times. Petitioner argues that

because he was employed by the City of Fort Worth in its Police

Department for the off-duty jobs, and not self-employed, he does

not have to pay self-employment taxes on the off-duty income.

Respondent asserts that petitioner was not under the control of

the Department at the time petitioner worked off-duty jobs.

Therefore, respondent's position is that petitioner was not an

employee, and as such, his compensation from off-duty employment

is subject to self-employment tax under section 1401.

OPINION

Section 1401 imposes a tax upon a taxpayer's self-employment

income. Self-employment income includes the net earnings from

self-employment derived by an individual during the taxable year.
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Sec. 1402(b). Net earnings from self-employment consist of gross

income derived by an individual from any trade or business

carried on by such individual, less the allowable deductions that

are attributable to such trade or business, plus certain items

not relevant here. Sec. 1402(a). However, the self-employment

tax generally does not apply to compensation paid to an employee

by an employer. Sec. 1402(c)(2) and (3).

Whether an individual is an employee or an independent

contractor in a particular situation is a question of fact that

must be determined through the application of common-law

principles to the circumstances of the situation at hand. Weber

v. Commissioner, 103 T.C. 378, 386-387 (1994), affd. 60 F.3d 1104

(4th Cir. 1995); sec. 31.3401(c)-1(d), Employment Tax Regs.

Section 31.3401(c)-1(b), Employment Tax Regs., defines the

employer/employee relationship as follows:

Generally the relationship of employer and employee
exists when the person for whom services are performed
has the right to control and direct the individual who
performs the services, not only as to the result to be
accomplished by the work but also as to the details and
means by which that result is accomplished. That is,
an employee is subject to the will and control of the
employer not only as to what shall be done but how it
shall be done. In this connection, it is not necessary
that the employer actually direct or control the manner
in which the services are performed; it is sufficient
if he [or she] has the right to do so. The right to
discharge is also an important factor indicating that
the person possessing that right is an employer. Other
factors characteristic of an employer, but not
necessarily present in every case, are the furnishing
of tools and the furnishing of a place to work to the
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individual who performs the services. In general, if
an individual is subject to the control or direction of
another merely as to the result to be accomplished by
the work and not as to the means and methods for
accomplishing the result, he [or she] is not an
employee.

The Court may consider various factors in determining the

relationship between the parties. These factors include:

(1) The degree of control exercised by the principal over the

details of the work; (2) which party invests in the facilities

used in the work; (3) the opportunity of the individual for

profit or loss; (4) whether or not 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. However, no one factor dictates the outcome.

Rather, we must look at all the facts and circumstances of each

case. Weber v. Commissioner, supra.

The facts of this case are strikingly similar to the facts

in Kaiser v. Commissioner, T.C. Memo. 1996-526, affd. without

published opinion 132 F.3d 1457 (5th Cir. 1997), and March v.

Commissioner, T.C. Memo. 1981-339. In accord with those

opinions, we find for the following reasons that petitioner was

not an employee of the City of Fort Worth when he worked off-duty

for the school district and the housing authority.
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As in the March and Kaiser cases, the Department in this

case exercises control over off-duty jobs in that it has a

detailed approval process and the officer is always to abide by

the manual and code of ethics. However, the Court previously

found, and we so find again, that the incidental control held by

the police department relates solely to the on-duty employment

relationship, rather than to the details of the off-duty

relationship. Kaiser v. Commissioner, supra; March v.

Commissioner, supra. We find that the Department is looking

after its own interests in making sure that off-duty work does

not interfere with on-duty work, that the Department's image is

not tarnished, and that the Department knows where its officers

are located in case of an emergency.

Petitioner puts forth another argument for departmental

control stating that he has to report to other officers on his

off-duty jobs. However, we find that the coordination of the

off-duty jobs by other officers is not comparable to departmental

control. Rather, the use of a coordinating officer is merely an

administrative aid to all parties involved. It is easier for the

school district and the housing authority to converse with one

individual officer rather than a group of officers. The amount

of control held by the Department is not sufficient for us to

find that petitioner was engaged in off-duty employment as an

employee of the Department. In fact, the Department does not
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recognize off-duty employment as employment by the Department.

This is evidenced by the Form W-2 issued to petitioner and by the

fact that income from such sources is not taken into account for

pension purposes.

The conclusions in March v. Commissioner, supra and Kaiser

v. Commissioner, supra regarding other indicia of an

employee/employer relationship will be briefly reiterated and

followed by this Court. One indicator is that an employee

performs work that directly benefits the employer. March v.

Commissioner, supra. Although petitioner testified that the

Department benefited from his off-duty employment because the

amount of police calls out to the school and apartments

decreased, such a benefit was indirect and could have resulted

from the use of private security guards. March v. Commissioner,

supra. The school district and the housing authority asked for

and received the main benefit of added security provided by

petitioner's presence on their premises.

Another factor of an employee/employer relationship is the

ability to select and discharge at will. March v. Commissioner,

supra. In this case, the school district and the housing

authority retained this power. This factor militates against

petitioner's position. The mere approval from the Department to

work off-duty does not amount to the ability to hire and fire
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with regard to the off-duty positions. Kaiser v. Commissioner,

supra.

The source and method of payment may also help establish

whether an employee/employer relationship existed. March v.

Commissioner, supra. In this case, both entities, the school

district and the housing authority, operate separately from the

City of Fort Worth/the Department. Petitioner was paid

separately by each entity and his earnings were never reported to

the Department. The entities treated petitioner as an

independent contractor and issued Form 1099's. The City of Fort

Worth did not include the off-duty pay in his W-2 Form.

Although there may be some factors that point to an

employee/employer relationship, such as the use of the uniform

and equipment, these factors are not as significant as the

factors which show that the Department was not petitioner's

employer for his off-duty services. In fact, the factors in

their totality show that petitioner was self-employed.

To the extent that any of petitioner's other arguments were

not addressed by this Court, we have considered them and find

them to be without merit.

We find that petitioner was not an employee of the City of

Fort Worth when he provided security for the school district and

the housing authority. For the reasons above, and those

expressed in March v. Commissioner, supra and Kaiser v.
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Commissioner, supra, we hold that the earnings in dispute are

earnings from self-employment under section 1402, subject to the

tax imposed by section 1401.

Decision will be entered for

respondent.