T.C. Memo. 2000-237
UNITED STATES TAX COURT
KENNETH W. FRISCHE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8919-98. Filed August 4, 2000.
Kenneth W. Frische, pro se.
Fred E. Green, Jr., for respondent.
MEMORANDUM OPINION
COUVILLION, Special Trial Judge: Respondent determined
deficiencies of $758, $1,823, and $1,862 in Federal income taxes,
respectively, for petitioner's 1994, 1995, and 1996 tax years and
the accuracy-related penalty under section 6662(a)1 in the
amounts of $365 and $372, respectively, for 1995 and 1996.
1
Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the years at issue.
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The issues for decision are: (1) Whether petitioner was
engaged in a trade or business as an independent contractor or as
an employee during the years at issue; (2) whether petitioner is
entitled, in connection with his activity, to a deduction for
meals for 1995 and 1996; and (3) whether petitioner is liable for
the section 6662(a) penalty for the years 1995 and 1996.2
Some of the facts were stipulated. Those facts and the
accompanying exhibits are so found and are incorporated herein by
reference. At the time the petition was filed, petitioner's
legal residence was Reno, Nevada.
Petitioner was a process server. He began this activity in
1983, when he lived in the San Francisco, California, bay area.
In 1987, he moved to Reno, Nevada, and continued the activity
there. In 1998, he discontinued the activity and took a full-
time job with a gambling casino.
In the Reno, Nevada, area, during the 3 years at issue,
petitioner's process-serving activity was conducted through the
Reno Carson Messenger Service (the Messenger Service) that was
owned by a third party. Petitioner derived all of his process-
serving work from the Messenger Service. Petitioner was required
to use his own vehicle and was assigned a certain geographic area
2
In the notice of deficiency, respondent disallowed a
deduction for utilities claimed by petitioner for 1994 and 1995.
At trial, petitioner conceded this adjustment.
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in and around Reno, Nevada, for his process services.
Petitioner considered himself an independent contractor for
tax purposes. He reported his process-serving income and claimed
his expenses on his Federal income tax returns on a Schedule C,
Profit or Loss From Business. Petitioner realized a net profit
for each of the years at issue.
Petitioner's earnings from his activity were paid to him by
the Messenger Service. For each year at issue, the Messenger
Service issued to petitioner Internal Revenue Service (IRS) Forms
W-2, Wage and Tax Statement, reflecting the amounts paid to
petitioner for his services. The Forms W-2 classified
petitioner's remunerations as wages. The Messenger Service
withheld Social Security and Federal income taxes on the
payments. Petitioner, however, on his Federal income tax
returns, reported the Form W-2 amounts as gross income on
Schedule C. Petitioner claimed deductions for expenses related
to his activity, consisting of car and truck expenses, meals and
entertainment, and utilities. Although he realized a net profit
for each of the years at issue, petitioner did not include with
his returns the appropriate schedules for self-employment taxes.
In the notice of deficiency, respondent determined that
petitioner was not an independent contractor but, rather, was an
employee and that his earnings from the Messenger Service
constituted salary or wages. Respondent further determined that
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the expenses incurred by petitioner in connection with his
activity constituted unreimbursed employee business expenses that
were deductible on Schedule A, Itemized Deductions, but subject
to the limitation of section 67(a). For the 3 years at issue,
respondent allowed all the car and truck expenses claimed by
petitioner on his Schedule C as itemized deductions. Similarly,
respondent allowed petitioner an itemized deduction for meals for
1994 but disallowed the amounts claimed for meals for 1995 and
1996.3 Respondent also disallowed utilities expenses claimed for
1994 and 1995, which petitioner conceded at trial. See supra
note 2.
With respect to the first issue, whether an individual is an
employee or an independent contractor is a factual question to be
answered using common-law principles. See Nationwide Mut. Ins.
Co. v. Darden, 503 U.S. 318, 322-325 (1992); Professional &
Executive Leasing, Inc. v. Commissioner 89 T.C. 225, 232 (1987),
affd. 862 F.2d 751 (9th Cir. 1988); Weber v. Commissioner, 103
T.C. 378, 386 (1994), affd. 60 F.3d 1104 (4th Cir. 1995). In
3
At trial, respondent orally moved to increase the
deficiency for 1994 for the disallowance of $2,625 in meal
expenses, which respondent contends was erroneously allowed in
the notice of deficiency. Although the deductibility of meal
expenses is in part a legal question, the meal expenses for 1995
and 1996 were also disallowed for lack of substantiation. Since
petitioner had no knowledge prior to trial that respondent would
move to increase the deficiency for 1994, respondent's oral
motion will be denied.
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determining the substance of an employment relationship some of
the factors to be considered 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 hired party for profit or loss; (4) whether
the type of work is part of the principal's regular business; (5)
the permanency of the relationship between the parties to the
relationship; (6) whether the principal has the right to
discharge the individual; (7) whether the principal provides
benefits to the hired party typical of those provided to
employees; and (8) the relationship the parties believe they are
creating. See Nationwide Mut. Ins. Co. v. Darden, supra at 322-
324; Professional & Executive Leasing, Inc. v. Commissioner,
supra at 232-233; Weber v. Commissioner, supra at 387. No one
factor is determinative; rather, all the incidents of the
relationship must be assessed and weighed. See Nationwide Mut.
Ins. Co. v. Darden, supra at 324.
The principal's right to control the manner in which the
taxpayer's work is performed ordinarily is the single most
important factor in determining whether there is a common-law
employment relationship. See Leavell v. Commissioner, 104 T.C.
140, 149 (1995). However, the principal need not stand over the
taxpayer and direct every move. Moreover, the degree of control
necessary to find employee status varies according to the nature
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of the services provided. Finally, the Court must consider not
only what actual control is exercised but also what right of
control exists as a practical matter. See Hathaway v.
Commissioner, T.C. Memo. 1996-389.
The Court finds it noteworthy that petitioner did not have
clients of his own. Petitioner's sole income as a process server
came from the Messenger Service. The Messenger Service
determined the geographic area that petitioner was to serve. At
least one other person was a process server who worked a
different geographic area. Petitioner was required to report or
make a return of his service activity to the Messenger Service.
Petitioner reported regularly, although not necessarily on a
daily basis, to a place maintained by the Messenger Service for
the conduct of its trade or business. Although petitioner was
not provided a daily schedule of services to be made on any given
day, the Messenger Service determined the urgency or the priority
for certain services, and petitioner was required to report on
the results of his services. On this record, the Messenger
Service retained the necessary control over petitioner's activity
consistent with an employer-employee relationship. Although
petitioner was required to use his own vehicle to make his
services, he otherwise had no investment in the work facilities.
Petitioner was paid a specific amount for each service he made
plus mileage; consequently, he had no opportunity for profit or
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loss. See Eren v. Commissioner, T.C. Memo. 1995-555. The
service work petitioner performed was part of the regular
business of the Messenger Service. The record indicates that the
Messenger Service had the right to discharge petitioner.
Finally, it is evident that petitioner and the Messenger Service
believed they had an employer-employee relationship because
petitioner's earnings each year were reflected by IRS Forms W-2
for salary or wages, a categorization that petitioner never
challenged. The facts do not support a finding that petitioner
was an independent contractor. Petitioner was an employee of the
Messenger Service. Respondent is sustained on this issue.
The second issue is with respect to deductions claimed by
petitioner for meals and entertainment on his 1995 and 1996
income tax returns. On his returns, petitioner claimed, after
application of the 50-percent limitation provision of section
274(n), $2,800 and $1,650, respectively, for meals and
entertainment for 1995 and 1996, which respondent disallowed.
The geographical area in which petitioner worked was the
city of Reno, points north and west of Reno, the Lake Tahoe area,
and occasionally east Reno. None of these areas was at a
distance that required petitioner to incur an expense for
lodging. Nevertheless, petitioner incurred expenses for meals.
Petitioner's position is that expenses for meals are deductible
while at work. As he testified at trial, "The meal deduction
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should be allowed whether I was away from home or not because I
was out there taking care of business. I was in my car all day
long."
Section 162(a)(2) allows the deduction of traveling
expenses, including meals, while away from home in the pursuit of
a trade or business. For a taxpayer to be considered "away from
home" within the meaning of section 162(a)(2), the Supreme Court
has held that the taxpayer must be on a trip requiring sleep or
rest. See United States v. Correll, 389 U.S. 299 (1967). In
Barry v. Commissioner, 54 T.C. 1210 (1970), affd. per curiam 435
F.2d 1290 (1st Cir. 1970), this Court applied the Correll rule in
disallowing expenses for meals claimed by a taxpayer on 1-day
business trips that extended from 16 to 19 hours during which the
taxpayer rested briefly once or twice in his automobile but
always returned home without incurring an expense for lodging.
This Court held, in Barry, that the rest period required for the
deductibility of travel expenses requires a rest of sufficient
duration in time that necessitates the securing of lodging, and
that a mere pause in the daily work routine does not satisfy the
requirements of section 162(a)(2). The rationale for allowance
of the deduction in away-from-home cases is the taxpayer's
significantly higher expenses incurred by reason of the lodging.
See United States v. Correll, supra at 304-305. On the other
hand, where no lodging expense is incurred, the meal expenses
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incurred by the taxpayer do not add to the taxpayer's business
expenses because such expenses result from the sort of rest that
anyone can, at any time, without special arrangement and without
special expense, take in his own automobile or office. See Barry
v. Commissioner, supra at 1213; see also Siragusa v.
Commissioner, T.C. Memo. 1980-68, affd. without published opinion
659 F.2d 1062 (2d Cir. 1981); Strohmaier v. Commissioner, 113
T.C. 106, 115 (1999).
Petitioner argued that he always claimed meals as a
deduction on his income tax returns and that, in 1987, while he
was a process server in San Francisco, California, his tax
returns for 1985 and 1986 were audited, and his meal expenses
were allowed as deductions. He also was audited for his 1990,
1991, and 1992 tax years where the same issue was raised. In
this audit, petitioner settled his case for $1,500, even though
respondent initially claimed he owed a deficiency of $5,000.
Petitioner did not offer any documentary evidence with respect to
either audit; consequently, the Court is unable to ascertain what
issues were involved or the basis upon which the expenses were
allowed. It appears that, in both audits, petitioner settled at
the administrative level, and no court proceedings were ever
pursued. Even if petitioner's expenses were allowed in prior
years under the same factual circumstances of this case, it is
well established that respondent is not estopped by an erroneous
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application of the law by agents of the IRS. See Estate of
Emerson v. Commissioner, 67 T.C. 612, 617-618 (1977); Automobile
Club of Michigan v. Commissioner, 353 U.S. 180 (1957). The
Court, therefore, rejects petitioner's argument and holds that
petitioner's deductions for meals for the years 1995 and 1996 are
not deductible. Respondent is sustained on this issue.
Respondent determined that petitioner was liable for the
accuracy-related penalty under section 6662(a) for negligence or
disregard of rules or regulations under section 6662(b)(1).
Section 6662(a) provides that, if it is applicable to any
portion of an underpayment in taxes, there shall be added to the
tax an amount equal to 20 percent of the portion of the
underpayment to which section 6662 applies. Under section
6664(c), no penalty shall be imposed under section 6662(a) with
respect to any portion of an underpayment if it is shown that
there was a reasonable cause for such portion, and that the
taxpayer acted in good faith with respect to such portion.
Section 6662(b)(1) provides that section 6662 shall apply to
any underpayment attributable to negligence or disregard of rules
or regulations. Section 6662(c) provides that the term
"negligence" includes any failure to make a reasonable attempt to
comply with the provisions of the internal revenue laws, and the
term "disregard" includes any careless, reckless, or intentional
disregard of rules or regulations. Negligence is the lack of due
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care or failure to do what a reasonable and ordinarily prudent
person would do under the circumstances. See Neely v.
Commissioner, 85 T.C. 934, 947 (1985). It is well established
that the taxpayer bears the burden of proof on this issue. See
Bixby v. Commissioner, 58 T.C. 757, 791 (1972).
The determination of whether a taxpayer acted with
reasonable cause and in good faith depends upon the facts and
circumstances of each particular case. See sec. 1.6664-4(b)(1),
Income Tax Regs. Relevant factors include the taxpayer's efforts
to assess his or her proper tax liability, the knowledge and
experience of the taxpayer, and reliance on the advice of a
professional, such as an accountant. See Drummond v.
Commissioner, T.C. Memo. 1997-71. However, the most important
factor is the extent of the taxpayer's effort to determine the
taxpayer's proper tax liability. See sec. 1.6664-4(b)(1), Income
Tax Regs. An honest misunderstanding of fact or law that is
reasonable in light of the experience, knowledge, and education
of the taxpayer may indicate reasonable cause and good faith.
See Remy v. Commissioner, T.C. Memo. 1997-72.
Petitioner did not directly address this issue at trial;
consequently, the Court decides the issue on the totality of the
evidence presented. In that light, the Court notes that
petitioner conceded the disallowed utility expenses he had
claimed on his 1994 and 1995 returns. Petitioner did not
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maintain accurate books and records with respect to his claimed
meals and entertainment expenses that would satisfy the
substantiation requirements of section 274(d). See sec. 6001;
sec. 1.6001-1(a), Income Tax Regs. There is no evidence in the
record that petitioner relied on the advice of a professional,
such as an accountant. Petitioner's obvious position, to be
surmised from the totality of his testimony, is that he relied on
two previous audits by the IRS in which the manner of reporting
his process-server income was accepted. As noted earlier, no
documentary evidence was presented to show the basis upon which
these audits were settled. In the second audit, petitioner paid
a deficiency of $1,500 that may or may not have been based on the
method of reporting his process-server income. Finally,
petitioner was certainly on notice each year when he received IRS
Forms W-2 from the Messenger Service that clearly identified his
earnings as salary or wages. Salary or wages do not constitute
self-employment income, nor is such income gross income from a
trade or business activity for purposes of Schedule C. The Court
sustains respondent on this issue.
An appropriate order and
decision will be entered.