T.C. Summary Opinion 2001-55
UNITED STATES TAX COURT
JACK C. GOINS, SR. AND EDITH M. GOINS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 316-99S. Filed April 16, 2001.
Jack C. Goins, Sr., pro se.
D. Lyndell Pickett, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for 1993 and 1994. Rule references are to
the Tax Court Rules of Practice and Procedure. The decision to
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
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Respondent determined deficiencies of $5,974 and $6,459, in
petitioners’ Federal income taxes for the years 1993 and 1994,
respectively. For each year, the issues for decision are: (1)
Whether petitioners are entitled to trade or business expense
deductions in excess of the amounts allowed by respondent, and
(2) whether Jack C. Goins, Sr. performed services as an insurance
examiner for the Commonwealth of Kentucky as an independent
contractor or employee.
Background
Some of the facts have been stipulated and are so found.
Petitioners filed a timely joint Federal income tax return for
each year in issue. At the time the petition was filed, they
resided in Frankfort, Kentucky. References to petitioner are to
Jack C. Goins, Sr.
Petitioner began performing services for the Commonwealth of
Kentucky Department of Insurance (DOI) as a market conduct
examiner on April 1, 1969. Over the years his position was
classified at times as an independent contractor and at times as
an employee. His working arrangement with DOI ended on June 30,
1996.
On July 3, 1996, petitioner filed a claim for unemployment
insurance benefits, claiming that he was laid off by his employer
on June 30, 1996. After an administrative hearing before a
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referee and an appeal to the Kentucky Unemployment Insurance
Commission, petitioner was denied benefits on the basis of
insufficient base period wages. Applying common-law factors
used in making such determinations, the Kentucky Unemployment
Insurance Commission found that “the services performed by * * *
[petitioner for the DOI] were performed as an independent
contractor” and that petitioner “was not an employee of” the DOI.
The decision of the Kentucky Unemployment Insurance
Commission is based in part upon petitioner’s employment
relationship with the DOI during the years in issue. For each of
those years the terms of that relationship are set forth in a
personal service contract. Among other things, each contract
provides for: (1) A term of 1 year, beginning on July 1 and
ending on June 30; (2) petitioner’s maximum annual fees for
services computed with reference to the maximum set on a daily
basis; and (3) reimbursement for traveling costs including a
fixed rate per diem amount depending, in part, upon distance
traveled. Each contract specifically provides:
The parties are cognizant that the State is liable for
Social Security employer’s contributions and for making
Social Security withholdings pursuant to 42 U.S. Code,
Section 418 [Section 218 of the Social Security Act],
relative to the compensation of the Second Party for
this contract.
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Petitioner’s obligations under each contract are described as
follows:
Performs market conduct examinations of insurance
companies authorized to do business in Kentucky. Audit
claims records, policy filings, rates, advertisements,
and agent records for compliance with law. Prepares
report of examinations and testifies in any formal
proceedings resulting from examination.
Usually, the examinations conducted by petitioner pursuant
to his contracts with the DOI took place at the offices of the
insurance company under examination where the records necessary
for the examination were stored; in most cases, the location was
not in Kentucky. Each contract contemplated the examinations
would require petitioner to travel extensively, which he did
during each year in issue.
For most audits, petitioner used his personally owned 1992
Cadillac to travel to the location where the insurance company
under audit was located. Petitioner was reimbursed $.22 per mile
for the use of his car for trips to and from the location of the
audit. If the audit was conducted within 200 miles of Frankfort,
petitioner was also entitled to mileage reimbursements for return
trips to Frankfort over the weekends.
Petitioner was paid a per diem allowance for meals and
lodging while traveling away from Frankfurt on DOI business as
follows:
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Distance Days Paid Rate Per Day
< 50 miles 0 0
51-200 miles 5 (M-F) $80 before 7/1/94
$85 thereafter
> 201 miles 7 $80 before 7/1/94
$85 thereafter
During 1993, petitioner received mileage reimbursements of
$1,570.80 and per diem payments of $27,920 (349 days x $80).
During 1994, petitioner received mileage reimbursements of
$1,430.38, and per diem payments of $23,375 ((170 days x $80) +
(115 days x $85)). Petitioner was required to submit a travel
voucher to DOI, but was not required to submit receipts.
Petitioners’ Federal income tax return for each year in
issue was prepared by a paid income tax return preparer.
Included with each return is a Schedule C, Profit or Loss From
Business. On each Schedule C, petitioner’s business is described
as “Contract State Insurance Auditor”. No income is reported on
either Schedule C; for each year the income paid to him by the
DOI was reported as wages, as evidenced by the issuance of Forms
W-2, Wage and Tax Statement. The travel reimbursements paid to
petitioner during the years in issue are not included in the
income reported on the Forms W-2.
The following deductions are claimed on the Schedules C:
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1993 1994
Gas & oil $3,588.08 $3,458.83
Lodging 7,547.28 7,478.77
Depreciation 500.00 3,000.00
Insurance 672.12 842.00
Interest - 0 - 1,660.89
Contract help 2,967.84 3,294.00
Postage 2,341.70 1,435.76
Rent & lease - 0 - 126.00
Supplies 1,431.11 2,175.31
Taxes & lic. 130.00 195.00
Airfare 335.12 - 0 -
Meals 6,818.06 2,714.36
Telephone 1,604.80 2,349.16
Cleaning svc. 865.63 874.18
Car repair - 0 - 1,325.61
In the notice of deficiency, respondent disallowed all of
the deductions claimed on the Schedules C. Respondent further
determined that petitioner performed services for the DOI as an
employee of the State rather than as an independent contractor.
Discussion
Generally, section 162(a) allows a taxpayer to deduct “all
the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business”, including the
business of being an employee. See Commissioner v. Flowers, 326
U.S. 465 (1946); Primuth v. Commissioner, 54 T.C. 374, 377
(1970). In general, traveling expenses, including expenses for
meals and lodging, qualify for deduction if the expenses are:
(1) Reasonable and necessary; (2) incurred while the taxpayer is
“away from home”; and (3) directly connected to the conduct of
the taxpayer’s trade or business. Sec. 162(a)(2); Commissioner
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v. Flowers, supra at 470. If a taxpayer’s otherwise deductible
traveling expenses are reimbursed by his employer, the taxpayer
is entitled to a deduction only for amounts in excess of the
reimbursements, and only if properly substantiated. See sec.
1.162-17(b)(3), Income Tax Regs.; sec. 1.274-5T(f)(2)(iii),
(5)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46028 (Nov. 6,
1985).
Section 274(d) imposes stringent substantiation requirements
for deductions related to travel, entertainment, gifts, and
“listed property (as defined in section 280F(d)(4))”. Otherwise
allowable deductions for these types of expenses are not allowed
unless:
the taxpayer substantiates by adequate records or by
sufficient evidence corroborating the taxpayer's own
statement (A) the amount of such expense or other item,
(B) the time and place of the travel, entertainment,
amusement, recreation, or use of the facility or
property, or the date and description of the gift, (C)
the business purpose of the expense or other item, and
(D) the business relationship to the taxpayer of
persons entertained, using the facility or property, or
receiving the gift. * * *
Sec. 274(d).
To substantiate his traveling expenses, petitioner produced
a travel log and numerous credit card receipts. According to
petitioner, expenses incurred in connection with his employment
with the DOI are recorded in the travel log. On a day-by-day
basis, petitioner’s travel log lists expenses for breakfast,
lunch, dinner, business meals, entertainment, tips (generally for
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food service), hotel, coffee breaks, clerical assistance, gas,
parking, repairs, telephone, postage, laundry, gifts, supplies,
and medical. The total amounts of these expenses form the basis
for the deductions claimed by petitioner on the Schedules C for
1993 and 1994.
According to petitioner, he only claimed deductions for
meals and lodging while he was traveling away from Frankfurt to
conduct an audit. Comparing petitioner’s travel log to various
credit card receipts indicates otherwise. On numerous dates in
1993 and 1994, the receipts indicate that petitioner was in
Frankfort, while petitioner’s travel log indicates that
petitioner incurred (and apparently deducted) expenses for one or
more meals. At trial, petitioner testified that on weekend
travel days he might be in Frankfort for some portion of the day
and in the city where the audit was being conducted for the
remaining portion. His explanation might cover some of the
occasions, but many of the receipts indicate that petitioner was
in Frankfort on a day during the work week. Under the
circumstances, we are unwilling to accept petitioner’s log as
adequate substantiation for the traveling expenses deducted on
the Schedules C.
Nor do petitioner’s receipts provide adequate substantiation
of the traveling expense deductions claimed on the Schedules C.
The lodging receipts do not total anywhere near the amount
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petitioner deducted each year for that expense. Moreover, some
of the receipts suggest that the expense incurred should not be
deductible at all. For example, petitioner testified that the
only car he used to travel to the locations of the various audits
he conducted during the years in issue was a personally owned
Cadillac, but several repair bills refer to a Bonneville. Also,
numerous receipts relate to the purchase of gasoline. The
quantities of gasoline purchased suggest that the tank of the car
was being filled. In some instances the receipts were produced
at the same filling station on the same day, sometimes within
minutes of each other.
Petitioner contends that he is unable to substantiate all
his Schedule C deductions because many of his receipts were
destroyed in a flood in 1995. Although petitioner established
that his residence suffered flood damages during that year, he
has not made any attempt to reasonably reconstruct those records
for 1993 or 1994. Based upon what evidence was presented, we
think it highly unlikely that even if petitioner reconstructed
his traveling expenses, the total of such expenses would exceed
the amount of the reimbursements that he received from his
employer during the years in issue.
Neither petitioner’s travel log nor the receipts introduced
into evidence during the trial constitute adequate substantiation
for the traveling expenses deducted on the Schedule C each year
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in issue. See sec. 274(d). Consequently, petitioner is not
entitled to any of the traveling expense deductions claimed on
the Schedules C. Respondent’s determinations in this regard are
therefore sustained.
Other types of business expenses were deducted on the
Schedules C and disallowed by respondent. Petitioner was not
entitled to reimbursement for these expenses. We find that, for
the year 1993, petitioner is entitled to deductions for these
expenses as follows:
Type of Expense Amount
Supplies $1,431
Depreciation 500
Postage 10
Taxes 60
Telephone 265
Total 2,266
Because the record does not contain adequate substantiating
evidence of business expenses that petitioner may have incurred
in 1994, or any evidence from which we can reasonably estimate
such expenses, petitioners are not entitled to any business
expense deductions for the year 1994.
Petitioner maintains that he provided services to the DOI
during the years in issue as an independent contractor. All of
the deductions here in dispute were claimed on a Schedule C as
though petitioner were not an employee of the DOI during either
year in issue.
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To the extent that petitioner is entitled to any business
expense deductions, respondent argues that the deductions should
be treated as employee business expenses, deductible as
miscellaneous itemized deductions. See secs. 62(a)(1) and (2),
67. In support of this argument, respondent points out that
petitioner’s employment contracts with the DOI constitute
agreements entered into pursuant to section 218 of the Social
Security Act. That being so, respondent relies upon section
3121(d)(4), which defines “employee” for purposes of the Federal
Insurance Contributions Act (FICA) as “any individual who
performs services that are included under an agreement entered
into pursuant to section 218 of the Social Security Act.”
Respondent apparently takes the position that an individual who
fits within the definition of employee for FICA purposes should
be treated as an employee for purposes of section 62. We
disagree.
In Hathaway v. Commissioner, T.C. Memo. 1996-389, we held
that a taxpayer described as an employee in section 3121(d)(3) is
not necessarily an employee for purposes of the treatment of the
taxpayer’s business expense deductions. Instead, we concluded
that for such purposes, the distinction between an employee and
an independent contractor is made through the application of
common-law rules applicable in determining whether an employer-
employee relationship exists. See id.
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These common-law rules take into account the following
factors: (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. See id.
In this case, the Kentucky Unemployment Insurance
Commission applied the above factors and found that the services
performed by petitioner for the DOI were performed as an
independent contractor. After examining all the facts and
circumstances in this case, we agree with the Commission’s
determination and find that, for purposes of section 62,
petitioner was an independent contractor during the years in
issue. Accordingly, petitioner’s allowable business expense
deductions, as set forth above, are properly deducted on a
Schedule C.
Reviewed and adopted as the report of the Small Tax Case
Division.
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Based upon the foregoing and respondent’s agreement that
Edith M. Goins is entitled to relief under section 6015(b),
Decision will be
entered under Rule 155.