MANGELS v. COMMISSIONER

T.C. Summary Opinion 2002-40

UNITED STATES TAX COURT

BARRY JOHN AND DEBORAH LEE HOUSTON MANGELS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9628-00S. Filed April 15, 2002.

Barry John and Deborah Lee Houston Mangels, pro se.

Monica J. Miller, for respondent.

PANUTHOS, Chief 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 the year at issue, and

all Rule references are to the Tax Court Rules of Practice and
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Procedure. The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.

Respondent determined a deficiency in petitioners’ Federal

income tax for 1997 of $7,896, an addition to tax under section

6651(a)(1) of $1,974, and an accuracy-related penalty under

section 6662 of $1,579. The issues for decision are: (1)

Whether Barry Mangels (petitioner) had unreported nonemployee

compensation of $27,429; (2) whether petitioner worked as an

independent contractor subject to self-employment tax; (3)

whether petitioners failed to file a timely Federal income tax

return without reasonable cause; and (4) whether petitioners are

subject to an accuracy-related penalty under section 6662.

Petitioners conceded receipt of $11,471 of unreported income.

Petitioners did not dispute or present evidence as to adjustments

in the notice of deficiency increasing interest income and

cancellation of indebtedness income. Accordingly, we deem these

issues to be conceded.

Background

The stipulation of facts and accompanying exhibits are

incorporated herein by reference. Petitioners resided in

Sarasota, Florida, at the time their petition was filed in this

case.

During the second half of 1997, petitioner worked as a

“handyman” on a few projects for John Salvatore Parziale (Sal

Parziale). Petitioner performed tile work, painting, and spackle
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work. Sal Parziale was employed as a supervisor with Joseph

Williams Homes Construction Co. (JWH), a subsidiary of the

Italian Brothers Construction Co. (IBC). Sal Parziale’s brother,

Joseph Parziale, was president of both IBC and JWH.

The projects involved the restoration of houses damaged by

flood or fire for which payment was made to JWH by insurance

companies. Petitioner was hired by Sal Parziale to work on three

projects. He worked on the “Roach” project, a house damaged by

fire, the “Penny” project, a water damaged trailer, and the

“Wise” project on which he did some painting. Petitioner was

paid for his work after the insurance companies paid JWH.

Petitioners’ 1997 Federal Income tax return was received and

date stamped by the Commissioner on September 4, 1998.

Petitioners did not report any income from JWH and the Parziale

brothers. Sal Parziale sent to petitioner and the Commissioner

Form 1099-MISC, Miscellaneous Income, reporting nonemployee

compensation paid to petitioner of $27,429 for 1997.

The notice of deficiency determined an increase in

petitioners’ income of $27,429, which was the amount reflected on

Form 1099-MISC. The petition states that “Barry Mangels worked

for John Salvatore Parziale and made $6,000 not $27,429.” At

trial, petitioner conceded that he received $11,471 in income in

1997 from Sal Parziale by way of checks.
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Discussion

Unreported Income

The parties agree that petitioner earned income in 1997 for

work performed for JWH and Sal Parziale that was not reported on

petitioners’ Federal income tax return. We must decide the

proper amount.

Generally, the burden of proof is on the taxpayer. Rule

142(a)(1). Under section 6201(d), if a taxpayer, in a court

proceeding, asserts a reasonable dispute with respect to the

income reported on an information return and fully cooperates

with the Secretary (including providing access to an inspection

of all witnesses, information, and documents within the control

of the taxpayer as reasonably requested by the Secretary), then

the Secretary shall have the burden of producing reasonable and

probative information in addition to such information return.

See Tanner v. Commissioner, 117 T.C. 237 (2001); McQuatters v.

Commissioner, T.C. Memo. 1998-88.

Petitioner challenged the accuracy of the information

provided to the Commissioner in the Form 1099-MISC. It appears

that petitioner has reasonably cooperated with the Commissioner.

As discussed in greater detail below, at trial, respondent

introduced evidence in the form of testimony of and business

records from Joseph Parziale in response to petitioners’

allegation that the Form 1099-MISC was inaccurate. Although we

find that the evidence in the record is not fully credible, we
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conclude that respondent has met his burden of production.

Therefore, we shall weigh the evidence in the record on its

merits.

Respondent asserts that petitioner worked as a contractor

for JWH and received payments in cash as well as by check.

Respondent called Joseph Parziale as a witness. Joseph Parziale

kept the records of the company. He testified that petitioner

was a subcontractor for the company on the Roach, Penny, and Wise

projects. Through Joseph Parziale, respondent introduced what

purports to be a summary of JWH records on which the Form 1099-

MISC was based.

Joseph Parziale did not produce any underlying records for

the Penny project. The underlying record for the Wise project

is a folder that lists amounts allegedly paid to petitioner but

includes no dates of payment or other details corroborating the

witness’s testimony.

The underlying records of the Roach project are more

detailed and have dates for several items. The records contain

additions, subtractions, and sums without an identified payee.

The underlying records reflect fewer payments to petitioner than

reflected in the summary records.

Joseph Parziale testified that JWH made cash payments to

petitioner. At one point during petitioner’s testimony, the

Court directly asked petitioner: “Did you ever get paid any cash

in 1997?”, to which petitioner replied: “None at all.” Yet in
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the petition petitioners admitted that “Mr. Mangels was an

employee and usually paid by personal check or in cash.” We find

petitioner’s testimony to be lacking in credibility.

We note that petitioner did not provide any records as to

income or expenses relating to work performed for Sal Parziale or

JWH. Further, petitioner did not report any income from either

of these two sources on his Federal income tax return for 1997.

The records produced by respondent’s witness, Joseph Parziale,

did not accurately represent actual amounts paid to petitioner.

The witness described the amounts reflected on folders for

various projects as amounts “bid” on a project. The witness

further indicated that amounts were paid in part to petitioner

and in part to other workmen (alleged subcontractors of

petitioner).

We conclude, based on this record, that in addition to

$11,471 of omitted income conceded by petitioner, he received an

additional $8,000 (total omitted income from this source of

$19,471).

Employee or Independent Contractor

An independent contractor is subject to self-employment tax

under section 1401. Sec. 1402(a). Whether an individual is an

employee or independent contractor is a factual question to which

common law principles apply. Secs. 3101, 3121(d)(2); Nationwide

Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992); Weber v.

Commissioner, 103 T.C. 378, 386 (1994), affd. 60 F.3d 1104 (4th
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Cir. 1995); Profl. & Executive Leasing, Inc. v. Commissioner, 89

T.C. 225, 232 (1987), affd. 862 F.2d 751 (9th Cir. 1988).

Factors that are relevant in determining the substance of an

employment relationship include: (1) The degree of control

exercised by the principal over the details of the work; (2) the

taxpayer’s investment in the facilities used in his or her work;

(3) the taxpayer’s opportunity for profit or loss; (4) the

permanency of the relationship between the parties; (5) the

principal’s right of discharge; (6) whether the work performed is

an integral part of the principal’s regular business; (7) the

relationship the parties believe they are creating; and (8) the

provision of employee benefits. NLRB v. United Ins. Co., 390

U.S. 254, 258 (1968); United States v. Silk, 331 U.S. 704, 716

(1947); Weber v. Commissioner, supra at 387; Profl. & Executive

Leasing, Inc. v. Commissioner, supra at 232; see also sec.

31.3121(d)-(1)(c)(2), Employment Tax Regs. (setting forth

criteria for identifying employees under the common law rules).

Because no single factor is dispositive, the Court must

assess and weigh all incidents of the relationship. Nationwide

Mut. Ins. Co. v. Darden, supra at 324. The factors are not

weighed equally; they are weighed according to their significance

in the particular case. Aymes v. Bonelli, 980 F.2d 857, 861 (2d

Cir. 1992).

Respondent’s witness, Joseph Parziale, testified that

petitioner worked as a subcontractor for JWH. Petitioner offered
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no evidence that he was an employee other than to conclude in his

testimony that “I was an employee.” Petitioner also testified

that he was just a laborer and did not have any employees.

Based on the facts in the record, we sustain respondent’s

determination that petitioner was self-employed as an independent

contractor for JWH in 1997. Petitioners are liable for self-

employment tax under section 1401 on the income received from Sal

Parziale and JWH during 1997.

Addition To Tax for Failure To File a Timely Return

Respondent determined an addition to tax under section

6651(a)(1) for petitioners’ failure to file timely a Federal

income tax return for 1997. Petitioners’ tax return was received

by the Commissioner on September 4, 1998. The return preparer’s

signature is dated August 4, 1998. Petitioners’ signatures are

not dated. Petitioner testified that he filed for an extension

of time to file the return. He did not retain a copy of the

request for an extension or produce evidence of the date the

request was made or of the date he mailed the return.

Petitioners have not presented any evidence that the delinquent

filing was due to reasonable cause. Respondent’s determination

that petitioners are liable for the addition to tax under section

6651(a)(1) is sustained.

Accuracy-Related Penalty

Respondent determined that petitioners are liable for the

accuracy-related penalty under section 6662(a) and (d)(1). The
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accuracy-related penalty is equal to 20 percent of any portion of

an underpayment of tax required to be shown on the return that is

attributable to, among other choices, any substantial

understatement of income tax. Sec. 6662(a) and (b)(2). A

taxpayer has a substantial understatement of income tax if the

amount of the understatement exceeds the greater of either 10

percent of the tax required to be shown on the return for the

taxable year or $5,000. Sec. 6662(d)(1)(A).

The penalties provided for in section 6662 are not imposed

on any portion of an underpayment if it is shown that there was

reasonable cause for such portion and the taxpayer acted in good

faith with respect to that portion. Sec. 6664(c)(1); sec.

1.6664-4(b), Income Tax Regs. Whether the taxpayer has acted

with reasonable cause and in good faith is determined by relevant

facts and circumstances, including the taxpayer’s own efforts to

assess his proper tax liability. Sec. 6664(c); Stubblefield v.

Commissioner, T.C. Memo. 1996-537.

Petitioners do not dispute adjustments in the notice of

deficiency including omitted wage income of $144, omitted

interest income of $15, and omitted cancellation of debt income

of $1,141. Also, at trial petitioners conceded omitted income

received from Sal Parziale or JWH of $11,471. Further, we

concluded that petitioner received an additional $8,000 from this

source. Petitioners did not provide any explanation as to the

failure to report these items of income. We conclude that
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petitioners did not have reasonable cause for the understatement

of tax, and they are liable for the accuracy-related penalty if

the Rule 155 computation results in an understatement of more

than $5,000.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

under Rule 155.