T.C. Summary Opinion 2002-47
UNITED STATES TAX COURT
GEORGE A. AND HILDA QUINTERO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8364-00S. Filed May 6, 2002.
Larry Fedro, for petitioners.
John T. Lortie, 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 1997. 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 an $8,780 deficiency in, and a $1,756
penalty under section 6662(a) with respect to petitioners’ 1997
Federal income tax. The Court must decide: (1) The amount of
compensation George A. Quintero earned and received from AAA
Transmissions Service Center of North Miami, Florida (AAA),
during 1997; (2) whether such compensation constitutes self-
employment income subject to the tax imposed by section 1401;
and (3) whether the underpayment of tax required to be shown on
petitioners’ 1997 Federal income tax return is a substantial
understatement of income tax.
Background
Some of the facts have been stipulated and are so found.
Petitioners are husband and wife. They filed a timely joint 1997
Federal income tax return. At the time the amended petition was
filed, petitioners resided in Pompano Beach, Florida. References
to petitioner are to George A. Quintero.
During 1997, petitioner was a student at the Ft. Lauderdale
campus of Keiser College. From the beginning of the year until
sometime in December, he was also employed as a “trainee-helper”
by AAA, an automobile transmission repair shop.
Petitioner was not a certified mechanic during 1997. His
duties at AAA included the removal and replacement of automobile
transmissions, but he did not repair or rebuild transmissions.
When at work he wore a uniform provided by AAA, he used tools
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borrowed from coworkers, and he was supervised by Stuart Smith,
AAA’s general manager. As general manager, Mr. Smith performed
the majority of AAA’s bookkeeping functions, including the
preparation of monthly payroll sheets.
Mr. Smith, on behalf of AAA, and petitioner signed an
“Independent Contractor Agreement”, dated December 15, 1996 (the
agreement). According to the agreement, petitioner agreed to
perform services for AAA as an independent contractor and not as
an employee.
Petitioner’s work schedule at AAA varied during 1997. At
the direction of AAA, generally he worked 5 days a week, Monday
through Friday, during business hours. Some weeks, he worked
“full-time” (40 or more hours), but often he worked fewer hours
because there was no work for him to do or so that he could
attend classes. Petitioner’s work hours on any given day were
set by AAA and noted on a calendar maintained by a shop
supervisor. Mr. Smith used the calendar to prepare monthly
payroll sheets that list the days and hours that petitioner
worked during 1997 and the amount of compensation he received.
AAA compensated petitioner at the rate of $13.63 per hour. He
was paid in cash, usually once a week on Friday. The monthly
payroll sheet indicates that petitioner was paid a total of
$23,552 according to the schedule included at appendix I.
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During 1997, petitioner maintained a checking account at
NationsBank (the checking account). The checking account was not
a joint account. He deposited some of his earnings from AAA into
the checking account. During 1997, total deposits of $18,087
were made to the checking account as set forth in Appendix II.
During 1997, Mrs. Quintero was employed part-time as a
housekeeper. She earned wages of $10,237 from this position, as
reflected on a Form W-2 issued to her by her employer.
AAA issued a Form 1099-MISC, Miscellaneous Income, reporting
nonemployee compensation earned by petitioner during 1997 in the
amount of $23,552. AAA’s accountant prepared the Form 1099-MISC
based on information contained on AAA’s monthly payroll sheets.
Petitioners’ 1997 return was prepared by H&R Block Eastern
Tax Service Inc. The return lists Mrs. Quintero’s occupation as
“housekeeping” and petitioner’s as “unemployed”. The only income
reported on petitioners’ 1997 return is the income earned by Mrs.
Quintero. There is no income tax liability (either under section
1 or section 1401) reported on the return. A refund of $3,656
attributable entirely to a section 32 earned income credit is
claimed on the return.
In the notice of deficiency, respondent, relying upon the
Form 1099-MISC issued to petitioner by AAA, increased
petitioners’ income by $23,552. Respondent further determined
that the compensation that petitioner received from AAA
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constitutes self-employment income subject to tax under section
1401. Respondent also determined that the underpayment of tax
required to be shown on petitioners’ 1997 is a substantial
understatement of income tax and imposed a penalty under section
6662(a). Other adjustments made in the notice of deficiency are
not in dispute.
Discussion
1. Unreported Income
Petitioners acknowledge that petitioner received
compensation from AAA during 1997 that was not reported on their
1997 return but claim that petitioner received less than the
amount reported on the Form 1099-MISC issued by AAA. According
to petitioners, AAA’s monthly payroll sheets, which were used to
prepare the Form 1099-MISC issued to petitioner, overstate the
number of hours petitioner worked during 1997 and, therefore,
overstate the compensation he was paid.
On their 1997 return, petitioners expressly represented that
petitioner was unemployed during 1997 and implicitly represented
that he earned no income during that year. Neither
representation is true. In the petition filed in this case,
petitioners represent that their “records” indicate that
petitioner’s “gross” earnings from AAA during 1997 amounted to
less than $5,000. If maintained, no such “records” were
presented at trial. At trial, petitioners estimated that
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petitioner’s earnings from AAA amounted to $6,350 (computed by
subtracting gifts from family members plus the income earned by
Mrs. Quintero reported on their 1997 return from the total
deposits made to the checking account).
We consider petitioners’ various claims as to the amount of
income petitioner earned during 1997 against the amount reflected
on AAA’s records.1 The accuracy of AAA’s monthly payroll
records, although not beyond question, is supported by the
pattern of deposits into petitioner’s checking account. All
things considered, we find AAA’s records more reliable than
petitioners’ various and inconsistent claims as to the amount of
compensation that petitioner received from AAA during 1997.
Accordingly, respondent’s determination that petitioner earned
and received compensation totaling $23,552 from AAA during 1997
is sustained.
2. Self-employment tax
In addition to the income tax imposed by section 1, section
1401(a) imposes a tax upon a taxpayer's self-employment income.
Disregarding irrelevant exceptions, "self-employment income" is
defined as "net earnings from self-employment", which, in turn,
is defined as "the gross income derived by an individual from any
1
We note that at trial respondent did not exclusively rely
upon the Form 1099. AAA’s payroll records as well as the
testimony of the person responsible for maintaining those records
were also admitted into evidence. See sec. 6201(d).
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trade or business carried on by such individual, less the
deductions allowed * * * which are attributable to such trade or
business". Sec. 1402(a) and (b). Other than under circumstances
not present in this case, services performed by an individual as
an employee do not constitute a trade or business for self-
employment tax purposes. Sec. 1402(c)(2).
According to respondent, the compensation that petitioner
received from AAA during 1997 constitutes self-employment income
subject to tax under section 1401. Petitioners, having failed to
report any such income on their 1997 return, did not report any
section 1401 tax on that return. They now claim that petitioner
performed services for AAA during 1997 as an employee rather than
an independent contractor.
The question of whether an individual performs services for
another as an employee or independent contractor is generally
considered a question of fact. Packard v. Commissioner, 63 T.C.
621, 629 (1975). In resolving such questions, this and other
Federal courts apply what is commonly referred to as the common
law test embodied in sections 31.3121(d)-1(c)(2) and 31.3401(c)-
1(b), Employment Tax Regs. Matthews v. Commissioner, 907 F.2d
1173, 1178 (D.C. Cir. 1990), affg. 92 T.C. 351 (1989); Packard v.
Commissioner, supra. An employee is defined as “any individual
who, under the usual common law rules applicable in determining
the employer-employee relationship, has the status of an
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employee”. Sec. 3121(d)(2). The relevant factors taken into
account to determine the status of an individual as an employee
or independent contractor 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. Profl. & Executive Leasing, Inc. v. Commissioner, 89
T.C. 225, 232 (1987), affd. 862 F.2d 751 (9th Cir. 1988); see
also United States v. Silk, 331 U.S. 704, 716 (1947). Although
no single factor is determinative, “employer control over the
manner in which the work is performed * * * is the basic test.”
Gen. Inv. Corp. v. United States, 823 F.2d 337, 341 (9th Cir.
1987).
Respondent’s position that petitioner was not an employee of
AAA during 1997 seems to be entirely based upon the agreement,
which, in fact, does undermine petitioners’ position to the
contrary. Nevertheless, the application of the other relevant
factors leads to the conclusion that AAA possessed and exercised
sufficient control over the services performed by petitioner so
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as to consider him an employee. It follows that the compensation
that petitioner received from AAA during 1997 does not constitute
self-employment income within the meaning of section 1401.
3. Substantial Understatement of Income Tax
Section 6662(a) imposes an accuracy-related penalty of 20
percent of any portion of an underpayment of tax that is
attributable to a substantial understatement of income tax.
Sec. 6662(b)(2), (d). An understatement of income tax is a
substantial understatement of income tax if it exceeds the
greater of $5,000 or 10 percent of the tax required to be shown
on the taxpayer’s return. Sec. 6662(d)(1).
Ignoring conditions not relevant here, for purposes of
section 6662, an understatement is defined as the excess of the
amount of the tax required to shown on the taxpayer’s return over
the amount of the tax which is shown on the return. Sec.
6662(d)(2)(A). In this case, for purpose of section 6662, the
amount of tax required to be shown on petitioners’ 1997 return is
$1,796.2 The amount of tax shown on the return is zero.3
Because the difference between these two amounts is less than
2
This is the sec. 1 income tax that results from including
in petitioners’ 1997 income the compensation that petitioner
received from AAA during that year.
3
Unlike the computation of a deficiency under sec. 6211 or
the computation of an understatement for purposes of sec. 6694,
the earned income credit claimed on petitioners’ 1997 return (and
disallowed in the notice of deficiency) is not taken into account
in the computation of the understatement of income tax for
purposes of sec. 6662.
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$5,000, the underpayment of tax required to be shown on their
1997 return is not a substantial understatement of income tax.
Consequently, they are not liable for the accuracy-related
penalty imposed by section 6662(a).
Reviewed and adopted as the report of the Small Tax Case
Division.
Based on the foregoing,
Decision will be entered
under Rule 155.
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Appendix I
Summary of AAA’s Monthly Payroll Records for Petitioner
Week of: Daily Hours Worked Total Hours Wages1
Mon Tues Wed Thurs Fri
1/3/97 9.5 9.5 9.5 9.5 9.5 47.5 $647.43
1/10/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
1/17/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
1/24/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
1/31/97 6 9 9 5 5 34 463.42
$3,053.14
2/7/97 5 0 0 9 9.5 23.5 $320.31
2/14/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
2/21/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
2/28/97 0 0 9.5 9.5 9.5 28.5 388.46
$2,003.63
3/14/97 9.5 9.5 9.5 9.5 9.5 47.5 $647.43
3/21/97 0 0 9.5 9.5 9.5 28.5 388.46
3/28/97 0 5 9.5 9.5 9.5 33.5 456.61
$1,492.50
4/4/97 5 8 9.5 9.5 9.5 41.5 $565.65
4/11/97 9.5 9.5 9.5 8 0 36.5 497.50
4/18/97 9.5 0 0 0 0 9.5 129.49
4/25/97 0 0 0 0 9.5 9.5 129.49
$1,322.13
5/2/97 0 9.5 9.5 9.5 9.5 38 $517.94
5/9/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
5/16/97 9.5 6 0 8 0 23.5 320.31
5/23/97 0 9.5 9.5 9.5 9.5 38 517.94
5/30/97 0 9.5 9 9 9.5 37 504.31
$2,507.93
6/6/97 0 9.5 9.5 9.5 9.5 38 $517.94
6/13/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
6/20/97 9.5 9.5 9 9 9.5 46.5 633.80
6/27/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
$2,446.60
Week of: Daily Hours Worked Total Hours Wages
1
Total hours multiplied by petitioner’s hourly rate of
$13.63.
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Mon Tues Wed Thurs Fri
7/4/97 0 9.5 9.5 9.5 9.5 38 $517.94
7/11/97 0 0 9.5 9.5 9.5 28.5 388.46
7/18/97 9.5 0 9 9 9 36.5 497.50
7/25/97 9.5 9.5 0 9.5 9.5 38 517.94
$1,921.84
8/1/97 9.5 0 9.5 9.5 9.5 38 $517.94
8/8/97 0 0 5.5 9.5 9.5 24.5 333.94
8/15/97 9.5 9 9 9 0 36.5 497.50
8/22/97 0 9.5 0 9.5 9.5 28.5 388.46
8/29/97 9 0 0 9.5 9.5 28 381.64
$2,119.48
9/5/97 9.5 0 9.5 0 9.5 28.5 $388.46
9/12/97 9 0 0 9.5 9.5 28 381.64
9/19/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
9/26/97 0 0 0 9.5 9.5 19 258.97
$1,676.50
10/3/97 9.5 9.5 9.5 9.5 9.5 47.5 $647.43
10/10/97 9 9 0 0 9.5 27.5 374.83
10/17/97 9.5 0 9.5 9.5 9.5 38 517.94
10/24/97 0 7 5.5 9 9.5 31 422.53
10/31/97 9.5 9.5 9.5 9.5 9.5 47.5 647.43
$2,610.16
11/7/97 9.5 9.5 9.5 9.5 9.5 47.5 $647.43
11/14/97 0 0 0 8 9.5 17.5 238.53
11/21/97 9.5 0 0 0 9.5 19 258.97
11/28/97 0 0 0 9.5 9.5 19 258.97
$1,403.90
12/5/97 9.5 9.5 9.5 0 9.5 38 $517.94
12/12/97 3 0 6 7 9.5 25.5 347.02
12/19/97 9.5 0 0 0 0 9.5 129.49
$994.45
Total earnings for 1997 (rounded
to nearest dollar) $23,552
Appendix II
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Schedule of Deposits into Petitioner’s Checking Account
Date of Deposit Amount
Jan. 21 $400
Feb. 4 350
Feb. 12 250
Feb. 18 525
Feb. 26 550
March 6 360
March 19 520
April 1 550
April 8 500
April 16 400
April 21 100
May 7 350
May 13 600
May 29 550
June 5 650
June 12 450
June 18 500
June 24 550
July 14 400
July 18 495
July 23 400
July 31 400
Aug. 8 400
Aug. 14 400
Aug. 28 440
Sept. 5 380
Sept. 10 480
Sept. 25 817
Oct. 9 600
Oct. 16 530
Oct. 22 460
Oct. 30 500
Date of Deposit Amount
Nov. 5 560
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Nov. 25 800
Dec. 4 390
Dec. 8 1,000
Dec. 10 480