T.C. Memo. 2003-2
UNITED STATES TAX COURT
JENNIFER L. RUSLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6599-01. Filed January 7, 2003.
Jennifer L. Rusley, pro se.
William W. Kiessling, for respondent.
MEMORANDUM OPINION
WOLFE, Special Trial Judge: This matter is before the Court
on petitioner’s motion for an award of administrative costs,
filed pursuant to section 7430 and Rules 230 through 233. Unless
otherwise indicated, all section references are to the Internal
Revenue Code in effect at relevant times, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
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Background
Petitioner timely filed her 1998 Federal income tax return
(return), reporting $14,379 of income and $6,918 of employment-
related expenses. Petitioner reported her income, including her
W-2, Wage and Tax Statement, income from USA Mobile, and also her
employment-related expenses on Form 1040, Schedule C, Profit or
Loss From Business, (Schedule C). She did not report her W-2
income on line 7 of Form 1040, U.S. Individual Income Tax Return,
nor did she report any employment-related expenses on Form 1040,
Schedule A, Itemized Deductions, (Schedule A).
On October 3, 2000, respondent issued to petitioner a notice
of proposed changes (30-day letter), in which respondent proposed
to deny petitioner’s claimed Schedule C expense deductions and to
increase petitioner’s tax liability by $1,292, plus interest.
Petitioner’s first written response to respondent was a
handwritten letter (first letter), dated October 3, 2000,
stating, in part:
On October 3, 2000, I spoke with * * * about the
notice I received in the mail * * *. During our phone
conversation he informed me on why the IRS had sent me
this particular notice concerning my 1998 tax return.
I, Jennifer Lynn Rusley, understand that my W2
income should be on line 7 and that my expenses should
be on Schedule A via 2106.
Respondent received this letter on October 6, 2000. Petitioner
then sent to respondent a handwritten note (second letter) that
she wrote on a copy of the 30-day letter. The second letter
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stated:
These expenses [$6,918] are correctly reported on Sch.
C because of my statutory employee status. I travel as
an outside sales person and my car expenses are shown
as other income on the Sch. C. I have requested a
confirmation of my duties with my employer and should
be receiving it shortly! Please hold this file until I
can get this confirmation. I now feel that my income
should not be on line 7!
Respondent received the second letter on December 13, 2000.
As suggested in her second letter, petitioner obtained
another letter, dated January 11, 2001, and written by Chris
Bastin, District Manager of the Tennessee Region for Arch
Wireless (third letter). The third letter purported to confirm
petitioner’s employment and stated, in part:
The purpose of this letter is to verify that Jennifer
Rusley worked for Arch Wireless as an Outside Account
Executive from 7/15/97 to 10/9/98. During this time
Jennifer’s responsibilities included outside business
to business sales and service for new and existing
customers.
Respondent received the third letter, but the record does not
establish how or when petitioner transmitted the letter or the
date of receipt by respondent.
On February 20, 2001, respondent issued a statutory notice
of deficiency disallowing petitioner’s Schedule C expense
deductions. On May 16, 2001, petitioner’s representative,
William De Montbreun, a certified public accountant, mailed a
petition to this Court by certified mail. Both petitioner and
Mr. De Montbreun signed the petition, and it was filed on May 21,
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2001. In her petition, petitioner contends that she is entitled
to the Schedule C expense deductions because she is a statutory
employee under section 3121(d)(3). At the time of filing,
petitioner resided in Nashville, Tennessee.
Upon receipt of the petition this Court promptly informed
William De Montbreun that he could not be recognized as counsel
of record because he was not admitted to practice before the Tax
Court and that all communication would be directed to petitioner.
Respondent filed an Answer on July 17, 2001. Petitioner then
sent a letter, dated July 18, 2001, to the Court affirming her
petition. The Court treated the letter as an Amendment to
Petition and filed it on July 23, 2001. Respondent then filed an
Answer to Amendment to Petition on August 8, 2001.
After the issues had been joined, Appeals Officer Elaine
Rhoton contacted petitioner to arrange for a conference and then
met with petitioner’s representative, Mr. De Montbreun. At this
meeting on October 16, 2002, Appeals Officer Rhoton reviewed the
information provided relating to petitioner’s employment status
during 1998, including a letter dated June 26, 2001, and written
by Daryl Neville, Human Resources Representative of Arch Wireless
(fourth letter). The fourth letter, which previously had not
been shown to any representative of respondent, confirmed
petitioner’s employment and stated, in part:
Jennifer Rusley * * * was employed by Arch
Communications from July 15, 1997 through October 9,
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1998. During her employment with Arch, Jennifer held
the position of Sales Executive in our Nashville, TN
market.
Jennifer’s responsibilities were to service
existing business and to solicit new business in a
defined territory within the Nashville area. The
position was a business to business sales position,
compensated with a base salary plus monthly
commissions. Jennifer was engaged in travel within her
assigned territory.
Jennifer sold Arch products and services, and
received the commission portion of her pay based upon
the revenue she derived for the company.
The fourth letter provided respondent with a basis for
concession, and the parties entered into a settlement stipulation
on October 24, 2001. This Court’s decision, pursuant to the
agreement of the parties, that there is no deficiency in income
tax due from petitioner was entered on October 26, 2001.
On January 18, 2002, petitioner filed a Motion for
Administrative Costs, and the decision was vacated and set aside.
On March 19, 2002, respondent filed an Objection to Motion for
Administrative Costs. On April 29, 2002, petitioner filed her
Response to Respondent’s Objection to Motion for Administrative
Costs.
Discussion
The prevailing party in an administrative proceeding may
recover reasonable administrative costs. Sec. 7430(a); Rule 231.
A judgment for administrative costs incurred in connection with
an administrative proceeding may be awarded if: (1) The taxpayer
is the “prevailing party”; (2) the taxpayer did not unreasonably
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protract the administrative proceeding; and (3) the
administrative costs are reasonable. Sec. 7430(a), (c)(4),
(b)(3), (c)(2). A taxpayer is the prevailing party only if: (1)
The taxpayer substantially prevailed with respect to the amount
in controversy or as to the most significant issue or set of
issues presented; (2) the taxpayer satisfies the applicable net
worth requirement; and (3) the position of the United States in
the proceeding is not substantially justified. Sec.
7430(c)(4)(A) and (B).
In this case, we first address the question, whether the
position of the United States was substantially justified,
because the other issues need not be considered if respondent has
established that his position in the administrative proceedings
was substantially justified.
Whether the position of the United States was substantially
justified turns on a finding of reasonableness, based upon all
the facts and circumstances, as well as the legal precedents
relating to the case. Pierce v. Underwood, 487 U.S. 552, 565
(1988). In deciding whether the Commissioner acted reasonably,
this Court must “‘consider the basis for the Commissioner’s legal
position and the manner in which the position was maintained’”.
Corkrey v. Commissioner, 115 T.C. 366, 373 (2000) (quoting Wasie
v. Commissioner, 86 T.C. 962, 969 (1986)). The fact that the
Commissioner concedes a case is not determinative of the
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reasonableness of the Commissioner’s position. See Sokol v.
Commissioner, 92 T.C. 760, 767 (1989); Wasie v. Commissioner,
supra. It is, however, “a relevant factor to consider in
deciding the degree of the Commissioner’s justification.”
Corkrey v. Commissioner, supra at 373.
We review the Commissioner’s position as of the earlier of
the date of the receipt by the taxpayer of the notice of decision
by the Office of Appeals or the date of the notice of deficiency
to determine whether respondent was substantially justified with
respect to the recovery of administrative costs. Sec.
7430(c)(7)(B). Therefore, in the present case the relevant
inquiry, with respect to the recovery of the administrative
costs, is whether respondent had a reasonable basis for his
position disallowing petitioner’s Schedule C expense deductions
at the time of the issuance of the notice of deficiency (February
20, 2001).
An individual’s adjusted gross income (AGI) is an
individual’s gross income less specified deductions, including
allowable deductions attributable to a trade or business carried
on by the taxpayer, if such trade or business does not consist of
the performance of services by the taxpayer as an employee. Sec.
62. Generally, miscellaneous itemized deductions, including
business expenses under section 162, are deductible from an
individual’s AGI only to the extent that the aggregate of those
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deductions exceeds 2 percent of the individual’s AGI. Sec. 67.
In this case, petitioner contends that her itemized deductions
for business expenses are not subject to the limitations imposed
by section 67 because, during the year in issue, with respect to
the amounts in issue, she was not an “employee” within the
meaning of section 62.
For purposes of employment taxes, an “employee” includes
“any individual who, under the usual common law rules applicable
in determining the employer-employee relationship, has the status
of an employee”. Sec. 3121(d)(2). Common law employees are
described as follows:
Generally such relationship 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 * * *.
Sec. 31.3121(d)-1(c)(2), Employment Tax Regs. Although the
determination of employee status is to be made by common law
concepts, a realistic interpretation of the term “employee”
should be adopted, and doubtful questions should be resolved in
favor of employment. Ewens & Miller, Inc. v. Commissioner, 117
T.C. 263, 269 (2001) (citing Breaux & Daigle, Inc. v. United
States, 900 F.2d 49, 52 (5th Cir. 1990)).
Also for employment tax purposes, an “employee” is:
Any individual * * * who performs services for
remuneration * * * as a traveling or city salesman * *
* engaged upon a full-time basis in the solicitation on
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behalf of, and the transmission to, his principal * * *
of orders from wholesalers, retailers, contractors, or
operators of hotels, restaurants, or other similar
establishments for merchandise for resale or supplies
for use in their business operations * * *.
Sec. 3121(d)(3)(D). An individual can be a “statutory employee”
under section 3121(d)(3) only if that individual is not a common
law employee under section 3121(d)(2). Ewens & Miller, Inc. v.
Commissioner, supra. Generally, as statutory employees under
section 3121(d)(3)(D), “City or traveling salesmen who sell to
retailers or to the others specified, operate off the premises of
their principals, and are generally compensated on a commission
basis”. Sec. 31.3121(d)-1(d)(3)(iv)(a), Employment Tax Regs.
A common law employee generally reports business expenses on
Schedule A, subject to limitations under section 67, but a
statutory employee under section 3121(d)(3)(D) is not an employee
for purposes of section 62 and may deduct business expenses on
Schedule C. See sec. 3121(d); see also Prouty v. Commissioner,
T.C. Memo. 2002-175 (illustrating that a statutory employee may
reflect business income and expenses in full on Schedule C);
Lickiss v. Commissioner, T.C. Memo. 1994-103 (holding that the
taxpayer was a common law employee and that any related business
expenses were to be reported on Schedule A, subject to the
limitations under section 67); Rev. Rul. 90-93, 1990-2 C.B. 33
(holding that a statutory employee under section 3121(d)(3) for
employment tax purposes is not a common law employee for purposes
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of section 62 and may deduct business expenses on Schedule C).
Respondent contends that his position disallowing
petitioner’s claimed Schedule C deductions was substantially
justified during the administrative process. We agree.
Petitioner filed her return, along with a Form W-2, listing
income from USA Mobile. She also reported related business
expense deductions on Schedule C. Petitioner has the
responsibility to substantiate her status as a statutory employee
so that she may report her deductions on Schedule C. See sec.
6001; Higbee v. Commissioner, 116 T.C. 438, 440 (2001); sec.
1.6001-1(a), Income Tax Regs. As a common law employee,
petitioner generally would be required to report her employee
business expense deductions on Schedule A. In the absence of
further explanation on the return, or persuasive proof of
petitioner’s status as a statutory employee, respondent was
reasonable to challenge petitioner’s Schedule C expense
deductions.
After respondent issued the 30-day letter, petitioner
attempted to explain her filing position to respondent. Her
explanations, though, were inconsistent and did not support her
use of Schedule C. In the first letter, petitioner contradicted
her filing position and stated that the Form W-2 income belonged
on line 7 with related expenses on Schedule A. In the second
letter petitioner reversed her argument again to affirm her
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original filing position. She stated that the Form W-2 income
did not belong on line 7 and that the expenses were properly
reported on Schedule C. On its face this position is confusing
and inconsistent. Petitioner also stated in the second letter
that she would be forwarding to respondent a confirmation of her
duties from her employer. Although petitioner obtained the third
letter that purported to confirm her employment and to support
her filing position, there is no evidence that respondent
received this letter prior to the issuance of the notice of
deficiency.1
Moreover, even if respondent had received the third letter
before issuing the notice of deficiency, the third letter does
not provide persuasive support for petitioner’s contention. The
third letter is written by a representative from Arch Wireless,
but petitioner’s tax return includes a Form W-2 from USA Mobile
as her employer. The third letter merely states that petitioner
was an outside account executive employed by Arch Wireless for
part of 1998 and that her responsibilities included “outside
business to business sales and service for new and existing
1
Respondent states in the objection to motion, filed Mar.
19, 2002, that the letters dated Jan. 11, 2001, and June 26,
2001, from officials of petitioner’s employer were first
presented to a representative of respondent on Oct. 16, 2001.
Appeals Officer Elaine Rhoton did not recall receiving any
documents from petitioner prior to her meeting with Mr. De
Montbreun on Oct. 16, 2001. The two letters were stapled
together in the administrative file, and the Appeals Officer
believes that they both were received at the same time.
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customers.” The third letter does not establish that petitioner
performed all or substantially all her services off the premises
of her employer and does not explain whether petitioner was paid
by salary or commission or some combination of the two. The
letter says nothing about the extent and nature of supervision of
petitioner in her work for Arch Wireless. The third letter
simply does not establish whether petitioner was a common law
employee or was a statutory employee during 1998.
We conclude that respondent had a reasonable basis in fact
and law for the position taken in the notice of deficiency. At
the time of the issuance of the notice of deficiency, petitioner
had not established her status as a statutory employee entitling
her to report her business expense deductions on Schedule C. The
fourth letter that petitioner ultimately presented to respondent
confirmed the details that formed the basis of respondent’s
concession to settle this matter. Petitioner did not present the
fourth letter until after respondent issued the notice of
deficiency. Therefore, under the circumstances of this case
respondent’s position was substantially justified. Petitioner is
not the prevailing party under section 7430 and is not entitled
to an award of administrative costs.
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To reflect the foregoing,
An appropriate order will be
issued denying petitioner’s motion,
and decision will be entered in
accordance with the agreement of
the parties.