T.C. Summary Opinion 2005-1
UNITED STATES TAX COURT
JOHN A. WALZ, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17415-03S. Filed January 3, 2005.
Charles Herbert Magnuson, for petitioner.
Valerie L. Makarewicz, for respondent.
PAJAK, 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. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
- 2 -
Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner’s 2000
Federal income tax in the amount of $18,468, an addition to tax
under section 6651(a)(1) in the amount of $2,403, and a penalty
under section 6662(a) in the amount of $5,181.
The Court must decide whether petitioner is an employee and,
if so, whether he is entitled to deduct certain business
expenses, whether petitioner is entitled to deduct home office
expenses, whether petitioner is subject to an addition to tax
under section 6651(a)(1), and whether petitioner is subject to a
penalty under section 6662(a).
Some of the facts in this case have been stipulated and are
so found. Petitioner resided in Pasadena, California, at the
time he filed his petition.
During 2000, petitioner was a professional cellist. In
fact, he was and is internationally, as well as nationally,
recognized as a cellist of exceptional ability. Petitioner’s
career has many facets. His main focus is as a concert soloist.
He also teaches music. He does “studio work”, recording
background music for movies and television. Petitioner has
performed for about 600 motion pictures.
Petitioner is a founding member of the Pacific Trio,
together with pianist Edith Orloff. Petitioner is a faculty
member of Idyllwild Arts.
- 3 -
Petitioner was a member of the Professional Musicians,
American Federation of Musicians, Local 47; and Long Beach Area
Musicians Association, Local 353, American Federation of
Musicians.
Petitioner performed under union agreements. The following
are some of the agreements: Master Agreement between The Music
Center Opera Association and the Professional Musicians, Local
47; Agreement between The Musicians Association, Local 353, A.F.
of M. and The Long Beach Symphony Association.
Petitioner offered his professional services to various
musical organizations. There is no question but that petitioner
kept his abilities and his cellos in fine tune so that he could
perform in an exceptional manner. During 2000, petitioner
performed for 25 organizations and received 25 Forms W-2, Wage
and Tax Statement. The organizations withheld Federal, State,
Social Security, and Medicaid taxes from petitioner’s earnings.
Petitioner performed for the Los Angeles Opera (Opera) for
approximately 10 years. The Opera selected the music to be
performed. The Opera provided him with the music for the season.
The Opera required petitioner to attend rehearsals. The Opera
set the time and length of the rehearsals. Petitioner could not
leave the rehearsals unless he was excused. The Opera would set
the dress uniform, whether tuxedo or otherwise, for the
performances. Petitioner claimed he had “quite a bit of say”
- 4 -
over the personnel in the cello section and some input as to the
rest of the orchestra.
Petitioner worked for the Long Beach Symphony (Symphony) for
20 years under conditions similar to those of the Opera.
Petitioner is hired for his “interpretive abilities” but is
subject to the unifying influence of the conductor. Petitioner
did not hold himself out to the Opera as an independent
contractor. Petitioner was paid for each performance by an
hourly wage set by union contract. Petitioner did not submit a
bill to the Opera for services rendered. Petitioner said the
union contract specified that the “principal gets scale and half,
and I was able, because of my reputation, to request double
scale”.
Petitioner also provided background music for motion
pictures. The movie companies would instruct him when to come
and perform. The movie companies provided him with the music.
There are no rehearsals because “rehearsing and recording is all
done as part of the same session.” He could not leave the
performance at will. Petitioner did not submit bills to the
movie companies, except bills were submitted for cartage (“extra
money * * * for lugging around large instruments”).
A representative for the Opera testified that the Opera
withheld taxes, made contributions to petitioner’s pension plan,
and that the contributions were mandatory under the collective
- 5 -
bargaining agreement. The Opera contributed “on behalf of each
musician it employs in the amount of 10% of that Musician’s Scale
wages.” The collective bargaining agreement provides for
employer rights as follows:
Employer’s Rights: The Employer shall at all times have
complete supervision, direction and control over the
Services of Musicians, and expressly reserves the right to
control the manner, means and details of the performance of
Services by the Musicians as well as the ends to be
accomplished.
The representative also observed that the Opera pays for
petitioner’s parking and his workmen’s compensation. The Opera
considered petitioner to be an employee.
A representative from the Symphony testified that his
orchestra issued a Form W-2 to petitioner, withheld FICA and
Medicare, and made 8 percent pension contributions, and 6 percent
contributions to petitioner’s health and welfare fund in
accordance with the union contract. The representative stated
that “we consider our musicians part-time employees”.
Petitioner requested an extension of time to file his 2000
return, which was granted until August 15, 2001. Petitioner had
no further extensions. His return was filed on November 21,
2001.
Petitioner filed his Form 1040, U.S. Individual Income Tax
Return, for 2000 with an attached Schedule C, Profit or Loss From
Business. The return was prepared by Mr. Henry Orloff, a tax
practitioner and petitioner’s accountant. On the Schedule C,
- 6 -
petitioner reported his profession as “INDEPENDENT PROFESSIONAL
MUSICIAN/SOLOIST CELLIST-Classic Music.” His reporting Code was
listed as 711510 (Independent artists, writers, & performers).
For 2000, petitioner reported $174,367 of income on his Schedule
C.
Petitioner claimed deductions on the Schedule C for the
following expenses, which total $83,588:
Auto $ 5,907
Depreciation 12,161
Insurance 2,632
Interest 350
Legal/professional 1,000
Office 1,874
Rent 6,869
Repairs 3,741
Supplies 2,707
Travel 10,135
Meals 1,969
Utilities 5,014
Other 20,687
Home office 8,542
Respondent issued a notice of deficiency on August 11, 2003.
Respondent disallowed the Schedule C expenses and made
computational and other adjustments.
After the notice of deficiency was issued, petitioner filed
a Form 1040X, Amended U.S. Individual Income Tax Return, for 2000
on September 14, 2004. On that form, petitioner stated that he
was “Changing from originally filed Schedule C with Form 1040, to
using Form 2106 (Employee Business Expense)”. In his amended
return, petitioner substantially reduced his claimed business
expenses.
- 7 -
We first consider the issue presented and argued by the
parties of whether petitioner is an employee or is self-employed.
This Court considers various factors to determine whether
there is an employment relationship between the parties.
Relevant factors 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 individual for profit or loss; (4) whether or not the
principal has the right to 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 believe they are creating. No one factor dictates the
outcome. Rather, we must look at all the facts and circumstances
of each case. Weber v. Commissioner, 103 T.C. 378, 379 (1994),
affd. 60 F.3d 1104 (4th Cir. 1995).
The “right-to-control” test is a crucial test to determine
the nature of a working relationship. The degree of control is
of great importance, though not conclusive. Accordingly, we must
examine not only the control exercised by an alleged employer,
but also the degree to which the alleged employer may intervene
to impose control. For an employer to retain the requisite
control over the details of an employee’s work, the employer need
not stand over the employee and direct every move made by that
employee. Also, the degree of control necessary to find employee
- 8 -
status varies according to the nature of the services provided.
Id. at 387-388.
The threshold level of control indicative of employee status
is generally lower when applied to professional services than
when applied to nonprofessional services. Id. In James v.
Commissioner, 25 T.C. 1296 (1956), this Court stated that
“despite this absence of direct control over the manner in which
professional men [and women] shall conduct their professional
activities, it cannot be doubted that many professional men [and
women] are employees.” Also, in Azad v. United States, 388 F.2d
74, 77 (8th Cir. 1969), the Court of Appeals said that “From the
very nature of the services rendered by * * * professionals, it
would be wholly unrealistic to suggest that an employer should
undertake the task of controlling the manner in which the
professional conducts his activities.” Generally a lower level
of control applies to professionals. Petitioner is a
professional musician.
Section 7491(a) is not applicable in this case because
petitioner did not meet the substantiation requirements.
Petitioner has the burden of proof. Rule 142(a); Welch v.
Helvering, 290 U.S. 111 (1933).
Petitioner contends that no one had the right to control
either the method or the means by which he played his cello.
However, there is no question but that the musical organizations
- 9 -
exercise control over petitioner in specifying when he plays, in
determining the length of his performance, when he participates
in rehearsals, whether he can take breaks, which dress uniform he
is required to wear, and in making him subject to the
instructions of the conductor. The musical organization provides
the place for rehearsals, the place for performances, and the
music used. Petitioner has the opportunity to work for an hourly
wage and we note he was an economically successful musician even
after deduction of allowable expenses. His performances are
obviously part of the principal’s regular business. Petitioner
has had a long-term relationship with at least two significant
musical organizations. Petitioner never held himself out as an
independent contractor to the musical organizations. He did so
only when he filed his original return for 2000. He retreated
from that position when he filed his amended return, in effect
admitting he was an employee. The musical organizations treated
him as an employee, considered him to be an employee, issued
Forms W-2, made withholding of various taxes, and made pension
contributions on his behalf.
Weighing all the facts and circumstances, we find that
petitioner was an employee during the year in issue.
We turn to the issue of whether petitioner is entitled to
deduct certain expenses. Respondent disallowed petitioner’s
Schedule C deductions in full and determined that petitioner did
- 10 -
not establish that the Schedule C expenses were ordinary and
necessary business expenses of petitioner. At trial, the parties
treated these deductions as though they were claimed as employee
business expenses and so shall we.
In this posture of the case, we must decide whether the
expenses in question are deductible as ordinary and necessary
business expenses of petitioner’s employment. Our findings in
this record are based in part upon the testimony of petitioner.
Our evaluation of petitioner’s testimony is founded upon “the
ultimate task of a trier of the facts – the distillation of truth
from falsehood which is the daily grist of judicial life.” Diaz
v. Commissioner, 58 T.C. 560, 564 (1972). In this case, we found
petitioner to be an honest, sincere, and credible witness.
Section 162(a) allows a deduction for all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business. To be deductible as a
business expense, the expenditure must relate to activities which
constitute the current carrying on of an existing trade or
business. Corbett v. Commissioner, 55 T.C. 884, 887 (1971).
Whether activities carried on by an individual can be
characterized as a trade or business is a question of fact. Id.
at 887. This Court has long held that a taxpayer may be in the
trade or business of being an employee. Primuth v. Commissioner,
54 T.C. 374, 377 (1970).
- 11 -
Deductions are strictly a matter of legislative grace.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Taxpayers must substantiate claimed deductions. Hradesky v.
Commissioner, 65 T.C. 87, 89 (1975), affd. per curium 540 F.2d
821 (5th Cir. 1976). Moreover, taxpayers must keep sufficient
records to establish the amounts of the deductions. Meneguzzo v.
Commissioner, 43 T.C. 824, 831 (1965); sec. 1.6001-1(a), Income
Tax Regs. Generally, except as otherwise provided by section
274(d), when evidence shows that a taxpayer incurred a deductible
expense, but the exact amount cannot be determined, the Court may
approximate the amount, bearing heavily if it chooses against the
taxpayer whose inexactitude is of his own making. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The Court,
however, must have some basis upon which an estimate can be made.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
Section 274(d) imposes stringent substantiation requirements
for the deduction of traveling expenses (including meals and
lodging while away from home), and certain listed property as
defined under section 280F(d)(4). Listed property includes any
passenger automobile or other property used as a means of
transportation. Taxpayers must substantiate by adequate means
certain elements in order to claim deductions, such as the amount
of such expenditure, the date of the expenditure or use, the
- 12 -
place of each separate expenditure, and the business purpose for
an expenditure or use. Sec. 274(d); sec. 1.274-5T(b), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). To
substantiate a deduction by means of adequate records, a taxpayer
must maintain an account book, diary, log, statement of expense,
trip sheets, and/or other documentary evidence, which, in
combination, are sufficient to establish each element of
expenditure or use. The log must be made at or near the time of
the expenditure. Sec. 1.274-5T(c)(2)(i) and (ii), Temporary
Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).
Petitioner is entitled to deduct $350 for interest on
purchases of business items and $1,874 for expenses relating to
his computer. The computer was used to send “CD” labels to
conductors and booking agents. Petitioner paid $1,000 for tax
return preparation and he is entitled to deduct that amount.
Section 280A limits the allowance of deductions related to
the use of a home office. There is an exception if a portion of
the house is used exclusively on a regular basis as the principal
place of business for the taxpayer’s trade or business. Sec.
280A(c)(1)(A). Section 280A(c) requires that the taxpayer “use
the portion of the home solely for the purpose of carrying on a
trade or business and that there be no personal use of that part
of the home.” Sengpiehl v. Commissioner, T.C. Memo. 1998-23.
Petitioner claimed a $8,542 deduction for home office
- 13 -
expenses. Petitioner had a residence in Pasadena and used one
bedroom solely as a studio/home office. In his home office,
petitioner practiced his cello for several hours almost daily.
He had part of his music library there. He kept his cello there.
He described the cello as follows: “It’s a beautiful cello made
in France in the late 1800s by a maker named Joseph Hel.”
Petitioner stored his extra cellos there. He has a computer and
printer on his computer desk. Petitioner kept his recording
equipment there for use by his students and himself. Petitioner
is entitled to deduct $8,542 for home office expenses. Popov v.
Commissioner, 246 F.3d 1190 (9th Cir. 2001), revg. on this issue,
T.C. Memo. 1998-374. The Ninth Circuit is the circuit to which
this case would be appealable if it were appealable. His
additional claim for the expenses of another studio in Idyllwild
is denied because as he put it: “the entire sort of downstairs
is one long room that I use.” Petitioner did not claim it was
used exclusively for a studio, and at a minimum he had to walk
through that room to get to the upstairs.
Petitioner deducted $3,741 for repairs. Petitioner had all
the bills concerning repairs to his cello. This included new
strings, rehairing the bow, related adjustments, and a new
bridge. Petitioner is entitled to deduct this amount.
Petitioner claimed $2,707 for supplies. He conceded he
could provide documentation only for $2,689.72. Part of this
- 14 -
expense related to a tour he produced with Ensemble Con Brio
(Ensemble), a German chamber orchestra. He provided brochures
for the concert programs. These were printed on a computer. He
paid postage to send them out. Petitioner toured with Ensemble
playing the “Haydn” concerts. Petitioner was the soloist on this
tour. They recorded their performance at the end of the tour.
Petitioner is entitled to deduct the revised amount for supplies.
The claimed $10,135 for travel was also with Ensemble. The
travel was for the rental of vans to transport the groups and for
airline fare to reach destinations. Petitioner also claimed a
deduction for automobile expenses and automobile insurance.
Unfortunately for petitioner, Congress has passed section 274
with respect to traveling expenses (including meals and lodging
while away from home), and listed property. As detailed above,
section 274(d) imposes stringent substantiation requirements for
the deduction of these expenses. Petitioner did not meet the
strict substantiation rules of section 274. He is not entitled
to a deduction for these expenses.
The claimed deduction of $1,969 is for meals petitioner ate.
Based on petitioner’s testimony, we find this to be a non-
deductible personal expense under section 262. As the Court said
at trial: “Not everything in life is deductible.”
The deduction for other expenses represents various items.
Petitioner testified that $566 was for the purchase of CDs,
- 15 -
books, DVDs, and sheet music, all of which related to his
profession. A $670 charge was for new publicity shots. The
foregoing items are deductible. Attending various concerts is a
nondeductible personal expense. Sec. 262. Petitioner is
entitled to deduct the union dues he paid of $3,415 and business-
related bank fees of $1,679.
All other determinations by respondent are sustained.
Section 7491(c) places the burden of production on
respondent with respect to the liability of any individual for
any penalty, addition to tax, or additional amount. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). To meet his burden of
production, respondent must come forward with sufficient evidence
indicating that it is appropriate to impose the relevant penalty.
Id. The burden of proof remains on the taxpayer with respect to
issues such as reasonable cause or substantial authority. Id.
Because petitioner untimely filed his 2000 return, respondent has
satisfied his burden of production with respect to the addition
to tax under section 6651(a)(1). Id. at 447. Respondent has
satisfied his burden of production with respect to the accuracy-
related penalty under section 6662(a) because petitioner took
inconsistent positions on his return and amended return.
Section 6651(a)(1) provides for an addition to tax for
failure to file a Federal income tax return by its due date,
determined with regard to any extension of time for filing
- 16 -
previously granted, unless such failure was due to reasonable
cause and not willful neglect. The addition is 5 percent of the
amount of tax required to be shown on the return, with 5 percent
added for each additional month that the return is late, not to
exceed 25 percent in total.
Section 6081 provides that an extension may be granted for
the filing of a return. Petitioner received an extension to file
his return to August 15, 2001. Nevertheless, he did not file a
return until November 21, 2001. Petitioner offered no
explanation for his late filing. Respondent is sustained on this
issue.
No penalty shall be imposed under section 6662(a) with
respect to any portion of an underpayment if it is shown that
there was reasonable cause and that the taxpayer acted in good
faith. See sec. 6664(c). Whether a taxpayer acted with good
faith depends upon the facts and circumstances of each case. See
sec. 1.6664-4(b)(1), Income Tax Regs. Reliance on the advice of
a professional tax adviser constitutes reasonable cause and is in
good faith if, under all the circumstances, the reliance was
reasonable and the taxpayer acted in good faith. United States
v. Boyle, 469 U.S. 241, 251 (1985).
Petitioner supplied his accountant with complete and
accurate information. Petitioner relied totally on Mr. Henry
Orloff, his accountant, to prepare his income tax return. Mr.
- 17 -
Orloff was experienced in tax matters and held himself out as a
tax practitioner. Petitioner reasonably relied on his advice,
and we find that he is not liable for the penalty under section
6662(a). Woody v. Commissioner, 19 T.C. 350, 355 (1952).
Contentions we have not addressed are irrelevant, moot, or
without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.