T.C. Memo. 2005-86
UNITED STATES TAX COURT
LISA BETH LEVINE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9715-03. Filed April 14, 2005.
Lisa Beth Levine, pro se.
W. Randolph Shump and Pamela J. Arthur Gerlach, for
respondent.
MEMORANDUM OPINION
JACOBS, Judge: Respondent determined a $2,571 deficiency in
petitioner’s 1999 Federal income tax. The ultimate issue to be
decided is whether petitioner is entitled to a deduction for her
contribution to her simplified employee pension for 1999.
Resolution of the ultimate issue depends upon whether
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petitioner’s employment relationship with the U.S. Department of
State (the State Department) from January 1 until November 19,
1999, under two personal service contracts covering that period,
was that of a common law employee of the State Department, as
respondent asserts, or an independent contractor, as petitioner
asserts. We hold that petitioner’s relationship with the State
Department was that of an independent contractor.1
1
Unless otherwise indicated, section references are to the
Internal Revenue Code Rule, and Rule references are to the Tax
Court Rules of Practice and Procedure.
In her opening brief, petitioner asserted that the burden of
proof should be shifted to respondent because the notice of
deficiency failed to adequately describe the basis for the tax
deficiency as required by sec. 7522(a). In response to an
inquiry of the Court, respondent concedes that sec. 7491(a)
applies in the present case because the examination of
petitioner’s 1999 return began after July 22, 1998, the effective
date of the statute. Respondent also concedes that petitioner
has complied with the substantiation and cooperation requirements
of sec. 7491(a)(2).
The burden of proof consists of two burdens--the burden of
production (the duty of bringing forward evidence) and the burden
of persuasion (the risk of nonpersuasion). Gerling Intl. Ins.
Co. v. Commissioner, 86 T.C. 468, 476 n.5 (1986). The initial
burden of production requires the taxpayer to introduce evidence
sufficient to establish his/her claim by a preponderance of the
evidence. Helvering v. Taylor, 293 U.S. 507, 514-515 (1935); see
also Pittman v. Commissioner, 100 F.3d 1308, 1317 (7th Cir.
1996), affg. T.C. Memo. 1995-243; Page v. Commissioner, 58 F.3d
1342, 1347-1348 (8th Cir. 1995), affg. T.C. Memo. 1993- 398.
Without regard to any burden-shifting provisions, if the taxpayer
successfully carries the initial burden of production as to a
particular adjustment, the burden of production (but not the
ultimate burden of persuasion) shifts to the Commissioner; i.e.,
the burden of introducing evidence showing an adjustment is
warranted shifts to the Commissioner. Helvering v. Taylor, supra
at 514-515; Berkery v. Commissioner, 91 T.C. 179, 186 (1988),
(continued...)
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Background
This case was submitted to the Court fully stipulated
pursuant to Rule 122. Petitioner resided in Berwyn Heights,
Maryland, when she filed her petition in this case.
A. Service Provided to the State Department Pursuant to
Personal Service Contracts
On June 30, 1998, petitioner entered into a personal service
contract with the State Department to provide full-time services
to the Office of Foreign Buildings Operations (FBO), Office of
Operations and Post Support, Safety Division, as an industrial
hygienist from July 5, 1998, to July 3, 1999. On July 2, 1999,
petitioner entered into a second personal service contract with
the State Department to provide full-time services as an
industrial hygienist from July 4, 1999, to July 1, 2000.
1
(...continued)
affd. without published opinion 872 F.2d 411 (3d Cir. 1989);
Cozzi v. Commissioner, 88 T.C. 435, 443-444, (1987); Jackson v.
Commissioner, 73 T.C. 394, 401 (1979); Westby v. Commissioner,
T.C. Memo. 2004-179.
In any case in which both parties have satisfied their
burdens of production by offering some evidence, then the party
whose position is supported by the weight of the evidence will
prevail regardless of which party bore the burden of persuasion.
Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2005),
affg. T.C. Memo. 2003-212. Consequently, a shift in the burden
of persuasion “has real significance only in the rare event of an
evidentiary tie”. Id.
In a fully stipulated case such as this, there are no facts
in dispute. Hence we decide this case on the weight of the
evidence without regard to any burden-shifting rule. See
Williams v. Commissioner, 123 T.C. 144 (2004).
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The personal service contracts stated that (1) the contracts
were authorized pursuant to 22 U.S.C. secs. 291-301 and (2)
personnel hired under personal service contracts were not
appointed, Federal employees (direct hire employees) as defined
in 5 U.S.C. sec. 2105. Standard Form 279, Federal Procurement
Data System (FPDS) Individual Action Report, states that the
contractor is a small, woman-owned business.
The State Department and/or petitioner had the right to
terminate the personal service contracts without cause at any
time with 30 days’ notice. The State Department could also
terminate the personal service contracts for cause by written
notice from the contracting officer to petitioner.
1. Statement of Work
As an industrial hygienist, petitioner was responsible for
(1) managing, coordinating, and implementing the State
Department’s worldwide industrial hygienist field technical
services program; (2) directing or conducting evaluations and
studies of work environments for health hazards; and (3)
providing specific guidance and assistance to ensure protection
of employees. Petitioner performed her services according to the
statement of work attached to the personal service contracts.
The statement of work described petitioner’s major duties to be
as follows:
1. Under the general direction of the senior
industrial hygienist, implements the Occupational
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Health Program to provide a responsive health program.
Conducts industrial hygiene and environmental health
inspections worldwide. Writes comprehensive reports
for the Safety Director, or the Senior Industrial
Hygienist, with little administrative direction.
2. Inspects and monitors facilities, processes, or
activities which may adversely impact employee health
or the environment. Recommends or implements measures
to eliminate or alleviate hazards. Writes
comprehensive and insightful reports based on a
professional evaluation of data collected during the
survey.
3. Evaluates proposals involving toxic chemicals or
physical agents which may adversely effect employee
health, public health, or the environment. Recommends
or implements measures to prevent anticipated hazards
during construction/renovation projects.
4. Specifies equipment to protect employees, the
public, or the environment from toxic chemicals or
physical agents. Specifies analytical information to
monitor toxic chemicals or physical agents such as
radiation, noise and heat stress.
5. Trains employees in the use, handling and disposal
of toxic chemicals and physical agents.
6. Investigates employee suggestions regarding
industrial hygiene or environmental health hazzards.
Recommends methods to eliminate or alleviate indoor air
quality concerns.
7. Plans and develops a system for monitoring,
coordination and collating industrial hygiene data
generated by the industrial hygiene contractor and/or
in-house resources. Develops an industrial hygiene
management information system.
The statement of work described the “Supervisory Controls”
as follows:
Incumbent [petitioner] works under broad
administrative guidance of the Senior Industrial
Hygienist, who makes work assignments in terms of
projects to be accomplished and provides statements of
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policy and overall scope to guide the incumbent.
Completed work is considered technically authoritative
and is normally accepted without significant change.
Petitioner was responsible for the quality and technical
accuracy of all services and work product delivered under the
personal service contracts. The Government had the right to
inspect and test all services, and if any of the services
performed did not conform with the contract requirement, the
Government could require petitioner alternatively to (1) perform
the services again in conformity with those requirements or (2)
take necessary action to ensure the conformance of future
performance.
2. Contracting Officer and Contracting Officer’s
Representative
The personal service contracts were executed by a
contracting officer on behalf of the Government. Under the
personal service contracts, the contracting officer could
designate a contracting officer’s representative (COR) to take
action for the Contacting Officer under the contracts. The
designation had to specify the scope and limitations of the
authority delegated. Under the personal service contracts,
petitioner was directly responsible to the COR. The COR was to
provide assignments to petitioner, provide policy guidance,
establish general priorities, and outline policy goals and
objectives. Petitioner was responsible for planning and carrying
out the projects.
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The personal service contracts named Stephen Urman as the
COR. Under Delegations of Authority and Responsibility of
Contracting Officer’s Representative, the contracting officer
authorized Mr. Urman to: (1) Coordinate with petitioner on all
technical matters, (2) give technical clarification as to the
meaning of the specifications including inspecting, testing, and
acceptance procedures, (3) inspect petitioner’s progress to
assure compliance with the contract terms and conditions, and (4)
perform all functions necessary to accept the products or
services for the Government. The delegation precluded Mr. Urman
from altering or modifying the personal service contracts. Upon
completion of petitioner’s work, Mr. Urman was to inspect
petitioner’s work and inform the contracting officer, in writing,
of any deviations from contract requirements. If there were no
deficiencies, a statement of satisfactory (or better) performance
would be appropriate. Mr. Urman was to prepare a written
evaluation of petitioner’s performance at the end of the
contract.
Under the personal service contracts, petitioner was
required to provide the services personally and was not permitted
to reassign or delegate her duties to others. Petitioner did not
have any employees.
Petitioner worked with Federal employees and other workers.
Petitioner did not supervise direct hire Government personnel,
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but she could make recommendations to the COR and coordinate
projects with direct hire personnel.
3. Office Space, Compensation, and Benefits
Petitioner’s services under the personal service contracts
required a valid security clearance. Petitioner was required to
maintain strict secrecy concerning any information or
documentation she obtained in conjunction with work performed
under the contracts. The contracts required classified materials
assigned to, or generated by, petitioner to be stored in
appropriate containers in FBO, the State Department, or the
appropriate U.S. Foreign Service Post.
The personal service contracts required the State Department
to provide to petitioner, to the extent practical, office space,
furniture, telephone, office equipment (including word
processors, computers, typewriters, calculators, copying
machines, etc.), and office supplies that would ordinarily be
used by Government employees doing similar work for the State
Department. Pursuant to the contracts, petitioner was to work 5
days per week, Monday through Friday, 8 hours per day from 8:30
a.m. to 5:15 p.m., with a 45-minute lunch break, when she worked
at the office location.
Petitioner performed approximately 40 percent of her
services outside the United States. Petitioner received
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reimbursements for travel expenses pursuant to the personal
service contracts.
Petitioner was paid an annual salary of $67,162 ($32.18 per
hour calculated on a work year of 2,087 hours) under the first
service contract and $69,631 ($33.36 per hour calculated on a
work year of 2,087 hours) under the second contract.
Petitioner’s salary was comparable to that of a Government
employee classified as GS-13, step 7, including the locality pay
differential for the Washington, D.C. area, during the contract
periods. Petitioner received base rate increases at the same
time and in the same proportion that regular State Department
employees received their wage scale increases during the contract
periods.
Petitioner was eligible to earn overtime for hours worked in
excess of 40 hours per week and could earn compensatory time in
lieu of overtime. Petitioner was required to obtain approval by
the COR in advance of working overtime and/or taking compensatory
time.
Petitioner was entitled to paid leave for official Federal
holidays. If she worked on a Federal holiday, she was entitled
to payment for overtime, or she could accrue compensatory time.
Petitioner accrued 4 hours of annual leave and 4 hours of
sick leave each pay period during the contract periods. Unused
annual and sick leave from the first contract period was
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transferable to the second contract period. Under petitioner’s
contracts, accrued annual leave was not carried over in the event
of direct hire.
Petitioner was entitled to “excused absences” for blood
donations, voting, inclement weather, and military leave.
Petitioner reported her time and attendance to the COR biweekly.
The personal service contracts required the State Department
to withhold two parts of Social Security (old age/survivors
disability insurance and Medicare) and Federal and State income
taxes from petitioner’s wages. The contracts required the State
Department to “make the employer’s contribution toward the two
parts of Social Security in behalf of Contractor [petitioner]”.
The State Department issued Forms W-2, Wage and Tax Statement, to
petitioner for years covered by the contract periods.
Petitioner was entitled to reimbursement of 50 percent of
her actual annual health insurance costs. Petitioner was
required to submit invoices for reimbursement of health insurance
premiums to the COR on SF-1034, Public Voucher for Purchases and
Services Other Than Personal. The personal service contracts
stated that under current law, reimbursements of actual
expenditures for health insurance were not reported as gross
income for Federal income tax purposes. Petitioner was not
covered by the State Department medical program, nor was she
entitled to participate in the Federal Employees Health Benefits
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Program. Petitioner was not permitted to enroll in the Immediate
Benefit Plan providing death benefits to Federal employees.
During the contract periods, petitioner was not permitted to
park in the parking facility reserved for permanent, full-time
employees of the State Department. Petitioner was not eligible
for (1) “Metrocheks”, although State Department employees within
the definition of 5 U.S.C. sec. 2105 were entitled to that
benefit; (2) performance awards during the contract periods; or
(3) membership in the Federal employees union while employed
under her personal service contracts.
Petitioner did not make capital investments related to her
personal service contracts during the periods covered by the
contracts. Petitioner worked exclusively for the State
Department and had no other clients or employers.
4. Mr. Urman’s Evaluation Report
At the end of the term of the first personal service
contract, Mr. Urman submitted a Contractor’s Evaluation
Statement, dated July 1, 1999, wherein he evaluated petitioner’s
performance under the contract. Mr. Urman stated that petitioner
was responsible for providing onsite and followup service to
overseas posts to help the posts implement effective “SHEM”
programs. As part of that activity, petitioner had visited 18
posts, prepared reports, and provided followup activities to
ensure that the posts understood and implemented her
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recommendations. Mr. Urman noted that petitioner had adapted to
her responsibilities without having the advantage of a mentor or
Mr. Urman’s close supervision. He rated petitioner’s performance
outstanding and recommended her for future contracts.
B. Petitioner Released From Second Personal Service Contract
and Appointed Federal Employee
On November 19, 1999, the State Department released
petitioner from the second personal service contract and hired
her as a full-time, permanent, appointed, Federal employee as an
industrial hygienist. Pursuant to the personal service
contracts, petitioner’s service under the contracts did not apply
toward her annual leave accrual rate or retirement credit for
direct hire service. Petitioner was not paid for any unused
accrued sick leave, and the leave was not carried over as a
credit under her direct hire service.
Her appointment was subject to completion of a 1-year
probationary period beginning November 11, 1999. Her service for
purposes of career tenure and FERS/FSPS began November 11, 1999.
C. Contribution to Simplified Employee Pension, Deduction on
the 1999 Return, Notice of Deficiency, and Tax Court
Proceedings
On March 10, 2000, petitioner made an $8,638 contribution to
her simplified employee pension for 1999. Petitioner calculated
the contribution on the basis of the income she earned under the
personal service contracts.
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Petitioner filed her 1999 Form 1040, U.S. Individual Income
Tax Return with the Philadelphia Service Center of the Internal
Revenue Service on April 15, 2000. Petitioner reported the
income she received from the State Department under the personal
service contracts as wages in conformity with the Form W-2 issued
by the State Department. Petitioner deducted the $8,638
contribution to her simplified employee pension on the 1999
return. Petitioner attached to the 1999 return an explanation of
the contribution to her simplified employee pension. On that
statement she asserted that the Form W-2 did not accurately
reflect her employment status with the State Department and
stated that she was an independent contractor.
On June 13, 2003, respondent issued a notice of deficiency
to petitioner for 1999 determining a $2,571 deficiency resulting
from the disallowance of petitioner’s deduction for the $8,638
contribution to her simplified employee pension for 1999. The
notice of deficiency explained that the deduction for the
contribution to petitioner’s simplified employee pension was not
allowed because petitioner had not established that she was
“entitled to this deduction”.
Petitioner timely filed a petition in this Court for
redetermination of the deficiency.
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Discussion
A. Deductibility of Contributions to Simplified Employee
Pension
A simplified employee pension is a qualified plan pursuant
to which an employer makes direct contributions to its employees’
individual retirement accounts or individual retirement annuities
as defined under section 408(a) and (b). Sec. 408(k). Section
404(a)(8) permits an employer to deduct certain contributions to
a simplified employee pension. Individuals who have net earnings
from self-employment (as defined in section 1402(a)) are treated
as their own employers under a simplified employee pension plan.
See secs. 401(c)(4), 408(k)(7). Section 1402(a) defines “net
earnings from self-employment” as the gross income derived by an
individual from any trade or business less deductions
attributable thereto. Section 1402(c)(2) provides that
performance of services as an employee does not constitute a
trade or business for purposes of self-employment income, except
for certain situations not relevant herein. See also sec.
1.401-10(b)(3)(i), Income Tax Regs. Employees include employees
and elected and appointed officials of the Federal Government, as
well as private-sector employees. Sec. 31.3401(c)-1(a),
Employment Tax Regs.
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B. Employee or Independent Contractor
Petitioner’s entitlement to the deduction at issue hinges
upon the proper classification of her work relationship with the
State Department.
Petitioner asserts she performed services under the personal
service contracts as an independent contractor.2 Respondent
asserts that petitioner was a common law employee of the State
Department.
The term “employee” is not defined in the Internal Revenue
Code. Consequently, whether an individual is an employee for
purposes of section 401(c) is a factual question the answer to
which depends upon the application of common law concepts. See
Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S.
440, 444-445 (2003); Nationwide Mut. Ins. Co. v. Darden, 503 U.S.
318, 322-323 (1992); Weber v. Commissioner, 60 F.3d 1104,
1110-1111 (4th Cir. 1995), affg. 103 T.C. 378 (1994); Air
Terminal Cab, Inc. v. United States, 478 F.2d 575, 578 (8th Cir.
1973); Profl. & Executive Leasing, Inc. v. Commissioner, 89 T.C.
225, 232 (1987), affd. 862 F.2d 751 (9th Cir. 1988); Burnetta v.
Commissioner, 68 T.C. 387, 397 (1977); Simpson v. Commissioner,
2
Petitioner asserts that she cannot be an employee of the
State Department because the personal service contracts specified
that she was not an appointed Federal employee as defined in 5
U.S.C. sec. 2105. We need not address this argument, because we
find that petitioner was an independent contractor and not a
common law employee of the State Department.
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64 T.C. 974, 984 (1975); Packard v. Commissioner, 63 T.C. 621,
629 (1975); sec. 1.1402(c)-1, Income Tax Regs.
Relevant factors courts consider to determine whether an
employer/employee relationship exists between the service
provider and the hiring party include: (1) The hiring party’s
right to control the manner and means by which the work is
accomplished; (2) the skill required; (3) which party furnishes
the equipment used and the place of work; (4) whether the work is
part of the hiring party’s regular business; (5) the worker’s
opportunity for profit or loss; (6) the manner in which the work
relationship may be terminated; i.e., by one or both parties,
with or without notice or explanation; (7) the permanency of the
relationship; (8) the method of payment, whether by time or by
the job; (9) whether the hiring party pays Social Security taxes;
(10) whether the worker receives employee benefits; and (11) the
relationship the parties believe they are creating. Clackamas
Gastroenterology Associates, P.C. v. Wells, supra at 449-450;
Nationwide Mut. Ins. Co. v. Darden, supra at 323-324; Horner v.
Acosta, 803 F.2d 687, 693 (Fed. Cir. 1986); Spirides v.
Reinhardt, 613 F.2d 826, 832 (D.C. Cir. 1979); Weber v.
Commissioner, 103 T.C. at 387; Profl. & Executive Leasing, Inc.
v. Commissioner, supra at 232; Simpson v. Commissioner, supra at
984-985; see also sec. 31.3401(c)-1(b), Employment Tax Regs. The
factor generally considered fundamental for resolving the
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question of whether an individual is an employee is the degree of
control exercised by the person for whom the work is performed
over the individual who renders the services. Weber v.
Commissioner, 60 F.3d at 1110; Packard v. Commissioner, supra at
629-630; sec. 31.3401(c)-1(b), Employment Tax Regs. Although the
degree of control is one of great importance, it is not
exclusive. Bartels v. Birmingham, 332 U.S. 126, 130 (1947) (the
relationship of employer-employee is not determined solely by the
control which the principal may or could exercise over the
details of the service rendered to his business by the worker).
Whether a worker is an employee depends on all of the incidents
of the relationship, and no one factor is determinative.
Clackamas Gastroenterology Associates, P.C. v. Wells, supra at
451; Weber v. Commissioner, 60 F.3d at 1110.
1. Degree of Control
If the person receiving the benefit of a service has the
right to control the manner in which the service is performed,
the person rendering the service may be an employee. Weber v.
Commissioner, 60 F.3d at 1110; Avis Rent A Car System, Inc. v.
United States, 503 F.2d 423, 429 (2d Cir. 1974). The degree of
control necessary to find employee status varies with the nature
of the services provided by the worker. Weber v. Commissioner,
103 T.C. at 388; Reece v. Commissioner, T.C. Memo. 1992-335;
Pulver v. Commissioner, T.C. Memo. 1982-437. The threshold level
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of control necessary to find employee status is generally lower
when applied to professional services than when applied to
nonprofessional services. Weber v. Commissioner, 60 F.3d at
1110-1111.
The absence of the need to control should not be confused
with the absence of the right to control. Air Terminal Cab, Inc.
v. United States, supra at 580. The right to control is
determinative, and it is not necessary that any control actually
be exercised. Thus, courts must examine not only the control
exercised by the principal, but also the degree to which the
principal may intervene to impose control. Radio City Music Hall
Corp. v. United States, 135 F.2d 715, 717 (2d Cir. 1943);
deTorres v. Commissioner, T.C. Memo. 1993-161.
Section 31.3121(d)-1(c)(2), Employment Tax Regs., describes
the right to control an employee as follows:
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. That is,
an employee is subject to the will and control of the
employer not only as to what shall be done but how it
shall be done. * * *
While the degree of control exercised over the details of the
work is important, the crucial test lies in the right to control
(1) the manner in which the service is to be performed; (2) the
means to be used in its accomplishment; and (3) the result to be
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obtained. Matthews v. Commissioner, 92 T.C. 351, 361 (1989),
affd. 907 F.2d 1173 (D.C. Cir. 1990).
To retain the requisite control over the details of an
individual’s work, the principal need not stand over the
individual and direct every move made by the individual; it is
sufficient if he has the right to do so. Weber v. Commissioner,
103 T.C. at 388; Profl. & Executive Leasing, Inc. v.
Commissioner, 89 T.C. at 234; Simpson v. Commissioner, 64 T.C. at
985; Gierek v. Commissioner, T.C. Memo. 1993-642. Similarly, the
principal need not set the employee’s hours or supervise every
detail of the work environment to control the employee. Gen.
Inv. Corp. v. United States, 823 F.2d 337, 342 (9th Cir. 1987).
Mr. Urman was the COR to whom petitioner was directly
responsible. Mr. Urman assigned projects to petitioner, provided
policy guidance, and established general priorities. Mr. Urman
could not, however, alter or modify the personal service
contracts. Therefore, Mr. Urman could not assign projects that
required services other than those delineated in the contracts,
change petitioner’s hours, or transfer her to another department.
Petitioner was responsible for planning and carrying out the
projects delivered under the personal service contracts, with
little administrative direction. She was responsible for the
quality and technical accuracy of all services and work product.
Petitioner’s completed work was considered technically
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authoritative and normally accepted without significant change.
Although Mr. Urman had the right to inspect and test all services
petitioner provided, he did not have the right to change her work
product.
We conclude that the control the Government had over the
details of petitioner’s work is more consistent with a
principal/independent contractor relationship than an
employer/employee relationship. This factor favors petitioner.
2. Special Skill
If a service requires a special skill to solve a problem,
the specialist called in to solve the problem is likely to be an
independent contractor. By contrast, a worker hired to perform
the essential, everyday chores of the employer’s operation is
likely to be an employee. McLaughlin v. Seafood, Inc., 861 F.2d
450 (5th Cir. 1988) (the workers were not specialists called in
to solve a problem, but laborers who performed the essential,
everyday chores of their employer’s operation).
The State Department was authorized under 22 U.S.C. sec. 296
to contract for petitioner’s services as an expert industrial
hygienist. The State Department hired petitioner to implement
its occupational health program by providing a responsive health
program; conduct industrial hygiene and environmental health
inspections worldwide; inspect and monitor facilities, processes,
or activities which might adversely affect an employee’s health
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or the environment; recommend or implement measures to eliminate
or alleviate hazards; specify equipment to protect employees, the
public, or the environment from toxic chemicals or physical
agents; plan and develop a system for monitoring, coordinating,
and collating industrial hygiene data generated by the industrial
hygiene contractor and/or in-house resources; and develop an
industrial hygiene management information system.
Petitioner wrote comprehensive reports for the safety
director, or the senior industrial hygienist, with little
administrative direction. Her completed work was considered
technically authoritative and normally accepted without
significant change. Petitioner was called in to solve a problem.
This factor supports a finding that petitioner was an
independent contractor.
3. Furnishing of Equipment and Facilities
If the worker has a substantial investment in his/her own
tools, equipment, or facilities, he/she may be an independent
contractor. Cf. Breaux & Daigle, Inc. v. United States, 900 F.2d
49, 53 (5th Cir. 1990). If, on the other hand, the worker
performs all work at an office furnished by the
principal/employer, he/she may be an employee.
The State Department provided petitioner with office space,
furniture, telephone, office equipment (including word
processors, computers, typewriters, calculators, copying
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machines, etc.), and office supplies that would ordinarily be
used by Government employees doing similar work for the State
Department. Petitioner worked at the office furnished by the
State Department, except for the periods she spent at foreign
mission sites. Normally, these circumstances would indicate an
employer-employee relationship.
With certain limited exceptions, 48 C.F.R. sec. 45.302-1
(2004) requires contractors of Federal agencies to furnish all
facilities in performance of their contracts with the agencies.
Title 48 C.F.R. sec. 45.302-1(a) (2004) permits an agency to
furnish facilities to contractors, inter alia, for support of
industrial preparedness programs and as otherwise authorized by
law or regulation. Title 48 C.F.R. sec. 45.302-3(a) (2004)
permits an agency to provide facilities to a contractor under a
contract (other than a facilities contract) when, inter alia, the
contract performance period is 12 months or less; the contract is
for services and the facilities are to be used in connection with
the operation of a Government-owned plant or installation; the
contract is for work within an establishment or installation
operated by the Government. 48 C.F.R. sec. 45.302-3(a)(3), (5),
(6) (2004).
Petitioner’s personal service contracts were for industrial
hygienist services for periods of 12 months and called for
services related to the operation of State Department
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installations. Petitioner was responsible for managing,
coordinating, and implementing the State Department’s worldwide
industrial hygienist field technical services program. She
inspected and monitored State Department facilities worldwide for
health hazards. She recommended or implemented measures to
eliminate or alleviate hazards and trained employees in the use,
handling, and disposal of toxic chemicals and physical agents.
During the first contract period, petitioner visited 18 posts and
performed approximately 40 percent of her services outside the
United States. Petitioner’s services required access to
classified information that was required to be kept at the State
Department. Under these circumstances, we think the State
Department’s providing petitioner with office facilities and
supplies is consistent with treating petitioner as an independent
contractor, as well as, treating her as an employee. This factor
is neutral.
4. Integral Part of the Business
The State Department’s FBO operates the Foreign Service
properties in foreign countries. The services petitioner
provided under the personal service contracts were integral to
the State Department’s obligation to ensure the safety of
Government employees who worked in those properties. Petitioner
did not perform services for other clients. See Breaux & Daigle,
Inc. v. United States, supra at 53 (financial success of
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processor of crab meat depended upon crab meat pickers;
therefore, crab meat pickers’ services were integral part of
processor’s business); Air Terminal Cab, Inc. v. United States,
478 F.2d at 581 (taxicab drivers were performing personal
services constituting integral part of taxpayer’s business
operations). This factor favors respondent.
5. Opportunity for Profit or Loss
If a person performing a service has an opportunity to
profit depending on his management skill, he may be an
independent contractor. United States v. Silk, 331 U.S. 704,
717-718 (1947). If a person performing a service undertakes a
substantial cost, for example by employing and paying his own
laborers, he may be an independent contractor. Id. Petitioner
had no opportunity for profit or loss. The amount of pay she
received depended only upon the number of hours she worked.
While petitioner was given a project to complete, the amount she
would earn did not depend upon completion of the project. This
factor favors respondent.
6. Termination of Relationship
In determining whether an employer-employee relationship
exists, courts consider the manner in which the work relationship
can be terminated; i.e., by one or both parties, at any time,
with or without notice or explanation. Horner v. Acosta, 803
F.2d at 693; Spirides v. Reinhardt, 613 F.2d at 832; Ewens &
- 25 -
Miller, Inc. v. Commissioner, 117 T.C. 263, 273 (2001); Day v.
Commissioner, T.C. Memo. 2000-375. Usually, the right to
discharge a worker, and the worker’s right to quit, at any time
indicates an employer-employee relationship. See United States
v. W.M. Webb, Inc., 397 U.S. 179, 193 (1970); Breaux & Daigle,
Inc. v. United States, 900 F.2d at 53; Air Terminal Cab, Inc. v.
United States, 478 F.2d at 581. The right to discharge without
cause is a factor that should be considered in determining
whether a person is an employee. Sec. Storage & Van Co. v.
United States, 528 F.2d 1166, 1167 (4th Cir. 1975).
Both petitioner and the State Department had the right to
terminate the personal service contracts without cause with 30
days’ notice. The State Department could terminate petitioner’s
services for cause only by written notice from the contracting
officer to petitioner. The State Department could not discharge
petitioner at any time without notice or explanation. This
factor favors petitioner.
7. Permanency of the Relationship
A transitory work relationship may point toward independent
contractor status. Herman v. Express Sixty-Minutes Delivery
Serv., Inc., 161 F.3d 299, 305 (5th Cir. 1998). Petitioner
performed work under the personal service contracts for a little
over 1 year. In November 1999, the State Department released
petitioner from the second personal service contract and hired
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her as a full-time, permanent, appointed, Federal employee as an
industrial hygienist. Petitioner’s employment was subject to
completion of a 1-year probationary period beginning November 11,
1999. Her service for purposes of career tenure and FERS/FSPS
also began November 11, 1999. Petitioner’s service under the
personal service contracts did not apply toward her annual leave
accrual rate or retirement credit as a Federal employee.
Petitioner was not paid for any unused accrued sick leave, and
the leave was not carried over as a credit under her direct hire
service.
The relationship created under the personal service
contracts was intended to be a temporary one entered into for a
stated period. It appears that, in November 1999, the State
Department, impressed with petitioner’s performance, decided to
hire her as an employee. The length of petitioner’s employment
is consistent with her status as an independent contractor. Cf.
Lewis v. Commissioner, T.C. Memo. 1993-635 (7-year employment
consistent with employee status). This factor favors petitioner.
8. Method of Payment
Courts consider whether the worker was paid by time,
indicative of an employee, or by the job, indicative of an
independent contractor. Petitioner was paid on the basis of a
40-hour week. She worked 5 days per week, Monday through Friday,
8 hours per day from 8:30 a.m. to 5:15 p.m., with a 45-minute
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lunch break. Petitioner reported her time and attendance to Mr.
Urman biweekly. This factor supports respondent.
9. Social Security Taxes
Another factor courts have considered in determining the
status of workers is whether there was a withholding of taxes and
payment into worker’s compensation and unemployment insurance
funds. Profl. & Executive Leasing, Inc. v. Commissioner, 862
F.2d 751, 753 (9th Cir. 1988).
The personal service contracts required the State Department
to withhold two parts of Social Security (old age/survivors
disability insurance and Medicare) and Federal and State income
taxes from petitioner’s wages. The contracts required The State
Department to “make the employer’s contribution toward the two
parts of Social Security in behalf of Contractor”. (Emphasis
added.) That language is appropriate where services are
performed for the Government by an employee of a contractor (here
a small, woman-owned business), and the Government agrees to pay
the contractor-employer’s contribution for the two parts of
Social Security. The provision is consistent with treating
petitioner as an employee of her own business, as well as
treating her as a State Department employee. This factor is
neutral.
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10. Employee Benefits
Receipt of employee benefits is an important factor in
determining whether an employer-employee relationship exists.
Packard v. Commissioner, 63 T.C. at 632.
a. Annual Leave
Petitioner accrued 4 hours of annual leave and 4 hours of
sick leave each pay period during the contract periods. Unused
annual and sick leave from the first contract period was
transferable to the second contract period. Petitioner was
entitled to “excused absences” for blood donations, voting,
inclement weather, and military leave. This factor supports
respondent.
b. Retirement Benefits
Petitioner was not entitled to any retirement benefits.
Moreover, when petitioner was appointed as a direct-hire
employee, her service under the personal service contracts was
not credited toward her retirement credit for direct hire
service. This factor favors petitioner.
c. Health Benefits
Although petitioner was not entitled to participate in the
State Department medical program or the Federal Employees Health
Benefits Program, she was entitled to reimbursement of 50 percent
of her actual annual health insurance costs. This factor
slightly favors respondent.
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d. Other Benefits
Petitioner was not permitted to enroll in the Immediate
Benefit Plan providing death benefits to Federal employees.
During the contract periods, petitioner was not permitted to park
in the parking facility reserved for permanent, full-time,
employees of the State Department. Petitioner was not eligible
for (1) “Metrocheks”, although State Department employees within
the definition of 5 U.S.C. sec. 2105 were entitled to that
benefit; (2) performance awards during the contract periods; or
(3) membership in the Federal employees union while employed
under her personal service contracts. This factor favors
petitioner.
11. Relationship the Parties Thought They Created
Courts have considered the relationship the parties believed
they were creating. Simpson v. Commissioner, 64 T.C. at 984-985.
The State Department apparently believed that its
relationship with petitioner for tax purposes was that of
employer-employee. The State Department withheld Federal income
taxes and FICA taxes from petitioner’s paychecks and issued Forms
W-2, rather than Forms 1099, to petitioner for years covered by
the contract periods. Moreover, we are mindful that, although
petitioner stated on her return that she was an independent
contractor, she did not pay any self-employment taxes for 1999.
This factor favors respondent.
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C. Conclusion
Courts have noted that the determination of whether an
employer/employee relationship existed can be a close question of
fact. See, e.g., Eren v. Commissioner, 180 F.3d 594, 597 (4th
Cir. 1999) (“Although this is arguably a close case, we cannot
say from these facts that the tax court was clearly erroneous in
finding that FBO had the right to control Eren’s activities.”),
affg. T.C. Memo. 1995-555; Lifetime Siding, Inc. v. United
States, 359 F.2d 657, 659 (2d Cir. 1966) (some evidence indicated
employee status and some pointed toward an independent contractor
status demonstrating “what may be said to have been a close
question of fact”); Serv. Trucking Co. v. United States, 347 F.2d
671, 673 (4th Cir. 1965) (“It cannot reasonably be said that this
record points indisputably to but a single answer. * * * But
analysis of the facts warrants different determinations depending
on the relative weight and significance the fact finder attaches
to various circumstances shown.”). Some cases examining the
relationship created by a personal service contract entered into
by a Federal agency and a professional, similar to petitioner’s
personal service contracts with the State Department, have
concluded that the contract created an employee/employer
relationship. See, e.g., Eren v. Commissioner, supra; Marckwardt
v. Commissioner, T.C. Memo. 1991-347; Juliard v. Commissioner,
T.C. Memo. 1991-230; Matt v. Commissioner, T.C. Memo. 1990-209.
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Other cases have found that the taxpayer was an independent
contractor. See, e.g., Chin v. United States, 57 F.3d 722 (9th
Cir. 1995); deTorres v. Commissioner, T.C. Memo. 1993-161.
In Eren v. Commissioner, supra, Mr. Eren was an architect
who worked for the State Department’s FBO from the late 1970s to
at least 1990. He worked as a project director for the FBO under
personal service contracts beginning in 1984. From July 1988 to
June 1990, Mr. Eren worked as project director for the
construction of an annex to the U.S. Embassy in Bogota, Colombia.
He performed the essential, everyday chores of the FBO’s
operations of constructing and maintaining embassies. Mr. Eren
supervised the construction of the annex; he was bound by the
construction documents for the building and could not exceed the
budget. Mr. Eren’s contract required him to “perform appropriate
functions and obligations in accordance with procedures or other
directives issued by the Contracting Officer or his designee”.
He was required to maintain a daily log and submit monthly
progress reports. Mr. Eren was not a specialist hired to solve a
problem. We found that Mr. Eren was an employee of the FBO. On
appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed
our decision, but noted that it was arguably a close case.
The case at bar is also a close case, but the totality of
the stipulated facts leads us to conclude that petitioner’s
relationship with the State Department under the personal
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services contracts materially differs from Mr. Eren’s
relationship with the FBO. Although petitioner and Mr. Eren were
both professionals, the State Department hired petitioner as a
specialist to evaluate and solve a problem. She evaluated work
environments for health hazards, recommended and implemented
measures to eliminate those hazards, and developed an industrial
hygiene management information system. Petitioner’s work was
considered technically authoritative and accepted without
significant change. The State Department had little control over
the means and manner by which petitioner’s work was accomplished.
Petitioner worked under the broad guidance of the COR, who made
assignments and provided statements of policy and overall scope
to guide petitioner. Petitioner was responsible for planning and
carrying out the projects. She submitted her evaluations and
recommendations to the COR in comprehensive written reports when
the project was completed; she was not required to maintain daily
logs or submit monthly reports. In sum, the FBO had more control
over Mr. Eren than the State Department had over petitioner.
Moreover, petitioner’s work relationship with the State
Department was more transitory than that of Mr. Eren. Mr. Eren
worked for the State Department under his personal service
contracts for many years, whereas petitioner worked for the State
Department under her personal service contracts for a little over
1 year.
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We conclude that petitioner’s relationship with the State
Department under the personal services contracts was that of an
independent contractor. As such, petitioner is entitled to a
deduction for her contribution to her simplified employee pension
for 1999.
To reflect the foregoing,
Decision will be entered for
petitioner.