T.C. Summary Opinion 2006-32
UNITED STATES TAX COURT
FREDERICK DOUGLAS ABDULLAH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2721-04S. Filed February 21, 2006.
Frederick Douglas Abdullah, pro se.
Catherine G. Chang, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect at the time the petition was filed. 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
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Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a $6,717 deficiency in petitioner’s1
2001 Federal income tax and a $1,977 penalty pursuant to section
6662(a). In his answer, respondent asserted an increased
deficiency totaling $7,398 and a reduced section 6662(a)
accuracy-related penalty of $1,480.
The issues remaining for decision are:2 (1) Whether amounts
petitioner received from various third parties (principals)
represent wages paid as an employee or payments as an independent
contractor; (2) whether petitioner is entitled to claimed
deductions either as miscellaneous itemized deductions (employee)
or as Schedule C, Profit or Loss From Business, expense
deductions (independent contractor); and (3) whether petitioner
is liable under section 6662(a) for an accuracy-related penalty.
Background
Some of the facts have been stipulated, and they are so
found. The stipulation and supplemental stipulation of facts and
the attached exhibits are incorporated herein by this reference.
1
A joint 2001 Federal income tax return was filed and the
notice of deficiency was issued to Frederick and S. Ghaswala
Abdullah. The petition was filed only by petitioner Frederick
Douglas Abdullah.
2
Petitioner agreed that he did not report $255 in interest
income received in 2001.
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At the time of filing the petition, petitioner resided in Union
City, California.
During the taxable year 2001 petitioner received
compensation for services from the following principals:
Critchfield Mechanical, Inc. (Critchfield) $6,117.76
Thermal Mechanical, Inc. (Thermal) 9,698.04
Therma 63,096.37
Subtotal 78,912.00
Matheson Mail Trans, Inc. (Matheson) 5,788.28
Total1 84,700.00
1
Subtotal and total are rounded to the nearest dollar.
The principals reported this compensation to the Internal Revenue
Service on respective Forms W-2, Wage and Tax Statement.
Petitioner was a member of the Local 342, Plumbers and
Pipefitters Union. Petitioner performed pipefitting work for
Critchfield, Thermal, and Therma. In order to perform this work,
petitioner was required to obtain a certified Journeyman
Pipefitter certification.
Petitioner worked for Critchfield from sometime in 2000
through March 2001. His pay was determined based upon union
contracts referred to as “project agreements” which set hourly
wages and pay differentials. The contracts permitted petitioner
to be hired and fired. Petitioner worked for Thermal for a few
weeks during the period from April through June of 2001. From
sometime in June through December 2001 petitioner worked for
Therma.
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Petitioner was paid on an hourly basis for his work as a
pipefitter as determined by respective project managers.
Petitioner was required to sign in and sign out at the worksite.
He typically worked an 8-hour day. Petitioner was required to
wear certain safety equipment, submit safety reports, and undergo
safety training. Petitioner was supervised on the job by
respective project managers. He was subject to discharge if his
finished product did not pass certain tests. While petitioner
utilized some of his own small tools on the jobs, approximately
90 percent of petitioner’s equipment was furnished by the
respective companies.
Petitioner also performed part-time work as a driver for
Matheson. The company delivered bulk mail for the U.S. Postal
Service under a contract negotiated with the International
Brotherhood of Teamsters Union. The contract permitted Matheson
to hire and fire petitioner. Petitioner would “on load” or “off
load” bulk mail and deliver it to various sites as directed by
Matheson. The trucks were owned by Matheson. Petitioner would
complete route sheets indicating the routes driven, and he was
compensated based on the number of routes driven.
Petitioner owned hand tools such as wrenches, screwdrivers,
and levels that he kept in his privately owned Mazda automobile.
In performing his work as a pipefitter, petitioner would drive
his Mazda to various jobsites and take his tools with him. The
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record does not reveal the number of trips or distances traveled.
As previously indicated, the above-described income was
reported to the IRS on four separate Forms W-2. Petitioner does
not assert that he did not receive Forms W-2 from each of the
principals.
Petitioner and his wife timely filed a joint Federal income
tax return for the taxable year 2001 and attached two Schedules C
to the Form 1040, U.S. Individual Income Tax Return. Petitioner
reported his combined income from Critchfield, Thermal, and
Therma in the amount of $78,912 as gross receipts on a Schedule
C. Petitioner listed the nature of the business as “steamfitting
and pipefitting” (Schedule C pipefitting). The Schedule C listed
deductions as follows:
Expenses Amount
Advertising $653
Bad debts from sales or service 1,953
Car and truck expenses 3,012
Commissions and fees 4,524
Insurance (other than heath) 1,147
Office expenses 1,765
Repairs and maintenance 1,336
Supplies 1,187
Taxes and licenses 611
Travel 407
Meals and entertainment 171
Utilities 1,944
Total 18,710
Petitioner also claimed a $3,602 deduction for business use of
home on the Schedule C.
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On a second Schedule C petitioner reported the income from
Matheson as $5,778 gross receipts. The nature of the business
was listed as “Trucking - General Freight & Postal” (Schedule C
trucking). Petitioner claimed deductions on this Schedule C as
follows:
Expenses Amount
Advertising $636
Car and truck expenses 2,307
Repairs and maintenance 475
Taxes and licenses 150
Meals and entertainment 756
Total 4,324
The notice of deficiency determined that petitioner was not
entitled to the $22,312 expenses ($18,710 plus the $3,602 of home
office expenses), claimed on the Schedule C pipefitting. No
adjustment was made with respect to the income, except that
respondent allowed petitioner a $299 self-employment tax
deduction. Respondent made no adjustments to the Schedule C
trucking in the notice of deficiency.
In an answer filed with the Court, respondent claims an
increased deficiency and seeks to correct adjustments from the
notice of deficiency. Respondent claims that the gross receipts
reported on the two Schedules C should be treated as salary or
wages. Consistent with this, respondent seeks to reverse the
$299 self-employment tax deduction previously allowed in the
notice of deficiency. Finally, respondent claims that petitioner
is not entitled to the $4,324 Schedule C trucking expenses.
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Discussion
I. Burden of Proof
Generally, the burden of proof is on the taxpayer. Rule
142(a)(1). Under section 7491, the burden of proof shifts from
the taxpayer to the Commissioner if the taxpayer produces
credible evidence with respect to any factual issue relevant to
ascertaining the taxpayer’s liability. Sec. 7491(a)(1).
However, where the Commissioner raises a new matter or claims an
increase in the deficiency, the burden of proof is on the
Commissioner. Rule 142(a)(1); Achiro v. Commissioner, 77 T.C.
881, 889-890 (1981); Burris v. Commissioner, T.C. Memo. 2001-49;
Jamerson v. Commissioner, T.C. Memo. 1986-302.
As to the adjustments set forth in the notice of deficiency,
petitioner has neither argued that the burden of proof should
shift nor satisfied the criteria that would cause the burden of
proof to shift. Given the lack of documentation and information
provided by petitioner, we conclude that the burden of proof
remains with him as to all adjustments determined in the notice
of deficiency. We further hold that the burden of proof is on
respondent with respect to the adjustments claimed in the answer
filed with the Court.
II. Petitioner’s Employment Status
A. Income--Employee Versus Independent Contractor
As indicated previously, this is a new issue first raised by
respondent in his answer, and accordingly the burden of proof is
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on respondent. We must decide whether the income that petitioner
received was reportable as gross receipts on Schedules C, or
whether the amounts are reportable as wages or salary on Form
1040.
The term “employee” is not defined in the Internal Revenue
Code for purposes of this income tax issue. Under these
circumstances, we apply common law rules to determine whether an
individual is an employee. Nationwide Mut. Ins. Co. v. Darden,
503 U.S. 318, 323-325 (1992); Weber v. Commissioner, 103 T.C.
378, 386 (1994), affd. 60 F.3d 1104 (4th Cir. 1995). Whether an
individual is a common law employee is a question of fact.
Profl. & Executive Leasing, Inc. v. Commissioner, 862 F.2d 751,
753 (9th Cir. 1988), affg. 89 T.C. 225 (1987); Simpson v.
Commissioner, 64 T.C. 974, 984 (1975). Among the relevant
factors in determining the nature of an employment relationship
are the following: (1) The degree of control exercised by the
principal over the details of the work; (2) the taxpayer’s
investment in the facilities used in the work; (3) the taxpayer’s
opportunity for profit or loss; (4) the permanency of the
relationship between the parties; (5) the principal’s right of
discharge; (6) whether the work performed is an integral part of
the principal’s business; (7) what relationship the parties
believe they are creating; and (8) the provision of employee
benefits. NLRB v. United Ins. Co., 390 U.S. 254, 258 (1968);
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Profl. & Executive Leasing, Inc. v. Commissioner, supra; Simpson
v. Commissioner, supra. No one factor is determinative; rather,
all the incidents of the relationship must be assessed and
weighed. NLRB v. United Ins. Co., supra.
Upon a review of these factors, we conclude that petitioner
was an employee of each of the four principals for which he
performed services in 2001.
We first look to the degree of control exercised by the
principals. The principals controlled the manner in which
petitioner performed his work. With respect to his work as a
pipefitter, petitioner was given specific jobs to do, and the
work was reviewed and inspected. To retain the requisite control
over the details of an individual’s work, the employer need not
stand over the individual and direct every move made; it is
sufficient that the employer has the right to do so. Weber v.
Commissioner, supra at 388. We are satisfied that all four of
the principals possessed the requisite degree of control over
petitioner. This factor supports a finding that petitioner was
an employee.
We next consider the extent of petitioner’s investment in
the facilities used at work. While petitioner used some of his
own tools, in the pipefitting activity, the large majority of
equipment was owned by the respective principals. With respect
to the his work as a truck driver, there is no evidence that
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petitioner had any investment in the trucking business. The
trucks and equipment for delivery was owned by the principal.
Petitioner had no investment in any of the facilities where he
performed work. This factor is strongly in favor of treating
petitioner as an employee.
The next factor is opportunity for profit or loss.
Petitioner received pay based on the hours worked as a pipefitter
and was paid based on the routes driven as a truck driver.
Petitioner had no risk of loss. Petitioner had no opportunity to
increase his profit. This factor supports a finding that
petitioner was an employee.
The next factor is the permanency of the relationship.
During the tax year 2001 petitioner worked for four different
principals. It does not appear that any of these relationships
had any permanency. This factor would support a finding in favor
of petitioner’s being treated as an independent contractor.
We next consider the principal’s right to discharge. It is
clear that petitioner could be discharged by any of the
principals involved. The respective principals had total control
of the decision to terminate employment. This factor strongly
supports a finding that petitioner was an employee.
The next factor is whether petitioner was an integral part
of the business of the principal. Petitioner performed
pipefitting work for principals that provided these services and
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drove a truck for a delivery company. It seems clear that
petitioner’s services were an integral part of the business of
the respective principals. This factor supports the finding that
petitioner was an employee.
The next factor is the relationship the parties believe they
created. Each of the principals treated petitioner as an
employee. Petitioner was issued a Form W-2 by each principal,
and there was withholding from petitioner’s paycheck. See Azad
v, United States, 388 F.2d 74, 78 (8th Cir. 1968); Weber v.
Commissioner, supra at 392. This factor supports a finding that
petitioner was an employee.
The final factor is employee benefits. There is nothing in
this record as to any employee benefits paid by any of the
principals. This factor is neutral.
Considering all the factors, we conclude that petitioner was
a common law employee, and accordingly gross income from the four
employers involved should have been reported as salary or wages
on Form 1040 and not gross receipts on Schedules C. Further,
petitioner is not subject to self-employment tax as determined in
the notice of deficiency.
B. Expenses
Based on our conclusions above, it is clear that any expense
deductions claimed, if allowable, should be deducted as Schedule
A, Miscellaneous Itemized Deductions.
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Section 162(a) permits a deduction for the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. The performance of services as
an employee constitutes a trade or business. See sec. 1.162-
17(a), Income Tax Regs. There must be a relationship between the
expenditures and the employment. See Evans v. Commissioner, T.C.
Memo. 1974-267, affd. in part, revd. in part 557 F.2d 1095 (5th
Cir. 1977). Expenses that are personal in nature are generally
not allowed as deductions. Sec. 262(a). A taxpayer is required
to maintain records sufficient to establish the amount of his
income and deductions. Sec. 6001; sec. 1.6001-1(a), (e), Income
Tax Regs. A taxpayer must substantiate his deductions by
maintaining sufficient books and records to be entitled to a
deduction under section 162(a). When a taxpayer establishes that
he has incurred a deductible expense but is unable to
substantiate the exact amount, we are generally permitted to
estimate the deductible amount. Cohan v. Commissioner, 39 F.2d
540, 543-544 (2d Cir. 1930). We can estimate the amount of the
deductible expense only when the taxpayer provides evidence
sufficient to establish a rational basis upon which the estimate
can be made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).
Section 274(d) supersedes the general rule of Cohan v.
Commissioner, supra, and prohibits the Court from estimating the
taxpayer’s expenses with respect to certain items. Sanford v.
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Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d
201 (2d Cir. 1969). Section 274(d) imposes strict substantiation
requirements for listed property as defined in section
280F(d)(4), gifts, travel, entertainment, and meal expenses.
Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). To obtain a deduction for a listed property,
travel, meal, or entertainment expense, a taxpayer must
substantiate by adequate records or sufficient evidence to
corroborate the taxpayer’s own testimony the amount of the
expense, the time and place of the use, the business purpose of
the use, and, in the case of entertainment, the business
relationship to the taxpayer of each person entertained. Sec.
274(d); sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985). Section 274 requires that expenses be
recorded at or near the time when the expense is incurred. Sec.
1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985). Listed property includes passenger automobiles.
Sec. 280F(d)(4)(A)(i).
We first consider the claimed expenses relating to
petitioner’s employment as a pipefitter. Petitioner presented no
documents to support the claimed business expense deductions. To
the extent that some of the claimed deductions are subject to the
strict substantiation requirements of section 274(d), it is clear
that petitioner is not entitled to said deductions. We now
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consider some of the other expenses. Petitioner testified that
the $1,953 bad debt expense claimed related to interest paid on
personal debt that he incurred while out of work. It is clear
that such interest expense would not be deductible. Sec. 163(h).
Petitioner testified that the claimed insurance expense related
to his privately owned automobile. Petitioner did not establish
that any deductions relating to the use of his privately owned
automobile are deductible. Petitioner also claimed a deduction
for business use of his home. Petitioner provided some minimal
information as to activities that took place in a room in his
house, but he did not establish that these expenditures
constitute an ordinary and necessary expense in relationship to
his activity as a pipefitter. Petitioner did not present any
documents or explanations as to other expense deductions claimed.
Based on the above analysis petitioner is not entitled to any of
the deductions claimed on his Schedule C pipefitting.
The claimed deductions on petitioner’s Schedule C trucking
present a different issue. As indicated, respondent has the
burden of proof to establish that the claimed deductions do not
relate to petitioner’s trucking activity and are not properly
deductible as miscellaneous itemized deductions. Respondent
presented no evidence or argument in this regard. Accordingly we
hold for petitioner on this issue.
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III. Section 6662(a) Accuracy-Related Penalty
The final issue for decision is whether petitioner is liable
for an accuracy-related penalty under section 6662(a) for the
year in issue.
Section 6662(a) imposes a penalty equal to 20 percent of any
underpayment of tax that is attributable to either negligence or
disregard of rules or regulations, or a substantial
understatement of income tax. See sec. 6662(a) and (b)(1) and
(2).
The term “negligence” includes any failure to make a
reasonable attempt to comply with the provisions of the internal
revenue laws. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax
Regs. The term “disregard” includes any careless, reckless, or
intentional disregard. Sec. 6662(c); sec. 1.6662-3(b)(2), Income
Tax Regs.
An understatement of income tax is “substantial” if it
exceeds the greater of 10 percent of the tax required to be shown
on the return, or $5,000. Sec. 6662(d)(1)(A). An
“understatement” is defined as the excess of the tax required to
be shown on the return over the tax actually shown on the return.
Sec. 6662(d)(2)(A).
Whether the accuracy-related penalty is applied because of
negligence or disregard of rules or regulations, or a substantial
understatement of tax, section 6664 provides an exception to
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imposition of the accuracy-related penalty if the taxpayer
establishes that there was reasonable cause for the
understatement and that the taxpayer acted in good faith with
respect to that portion. Sec. 6664(c)(1); sec. 1.6664-4(b),
Income Tax Regs.; see United States v. Boyle, 469 U.S. 241, 242
(1985). Although not defined in the Code, “reasonable cause” is
viewed in the applicable regulations as the “exercise of ordinary
business care and prudence”. Sec. 301.6651-1(c)(1), Proced. &
Admin. Regs.; see United States v. Boyle, supra at 246. The
determination of whether a taxpayer acted with reasonable cause
and in good faith is made on a case-by-case basis, taking into
account all the pertinent facts and circumstances. Sec. 1.6664-
4(b)(1), Income Tax Regs. Generally, the most important factor
is the extent of the taxpayer’s effort to assess the proper tax
liability, including reliance on the advice of a tax return
preparer. Id.
By virtue of section 7491(c), respondent has the burden of
production with respect to the accuracy-related penalty. To meet
this burden, respondent must produce sufficient evidence
indicating that it is appropriate to impose the penalty. See
Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once
respondent meets this burden of production, petitioner must come
forward with persuasive evidence that respondent’s determination
is incorrect. Rule 142(a); see Higbee v. Commissioner, supra.
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As a defense to the penalty, petitioner bears the burden of
proving that he acted with reasonable cause and in good faith.
See sec. 6664(c)(1); see also Higbee v. Commissioner, supra; sec.
1.6664-4(b)(1), Income Tax Regs.
Respondent satisfied his burden of production under section
7491(a)(1) because the record shows that petitioner substantially
understated his income tax for the year in issue. See sec.
6662(d)(1)(A)(ii); Higbee v. Commissioner, supra at 442.
Accordingly, petitioner bears the burden of proving that the
accuracy-related penalty should not be imposed with respect to
any portion of the understatement for which he acted with
reasonable cause and in good faith. See sec. 6664(c)(1); Higbee
v. Commissioner, supra at 446.
A review of this record reflects that petitioner claimed
substantial deductions for which he apparently maintained no
records. Further, some of the claimed deductions, like bad
debts, which petitioner testified was personal interest, are
clearly nondeductible personal items. Based on this entire
record, we conclude that petitioner is liable for the penalty
under section 6662(a).
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.