T.C. Memo. 2006-44
UNITED STATES TAX COURT
SAMUEL A. COLE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11968-04. Filed March 16, 2006.
Samuel A. Cole, pro se.
Beth A. Nunnink, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a deficiency of $3,494
in petitioner’s Federal income tax for 2001 and an addition to
tax of $35 under section 6651(a)(1). After concessions by
respondent, the issues for decision are:
(1) Whether petitioner was a statutory employee in 2001
under section 3121(d)(3)(D);
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(2) whether petitioner is entitled to deduct additional
expenses in 2001;
(3) whether petitioner is liable for the 10-percent
additional tax on his Individual Retirement Account (IRA)
distribution under section 72(t)(1); and
(4) whether petitioner received $17 of interest from the
Commonwealth of Virginia in 2001.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in Knoxville, Tennessee, at the time that he
filed his petition.
Petitioner was employed as a computer software consultant
by Metamor Enterprise Solutions, Inc. (Metamor), until his
position was eliminated and he was discharged on March 30, 2001.
While working for Metamor, petitioner traveled from his home to
temporary client sites to make sales presentations to businesses
regarding computer software, prepare proposals for implementation
of the software for the business, and, if it was purchased,
implement the computer software. At times, petitioner’s job with
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Metamor entailed traveling long distances to these client sites.
All travel or other expenses were subject to approval by Metamor.
In the letter discharging petitioner, Metamor informed him that
he would be reimbursed for any outstanding salary and vacation
pay that had accrued, as well as any reasonable business expenses
incurred on behalf of the company prior to his last day of
employment. Additionally, petitioner was informed that his
medical benefits would continue until March 31, 2001. While at
Metamor in 2001, petitioner received $32,483.41 in wages. Income
and payroll taxes were withheld from these wages.
Between August and October 2001, petitioner worked as a
temporary employee, paid at an hourly rate of $16.50, for Robert
Half International, Inc. (Robert Half). Robert Half provided
temporary employees to companies. Robert Half would contact
petitioner to inform him of a client with a project that would
require someone with computer skills to complete. Those projects
tended to be making presentations and implementing software.
Once the project was completed, petitioner was available for a
different project through Robert Half. Petitioner was required
to have his time sheet signed by the client and sent to Robert
Half each week for payment. While working for Robert Half in
2001, petitioner earned $4,760.25 in wages. Income and payroll
taxes were withheld from these wages.
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Because of the frequency of his travels during employment,
petitioner leased a Cadillac Escalade (SUV) on September 30,
2000, for $654.94 a month for 36 months. Between September 30,
2000, and March 30, 2001, petitioner paid $580.30 for insurance
on the SUV. While unemployed from March 31 through August 2001,
petitioner continued to make lease payments on the SUV, and,
between March 30 and September 30, 2001, petitioner paid $611.75
for insurance on the SUV.
On or about August 2, 2001, petitioner requested a
distribution of $3,000 from his IRA funds with the Oppenheimer
Trust Co. (Oppenheimer). On or about November 30, 2001,
petitioner requested an additional distribution of $1,000.
Oppenheimer issued Forms 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., to petitioner showing distributions in 2001
totaling $4,000. Petitioner was 47 years old at the time of the
distributions.
Petitioner purchased a house in Alexandria, Virginia, in
1999 and refinanced it in 2001.
Petitioner received interest of $17 from the Virginia
Department of Taxation in 2001.
Petitioner electronically filed a Form 1040, U.S. Individual
Income Tax Return, for 2001 reporting his status as married
filing separately. On Schedule C, Profit or Loss From Business,
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attached to his tax return, petitioner claimed to be a statutory
employee and reported income of $37,243 and expenses of $32,638
for a profit of $4,605. On his return, petitioner included the
$4,000 distribution of IRA funds, but he did not include the
10-percent additional tax on the early distribution. Petitioner
also included unemployment compensation of $2,208 and deductions,
as claimed on Schedule A, Itemized Deductions, of $19,929. He
did not report any interest income or State tax refunds on his
return.
The Forms W-2, Wage and Tax Statement, issued by Metamor and
Robert Half did not have the “Statutory employee” box checked.
However, petitioner claimed to be a statutory employee when
completing Form W-2 information for his electronically filed
Form 1040 for 2001.
The Internal Revenue Service (IRS) sent a statutory notice
of deficiency to petitioner on June 1, 2004. In the notice, the
IRS disallowed petitioner’s claim to be a statutory employee and
transferred his wage income from the Schedule C to Form 1040 and
disallowed the expenses claimed against that income. The notice
explained:
Since your employer did not indicate on Form W-2 that
you were a statutory employee, we disallowed the
expenses you claimed against that income on Schedule C
or Schedule C-EZ. If you are not a statutory employee,
you must include the income as wages on your tax
return.
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Additionally, the notice applied a 10-percent additional tax
of $400 to petitioner’s distribution from his IRA funds, because,
according to the notice of deficiency, he did not roll over the
distribution into another qualified retirement plan, he was not
disabled, or he was not at least 59-1/2 years old at the time of
the distribution. The notice also added the $17 of interest
received from the Commonwealth of Virginia to petitioner’s
income.
OPINION
Statutory Employee
Statutory employees may report their compensation, less
related expenses, as business income on Schedule C and thus may
avoid limitations on deduction of employee business expenses and
other itemized deductions reportable on Schedule A of individual
income tax returns. See Prouty v. Commissioner, T.C. Memo. 2002-
175; Hathaway v. Commissioner, T.C. Memo. 1996-389. An
individual is a statutory employee under section 3121(d)(3) only
if such individual is not a common law employee under section
3121(d)(2). Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263,
269 (2001). Whether an individual is a common law employee under
section 3121(d)(2) is a question of fact. See Nationwide Mut.
Ins. Co. v. Darden, 503 U.S. 318, 322-324 (1992); Profl. &
Executive Leasing, Inc. v. Commissioner, 89 T.C. 225, 232 (1987),
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affd. 862 F.2d 751 (9th Cir. 1988); Simpson v. Commissioner, 64
T.C. 974, 984 (1975). Section 3121(d) provides:
SEC. 3121(d). Employee.–-For purposes of this
chapter, the term "employee" means--
(1) any officer of a corporation; or
(2) any individual who, under the usual
common law rules applicable in determining the
employer-employee relationship, has the status of
an employee; or
(3) any individual (other than an individual
who is an employee under paragraph (1) or (2)) who
performs services for remuneration for any
person--
* * * * * * *
(D) as a traveling or city salesman,
other than as an agent-driver or commission-
driver, engaged upon a full-time basis in the
solicitation on behalf of, and the
transmission to, his principal (except for
side-line sales activities on behalf of some
other person) 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;
if the contract of service contemplates that
substantially all of such services are to be
performed personally by such individual; except
that an individual shall not be included in the
term "employee" under the provisions of this
paragraph if such individual has a substantial
investment in facilities used in connection with
the performance of such services (other than in
facilities for transportation) * * *
Petitioner argues that he is a statutory employee under the
definition in section 3121. He summarized in his testimony that
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he “was actually selling * * * computer software, and it was used
for the operation of the businesses” to which he was making the
sales presentation. Petitioner’s employment does not fit the
specific categories of exceptions listed in section
3121(d)(3)(D). The evidence shows that petitioner was a common
law employee under section 3121(d)(2).
Some of the relevant factors used to decide whether an
individual is a common law employee are: (1) The degree of
control exercised by the principal over the details of the
individual’s work, (2) the individual's investment in facilities,
(3) the individual's opportunity for profit or loss,
(4) 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. See Nationwide Mut. Ins. Co. v.
Darden, supra at 323-324; NLRB v. United Ins. Co. of Am., 390
U.S. 254, 258 (1968); Simpson v. Commissioner, supra at 984-985;
Hathaway v. Commissioner, supra; see also sec. 31.3121(d)-
1(c)(2), Employment Tax Regs. No one factor is determinative.
Instead, all of the facts and circumstances of the relationship
must be weighed. Nationwide Mut. Ins. Co. v. Darden, supra at
324; NLRB v. United Ins. Co. of Am., supra at 258; Ewens &
Miller, Inc. v. Commissioner, supra at 270; Hathaway v.
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Commissioner, supra. The factors should not be weighted equally
but should be weighted according to their significance in the
particular case. See Del Monico v. Commissioner, T.C. Memo.
2004-92.
The degree of control exercised by the principal over the
details of the individual’s work is one of the most important
factors in determining whether a common law employment
relationship exists. Clackamas Gastroenterology Associates, P.C.
v. Wells, 538 U.S. 440, 448 (2003); Leavell v. Commissioner, 104
T.C. 140, 149 (1995); see also Hathaway v. Commissioner, supra.
All that is necessary is that the principal have the right to
control the details of the individual’s work. Ewens & Miller,
Inc. v. Commissioner, supra.
Petitioner, while working for Metamor and Robert Half, was
directed to the clients, was told where he needed to go, and was
told what needed to be done. Petitioner was not allowed to
travel to clients’ sites or incur any expenses without Metamor’s
permission. While at Robert Half, petitioner was required to
turn in time sheets signed by the client stating that the work
had been done satisfactorily. Metamor and Robert Half both had
the right to and did exercise a considerable degree of control
over the details of petitioner’s work.
Though petitioner testified that he worked from home, he has
not presented any evidence that he made any expenditures to
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establish a home office qualifying under section 280A or any
other investment in business facilities. See Lewis v.
Commissioner, T.C. Memo. 1993-635.
While working for Metamor, petitioner received a salary and
was reimbursed for his traveling and for approved expenses.
Robert Half paid petitioner an hourly rate that never changed in
the time that he was there. The evidence shows no potential for
risk of loss or opportunity for profit to petitioner.
Petitioner’s position at Metamor was terminable at will, and
he was, in fact, discharged. Petitioner’s position at Robert
Half was temporary. There was no permanency of either
relationship.
Petitioner was a connection between the principal and the
client at both Metamor and Robert Half. The work performed by
petitioner was within the scope of the principal’s business.
Metamor was in the business of computer software, and petitioner
made the sales presentations and proposals to implement the
software. Robert Half was in the business of providing temporary
employees to businesses, and petitioner was a temporary employee
for computer businesses while at Robert Half. Therefore,
petitioner was an integral part of each of the businesses.
It is apparent that petitioner’s employers considered him a
common law employee. The statutory employee box on the Forms W-2
provided by Metamor and by Robert Half was not checked.
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Additionally, Metamor and Robert Half withheld income tax and
applicable payroll taxes and did not issue Forms 1099 to
petitioner.
Metamor’s letter terminating petitioner referred to vacation
and medical benefits and right to reimbursement for approved
expenses.
None of the relevant factors discussed above supports
petitioner’s position. Considering all of the facts and
circumstances, we conclude that petitioner was a common law
employee of both Metamor and Robert Half under section 3121(d)(2)
and was not a statutory employee under section 3121(d)(3). See
Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263 (2001).
Therefore, petitioner is not entitled to report his income and
expenses on Schedule C.
Additional Expenses
A common law employee may report business expenses on
Schedule A, subject to the limitations under section 67. See
Lickiss v. Commissioner, T.C. Memo. 1994-103. An individual
performing services as an employee may deduct expenses incurred
in the performance of those services as miscellaneous itemized
deductions on Schedule A only to the extent such expenses exceed
2 percent of the individual's adjusted gross income. Secs.
63(a), (d), 67(a) and (b).
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The burden of showing a right to a claimed deduction rests
with the taxpayer. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); see also Banker v. Commissioner, T.C. Memo. 1999-351.
The taxpayer must establish that the expenses deducted are
ordinary and necessary and must maintain records sufficient to
substantiate the amounts of the deductions claimed. Sec. 6001;
sec. 1.6001-1(a), Income Tax Regs. If the taxpayer does not
retain the required records, the burden of proof does not shift
to respondent. Sec. 7491(a)(2)(A) and (B).
Petitioner claimed deductions for advertising expenses, bad
debt expenses, car and truck expenses, mortgage interest, repairs
and maintenance expenses, and supplies expenses on his Schedule C
in 2001. Petitioner provided no substantiation for any
advertising, bad debt, repairs and maintenance, or supplies
expenses. Therefore, petitioner is not allowed to deduct any of
these claimed expenses on his Schedule A for 2001.
Petitioner deducted mortgage interest of $14,803 on his
Schedule A for 2001 and an additional amount on Schedule C.
Respondent received information returns for petitioner showing
total mortgage interest paid of $14,802 and allowed that amount
on petitioner’s Schedule A. Petitioner did not provide any
evidence showing that the deductible amount should be greater
than that allowed by respondent.
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Petitioner claimed expenses of $9,252 for his SUV. Because
passenger automobiles are listed property under section
280F(d)(4)(A)(i), a deduction for automobile expenses requires
additional substantiation. Sec. 274(d). A taxpayer must
substantiate by adequate records or by sufficient evidence
corroborating the taxpayer’s own statement the amount of such
expense, the time and place of travel, and the business purpose
of the expense. Id.; see also sec. 1.274-5T(b)(6), Temporary
Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Though petitioner provided substantiation of his monthly
lease and insurance payments due on the SUV, he did not
substantiate the business use of the SUV. Petitioner takes the
improbable position that all of his use of the vehicle was
business. He did not provide substantiation of times or dates of
business use or mileage on the SUV for business use. Because of
his failure to provide any records of use, petitioner may not
deduct the vehicle expenses in 2001.
10-Percent Additional Tax
Section 72(t) provides for a 10-percent additional tax on
early distributions from a qualified retirement plan for the
taxable year in which such amount is received. Petitioner does
not dispute that he received an early distribution from a
qualified retirement plan in 2001.
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The 10-percent additional tax, however, does not apply to
certain distributions. Section 72(t)(2) sets forth specific
exceptions. Those exceptions include, but are not limited to,
distributions made on or after the date on which the employee
attains age 59-1/2; distributions made to the employee to the
extent such distributions do not exceed amounts paid for medical
care; distributions to unemployed individuals for health
insurance premiums; and distributions from certain plans for
first home purchases. Sec. 72(t)(2)(A)(i), 72(t)(2)(A)(v),
72(t)(2)(B), 72(t)(2)(D), 72(t)(2)(F).
Petitioner seeks relief from the 10-percent additional tax
on his IRA distribution based on hardship, medical expenses,
payment of health insurance premiums, and a first home purchase.
There is no exception under section 72(t) for financial hardship.
See Arnold v. Commissioner, 111 T.C. 250, 255 (1998); Gallagher
v. Commissioner, T.C. Memo. 2001-34; Deal v. Commissioner, T.C.
Memo. 1999-352.
Petitioner argues that he falls within the exception for
distributions made for medical expenses under section 72(t)(2)(B)
because he was responsible for the health expenses of his minor
dependent and spouse during his period of unemployment. No
medical expenses were claimed on petitioner’s Form 1040, and he
did not file jointly with his spouse. Petitioner testified that,
though there were medical and dental expenses, he could not “lay
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hands on those records”. Because petitioner did not produce any
records or other evidence showing medical expenses incurred in
2001 for himself or his dependent, he has not shown that the
exception applies.
Petitioner argues that he falls within the exception for
distributions made to unemployed individuals for health insurance
premiums under section 72(t)(2)(D) because he was unemployed for
12 weeks during 2001 and “solicited for individual health
insurance and was quoted health insurance premium [sic] over
* * * $400.00 per month for a family plan to include his spouse
and minor dependent child.” However, petitioner has not produced
any evidence showing that he paid health insurance premiums
during that time. Therefore, this exception does not apply to
petitioner.
Finally, petitioner argues that he falls within the
exception for distributions made for qualified first-time home
buyers under section 72(t)(2)(F). “Qualified first-time
homebuyer distribution” is any payment received by an individual
to the extent that the distribution is used by the individual
within 120 days to pay qualified acquisition costs with respect
to a principal residence of a first-time home buyer. Sec.
72(t)(8)(A). Qualified acquisition costs are costs of acquiring,
constructing, or reconstructing a residence. Sec. 72(t)(8)(C).
A first-time home buyer is an individual who had no present
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ownership interest in a principal residence during the 2-year
period ending on the date of acquisition of the principal
residence. Sec. 72(t)(8)(D)(i). The date of acquisition is the
date into which a binding contract was entered or when
construction or reconstruction of such a residence was commenced.
Sec. 72(t)(8)(D)(iii).
Petitioner purchased his home in 1999 and refinanced it in
2001. Petitioner had a present ownership interest in his home
during the 2-year period prior to 2001. Petitioner did not
acquire, construct, or reconstruct a home in 2001. Therefore,
this exception does not apply to petitioner.
Thus, the IRA distribution received by petitioner is subject
to the 10-percent additional tax under section 72(t).
Interest Income
Gross income means all income from whatever source derived.
Sec. 61(a). Under section 61(a)(4), interest is includable in
gross income.
Petitioner does not dispute that he received $17 of interest
income in 2001. Petitioner did not report any amounts received
from the Virginia Department of Taxation on his 2001 Federal
income tax return and, therefore, is liable for the deficiency
caused by his failure to report the interest.
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To reflect the foregoing,
Decision will be entered
under Rule 155.