T.C. Summary Opinion 2006-125
UNITED STATES TAX COURT
MICHAEL ALLEN BYER AND LARISA AKSENOVA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11292-04S. Filed August 2, 2006.
Michael Allen Byer, pro se.
Robert V. Boeshaar, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when the petition was filed.1
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
- 2 -
Respondent determined a deficiency of $11,746 in
petitioners’ Federal income tax for the year 2000 and the
accuracy-related penalty under section 6662(a) in the amount of
$2,298.
The issues for decision are: (1) Whether, for the year at
issue, Michael Allen Byer (petitioner) was a statutory employee
as a full-time life insurance salesman under section
3121(d)(3)(B) and section 31.3121(d)-1(d)(3)(ii), Employment Tax
Regs.; (2) whether petitioners are entitled to deductions for
disallowed trade or business expenses incurred in connection with
petitioner’s insurance activity; and (3) whether petitioners are
liable for the section 6662(a) accuracy-related penalty for the
year at issue.2
Some of the facts were stipulated. Those facts, with the
exhibits annexed thereto, are so found and made part hereof.
2
Sec. 7491(a) shifts the burden of proof to the Commissioner
where the taxpayer introduces credible evidence with respect to
any factual issue, if the taxpayer has complied with the
requirements for substantiation of any item at issue, has
maintained records with respect to such items, and has cooperated
with reasonable requests by respondent for such information.
Since the principal issue as to whether petitioner was a
statutory employee is essentially a question of law, and the
facts relating thereto are not in dispute, the question of who
has the burden of proof is not material. As to the expenses
relating to the principal issue, petitioners did not cooperate
with respondent’s requests for substantiating information prior
to trial, therefore, the burden of proof does not shift to
respondent. As to the sec. 6662(a) penalty, the burden of
production is on respondent. The Court’s conclusions, therefore,
on all issues, are made with due consideration to the burden of
proof requirements of sec. 7491.
- 3 -
Petitioners’ legal residence at the time the petition was filed
was Vancouver, Washington.
Petitioner is an attorney who has a master of laws degree in
taxation and was previously employed as an auditor by the IRS
from 1987 to 1999. From January 1999 through April 15, 2002
(which includes the year at issue), petitioner was engaged in an
income-producing activity with Corben Financial Services (Corben)
of Lake Oswego, Oregon. The nature of petitioner’s income from
Corben and the nature of his activity is the principal issue in
this case. After termination of his affiliation with Corben in
April 2002, petitioner became a truck driver, driving what he
described at trial as “an 18-wheeler”.
Corben, from which petitioner earned income during the year
at issue, was in the trade or business of selling insurance,
primarily life insurance. Corben represented several life
insurance companies, and the employees and/or agents of Corben
were engaged in selling insurance that would meet the needs of
its customers. Corben, through its agents or employees,
conducted workshops, seminars, and marketing campaigns designed
to promote the sale of insurance. Petitioner was one of Corben’s
agents or employees and participated in these sale and marketing
activities.
For the year at issue, petitioners filed a joint Federal
income tax return, on which they reported no salary or wage
- 4 -
income, but, on a Schedule C, Profit or Loss From Business, they
reported petitioner’s income and expenses from Corben as follows:
Gross receipts or sales (gross income) $61,100
Expenses:
Advertising $ 3,014
Bad debts 2,010
Car and truck expenses 14,046
Insurance 1,550
Legal and professional 876
Repairs and maintenance 1,845
Supplies 2,310
Taxes and licenses 850
Travel 4,295
Meals and entertainment (net) 3,617
Utilities 810
Other expenses 7,599
(42,822)
Net profit $18,278
Petitioners did not include with their return a Schedule SE,
Self-Employment Tax, for self-employment tax that would
ordinarily be due on the $18,278 in net profit. In the notice of
deficiency, respondent determined self-employment tax on that
income and disallowed deductions for some of the claimed
expenses.
As described above, all of the gross income on petitioners’
Schedule C was the compensation petitioner received from Corben.
Petitioners contend that they are not liable for self-employment
tax on the net earnings from Corben for the reason that
petitioner was a statutory employee of Corben, a position that
respondent does not agree with, thus framing the principal issue
before the Court.
- 5 -
Respondent contends that petitioner was not a statutory
employee but was engaged in a self-employed trade or business
activity. Accordingly, respondent determined that, after
adjustments to the claimed expenses, the net income from the
activity was subject to self-employment tax under section 1401.
Corben did not consider petitioner to be an employee and,
therefore, withheld no income tax and paid no Social Security
taxes on the compensation paid to petitioner.
Adjusted gross income generally consists of gross income
less trade or business expenses, except in the case of the
performance of services by an employee, generally referred to as
a common law employee. Sec. 62. An individual performing
services as a common law employee deducts such expenses as
miscellaneous itemized deductions incurred in the performance of
services as an employee but only to the extent the expenses
exceed 2 percent of the employee’s adjusted gross income. Sec.
67(a). A statutory employee, on the other hand, pursuant to
rulings by the Commissioner, is not an employee for purposes of
sections 62 and 67, and, therefore, a statutory employee under
section 3121(d)(3) is not subject to the section 67(a) 2-percent
limitation for expenses incurred by such employee in the
performance of services as an employee. Rev. Rul. 90-93, 1990-2
C.B. 33. Thus, an individual who is a statutory employee under
section 3121(d)(3) is allowed to deduct expenses from gross
- 6 -
income that otherwise would be subject to the 2-percent
limitation of section 67(a).
An employee for employment tax purposes is defined in
pertinent part by section 3121(d) as follows:
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--
* * * * * * *
(B) as a full-time life insurance salesman;
For purposes of section 3121(d)(3)(B), section 31.3121(d)-
1(d)(3)(ii), Employment Tax Regs., defines a “full-time life
insurance salesman” as:
An individual whose entire or principal business activity is
devoted to the solicitation of life insurance or annuity
contracts, or both, primarily for one life insurance company
is a full-time life insurance salesman. * * * An
individual who is engaged in the general insurance business
under a contract or contracts of service which do not
contemplate that the individual’s principal business
activity will be the solicitation of life insurance or
annuity contracts, or both, for one company, or any
individual who devotes only part time to the solicitation of
life insurance contracts, including annuity contracts, and
is principally engaged in other endeavors, is not a full-
time life insurance salesman. [Emphasis added.]
- 7 -
Accordingly, under the foregoing regulation, a full-time
life insurance salesman is an individual who principally sells
life insurance and annuity contracts for one insurer. Whether an
individual taxpayer satisfies this standard “depends upon the
facts of the particular situation.” Sec. 31.3121(d)-1(d)(2),
Employment Tax Regs.
In this case, the facts are not in dispute. At trial,
petitioner named at least six insurance companies from which he
placed insurance for clients, based upon their individual needs.
Additionally, the parties at trial stipulated a statement from
the chief executive officer of Corben addressed to a tax
compliance officer of the IRS regarding petitioner’s status with
Corben. That statement, in pertinent part, stated:
Michael Byer never was a salaried employee, therefore there
are no W2 forms. As for his 1099’s for 2000, 2001, and
2002, he and his CPA should be able to provide those for
you. We never had an employment agreement with Michael. He
was only paid commissions that resulted from life insurance
sales with which he was involved.
Mr. Byer was hired in December 1998, starting in our office
January 1999. We were impressed with his insurance
knowledge and his tax knowledge. I felt this would help our
firm with life insurance sales. Mr. Byer held a valid life
insurance license required by law and necessary for this
position with The Corben Institute. We sell life insurance;
it’s our only source of income.
Michael was a life insurance agent but was required to help
with our marketing campaigns. He assisted us with
developing our materials, such as brochures and
presentations. He used his legal and tax knowledge to get
clients and their financial advisors to meet with our
agency.
- 8 -
As I mentioned in our telephone conversation, Michael
handled workshops and attended many outside meetings and
seminars representing The Corben Institute. The biggest
part of life insurance sales is getting in front of people
who need life insurance or people who can recommend to
others to buy life insurance from us, Michael was a large
part of our success.
Michael was paid $5,000 a month, which was based on our life
insurance sales. We are in the Life Insurance business, all
of our income comes from commissions. Everyone in the
office was asked to do other jobs from time to time but
everyone knew we live and die based on commissions from life
insurance sales.
It is quite evident, therefore, that petitioner’s work with
Corben was not devoted to one insurance company, and, moreover,
petitioner was required to perform other duties for Corben beyond
selling insurance. Additionally, the statement establishes that
petitioner was not considered an employee by Corben.
Petitioner’s earnings from Corben were reflected on Forms 1099,
which indicate that petitioner was considered to be self-employed
and not an employee. The Court holds, therefore, that petitioner
was not an employee of Corben, nor was he a statutory employee.3
Petitioner was engaged in a self-employment activity, and, as
such, his net earnings from that activity were subject to self-
employment tax. Respondent, therefore, is sustained in
3
The Court notes, however, that there are certain facets of
petitioner’s relationship with Corben that would indicate an
employer-employee relationship, such as the fact that petitioner
was paid $5,000 per month rather than commissions, and that
Corben had some control over petitioner, such as his required
participation in seminars and marketing promotions. The Court
does not consider these factors as overriding.
- 9 -
concluding that petitioner was not a statutory employee and was
engaged in a self-employment activity, the net income of which is
subject to self-employment tax as determined in the notice of
deficiency.
The second issue relates to adjustments in the notice of
deficiency as to the income and expenses reported by petitioners
on their income tax return for 2000 relating to the activity with
Corben reported on Schedule C.4
On Schedule C, petitioners reported gross receipts of
$61,100. In the notice of deficiency, respondent increased that
amount by $1,000. Petitioner did not address this adjustment at
trial; consequently, that adjustment is deemed conceded. As to
the expenses, the amounts deducted on Schedule C and the amounts
disallowed are as follows:
Claimed on Disallowed by
Return Respondent
Other expenses $ 7,599 $ 7,599
Car and truck expenses 14,046 14,046
Meals and entertainment 3,617 3,617
Repairs and maintenance 1,845 1,845
Travel 4,295 4,295
Legal and professional 876 876
As to the other expenses of $7,599 shown above, respondent
at trial conceded that petitioner was entitled to a deduction of
4
In the notice of deficiency, respondent determined capital
gain income of $816. At trial, petitioner conceded this
adjustment.
- 10 -
$610 for parking. Respondent also conceded that petitioner was
entitled to a deduction for supplies. That concession is not
clear because petitioner claimed a separate line item expense of
$2,310 for supplies on Schedule C of the return, and that amount
was not disallowed or adjusted in the notice of deficiency.
Since a Rule 155 computation will be necessary in this case, the
nature and amount of this concession can be taken into
consideration by the parties in determining the deficiency.
With respect to the expenses listed above for car and truck,
meals and entertainment, and travel, petitioner did not address
those at trial. Instead, petitioner offered into evidence
envelopes as to each of these expenses containing receipts that
he contends would substantiate the amounts claimed on the return.
The envelopes referred to essentially contain only receipts;
however, the substantiation requirements of section 274(d) appear
to be applicable to all the amounts claimed. No books and
records were offered to corroborate or otherwise satisfy the
strict substantiation requirements of section 274(d).
Petitioner, being a former auditor for the IRS, certainly knew
what is required for substantiation of expenses of this nature.
The Court, therefore, declines to consider the exhibits offered
as proof that the expenses claimed are deductible. Respondent,
therefore, is sustained as to those expenses.
- 11 -
The final issue is respondent’s determination that
petitioners are liable for the section 6662(a) accuracy-related
penalty.
Section 6662(a) imposes an accuracy-related penalty in the
amount of 20 percent on any portion of an underpayment of tax
that is attributable to causes set forth in subsection (b).
However, under section 6664(c), no penalty shall be imposed under
section 6662(a) with respect to any portion of an underpayment if
it is shown that there was a reasonable cause for the
underpayment and that the taxpayer acted in good faith with
respect to the underpayment.
The determination of whether a taxpayer acted with
reasonable cause and in good faith is made on a case-by-case
basis. Sec. 1.6664-4(b), Income Tax Regs. The most important
factor is the extent of the taxpayer’s effort to assess the
taxpayer’s proper tax liability. See id. An honest
misunderstanding of fact or law that is reasonable in light of
the experience, knowledge, and education of the taxpayer may
indicate reasonable cause and good faith. Remy v. Commissioner,
T.C. Memo. 1997-72. Here, petitioner is an attorney with a
specialized degree in tax law who was employed as an auditor by
the IRS for several years. His education, knowledge, and
experience in that field place him in a category that few
- 12 -
taxpayers who come before this Court have. The Court has no
choice but to sustain respondent on this issue.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.