T.C. Summary Opinion 2009-76
UNITED STATES TAX COURT
THOMAS R. TAVELLA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11463-07S. Filed May 14, 2009.
Thomas R. Tavella, pro se.
Alexander D. Devitis, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioner’s Federal
income tax of $9,922 for 2004. The issue for decision is whether
petitioner is subject to self-employment tax.
Background
Some of the facts and one of the issues has been stipulated.
The stipulated facts and issue are so found. The stipulation of
facts and the exhibits received in evidence are incorporated
herein by reference. At the time the petition was filed,
petitioner resided in California.
During 2004 petitioner worked as a “consultant” and
independent contractor for the sole proprietorship of Mark H.
Randall (Mr. Randall), who was doing business as “The Mark
Randall Company” (Mark Randall). Petitioner entered into an oral
contract “sealed with a handshake” with Mr. Randall to “work
together and build his business and make it successful.”
Petitioner has worked exclusively for Mark Randall since 1994.
Petitioner described his work with Mark Randall as
“collaborative”, but petitioner does not handle any account
completely on his own.
Petitioner used the title “President” of Mark Randall
because it conveyed to clients his importance to the business of
Mark Randall. Petitioner, however, maintained no ownership
interest in and had no executive responsibility for Mark Randall.
As Mark Randall had no offices, petitioner maintained a home
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office for his work. Any travel required for petitioner’s work
was usually on weekends; he usually called on his clients on
Sunday.
Typically, petitioner consulted with synagogues in
fundraising matters. He conducted interviews from his home with
members of the client congregations to determine their feelings
about their synagogue and whether they would be willing to
increase their donations. Petitioner might also conduct meetings
with volunteer congregants to help them solicit funds. Mark
Randall paid petitioner a fixed rate per month per client until
either the contract between Mark Randall and the client ended or
the fee to the client was reduced.
Petitioner included a Schedule C, Profit or Loss From
Business, with his Federal income tax return for 2004, stating
his business or profession as consultant. Petitioner, however,
did not report any self-employment tax. Respondent examined
petitioner’s return and determined that petitioner owes self-
employment tax on his income from Mark Randall. As a result of
the adjustment to self-employment tax respondent made other
computational adjustments that will be resolved by the Court’s
decision on the self-employment tax issue.
Discussion
Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer has the burden
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of proving that those determinations are erroneous. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In some
cases the burden of proof with respect to relevant factual issues
may shift to the Commissioner under section 7491(a). Because
there is no dispute as to any factual issue in this case, section
7491(a) is inapplicable.
“Statutory Employee”
Petitioner argues that he is a so-called statutory employee
and therefore is not subject to self-employment taxes.
Generally, the tax on self-employment income applies to the “net
earnings from self-employment” of an individual. Secs. 1401,
1402(b). In simplified terms, net earnings from self employment
means the “gross income derived by an individual from any trade
or business carried on by such individual,” less the deductions
attributable to the trade or business. Sec. 1402(a). The term
“trade or business” generally does not include the performance of
services by an individual as an employee. Sec. 1402(c)(2). The
term “employee” for employment tax purposes has the same meaning
as in section 3121(d). Sec. 1402(d).
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
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(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
* * *
as an agent or commission driver who distributes certain food
products, as a life insurance salesman, as a home worker working
on certain materials or goods, or as a traveling or city
salesman, who is not an agent or commission driver, who meets
certain other requirements. The listed individuals, if the
contract of service contemplates that substantially all of such
services are to be performed personally by such individual, will
be classified as employees except that an individual will not be
included in the term “employee” if he has a substantial
investment in facilities used in connection with the performance
of the services (other than in facilities for transportation).
Sec. 3121(d).
The Social Security Act Amendments of 1950 “restyled the
predecessor” of section 3121(d) and extended coverage to
specified classes of workers “irrespective of their common-law
status.” See United States v. W.M. Webb, Inc., 397 U.S. 179,
186 n. 12 (1970). According to S. Rept. 1669, 81st Cong., 2d
Sess. (1950), 1950-2 C.B. 302, 346-347, the definition of
“employee” was to be expanded to include individuals performing
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“certain categories of service which are subject to clear-cut
definition,” and if “the services are not performed in one of the
designated occupational groups,” the paragraph is inapplicable
with respect to such services.
Petitioner takes the position that his work was similar to
that of life insurance agents and that he competed with them for
clients. According to petitioner: “it is reasonable to assume
that the list of jobs was meant to be examples of and not a
finite list to the exclusion of all others who may work in the
same manner.” Section 3121(d), however, does not provide that
the term “employee” includes the occupations on the list. It
defines the term “employee” and lists discrete and specific
categories of service that are not so ambiguous as to allow
petitioner in his service profession, to fit the definition of
“statutory employee” as prescribed by that section. The
legislative history clearly states the intention of Congress to
exclude from the definition of “employee” individuals performing
services that “are not performed in one of the designated
occupational groups”.
If the statute does not include him, petitioner counters by
arguing that since he competes with life insurance salesmen,
allowing them to be classified as statutory employees while
denying him the same classification is unfair and violates his
right of equal protection.
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Under equal protection analysis, a classification in a
Federal statute is subject to strict scrutiny only if it
“impermissibly interferes with the exercise of a fundamental
right or operates to the peculiar disadvantage of a suspect
class.” Mass. Bd. of Ret. v. Murgia, 427 U.S. 307, 312 (1976);
San Antonio Indep. Sch. Dist. v. Rodriguez, 411 U.S. 1, 16-17
(1973). Neither of these circumstances applies here.
Consequently, the rational basis standard is the appropriate one
to apply. Under the standard, where a rational basis exists for
divergent treatment of different classes of persons under a tax
statute, the statute is not in violation of the Fifth Amendment
because of the divergent treatment. Regan v. Taxation With
Representation, 461 U.S. 540 (1983); United States v. Maryland
Savings-Share Ins. Corp., 400 U.S. 4 (1970). Generally, under
this standard, a differentiation in treatment is not violative of
equal protection principles if any state of facts rationally
justifying it is demonstrated to or perceived by the courts.
United States v. Maryland Savings-Share Ins. Corp., supra at 6.
The Supreme Court has stated that “the presumption of
constitutionality can be overcome only by the most explicit
demonstration that a classification is a hostile and oppressive
discrimination against particular persons and classes. The
burden is on the one attacking the legislative arrangement to
negative every conceivable basis which might support it.” Madden
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v. Commonwealth of Kentucky, 309 U.S. 83, 88 (1940). The
presumption of the existence of a rational basis for a
classification in a revenue statute is particularly strong.
Black v. Commissioner, 69 T.C. 505, 507-508 (1977); Nammack v.
Commissioner, 56 T.C. 1379, 1385 (1971), affd. per curiam 459
F.2d 1045 (2d Cir. 1972).
The Supreme Court, in United States v. W.M. Webb, Inc.,
supra at 186, suggests that Congress intended by the statutory
revision to limit those occupations that might be considered to
be filled by employees.
Petitioner has not shown that Congress did not rationally
decide to include individuals in specific service professions in
the category of “employee” regardless of the common law rules for
determining the employer-employee relationship and to exclude
others. The Court finds that the legislative classification is
constitutional.
Petitioner, therefore, cannot be a “statutory” employee
under section 3121(d)(3). It follows that petitioner had income
from self-employment and is liable for self-employment tax for
2004. See secs. 1401 and 1402.
To reflect the foregoing,
Decision will be entered
for respondent.