T.C. Summary Opinion 2009-162
UNITED STATES TAX COURT
ANGELA LEE SLOAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3529-08S. Filed October 19, 2009.
Angela Lee Sloan, pro se.
Mark H. Pfeffer, 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 in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice
and Procedure.
For 2004 respondent determined a deficiency of $2,089 in
petitioner’s Federal income tax. The issues for decision1 are:
(1) Whether respondent properly disallowed petitioner’s claimed
business expenses as a “musician, vocalist, and actress”
(musician business) and as a “services musician vocalist” (band
business); (2) whether respondent properly disallowed
petitioner’s claimed deduction for the business use of her home;
and (3) whether petitioner is a statutory employee pursuant to
section 3121(d)(3)(D).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. When petitioner filed her
petition, she resided in California.
In October 2005 petitioner timely filed a Form 1040, U.S.
Individual Income Tax Return, for 2004. On one Schedule C,
Profit or Loss From Business, she reported expenses of $8,1762
from her musician business. On a second Schedule C she reported
1
Petitioner conceded that she failed to report $735 in wage
income.
2
This Schedule C included deductions for expenses of:
(1) $1,877 for depreciation and sec. 179 expenses; (2) $1,538 for
other expenses; and (3) $4,761 for the business use of her home.
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expenses of $2,9653 from her band business. She did not report
income from either her musician business or her band business.
On Schedule A, Itemized Deductions, petitioner reported
business expenses associated with her sales position for Clear
Channel Communications (Clear Channel). She now contends that
she is a statutory employee and is entitled to deduct those
expenses on Schedule C.
On November 6, 2007, respondent issued petitioner a notice
of deficiency disallowing the deductions claimed on her Schedules
C.
Petitioner has worked as a sales representative4
(representative) for Clear Channel since 2001. As a
representative, petitioner spends over 50 percent of her time
outside of the office selling and marketing on-air media time5 to
prospective clients. She uses her personal cell phone and
vehicle to solicit and serve clients and she occasionally
3
This Schedule C included deductions for expenses of:
(1) $240 for repairs and maintenance; (2) $373 for supplies; and
(3) $2,352 for other expenses.
4
Although it is unclear whether petitioner is an account
executive or a sales representative, her job title has no bearing
on the decision of the Court.
5
On-air media advertising consists of radio, Internet, and
other nontraditional advertising.
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purchases gifts and meals for her clients, expenses for which
Clear Channel does not reimburse her.6
Clear Channel provides petitioner with a work space
furnished with a desk, a computer, and a phone and hires
personnel to assist petitioner. Clear Channel also provides
health and dental insurance and contributes to petitioner’s
section 401(k) retirement plan. Although petitioner is required
to recruit her own clients, Clear Channel occasionally provides
representatives with customer leads and existing client accounts.
Discussion
I. Burden of Proof
Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer has the burden
of proving that those determinations are erroneous. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In certain
circumstances, however, section 7491(a)(1) places the burden of
proof on the Commissioner. Petitioner has not alleged that
section 7491 is applicable, nor has she established compliance
with the requirements of section 7491(a)(2)(A). Therefore, the
burden of proof does not shift to respondent.
6
Clear Channel’s general policy in 2004 was not to reimburse
employees for expenses.
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II. Claimed Business Expense Deductions
Deductions are strictly a matter of legislative grace, and
taxpayers must satisfy the specific requirements for any
deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,
440 (1934). Taxpayers bear the burden of substantiating the
amount and purpose of any claimed deduction. See Hradesky v.
Commissioner, 65 T.C. 87 (1975), affd. per curiam 540 F.2d 821
(5th Cir. 1976).
A. Business Use of Home
As a general rule, section 280A(a) denies deductions with
respect to the use of a dwelling unit that was used by the
taxpayer as a residence during the taxable year. But section
280A(c)(1)(A) permits the deduction of expenses allocable to a
portion of the dwelling unit that was used exclusively and
regularly as the principal place of business for the taxpayer’s
trade or business.
Section 280A(c)(5) limits the allowable deduction of
expenses related to the trade or business use of a residence to
the excess of the gross income derived from the trade or business
use for the year over the sum of certain deductions allocable to
such income.
Petitioner claimed a deduction for the business use of her
home on the Schedule C for her musician business. Pursuant to
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section 280A(c)(5), she is entitled to deduct expenses from the
business use of her home only to the extent the income from her
musician business exceeds allowable deductions. Petitioner did
not report any income from her business or otherwise demonstrate
probable receipt of income. She therefore is not entitled to
deduct expenses for the business use of her home for 2004, and
the Court sustains respondent’s disallowance.
B. Schedule C Expenses
Section 162(a) allows a deduction for all ordinary and
necessary expenses paid or incurred by a taxpayer in carrying on
any trade or business. An expense is considered ordinary if
commonly or frequently incurred in the trade or business of the
taxpayer. Deputy v. du Pont, 308 U.S. 488, 495-496 (1940). An
expense is necessary if it is appropriate or helpful in carrying
on a taxpayer’s trade or business. Commissioner v. Heininger,
320 U.S. 467, 471 (1943); Welch v. Helvering, supra at 113.
A taxpayer must maintain records sufficient to substantiate
the amounts of the deductions claimed. Sec. 1.6001-1(a), Income
Tax Regs. If a taxpayer establishes that an expense is
deductible but is unable to substantiate the precise amount, we
may estimate the amount, bearing heavily against the taxpayer
whose inexactitude is of his own making. Cohan v. Commissioner,
39 F.2d 540, 543-544 (2d Cir. 1930). The taxpayer must present
sufficient evidence for the Court to form an estimate because
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without such a basis, any allowance would amount to unguided
largesse. Williams v. United States, 245 F.2d 559, 560-561 (5th
Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
Petitioner asserts that she engaged in her band and musician
businesses for profit. But respondent’s dispute concerns whether
petitioner has substantiated her claimed business expenses, not
whether she engaged in these activities for profit. Thus, the
Court need address only whether petitioner substantiated her
business expenses.
Petitioner did not testify as to her claimed business
expenses and failed to present any credible evidence to
substantiate expenses for either her musician or her band
business. She also did not provide the Court with sufficient
evidence to permit an estimate of the expenses. Respondent’s
determination is sustained.
III. Petitioner’s Employment Status
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. Sec. 62. With
exceptions not relevant here, an individual performing services
as an employee may deduct expenses incurred in the performance of
services as an employee only as miscellaneous itemized deductions
on Schedule A and then only to the extent such expenses exceed 2
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percent of the individual’s adjusted gross income. Secs. 63(a),
(d), 67(a) and (b).
Petitioner claims that she is not an employee and relies on
sections 3508(b)(2) and 3121(d)(3).
A. Petitioner’s Employment Status Under Section 3508(b)(2)
Section 3508 affords nonemployee status to certain
statutorily defined classes of activities, including those of a
direct seller. A “direct seller” is a person engaged in the
trade or business of either selling consumer products in the home
as opposed to a permanent retail establishment or delivering or
distributing newspapers or shopping news. Sec. 3508(b)(2)(A).
Section 3508(b)(2)(B) also requires that the person receive
remuneration related to sales rather than to the number of hours
worked. Finally, section 3508(b)(2)(C) requires that the person
perform services pursuant to a written contract that provides
that the person is not treated as an employee with respect to
those services for Federal tax purposes.
Although substantially all the remuneration petitioner
received is directly related to sales rather than to the number
of hours worked, she does not satisfy the requirements of section
3508(b)(2)(A) or (C). Petitioner does not sell consumer products
or deliver newspapers, and she did not provide evidence of a
contractual agreement with Clear Channel indicating that she
would not be treated as an employee for Federal tax purposes.
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Accordingly, she is not entitled to report deductions on Schedule
C under section 3508(b)(2).
B. Petitioner’s Employment Status Under Section 3121(d)(3)
An individual who is a statutory employee under section
3121(d)(3) is not an employee for purposes of sections 62 and 67
and 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. Ewens & Miller, Inc. v. Commissioner, 117 T.C.
263 (2001); Prouty v. Commissioner, T.C. Memo. 2002-175.
An employee for employment tax purposes is defined 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
* * *
* * * * * * *
(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
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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 asserts that she meets the statutory exception
under section 3121(d)(3)(D).7 Respondent alleges that
petitioner’s working relationship with Clear Channel is that of
a common law employee and that the character of the product
petitioner sells and the character of her customers do not meet
the exception described in section 3121(d)(3)(D).
Section 3121(d)(3)(D) defines a salesperson as engaged in
the sale of “merchandise for resale” or in the sale of “supplies
for use in their business operations”. Petitioner does not sell
“merchandise”; rather, petitioner sells advertising “time”.
Furthermore, her clients purchase air time not for resale or for
use as a supply in their business operations but to advertise
their products and services. Additionally, on Schedules C
businesses deduct advertising expenses separately from goods and
7
Petitioner does not allege that she is a statutory employee
under sec. 3121(d)(3)(A), (B), or (C).
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supply expenses, providing further evidence that air time is not
“merchandise” as contemplated under section 3121(d)(3)(D).
Petitioner’s employment does not fall within the definition
of a traveling or city salesperson under section 3121(d)(3)(D),
and the evidence shows that she is a common law employee under
section 3121(d)(2).
Whether an individual is a common law employee under
section 3121(d)(2) is a question of fact. Profl. & Executive
Leasing, Inc. v. Commissioner, 89 T.C. 225, 232 (1987), affd.
862 F.2d 751 (9th Cir. 1988); Simpson v. Commissioner, 64 T.C.
974, 984 (1975). Among the relevant factors in determining the
substance 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
facilities; (3) the taxpayer’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. NLRB v. United Ins. Co., 390
U.S. 254, 258 (1968); Garrett v. Phillips Mills, Inc., 721 F.2d
979, 981 (4th Cir. 1983); Simpson v. Commissioner, supra at 984-
985; sec. 31.3121(d)-1(c)(2), Employment Tax Regs. (setting
forth criteria for identifying common law employees). No one
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factor is determinative. Cmty. for Creative Non-Violence v.
Reid, 490 U.S. 730, 752 (1989). Instead, all the incidents of
the relationship must be assessed and weighted. NLRB v. United
Ins. Co., supra at 258; Simpson v. Commissioner, supra at 985.
The factors should not be weighted equally but should be
weighted according to their significance in the particular case.
Aymes v. Bonelli, 980 F.2d 857, 861 (2d Cir. 1992); Matt v.
Commissioner, T.C. Memo. 1990-209.
The control factor is the “crucial test” to determine the
nature of a working relationship. Weber v. Commissioner, 103
T.C. 378, 387 (1994), affd. per curiam 60 F.3d 1104 (4th Cir.
1995). Both the control exercised by the alleged employer and
the degree to which the alleged employer may intervene to impose
control must be examined. Id. at 387-388. 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; it is sufficient that the employer has the right to do so.
Id. at 388; Thomas Kiddie, M.D., Inc. v. Commissioner, 69 T.C.
1055, 1058 (1978).
Although petitioner is solely responsible for soliciting
clients and collecting commissions, Clear Channel establishes
her duties, sets performance goals, and provides sales training
consistent with Clear Channel procedures. Petitioner also has a
manager who oversees and supervises her performance. If her
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performance is unsatisfactory, Clear Channel may terminate her
employment. Petitioner is also required to submit reports of
her client accounts for evaluation, submit a weekly timecard
reflecting hours worked, and request permission for time off.
The foregoing facts indicate that petitioner works under
the direction and control of Clear Channel.
Additionally, although petitioner is compensated solely on
commission, she does not purchase or own the air time she sells,
making her risk of loss negligible at best.
It is apparent that Clear Channel considers petitioner a
common law employee. Clear Channel withholds Federal income
taxes, FICA taxes, and Medicare taxes and does not issue
petitioner a Form 1099.8 The withholding of taxes is consistent
with a finding that petitioner is a common law employee. See
Packard v. Commissioner, 63 T.C. 621, 632 (1975).
Petitioner also receives health and dental insurance,
participates in a section 401(k) retirement plan, and accrues
sick leave and vacation time.
Lastly, the record reflects that petitioner has little or
no investment in facilities or equipment beyond the use of her
personal computer, cell phone, and vehicle. Clear Channel
8
Petitioner’s Form W-2, Wage and Tax Statement, for 2004 was
not attached to her 2004 Federal income tax return.
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provides a work space, furnished with a desk, a computer, and a
phone and hires personnel to assist petitioner.
None of the relevant factors discussed above support
petitioner’s position. Considering the record and all the facts
and circumstances, the Court concludes that petitioner is a
common law employee under section 3121(d)(2) and is not a
statutory employee under section 3121(d)(3).
Other arguments made by the parties and not discussed
herein were considered and rejected as irrelevant, without
merit, or moot.
To reflect the foregoing,
Decision will be entered
for respondent.