T.C. Summary Opinion 2010-89
UNITED STATES TAX COURT
LEROY AND ELAINE G. DAVIS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4256-04S. Filed July 7, 2010.
Leroy Davis, pro se.
Emile L. Hebert, III, for respondent.
CARLUZZO, 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.1 Pursuant to
section 7463(b), the decision to be entered is not reviewable by
1
Subsequent section references are to the Internal Revenue
Code of 1986, as amended, in effect for the relevant period.
Rule references are to the Tax Court Rules of Practice and
Procedure.
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any other court, and this opinion shall not be treated as
precedent for any other case.
In two separate notices of deficiency, both dated December
8, 2003, respondent determined deficiencies, additions to tax,
and penalties with respect to petitioners’ Federal income taxes
for 1997 through 2000, inclusive.
Most of the adjustments, including the imposition of the
additions to tax and penalties, made in the notices of deficiency
have been resolved by the parties. The parties now dispute only
whether certain trade or business expenses deducted on Schedules
C, Profit or Loss From Business, included with petitioners’ 1997,
1998, 1999, and 2000 Federal income tax returns should be treated
instead as unreimbursed employee business expenses. The
resolution of the dispute depends upon whether services provided
as a city councilman (Leroy Davis) or services provided as a
member of a city’s school board (Elaine G. Davis) were so
provided as employees of the city.
Background
Some of the facts have been stipulated and are so found.
Petitioners are, and have been at all times relevant, married to
each other. At the time the petition was filed, they resided in
Louisiana.
In 1990 Mr. Davis was appointed to serve as a councilman for
the city of Baker, Louisiana (City). He was subsequently
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reelected to the position and served as a City councilman at all
times relevant to this proceeding. As a City councilman, Mr.
Davis incurred and paid certain expenses that respondent concedes
are deductible as trade or business expenses. For each year,
those expenses exceeded the compensation that he received from
City as one of its councilmen.
During 1999 and 2000 Mrs. Davis served on City’s school
board. As a member of the school board, she incurred and paid
certain expenses that respondent concedes are deductible as trade
or business expenses. For each year, those expenses exceeded the
compensation she received from City as a member of its school
board.
Neither petitioner was compensated on a fee basis by City;
each received a salary fixed by law. City treated each
petitioner as an employee for purposes of employment taxes and
Federal tax withholdings. For each year, the compensation City
paid to each petitioner was reported and shown as “wages” on a
Form W-2, Wage and Tax Statement. As a City councilman, Mr.
Davis participated in a retirement system offered to City
employees, but City councilmen elected after a certain date are
no longer eligible to participate in that retirement system.
Petitioners’ joint Federal income tax return for each year
in issue was timely filed. Each of those returns includes a
Schedule A, Itemized Deductions, and each return, as applicable
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for that year, includes a Schedule C on which the income and
deductions related to their respective public offices are shown.
The adjustments made in the notices of deficiency that
remain in dispute reflect respondent’s determination that for
each year, as a City councilman and a member of City’s school
board each petitioner was a City employee.
Discussion
Generally, the proper treatment of an individual’s business
expense deductions for Federal income tax purposes depends upon
the individual’s worker classification as either an employee or a
nonemployee.
The manner in which each petitioner treated compensation
received from City for each year shows that they consider
themselves to have earned that compensation as nonemployees or,
for purposes of our discussion, independent contractors.
Income and deductions attributable to the trade or business
of an individual who performs services as an independent
contractor are shown on a Schedule C. The resultant net profit
or loss shown on the Schedule C is taken into account in the
computation of adjusted gross income. Sec. 62(a)(1).
According to respondent, as applicable for each year, each
petitioner was a City employee, not an independent contractor.
According to respondent, the income received and expenses
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incurred by either petitioner as a City councilman or a school
board member must be treated accordingly.
Generally, income earned as an employee is treated and
reportable as “wages” on the employee’s Federal income tax
return. Ignoring exceptions not relevant here, employee business
expenses, to the extent not reimbursed by an employer and subject
to certain limitations, must be deducted on a Schedule A as
miscellaneous itemized deductions. Secs. 62(a)(2), 63(a), (d),
67(a) and (b), 162(a).
If petitioners are treated as employees rather than
independent contractors, certain consequences, no doubt viewed as
negative by petitioners, follow: (1) Petitioners’ trade or
business expense deductions would be limited by section 67(a);
(2) their otherwise allowable itemized deductions might be
reduced/limited as provided in section 68 (taking into account
their adjusted gross income); and (3) they might be subject to an
alternative minimum tax liability because miscellaneous itemized
deductions are not taken into account in the determination of a
taxpayer’s alternative minimum taxable income. See sec.
56(b)(1)(A)(i); Johnson v. Commissioner, T.C. Memo. 1993-530.2
2
On the other hand, it should be noted that treating each
petitioner as an independent contractor rather than an employee
could, under circumstances not present here, result in “negative”
consequences as well--the imposition of the tax on the “net
earnings from self-employment” each received from City. See
secs. 1401 and 1402.
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Under the circumstances of this case, the worker
classification of each petitioner is informed by the same
controlling principles. It is unnecessary to consider each
petitioner separately. Instead, the following discussion will
apply to both with respect to the public office held by each.
Generally, for Federal tax purposes, questions involving
worker classification are resolved with reference to common law
principles of agency. See Nationwide Mut. Ins. Co. v. Darden,
503 U.S. 318, 322-325 (1992); Weber v. Commissioner, 103 T.C.
378, 386 (1994), affd. 60 F.3d 1104 (4th Cir. 1995); Profl. &
Executive Leasing, Inc. v. Commissioner, 89 T.C. 225, 232 (1987),
affd. 862 F.2d 751 (9th Cir. 1988). Determining a worker’s
classification generally takes into account factors such as: (1)
The degree of control exercised by the principal over the detail
of the work; (2) which party invests in the work facilities used
by the worker; (3) the opportunity of the hired worker for profit
or loss; (4) whether the principal can discharge the individual;
(5) whether the work is part of the principal’s regular business;
(6) the permanency of the relationship; (7) the relationship the
parties believed they were creating; and (8) the provision of
employee benefits that the principal typically provides to
employees. See NLRB v. United Ins. Co. of Am., 390 U.S. 254, 258
(1968); United States v. Silk, 331 U.S. 704 (1947); Avis Rent A
Car Sys., Inc. v. United States, 503 F.2d 423, 429 (2d Cir.
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1974); Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 270
(2001); Weber v. Commissioner, supra at 387; Rosato v.
Commissioner, T.C. Memo. 2010-39.
All things considered, we find that for Federal income tax
purposes, attempting to establish the worker classification of a
public official by the application of the above-referenced
factors is somewhat like forcing round pegs into square holes.
Instead, we note that for employment tax purposes, the definition
of “employee” includes a public official. See sec. 3401(c).
Furthermore, for income tax purposes, only a public official who
is compensated on a fee basis may deduct business expenses as an
“independent contractor”, that is, on a Schedule C rather than a
Schedule A. See sec. 62(a)(2)(C). Lastly, for purposes of civil
tort liability, each petitioner would be treated as an employee
of City. See La. Rev. Stat. Ann. sec. 42:1441.3 (2006).
In determining the worker classification of each petitioner,
we are more influenced by the statutory provisions referenced in
the preceding paragraph than we are by the application of the
above-listed common law factors to their respective public
offices. These statutory provisions, when considered together,
strongly suggest that consistent with their treatment for
employment tax purposes, petitioners, as public officials, should
be treated as employees of City for Federal income tax purposes
as well. Petitioners’ evidence and arguments that focus
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exclusively on the application of the common law factors do not
persuade us to rule in a manner inconsistent with this
suggestion. We find that for purposes relevant here, each
petitioner is treated as an employee of City.
Because neither petitioner was compensated on a fee basis by
City, the business expenses they incurred in their respective
public offices must be deducted accordingly; that is, on a
Schedule A as unreimbursed employee business expenses. See secs.
62(a)(1), 63(d), 67(a). Respondent’s determination that provides
for that treatment is therefore sustained.
On the basis of the foregoing,
Decision will be entered
under Rule 155.