T.C. Memo. 2010-157
UNITED STATES TAX COURT
DANIEL FEASTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2296-09. Filed July 22, 2010.
Daniel Feaster, pro se.
David M. McCallum, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a deficiency of $1,387
in petitioner’s 2006 Federal income tax. The issue for decision
is whether petitioner was an independent contractor or a common
law employee. Unless otherwise indicated, all section references
are to the Internal Revenue Code in effect for the year in issue.
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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 South Carolina at the time that he filed
his petition.
From 2002 to 2009, petitioner was an accountant performing
field auditing services for Wm. Langer & Associates, Inc., of the
Carolinas (Langer), a company engaged in the business of
insurance premium audits and inspections. On December 18, 2002,
he provided to Langer a completed Form W-4, Employee’s
Withholding Allowance Certificate. On December 20, 2002, he
signed an acknowledgment statement that was part of a Langer
employee job description. The job description set forth
requirements for, among other things: Time limits on the
performance of services for Langer’s customers; submission of
completed work to Langer’s office “a minimum of three times
weekly”; quality specifications; control by Langer over customer
charges; communication with the Langer office; progress reports;
submission of weekly itineraries; closing out cases; pay, based
on billable hours, to be increased or decreased based on the
employee’s “overall job performance”; reimbursement of expenses
and an explanation that employees would receive separate checks
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for taxable pay and non-taxable reimbursements; and employee
benefits. The “Description of Job” concluded with the following
statement:
Employees are sent cases to be completed and these
cases are to be completed and returned to the office
within the time restraints, with the quality and time
charges as shown in the above paragraphs. Federal,
State, County and City taxes will be deducted from the
employee pay as determined by the state in which they
are domiciled.
Immediately beneath the concluding job description, the
acknowledgment statement petitioner executed stated: “I have
fully read and understand the expectations of this Company in
regard to my job description and agree to follow these guidelines
as established by Langer & Associates, Inc.”.
During 2006, Langer paid petitioner $29,615 in wages and
withheld $1,915 for Federal income tax, $1,836.13 for Social
Security tax, and $429.42 for Medicare tax. Langer reimbursed
petitioner $6,764 for expenses.
On his 2006 Form 1040, U.S. Individual Income Tax Return,
petitioner reported $30,155 of gross receipts and $19,739.01 of
net profits on Schedule C, Profit or Loss From Business. The
gross receipts included the wages received from Langer.
Petitioner deducted car and truck expenses, office expenses,
travel and meals expenses, and expenses for business use of his
home in arriving at net profit. He reported $76.30 in self-
employment tax and attached an explanatory statement as follows:
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To The Reviewer of My Tax Return:
I claim that only part of my self-employment
income is subject to the Self-Employment tax. the
basis of my claim is as follows:
Some of my self-employment income satisfies the
first paragraph, of the Internal Revenue Service 2006
Instructions for Schedule SE, Self-Employment Tax
document, under the section “Income and Losses Not
Included in Net Earnings From Self-Employment”, which
reads; “Salaries, fees, etc., subject to social
security or Medicare tax that you received for
performing services...”.
One of my clients deducted fully-matched social
security and Medicare tax, from the payments for my
services. The W-2 form attached to my form 1040 in
this return, attests to this claim. My Schedule SE
computes the self employment tax on all other self
employment income.
In the notice of deficiency, the expenses claimed on
Schedule C were disallowed, with the following explanation:
SCHEDULE C OR SCHEDULE C-EZ EXPENSES USED TO REDUCE INCOME
Only statutory employee income can be offset by
expenses reported on Schedule C, Profit or Loss From
Business, or Schedule C-EZ. Since your employer did
not indicate on Form W-2, Wage and Tax Statement, that
you were a statutory employee, we can not allow the
expenses used to offset that income on Schedule C or
Schedule C-EZ.
If this is incorrect, please send us a statement
from your employer(s) verifying that you are a
statutory employee.
If you are not a statutory employee, you must
include the income as wages on your tax return.
Allowable related expenses on Form 2106, Employee
Business Expenses, can be claimed as an itemized
deduction on Schedule A.
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OPINION
An individual performing services as an employee may deduct
expenses incurred in the performance of services as an employee
as miscellaneous itemized deductions on Schedule A, Itemized
Deductions, to the extent the expenses exceed 2 percent of the
taxpayer’s adjusted gross income. Secs. 62(a)(2), 63(a), (d),
67(a) and (b), 162(a). Itemized deductions may be limited under
section 68 and may have alternative minimum tax implications
under section 56(b)(1)(A)(i).
An individual who performs services as an independent
contractor is entitled to deduct expenses incurred in the
performance of services on Schedule C and is not subject to
limitations imposed on miscellaneous itemized deductions. A
statutory employee under section 3121(d)(3)(D) is not an employee
for purposes of section 62 and may deduct business expenses on
Schedule C. See Rosemann v. Commissioner, T.C. Memo. 2009-185;
Rev. Rul. 90-93, 1990-2 C.B. 33. Petitioner does not claim that
he is a statutory employee, and, in any event, our determination
of status would be the same under rules applicable to statutory
employees. See, e.g., Rosato v. Commissioner, T.C. Memo. 2010-
39.
Petitioner argues that in 2006 he was entitled to deduct
business expenses on Schedule C because he was an independent
contractor. Respondent contends that petitioner was a common law
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employee in 2006. Neither party has identified any dispute as to
the expenses petitioner claimed, and petitioner has not
presented any evidence of deductions to which he is entitled that
respondent has not allowed.
Under these circumstances, we apply common law rules to
determine whether the taxpayer is an employee. Nationwide Mut.
Ins. Co. v. Darden, 503 U.S. 318, 323-325 (1992); Weber v.
Commissioner, 103 T.C. 378, 386 (1994), affd. 60 F.3d 1104 (4th
Cir. 1995). Whether an individual is an employee must be
determined on the basis of the specific facts and circumstances
involved. Weber v. Commissioner, 60 F.3d at 1110; Profl. & Exec.
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). Relevant factors include: (1) The degree of control
exercised by the principal; (2) which party invests in the work
facilities used by the worker; (3) the opportunity of the
individual 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. See Weber
v. Commissioner, 60 F.3d at 1110, 1114; Ewens & Miller, Inc. v.
Commissioner, 117 T.C. 263, 270 (2001). We consider all of the
facts and circumstances of each case, and no single factor is
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determinative. Weber v. Commissioner, 60 F.3d at 1110; Ewens &
Miller, Inc. v. Commissioner, supra at 270.
Although not the exclusive inquiry, the degree of control
exercised by the principal over the worker is the crucial test in
determining the nature of a working relationship. See Clackamas
Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440, 448
(2003); Leavell v. Commissioner, 104 T.C. 140, 149-150 (1995).
To retain the requisite degree of control over a worker, the
principal need not direct the worker’s every move; it is
sufficient if the right to do so exists. Weber v. Commissioner,
60 F.3d at 1110; see sec. 31.3401(c)-1(b), Employment Tax Regs.
Petitioner signed his job description, acknowledging his
agreement to follow guidelines established by Langer with respect
to time limits for cases to be completed, frequency of
submissions of completed work to the office, quality of work,
charges to the customer, communication with Langer, status or
progress reports, submission of itineraries, and closing cases.
Petitioner testified that he was not very good about complying
with his obligations under the agreement to communicate with
Langer. Nonetheless, we conclude that Langer exercised, or had
the right to exercise, control over petitioner in the performance
of his services for Langer.
The fact that a worker provides his or her own tools, or
owns a vehicle that is used for work, is indicative of
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independent contractor status. Ewens & Miller, Inc. v.
Commissioner, supra at 271 (citing Breaux & Daigle, Inc. v.
United States, 900 F.2d 49, 53 (5th Cir. 1990)). Additionally,
maintenance of a home office is consistent with independent
contractor status, although alone it does not constitute
sufficient basis for a finding of independent contractor status.
See Colvin v. Commissioner, T.C. Memo. 2007-157, affd. 285 Fed.
Appx. 157 (5th Cir. 2008).
The opportunity for profit or loss indicates nonemployee
status. Simpson v. Commissioner, supra at 988. Earning an
hourly wage or fixed salary indicates that an employer-employee
relationship exists. See Kumpel v. Commissioner, T.C. Memo.
2003-265.
Petitioner testified that he had to provide his own Internet
service and that he worked out of his home, incurring office
expenses. He acknowledged that he was offered hotel, meal, and
vehicle mileage reimbursement and that he was reimbursed for some
trip expenses during 2006. He was paid on an hourly basis, and
his pay was subject to increase or decrease depending on Langer’s
assessment of his performance. There is no indication that he
had an opportunity for profit or risk of loss from his
activities. On balance, none of these factors supports a
conclusion that petitioner was an independent contractor.
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Where the principal retains the right to discharge a worker,
it is indicative of an employer-employee relationship. See
Colvin v. Commissioner, supra. Petitioner testified that the
relationship could have been terminated at any time.
Where work is part of the principal’s regular business, it
is indicative of employee status. See Simpson v. Commissioner,
supra at 989; Rosemann v. Commissioner, T.C. Memo. 2009-185.
Petitioner’s auditing services were, so far as the record
reflects, the type of services that Langer’s business provided.
Permanency of a working relationship is indicative of common
law employee status. See Rosemann v. Commissioner, supra.
Petitioner worked for Langer 3 years before and 3 years after the
year in issue. The lengthy working relationship between
petitioner and Langer weighs in favor of petitioner’s being a
common law employee.
Langer obviously considered petitioner a common law
employee. The written agreement is unambiguous in describing the
relationship as that of employer/employee, and Langer provided
petitioner a Form W-2, Wage and Tax Statement, for 2006 and
withheld Federal and State income taxes and Social Security and
Medicare taxes from petitioner’s pay. See Packard v.
Commissioner, 63 T.C. 621, 632 (1975). Petitioner testified that
he did not object to withholding from his compensation and agreed
to Langer’s payroll practices after he was advised that Langer’s
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accountant had advised employee treatment. He acknowledged that
“They never changed the employer-employee records for me”, even
though he asserted that other auditors were treated as
independent contractors before and after he was hired.
Unfortunately for petitioner, the most persuasive evidence in
this record is the documentation, including the job description
that he signed and the tax reporting by Langer. That evidence
leads to the conclusion that petitioner was an employee.
Benefits such as health insurance, life insurance, and
retirement plans are typically provided to employees. Weber v.
Commissioner, 103 T.C. at 393-394. Petitioner admits that those
benefits were available to employees who worked extra hours, but
he denies that he ever received any of those benefits. The
availability of the benefits suggests employee status, but
whether or not they were actually paid is not determinative here.
Considering the record and weighing the factors, we conclude
that petitioner was a common law employee of Langer in 2006 and
he was not entitled to claim deductible expenses on Schedule C.
To reflect the foregoing,
Decision will be entered
for respondent.