Rosenfeld v. Comm'r

T.C. Memo. 2011-110

UNITED STATES TAX COURT

MICHAEL ROSENFELD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12373-07. Filed May 23, 2011.

Ned Leiba, for petitioner.

Michael W. Berwind, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DEAN, Special Trial Judge: For 2003 respondent determined a

deficiency in petitioner’s Federal income tax of $2,609 and an

accuracy-related penalty under section 6662(a)1 of $521.80. The

1
Unless otherwise indicated, subsequent section and chapter
references are to the Internal Revenue Code (Code) in effect for
the year at issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
 - 2 -

issues for decision2 are whether petitioner: (1) Was an

independent contractor or a common law employee of the British

Consulate General (BCG) in 2003; (2) overcontributed to a

simplified employee pension (SEP) plan; (3) is liable for the

excise tax under section 4973(a) for excess SEP plan

contributions; and (4) is liable for the accuracy-related penalty

under section 6662(a).

Preliminary Matters

Respondent seeks to introduce into evidence the United

States Engaged Staff Handbook (Handbook) issued in 2002 by the

British Embassy in Washington D.C. as Exhibit 15-R.3 Petitioner

objects to the admission of the Handbook on the grounds that it

would cause confusion of the issues and constitutes hearsay.

Respondent contends that the Handbook is admissible under the

exception to the hearsay rule under rule 807 of the Federal Rules

2
Petitioner presented no evidence and made no argument with
respect to expenses reported on Schedule C, Profit or Loss From
Business, that included deductions for business expenses and
expenses associated with the business use of his home; the Court
deems these issues conceded. See Money v. Commissioner, 89 T.C.
46, 48 (1987); Stutsman v. Commissioner, T.C. Memo. 1961-109.
Petitioner’s deduction for self-employed health insurance is a
computational adjustment to be determined consistent with this
opinion.
3
Respondent proffered a document as a copy of the Handbook,
introduced as Exhibit 4-R, obtained from a Web site during the
course of his examination of petitioner’s 2003 Federal income tax
return. Petitioner has not stipulated its authenticity, nor has
respondent provided testimony or otherwise credible evidence to
demonstrate its authenticity. Accordingly, this document is
inadmissible.
 - 3 -

of Evidence, or in the alternative, under rule 106 of the Federal

Rules of Evidence.4

The Court need not and does not decide whether the Handbook

is admissible under rule 807 or 806 of the Federal Rules of

Evidence. Because the Court finds for respondent without it, the

Court need not consider the Handbook in reaching a decision.5

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulations of fact and the exhibits received into evidence

are incorporated herein by reference. When petitioner filed his

petition, he resided in California.

I. Petitioner’s Employment History

Petitioner graduated from the University of Southern

California with a master’s degree in journalism and has worked as

a corporate marketing executive, financial writer, and journalist

for over 20 years. In 1985 he started his own consulting

4
Respondent raised, in his pretrial memorandum, the
possibility that the Handbook is admissible under the hearsay
exception of Fed. R. Evid. 803(6). Respondent did not set forth
the argument in his pretrial memorandum or offer argument post
trial. The argument is deemed conceded. See Money v.
Commissioner, supra at 48.
5
Petitioner’s proffer of a copy of a Handbook, issued in
2005, as evidence to provide context to the Handbook issued in
2002 is rendered moot.
Respondent reserved a hearsay exception to petitioner’s
letter of appointment in the event the Handbook was not received
into evidence. Because the Court’s decision is unaffected by the
Handbook, the Court finds that it is not unfair to consider the
letter of appointment without the “context” of the Handbook.
 - 4 -

business, representing clients in a variety of professional

services. In 1994 he left his consulting business to work in

corporate communications and marketing. In 1999 he reestablished

his business, and he continues to work as a consultant for his

business.

In July or August 2003, in an effort to expand into the

British investment community, petitioner met with the deputy

consul general, Brian Conley (Mr. Conley), of the BCG in the

United States. During the meeting Mr. Conley indicated that the

BCG might be interested in using petitioner’s services to promote

British companies seeking to invest in the United States and to

assist U.S. companies interested in investing in the United

Kingdom.

After several meetings discussing petitioner’s

qualifications, the BCG formally offered petitioner a full-time

appointment for a 3-year defined term. Petitioner signed a

letter of appointment (letter) dated September 22, 2003, and was

appointed at the level of “Trade Officer Grade US8”. The letter

provided for annual increases to his salary dependent upon

satisfactory services, as determined by the BCG. The award of an

annual increase could be “withheld or withdrawn for reasons of

discipline or inefficiency”.

The BCG, as a foreign employer of a U.S. citizen,

categorized petitioner as self-employed “for tax purposes”. The
 - 5 -

BCG did not withhold taxes from petitioner’s salary, and

petitioner was responsible for all Federal, State, and local

taxes and for self-employment taxes.

II. The Deficiency

Petitioner timely filed a Form 1040, U.S. Individual Income

Tax Return, for 2003. On Schedule C, petitioner reported total

gross receipts of $109,926, total expenses of $37,280, and

business use of home expenses of $6,783 for his “financial

journalist corporate relations consultant” (consultant) business.

As a self-employed individual, petitioner contributed to an SEP

plan on the basis of his consultant earnings. Petitioner

reported gross receipts from the BCG on Schedule C and also

contributed to an SEP plan on the basis of these earnings.6 In

2003 he contributed $12,242 to his SEP plan.7

In the notice of deficiency respondent determined in

pertinent part that petitioner was: (1) A common law employee of

the BCG and consequently was not entitled to report gross

receipts and expenses associated with his work for the BCG on

6
The record does not indicate whether petitioner established
two separate SEP plans–-one for his consulting firm earnings and
one for his BCG earnings. Petitioner testified, however, that he
believed that the BCG was a client of his consulting firm and
there is no indication that he established a separate SEP plan
for his BCG earnings in 2003.
7
Petitioner testified that he “was fairly successful” at
fully funding his SEP plan each year, and in fact petitioner’s
counsel represented that he did fully fund his SEP plan for 2003.
 - 6 -

Schedule C for 2003; (2) subject to an excise tax pursuant to

section 4973 for excess contributions to an SEP plan for 2003;

and (3) liable for the accuracy-related penalty under section

6662(a) for 2003.

OPINION

I. Burden of Proof

Petitioner has moved to shift the burden of proof to

respondent, maintaining that he has satisfied the requirements

under section 7491(a). Section 7491(a)(1) provides that, subject

to certain limitations, where a taxpayer introduces credible

evidence with respect to a factual issue relevant to ascertaining

the taxpayer’s tax liability, the burden of proof shifts to the

Commissioner with respect to that issue.

In a case where the standard of proof is based on a

preponderance of the evidence, as it is here, the Court may

decide the case on the weight of the evidence and need not decide

it on an allocation of the burden of proof. See FRGC Inv., LLC

v. Commissioner, 89 Fed. Appx. 656 (9th Cir. 2004), affg. T.C.

Memo. 2002-276; Knudsen v. Commissioner, T.C. Memo. 2007-340.

The Court, therefore, need not and does not decide the

allocation of the burden of proof under section 7491(a). The

outcome of this case is decided on the preponderance of the

evidence and thus is unaffected by section 7491. See FRGC Inv.,

LLC v. Commissioner, supra. Petitioner’s motion will be denied.
 - 7 -

II. Petitioner’s Employment Status

The term “employee” is not defined in the Code.

Consequently, whether an individual is a common law employee is a

factual question that depends on the application of common law

concepts. See Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318,

322-323 (1992); Weber v. Commissioner, 103 T.C. 378, 386 (1994),

affd. per curiam 60 F.3d 1104 (4th Cir. 1995); Profl. & Exec.

Leasing, Inc. v. Commissioner, 89 T.C. 225, 232 (1987), affd. 862

F.2d 751 (9th Cir. 1988). Among the relevant factors in

determining the substance of an employment relationship are: (1)

The degree of control exercised by the principal over the details

of the individual’s 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. Nationwide Mut. Ins. Co. v.

Darden, supra at 323-324; Weber v. Commissioner, supra at 387;

Profl. & Exec. Leasing, Inc. v. Commissioner, supra at 232-233;

sec. 31.3121(d)-1(c)(2), Employment Tax Regs. (setting forth

criteria for identifying common law employees). No one factor is

determinative. Cmty. for Creative Non-Violence v. Reid, 490 U.S.

730, 752 (1989). Instead, all aspects of the relationship must
 - 8 -

be assessed and weighted. NLRB v. United Ins. Co., 390 U.S. 254,

258 (1968). The Court addresses the foregoing factors below.

A. Degree of Control

All that is necessary for a finding of control is that the

principal have the right to control the details of the person’s

work. McGuire v. United States, 349 F.2d 644, 646 (9th Cir.

1965); Thomas Kiddie, M.D., Inc. v. Commissioner, 69 T.C. 1055,

1058 (1978). It is not necessary for the principal to actually

exercise that control. Potter v. Commissioner, T.C. Memo. 1994-

356. 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 made by the individual. Weber

v. Commissioner, supra at 388.

Petitioner argues that he was not subject to the direction

and control of the BCG. In support, petitioner cites section

31.3121(d)-1(c)(2), Employment Tax Regs., which provides:

if an individual is subject to the control or direction
of another merely as to the result to be accomplished
by the work and not as to the means and methods for
accomplishing the result, he is an independent
contractor. An individual performing services as an
independent contractor is not * * * an employee under
the usual common law rules. Individuals such as
physicians, lawyers, dentists, veterinarians,
construction contractors, * * * engaged in the pursuit
of an independent trade * * * in which they offer their
services to the public, are independent contractors and
not employees.

Petitioner argues that he is an independent contractor; he

practices a public calling, and the services he provided to the
 - 9 -

BCG were within the scope of the pursuit of his consultant

business.

Petitioner testified that his supervisor provided only

limited and periodic reviews of his work. He was not required to

submit a timesheet or sign in when he worked on site at the BCG.

Petitioner further contends that the BCG could not unilaterally

alter his employment agreement; namely, it could not assign him

to projects outside the scope of his professional expertise and

it could not change his hours, move him to another department,

prevent him from working for other clients, or require him to use

its facilities.

Although petitioner alleged that he was not subject to the

BCG’s direction and control, petitioner admitted that the head of

the consulate could ask him to prepare or stop assignments and to

attend conferences and meetings. His letter of appointment also

specified that increases in his annual salary would be awarded

only upon satisfactory service. Furthermore, contrary to

petitioner’s assertions, the BCG did have the right to modify his

employment arrangement. His letter of appointment explicitly

stated that the BCG reserved the right to alter his conditions of

service at any time.8 See Urban Redev. Corp. v. Commissioner,

8
Petitioner alleges that the letter of appointment contained
no specific controls that dictated the details of his work, but
simply that it could change what might be required and that
petitioner might or might not agree to continue rendering
(continued...)
 - 10 -

294 F.2d 328, 332 (4th Cir. 1961) (the court may reject a

taxpayer’s uncorroborated, self-serving testimony), affg. 34 T.C.

845 (1960); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)

(same). In addition, petitioner was required to work 40 hours

per week and was not permitted to have outside business interests

that could be furthered by virtue of his employment.

The Court is convinced that the BCG had the right to

exercise control over petitioner’s work; this factor favors

respondent.

B. Investment in Facilities

Petitioner paid many of the costs associated with his work.

He used his own computer and cell phone, and he used his personal

check/credit card.

The BCG provided petitioner a desk, a phone, a computer, and

business cards. Petitioner argues that because there is no

evidence that the BCG incurred additional capital expenses to

accommodate him, it is not a distinguishing factor that the BCG

8
(...continued)
services. Petitioner further alleges that the more relevant
evidence is his own testimony in which he asserts that if the BCG
had attempted to control the details of his work, “I would not
have worked under those conditions. I would not have taken them
on as a client.” He further argues that the portion of the
letter about his not having outside business interests did not
apply to him.
Petitioner’s testimony does not comport with the terms of
the letter of appointment. Petitioner unequivocally accepted the
terms of the letter of appointment when he signed the letter
despite his assertions and testimony to the contrary regarding
his relationship with the BCG.
 - 11 -

provided an office space for him. Petitioner’s argument ignores

the legal implications of the provision of facilities, regardless

of the impact on the BCG’s capital expenses. If petitioner was

provided facilities, whether additional costs were imposed on the

BCG as a result or whether petitioner in fact used those

facilities is irrelevant. Taking into consideration that

petitioner paid many of the costs associated with his work and

used his personal work equipment, the Court finds that this

factor is neutral.

C. Opportunity for Profit or Loss

The BCG paid petitioner a fixed salary for his services as a

trade officer. Petitioner testified that he submitted monthly

invoices to the BCG; however, there is no evidence that the

invoices were actually submitted to the BCG, that the BCG

actually reimbursed petitioner, or that his monthly salary was

contingent on those invoices. In fact, the evidence indicates

that petitioner received his fixed monthly salary before the

dates indicated on the invoices. Petitioner explained that

although he was paid a fixed amount by the BCG, that practice is

similar to and consistent with his standard business practice.

Although the record reflects that petitioner drafted

invoices to the BCG for incurred expenses, the record does not

reflect whether he submitted the invoices to the BCG, nor does
 - 12 -

the record reflect that the BCG reimbursed petitioner for these

expenses. This factor favors respondent.

D. Permanency of Relationship

Petitioner signed a 3-year defined-term contract with the

BCG. The contract’s renewal was solely at the discretion of the

BCG, with a maximum period of 9 years or three defined terms.

Petitioner’s employment relationship was not defined as long term

but was eligible for extension. This factor is neutral.

E. Principal’s Right of Discharge

During 2003 both parties could terminate the employment

relationship without cause; this factor is neutral.

F. Integral Part of Business

The BCG presents British policies to Americans and the U.S.

Government, explains American policies and views to the British

Government, and promotes British interests in the United States.

The BCG is also responsible for press and cultural relations and

for visa and consular services. Petitioner provided consulting

and communications services related to commercial opportunities

in the United States for British companies. Petitioner’s

services furthered the BCG’s goals. This factor favors

respondent.

G. Relationship Parties Believe They Created

Petitioner testified that he was hired by the BCG as an

independent contractor for his consultant services. In support,
 - 13 -

petitioner refers to the work invoices that he submitted to the

BCG. He alleges that even though he was paid a fixed salary,

submitting work invoices and obtaining contracts with fixed

payments were consistent with his standard business practice.

Petitioner also cites the letter of appointment, which specified

that he was self-employed for tax purposes.

Petitioner further argues that the phrase “Self Employed for

tax purposes” in the letter of appointment did not reflect the

BCG’s understanding of petitioner’s employment status; it does

not refer to the Internal Revenue Code, and there is no reasoning

given by the BCG which reflects the BCG’s understanding of

petitioner’s employment status.

As discussed supra, the evidence does not indicate that the

BCG paid petitioner a salary based on petitioner’s invoices. The

BCG offered petitioner a position as a trade officer at the

“Grade US8” salary level.

In addition, the letter of appointment specified that the

BCG would not withhold taxes from petitioner’s gross salary

because, as a U.S. citizen, he was categorized as self-employed

for tax purposes. Section 3121(b)(11) specifically provides

that, for purposes of chapter 21 Federal Insurance Act taxes,

employment by a foreign Government is excepted from the term

“employment”. The phrase “Self Employed for tax purposes” in the

letter of appointment did not reflect the BCG’s understanding of
 - 14 -

petitioner’s employment status. Rather, it reflected the tax

consequences for a U.S. citizen employed by a foreign

Government.9 The letter of appointment was unambiguous regarding

petitioner’s employment relationship.10 The BCG offered him a

full-time appointment as a Trade Officer US8 with a fixed monthly

salary. The record does not reflect that the BCG intended to

hire petitioner as an independent contractor. This factor favors

respondent.

9
The Internal Revenue Service is unable to levy on a foreign
Government the employer tax portion of Federal Insurance
Contributions Act taxes; instead, citizens employed by foreign
Governments are treated as self-employed individuals for purposes
of Self-Employment Contributions Act taxes. See S. Rept. 1856,
86th Cong., 2d Sess. 1960, 1960-2 C.B. 792, 795.
10
Petitioner alleges that because the letter of appointment
did not refer to the Code, the Court cannot infer that the BCG’s
understanding of the relationship was only tax motivated as a
result of the statement that petitioner was “Self Employed for
tax purposes”.
While acknowledging petitioner’s position, the Court notes
that the letter of appointment referred to the numerous tax
consequences for its employees. This portion of the letter was
not a specific reference to petitioner; rather it was a general
reference to the tax consequences for any U.S. citizen employed
by the BCG. If the Court were to read the language as petitioner
would have us read it, all U.S. citizens employed by the BCG
would be independent contractors. The letter of appointment also
provided the tax consequences for employees that were not U.S.
citizens. It specified, generally, the tax consequences that any
number of its employees might face on the basis of citizenship.
The language in the letter of appointment specifically
categorized petitioner as self-employed for tax purposes because
he was a U.S. citizen employed by a foreign Government.
Regardless of whether the letter of appointment specified a Code
section, the parties do not dispute that petitioner’s services
are statutorily excepted from employment, for purposes of ch. 21,
pursuant to sec. 3121(b)(11).
 - 15 -

H. Employee Benefits

Receipt of employee benefits is an important factor in

determining whether an employer-employee relationship exists.

Packard v. Commissioner, 63 T.C. 621, 632 (1975).

Petitioner testified that he did not receive sick pay,

overtime pay, retirement benefits, or life insurance and received

only minimal remuneration for health and dental insurance. But

in 2003 petitioner accrued annual and sick leave and had the

opportunity to participate in the BCG’s health insurance and

pension plans but declined to do so. See Feaster v.

Commissioner, T.C. Memo. 2010-157 (the availability and not the

receipt of benefits is the determinative factor); see also Weber

v. Commissioner, 103 T.C. at 393-394; Colvin v. Commissioner,

T.C. Memo. 2007-157, affd. 285 Fed. Appx. 157 (5th Cir. 2008).

Petitioner’s access to and receipt of employee benefits at the

BCG further supports a finding that he was a common law employee.

Petitioner contends that on the basis of the foregoing

factors the Court should find that he was an independent

contractor of the BCG. In support, petitioner cites Levine v.

Commissioner, T.C. Memo. 2005-86, and argues that the facts in

his case more strongly support his status as an independent

contractor than did the facts support the taxpayer in Levine.

In Levine, the taxpayer entered into a personal services

contract with the U.S. State Department (Department) to manage
 - 16 -

and implement the Department’s worldwide industrial hygienist

field technical services program. The taxpayer provided

significant explanatory evidence of her position with the

Department, including her employment contract. The employment

contract described, in detail, her employment duties, how she

performed her duties, and how she interacted with employees and

supervisors.

In contrast, petitioner provided the Court with mere

generalities as to his tasks, his employment position, and the

control the BCG exercised over his position.

Additional factors considered by the parties as addressed in

Levine include: (1) The skill required by the worker to solve a

problem; (2) the method of payment; and (3) whether the hiring

party pays Social Security taxes.

Petitioner asserts that he was hired to solve a specific

problem for the BCG. However, petitioner failed to demonstrate

that he was hired for the purpose of providing public relations

work as an independent contractor and not as a common law

employee. The letter of appointment indicated that he was hired

as a Trade Officer; there is no indication he was hired to fill a

specified public relations function performed by his firm as an

independent contractor. This factor favors respondent.

Petitioner also asserts that he was paid on a retainer basis

by the BCG and that he submitted monthly invoices commensurate
 - 17 -

with his work for the BCG. The record indicates, however, that

he was paid a fixed salary and that regardless of the invoices,

petitioner was paid the same fixed salary for the months of

October, November, and December.11

Finally, the fact that the BCG did not withhold taxes from

petitioner’s pay is a neutral factor for purposes of determining

petitioner’s employment status. Under section 3121(b)(11),

“service performed in the employ of a foreign government” is

excepted from “employment” for purposes of Social Security and

Medicare taxes. See sec. 31.3121(b)(11)-1, Employment Tax Regs.

Services excepted from employment do not constitute employment

for tax purposes. See. sec. 31.3121(b)-4, Employment Tax Regs.

The fact that the BCG did not withhold taxes from petitioner’s

pay does not establish either his or the BCG’s intent regarding

his relationship with the BCG.

Although petitioner testified that he provided the same

services to the BCG as to his other clients in 2003, the Court is

unable to conclude that petitioner is not a common law employee

of the BCG. As the only material witness at his own trial,

petitioner has a vested interest in the outcome of this case. It

is well settled that the Court need not accept at face value a

witness’s testimony that is self-interested or otherwise

11
The record indicates that petitioner received his paycheck
each month before the dates indicated on his monthly invoices to
the BCG.
 - 18 -

questionable. See Archer v. Commissioner, 227 F.2d 270, 273 (5th

Cir. 1955), affg. a Memorandum Opinion of this Court; Weiss v.

Commissioner, 221 F.2d 152, 156 (8th Cir. 1955), affg. T.C. Memo.

1954-51; Schroeder v. Commissioner, T.C. Memo. 1986-467.

The Court is not compelled to believe evidence that seems

improbable or to accept as true uncorroborated, although

uncontradicted, evidence from an interested witness. Blodgett v.

Commissioner, 394 F.3d 1030, 1036 (8th Cir. 2005) (quoting

Marcella v. Commissioner, 222 F.2d 878, 883 (8th Cir. 1955),

affg. in part and vacating in part a Memorandum Opinion of this

Court), affg. T.C. Memo. 2003-212.

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 was a

common law employee of the BCG.

III. Excess Contributions to a Simplified Employee Pension Plan

In 2003 petitioner contributed to an SEP plan on the basis

of his earnings from both his consultant business and the BCG.

Respondent challenges petitioner’s deduction for excess SEP plan

contributions attributable to his BCG earnings.

An SEP plan is a qualified plan pursuant to which an

employer makes direct contributions to its employees’ individual

retirement accounts or individual retirement annuities as defined
 - 19 -

under section 408(a) and (b). Sec. 408(k); Levine v.

Commissioner, supra.

Section 404(a)(8) permits an employer to deduct certain

contributions to an employee’s SEP plan. See sec. 404(a)(8)(C),

(h) (contributions to an SEP plan on behalf of an employee within

the meaning of section 401(c)(1) shall be considered to satisfy

the conditions of section 162 or 212 to the extent such

contributions do not exceed the earned income of such individual

derived from the trade or business with respect to which such

plan is established). For purposes of section 404(a)(8), the

term “employee” includes an individual who is an employee within

the meaning of section 401(c)(1), and the employer of such an

individual is the person treated as his employer under section

401(c)(4).

Self-employed individuals and sole proprietors are treated

as their own employers and employees for purposes of SEP plan

deductions. See secs. 401(c), 404(h), 408(k)(7); sec. 1.401-

10(b)(2), Income Tax Regs. (for purposes of applying sections 401

through 404, if a self-employed individual is engaged in more

than one trade or business, each business shall be considered a

separate employer). A self-employed individual shall be treated

as his own employer if he satisfies the definition of employer

under section 401(c)(4). Secs. 402(i), 404(a)(8), 408(k)(7) (the

terms “employee” and “employer” shall have the respective
 - 20 -

meanings given by section 401(c)); see also Kellough v.

Commissioner, T.C. Memo. 1995-282. Additionally, a self-employed

individual must also be his own employee and shall be treated as

such if he satisfies the definition of employee under section

401(c)(1). Sec. 408(k)(7).

Petitioner argues that he satisfies the requirements of

section 401(c) and is qualified to make and deduct contributions

to his SEP plan derived from both his consultant business and BCG

earnings.12 Respondent does not contest that petitioner is

entitled to deduct contributions to his SEP plan from the

earnings derived from his consultant business. Therefore, the

remaining determination is whether petitioner is entitled to

deduct the contributions he made to his SEP plan with respect to

his BCG earnings.

Petitioner alleges that as an employee of a foreign

Government, he is self-employed pursuant to section 3121(b)(11)

and is treated as his own employee under section 401(c)(1) and

(2).13 Next, he contends that even if the Court concludes that

12
Sec. 1.401-10(b)(3)(i), Income Tax Regs., provides that an
individual who is a common law employee is not a self-employed
individual with respect to income attributable to such
employment, even though such income constitutes net earnings from
self-employment as defined in sec. 1402(a). Petitioner contends
that this regulation is an invalid interpretation of sec. 401(c).
The Court, however, need not reach this issue because this case
rests on the plain language of sec. 401(c).
13
Sec. 3121(b)(11), for the purposes of ch. 21 Federal
Insurance Contribution Act taxes, excludes from the definition of
(continued...)
 - 21 -

he is a common law employee of the BCG, as the Court has found,

he is still his own employer with respect to his BCG earnings.

Consequently, he is entitled to deduct the contributions to his

SEP plan that are attributable to his BCG earnings.

Petitioner directs the Court to section 415(c) in support of

his assertion that he satisfies the definition of employer

pursuant to section 401(c)(4).14

Petitioner also cites the legislative history of section

401(c) in support of his argument that he is his own employer

with respect to his BCG earnings. Petitioner cites the House

13
(...continued)
“employment” any service performed in the employ of a foreign
government.
14
Sec. 415(c) provides the contribution limits for qualified
plans such as an SEP plan. See sec. 415(a). Petitioner invites
the Court’s attention to sec. 415(c)(3), which defines a
“participant’s compensation” for purposes of determining the
limit of a contribution. A participant’s compensation is defined
as “the compensation of the participant from the employer for the
year”. Sec. 415(c) also provides a special definition of a
participant’s compensation for self-employed individuals. In the
case of a self-employed individual who is considered an employee
pursuant to sec. 401(c)(1), the participant’s compensation is
defined as “‘the participant’s earned income (within the meaning
of section 401(c)(2)’”. Sec. 415(c).
Petitioner contends that according to sec. 415(c), the Court
need not look to sec. 401(c)(4) for the definition of employer.
He argues that if an individual has earned income, as defined
under sec. 401(c)(2), then ipso facto he has compensation from
the employer, because in the case of a self-employed individual,
a participant’s compensation under sec. 415(c) is defined as the
“compensation of the participant from the employer” and in the
case of a self-employed individual, it is defined as “the
participant’s earned income”. Therefore, according to
petitioner, any argument about who is an employer is settled by
this passage.
 - 22 -

report, which defines an employee, for purposes of retirement

plan contributions, as a self-employed individual. See H. Rept.

378, 87th Cong., 1st Sess. 89 (1961), 1962-3 C.B. 261, 279-280.

Petitioner concludes that on the basis of the legislative

history a common law employee who has self-employment earnings is

treated as an owner-employee and is entitled to make retirement

plan contributions and deduct those contributions on the basis of

the self-employment income.

Petitioner asserts that the definition of an “owner-

employee” remained unchanged and that section 401(c)(3) contains

the same definition of “owner-employee” as the proposed language

in the House bill. However, the codified language of section

401(c)(3) does in fact differ from that proposed in the House

bill. See H. Rept. 378, supra at 89, 1962-3 C.B. at 279-280.

Section 401(c)(3) defines an owner-employee, in pertinent part,

as an employee who owns the entire interest in an unincorporated

trade or business. Therefore, petitioner’s assertion that the

legislative history of section 401(c) supports his argument that

he is his own employer with respect to his BCG earnings is in

error.
 - 23 -

Furthermore, petitioner’s arguments15 completely disregard

section 401(c)(4) and the mandate of section 404(a)(8), rendering

section 401(c)(4) superfluous. See sec. 402(i); Weinberger v.

Hynson, Westcott & Dunning, Inc., 412 U.S. 609, 633 (1973) (an

interpretation that renders a statutory provision superfluous

should be avoided since it would offend “the well-settled rule of

statutory construction that all parts of a statute, if at all

possible, are to be given effect”). The Court must make its

decision in accordance with the mandate of the Code.

Accordingly, the Court turns to section 401(c)(4) to determine

whether petitioner satisfies the definition of employer.

Section 401(c)(4) defines an employer as “an individual who

owns the entire interest in an unincorporated trade or business”.

Kellough v. Commissioner, supra. While petitioner owned the

entire interest in and maintained a qualified SEP plan for his

consultant business, he may deduct contributions made to that SEP

plan only with respect to the earned income from that business.

See sec. 401(d). With respect to his work for the BCG,

15
Petitioner alleges that sec. 401(c)(4) was adopted to
exclude corporate owner-employees and that the term “owner-
employee” is intended to exclude shareholder-employees of
corporations from that definition. See sec. 401(c)(3) and (4);
H. Rept. 378, 87th Cong., 1st Sess. at 89 (1961), 1962-3 C.B.
261, 279-280.
Whether sec. 401(c)(4) was adopted to exclude shareholder-
employees from the definition of “owner-employee” is irrelevant,
and the question still remains as to whether petitioner was his
own employer with respect to his earnings attributable to the
BCG.
 - 24 -

petitioner does not satisfy the definition of employer under

section 401(c) because he does not own the entire interest in the

BCG. Petitioner, as a common law employee of the BCG, does not

satisfy the definition of “employer” for purposes of section

401(c)(4); he is not his own employer for purposes of his BCG

earnings. Therefore, he is not entitled to a deduction with

respect to the contributions that are attributable to his BCG

earnings.
 - 25 -

IV. Section 497916 Excise Tax17

Respondent determined that petitioner is liable for an

excise tax of $178 for excess contributions to his Schedule C SEP

plan. Section 408(k)(6)(C)(i) provides that any excess

contribution under an SEP plan shall be treated as an excess

contribution for purposes of section 4979. See sec. 4979(e)(4).

Section 4979 imposes a 10-percent18 tax on employers who make

excess contributions to an SEP plan.

Petitioner asserts that even if he did make an excess

contribution to his SEP plan, he nonetheless should not be taxed

for any excess contributions for 2003. He notes that section

4973 requires that the Court determine the excess funding amount

as of the close of the taxable year; i.e., 2003.19 Because he

did not make his SEP plan contribution until 2004, petitioner

16
Respondent determined that petitioner is liable for an
excise tax of $178 under sec. 4973(a) for overfunding his
consultant business SEP plan. Sec. 4973 imposes a 6-percent tax
on individuals who make excess contributions to individual
retirement accounts (IRA), annuities, or similar plans. An
excess contribution is defined as an amount contributed to an IRA
less any qualified rollovers and less the amount allowable as a
deduction under sec. 219. See secs. 4973(b)(1), 404(h), (k)(6)
(C)(i).
Sec. 219, however, does not apply with respect to an
employer contribution to an SEP plan. See sec. 219(b).
17
Petitioner alleged that respondent abandoned this issue.
Respondent raised the issue in his pretrial memorandum as well as
in his reply brief; the issue was not abandoned or conceded.
18
Respondent asserted only a 6-percent excise tax;
consequently, respondent is limited to the 6-percent excise tax.
19
Sec. 4979 contains a similar provision. See sec. 4979(a).
 - 26 -

suggests that any excess contribution would have been made in

2004.

Section 404 addresses this inaccurate assumption. Section

404(a) provides the general rules relating to retirement savings

and specifies the time when contributions to a retirement plan

are deemed made. Under section 404(a)(6), a taxpayer shall be

deemed to have made a contribution for a taxable year if the

contribution is made on account of the taxable year and is made

not later than the time prescribed by law for filing the return

for the taxable year. See also sec. 404(h)(1)(B). Accordingly,

for purposes of the excise tax calculation, petitioner’s 2003 SEP

plan contribution, although paid in 2004, is deemed paid in

2003.20 Therefore, petitioner’s argument based on timing fails.

Respondent’s determination that petitioner must pay a 6-percent

excise tax of $178 on the excess contribution is sustained.

V. Accuracy-Related Penalty

Respondent determined that petitioner is liable for an

accuracy-related penalty under section 6662(a). Section 6662(a)

imposes a 20-percent penalty on the portion of an underpayment

attributable to any one of various factors, including negligence

or disregard of rules or regulations. See sec. 6662(b)(1).

“Negligence” includes any failure to make a reasonable attempt to

20
Petitioner timely filed his 2003 Federal income tax return
and does not contest that he computed his SEP plan contribution
on the basis of his 2003 BCG and consulting firm earnings.
 - 27 -

comply with the provisions of the Code, including any failure to

keep adequate books and records or to substantiate items

properly. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax

Regs. Under section 7491(c), respondent has the burden of

production with respect to the accuracy-related penalty. See

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Section 6664(c)(1) provides an exception to the section

6662(a) penalty if it is shown that there was reasonable cause

for any portion of the underpayment and the taxpayer acted in

good faith. The determination of whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability. Id. Circumstances that may indicate

reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in view of the

taxpayer’s experience, knowledge, and education. Id.

Reliance on the advice of a professional, such as a

certified public accountant, may also constitute reasonable cause

as a defense to an accuracy-related penalty if, under all the

facts and circumstances, such reliance is reasonable and the

taxpayer acted in good faith. Secs. 6662(a), 6664(c)(1); Freytag

v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011
 - 28 -

(5th Cir. 1990), affd. 501 U.S. 868 (1991). However, a taxpayer

is not relieved from liability for the addition to tax for

negligence merely by shifting the responsibility to a tax

professional. Enoch v. Commissioner, 57 T.C. 781, 802 (1972).

Reliance on an expert is not an absolute defense but is a factor

to be considered. Freytag v. Commissioner, supra at 888. A

taxpayer’s reliance must be in good faith and demonstrably

reasonable. Ewing v. Commissioner, 91 T.C. 396, 423 (1988),

affd. without published opinion 940 F.2d 1534 (9th Cir. 1991);

Freytag v. Commissioner, supra at 888-889. In such a case, a

taxpayer will be entitled to rely upon an expert’s advice, even

if the expert’s advice should prove to be erroneous. Jackson v.

Commissioner, 86 T.C. 492, 539 (1986), affd. 864 F.2d 1521 (10th

Cir. 1989).

Petitioner has been a sole proprietor for many years and has

paid his own Federal income and self-employment taxes. In

addition to his own understanding of his relationship with the

BCG, petitioner had the assistance of a tax return preparer, who

had prepared his tax returns for over 25 years and prepared his

2003 return. Petitioner’s tax return preparer also agreed, on

his understanding of petitioner’s employment relationship with

the BCG, that his earnings were reportable on Schedule C.

Petitioner relied, in good faith, on his tax return preparer.
 - 29 -

Under petitioner’s unique circumstances, the similarity of

his consultant work to his work for the BCG, and the difficulty

of the interplay between sections 3121 and 401(c), the Court

finds that it was reasonable for petitioner to rely on the advice

of his tax return preparer in determining that he was an

independent contractor of the BCG. Therefore, respondent’s

determination of a section 6662(a) penalty is not sustained.

Other arguments made by the parties and not discussed herein

were considered and rejected as irrelevant, without merit, or

moot.

To reflect the foregoing,

An appropriate order will

be issued denying petitioner’s

motion to shift the burden of

proof, and decision will be

entered under Rule 155.