T.C. Memo. 2011-212
UNITED STATES TAX COURT
WILLIAM EDWARD SCHRAMM AND STELLA LOGAN SHERROUSE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8938-09. Filed August 30, 2011.
William Edward Schramm and Stella Logan Sherrouse, pro sese.
Caroline R. Krivacka, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, Judge: Respondent determined a $3,913 deficiency in
petitioners’ 2006 Federal income tax.1 After a concession by
1
The deficiency was determined on the basis of respondent’s
erroneous calculation of petitioners’ gross income.
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respondent, the amount of the deficiency in dispute is
approximately $700. The issues for decision are: (1) Whether
William Edward Schramm (petitioner) was a statutory employee2 of
Nova Southeastern University (NSU) during the taxable year 2006;
and (2) whether petitioners are entitled to deduct claimed
business expenses of $2,785.63 pertaining to petitioner’s
employment with NSU on Schedule C as profit or loss from a
business, or whether such expenses should be reported on Schedule
A as itemized deductions for taxable year 2006.
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
At the time the petition was filed, petitioners resided in
Tennessee.
Petitioner was an adjunct professor at NSU during 2006 and
taught online courses in economics. From 1999 to 2007 petitioner
taught 4 to 12 online courses per year for NSU. NSU and
petitioner entered into a separate employment contract with
2
The term “statutory employee” means an individual described
in sec. 3121(d)(3). A common law employee cannot be a statutory
employee.
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regard to each course that petitioner taught. During 2006 the
period of each contract was 6 weeks. As a condition of his
employment, NSU required petitioner to follow various employment
policies, including a sexual harassment policy, a drug policy,
and a conflict of interest policy. NSU paid petitioner a fixed
amount for each course that he taught. In 2006 petitioner
received $20,000 from NSU.
NSU provided petitioner with a syllabus for each course he
taught that specified the material that was to be covered.
Petitioner prepared another more detailed syllabus to set forth
specifics regarding the class, such as the assignments and
examinations. Petitioner established his own work hours and was
able to perform his work from any location via a computer with an
Internet connection. However, NSU set the course dates, which
established the period within which petitioner’s classes were to
begin and conclude. NSU also supplied the Web site interface
that was used for each course petitioner taught and the services
necessary to register and enroll students in the courses.
Following the completion of a course, petitioner was required to
submit to NSU a report that included an evaluation of his
students’ learning.
NSU issued petitioner a Form W-2, Wage and Tax Statement,
relating to his employment with the university during 2006. On
the Form W-2, NSU did not check box 13 to indicate that
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petitioner was a statutory employee. NSU withheld Federal income
taxes and employment taxes from the wages it paid to petitioner
during the 2006 taxable year.
On or about January 3, 2007, petitioner wrote to NSU
requesting clarification of his employment status with the
university. On January 8, 2007, NSU’s payroll manager, Linda
Trosper (Ms. Trosper), sent him a letter advising him that NSU
classifies all of its adjunct professors, including petitioner,
as employees and not as statutory employees or independent
contractors. NSU’s decision regarding the classification of
employees was in conformity with an SS-8 ruling3 the Internal
Revenue Service (IRS) issued on June 10, 2003, regarding another
adjunct professor who taught online courses at NSU. In that SS-8
ruling, the IRS determined that the adjunct professor was a
common law employee and, therefore, was not a statutory employee.
In her letter to petitioner, Ms. Trosper indicated that she
agreed with the IRS’ decision in the SS-8 ruling to classify
adjunct professors as employees.
On their 2006 Federal income tax return, petitioners
reported the amounts petitioner received from NSU as business
income on Schedule C, Profit or Loss From Business, rather than
3
Form SS–8, Determination of Worker Status for Purposes of
Federal Employment Taxes and Income Tax Withholding, is used by a
firm or worker to request a determination or ruling letter
regarding a worker’s Federal employment tax status.
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on line 7 of the return as wages, salaries, tips, etc. In
addition, petitioners claimed business expenses on Schedule C
totaling $2,785.63, which were related to petitioner’s employment
with NSU.
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;
see also Rev. Rul. 90-93, 1990-2 C.B. 33.
Petitioners argue that petitioner was an independent
contractor or statutory employee in 2006 and is thereby entitled
to deduct business expenses on Schedule C. Respondent contends
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that petitioner was a common law employee in 2006 and that his
unreimbursed employee expenses are thus properly reportable on
Schedule A, subject to the 2-percent-of-adjusted-gross-income
limitation.
An individual qualifies as a statutory employee under
section 3121(d)(3) only if the individual is not a common law
employee pursuant to section 3121(d)(2). See Ewens & Miller,
Inc. v. Commissioner, 117 T.C. 263, 269 (2001); Rosemann v.
Commissioner, supra. Section 3121(d)(2) provides that an
“employee” is “any individual who, under the usual common law
rules applicable in determining the employer-employee
relationship, has the status of an employee”. Because an
individual qualifies as a statutory employee only if the
individual is not a common law employee, we will first decide
whether petitioner was a common law employee of NSU.
Common Law Employee
“Although the income tax treatment of a taxpayer’s trade or
business expense deductions under section 62(a) depends on
whether the taxpayer is ‘[performing] * * * services * * * as an
employee’, subtitle A of the Internal Revenue Code does not
define ‘employee’”. Rosato v. Commissioner, T.C. Memo. 2010-39.
Under these circumstances, we apply common law rules to determine
whether the taxpayer is an employee. Weber v. Commissioner, 103
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T.C. 378, 386 (1994), affd. 60 F.3d 1104 (4th Cir. 1995); Rosato
v. Commissioner, supra.
Whether an individual is an employee must be determined on
the basis of the specific facts and circumstances involved.
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
Avis Rent A Car Sys., Inc. v. United States, 503 F.2d 423, 429
(2d Cir. 1974); Ewens & Miller, Inc. v. Commissioner, supra at
270; Weber v. Commissioner, supra at 387. We consider all of the
facts and circumstances of each case, and no single factor is
determinative. Ewens & Miller, Inc. v. Commissioner, supra at
270; Weber v. Commissioner, supra at 387. Although the
determination of employee status is to be made by common law
concepts, a realistic interpretation of the term “employee”
should be adopted, and doubtful questions should be resolved in
favor of employment in order to accomplish the remedial purposes
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of the legislation involved. Breaux & Daigle, Inc. v. United
States, 900 F.2d 49, 52 (5th Cir. 1990); see Donald G. Cave A
Profl. Law Corp. v. Commissioner, T.C. Memo. 2011-48.
1. Degree of Control
The degree of control that the principal exercises over the
worker has been referred to as the crucial test in making the
determination. See Clackamas Gastroenterology Associates, P.C.
v. Wells, 538 U.S. 440, 448 (2003); Rosato v. Commissioner,
supra. The degree of control necessary to find employment status
varies with the nature of the services provided by the worker.
Weber v. Commissioner, supra at 388; Potter v. Commissioner, T.C.
Memo. 1994-356. To retain the requisite degree of control, the
principal need not actually direct or control the manner in which
the services are performed; it is sufficient if the principal has
the right to do so. Weber v. Commissioner, supra at 388; Potter
v. Commissioner, supra; sec. 31.3401(c)-l(b), Employment Tax
Regs. Where the inherent nature of the job mandates an
independent approach, a lesser degree of control exercised by the
principal may result in a finding of an employer-employee status.
See Potter v. Commissioner, supra; Bilenas v. Commissioner, T.C.
Memo. 1983–661 (finding that an untenured college professor who
taught on a course-by-course basis was a common law employee of
the university).
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It is clear that the inherent nature of petitioner’s
position as an adjunct professor calls for him to follow an
independent approach in teaching his classes. However, we
believe that NSU either exercised appropriate control over
petitioner or had the authority to exercise it in a manner
sufficient to render him an employee of the university. For each
course petitioner taught, NSU dictated the textbook that he was
required to use, the subjects that had to be covered, and the
duration of the course. In addition, NSU managed the enrollment
of students and supplied the Web site interface used to
facilitate instruction in online courses. NSU also required
petitioner to follow several of its employment policies,
including those dealing with sexual harassment, drug use, and
conflicts of interest. It is also of great significance that NSU
regarded petitioner as an employee rather than as an independent
contractor. See Bilenas v. Commissioner, supra. Although NSU
did not supervise the minute details of petitioner’s work, we
find that it did exercise the requisite degree of control
necessary to establish an employer-employee relationship with
him. This factor weighs heavily in favor of a finding that
petitioner was a common law employee of NSU.
2. Investment in Facilities
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, 117 T.C. at 271. In addition, 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. Colvin v.
Commissioner, T.C. Memo. 2007-157, affd. 285 Fed. Appx. 157 (5th
Cir. 2008); Lewis v. Commissioner, T.C. Memo. 1993-635.
NSU bears the cost of maintaining a staff for recruitment,
registration, and recordkeeping related to students, and it
provides the servers and support required to maintain the online
classroom. Petitioner’s investment is not substantial,
consisting of a computer and office supplies, maintenance of an
Internet connection, and the use of a portion of his home as an
office. Petitioner’s investment in facilities was insubstantial
and, thus, insufficient to render him an independent contractor.
As a result, we find that this factor is supportive of
petitioner’s classification as a common law employee.
3. Opportunity for Profit or Loss
The opportunity for profit or loss indicates nonemployee
status. Simpson v. Commissioner, supra at 988; Rosato v.
Commissioner, T.C. Memo. 2010-39. Petitioner lacked significant
opportunity for profit or loss because the amount of pay he
received depended only upon the number of classes he taught. See
Potter v. Commissioner, supra. The amount petitioner received
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for teaching a course was not subject to fluctuation and was paid
to him in exchange for his working within predetermined starting
and ending dates, which were not subject to change. The fact
that the wages petitioner received were not subject to change and
that the duration of the classes was fixed left him with no more
than a negligible risk of loss. When a worker’s risk of loss is
negligible, this factor weighs in favor of a determination of
employee status. See Colvin v. Commissioner, supra. The greater
risk of profit or loss remained with NSU, whose revenue
necessarily fluctuated on the basis of the number of students
enrolled relative to the costs involved in running a university.
4. Right To Discharge
The employment relationship between NSU and petitioner is
governed by a separate contract established for each class
section he taught. Copies of the employment contracts were not
made a part of the record before the Court. Therefore, we cannot
determine with certainty whether the contracts provided the
university with the express right to terminate petitioner’s
employment at any time. However, employers typically have the
right to terminate employees
at will. Ellison v. Commissioner, 55 T.C. 142, 155 (1970);
Colvin v. Commissioner, supra. Furthermore, because the parties
entered into a contract for each specific course, NSU could have
ended its long-term relationship with petitioner by electing not
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to renew the contracts for further courses. In addition,
petitioner has failed to provide any evidence to indicate that
NSU would be liable for breach of contract if it chose to
terminate the relationship before the contract expired. As a
result, we find that this factor supports the finding that
petitioner was a common law employee.
5. Work Is Part of Principal’s Regular Business
Where work is part of the principal’s regular business, it
is indicative of employee status. Simpson v. Commissioner, 64
T.C. at 989; Rosato v. Commissioner, supra. As an educational
institution, NSU’s regular business involves the education of
students and the evaluation of their work. Petitioner was hired
to further NSU’s regular business, in that he taught specific
courses and then evaluated the students’ learning in each course.
Petitioner’s services were clearly an important part of NSU’s
primary business. Therefore, we find that this factor supports
petitioner’s classification as a common law employee.
6. Permanency of Relationship
Permanency of a working relationship is indicative of an
employer-employee relationship. Rosemann v. Commissioner, T.C.
Memo. 2009-185. In contrast, a transitory work relationship may
weigh in favor of independent contractor status. Ewens & Miller,
Inc. v. Commissioner, 117 T.C. at 273.
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Petitioner was employed by NSU from 1999 to 2007 and taught
4 to 12 online courses per year during that period. Although NSU
and petitioner entered into a separate employment contract with
regard to each course that petitioner taught, petitioner
maintained a consistent employment relationship with NSU over a
period of many years. Petitioner and NSU’s decision to
continually renew petitioner’s contract for more courses
indicates that a certain level of stability and continuity
existed in their employment relationship. Although the
contractual arrangement between the parties did not create an
explicit permanent employment relationship, the relationship in
practice was continuing in nature. Therefore, we find that this
factor weighs in favor of petitioner’s being classified as an
employee. Furthermore, even if we were to determine that this
factor supported petitioner’s classification as an independent
contractor, it alone would not be sufficient to preclude a
finding that he was an employee at NSU on the basis of the other
factors examined. See Potter v. Commissioner, T.C. Memo. 1994-
356.
7. Relationship the Parties Thought They Created
The record indicates that petitioner and NSU considered
their relationship to be that of an employer and an employee.
NSU withheld Federal income taxes and employment taxes from the
wages it paid to petitioner. The withholding of taxes is
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consistent with a finding that an individual is a common law
employee. Rosato v. Commissioner, T.C. Memo. 2010-39; Lewis v.
Commissioner, T.C. Memo. 1993-635. In addition, NSU issued
petitioner a Form W-2 for the tax year in question on which it
did not check box 13 to indicate an intention to classify
petitioner as a statutory employee. Furthermore, NSU’s payroll
manager personally informed petitioner that the university
classified him as a common law employee, before petitioners filed
their Federal income tax return.
Altogether it is clear that the parties believed that they
had established an employer-employee relationship. This factor
weighs in favor of petitioner’s being treated as a common law
employee.
8. Provision of Employee Benefits
Benefits such as health insurance, life insurance, and
retirement plans are typically provided to employees by an
employer. Weber v. Commissioner, 103 T.C. at 393-394.
Petitioner contends that NSU offers such benefits to other
categories of workers, but it neither offered nor provided them
to petitioner. However, aside from his testimony at trial,
petitioner offered no evidence to substantiate his contention.
As a result, while we find that this factor supports petitioner’s
status as an independent contractor, we decline to place much
weight on it in making our ultimate determination, on account of
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the lack of evidence in the record. See Potter v. Commissioner,
supra.
On the basis of a careful consideration of the foregoing
factors, in the light of the facts and circumstances particular
to this case, we hold that petitioner was a common law employee
of NSU for the taxable year 2006.
Furthermore, because we have found that petitioner was a
common law employee of NSU during 2006, we also hold that he was
not a statutory employee under section 3121(d)(3). See Ewens &
Miller, Inc. v. Commissioner, 117 T.C. at 269.
Petitioners’ Deductions
An individual may deduct unreimbursed employee business
expenses as miscellaneous itemized deductions on Schedule A,
but only to the extent that the expenses exceed 2 percent of the
individual’s adjusted gross income. See secs. 62(a), 67(a) and
(b), 162(a). A statutory employee may deduct business expenses
incurred on Schedule C and thereby avoid the Schedule A
limitation. Rosemann v. Commissioner, supra. Because we have
held that petitioner was a common law employee and not a
statutory employee of NSU during the 2006 taxable year,
petitioners’ claimed business expenses of $2,785.63 must be
reported on Schedule A as miscellaneous itemized deductions and,
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thus, are deductible only to the extent that they exceed 2
percent of petitioners’ adjusted gross income.
To reflect the foregoing,
Decision will be entered
under Rule 155.