T.C. Summary Opinion 2014-35
UNITED STATES TAX COURT
ATIG RAHMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 29178-12S. Filed April 15, 2014.
Atig Rahman, pro se.
Randall B. Childs, for respondent.
SUMMARY OPINION
ARMEN, Special Trial Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect when the -2-
petition was filed.1 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.
Respondent determined a deficiency in petitioner’s 2010 Federal income tax
of $7,038 and an accuracy-related penalty of $1,115 under section 6662(a).
After concessions by petitioner,2 the issues for decision are as follows:
(1) Whether, for purposes of self-employment tax, petitioner was an
employee or an independent contractor of Ever Care Adult Care Services (Ever
Care). We hold that he was an employee; and
(2) whether petitioner is liable for an accuracy-related penalty under section
6662(a) attributable to a substantial understatement of income tax resulting from
petitioner’s unreported income from unemployment compensation and Ever Care.
To the extent that there is a substantial understatement of income tax, we hold that
he is.
1 Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. 2 Petitioner concedes that for 2010 he received unemployment compensation from the Florida Agency for Workforce Innovation of $14,166 and compensation from Ever Care of $9,075. Adjustments made in the notice of deficiency that are purely mechanical are not in issue and will be resolved on the basis of petitioner’s concessions and the Court’s disposition of the disputed substantive issue. -3-
Background
Some of the facts have been stipulated, and they are so found. We
incorporate by reference the parties’ stipulation of facts and accompanying
exhibits. Petitioner resided in the State of Florida at the time that the petition was
filed.
Petitioner was unemployed for the first part of 2010. As a result, he
received unemployment compensation of $14,166 from the Florida Agency for
Workforce Innovation. In or around March 2010 petitioner began working for
Ever Care. Ever Care paid petitioner $9,075 for his services in 2010.
Ever Care is a business that provides a home and other care services to
adults with disabilities. During 2010 Ever Care owned three homes and acquired a
fourth. Ever Care hires both floor staff and group home managers.
Ever Care originally hired petitioner to be a member of floor staff, but he
was promoted to group home manager after working approximately two weeks.
The group home he managed was staffed with approximately six other full-time
workers, and the home always had at least one staff member present. Petitioner
worked approximately 40 hours per week and was paid an hourly rate every two
weeks. When petitioner was not working, he was on call as the first point of
contact should a problem arise at the home. Petitioner did not have any ownership -4-
interest in Ever Care or in any of the properties associated with Ever Care. There
is nothing in the record to indicate that either party intended petitioner’s
employment to be temporary or short term.
When Ever Care hired petitioner, Ever Care specifically enumerated his
duties and responsibilities, many of which were required by the State of Florida to
maintain an adult care facility. A copy of such duties and responsibilities was
posted in each of Ever Care’s group homes. Ever Care specified not only
petitioner’s particular job duties, but also when and where to perform them.
Petitioner’s duties included: preparing a monthly forecast of finances;
purchasing groceries for the home; meeting with officials from the Florida
licensing agency; maintaining the home and making repairs; and scheduling,
hiring, and firing staff. Petitioner’s duties also included assisting residents with
personal grooming and facilitating transportation for them.
Petitioner provided Ever Care’s owner with financial projections each
month and met with the owner weekly for an accounting of grocery purchases.
Petitioner also reported to the owner daily regarding how the home was running.
In addition, petitioner would contact the owner in the event of any emergency. -5-
Ever Care paid for the weekly groceries for the residents as well as for
upkeep and repairs to the home. Petitioner did not incur any out-of-pocket
expenses related to his work at Ever Care.
In or around early 2011 Ever Care discharged petitioner.
Ever Care considered petitioner to be an independent contractor and
provided him with a Form 1099-MISC, Miscellaneous Income, for 2010.
Petitioner also received a Form 1099-G, Certain Government Payments, reflecting
his unemployement compensation from the Florida Agency for Workforce
Innovation.
Petitioner hired a certified public accountant (C.P.A.) to prepare his 2010
Federal income tax return. Petitioner did not report either unemployment
compensation or compensation from Ever Care, nor did he report liability for self-
employment tax on the return.
Respondent mailed petitioner a notice of deficiency for 2010, determining a
deficiency of $7,038 and an accuracy-related penalty of $1,115. In the notice,
respondent determined, inter alia, that petitioner was an independent contractor of
Ever Care and therefore liable for self-employment tax.
Petitioner timely filed a petition for redetermination, alleging that he was an
employee of Ever Care and therefore not liable for self-employment tax. -6-
Discussion
I. Burden of Proof
In general, the Commissioner’s determinations set forth in a notice of
deficiency are presumed to be correct, and the taxpayer bears the burden of
proving that those determinations are in error. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933); cf. sec. 7491(a)(1) (providing for burden shifting under
prescribed conditions). However, we need not be overly concerned with such
matters because, as discussed below, the preponderance of the evidence
demonstrates that petitioner was an employee of Ever Care in 2010.
II. Employment Status
Pursuant to section 1401, there is a tax on income earned from self-
employment. Income from self-employment consists of gross income derived by
an individual from any trade or business carried on by such individual. Sec.
1402(a). The self-employment tax, however, does not generally apply to
compensation paid to an employee. Sec. 1402(c)(2).
“Employee” means any individual who, under the usual common law rules
applicable in determining the employer-employee relationship, has the status of an -7-
employee. Sec. 3121(d)(2).3 Such definition is made applicable for self-
employment tax purposes by section 1402(d).
Whether an individual is an employee or independent contractor is a factual
question to which common law principles apply. Sec. 3121(d)(2); Nationwide
Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992); Hosp. Res. Pers., Inc. v.
United States, 68 F.3d 421, 424 (11th Cir. 1995); Weber v. Commissioner, 103
T.C. 378, 386 (1994), aff’d, 60 F.3d 1104 (4th Cir. 1995); Prof’l & Exec. Leasing,
Inc. v. Commissioner, 89 T.C. 225, 232 (1987), aff’d, 862 F.2d 751 (9th Cir.
1988); sec. 31.3401(c)-1(b), (d), Employment Tax Regs. We do not analyze in
depth all of the factors enumerated in the regulations and cases but rather focus on
some of the more important ones that inform our decision.
Factors that are particularly relevant in determining the substance of an
employment relationship include: (1) the degree of control exercised by the
3 Sec. 3121(d) defines “employee”, in pertinent part, 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 * * * -8-
principal over the details of the work; (2) the taxpayer’s investment in the facilities
used in his or her work; (3) the taxpayer’s opportunity for profit or loss; (4) the
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
regular business; and (7) the relationship that the parties think they are creating.
NLRB v. United Ins. Co., 390 U.S. 254, 258-260 (1968); United States v. Silk,
331 U.S. 704, 716 (1947); Weber v. Commissioner, 103 T.C. at 387; Prof’l &
Exec. Leasing, Inc. v. Commissioner, 89 T.C. at 232; see also sec. 31.3121(d)-
1(c)(2), Employment Tax Regs. (setting forth criteria for identifying employees
under common law rules).
We consider all of the facts and circumstances of each case, and no single
factor is determinative. Nationwide Mut. Ins. Co., 503 U.S. at 324; Ewens &
Miller, Inc. v. Commissioner, 117 T.C. 263, 270 (2001); Weber v. Commissioner,
103 T.C. at 387. The factors are not necessarily weighted equally; rather, they are
considered according to their significance in the particular case. Aymes v.
Bonelli, 980 F.2d 857, 861 (2d Cir. 1992). After considering these factors, as
discussed below, we conclude that petitioner was an employee of Ever Care and
not an independent contractor. -9-
A. Degree of Control
Although not the exclusive inquiry, the degree of control exercised by the
principal over the worker is the most important consideration in determining the
nature of a working relationship. See Clackamas Gastroenterology Assocs., P.C.
v. Wells, 538 U.S. 440, 448 (2003); Leavell v. Commissioner, 104 T.C. 140, 149-
150 (1995). The degree of control necessary to find employment status varies
with the nature of the services provided by the worker. See Weber v.
Commissioner, 103 T.C. at 388; Potter v. Commissioner, T.C. Memo. 1994-356.
Where the inherent nature of the job mandates an independent approach, a
lesser degree of control exercised by the principal may still result in finding an
employer-employee status. See Potter v. Commissioner, T.C. Memo. 1994-356;
Bilenas v. Commissioner, T.C. Memo. 1983-661. To possess a degree of control
over a worker indicative of employment, the principal need not direct the worker’s
every move; rather, it is sufficient if the right to do so exists. Weber v.
Commissioner, 103 T.C. at 387; see sec. 31.3401(c)-1(b), Employment Tax Regs.
Similarly, the principal need not set the worker’s hours or supervise every detail of
the work environment to control the worker. Gen. Inv. Corp. v. United States, 823
F.2d 337, 342 (9th Cir. 1987). - 10 -
At trial petitioner credibly testified that “[the owner had] a certain way of
doing things and we had to follow that to the ‘T’,” and “[the owner] always had, it
was always a certain, specific protocol that she always wanted us to do”. Indeed,
in that regard Ever Care specifically enumerated petitioner’s duties and
responsibilities and posted a copy thereof in each of Ever Care’s homes. Ever
Care also instructed petitioner regarding when and where to perform his duties.
Petitioner was obligated to contact the Ever Care’s owner daily to report the status
of the home he managed. Petitioner was further obligated to contact Ever Care’s
owner to request that repairs be made and in the event of an emergency. In
addition, petitioner met with the owner weekly to account for groceries, and he
prepared a financial projection each month, which he provided to Ever Care’s
owner.
On the basis of these facts, we find that Ever Care had the right to control
petitioner’s work and that it did, in fact, exercise a high degree of control over it.
This factor weighs heavily in favor of a finding that petitioner was a common law
employee of Ever Care.
B. Investment in Facilities
The fact that a worker provides his or her own tools or goods generally
indicates independent contractor status. Ewens & Miller, Inc. v. Commissioner, - 11 -
117 T.C. at 271. Petitioner did not supply any tools or goods to the group home he
managed. Ever Care provided petitioner money each week for him to buy
groceries. In addition, Ever Care paid for any repairs made to the home.
Petitioner had no out-of-pocket costs relating to his work at Ever Care. This factor
indicates that petitioner was a common law employee.
C. Opportunity for Profit or Risk of Loss
An opportunity for profit or the risk of loss on the basis of the worker’s own
efforts and skill indicates independent contractor status. Simpson v.
Commissioner, 64 T.C. 974, 988 (1975); see also Rosato v. Commissioner, T.C.
Memo. 2010-39. In contrast, earning an hourly wage or a fixed salary indicates an
employer-employee relationship. See Robinson v. Commissioner, T.C. Memo.
2011-99 (citing James v. Commissioner, 25 T.C. 1296, 1300 (1956)), aff’d, 487
Fed. Appx. 751 (3d Cir. 2012). In the instant case, Ever Care paid petitioner an
hourly rate. Furthermore, petitioner had no other opportunity for profit or risk of
loss in Ever Care. This factor indicates that petitioner was a common law
employee.
D. Right To Discharge
The principal’s retention of the right to discharge a worker is indicative of a
common law employer-employee relationship. Rodriguez v. Commissioner, T.C. - 12 -
Memo. 2012-286, at *20 (citing Weber v. Commissioner, 103 T.C. at 391); see
also Ellison v. Commissioner, 55 T.C. 142, 152 (1970) (“‘The right to discharge is
also an important factor indicating that the person possessing the right is an
employer.’” (quoting section 31.3401(c)-(1)(b), Employment Tax Regs.); Colvin
v. Commissioner, T.C. Memo. 2007-157, aff’d, 285 Fed. Appx. 157 (5th Cir.
2008). Ever Care retained the right to discharge petitioner and in fact discharged
him in or around early 2011. This factor indicates that petitioner was a common
law employee. See Kumpel v. Commissioner, T.C. Memo. 2003-265.
E. Integral Part of Regular Business
Where a type of work is part of the principal’s regular business, it is
indicative of employee status. See Simpson v. Commissioner, 64 T.C. at 989;
Rosemann v. Commissioner, T.C. Memo. 2009-185. In the instant case, Ever
Care’s business was to provide homes and services to adults with disabilities.
Petitioner’s work with Ever Care was managing one of Ever Care’s four homes,
including hiring staff, grocery shopping for the residents, maintaining the home,
and meeting with officials from the Florida licensing agency to ensure that the
home was running properly. When petitioner was not working, he was on call as
the first point of contact should a problem arise. Thus, the work petitioner - 13 -
performed was an integral part of Ever Care’s regular business. This factor
F. Permanency of Relationship
A continuing relationship indicates an employment relationship, while a
transitory relationship may be indicative of independent contractor status. Ewens
& Miller, Inc. v. Commissioner, 117 T.C. at 273; Rosemann v. Commissioner,
T.C. Memo. 2009-185. The parties’ contemplation of a continuing relationship
indicates an employment relationship. Ellison v. Commissioner, 55 T.C. at 155.
In contrast, a relationship established to accomplish a specified objective is
indicative of an independent contractor relationship. Id.
Petitioner worked at Ever Care full time for approximately nine months
during 2010 and early 2011, at which point he was discharged. Although there is
no evidence of a contractual arrangement between petitioner and Ever Care
creating an explicit permanent employment relationship, the relationship in
practice was ongoing and was not thought to be temporary or short term by either
party. See Twin Rivers Farm, Inc., v. Commissioner, T.C. Memo. 2012-184, 2012
WL 2533949, at *4. Rather, petitioner’s work was continuing or recurring, and
his relationship with Ever Care looked to a long-term relationship rather than one
ceasing at the end of a particular job or result. See Westover v. Stockholders - 14 -
Publ’g Co., 237 F.2d 948, 952-953 (9th Cir. 1956). Therefore, petitioner’s work
relationship should be regarded as indefinite, if not permanent. This factor
G. Relationship Contemplated by the Parties
The withholding of taxes is consistent with a finding that an individual is a
common law employee. See Packard v. Commissioner, 63 T.C. 621, 632 (1975);
Rosato v. Commissioner, T.C. Memo. 2010-39. Ever Care issued petitioner a
Form 1099-MISC for 2010 and did not withhold State income tax or Social
Security and Medicare taxes from his pay. This indicates that Ever Care intended
petitioner to be an independent contractor. However, in treating petitioner as an
independent contractor, Ever Care was not a disinterested party, as it benefited by
classifying him as an independent contractor and thereby avoided the necessity of
filing employment tax returns and paying employment taxes.
H. Conclusion
Considering the record and taking into account all the facts and
circumstances, we conclude that petitioner was a common law employee of Ever
Care. Accordingly, petitioner is not liable for self-employment tax pursuant to
section 1401 on income earned from Ever Care in 2010. - 15 -
III. Accuracy-Related Penalty
Respondent contends that petitioner is liable for the section 6662(a) penalty
because petitioner’s underpayment was attributable to a substantial understatement
of income tax. Section 6662(a) and (b)(2) imposes a penalty equal to 20% of the
amount of any underpayment of tax that is attributable to a substantial
understatement of income tax. A “substantial understatement of income tax”
exists if the amount of the understatement of income tax exceeds the greater of
10% of the tax required to be shown on the return or $5,000. See sec. 6662(d);
sec. 1.6662-4(b), Income Tax Regs. As relevant here, the term “understatement”
means the excess of the amount required to be shown on the return for the taxable
year over the amount of tax imposed that is shown on the return. Sec.
6662(d)(2)(A).
With respect to a taxpayer’s liability for any penalty, section 7491(c) places
on the Commissioner the burden of production, thereby requiring the
Commissioner to come forward with sufficient evidence indicating that it is
appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-
447 (2001). Once the Commissioner meets his burden of production, the taxpayer
must come forward with persuasive evidence that the Commissioner’s
determination is incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. at 115. - 16 -
Section 6664(c)(1) provides an exception to the imposition of the section
6662(a) penalty with respect to any portion of an underpayment if the taxpayer
establishes that there was reasonable cause for such portion and the taxpayer acted
in good faith with respect to such portion. The decision as to whether the taxpayer
acted with reasonable cause and in good faith is made on a case-by-case basis,
taking into account the pertinent facts and circumstances, including the taxpayer’s
knowledge, education, and experience, as well as the taxpayer’s reliance on
professional advice. Thomas v. Commissioner, T.C. Memo. 2013-60; see also
Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000) (providing a
three-prong test to establish reasonable reliance on professional advice), aff’d, 299
F.3d 221 (3d Cir. 2002); sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the
most important factor is the extent of the taxpayer’s effort to assess his or her
proper tax liability. Humphrey, Farrington & McClain, P.C. v. Commissioner,
T.C. Memo. 2013-23; sec. 1.6664-4(b)(1), Income Tax Regs.
We have found that petitioner is not liable for self-employment tax for 2010
related to his income from Ever Care. However, petitioner conceded that for 2010
he failed to report income both from unemployment compensation and from Ever
Care. Petitioner’s 2010 Federal income tax return was prepared by a C.P.A., but
such fact does not, in and of itself, prove that he acted with reasonable cause and - 17 -
in good faith. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 99-100.
In that regard, petitioner did not allege that he provided the respective Forms 1099
to his C.P.A. in preparing his 2010 return, nor did he allege that his C.P.A.
determined that this income did not need to be reported. See id. Petitioner has not
cited any authorities upon which he relied in deciding not to report the income,
and we are confident that there are none.
We therefore hold that petitioner does not come within the reasonable cause
exception of section 6664(c)(1), nor within any other exception, e.g., section
6662(d)(2)(B). Accordingly, to the extent that the Rule 155 computation shows
that the understatement of income tax exceeds the greater of 10% of the tax
required to be shown on the return or $5,000, petitioner will be liable for the
accuracy-related penalty under section 6662(a). See sec. 6662(d)(1)(A); sec.
1.6662-4(b)(1), (d), Income Tax Regs.
Conclusion
We have considered the other arguments of the parties, and those arguments
are not material to our conclusions. - 18 -
To give effect to petitioner’s concessions and our disposition of the disputed
issue,
Decision will be entered under
Rule 155.4
4 Presumably the parties will reflect by stipulation the $1,463 increase in petitioner’s tax withholding determined in the notice of deficiency.