T.C. Summary Opinion 2002-153
UNITED STATES TAX COURT
HENRY A. RABAGO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2504-01S. Filed December 11, 2002.
Henry A. Rabago, pro se.
Nicholas J. Richards, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463.1 The decision to be entered is not
reviewable by any other Court, and this opinion should not be
cited as authority.
1 Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. - 2 -
Respondent determined deficiencies of $2,962 and $3,180 in
petitioner's Federal income taxes for 1997 and 1998,
respectively.
At trial, respondent conceded petitioner's entitlement to a
child care credit under section 21 for both years. The issues
for decision are: (1) Whether petitioner, during the years at
issue, was a statutory employee under section 3121(d)(3)(A), or
whether, as respondent contends, a common-law employee under
section 3121(d)(2), and (2) whether petitioner is entitled to
deductions for either employee business expenses or trade or
business expenses under section 162(a).
Some of the facts were stipulated. Those facts, with the
exhibits annexed thereto, are so found and are incorporated
herein by reference. Petitioner was a legal resident of
Lakewood, California, at the time the petition was filed.
For some 12 years, petitioner delivered bakery products to
various stores and vendors in his home area for and on behalf of
Best Foods, agent for Entenmann's, Inc. (Best Foods). The
products petitioner delivered were baked breads and cakes bearing
the brand names Oroweat and Entenmann's. Petitioner's duties
were to report each morning at approximately 3 a.m. at a
distribution facility and load the delivery vehicle provided to
him, from which he proceeded to deliver the products to six or
seven store locations on a route designated for him. His - 3 -
delivery schedule was usually completed anywhere between 11:00
a.m. and approximately 1:30 p.m. each day. He generally had no
further duties after completing his route, although he could be
called upon to supplement a store's supply if the situation
warranted. Petitioner did not own the vehicle used in his
deliveries, nor was he liable for the gasoline and other
operational and maintenance expenses. He was required to punch a
time clock each day at the commencement and at the conclusion of
his deliveries. He could make deliveries only on the route
designated for him by Best Foods. Petitioner was required to bid
for any new route or changes to his route. Petitioner was
required to become a member of a labor union, the Teamsters,
which had a collective bargaining agreement with Best Foods.
While on his route, petitioner was required to wear a shirt that
bore the logo or trade names of the products he delivered.
Petitioner shelved the products he delivered, solicited and
accepted sales orders at each location, monitored the needs or
requirements of the stores on his route, and filed invoices of
his deliveries with Best Foods. Petitioner also removed from
each delivery point any stale, unsold, or outdated goods from
prior deliveries.
Petitioner did not purchase or own the products he
delivered, nor did petitioner have any ownership or investment in - 4 -
any of the facilities or equipment used in connection with the
baked goods he delivered.
For his services, petitioner was paid a base salary plus a
commission on the goods he delivered. His commissions, however,
were reduced for any stale or unsold goods that were removed from
store shelves. Petitioner was allowed paid vacation and sick
leave.
Each year, including the years at issue, Best Foods issued
to petitioner an IRS Form W-2, Wage and Tax Statement, which
reflected the net amounts paid to petitioner for his delivery
services. The payments to petitioner were characterized as
wages, from which Federal and State income and Social Security
taxes were withheld. Block 15 of the Form W-2, indicating
whether petitioner was a statutory employee, was not marked.
On his Federal income tax returns for the 2 years at issue,
petitioner reported the income shown on his Forms W-2 as gross
receipts from a trade or business activity on a Schedule C,
Profit or Loss From Business. He subtracted from gross receipts
an amount for cost of goods sold representing the stale and
unsold products he had removed from store shelves during the
year. Petitioner then claimed deductions for expenses incurred
in the activity.
In the notice of deficiency, respondent determined that
petitioner was a common-law employee, and, as such, his income - 5 -
constituted salary or wage income and not gross receipts from a
trade or business activity. Respondent also disallowed the cost
of goods sold adjustment and all the claimed Schedule C expense
deductions for lack of substantiation. Respondent made no
allowance for deduction of any of the claimed expenses as
itemized deductions. The child care credit claimed for both
years was disallowed; however, respondent conceded that
adjustment at trial. Petitioner's claimed head-of-household
filing status under section 2(b)(1) was allowed.
With respect to the first issue, adjusted gross income
generally consists of gross income less trade or business
expenses, except in the case of the performance of services by an
employee. Sec. 62. An individual performing services as an
employee may deduct miscellaneous itemized deductions incurred in
the performance of services as an employee only to the extent
such expenses exceed 2 percent of the individual's adjusted gross
income. Sec. 67(a). The deduction for business expenses under
section 162 is included in miscellaneous itemized deductions.
Sec. 67. The Commissioner has ruled that an individual who is a
statutory employee under section 3121(d)(3), which relates to
employment taxes, is not an employee for purposes of sections 62
and 67, and, therefore, a statutory employee under section
3121(d)(3) is not subject to the section 67(a) 2-percent
limitation for expenses incurred by such employee in the - 6 -
performance of services as an employee. Rev. Rul. 90-93, 1990-2
C.B. 33. Thus, an individual who is a statutory employee under
section 3121(d)(3) is allowed to deduct expenses from gross
income that otherwise would be subject to the 2-percent
limitation of section 67(a).
An employee for employment tax purposes is defined in
pertinent part by section 3121(d) 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; or
(3) any individual (other than an individual who is an employee under paragraph (1) or (2)) who performs services for remuneration for any person--
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T.C. Summary Opinion 2002-153
UNITED STATES TAX COURT
HENRY A. RABAGO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2504-01S. Filed December 11, 2002.
Henry A. Rabago, pro se.
Nicholas J. Richards, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463.1 The decision to be entered is not
reviewable by any other Court, and this opinion should not be
cited as authority.
1 Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. - 2 -
Respondent determined deficiencies of $2,962 and $3,180 in
petitioner's Federal income taxes for 1997 and 1998,
respectively.
At trial, respondent conceded petitioner's entitlement to a
child care credit under section 21 for both years. The issues
for decision are: (1) Whether petitioner, during the years at
issue, was a statutory employee under section 3121(d)(3)(A), or
whether, as respondent contends, a common-law employee under
section 3121(d)(2), and (2) whether petitioner is entitled to
deductions for either employee business expenses or trade or
business expenses under section 162(a).
Some of the facts were stipulated. Those facts, with the
exhibits annexed thereto, are so found and are incorporated
herein by reference. Petitioner was a legal resident of
Lakewood, California, at the time the petition was filed.
For some 12 years, petitioner delivered bakery products to
various stores and vendors in his home area for and on behalf of
Best Foods, agent for Entenmann's, Inc. (Best Foods). The
products petitioner delivered were baked breads and cakes bearing
the brand names Oroweat and Entenmann's. Petitioner's duties
were to report each morning at approximately 3 a.m. at a
distribution facility and load the delivery vehicle provided to
him, from which he proceeded to deliver the products to six or
seven store locations on a route designated for him. His - 3 -
delivery schedule was usually completed anywhere between 11:00
a.m. and approximately 1:30 p.m. each day. He generally had no
further duties after completing his route, although he could be
called upon to supplement a store's supply if the situation
warranted. Petitioner did not own the vehicle used in his
deliveries, nor was he liable for the gasoline and other
operational and maintenance expenses. He was required to punch a
time clock each day at the commencement and at the conclusion of
his deliveries. He could make deliveries only on the route
designated for him by Best Foods. Petitioner was required to bid
for any new route or changes to his route. Petitioner was
required to become a member of a labor union, the Teamsters,
which had a collective bargaining agreement with Best Foods.
While on his route, petitioner was required to wear a shirt that
bore the logo or trade names of the products he delivered.
Petitioner shelved the products he delivered, solicited and
accepted sales orders at each location, monitored the needs or
requirements of the stores on his route, and filed invoices of
his deliveries with Best Foods. Petitioner also removed from
each delivery point any stale, unsold, or outdated goods from
prior deliveries.
Petitioner did not purchase or own the products he
delivered, nor did petitioner have any ownership or investment in - 4 -
any of the facilities or equipment used in connection with the
baked goods he delivered.
For his services, petitioner was paid a base salary plus a
commission on the goods he delivered. His commissions, however,
were reduced for any stale or unsold goods that were removed from
store shelves. Petitioner was allowed paid vacation and sick
leave.
Each year, including the years at issue, Best Foods issued
to petitioner an IRS Form W-2, Wage and Tax Statement, which
reflected the net amounts paid to petitioner for his delivery
services. The payments to petitioner were characterized as
wages, from which Federal and State income and Social Security
taxes were withheld. Block 15 of the Form W-2, indicating
whether petitioner was a statutory employee, was not marked.
On his Federal income tax returns for the 2 years at issue,
petitioner reported the income shown on his Forms W-2 as gross
receipts from a trade or business activity on a Schedule C,
Profit or Loss From Business. He subtracted from gross receipts
an amount for cost of goods sold representing the stale and
unsold products he had removed from store shelves during the
year. Petitioner then claimed deductions for expenses incurred
in the activity.
In the notice of deficiency, respondent determined that
petitioner was a common-law employee, and, as such, his income - 5 -
constituted salary or wage income and not gross receipts from a
trade or business activity. Respondent also disallowed the cost
of goods sold adjustment and all the claimed Schedule C expense
deductions for lack of substantiation. Respondent made no
allowance for deduction of any of the claimed expenses as
itemized deductions. The child care credit claimed for both
years was disallowed; however, respondent conceded that
adjustment at trial. Petitioner's claimed head-of-household
filing status under section 2(b)(1) was allowed.
With respect to the first issue, adjusted gross income
generally consists of gross income less trade or business
expenses, except in the case of the performance of services by an
employee. Sec. 62. An individual performing services as an
employee may deduct miscellaneous itemized deductions incurred in
the performance of services as an employee only to the extent
such expenses exceed 2 percent of the individual's adjusted gross
income. Sec. 67(a). The deduction for business expenses under
section 162 is included in miscellaneous itemized deductions.
Sec. 67. The Commissioner has ruled that an individual who is a
statutory employee under section 3121(d)(3), which relates to
employment taxes, is not an employee for purposes of sections 62
and 67, and, therefore, a statutory employee under section
3121(d)(3) is not subject to the section 67(a) 2-percent
limitation for expenses incurred by such employee in the - 6 -
performance of services as an employee. Rev. Rul. 90-93, 1990-2
C.B. 33. Thus, an individual who is a statutory employee under
section 3121(d)(3) is allowed to deduct expenses from gross
income that otherwise would be subject to the 2-percent
limitation of section 67(a).
An employee for employment tax purposes is defined in
pertinent part by section 3121(d) 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; or
(3) any individual (other than an individual who is an employee under paragraph (1) or (2)) who performs services for remuneration for any person--
(A) as an agent-driver or commission-driver engaged in distributing meat products, vegetable products, bakery products, beverages (other than milk), or laundry or dry-cleaning services, for his principal; [Emphasis added.]
* * * * * * *
if the contract of service contemplates that substantially all of such services are to be performed personally by such individual; except that an individual shall not be included in the term "employee" under the provisions of this paragraph if such individual has a substantial investment in facilities used in connection with the performance of such services (other than in facilities for transportation) * * * - 7 -
An individual is a statutory employee under section 3121(d)(3)(A)
only if such individual is not a common-law employee under
section 3121(d)(2).
There is no dispute that petitioner was engaged in the
distribution and delivery of bakery products as described in
section 3121(d)(3)(A). Petitioner, however, did not have a
substantial investment in the facilities used in connection with
the performance of his services. Moreover, the first part of
section 3121(d)(3) states clearly that section 3121(d)(3) applies
only to an individual "other than an individual who is an
employee under paragraph (1) or (2)". Therefore, it is
necessary, for purposes of this case, to view petitioner's
situation under section 3121(d)(1) and (2), and, if his situation
falls within either of these categories, petitioner cannot
qualify as a statutory employee under section 3121(d)(3). An
individual is a statutory employee under section 3121(d)(3)(A)
only if such individual is not a common-law employee under either
section 3121(d)(1) or (2). Lickiss v. Commissioner, T.C. Memo.
1994-103.
Whether an individual is a common-law employee under section
3121(d)(2) is a question of fact. Profl. & Executive 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). Among the relevant factors in determining the substance - 8 -
of an employment relationship are the following: (1) The degree
of control exercised by the principal over the details of the
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. NLRB v. United Ins. Co., 390 U.S. 254, 258 (1968);
United States v. Silk, 331 U.S. 704, 716 (1947); Garrett v.
Phillips Mills, Inc., 721 F.2d 979, 981 (4th Cir. 1983); Simpson
v. Commissioner, supra at 984-985; Leitch v. Commissioner, T.C.
Memo. 1993-154; sec. 31.3121(d)-1(c)(2), Employment Tax Regs.
(setting forth criteria for identifying common-law employees).
No one factor is determinative. Community for Creative Non-
Violence v. Reid, 490 U.S. 730, 752 (1989). Instead, all the
incidents of the relationship must be assessed and weighed. NLRB
v. United Ins. Co., supra at 258; United States v. Silk, supra at
716; Simpson v. Commissioner, supra at 985. The factors should
not be weighed equally but should be weighed according to their
significance in the particular case. Aymes v. Bonelli, 980 F.2d
857, 861 (2d Cir. 1992); Matt v. Commissioner, T.C. Memo. 1990-
209. - 9 -
Based on the facts recited earlier, the Court holds that
petitioner was a common-law employee under section 3121(d)(2)
and, therefore, was not a statutory employee under section
3121(d)(3). Respondent is sustained on this issue.
The second issue is petitioner's entitlement to deductions
for expenses incurred in connection with his employment, as
itemized deductions, to the extent such expenses exceed 2 percent
of his adjusted gross income each year. Sec. 67(a).
The first item to be considered is the cost of goods sold
that petitioner claimed as a reduction of his gross receipts.
Petitioner explained at trial that the amounts claimed
represented stale, unsold merchandise he removed from store
shelves. The Court holds that petitioner is not entitled to such
reduction because he had not purchased the products he delivered;
consequently, he had no basis in the returned goods. Although
petitioner lost the commissions on the returned goods, the Court
concludes from the record that the income amounts shown on the
Forms W-2 represented the net commissions paid to petitioner
after deducting the forfeited commissions. Petitioner,
therefore, is not entitled to either a cost of goods sold
adjustment or a deduction for forfeited commissions.
The expenses deducted by petitioner on Schedules C for both
years were: - 10 -
1997 1998
Legal and professional $2,735 $2,175 Taxes and licenses 104 193 Telephone 615 627 Safety equipment 50 55 Uniforms 250 265 Union dues 384 396 Office in the home 5,574 4,912 Charity –- 850 Totals $9,712 $9,473
Respondent disallowed all the deductions claimed for lack of
substantiation. The explanatory schedules in the notice of
deficiency state that the deductions were disallowed "because we
did not get an answer to our request for information to support
your entries." At trial, petitioner presented no documentation
to substantiate any of the expenses shown above. He admitted
that the amounts listed above for charity were for contributions
he made to his church, and the legal and professional expenses
were incurred in connection with divorce and custody proceedings
against his former wife. These are all personal expenses that
are not deductible under section 262. The Court, however, is
satisfied from the record that petitioner incurred expenses for
union dues and uniforms. Pursuant to Cohan v. Commissioner, 39
F.2d 540 (2d Cir. 1930), the Court allows petitioner a deduction
of $75 for each year for uniforms and the amounts of $384 and
$396 claimed on the returns as union dues for 1997 and 1998. The
Court makes no determination whether these allowed amounts will - 11 -
provide any tax benefit to petitioner as a result of the
applicability of section 67(a). Respondent is sustained in the
disallowance of all the other deductions, since petitioner
presented no substantiating evidence to support the expenses
deducted.2
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.
2 Sec. 7491, under certain circumstances, places the burden of production on the Secretary with respect to a taxpayer's liability for taxes, penalties, and additions to tax in court proceedings arising in connection with examinations commencing after July 22, 1998. The record is unclear as to whether the examination of petitioner's returns commenced before or after July 22, 1998. Nevertheless, the burden of proof did not shift to respondent because petitioner did not provide substantiation and credible evidence in connection therewith. Higbee v. Commissioner, 116 T.C. 438 (2001).