T.C. Summary 2002-36
UNITED STATES TAX COURT
STEPHEN J. MAJOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3830-00S. Filed April 4, 2002.
Stephen J. Major, pro se.
Rachael Zepeda, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. - 2 -
Respondent determined a deficiency in petitioner’s 1997
Federal income tax in the amount of $7,562, and an accuracy-
related penalty under section 6662(a)(1) in the amount of $1,512.
After concessions by petitioner,1 the issues for decision
are: (1) Whether petitioner failed to report $24,000 on his 1997
Federal income tax return; (2) whether petitioner is subject to
the self-employment tax on this amount; and (3) whether
petitioner is liable for an accuracy-related penalty under
section 6662(a).
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 of filing the
petition, petitioner resided in Oro Valley, Arizona.
During 1997, petitioner was a full-time employee of Quality
Screw & Nut Company (QSN) in its Tucson, Arizona, branch.
Petitioner was the general manager of the branch and conducted
regular business in Mexico on behalf of petitioner’s main client,
McCulloch Corporation (McCulloch). McCulloch, based in Tucson,
Arizona, manufactured various power tools including gas and
electric chain saws, string trimmers, and blowers. QSN provided
supplies, including screws and nuts, and logistics management for
1 Petitioner concedes that he failed to include $24 of taxable interest received from Capital One Federal Savings Bank and $48 of taxable interest received from DM-Federal Credit Union in 1997. - 3 -
McCulloch. The supplies were sent to McCulloch’s plant in Mexico
where parts were assembled. The parts were later shipped back to
the United States where end products were assembled.
Petitioner’s duties at QSN included overseeing the delivery of
QSN’s screws and nuts to McCulloch. During 1997, petitioner
traveled to Mexico approximately once a week. Petitioner also
managed nine Mexican national employees in Mexico.
Petitioner testified that QSN received a 9-percent
management fee based upon the delivery of screws and nuts to
McCulloch’s plant in Mexico and the parts shipped back to the
United States for assembly. Petitioner testified that any taxes
or fees paid to the Mexican taxing authorities were paid by
petitioner from the 9-percent management fee. No contracts or
agreements between QSN and McCulloch were introduced at trial.
During the year in issue, petitioner was a salaried employee
of QSN. In addition to his regular salary, petitioner stipulated
that he received a monthly car allowance of $400, totaling $4,800
during 1997. Petitioner also stipulated that he received a
monthly check from QSN of $2,000, totaling $24,000 during 1997.
Petitioner does not dispute that he deposited the $400 monthly
car allowance and $2,000 monthly check into his personal checking
account at DM-Federal Credit Union.
Both the $400 monthly car allowance and $2,000 monthly check
were prepared by Ms. Jacqueline S. Udell (Ms. Udell) at QSN’s - 4 -
headquarters located in Bensenville, Illinois. Ms. Udell was
directed to write out the checks to petitioner by Mr. Art
Wondrasek (Mr. Wondrasek), the president of QSN. Mr. Wondrasek
hired petitioner and generally approved all compensation packages
for QSN employees.
In addition to petitioner’s regular salary, the monthly $400
car allowance, and monthly $2,000 check, petitioner also received
employee expense reimbursements directly from QSN’s headquarters
after submitting a detailed expense report or currency exchange
worksheet. Reimbursement checks were routinely sent to each
branch in weekly packages with other checks.
For 1997, QSN prepared a Form W-2, Wage and Tax Statement,
and 2 Forms 1099-MISC, Miscellaneous Income, reflecting
petitioner’s salary, car allowance of $4,800, and “commission”
income of $24,000, respectively.
Petitioner timely filed his income tax return for the
taxable year 1997 reporting $57,090 in wages and the $4,800 car
allowance as gross receipts on his Schedule C, Profit or Loss
From Business. Petitioner did not report as income the $24,000
from the $2,000 monthly check received during 1997 from QSN.
In a notice of deficiency respondent determined that
petitioner failed to report the $24,000 as commission income
received during 1997, and, further, that the commission income is
subject to self-employment tax. Respondent also determined that - 5 -
petitioner was liable for an accuracy-related penalty due to a
substantial understatement of tax under section 6662(a) and
(d)(1). Petitioner contends that he should not have to pay self-
employment tax since the $24,000 received was not commission
income, but rather reimbursements of other business expenses.
We note that petitioner incorrectly reported the $4,800 car
allowance as gross receipts on his Schedule C. Similarly,
petitioner deducted car/truck expenses of $10,395 on his Schedule
C, resulting in a net loss from business of $5,595. We find that
these amounts should be reported on petitioner’s Schedule A,
Itemized Deductions, as an unreimbursed job expense subject to
the 2-percent floor of section 67. By use of Form 2106, Employee
Business Expenses, we recharacterize the correct amount reported
on line 20 of petitioner’s Schedule A as follows:
Vehicle Expenses $10,395 Less: Reimbursements received from employer 4,800 Net unreimbursed employee expenses $5,595
Respondent’s determination is presumed correct, and
petitioner bears the burden of proving that respondent’s
determination is erroneous. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933).2
2 Because petitioner failed to introduce any credible evidence, he failed to meet the requirements of sec. 7491(a), as amended, so as to place the burden of proof on respondent with respect to any factual issue relevant to ascertaining liability for the tax deficiency in issue. As to the accuracy-related (continued...) - 6 -
Unreported Income
Gross income includes all income from whatever source
derived. Sec. 61(a). Section 61(a)(1) specifically includes
income derived from compensation for services, including fees,
commissions, fringe benefits, and similar items. It is required
under Federal law that taxpayers maintain adequate and accurate
tax records. Sec. 6001; see also Jones v. Commissioner, 903 F.2d
1301, 1303 (10th Cir. 1990), affg. in part, revg. in part and
remanding T.C. Memo. 1988-373.
Petitioner does not dispute that he received $24,000 from
QSN during 1997 in addition to his regular salary. Petitioner
instead argues that respondent mischaracterized the checks as
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T.C. Summary 2002-36
UNITED STATES TAX COURT
STEPHEN J. MAJOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3830-00S. Filed April 4, 2002.
Stephen J. Major, pro se.
Rachael Zepeda, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. - 2 -
Respondent determined a deficiency in petitioner’s 1997
Federal income tax in the amount of $7,562, and an accuracy-
related penalty under section 6662(a)(1) in the amount of $1,512.
After concessions by petitioner,1 the issues for decision
are: (1) Whether petitioner failed to report $24,000 on his 1997
Federal income tax return; (2) whether petitioner is subject to
the self-employment tax on this amount; and (3) whether
petitioner is liable for an accuracy-related penalty under
section 6662(a).
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 of filing the
petition, petitioner resided in Oro Valley, Arizona.
During 1997, petitioner was a full-time employee of Quality
Screw & Nut Company (QSN) in its Tucson, Arizona, branch.
Petitioner was the general manager of the branch and conducted
regular business in Mexico on behalf of petitioner’s main client,
McCulloch Corporation (McCulloch). McCulloch, based in Tucson,
Arizona, manufactured various power tools including gas and
electric chain saws, string trimmers, and blowers. QSN provided
supplies, including screws and nuts, and logistics management for
1 Petitioner concedes that he failed to include $24 of taxable interest received from Capital One Federal Savings Bank and $48 of taxable interest received from DM-Federal Credit Union in 1997. - 3 -
McCulloch. The supplies were sent to McCulloch’s plant in Mexico
where parts were assembled. The parts were later shipped back to
the United States where end products were assembled.
Petitioner’s duties at QSN included overseeing the delivery of
QSN’s screws and nuts to McCulloch. During 1997, petitioner
traveled to Mexico approximately once a week. Petitioner also
managed nine Mexican national employees in Mexico.
Petitioner testified that QSN received a 9-percent
management fee based upon the delivery of screws and nuts to
McCulloch’s plant in Mexico and the parts shipped back to the
United States for assembly. Petitioner testified that any taxes
or fees paid to the Mexican taxing authorities were paid by
petitioner from the 9-percent management fee. No contracts or
agreements between QSN and McCulloch were introduced at trial.
During the year in issue, petitioner was a salaried employee
of QSN. In addition to his regular salary, petitioner stipulated
that he received a monthly car allowance of $400, totaling $4,800
during 1997. Petitioner also stipulated that he received a
monthly check from QSN of $2,000, totaling $24,000 during 1997.
Petitioner does not dispute that he deposited the $400 monthly
car allowance and $2,000 monthly check into his personal checking
account at DM-Federal Credit Union.
Both the $400 monthly car allowance and $2,000 monthly check
were prepared by Ms. Jacqueline S. Udell (Ms. Udell) at QSN’s - 4 -
headquarters located in Bensenville, Illinois. Ms. Udell was
directed to write out the checks to petitioner by Mr. Art
Wondrasek (Mr. Wondrasek), the president of QSN. Mr. Wondrasek
hired petitioner and generally approved all compensation packages
for QSN employees.
In addition to petitioner’s regular salary, the monthly $400
car allowance, and monthly $2,000 check, petitioner also received
employee expense reimbursements directly from QSN’s headquarters
after submitting a detailed expense report or currency exchange
worksheet. Reimbursement checks were routinely sent to each
branch in weekly packages with other checks.
For 1997, QSN prepared a Form W-2, Wage and Tax Statement,
and 2 Forms 1099-MISC, Miscellaneous Income, reflecting
petitioner’s salary, car allowance of $4,800, and “commission”
income of $24,000, respectively.
Petitioner timely filed his income tax return for the
taxable year 1997 reporting $57,090 in wages and the $4,800 car
allowance as gross receipts on his Schedule C, Profit or Loss
From Business. Petitioner did not report as income the $24,000
from the $2,000 monthly check received during 1997 from QSN.
In a notice of deficiency respondent determined that
petitioner failed to report the $24,000 as commission income
received during 1997, and, further, that the commission income is
subject to self-employment tax. Respondent also determined that - 5 -
petitioner was liable for an accuracy-related penalty due to a
substantial understatement of tax under section 6662(a) and
(d)(1). Petitioner contends that he should not have to pay self-
employment tax since the $24,000 received was not commission
income, but rather reimbursements of other business expenses.
We note that petitioner incorrectly reported the $4,800 car
allowance as gross receipts on his Schedule C. Similarly,
petitioner deducted car/truck expenses of $10,395 on his Schedule
C, resulting in a net loss from business of $5,595. We find that
these amounts should be reported on petitioner’s Schedule A,
Itemized Deductions, as an unreimbursed job expense subject to
the 2-percent floor of section 67. By use of Form 2106, Employee
Business Expenses, we recharacterize the correct amount reported
on line 20 of petitioner’s Schedule A as follows:
Vehicle Expenses $10,395 Less: Reimbursements received from employer 4,800 Net unreimbursed employee expenses $5,595
Respondent’s determination is presumed correct, and
petitioner bears the burden of proving that respondent’s
determination is erroneous. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933).2
2 Because petitioner failed to introduce any credible evidence, he failed to meet the requirements of sec. 7491(a), as amended, so as to place the burden of proof on respondent with respect to any factual issue relevant to ascertaining liability for the tax deficiency in issue. As to the accuracy-related (continued...) - 6 -
Unreported Income
Gross income includes all income from whatever source
derived. Sec. 61(a). Section 61(a)(1) specifically includes
income derived from compensation for services, including fees,
commissions, fringe benefits, and similar items. It is required
under Federal law that taxpayers maintain adequate and accurate
tax records. Sec. 6001; see also Jones v. Commissioner, 903 F.2d
1301, 1303 (10th Cir. 1990), affg. in part, revg. in part and
remanding T.C. Memo. 1988-373.
Petitioner does not dispute that he received $24,000 from
QSN during 1997 in addition to his regular salary. Petitioner
instead argues that respondent mischaracterized the checks as
commission checks, rather than reimbursements for other business
expenses; namely, out-of-pocket expenditures from business
dealings in Mexico with QSN’s client, McCulloch.
The record consists of petitioner’s weekly expense reports
and currency exchange worksheets that he submitted to QSN’s
headquarters for reimbursements in 1997. We find it puzzling
that petitioner failed to produce credit card statements,
receipts, expense records or logs, additional currency exchange
reports, independent testimony, or any other credible evidence to
2 (...continued) penalty, we find that respondent has satisfied his burden of production under sec. 7491(c) because the record shows that petitioner failed to include the income on his return. Higbee v. Commissioner, 116 T.C. 438 (2001). - 7 -
show that these payments were related to “other” reimbursable
business expenses and not commission or other income from QSN.
Respondent presented extensive business records that petitioner
submitted to QSN’s headquarters to substantiate his expenses
which were reimbursed. Petitioner suggests that there are other
records available at the branch level which could support his
contentions; however, he failed to introduce any of them at
trial.
We note that the $2,000 monthly checks were paid regularly
and did not vary in amount from month to month, whereas the
employee expense reimbursement checks fluctuated by date and by
amount depending on the expense report submitted for that period.
Without any corroborative evidence, we find that petitioner
failed to show that the $24,000 received from QSN during 1997 was
a reimbursement of employee expenses. Accordingly, the $24,000
received from QSN is includable in gross income and properly
reported as “other income” on petitioner’s 1997 Form 1040.
Self-Employment Tax
Section 1401 imposes a tax on an individual’s self-
employment income. Self-employment income is defined as “net
earnings from self-employment”. Sec. 1402(b). The term “net
earnings from self-employment” is defined as an individual’s
gross income from a trade or business carried on by such
individual, less the deductions attributable to such trade or - 8 -
business. Sec. 1402(a).
Respondent contends that petitioner is liable for the self-
employment tax because the $24,000 was commission income in
petitioner’s trade or business as a salesperson. We disagree.
For purposes of section 1401, “trade or business” shares the
same definition as when used in section 162. Sec. 1402(c).
However, an exception exists where the performance of service is
by an individual as an employee. Sec. 1402(c)(2). Section
1.1402(c)-3, Income Tax Regs., states as follows:
the performance of service by an individual as an employee, as defined in the Federal Insurance Contributions Act (chapter 21 of the Internal Revenue Code) does not constitute a trade or business within the meaning of section 1402(c) and section 1.1402(c)-1. * * *
Petitioner was a full-time, salaried employee of QSN during the
year in issue. He did not engage in a trade or business subject
to the self-employment tax during the year in issue.
Accordingly, petitioner is not subject to self-employment
tax. Petitioner is sustained on this issue.
Section 6662(a)
The last issue for decision is whether petitioner is liable
for an accuracy-related penalty pursuant to section 6662(a) for
the year in issue. Section 6662(a) imposes a penalty of 20
percent of the portion of the underpayment which is attributable
to negligence or disregard of rules or regulations. Sec.
6662(b)(1). Negligence is the “‘lack of due care or failure to - 9 -
do what a reasonable and ordinarily prudent person would do under
the circumstances.’” Neely v. Commissioner, 85 T.C. 934, 947
(1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th
Cir. 1967), affg. in part and remanding in part on another issue
43 T.C. 168 (1964) and T.C. Memo. 1964-299). A “substantial
understatement” exists where the amount of the understatement
exceeds the greater of 10 percent of the tax required to be shown
on the return for the taxable year or $5,000. Sec. 6662(d)(1).
No penalty shall be imposed if it is shown that there was
reasonable cause for the underpayment and the taxpayer acted in
good faith with respect to the underpayment. Sec. 6664(c).
Petitioner failed to address the accuracy-related penalty
and offered no evidence that he had reasonable cause for the
underpayment. Accordingly, we sustain respondent’s
determination.
We have considered all arguments made by the parties, and,
to the extent not discussed above, conclude they are irrelevant
or without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.