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.

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.
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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
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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
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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
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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
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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) * * * 
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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
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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 NonViolence 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.
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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:
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 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
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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).

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.