1 Unless otherwise indicated, subsequent section references are

to the Internal Revenue Code in effect for the years in issue.

T.C. Summary Opinion 2001-106

UNITED STATES TAX COURT

HAROLD E. NICHOLAS, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 423-98S. Filed July 23, 2001.

Lisa A. Alexander, for petitioner.

Bradford A. Johnson, for respondent.

POWELL, Special Trial Judge: This case was heard pursuant

to the provisions of section 74631 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.
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Respondent determined deficiencies in petitioner’s Federal

income taxes and penalties as follows:

 Penalty

Year Deficiency Sec. 6662(a)

1992 $2,242 $448

1993 3,110 622

1994 705 141

The issues are whether petitioner qualifies as a statutory

employee under section 3121(d)(3)(C) and whether petitioner is

liable for the negligence penalties under section 6662(a) for the

years in issue. At the time the petition was filed, petitioner

resided in Petersburg, New York. 

Background

The applicable facts may be summarized as follows. During

the years at issue petitioner’s occupation consisted of repairing

and maintaining x-ray imaging equipment for medical

establishments. Petitioner’s income during these years was

received from two entities: Troy Management Associates, Inc.

(Troy), and Empire Imaging Technologies, Ltd. (Empire). At issue

is the work arrangement between petitioner and Empire.

Empire was formed in 1992 as a joint venture between a group

of radiologists and several individuals, including petitioner,

who serviced medical imaging equipment. Empire provided

maintenance and sales services to various medical establishments

and dealt with several types of medical imaging equipment,

including x-ray imaging equipment, magnetic resonance imaging
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(MRI) equipment, and computerized axial tomography (CAT scan)

equipment. 

Petitioner had a 12-percent stock interest in Empire and was

on Empire’s board of directors. Additionally, petitioner held

the position of “technical director.” His duties as technical

director were to be defined by the board; the record, however, is

barren as to the specific nature of the technical director’s

duties. In addition to his managerial and directorial positions

with Empire, petitioner was the sole individual hired by Empire

to perform maintenance work on x-ray machines for Empire’s

customers. 

The nature of petitioner’s work as Empire’s x-ray specialist

involved traveling to the customer’s location, troubleshooting

the customer’s x-ray equipment, and performing any necessary

maintenance. If a malfunctioning part required repairs greater

than those which petitioner could perform on the customer’s

premises, petitioner took the damaged part to his home-based

workshop where he would perform the repairs. If a part needed to

be replaced, petitioner would obtain the replacement and return

on a subsequent visit for installation. Petitioner owned all of

the tools and equipment he used to fulfill his maintenance

duties, including the vehicle used to make service calls.

Petitioner also performed tasks related to his activities

with Empire from his home. These tasks generally included making
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phone calls to dealerships and manufacturers for replacement

parts and new equipment, calling prospective customers with

respect to sales, and contacting customers regarding their

maintenance needs. This work was done from petitioner’s home

because Empire did not have adequate office space from which

petitioner could work. Petitioner had no set hours, no

supervision, and underwent no training during his time with

Empire.

The record contains an employment agreement (agreement)

between petitioner and Empire that was never formally executed. 

The agreement, however, generally set forth the intentions of

petitioner and Empire as to the nature of petitioner’s work. 

Under the agreement petitioner was to receive a salary of $32,500

per annum, was to be reimbursed for all incidental business

expenses, and was subject to dismissal without cause upon a 90-

day written notice. There was also a trade secrets clause and a

covenant not to compete. The covenant would prevent petitioner

from owning, operating, or otherwise working for a competitor of

Empire while providing services to Empire and for a period of 1

year after his separation from service with Empire. This

covenant was limited to a six-county region of New York,

presumably the regions in which Empire operated. The covenant

did not include the region petitioner maintained while providing

services to Troy.
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Petitioner and the other shareholders of Empire executed a

shareholder agreement. The shareholder agreement provides that

petitioner assign all preexisting contracts to Empire, agree to

terminate his sole proprietorship, and transfer all preexisting

accounts receivable to Empire in exchange for a 12-percent

interest in Empire and a payment of $25,000. Again, petitioner’s

services to Troy were excluded from the shareholder agreement. 

Furthermore, the shareholder agreement provided that all

management services would be provided by an entity called

PhyServ, Ltd., an entity wholly owned by the radiologists with

whom petitioner joined to form Empire. The management services

were to include “consultative” services, management of accounts

receivable and accounts payable, payroll services, marketing, and

general administrative services. It is unclear what services

were in fact actually provided by PhyServ, Ltd.

The Form W-2, Wage and Tax Statement, originally issued by

Empire to petitioner for the years in issue did not have the box

checked to indicate that petitioner was a “statutory employee”. 

After the audit had commenced, petitioner requested that Empire

issue amended Forms W-2 for the years in issue indicating a

statutory employee status. 

During the years in issue, Troy required identical

maintenance services from petitioner. The sole difference was

that Troy’s only customer was St. Mary’s Hospital, located in
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Troy, New York. Troy treated petitioner as a common law employee

on the Forms W-2 it issued to petitioner. Petitioner does not

contest that classification.

While, under the nonexecuted employment agreement,

petitioner was to be reimbursed for his expenses, it is

undisputed that petitioner incurred expenses for which he was not

reimbursed. On his income tax returns, petitioner claimed

deductions for the expenses associated with his activities with

Empire on Schedule C, Profit or Loss From Business. The returns

were prepared by petitioner’s accountant who had full knowledge

of all of the facts. Respondent determined that these expenses

should be properly reported on Schedule A, Itemized Deductions,

as unreimbursed employee business expenses.

Discussion

There is no dispute that petitioner incurred the expenses

for the deductions he claimed. Rather, the dispute focuses on

whether petitioner should be considered a common law employee or

a statutory employee. If petitioner is characterized as a common

law employee, the deductions for his expenses are not deductible

in determining adjusted gross income, see sec. 62(a)(1), are

classified as “miscellaneous itemized deductions”, sec. 67(b),

and are limited “to the extent that * * * [they exceed] 2 percent

of adjusted gross income”, sec. 67(a). In addition,

miscellaneous itemized deductions are not deductible for
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computation of the alternative minimum tax. See sec. 56(b). 

 “Statutory employees” are individuals in specified occupation

groups who are not common law employees. See sec. 7701(a)(20). 

Instead, they are treated like common law employees solely for

purposes of applying the Federal Insurance Contributions Act

(FICA) under section 3121(d)(3). As independent contractors

under common law principles, statutory employees are not treated

as employees under sections 62 or 67. Also, statutory employees

are not subject to the self-employment tax on their earnings as

statutory employees. 

Section 3121(d) provides, 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; 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-– 

****** *

(C) as a home worker performing work,

according to specifications furnished by the

person for whom the services are performed, on

materials or goods furnished by such person which

are required to be returned to such person or a

person designated by him; * * *

****** *

if the contract of service contemplates that

substantially all of such services are to be performed
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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),

or if the services are in the nature of a single

transaction not part of a continuing relationship with

the person for whom the services are performed; * * *

A taxpayer cannot be a “statutory employee” under section

3121(d)(3)(C) if he or she is a common law employee under section

3121(d)(2) or an officer of a corporation under section

3121(d)(1). Therefore, the initial question is whether

petitioner was a common law employee or independent contractor,

and then, if he is an independent contractor, whether he

qualifies as a home worker.
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2 Sec. 31.3401(c)-1(b), Employment Tax Regs., defines an

employer-employee relationship as follows:

(b) Generally the relationship of employer and

employee exists when the person for whom services are

performed has the right to control and direct the

individual who performs the services, not only as to

the result to be accomplished by the work but also as

to the details and means by which that result is

accomplished. That is, an employee is subject to the

will and control of the employer not only as to what

shall be done but how it shall be done. In this

connection, it is not necessary that the employer

actually direct or control the manner in which the

services are performed; it is sufficient if he has the

right to do so. The right to discharge is also an

important factor indicating that the person possessing

that right is an employer. Other factors

characteristic of an employer, but not necessarily

present in every case, are the furnishing of tools and

the furnishing of a place to work to the individual who

performs the services. In general, if an individual is

subject to the control or direction of another merely

as to the result to be accomplished by the work and not

as to the means and methods for accomplishing the

result, he is not an employee.

Whether an employer-employee relationship2 exists is a

question of fact. See Air Terminal Cab, Inc. v. United States,

478 F.2d 575, 578 (8th Cir. 1973); Profl. & Executive Leasing,

Inc., v. Commissioner, 89 T.C. 225, 232 (1987), affd. 862 F.2d

751 (9th Cir. 1988). If an employer-employee relationship

exists, its characterization by the parties as some other

relationship is of no consequence. See sec. 31.3121(d)-1(a)(3),

Employment Tax Regs.

This Court looks to seven factors to determine the existence

of an employer-employee relationship versus an independent
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3 Due to our ultimate holding in this case it is unnecessary for

us to consider what portion, if any, of petitioner’s income from

Empire was received due to his position as an officer.

contractor relationship. Those factors are: (1) The degree of

control exercised by the principal over the details of the work;

(2) which party invests in the facilities used in the work; (3)

the opportunity of the individual for profit or loss; (4) whether

the principal has the right to discharge the individual; (5)

whether the work is an integral part of the principal’s regular

business; (6) the permanency of the relationship; and (7) the

relationship the parties believe they are creating. Weber v.

Commissioner, 103 T.C. 378, 387 (1994), affd. per curiam 60 F.3d

1104 (4th Cir. 1995); Profl. & Executive Leasing, Inc. v.

Commissioner, supra at 232; Simpson v. Commissioner, 64 T.C. 974,

984-985 (1975); see also United States v. Silk, 331 U.S. 704, 716

(1947). No single factor is dispositive, and we must look at all

the facts and circumstances in each case. See Profl. & Executive

Leasing, Inc. v. Commissioner, supra at 232; Simpson v.

Commissioner, supra at 985; Eren v. Commissioner, T.C. Memo.

1995-555, affd. 180 F.3d 594 (4th Cir. 1999).

Applying these criteria to the facts here, we believe that

petitioner was an employee of Empire.3 It is clear that the

employment agreement between petitioner and Empire, while perhaps

unsigned, by petitioner’s testimony, represented the intent of

the parties. Under that agreement, the parties intended that
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petitioner would be an employee. We recognize that Empire’s

supervision of the specifics of petitioner’s daily work was 

minimal. This, however, results from the professional nature of

petitioner’s work. As we noted in James v. Commissioner, 25 T.C.

1296, 1301 (1956):

The methods by which professional men work are prescribed by

the techniques and standards of their professions. No

layman should dictate to a lawyer how to try a case or to a

doctor how to diagnose a disease. Therefore, the control of

an employer over the manner in which professional employees

shall conduct the duties of their positions must necessarily

be more tenuous and general than the control over

nonprofessional employees. Yet, despite this absence of

direct control over the manner in which professional men

shall conduct their professional activities, it cannot be

doubted that many professional men are employees. * * *

We also recognize that petitioner’s daily work life under

his association with Empire may not have differed significantly

from that when he was working as a sole proprietor. On a daily

basis, this may have been true. But, it ignores the fact that

petitioner’s relationship with former customers was fundamentally

altered, albeit perhaps formally. Moreover, by joining Empire,

petitioner chose the benefits of working for a corporation, and

he cannot, when that form seems disadvantageous, disavow the

corporate structure. See Moline Props. v. Commissioner, 319 U.S.

436 (1943).

On balance, considering the record and weighing all of the

factors, we conclude that petitioner was a common law employee

and not an independent contractor. Since petitioner was not an
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independent contractor, he therefore could not be a statutory

employee. See sec. 3121(d)(3); Lickiss v. Commissioner, T.C.

Memo. 1994-103. 

Respondent also determined penalties for negligence under

section 6662(a) for the years in issue. Section 6662(a) provides

that, if the section applies, there is imposed a penalty in an

amount equal to 20 percent of the portion of the underpayment. 

The penalty applies, inter alia, to an underpayment due to

negligence or disregard of the rules or regulations. See sec.

6662(b)(1). The term “disregard” includes “any careless,

reckless, or intentional disregard.” Sec. 6662(c). Negligence

includes “any failure to make a reasonable attempt to comply”. 

Id.

We do not understand respondent’s argument that petitioner’s

conduct falls within the “disregard” ambit of section 6662(b)(1). 

We focus, therefore, on whether petitioner’s actions constituted

negligence. 

A good faith reliance on advice from a qualified accountant

can be a defense to the accuracy-related penalty for negligence

in certain circumstances. See Schwalbach v. Commissioner, 111

T.C. 215, 230 (1998). Petitioner must establish that the adviser

was qualified, that he supplied all relevant information, and

that he relied on the advice in good faith. Id. These

requirements are satisfied here. 
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Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

for respondent with respect to

the deficiencies and for

petitioner with respect to the

penalties under section

6662(a).