T.C. Summary Opinion 2002-18

UNITED STATES TAX COURT

RICHARD G. AND CAROLYN J. NEWHOUSE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7684-00S. Filed February 28, 2002.

Richard G. and Carolyn J. Newhouse, pro sese.

Michael W. Berwind, for respondent.

DEAN, 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. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year at issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure. 

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 for 1995 a deficiency in petitioners'

Federal income tax of $3,814 and an addition to tax under section

6651(a)(1) of $509. The issues for decision are whether Richard

Newhouse (petitioner): (a) Was an independent contractor

entitled to deductions for business expenses on Schedule C,

Profit or Loss From Business; (b) is entitled to business expense

deductions in excess of those allowed by respondent; and (c)

failed timely to file his Federal income tax return without

reasonable cause.

Background

The stipulation of facts and the accompanying exhibits are

incorporated herein by reference. Petitioners resided in Garden

Grove, California, at the time their petition was filed in this

case.

Petitioner is a professor of geography. He started teaching

at junior colleges on a part-time basis in 1989. In 1995,

petitioner taught at four different junior colleges from each of

which he received a Form W-2, Wage and Tax Statement. 

Petitioners reported $9,473 as income earned from his teaching

jobs on Schedule C of their 1995 Federal income tax return. The

Forms W-2 issued to petitioner by the junior colleges and one

issued to him by "Safeway Incorporated" list amounts totaling

only $7,228. Petitioners also included $7,228 of petitioner's

Form W-2 income as wages on line 7 of the U.S. Individual Income
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Tax Return, Form 1040. In addition, petitioners deducted

business expenses of $39,553 from petitioner's "Geography

Professor" activity on Schedule C. Of the total business

expenses deducted, $13,088 is attributable to the rental of

"other business property". Petitioners kept no substantiation

for any of the business expense deductions except for "other

business property" rental expenses.

As a junior college professor, petitioner performed the

tasks common to that profession. He prepared his lessons,

presented material to his students, and prepared and graded

exams. Petitioner purchased from his own funds items he used to

assist him in presenting geographical material to his students,

including globes, maps, films, photos, and books. 

Petitioner's Form W-2 from Mt. San Antonio Community College

indicates that he had a "457 contrib." deducted from his pay. 

Section 457 governs "deferred compensation plans of state and

local governments and tax-exempt organizations". His W-2 from

Long Beach City College indicates he made a "sec 414(h)(2)

contribution". Section 414(h)(2) deals with amounts contributed

to an employees' trust in the case of a plan established by the

government of a State or a political subdivision of a State. The

colleges furnished petitioner classrooms, a class schedule, and

students.
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Petitioners dated and signed their 1995 Federal income tax

return on April 14, 1998.

Discussion

Petitioners argue that petitioner was an independent

contractor with respect to his teaching positions in 1995 at the

four junior colleges. If the Court should determine that he was

not an independent contractor, petitioners argue that they should

be allowed employee business expense deductions on Schedule A,

Itemized Deductions, of $39,553 as claimed on Schedule C of their

return. 

Employee or Independent Contractor

Whether an individual is an employee or independent

contractor is a factual question to which common law principles

apply. Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323

(1992); Weber v. Commissioner, 103 T.C. 378, 386 (1994), affd. 60

F.3d 1104 (4th Cir. 1995); Profl. & Executive Leasing, Inc. v.

Commissioner, 89 T.C. 225, 232 (1987), affd. 862 F.2d 751 (9th

Cir. 1988). Factors that are relevant in determining the

substance of an employment relationship include: (1) The degree

of control exercised by the 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
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performed is an integral part of the principal's regular

business; (7) the relationship the parties believe they are

creating; and (8) the provision of employee benefits. NLRB v.

United Ins. Co. of Am., 390 U.S. 254, 258 (1968); United States

v. Silk, 331 U.S. 704, 716 (1947); Weber v. Commissioner, supra

at 387; Profl. & Executive Leasing, Inc. v. Commissioner, supra

at 232; see also sec. 31.3121(d)-(1)(c)(2), Employment Tax Regs.

(setting forth criteria for identifying employees under the

common law rules). 

No single factor is dispositive; the Court must assess and

weigh all incidents of the relationship. Nationwide Mut. Ins.

Co. v. Darden, supra at 324. The factors are not weighed

equally; they are weighed according to their significance in the

particular case. Aymes v. Bonelli, 980 F.2d 857, 861 (2d Cir.

1992).

While all of the above factors are important, the right-tocontrol test is the "master test" in determining the nature of a

working relationship. Matthews v. Commissioner, 92 T.C. 351, 361

(1989), affd. 907 F.2d 1173 (D.C. Cir. 1990); accord Weber v.

Commissioner, supra at 387. Both the control exercised by the

alleged employer and the degree to which the alleged employer may

intervene to impose control must be examined. Radio City Music

Hall Corp. v. United States, 135 F.2d 715, 717 (2d Cir. 1943);

Weber v. Commissioner, supra at 387-388; deTorres v.
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Commissioner, T.C. Memo. 1993-161. "[N]o actual control need be

exercised, as long as the employer has the right to control." 

Profl. & Executive Leasing, Inc. v. Commissioner, 862 F.2d at

753. In order for an employer to retain the requisite control

over the details of an employee's work, the employer need not

direct each step taken by the employee. Profl. & Executive

Leasing, Inc. v. Commissioner, 89 T.C. at 234; Gierek v.

Commissioner, T.C. Memo. 1993-642.

The exact amount of control required to find an employeremployee relationship varies with different occupations. United

States v. W.M. Webb, Inc., 397 U.S. 179, 192-193 (1970). In

fact, the threshold level of control necessary to find employee

status is in most circumstances lower when applied to

professional services than when applied to nonprofessional

services. Azad v. United States, 388 F.2d 74, 77 (8th Cir.

1968); Profl. & Executive Leasing, Inc. v. Commissioner, 89 T.C.

at 234. "From the very nature of the services rendered by 

* * * professionals, it would be wholly unrealistic to suggest

that an employer should undertake the task of controlling the

manner in which the professional conducts his activities." Azad

v. United States, supra at 77; Weber v. Commissioner, supra at

388. An alleged employer's control "must necessarily be more

tenuous and general than the control over nonprofessional

employees." James v. Commissioner, 25 T.C. 1296, 1301 (1956).
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In this case the Court is satisfied that the junior colleges

for which petitioner worked had the authority to exercise, and

did exercise, sufficient control over petitioner's teaching

assignments to support a finding that he was an employee of the

colleges. See Potter v. Commissioner, T.C. Memo. 1994-356;

Bilenas v. Commissioner, T.C. Memo. 1983-661. In addition, the

Court finds: (1) The investment in the facilities used in the

work of teaching students was made by the junior colleges; (2)

petitioner's pay was fixed, thereby eliminating the opportunity

for "profit" or loss; (3) the work performed by petitioner was an

integral part of the junior colleges' business; (4) two of the

junior colleges provided employee benefits to petitioner; and (5)

the Forms W-2 issued by each of the junior colleges to petitioner

indicate that they considered petitioner to be an employee. 

Accordingly, the Court finds that petitioner was an employee of

the four junior colleges for which he worked and not an

independent contractor.

Employee Business Expense Deductions

Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business. Generally, no deduction is

allowed for personal, living, or family expenses. See sec. 262. 

The taxpayer must show that any claimed business expenses were

incurred primarily for business rather than personal reasons. 
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1Petitioner has made no argument that the burden of proof

shifting provisions of sec. 7491(a)(1) have application to this

case, nor has he offered any evidence that he has complied with

the requirements of sec. 7491(a)(2).

See Rule 142(a).1 To show that an expense was not personal, the

taxpayer must show that the expense was incurred primarily to

benefit his business, and there must have been a proximate

relationship between the claimed expense and the business. 

Walliser v. Commissioner, 72 T.C. 433, 437 (1979).

Where a taxpayer has established that he has incurred a

trade or business expense, failure to prove the exact amount of

the otherwise deductible item may not always be fatal. 

Generally, unless prevented by section 274, the Court may

estimate the amount of such an expense and allow the deduction to

that extent. See Finley v. Commissioner, 255 F.2d 128, 133 (10th

Cir. 1958), affg. 27 T.C. 413 (1956); Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930). In order for the Court to

estimate the amount of an expense, however, the Court must have

some basis upon which an estimate may be made. See Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985). Without such a basis,

an allowance would amount to unguided largesse. See Williams v.

Commissioner, 245 F.2d 559, 560 (5th Cir. 1957).

Certain business deductions described in section 274 are

subject to strict rules of substantiation that supersede the

doctrine in Cohan v. Commissioner, supra. See sec. 1.274-
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5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6,

1985). Section 274(d) provides that no deduction shall be

allowed with respect to: (a) Any traveling expense, including

meals and lodging away from home; (b) any item related to an

activity of a type considered to be entertainment, amusement, or

recreation; or (c) the use of any “listed property”, as defined

in section 280F(d)(4), unless the taxpayer substantiates certain

elements. “Listed property” includes any passenger automobile. 

Sec. 280F(d)(4)(A)(i). 

When petitioner was questioned about the existence of

substantiation for his business expenses, specifically the

automobile expenses, he replied: “I have found it to be not

financially worthwhile to complete detailed logs of things." He

added that "I don't have any detailed records with me at this

time." In fact, petitioner did not have any records to

substantiate any of his claimed expenses except for his rental

expenses. The Court cannot estimate the amount of any of his

claimed expenses except for his rental expenses.

The rental payments, according to petitioner, are made up of

two elements. One is the expense of renting two storage spaces

10 feet by 30 feet in public "warehouses". The other element is

the rental of his home. Petitioner explained that his "home

situation has been temporary" due to the fact that his job

situation was unstable. He was looking for a full-time job, he
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said, and did not want to "move in and get all set up, because

one never knew how long you'd be there."

Petitioner testified that he kept in the storage spaces

books, maps, globes, bookcases, file cases, desks, "and so on

like that." Petitioner further testified that "there is some

personal aspect to each of them" but that if he did not have all

of his teaching material in there: "I would find a way of

stuffing the small amount of personal stuff in the warehouses

into the house."

Petitioner testified that he treated 85 percent of the

rental payments on his three-bedroom house as a business expense. 

According to petitioner, "Most of the home is a library, and/or

office, or storage for various books, maps, globes, atlases, air

photos." His view, according to his testimony, is that geography

is "in effect, the world and everything that's in it, and to some

extent, that is why I have such a large library." 

The Court accepts, for the purposes of argument, that

petitioner's home is used primarily as a storage place for

various books, maps, and globes. Petitioner, however, has not

shown that the rental expense of the storage spaces was ordinary

and necessary. See sec. 162(a); Welch v. Helvering, 290 U.S. 111

(1933). 

Section 162 allows a deduction for ordinary and necessary

expenses paid or incurred by a taxpayer in carrying on a trade or
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business. The expenses must be directly or proximately related

to the taxpayer's trade or business. Deputy v. du Pont, 308 U.S.

488, 494-495 (1940); sec. 1.162-1, Income Tax Regs. An expense

is considered "ordinary" if commonly or frequently incurred in

the trade or business of the taxpayer. Deputy v. du Pont, supra

at 495-496. An expense is "necessary" if it is one that is

appropriate or helpful in carrying on petitioner's trade or

business. Commissioner v. Heininger, 320 U.S. 467, 475 (1943). 

The expense must also be reasonable in amount relative to its

purpose. Cardwell v. Commissioner, T.C. Memo. 1982-453 (citing

United States v. Haskal Engg. & Supply Co., 380 F.2d 786, 788

(9th Cir. 1967)). 

An employee's trade or business is earning his compensation,

and generally only those expenses that are related to the

continuation of his employment are deductible. Noland v.

Commissioner, 269 F.2d 108, 111 (4th Cir. 1959), affg. T.C. Memo.

1958-60.

Petitioner has not established through his testimony or by

other evidence that the rental expenses incurred to store his own

"library" were of a type commonly or frequently incurred in

petitioner's trade or business of earning pay as a part-time

temporary junior college professor. Although it is to be

expected that petitioner would keep a certain amount of books,

maps, and other items on hand as aids to teaching geography, it
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is extraordinary that he would need to incur the expense to keep

and store a whole "library". 

Petitioner has not established that the costs of

commercially storing the books and other materials are deductible

business expenses. The Court finds that petitioner collected

large amounts of books, maps, and other geographical materials

for personal reasons. See Mann v. Commissioner, T.C. Memo. 1993-

201; Wheatland v. Commissioner, T.C. Memo. 1964-95.

Focusing now on petitioners' home, they argue that they are

entitled to deduct a substantial portion of the cost of renting

the three-bedroom house in which they reside. Section 280A

generally prohibits deduction of otherwise allowable expenses

with respect to the use of an individual taxpayer's home. As an

exception, this restriction does not apply to any item to the

extent such item is allocable to a portion of the dwelling unit

which is exclusively used on a regular basis as the principal

place of business for any trade or business of the taxpayer. 

Sec. 280A(c)(1)(A). In the case of an employee, the exclusive

use of a portion of the dwelling unit must be for the convenience

of his employer. Sec. 280A(c). Petitioner has not shown that

his home was used for the convenience of his employer. See

Gantner v. Commissioner, 91 T.C. 713, 730 (1988), affd. 905 F.2d

241 (8th Cir. 1990); Bowles v. Commissioner, T.C. Memo. 1993-222. 

Nor has he shown that his principal place of business was other
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than at the respective junior colleges where he taught. 

Commissioner v. Soliman, 506 U.S. 168, 175 (1993)("principal

place of business" means not merely an important or necessary

place of business, but the most important one); Puckett v.

Commissioner, T.C. Memo. 1990-89.

The Court holds that petitioner is not entitled to any

deductions related to his employment as a part-time temporary

junior college professor in excess of those allowed by

respondent.

Timeliness of the Return

Respondent determined an addition to tax under section

6651(a)(1) for petitioners' failure to file timely a Federal

income tax return for 1995. In the stipulation of facts signed

by the parties, it is stated that "Petitioners timely filed a

U.S. Individual Income Tax Return, Form 1040, for 1995" and that

a "true and correct copy of this return is attached hereto as

Joint Exhibit 1-J."

The return attached to the stipulation and represented to be

true and correct is dated as signed by petitioners on April 14,

1998, 2 years after the due date of the return. During trial,

petitioner identified his signature and agreed that it was dated

when he signed it. The face of the return bears an IRS date

stamp indicating that it was received on April 17, 1998.
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The Court does not lightly set aside stipulations of fact

but may exercise broad discretion to determine whether to hold a

party to a stipulation. Blohm v. Commissioner, 994 F.2d 1542,

1553 (11th Cir. 1993), affg. T.C. Memo. 1991-636. "The evidence

in the record demonstrates that the stipulation is simply

incorrect." Estate of Eddy v. Commissioner, 115 T.C. 135, 137

n.4 (2000). Stipulations of fact that are contrary to facts

contained in the record do not bind the Court. Blohm v.

Commissioner, supra; Estate of Eddy v. Commissioner, supra;

Estate of Branson v. Commissioner, T.C. Memo. 1999-231.

Petitioners failed to file timely their Federal income tax

return for 1995. They have failed to offer any evidence that

such failure was due to reasonable cause and not to willful

neglect. Respondent's determination that they are liable for the

addition to tax under section 6651(a) is sustained. 

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

for respondent.