TAX COURT OPINION

Case: Shuming Du & Xiaoqing Yang
Docket Number: 1373-12
Judge: Haines
Opinion Type: bench
Filed: 01/30/2013
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 SHUMING DU & XIAOPING YANG, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, ) ) ) ) ) Docket No. 1373-12. ) Respondent ) ) ) ORDE R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial of this case before Judge Haines at San Francisco, California on January 7, 2013, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Harry A. Haines Judge Dated: Washington, D.C. January 30, 2013 SERVED JAN $1200 I Capital Reporting Company Shuming Du & Xiaoqing Yang 01-10-2013 3 1 Bench Opinion by Judge Harry A. Haines 2 Shuming Du & Xiaoqing Yang v. Commissioner 3 Docket No. 1373-12 4 5 January 10, 2013 THE COURT: The Court has decided to render 6 oral findings of fact and opinion in this case; and 7 8 the following represents the Court's oral findings of fact and opinion. The oral findings of fact and 9 opinion shall not be relied upon as precedent in any 10 other case. 11 12 Shuming Du and Xiaoqing Yang, petitioners, filed a petition with the Court in response to a 13 notice of deficiency for 2009 that asserted a 14 deficiency of $4,281 due to a failure to pay self- 15 employment tax under Secti.on 1401 and 1402 on 16 consulting income earned by Petitioner Shuming Du 17 18 (Petitioner Du). The parties' stipulation of facts and the attached exhibits are incorporated herein by 19 this reference. 20 At the time of filing their petition, 21 petitioners resided in Elk Grove, California. 22 Petitioner Du is an environmental specialist and has 23 been employed by the State of California since 2001. 24 In addition to his job with the State of California, 25 since 2007 Petitioner Du has been working as an (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Shuming Du & Xiaoqing Yang 01-10-2013 4 environmental consultant on various projects with law firms in Canada. No formal consulting contracts were ever executed. Petitioner Du was paid by the law firms upon the completion of each project. At no time was Petitioner Du considered an employee of the law firms . :Beginning with their joint Form 1040, U.S. Individual Income Tax Return, filed for 2007, to and including their 2009 federal income tax return, 1 2 3 4 5 6 7 8 9 10 Petitioners reported the income received from 11 Petitioner Du's environmental consulting services as ) 12 13 14 "Other income" on line 21. For their joint returns filed for 2010 and 2011 petitioners reported the income received for the consulting services on 15 Schedule C, Profit or Loss from Business. 16 During 2009 Petitioner Du was a full-time 17 employee of the State of California and received 18 wages in the amount of $78,959. The State of 19 California issued Petitioner Du a Form W-2. During 20 2009 Petitioner Du also worked on two consulting 21 projects and was paid $74,487 from Canadian law firms 22 23 in exchange for his services. The law firms did not issue a Form W-2 or a Form 1099 reporting the $74,487 24 paid to Petitioner Du. 25 Petitioners timely filed their Joint Form (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Shuming Du & Xiaoqing Yang 01-10-2013 5 1 2 1040, U.S. Individual Income Tax Return for 2009. On their 2009 return Petitioners reported the $74, 487 in 3 environmental consulting income as "Other Income" on 4 5 Line 21, as they had the previous two years, and listed the type of income as foreïgn income. 6 Petitioners did not file a Schedule C, Profit or Loss 7 from Business, with their 2009 return. Petitioners 8 also did not report any self-employment tax on their 9 2009 return and did not file a Schedule SE, Self- 10 Employment Tax, with their 2009 return. 11 12 Respondent determined that the $74, 487 in income reported on petitioners' 2009 return was 13 subject to self-employment tax and issued a notice of 14 deficiency to petitioners on October 31, 2011, 15 determining an lncome tax deficiency in the amount of 16 17 $4,281 for 2009. On January 17th, 2012, petitioners filed a 18 petition with this Court seeking review of the notice 19 of deficiency. 20 Section 14.01 imposes a tax on the self- 21 employment income of individuals. Respondent 22 determined that the income Petitioner Du received 23 from consulting services constituted self-employment 24 income and consequently petitioners were liable for 25 self-employment tax. (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Shuming Du & Xiaoqing Yang 01-10-2013 6 1 We need not decide whether the burden of 2 proof shifts to respondent under Section 7491(a), 3 4 5 because we decide this case on the basis of the preponderance of evidence on the record. Self-employment income means the net 6 earnings from self-employment derived by an 7 8 9 individual, Section 1402 (b) .. Net earnings from self- employment are the gross income derived by an individual from any trade or business carried on by 10 such individual less the deductions allowed which are 11 attributable to such trade or business, Section 12 13 14 1402 (a) . The term "derive" requires "a nexus between the income received and the trade or business that is 15 or was actually carried on, Newbury v cùs v- 16 Commissioner, 76 Te-g_Cm 441, 444 (1981) . 17 The trade or business must be carried on by 18 the individual either personally or through agents or 19 employee s, Section 1. 14 02 (a ) -2 (b) , inseme-.t--a-x~r..a-i.sed . 20 The self-employment tax provisions are 21 broadly construed in favor of treating income as 22 earnings from self-employment, Braddock v. 23 Commissioner, 95 T. C. 639, 644 (1990) ; Hornaday v. 24 Commissioner 81 T.C. 830, 834 (1983) . 25 Petitioners contend that the $74,487 in (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Shuming Du & Xiaoqing Yang 01-10-2013 7 1 2 income Petitioner Du earned in 2009 from consulting services was not subject to self-employment tax. 3 Specifically, petitioners argue that in 2009 4 Petitioner Du did not regularly provide consulting 5 6 7 8 9 services unless such income does not meet the requirements to be considered business .income as set forth in the instructions for Form 1040 Schedule C. Instead, Petitioners argue that Petitioner Du's consulting income should be reported as "Other 10 Income" on Form 1040, Line 21. Further, Petitioners 11 argue that there is no place on Schedule SE for 12 13 income reported on Form 1040, Line 21. Thus such , income is not subject to self-employment tax. 14 Petitioners rely solely on the instructions for Forms 15 16 17 18 1040 Schedule C and Schedule SE as the authority for their position. Because only gros.s .income derived from a trade or business carried on by the taxpayer is taken 19 into account in calculating net earnings^ from self- 20 employment, we first consider whether petitioners 21 carried on a trade or business during the year at 22 issue. The term "trade or business" has the same 23 meaning for purposes of Section 1402 as it has for 24 purposes of Section 162, Sect·ïon 1402 (c) . "Trade or 25 business" under Sections 162 has been interpreted to (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Shuming Du & Xiaoqing Yang 01-10-2013 8 1 mean an activity that is conducted "with continuity 2 and regularity" and with the primary purpose of 3 making income or a profit, Commissioner vE(cid:0)576cmcc.. 4 Groetzinaer, 480 U.S. 23, 35 (1987). 5 Whether a taxpayer is engaged in a trade or 6 business must be ascertained from a review of all the 7 relevant facts and c-ircumstances, Comm1ssioner vüaos 8 Groetzinger, supra, ("In the absence of guidancefwe 9 would defer to the Code's normal focus on what we 10 11 regard as a common sense concept of what is a trade or business . ") Petitioners argue that Petitioner Du 12 did not perform environmental consulting services 13 "with continuity and regularity" during 2009. 14 Moreover, petitioners argue that Petitioner Du "did 15 not intend to carry out these activities continuously 16 and regularly. " That is why they did not report the 17 18 income as business income and file Schedule C in 2009. They argue that Petitioner Du did not intend 19 to carry out these activities on a continual and regular bes+ne-s·e until 2010, at which point aGIS 20 21 petitioners reported Petitioner Du's consulting 22 income as business income on Schedule C. 23 We disagree and find that Petitioner Du did 24 provide environmental consulting services with 25 regularity and continuity in 2009. Petitioner Du (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Shuming Du & Xiaoqing Yang 01-10-2013 9 1 2 3 4 5 6 earned almost an equivalent amount of income from his consulting work as he did from his regular full-time job with the State of California in 2009. Moreover, he took multiple consulting jobs in 2009. Based on these facts and circumstances we find that petitioner Du regularly and continuously 7 performed consulting services in 2009. Moreover, 8 petitioners argument that Petitioner Du never 9 intended to provide regular and continuous consulting 10 services in 2009 is irrelevant. 11 12 13 14 We, therefore, hold for respondent and find that Petitioner Du's consulting income earned in 2009 is subject to self-employment tax. Finally, having found that Petitioner Du's 15 consulting income is from a trade or business and 16 thus reportable on petitioners' Form 1040 Schedule C, 17 we need not consider petitioners' alternative 18 argument that as "other income" his consulting 19 services income is not included on Form 1040 Schedule 20 SE per the instructions to Schedule SE and thus not 21 22 subject to self-employment tax. That said, we note that this Court has 23 repeatedly found that IRS instructions carry no 24 authoritative weight and a taxpayer cannot rely on 25 informal IRS instructions to justify a reporting (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Shuming Du & Xiaoqing Yang 01-10-2013 1 position that is otherwise inconsistent with the 2 controlling statutòry provisions, Johnson v. 3 Commissioner, 620 F. 2d 153, 155 (7th Cir. 1980) 4 affirmin T.C. Memo 1978-426; Graham v. Commissioner, 10 5 T.C. Memo 1995-114; Merlo v. Commissioner, 126 5-w 6 7 8 9 205, 211, Ne-t-e 10 (200 6) , _ _rmed.,492 F. 3d, 618 (5th Cir.cuig 2007); Van Dusen v. Commissioner, 136 Tar,"trtw$ 515, 531 B o'ty 29, (2011) . In ·reaching these holdings the Court has 10 considered all arguments and to the extent not 11 mentioned concludes that they are moot, irrelevant, 12 13 or without merit. To reflect the foregoing, decision will be 14 entered for respondent. 15 This concludes the Court's oral findings of 16 facts and opinion. (Whereupon, at 9:20 a.m. the above- entitled matter was concluded.) 17 18 19 20 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2013