TAX COURT OPINION

Case: Jason H. Tagal & Lyn Y. Tagal
Docket Number: 21565-16
Judge: Goeke
Opinion Type: bench
Filed: 06/19/2017
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 JASON H. TAGAL & LYN Y. TAGAL, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 21565-16. ) ) ) ) ORDER 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 in the above case before Judge Joseph Robert Goeke at Honolulu, Hawaii containing his oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. June 19, 2017 SERVED JUN 2 0 2017 Capital Reporting Company 3 1 Bench opinion by Judge Joseph Robert Goeke 2 May 19, 2017 3 Jason H. Tagal and Lyn Y. Tagal v. Commissioner 4 Docket No. 21565-16 5 6 7 8 9 THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. The oral findings of fact and opinion shall 10 not be relied upon as precedent in any other case. 11 This opinion is rendered pursuant to the authority 12 provided by section 7459(b) of the Internal Revenue 13 Code; hereinafter section references are to the 14 15 16 17 Internal Revenue Code in effect for the taxable year 2013. This opinion is also authorized by Rule 152 of the Tax Court Rules of Practice and Procedure. This case is before the Court based upon 18 our authority and jurisdiction to review timely 19 petitions filed after the issuance of notices of 20 deficiency by the Internal Revenue Service. The 21 petitioners in the present case received such a 22 notice of deficiency for the year 2013 regarding 23 their income tax liabilities. They petitioned this 24 court following receipt of that notice of deficiency 25 and the case was called for trial in Honolulu, (866) 448 - DEPO www.CapitalReportingCompany.com 2017 Capital Reporting Company 4 1 Hawaii, on May 15th, 2017. 2 The evidence submitted for trial included 3 stipulated facts and exhibits associated with that 4 stipulation of facts as well as the testimony of Mr. 5 6 7 Jason H. Tagal, the petitioner husband in the present case. The parties settled all the issues pending in the case with the exception of the question whether 8 Mr. Tagal was an employee or an independent 9 contractor during the year 2013. 10 11 At the time they filed their petition in this case, the petitioners were residents of Hawaii. 12 The facts regarding the issue that remains for 13 decision are relatively straightforward. 14 15 16 17 18 On petitioners' joint federal income tax return for 2013, they reported wages in the amount of $14,087 received by Mrs. Tagal, and they reported income based upon Schedule C in the amount of $145,902. This was regarding Mr. Tagal's activity, 19 which remains in dispute regarding the character of 20 that activity. 21 The Schedule C attached to the joint return 22 of 2013 reflected Mr. Tagal's principal business as 23 an education consultant. He did not report any gross 24 receipts or sales of net gross receipts on that 25 schedule but instead reported $184,408 on Schedule C, (866) 448 - DEPO www.Capita1ReportingCompany.com 2017 Capital Reporting Company 1 2 line 6 as other income. He claimed various expenses associated with 5 3 his activities, as reflected on the Schedule C; and 4 that resulted in the net reporting of income stated 5 previously of $145,902. 6 7 Originally respondent adjusted certain of these expenses, but all those adjustments have been 8 settled by the parties and are reflected in a 9 separate stipulation settlement with the parties, 10 which the parties filed. 11 In the notice of deficiency issued to 12 petitioners, which asserted a deficiency in income 13 tax for 2013, respondent also asserted an addition to 14 15 tax under section 6662(a). In the stipulation of settlement, respondent has conceded that this 16 addition to tax is not applicable to the years in 17 question. 18 Mr. Tagal was engaged as a field admissions 19 representative with Universal Technology Institute, 20 hereinafter referred to as UTI, and was is,sued a Form 21 W-2 for wages paid, in the amount of $184,407, with 22 Federal income tax withholding in the amount of $32,501. 23 24 UTI is a trade school providing technical 25 education training for students seeking careers as (866) 448 - DEPO www.CapitalReportingCompany.com 2017 Capital Reporting Company 6 1 professional automotive, diesel, collision repair, 2 motorcycle, and maritime technicians. Mr. Tagal's 3 4 job or responsibility with respect to UTI was to recruit potential students to attend UTI's campus in 5 Arizona. 6 In prior years, the position held by Mr. 7 Tagal had been the responsibility of his father, who 8 9 for many years worked for UTI. And even in 2013, based upon the testimony of Mr. Tagal, Mr. Tagal's 10 father continued to work for UTI. 11 The petitioners rely upon a case involving 12 Mr. Tagal's father, which was decided by this court 13 in a summary opinion in 1992. That opinion is 14 Antonio B. Tagal and Carol A. Tagal v. Commissioner, 15 T.C. Summary Opinion 1992-263, which was rendered on 16 October 29th, 1992. 17 In that opinion, the Court held that Mr. 18 Tagal's father was an independent contractor engaged 19 by UTI. We will quote from page 8 of the slip 20 opinion to explain the holding in the prior case 21 22 involving Mr. Tagal's father: "The specific question we must determine is 23 whether petitioner is entitled to compute his 24 allowable deductions under Schedule C on his returns, 25 or whether his deductions, as allowed by respondent, (866) 448 - DEPO www.CapitalReportingCompany.com 2017 C Capital Reporting Company 7 1 must be repo-rted as individual items of deduction, 2 3 unreimbursed employee expenses, and subject to the limitations of a percentage of adjusted gross income 4 which the Code provides. This requires the Court to 5 determine whether petitioner, in his relationship to 6 UTI, was an independent contractor or an employee. 7 8 9 In determining this question, the reality of the arrangement between petitioner and UTI -- the entire relationship -- controls the determination whether a 10 person is an employee or an independent contractor in 11 a given case." Citations omitted. 12 13 14 15 16 17 "A review of the facts in this case leads us to conclude that petitioner was an independent contractor and not an employee of UTI. He was furnished no facilities; he determined his own work schedule; his only duty was to recruit and furnish students who were acceptable to UTI; he was given no 18 specific directions or supervision as to how to do 19 this; he was paid purely on a commission basis, as 20 acceptable students were recruited; and he received 21 22 no reimbursement for the expenses which he incurred in carrying out his recruiting activity. His 23 position was essentially the same as that of an 24 outside insurance salesman, working at his own 25 discretion and expense, and payable solely by (866) 448 - DEPO www.Capita1ReportingCompany.com 2017 Capital Reporting Company 8 1 2 3 commissions on business generated." We note that in 2013 Mr. Tagal's activities for UTI were very similar to his father's in that the 4 critical difference between his situation in 2013 and 5 the situation of his father, as analyzed by the 1992 6 opinion of this court, is that his father was paid 7 solely by commission and he was paid a salary subject 8 9 to W-2 and withholding of federal income tax. At the trial of this case, Mr. Tagal 10 testified that the reason he was compensated as an 11 12 13 14 15 16 employee was because the Department of Education had enacted a regulation which required that persons recruiting individuals who would be subject to grants in a federal education program should not be paid by commission. He did not know the citation for this regulation, but we believe he was referring to 17 Regulation 34 CFR section 668.14. 18 This regulation does provide that an 19 institution which wishes to participate in federal 20 programs must enter into a written program 21 participation agreement and that this agreement 22 should provide that the institution agrees not to 23 provide any commission, bonus, or other incentive 24 payments based in any part, directly or indirectly, 25 upon success in securing enrollments or the award of (866) 448 - DEPO www.CapitalReportingCompany.com 2017 Capital Reporting Company 9 1 2 3 4 5 6 7 8 financial aid to any person or entity who is engaged as a student in a student recruitment activity. There are certain exceptions to this requirement, but we believe this is the requirement that Mr. Tagal referred to in his testimony. And based upon this requirement, UTI began compensating him as an employee and withheld from his wages. Based upon the record that has been 9 stipulated, it is clear that this was the intent of 10 UTI, to treat Mr. Tagal as an employee. Mr. Tagal 11 obviously believed he should be treated in the same 12 fashion that his father had been treated when he was 13 paid by commission in prior years. 14 We must determine if the critical 15 difference in the intent of UTI and the payment of a 16 salary as opposed to a commission is decisive in the 17 18 outcome of this case. Mr. Tagal complains that he was a statutory 19 employee of UTI and that his situation was analogous 20 to that of an insurance salesman, and that's why he 21 believes he is entitled to claim his expenses on 22 Schedule C. 23 24 25 Respondent maintains that Mr. Tagal was a common law employee of UTI, pursuant to section 3121(d), and that therefore, Mr. and Mrs. Tagal are (866) 448 - DEPO www.CapitalReportingCompany.com 2017 Capital Reporting Company 1 not entitled to deduct the claimed business expenses 2 on Schedule C but, rather, the expenses should be 3 deductible only on Schedule A, subject to a 2 percent 4 exclusion based upon the petitioners' adjusted gross 10 5 6 7 8 income. Whether an individual is an independent contractor or a common law employee is a question of fact. Weber v. Commissioner, 103 T.C. 378 (1994), 9 affirmed, 60 F.3d 1104 (4th Cir., 1995). 10 In determining whether an individual 11 performing services for a principal is an employee 12 rather than an independent contractor, for purposes 13 of federal employment-related taxes, the Tax Court 14 considers the degree of control the principal 15 exercised over the details of the work, whether the 16 party in question invested in facilities that he used 17 in performing the work, the work'er's opportunity'for 18 profit or loss, whether the worker could be 19 discharged, whether the work performed was part of 20 the payor's principal business, whether the 21 relationship was intended to be permanent, and what 22 was the nature of the relationship the parties 23 believed they were engaged in. 24 25 The Court also sometimes considers whether the individual in question is provided benefits, (866) 448 - DEPO www.Capita1ReportingCompany.com 2017 Capital Reporting Company 11 1 which are normally provided to an employee. 2 3 Generally, all of these facts and circumstances are considered in an analysis of 4 whether an individual is an employee or an 5 6 independent contractor. Looking at the present case, it is clear that there is some degree of control over 7 Mr. Tagal's activities but that he does control his 8 9 own schedule and has a great deal of flexibility in how he spends his time. We also note that Mr. Tagal 10 worked from an office at his home and was not 11 provided an office by UTI. 12 Considering the important question of 13 whether Mr. Tagal had the ability to have a profit or 14 a loss, the fact that he was paid a salary virtually 15 eliminated the possibility he was going to have a 16 loss in the year 2013; although he did determine his 17 18 19 own travel expenses and the extent of those travel expenses in that year. Mr. Tagal was an at-will employee of UTI 20 and could have been discharged by UTI at any time. 21 His work was part of UTI's regular business and was 22 fundamentally important to UTI's activity. He had a 23 permanent relationship with UTI, as he began working 24 for UTI in 2007. 25 UTI clearly considered Mr. Tagal to be an (866) 448 - DEPO www.CapitalReportingCompany.com 2017 Capital Reporting Company 1 employee, as they withheld federal income taxes from 2 his wages. Mr. Tagal signed the acknowledgment of an 12 . 3 4 5 6 7 8 9 employee handbook he was provided by UTI, which had an employee code of conduct. Only Mr. Tagal's vision of his employment as an independent contractor is inconsistent with the assumption that the parties intended his employment to be based upon an employee-employer relationship. Mr. Tagal did receive employee benefits, 10 such as health insurance and certain life insurance. 11 His paid leave for holidays and vacation/personal 12 13 14 time seems to be somewhat in dispute based upon his testimony, but he did have a great deal of flexibility in his employment and could generally 15 control his own work schedule based upon his 16 testimony, and we believe his testimony in this 17 18 regard was credible. Having analyzed these factors, we believe 19 they weigh in favor of respondent's position that Mr. 20 Tagal was an employee in 2013 and that the expenses 21 in question are subject to the statutory limitation 22 provided relative to Schedule A expenses. 23 We believe Mr. and Mrs. Tagal were in good 24 faith in attempting to treat the expenses as Schedule 25 C expenses, based upon his father's history and the (866) 448 - DEPO www.CapitalReportingCompany.com 2017 Capital Reporting Company 1 prior case involving his father. However, the 13 2 3 4 5 6 7 8 circumstances must be looked at in the context of the year we have before us, which is 2013. It is clear that each tax year stands on its own. Rose v. Commissioner, 55 T.C. 28, 31-32 (1970). In analyzing this case, we have to look at the facts that are pertinent to the year in question. 9 And while Mr. Tagal relies upon the fact that the 10 11 relationship he had with UTI was different from his father, primarily because of the Department of 12 Education regulatory change, this does not support 13 his position but rather supports respondent's 14 position, because this change caused a fundamental 15 change in his relationship with UTI. 16 Given our conclusion in this case and the 17 parties' prior settlement, a Rule 155 computation 18 will be necessary. 19 This concludes the Court's oral findings of 20 fact and opinion in this case. (Whereupon, at 9:19 a.m., the above- entitled matter was concluded.) 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2017