TAX COURT OPINION

Case: Martin J. Levins & Janet C. Levins
Docket Number: 21853-19
Judge: Buch
Opinion Type: bench
Filed: 09/17/2021
Pages: 19

Martin J. Levins & Janet C. Levins, Petitioners v. Commissioner of Internal Revenue, Respondent United States Tax Court Washington, DC 20217 Docket No. 21853-19. ) ) ) ) ) ) ) ) ) ) ) O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioners and respondent a copy of the pages of the transcript of the remote trial in this case before Judge Ronald L. Buch, where the place of trial was designated as Tampa, Florida, containing his oral findings of fact and opinion rendered at the remote trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Ronald L. Buch Judge Served 09/17/21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinion by Judge Ronald L. Buch August 19, 2021 3 Martin J. Levins & Janet C. Levins v. Commissioner Docket No. 21853-19 THE COURT: The following is the Court's oral findings of fact and opinion in this case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152, and it may not be relied upon as precedent in any other case. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code as amended and in effect at all relevant times. Martin Levins had a history of working as an independent contractor. In 2017, Mr. Levins interviewed and was hired for a position as an employee. When they filed their return, the Levinses reported employee business expenses relating to Mr. Levins's employment. The Commissioner disallowed those expenses. Before this Court, the Levinses argue that the expenses were deductible because Mr. Levins was an independent contractor. We find that Mr. Levins was an employee, not an independent contractor. Furthermore, because his employer had a policy that allowed for reimbursement of business expenses, the expenses he incurred are not 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 deductible as employee business expenses. 4 Background Martin J. Levins is a businessman specializing in Customer Relationship Management or CRM. CRM is a process through which companies manage their communications and relationships with customers. CRM includes a technological component, such as a software, and an interpersonal component that focuses on communication preferences and training personnel to implement the technology. While living in Massachusetts, Mr. Levins operated a CRM consulting business through an S corporation. Through that S corporation, Mr. Levins contracted with companies providing his expertise on what CRM platforms would most benefit his clients. He generally worked with multiple clients at a time. His corporation provided the services but had no employees other than Mr. Levins. When the Levinses moved to Florida in 2016 or 2017, Mr. Levins dissolved his Massachusetts S corporation and re-started his business as an LLC in Florida. On June 19, 2017, National Securities Corporation (National Securities) hired Mr. Levins as their CRM Implementation Manager after Mr. Levins applied for the position. National Securities hired Mr. Levins to create a set of criteria for the company to select a CRM 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 platform, to find vendors that would meet these criteria, 5 to contact the vendors, to implement the system, and to manage the system. This was a new position within National Securities that was created when the company decided to implement a CRM platform. National Securities hires both employees and independent contractors. The process of hiring employees generally follows a familiar pattern. A future employee will go through a conventional hiring process and is presented with a written offer letter or employment agreement. The employee must then pass a background check, and sign documents acknowledging National Securities' policies and its employee handbook. Employees are offered an array of benefits, including health, dental, vision, and life insurance. New employees also fill out a Form W-4, Employee's Withholding Allowance Certificate, notifying National Securities of the employee's Federal tax withholdings. Upon starting at National Securities, new employees must undergo diversity and harassment trainings. The process for hiring independent contractors at National Securities is materially different and is typically limited to financial advisors or stockbrokers. The independent contractors are presented with an independent contractor agreement and must undergo a 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 background check and fill out certain documents; but they 6 operate outside of National Securities. These contractors have their own clients and hire their own staff. Contractors do not receive any benefits from National Securities and do not fill out Forms W-4. National Securities hired Mr. Levins as an employee. He submitted an "application for employment" to National Securities, looking for a CRM position. He received an offer of employment for a full-time position as the CRM Implementation Manager. The letter informed Mr. Levins that he would receive an annual salary of $130,000 a year to be paid in installments of $5,417 twice a month. The letter dictated Mr. Levins's place of employment, Boca Raton, and identified his direct supervisor. The letter repeatedly referred to the relationship as employment and frequently used the term "Employee" to refer to the recipient of the letter rather than referring to Mr. Levins by name. The letter informed Mr. Levins that he would be eligible to participate in any of the employee benefit plans offered. Mr. Levins signed under a signature block captioned "EMPLOYEE" in all capital letters. Once employed, Mr. Levins received his salary in twice-monthly payments and participated in the company's benefit plans. He also filled out a Form W-4 listing his Federal tax withholdings. He participated in 1 2 3 4 5 6 7 8 9 10 11 12 mandatory diversity training that was required of 7 employees but not of independent contractors. Mr. Levins was not provided with an independent contractor agreement. The offer letter also addressed the reimbursement of business expenses. The letter, signed by Mr. Levins, provided "You shall be reimbursed for all reasonable pre-approved expenses incurred in the performance of your duties including, but not limited to, entertainment, travel and any other expenses deemed reasonably necessary by your direct supervisor." Mr. Levins did not provide CRM services for any entity other than National Securities during his 13 employment there. 14 15 16 17 18 19 20 21 22 23 24 25 As CRM Implementation Manager, Mr. Levins used his expertise to find the right CRM platform for National Securities. He developed an understanding of the technology needed by the company and then sought CRM platforms that would fit those needs. Mr. Levins worked out of the corporate headquarters in Boca Raton even though he lived over 200 miles away. National Securities provided him with a workspace in the corporate office along with a computer and other necessary equipment to do his job. He occasionally worked from his home. Kurosh Golchubian supervised Mr. Levins within his team at National Securities. Mr. Golchubian stated 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that he had "quite a bit of contact" with Mr. Levins and 8 that they would meet "very often." Mr. Levins regularly provided Mr. Golchubian and the broader team with updates on the CRM vendor selection process. During these update meetings and during day-to-day conversations, Mr. Golchubian provided Mr. Levins with feedback on his progress. Mr. Golchubian allowed for a flexible work schedule within his team and allowed Mr. Levins to work from home "on occasion" at Mr. Golchubian's discretion. Mr. Golchubian's supervision extended to whether Mr. Levins continued to work at the company. Mr. Golchubian explained that "if Mr. Levins's job performance was unsatisfactory, he would have been terminated" or been given feedback on how he could have improved. Mr. Levins traveled twice for work while at National Securities. In October 2017, he attended a sales conference in Miami along with some colleagues. In December that year, Mr. Levins, Mr. Golchubian, and others traveled to New York City to attend a presentation by Salesforce, a CRM platform. National Securities employees who travel for business purposes may submit to the company for reimbursement of expenses paid for lodging, mileage, parking, transportation, conference registration fees, tolls, phone calls, photocopies, internet charges, meals, and entertainment. For both the Miami and New York City 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 trips, Mr. Levins submitted for, and received, 9 reimbursement for his expenses. At the end of 2017, Mr. Levins presented National Securities with three CRM platforms that would fit the company's needs: Salesforce, SugarCRM, and Pegasus. National Securities chose Salesforce. On January 5, 2018, National Securities terminated Mr. Levins's employment. National Securities hired Mr. Levins with the understanding that after Mr. Levins helped the company choose a CRM platform, he would remain at the company to implement and manage the platform. But there was a change of plans. Salesforce recommended that National Securities use Salesforce's implementation system instead, and the executives at National Securities terminated Mr. Levins and eliminated his position. The Levinses hired a certified public accountant, Thomas Murtha of Murtha & Murtha LLC, to prepare their 2017 tax returns. He first worked for the Levinses the prior year. The Levinses 2017 Form 1040, U.S. Individual Income Tax Return, reported wages from National Securities of $67,612. They attached a Schedule A, Itemized Deductions, which reported a deduction for unreimbursed employee expenses of $55,791. They also attached a Form 2106, Employee Business Expenses, reporting employee business expenses of $55,791. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The Commissioner sent the Levinses a notice of 10 deficiency dated September 26, 2019, for their 2017 tax year. The notice disallowed the employee business expenses in their entirety due to lack of substantiation. The Commissioner determined a total deficiency of $11,786 and a section 6662(a) penalty of $2,357. Before trial, the Commissioner conceded the penalty. The Levinses petitioned the Court on December 10, 2019, while residing in Florida. In their petition, the Levinses argued that the disallowed expenses were business expenses. They alleged that they provided all substantiating receipts to the Commissioner and claimed that Mr. Levins's "[w]ork is engaged under a number of circumstances including corp to corp, 1099, W2." In the time leading up to trial, Mr. Levins made clear that his argument is that he was not an employee of National Securities, but instead, he was an independent contractor. Trial was held virtually on August 17, 2021. Before trial, in addition to the Commissioner conceding the section 6662 accuracy-related penalty, the parties stipulated that Mr. Levins paid or incurred $46,298 of expenses in 2017, out of which $18,604 were business expenses, with the remainder being personal. The parties did not stipulate as to the deductibility of any of those expenses. As a result, the question that remained for 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 trial is whether the business expenses are deductible 11 nonemployee business expenses (as argued by the Levinses), nondeductible employee business expenses (as argued by the Commissioner), or deductible employee business expenses subject to the limits imposed on such deductions. Discussion Deductions are a matter of legislative grace and a taxpayer bears the burden of proving that he is entitled to his claimed deductions. Rule 142(a): INDOPCO, Inc. v. Commissioner, 504 U.S. 79, 84 (1992). The taxpayer must maintain records sufficient to enable the Commissioner to determine his correct tax liability. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Additionally, the taxpayer bears the burden of substantiating the amount and purpose of the claimed deduction. Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Whether a taxpayer may report business expenses on a Schedule C, Profit or Loss From Business, or Schedule A, Itemized Deductions, hinges on whether the taxpayer is an independent contractor or an employee. Employees must report deductible business expenses on a Schedule A, and employees are limited in what they may deduct. Most notably, an employee may only deduct unreimbursed business expenses if they exceed 2% of the employee's adjusted gross income. Sec. 67(a); Quintanilla v. Commissioner, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 T.C. Memo. 2016-5, at *2. 12 Whether an individual is self-employed or an employee is a factual question. Simpson v. Commissioner, 64 T.C. 974, 984 (1975). We use several factors to determine whether an employer-employee relationship exists: (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 part of the principal's regular business; (6) the permanency of the relationship; and (7) the relationship the parties believe they are creating. Simpson v. Commissioner, 64 T.C. 974, 984-985 (1975). In assessing these factors, no one factor is controlling; rather, we look to the entire situation and the special facts and circumstances of each case. Herman v. Commissioner, T.C. Memo. 1986-590. The petitioner bears the burden of proof. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). We now turn to those factors. (1) Degree of Control This factor is fundamental in determining the relationship between a principal and individual. Reece v. Commissioner, T.C. Memo. 1992-335. But the degree of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 control necessary to determine that an employee-employer 13 relationship exists varies with the nature of the services performed by the individual. James v. Commissioner, 25 T.C. 1296, 1301 (1956). The degree of control necessary to establish an employer-employee relationship generally is lower for those providing more professional services. Herman v. Commissioner, T.C. Memo. 1986-590. When the job at issue requires "a more independent approach, a lesser degree of control" is warranted. Reece v. Commissioner, T.C. Memo. 1992-335. National Securities exerted significant control over Mr. Levins. Mr. Levins's duty station was the corporate office in Boca Raton. Although he could work from home, this could happen only "occasionally" and with the permission of his supervisor. National Securities paid wages (not for project completion), reimbursed him for travel, and withheld his Federal income tax. See Herman v. Commissioner, T.C. Memo. 1986-590 (where because the principal paid the taxpayer's wages, provided for vacation time, and reimbursed travel, we held the principal had control over the taxpayer consistent with an employer-employee relationship). He attended a sales conference and a presentation from Salesforce as part of National Securities; he did not attend these events independently conducting research or receiving training 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 for an outside client; he was directed to do so by his 14 supervisor. Mr. Levins did not operate independently outside the rest of the workforce at the company, but rather, he was integrated into the company as part of a team. Mr. Golchubian actively supervised Mr. Levins. Mr. Levins and Mr. Golchubian spoke frequently, and Mr. Golchubian used these opportunities to provide Mr. Levins with feedback on his performance. Mr. Golchubian was interested in Mr. Levins's CRM recommendation, but he was also engaged in the process to reach that recommendation. This can be contrasted with the facts in Butts v. Commissioner, T.C. Memo. 1993-478, which was cited by Mr. Levins. In that case, the principal did not control or dictate the work processes of the taxpayer, and the principal did not exercise the control over the taxpayer necessary to create an employer-employee relationship. But here, Mr. Golchubian supervised Mr. Levins in the same way he supervised the other employees under him. These facts indicate that Mr. Levins worked under the direction and control of National Securities. (2) Facilities Invested in the Work National Securities provided Mr. Levins with all the equipment and supplies necessary for him to complete his work. The company ensured that Mr. Levins had a desk, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 workspace, phone, computer, supplies, and the requisite 15 software. When working from his duty station at the Boca Raton office, Mr. Levins had the facilities he needed to perform his job. National Securities thus invested in the facilities, not Mr. Levins. (3) Opportunity for Profit or Loss Mr. Levins earned a salary from National Securities that the company paid to him twice a month. Mr. Levins was paid regardless of whether he delivered a final recommendation on a CRM platform. His earnings hinged on his continued employment with National Securities, not on his delivery of an ultimate work product. Mr. Levins did not work for commission and did not stand to earn more if he made more contacts or presented more CRM product options to National Securities. Likewise, he bore no risk of loss. Mr. Levins's failure to meet a deliverable may have warranted a discussion with his supervisor, but would not have affected his income. This indicates an employer-employee relationship. (4) The Right to Discharge National Security also had the authority to fire Mr. Levins. A principal's ability to discharge an individual points to control. See Simpson v. Commissioner, 64 T.C. 974, 986 (1975). Mr. Golchubian explained that if Mr. Levins performed unsatisfactory 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 work, he could have been fired. 16 In fact, National Securities did terminate Mr. Levins. Mr. Levins categorized his termination as a mutual parting of ways after he delivered CRM platform recommendations at the end of 2017. While National Securities hired Mr. Levins to find a CRM platform for the company, both National Securities employees who testified were consistent in their statements that the company intended to keep Mr. Levins in his position to manage the CRM platform after its implementation. National Securities terminated Mr. Levins after Salesforce suggested it go a different route for the implementation and management of the CRM platform. Mr. Levins did not have input in his termination. His termination was not a mutual disengagement between Mr. Levins and National Securities after Mr. Levins completed his expected task, but a termination that prematurely ended Mr. Levins's expected employment. National Securities' ability to terminate Mr. Levins indicates that Mr. Levins served as the company's employee, not as an independent contractor. (5) Work Part of the Principal's Regular Business National Securities is a brokerage firm, connecting buyers and sellers of stocks, bonds, and other financial instruments. Mr. Levins was not a broker or a 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 financial manager. National Securities did not have a 17 comprehensive CRM platform before hiring Mr. Levins, making him the first employee at the company to serve as a CRM expert. National Securities felt the need to implement a CRM platform to facilitate their brokerage operations, and Mr. Levins spearheaded this implementation. Thus while CRM management was not part of National Securities' regular business, Mr. Levins was hired to further the company's regular business. This factor is therefore neutral. (6) Permanency of the Relationship As discussed, Mr. Levins's employment was meant to continue indefinitely to allow him to manage the CRM platform for National Securities. The relationship did not have a stated end date and was not intended to expire when Mr. Levins completed a specified task. This further indicates that National Securities hired Mr. Levins has an 18 employee. 19 20 21 22 23 24 25 (7) Beliefs of the Parties Despite Mr. Levins's claim otherwise, the documents confirm that the parties intended that Mr. Levins be an employee. He was sent a letter offering employment. He filled out a Form W-4. He received health, dental, vision, and life insurance benefits that were only provided to National Securities employees. He 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 participated in employee training and generally worked 18 with and among the other employees at National Securities. Contrary to his previous practice where he would have multiple simultaneous clients, Mr. Levins worked only for National Securities during his time there. At all times, National Securities believed Mr. Levins to be an employee; it hired him as an employee and treated him in a manner consistent with how it treated other employees. The parties believed they were establishing an employer- employee relationship. Having established that Mr. Levins worked as an employee of National Securities, we now move to whether he may deduct his claimed business expenses. Section 162 allows a taxpayer to deduct all ordinary and necessary expenses incurred by the taxpayer in carrying on a trade or business. Sec. 162(a). The performance of services as an employee is considered a trade or business. Primuth v. Commissioner, 54 T.C. 374, 377 (1970). An employee may therefore deduct expenses that are ordinary and necessary to his employment. Lucas v. Commissioner, 79 T.C. 1, 6 (1982). To deduct unreimbursed employee business expenses, a taxpayer must not have received reimbursement and must not have had the right to reimbursement. Podems v. Commissioner, 24 T.C. 21, 22-23 (1955). 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 National Securities had a comprehensive expense 19 reimbursement plan. It reimbursed employees for all reasonable pre-approved expenses incurred in the performance of their duties. Mr. Levins knew of this plan and availed himself of it on two occasions: after the sales conference in Miami and the Salesforce meeting in New York City. Any of Mr. Levins's business expenses that were reimbursable under this policy are not deductible. Alternatively, it is possible that some of these expenses could be attributable to other work that Mr. Levins performed as part of his independent business. To the extent that Mr. Levins incurred business expenses for work he did for other clients as part of an independent contractor relationship before he joined National Securities, he could deduct expenses attributable to that work. Secs. 162(a) & 274(d). But Mr. Levins did not offer any evidence tying his expenses to work he did for any client during 2017. The Levinses' 2017 tax return does not include any Schedule C, Profit or Loss From Business, and he did not provide any testimony regarding work for other clients during 2017. There is no evidence that the expenses were related to any work other than Mr. Levins's work for National Securities, and the claimed business expenses are thus nondeductible. Conclusion 20 The evidence overwhelming indicates that Mr. Levins was an employee of National Securities. To the extent he incurred bona fide expenses attributable to his employment with National Securities, he was entitled to reimbursement from his employer. This renders the expenses nondeductible for Federal income tax purposes. He did not otherwise establish deductibility. Accordingly, Decision will be entered in favor of the Commissioner as to the deficiency and in favor of Mr. Levins as to the penalty. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 10:25 a.m., the above-entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25