Taxing Lessons From Court Decisions

Decisions — If not A, than C

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No, the title doesn’t refer to an obscure math problem that you’ll need to solve. The question to be solved in T.C. Memo. 2018-75 (Fiedziuszko) is whether the taxpayer is a statutory employee who can deduct expenses on Schedule C, Profit or Loss from Business, or a common law employee who must deduct unreimbursed expenses on Schedule A, Itemized Deductions.

On the tax spectrum, statutory employees fit between independent contractors and individuals who are classified as employees. These workers enjoy some of the benefits of both classifications. In order to be considered a statutory employee, the individual must meet more of the traits of an independent contractor than of a common law employee.

In this case, the taxpayer was a semiretired aerospace engineer. He advertised his services to several satellite companies and accepted work as a consultant for a company that designs and builds satellites and other spacecraft systems. His contract began in 2011 and ended in July 2012. He worked primarily from home on a satellite development project, producing reports and components.

The company made weekly deposits into the taxpayer’s checking account under the entry “Company Payroll.” The deposits included a date that was two days before the actual deposit and the last four digits of the taxpayer’s social security number.

The company withheld federal income tax as well as social security and medicare taxes, and offered a deferred compensation plan, but not medical or dental insurance, paid vacation leave, or reimbursement of the taxpayer’s expenses.

The company checked the statutory employee box on the taxpayer’s 2011 Form W-2, Wage and Tax Statement, but did not check the box on his 2012 Form W-2.

When the taxpayer filed his 2012 federal income tax return, he claimed deductions related to his consulting on Schedule C, Profit or Loss from Business, as well as a self-employed health insurance deduction on page 1 of the tax return.

The IRS said the taxpayer was not a statutory employee for the 2012 tax year and could not report business income and expenses on Schedule C.

The court applied eight factors of common law rules to determine whether the taxpayer was a common law employee.

1. The degree of control exercised by the principal

Although not the exclusive inquiry, the degree of control exercised by the principal over the individual is the crucial test in determining the nature of the working relationship. The principal need not direct the worker’s every move to indicate common law employee status; the right to do so is sufficient, and the degree of control necessary to find that an individual is an employee generally is lower when applied to professional services than when applied to nonprofessional services.

 

2. Which party invests in the work facilities used by the individual

The fact that an individual provides his or her own tools, or owns a vehicle used for work, weighs against employee status.

 

3. The opportunity of the individual for profit or loss

Earning an hourly or fixed salary weighs in favor of employee status while the opportunity for profit or loss weighs against it.

 

4. Whether the principal can discharge the individual

 

5. Whether the work is part of the principal’s regular business

 

6. The permanency of the relationship

Permanency of a working relationship is indicative of common law employee status.

 

7. The relationship the parties believed they were creating

 

8. The provision of employee benefits

The withholding of taxes is consistent with a finding that an individual is a common law employee. Benefits such as health insurance, life insurance, and retirement plans are typically provided to employees.

 

Here’s the relevant tax law.

From internal revenue code section 3121(d): Defines “employee”, in pertinent part, as (3) any individual (other than an individual who is * * * [a] corporate officer or common law employee]) who performs services for remuneration for any person–* * * 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 personally by such individual* * *

 

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Bonus Question—Medical Expenses

The taxpayer was considered obese and displayed prediabetic indications, and his wife was diagnosed with morbid obesity in 2011. Both were counseled by their doctor to enter a medically supervised weight loss program. The taxpayer and his wife entered a program designed by a national company and administered through a not-for-profit health care organization and were supervised by a health educator. They reported $16,322 of deductible medical expenses for the cost of the program.

Here’s the relevant tax law.

From internal revenue code section 213: Allows a deduction for the cost of medical care not paid for by insurance. The cost of medical care includes “amounts paid * * * for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” No deduction is allowed for personal, living, or family expenses.

From internal revenue code section 262(a): An expenditure which is merely beneficial to the general health of an individual, such as an expenditure for a vacation, is not an expenditure for medical care.

 

Is obesity considered a disease for purposes of section 213?

or

 

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

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Right answer!
Sorry, wrong answer :(

For the taxpayer.

We find that the taxpayer was not a common law employee of the company and that he is instead a statutory employee.

While his Form W-2 for 2012 did not indicate that he was a statutory employee, we believe this to be a mistake. His Form W-2 for 2011 indicated that he was a statutory employee. Nothing changed between 2011 and 2012. He was providing services under the same consulting contract with the company in 2012 as he was in 2011.

Further, the taxpayer worked primarily from his home office rather than the company’s offices and produced reports and patents according to his assignments from the company.

We therefore find that the taxpayer’s employment status did not change from 2011 to 2012.

We also conclude that both the taxpayer and the company intended to form an independent consulting relationship rather than a common law employee-employer relationship. The taxpayer advertised his services to several satellite companies and was hired by this company through the temporary employment agency with which the company works. Their relationship was a temporary assignment that terminated in July 2012.

The evidence weighing against statutory employee status appears consistent with an error by the company in classifying the taxpayer. The weekly payroll deposits into his checking account and the withholding of federal and state income taxes and social security and medicare taxes from his pay are consistent with a consulting contract for services.

We conclude that the totality of the circumstances indicates that the taxpayer was a statutory employee pursuant to internal revenue code section 3121(d)(3) for the 2012 tax year and was entitled to report business income and expenses on Schedule C of Form 1040.

Editorial Note: The taxpayer did not have substantiation for his business expenses, and so could not deduct them.

Right answer!

The Internal Revenue Service considers obesity a disease for purposes of section 213. (See revenue ruling 2002-19.)

Uncompensated amounts paid for participation in a weight-loss program as treatment for obesity are expenses for medical care under section 213. The taxpayers were directed by their physician to enter a medically supervised weight-loss program and did so.

We find, therefore, that the taxpayers incurred expenses for their treatment in the program for medical care under section 213.

Editorial Note: The taxpayers failed to substantiate the cost of their treatment.

Sorry, wrong answer :(
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