According to the old proverb, children tend to have traits similar to their parents, and tend to do what their parents have done. Does that hold true for tax purposes?
In a recent bench opinion (Tagal), the taxpayer held the same position as his father had before him – recruiter for a technical trade school. During 2013, the taxpayer received a wage and tax statement (Form W-2) for his work, but reported the income and related expenses on his federal income tax return on Schedule C (profit or loss from business).
The taxpayer believed this reporting was correct, because his father, who held the same position at the same school, won a tax court case in 1992 that concluded he was an independent contractor and not an employee of the school. The taxpayer’s activities for the school were very similar to his father’s. The difference between his situation in 2013 and the situation of his father, per the 1992 tax court opinion, was that his father was paid solely by commission and the taxpayer was paid a salary subject to W-2 reporting and withholding of federal income tax.
The taxpayer says the only reason he received Form W-2 was because the school now had to abide by a Department of Education regulation which required that the school not pay bonuses or commissions to recruiters if the school wanted to continue to participate in federal grant programs. That regulation was not in effect in 1992. In all other respects, the taxpayer’s work was the same as his father’s, and he was a statutory employee.
The IRS said the taxpayer was a common law employee, and therefore required to report his income as wages and claim expenses as miscellaneous itemized deductions.
Here are the factors considered by the court.
Degree of control. There is some degree of control over the taxpayer’s activities but he does control his own schedule and has a great deal of flexibility in how he spends his time.
Investment in facilities. The taxpayer worked from an office at his home and was not provided an office by the school.
Opportunity for profit or loss. The fact that the taxpayer was paid a salary virtually eliminated the possibility he was going to have a loss in the year 2013, although he did determine his own travel expenses and the extent of those travel expenses in that year.
Discharge. The taxpayer was an at-will employee of the school and could have been discharged at any time.
Receipt of benefits normally provided to an employee. The taxpayer did receive employee benefits, such as health insurance and certain life insurance. His paid leave for holidays and vacation/personal 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 control his own work schedule.
Principal business. The taxpayer’s work was part of the school’s regular business and was fundamentally important to the school’s activity.
Permanency of relationship. The taxpayer had a permanent relationship with the school, as he began working for the school in 2007.
Nature of relationship. The school considered the taxpayer to be an employee, as they withheld federal income taxes from his wages. The taxpayer signed the acknowledgment of an employee handbook he was provided by the school, which had an employee code of conduct. The taxpayer considered himself an independent contractor.
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For the IRS.
We believe the factors analyzed weigh in favor of the IRS’s position that the taxpayer was an employee in 2013 and that the expenses in question are subject to the statutory limitation provided relative to Schedule A expenses.
We believe the taxpayer was in good faith in attempting to treat the expenses as Schedule C expenses, based upon his father’s history and the prior case involving his father.
However, the circumstances must be looked at in the context of the year we have before us, which is 2013. Each tax year stands on its own. In analyzing this case, we have to look at the facts that are pertinent to the year in question.
And while the taxpayer relies upon the fact that the relationship he had with the school was different from his father primarily because of the Department of Education regulatory change, this does not support his position but rather supports the IRS’s position, because this change caused a fundamental change in his relationship with the school.