Leroy & Elaine G. Davis, Petitioner

UNITED STATES TAX COUR T

LEROY AND ELAINE G . DAVIS, Petitioners v . .COMMISSIONER OF INTERNAL" REVENUE, Responden t Docket No : 4256-04S .

Emile L Hebert,'III , for respondent .

CARLUZZO, Special Trial Judge : This case was heard pursuant to the provisions of section 7 .463 of ,the Internal Revenue Code (cid:127)in effect "when the petition was filed .' Pursuant to section 7463(b) ., the decision to be-entered is not . reviewable b y 1Subsequent section :references are to the Internal Revenue Code of 1986, as amended, in effect for the relevant period . Rule references are to the Tax Court Rules of Practice and Procedure .

SERVED JUL - 7 2010

any other court, and this opinion shall not be treated as precedent for any other case .

In two separate notices of deficiency, both dated December 8, 2003, respondent determined deficiencies, additions to tax, and penalties with respect to petitioners' Federal income taxes for 1997 through 2000, inclusive .

Most of the adjustments, including the imposition of the additions to tax and penalties, . made in the notices of deficiency have been resolved by the parties . The parties now dispute only whether certain trade or business expenses deducted on Schedules C, Profit orLoss From Business,,included .with petitioners' 1997, 1998, 1999, and 2000 Federal income tax returns should be treate d instead as unreimbursed employee business expenses . The resolution of the dispute depends upon whether services provided as a city councilman (Leroy Davis) or services . provided as a member of a city's school board (Elaine G . Davis) were so provided as employees of the city .

Background Some of the facts have been stipulated and are so found .

Petitioners are, and have been at all times relevant, married to each other. At the time the petition was filed, they resided in Louisiana .

In 1990 Mr . Davis was appointed to serve as a councilman for the city of Baker ., Louisiana (City)-. He was subsequently reelected to the position and served . as a City councilman at, all times relevant to this proceeding . As .a City councilman, Mr .

Davis incurred-and paid certain expenses that respondent concedes are deductible as(cid:127)`trade'or business expenses . . For-each year, those expenses exceeded the compensation that .he'received-from City as one .of its councilmen .

During 1999 and 2000 Mrs . , Davis served on City's school board . As ' a member of the . school board,- she incurred. `and paid certain expenses that' :res-pondent concedes are deductible-as -trad e .or business expenses . . For each year,-those expenses exceeded . the compensation she received from City(cid:127)as a member of its school board .

Neither .petitioner was compensated on a fee basis by City ; each received a salary fixed by law . City treated each, petitioneras~an employee for purposes of employment taxes and Federal -tax withholdings . For each year, the compensation City paid to each petitioner was reported and shownr°as "wages" on a Form W-.2, Wage andkTax Statement As a`City councilman,-Mr .

Davis'participatedin a retirement system offered to City - employees ; but City councilmen elected after' a ,certain 'date are notlonger~eligible to participate .in that retirement system .

Petitioners' joint Federal income`tax return for .each year in issue was timely :filed . Each of those returns includes a Schedule A, Itemized Deductions, and each return, as, .applicable .for that year,,includes a . Schedule C on which the income an d deductions related to' their. respective p.ublic,off-ices . are shown .

X The adjustments made in the notices of deficiency tha t remainnIi,n -dispute ;reflect respondent's determination,that fo r each year ,, as a City councilman and a member of City' s schoo l board,, each petitioner was a City employee .

Discussio n Generally, the proper'treatment,of an individual's,busines s expense deductions for Federal income tax-purposes depends upo n .the individual' .s~.°worker classification as,, either -an ..employee o r The-manner in which each, petitioner treated compensation .

received from City for, each year shows that they consider .

, themselves to-have-earned that compensation :as,nonemp.loyee s ,for purposes of ..our'discussion, independent, contractor s Income ,and .,deductions . .attributable to(cid:127)the ; .: trade or busines s of an individual 'who performs services as~an,independent .

contractor are shown . on' Schedule C .r The resultant net ,profi t .or loss shown on the Schedule C is taken into accountin th e computation 'of adjusted gross income, .

.- Sec .. . 62 (a)'(1 ) as-,applicable for each year, eac h independent contractor .

expenses incurred by either petitioner as a City councilman or a school board member must be treated accordingly :

Generally, : income : earned as- an .employee' i°s- treated an d reportable l as " wages" on „-the employee ' s~Federal income tax return ., Ignoring' exceptions not relevant here , employee business expenses , to-the extent .not-reimbursed ,_ by an ; employer and subject to certain = .limitations, must be deducted on a . Schedule AA as miscellaneous itemized _deductions .

Secs 62 ( a) (263,( a), . (d)-, = 67.(a) and (b), 162(a) .

If petitioners are'treated'as erriployees rather tha n independent contractors, certain .consequences, no doubt-viewed,as- negative by'petitioners, .follow : (1)'Petitioners' trade o r business expense -deductionswould .be limited`.by section .67,( a (2) . their otherwise allowable itemized deductions(cid:127)-might be reduced/limited as provided'~in section 68 (takingdnto account their adjusted gross.' income) ; -and (2) they might .be -.subject to an alternative-minimum tax liability because'"miscellaneous itemized deductions are not'taken into account in the determinatio .n .of- a taxpayer's alternative minimum taxable income .

; .See sec .

56(b)'(1)(A)(i') 'Johnson v Commissioner , T :C . . Memo . 1993-530 . 2 On the other hand, it should"be noted'that treating each', petitioner as an independent contractor, rather than an employee could, under circumstances not presenthere, resultin "negative consequences as well--the imposition of the tax on the "ne t earnings . from' self-employment"each'redeivedfrom City . See secs . 1401 and 1402 .

Under the circumstances of this case, the worke r 'classification of each petitioner is informed by-the same controlling principles . It is unnecessary t,o consider each petitioner separately . Instead, the following discussion will apply to both . with respect to the public office held by each .

Generally, for Federal tax purposes, questions involving worker . classification are resolved with reference to common law- principles of agency . See Nationwide Mut . Ins . Co . v . Darden , 503 U .S . 318, 322-325 (1992) ; Weber v . Commissioner , 103 T .C .

378, 386 (1994), affd . 60 F .3d 1104 (4th Cir . 1995) ; Profl . & Executive Leasing, Inc . .v .Commissioner , 89 T .C . 225 ., 232 (1987 affd . 862 F .2d(cid:127)751 (9th Cir . 1988) . . Determining a worker' s classification generally. takes into account factors such as : (1) The .degree of control exercised by the principal over the detail, of the work ; (2)(cid:127)which party invests in the work facilities used by the worker ; (3) the . opportunity. of the,hired worker for profit or, loss ; (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 ; (7) the relationship the parties believed they were creating ; and (8) the provision of employee benefits that the principal typically provides to .employees . See NLRB v . United Ins . Co . of Am . , 390 U .S .,254, 25 8 (1968(cid:127)) ; United States v . Silk , `331 U .S . 704 (1947) ; Avis Rent A Car Sys Inc . v . United 'State's., 503 F .2d 423, 429.(2d Cir .

1974) ; Ewens & Miller ` Inc .-'j v . Commissioner , 117- T .C . ;, 263, 27 0 '(2001) ; Weber v . Commissioner ., supra at =387 ; Rosato `y .

Commiss16ne-r, 'T .C . Memo : 2010-39 .

All things considered, `we find' that for Federal 'income tax .purposes, attempting to establish~the<-worker classification of a public official by the application',of .the above- referenced ` factors 'is- somewhat like forcing round pegs into 'square holes .

Instead, we note that for empl_oymen,t tax purposes, the definitio n -'.'employee',' includesa public official .

See sec . 3401(c) .

Furthermore, for income tax purposes, only a public official wh o is compensated on .a fee basis may . deduct business expenses as an "independent contractor .", that is, on a Schedule{C rather than a Schedule A . See sec . 62(a)(2)(C) . 'Lastly, for purposes of civil .tort liability, each petitioner would be treated as an employe e of City . See La . .Rev . Stat . Ann . sec . 42 :1441 .3 (2006) .

In determining the worker classification of each petitioner , we ,a re more influenced by the statutory provisions referenced i n the preceding paragraph than we are by the application of th e above-listed common law factors to their respective publi c offices . -These statutory provisions, when,, considered . together, strongly suggest that consistent with their treatment for employment tax purposes, petitioners, as public officials, shoul d be treated as employees of City for Federal income tax purpose s as well . Petitioners' evidence and arguments that focus 8 - exclusively on the application of the common law factors do not persuade us to rule .in,a manner inconsistent with thi s suggestion . We find that for purposes relevant here, eac h petitioner is treated as an employee of City .

Because neither petitioner was compensated on a fee basis by City, the business expenses they incurred in their respective public offices must-be deducted accordingly ;, that is, on a Schedule A as .unreimbursed employee business expenses . See secs ., 62(a) (1) , : 63 (d) ., 67 (a) . Respondent's determination that provide s for that treatment'istherefore sustained .

,On the basis of the foregoing .,, Decision will be entere d under Rule 155 .