                  T.C. Summary Opinion 2006-125



                     UNITED STATES TAX COURT



     MICHAEL ALLEN BYER AND LARISA AKSENOVA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11292-04S.              Filed August 2, 2006.



     Michael Allen Byer, pro se.

     Robert V. Boeshaar, for respondent.




     COUVILLION, Special Trial Judge:    This case was heard

pursuant to section 7463 in effect when the petition was filed.1

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.


     1
      Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
                              - 2 -

     Respondent determined a deficiency of $11,746 in

petitioners’ Federal income tax for the year 2000 and the

accuracy-related penalty under section 6662(a) in the amount of

$2,298.

     The issues for decision are:   (1) Whether, for the year at

issue, Michael Allen Byer (petitioner) was a statutory employee

as a full-time life insurance salesman under section

3121(d)(3)(B) and section 31.3121(d)-1(d)(3)(ii), Employment Tax

Regs.; (2) whether petitioners are entitled to deductions for

disallowed trade or business expenses incurred in connection with

petitioner’s insurance activity; and (3) whether petitioners are

liable for the section 6662(a) accuracy-related penalty for the

year at issue.2

     Some of the facts were stipulated.   Those facts, with the

exhibits annexed thereto, are so found and made part hereof.


     2
      Sec. 7491(a) shifts the burden of proof to the Commissioner
where the taxpayer introduces credible evidence with respect to
any factual issue, if the taxpayer has complied with the
requirements for substantiation of any item at issue, has
maintained records with respect to such items, and has cooperated
with reasonable requests by respondent for such information.
Since the principal issue as to whether petitioner was a
statutory employee is essentially a question of law, and the
facts relating thereto are not in dispute, the question of who
has the burden of proof is not material. As to the expenses
relating to the principal issue, petitioners did not cooperate
with respondent’s requests for substantiating information prior
to trial, therefore, the burden of proof does not shift to
respondent. As to the sec. 6662(a) penalty, the burden of
production is on respondent. The Court’s conclusions, therefore,
on all issues, are made with due consideration to the burden of
proof requirements of sec. 7491.
                                - 3 -

Petitioners’ legal residence at the time the petition was filed

was Vancouver, Washington.

     Petitioner is an attorney who has a master of laws degree in

taxation and was previously employed as an auditor by the IRS

from 1987 to 1999.   From January 1999 through April 15, 2002

(which includes the year at issue), petitioner was engaged in an

income-producing activity with Corben Financial Services (Corben)

of Lake Oswego, Oregon.    The nature of petitioner’s income from

Corben and the nature of his activity is the principal issue in

this case.    After termination of his affiliation with Corben in

April 2002, petitioner became a truck driver, driving what he

described at trial as “an 18-wheeler”.

     Corben, from which petitioner earned income during the year

at issue, was in the trade or business of selling insurance,

primarily life insurance.    Corben represented several life

insurance companies, and the employees and/or agents of Corben

were engaged in selling insurance that would meet the needs of

its customers.   Corben, through its agents or employees,

conducted workshops, seminars, and marketing campaigns designed

to promote the sale of insurance.    Petitioner was one of Corben’s

agents or employees and participated in these sale and marketing

activities.

     For the year at issue, petitioners filed a joint Federal

income tax return, on which they reported no salary or wage
                              - 4 -

income, but, on a Schedule C, Profit or Loss From Business, they

reported petitioner’s income and expenses from Corben as follows:


     Gross receipts or sales (gross income)             $61,100
     Expenses:
       Advertising                            $ 3,014
       Bad debts                                2,010
       Car and truck expenses                  14,046
       Insurance                                1,550
       Legal and professional                     876
       Repairs and maintenance                  1,845
       Supplies                                 2,310
       Taxes and licenses                         850
       Travel                                   4,295
       Meals and entertainment (net)            3,617
       Utilities                                  810
       Other expenses                           7,599
                                                        (42,822)
        Net profit                                      $18,278


     Petitioners did not include with their return a Schedule SE,

Self-Employment Tax, for self-employment tax that would

ordinarily be due on the $18,278 in net profit.   In the notice of

deficiency, respondent determined self-employment tax on that

income and disallowed deductions for some of the claimed

expenses.

     As described above, all of the gross income on petitioners’

Schedule C was the compensation petitioner received from Corben.

Petitioners contend that they are not liable for self-employment

tax on the net earnings from Corben for the reason that

petitioner was a statutory employee of Corben, a position that

respondent does not agree with, thus framing the principal issue

before the Court.
                                - 5 -

     Respondent contends that petitioner was not a statutory

employee but was engaged in a self-employed trade or business

activity.   Accordingly, respondent determined that, after

adjustments to the claimed expenses, the net income from the

activity was subject to self-employment tax under section 1401.

Corben did not consider petitioner to be an employee and,

therefore, withheld no income tax and paid no Social Security

taxes on the compensation paid to petitioner.

     Adjusted gross income generally consists of gross income

less trade or business expenses, except in the case of the

performance of services by an employee, generally referred to as

a common law employee.   Sec. 62.   An individual performing

services as a common law employee deducts such expenses as

miscellaneous itemized deductions incurred in the performance of

services as an employee but only to the extent the expenses

exceed 2 percent of the employee’s adjusted gross income.      Sec.

67(a).   A statutory employee, on the other hand, pursuant to

rulings by the Commissioner, is not an employee for purposes of

sections 62 and 67, and, therefore, a statutory employee under

section 3121(d)(3) is not subject to the section 67(a) 2-percent

limitation for expenses incurred by such employee in the

performance of services as an employee.    Rev. Rul. 90-93, 1990-2

C.B. 33.    Thus, an individual who is a statutory employee under

section 3121(d)(3) is allowed to deduct expenses from gross
                                - 6 -

income that otherwise would be subject to the 2-percent

limitation of section 67(a).

     An employee for employment tax purposes is defined in

pertinent part by section 3121(d) as follows:


          SEC. 3121(d). Employee.--For purposes of this chapter,
     the term “employee” means--

               (1) any officer of a corporation; or

               (2) any individual who, under the usual common law
          rules applicable in determining the employer-employee
          relationship, has the status of an employee; or

               (3) any individual (other than an individual who
          is an employee under paragraph (1) or (2)) who performs
          services for remuneration for any person--

          *       *        *       *       *       *       *

                      (B) as a full-time life insurance salesman;


     For purposes of section 3121(d)(3)(B), section 31.3121(d)-

1(d)(3)(ii), Employment Tax Regs., defines a “full-time life

insurance salesman” as:


     An individual whose entire or principal business activity is
     devoted to the solicitation of life insurance or annuity
     contracts, or both, primarily for one life insurance company
     is a full-time life insurance salesman. * * * An
     individual who is engaged in the general insurance business
     under a contract or contracts of service which do not
     contemplate that the individual’s principal business
     activity will be the solicitation of life insurance or
     annuity contracts, or both, for one company, or any
     individual who devotes only part time to the solicitation of
     life insurance contracts, including annuity contracts, and
     is principally engaged in other endeavors, is not a full-
     time life insurance salesman. [Emphasis added.]
                               - 7 -

     Accordingly, under the foregoing regulation, a full-time

life insurance salesman is an individual who principally sells

life insurance and annuity contracts for one insurer.    Whether an

individual taxpayer satisfies this standard “depends upon the

facts of the particular situation.”    Sec. 31.3121(d)-1(d)(2),

Employment Tax Regs.

     In this case, the facts are not in dispute.    At trial,

petitioner named at least six insurance companies from which he

placed insurance for clients, based upon their individual needs.

Additionally, the parties at trial stipulated a statement from

the chief executive officer of Corben addressed to a tax

compliance officer of the IRS regarding petitioner’s status with

Corben.   That statement, in pertinent part, stated:


     Michael Byer never was a salaried employee, therefore there
     are no W2 forms. As for his 1099’s for 2000, 2001, and
     2002, he and his CPA should be able to provide those for
     you. We never had an employment agreement with Michael. He
     was only paid commissions that resulted from life insurance
     sales with which he was involved.

     Mr. Byer was hired in December 1998, starting in our office
     January 1999. We were impressed with his insurance
     knowledge and his tax knowledge. I felt this would help our
     firm with life insurance sales. Mr. Byer held a valid life
     insurance license required by law and necessary for this
     position with The Corben Institute. We sell life insurance;
     it’s our only source of income.

     Michael was a life insurance agent but was required to help
     with our marketing campaigns. He assisted us with
     developing our materials, such as brochures and
     presentations. He used his legal and tax knowledge to get
     clients and their financial advisors to meet with our
     agency.
                               - 8 -

     As I mentioned in our telephone conversation, Michael
     handled workshops and attended many outside meetings and
     seminars representing The Corben Institute. The biggest
     part of life insurance sales is getting in front of people
     who need life insurance or people who can recommend to
     others to buy life insurance from us, Michael was a large
     part of our success.

     Michael was paid $5,000 a month, which was based on our life
     insurance sales. We are in the Life Insurance business, all
     of our income comes from commissions. Everyone in the
     office was asked to do other jobs from time to time but
     everyone knew we live and die based on commissions from life
     insurance sales.


     It is quite evident, therefore, that petitioner’s work with

Corben was not devoted to one insurance company, and, moreover,

petitioner was required to perform other duties for Corben beyond

selling insurance.   Additionally, the statement establishes that

petitioner was not considered an employee by Corben.

Petitioner’s earnings from Corben were reflected on Forms 1099,

which indicate that petitioner was considered to be self-employed

and not an employee.   The Court holds, therefore, that petitioner

was not an employee of Corben, nor was he a statutory employee.3

Petitioner was engaged in a self-employment activity, and, as

such, his net earnings from that activity were subject to self-

employment tax.   Respondent, therefore, is sustained in


     3
      The Court notes, however, that there are certain facets of
petitioner’s relationship with Corben that would indicate an
employer-employee relationship, such as the fact that petitioner
was paid $5,000 per month rather than commissions, and that
Corben had some control over petitioner, such as his required
participation in seminars and marketing promotions. The Court
does not consider these factors as overriding.
                               - 9 -

concluding that petitioner was not a statutory employee and was

engaged in a self-employment activity, the net income of which is

subject to self-employment tax as determined in the notice of

deficiency.

     The second issue relates to adjustments in the notice of

deficiency as to the income and expenses reported by petitioners

on their income tax return for 2000 relating to the activity with

Corben reported on Schedule C.4

     On Schedule C, petitioners reported gross receipts of

$61,100.   In the notice of deficiency, respondent increased that

amount by $1,000.   Petitioner did not address this adjustment at

trial; consequently, that adjustment is deemed conceded.   As to

the expenses, the amounts deducted on Schedule C and the amounts

disallowed are as follows:


                                   Claimed on     Disallowed by
                                     Return         Respondent

     Other expenses                    $ 7,599       $ 7,599
     Car and truck expenses             14,046        14,046
     Meals and entertainment             3,617         3,617
     Repairs and maintenance             1,845         1,845
     Travel                              4,295         4,295
     Legal and professional                876           876


     As to the other expenses of $7,599 shown above, respondent

at trial conceded that petitioner was entitled to a deduction of


     4
      In the notice of deficiency, respondent determined capital
gain income of $816. At trial, petitioner conceded this
adjustment.
                              - 10 -

$610 for parking.   Respondent also conceded that petitioner was

entitled to a deduction for supplies.   That concession is not

clear because petitioner claimed a separate line item expense of

$2,310 for supplies on Schedule C of the return, and that amount

was not disallowed or adjusted in the notice of deficiency.

Since a Rule 155 computation will be necessary in this case, the

nature and amount of this concession can be taken into

consideration by the parties in determining the deficiency.

     With respect to the expenses listed above for car and truck,

meals and entertainment, and travel, petitioner did not address

those at trial.   Instead, petitioner offered into evidence

envelopes as to each of these expenses containing receipts that

he contends would substantiate the amounts claimed on the return.

The envelopes referred to essentially contain only receipts;

however, the substantiation requirements of section 274(d) appear

to be applicable to all the amounts claimed.    No books and

records were offered to corroborate or otherwise satisfy the

strict substantiation requirements of section 274(d).

Petitioner, being a former auditor for the IRS, certainly knew

what is required for substantiation of expenses of this nature.

The Court, therefore, declines to consider the exhibits offered

as proof that the expenses claimed are deductible.    Respondent,

therefore, is sustained as to those expenses.
                               - 11 -

     The final issue is respondent’s determination that

petitioners are liable for the section 6662(a) accuracy-related

penalty.

     Section 6662(a) imposes an accuracy-related penalty in the

amount of 20 percent on any portion of an underpayment of tax

that is attributable to causes set forth in subsection (b).

However, under section 6664(c), no penalty shall be imposed under

section 6662(a) with respect to any portion of an underpayment if

it is shown that there was a reasonable cause for the

underpayment and that the taxpayer acted in good faith with

respect to the underpayment.

     The determination of whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case

basis.   Sec. 1.6664-4(b), Income Tax Regs.   The most important

factor is the extent of the taxpayer’s effort to assess the

taxpayer’s proper tax liability.   See id.    An honest

misunderstanding of fact or law that is reasonable in light of

the experience, knowledge, and education of the taxpayer may

indicate reasonable cause and good faith.     Remy v. Commissioner,

T.C. Memo. 1997-72.   Here, petitioner is an attorney with a

specialized degree in tax law who was employed as an auditor by

the IRS for several years.   His education, knowledge, and

experience in that field place him in a category that few
                             - 12 -

taxpayers who come before this Court have.   The Court has no

choice but to sustain respondent on this issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                   Decision will be entered

                              under Rule 155.
