                   T.C. Summary Opinion 2005-1



                     UNITED STATES TAX COURT



                JOHN A. WALZ, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17415-03S.           Filed January 3, 2005.


     Charles Herbert Magnuson, for petitioner.

     Valerie L. Makarewicz, for respondent.



     PAJAK, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the
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Tax Court Rules of Practice and Procedure.

     Respondent determined a deficiency in petitioner’s 2000

Federal income tax in the amount of $18,468, an addition to tax

under section 6651(a)(1) in the amount of $2,403, and a penalty

under section 6662(a) in the amount of $5,181.

     The Court must decide whether petitioner is an employee and,

if so, whether he is entitled to deduct certain business

expenses, whether petitioner is entitled to deduct home office

expenses, whether petitioner is subject to an addition to tax

under section 6651(a)(1), and whether petitioner is subject to a

penalty under section 6662(a).

     Some of the facts in this case have been stipulated and are

so found.   Petitioner resided in Pasadena, California, at the

time he filed his petition.

     During 2000, petitioner was a professional cellist.      In

fact, he was and is internationally, as well as nationally,

recognized as a cellist of exceptional ability.      Petitioner’s

career has many facets.    His main focus is as a concert soloist.

He also teaches music.    He does “studio work”, recording

background music for movies and television.      Petitioner has

performed for about 600 motion pictures.

     Petitioner is a founding member of the Pacific Trio,

together with pianist Edith Orloff.      Petitioner is a faculty

member of Idyllwild Arts.
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     Petitioner was a member of the Professional Musicians,

American Federation of Musicians, Local 47; and Long Beach Area

Musicians Association, Local 353, American Federation of

Musicians.

     Petitioner performed under union agreements.   The following

are some of the agreements:   Master Agreement between The Music

Center Opera Association and the Professional Musicians, Local

47; Agreement between The Musicians Association, Local 353, A.F.

of M. and The Long Beach Symphony Association.

     Petitioner offered his professional services to various

musical organizations.    There is no question but that petitioner

kept his abilities and his cellos in fine tune so that he could

perform in an exceptional manner.   During 2000, petitioner

performed for 25 organizations and received 25 Forms W-2, Wage

and Tax Statement.   The organizations withheld Federal, State,

Social Security, and Medicaid taxes from petitioner’s earnings.

     Petitioner performed for the Los Angeles Opera (Opera) for

approximately 10 years.   The Opera selected the music to be

performed.   The Opera provided him with the music for the season.

The Opera required petitioner to attend rehearsals.   The Opera

set the time and length of the rehearsals.    Petitioner could not

leave the rehearsals unless he was excused.   The Opera would set

the dress uniform, whether tuxedo or otherwise, for the

performances.   Petitioner claimed he had “quite a bit of say”
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over the personnel in the cello section and some input as to the

rest of the orchestra.

     Petitioner worked for the Long Beach Symphony (Symphony) for

20 years under conditions similar to those of the Opera.

     Petitioner is hired for his “interpretive abilities” but is

subject to the unifying influence of the conductor.      Petitioner

did not hold himself out to the Opera as an independent

contractor.    Petitioner was paid for each performance by an

hourly wage set by union contract.      Petitioner did not submit a

bill to the Opera for services rendered.      Petitioner said the

union contract specified that the “principal gets scale and half,

and I was able, because of my reputation, to request double

scale”.

     Petitioner also provided background music for motion

pictures.   The movie companies would instruct him when to come

and perform.    The movie companies provided him with the music.

There are no rehearsals because “rehearsing and recording is all

done as part of the same session.”      He could not leave the

performance at will.    Petitioner did not submit bills to the

movie companies, except bills were submitted for cartage (“extra

money * * * for lugging around large instruments”).

     A representative for the Opera testified that the Opera

withheld taxes, made contributions to petitioner’s pension plan,

and that the contributions were mandatory under the collective
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bargaining agreement.    The Opera contributed “on behalf of each

musician it employs in the amount of 10% of that Musician’s Scale

wages.”   The collective bargaining agreement provides for

employer rights as follows:

     Employer’s Rights: The Employer shall at all times have
     complete supervision, direction and control over the
     Services of Musicians, and expressly reserves the right to
     control the manner, means and details of the performance of
     Services by the Musicians as well as the ends to be
     accomplished.

The representative also observed that the Opera pays for

petitioner’s parking and his workmen’s compensation.     The Opera

considered petitioner to be an employee.

     A representative from the Symphony testified that his

orchestra issued a Form W-2 to petitioner, withheld FICA and

Medicare, and made 8 percent pension contributions, and 6 percent

contributions to petitioner’s health and welfare fund in

accordance with the union contract.     The representative stated

that “we consider our musicians part-time employees”.

     Petitioner requested an extension of time to file his 2000

return, which was granted until August 15, 2001.     Petitioner had

no further extensions.   His return was filed on November 21,

2001.

     Petitioner filed his Form 1040, U.S. Individual Income Tax

Return, for 2000 with an attached Schedule C, Profit or Loss From

Business.   The return was prepared by Mr. Henry Orloff, a tax

practitioner and petitioner’s accountant.     On the Schedule C,
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petitioner reported his profession as “INDEPENDENT PROFESSIONAL

MUSICIAN/SOLOIST CELLIST-Classic Music.”   His reporting Code was

listed as 711510 (Independent artists, writers, & performers).

For 2000, petitioner reported $174,367 of income on his Schedule

C.

     Petitioner claimed deductions on the Schedule C for the

following expenses, which total $83,588:

        Auto                               $ 5,907
        Depreciation                        12,161
        Insurance                            2,632
        Interest                               350
        Legal/professional                   1,000
        Office                               1,874
        Rent                                 6,869
        Repairs                              3,741
        Supplies                             2,707
        Travel                              10,135
        Meals                                1,969
        Utilities                            5,014
        Other                               20,687
        Home office                          8,542

     Respondent issued a notice of deficiency on August 11, 2003.

Respondent disallowed the Schedule C expenses and made

computational and other adjustments.

     After the notice of deficiency was issued, petitioner filed

a Form 1040X, Amended U.S. Individual Income Tax Return, for 2000

on September 14, 2004.   On that form, petitioner stated that he

was “Changing from originally filed Schedule C with Form 1040, to

using Form 2106 (Employee Business Expense)”.   In his amended

return, petitioner substantially reduced his claimed business

expenses.
                                - 7 -

     We first consider the issue presented and argued by the

parties of whether petitioner is an employee or is self-employed.

     This Court considers various factors to determine whether

there is an employment relationship between the parties.

Relevant factors include: (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 or not 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.      No one factor dictates the

outcome.    Rather, we must look at all the facts and circumstances

of each case.    Weber v. Commissioner, 103 T.C. 378, 379 (1994),

affd. 60 F.3d 1104 (4th Cir. 1995).

     The “right-to-control” test is a crucial test to determine

the nature of a working relationship.     The degree of control is

of great importance, though not conclusive.     Accordingly, we must

examine not only the control exercised by an alleged employer,

but also the degree to which the alleged employer may intervene

to impose control.   For an employer to retain the requisite

control over the details of an employee’s work, the employer need

not stand over the employee and direct every move made by that

employee.   Also, the degree of control necessary to find employee
                               - 8 -

status varies according to the nature of the services provided.

Id. at 387-388.

     The threshold level of control indicative of employee status

is generally lower when applied to professional services than

when applied to nonprofessional services.    Id.   In James v.

Commissioner, 25 T.C. 1296 (1956), this Court stated that

“despite this absence of direct control over the manner in which

professional men [and women] shall conduct their professional

activities, it cannot be doubted that many professional men [and

women] are employees.”   Also, in Azad v. United States, 388 F.2d

74, 77 (8th Cir. 1969), the Court of Appeals said that “From the

very nature of the services rendered by * * * professionals, it

would be wholly unrealistic to suggest that an employer should

undertake the task of controlling the manner in which the

professional conducts his activities.”   Generally a lower level

of control applies to professionals.   Petitioner is a

professional musician.

     Section 7491(a) is not applicable in this case because

petitioner did not meet the substantiation requirements.

Petitioner has the burden of proof.    Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933).

     Petitioner contends that no one had the right to control

either the method or the means by which he played his cello.

However, there is no question but that the musical organizations
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exercise control over petitioner in specifying when he plays, in

determining the length of his performance, when he participates

in rehearsals, whether he can take breaks, which dress uniform he

is required to wear, and in making him subject to the

instructions of the conductor.    The musical organization provides

the place for rehearsals, the place for performances, and the

music used.   Petitioner has the opportunity to work for an hourly

wage and we note he was an economically successful musician even

after deduction of allowable expenses.   His performances are

obviously part of the principal’s regular business.    Petitioner

has had a long-term relationship with at least two significant

musical organizations.   Petitioner never held himself out as an

independent contractor to the musical organizations.    He did so

only when he filed his original return for 2000.   He retreated

from that position when he filed his amended return, in effect

admitting he was an employee.    The musical organizations treated

him as an employee, considered him to be an employee, issued

Forms W-2, made withholding of various taxes, and made pension

contributions on his behalf.

     Weighing all the facts and circumstances, we find that

petitioner was an employee during the year in issue.

     We turn to the issue of whether petitioner is entitled to

deduct certain expenses.   Respondent disallowed petitioner’s

Schedule C deductions in full and determined that petitioner did
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not establish that the Schedule C expenses were ordinary and

necessary business expenses of petitioner.     At trial, the parties

treated these deductions as though they were claimed as employee

business expenses and so shall we.

     In this posture of the case, we must decide whether the

expenses in question are deductible as ordinary and necessary

business expenses of petitioner’s employment.     Our findings in

this record are based in part upon the testimony of petitioner.

Our evaluation of petitioner’s testimony is founded upon “the

ultimate task of a trier of the facts – the distillation of truth

from falsehood which is the daily grist of judicial life.”      Diaz

v. Commissioner, 58 T.C. 560, 564 (1972).     In this case, we found

petitioner to be an honest, sincere, and credible witness.

     Section 162(a) allows a deduction for all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.     To be deductible as a

business expense, the expenditure must relate to activities which

constitute the current carrying on of an existing trade or

business.   Corbett v. Commissioner, 55 T.C. 884, 887 (1971).

Whether activities carried on by an individual can be

characterized as a trade or business is a question of fact.     Id.

at 887.   This Court has long held that a taxpayer may be in the

trade or business of being an employee.     Primuth v. Commissioner,

54 T.C. 374, 377 (1970).
                              - 11 -

     Deductions are strictly a matter of legislative grace.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Taxpayers must substantiate claimed deductions.     Hradesky v.

Commissioner, 65 T.C. 87, 89 (1975), affd. per curium 540 F.2d

821 (5th Cir. 1976).   Moreover, taxpayers must keep sufficient

records to establish the amounts of the deductions.     Meneguzzo v.

Commissioner, 43 T.C. 824, 831 (1965); sec. 1.6001-1(a), Income

Tax Regs.   Generally, except as otherwise provided by section

274(d), when evidence shows that a taxpayer incurred a deductible

expense, but the exact amount cannot be determined, the Court may

approximate the amount, bearing heavily if it chooses against the

taxpayer whose inexactitude is of his own making.     Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).    The Court,

however, must have some basis upon which an estimate can be made.

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

     Section 274(d) imposes stringent substantiation requirements

for the deduction of traveling expenses (including meals and

lodging while away from home), and certain listed property as

defined under section 280F(d)(4).   Listed property includes any

passenger automobile or other property used as a means of

transportation.   Taxpayers must substantiate by adequate means

certain elements in order to claim deductions, such as the amount

of such expenditure, the date of the expenditure or use, the
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place of each separate expenditure, and the business purpose for

an expenditure or use.    Sec. 274(d); sec. 1.274-5T(b), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).    To

substantiate a deduction by means of adequate records, a taxpayer

must maintain an account book, diary, log, statement of expense,

trip sheets, and/or other documentary evidence, which, in

combination, are sufficient to establish each element of

expenditure or use.    The log must be made at or near the time of

the expenditure.    Sec. 1.274-5T(c)(2)(i) and (ii), Temporary

Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

     Petitioner is entitled to deduct $350 for interest on

purchases of business items and $1,874 for expenses relating to

his computer.    The computer was used to send “CD” labels to

conductors and booking agents.    Petitioner paid $1,000 for tax

return preparation and he is entitled to deduct that amount.

     Section 280A limits the allowance of deductions related to

the use of a home office.    There is an exception if a portion of

the house is used exclusively on a regular basis as the principal

place of business for the taxpayer’s trade or business.      Sec.

280A(c)(1)(A).    Section 280A(c) requires that the taxpayer “use

the portion of the home solely for the purpose of carrying on a

trade or business and that there be no personal use of that part

of the home.”    Sengpiehl v. Commissioner, T.C. Memo. 1998-23.

     Petitioner claimed a $8,542 deduction for home office
                                - 13 -

expenses.    Petitioner had a residence in Pasadena and used one

bedroom solely as a studio/home office.      In his home office,

petitioner practiced his cello for several hours almost daily.

He had part of his music library there.      He kept his cello there.

He described the cello as follows:       “It’s a beautiful cello made

in France in the late 1800s by a maker named Joseph Hel.”

Petitioner stored his extra cellos there.      He has a computer and

printer on his computer desk.     Petitioner kept his recording

equipment there for use by his students and himself.      Petitioner

is entitled to deduct $8,542 for home office expenses.       Popov v.

Commissioner, 246 F.3d 1190 (9th Cir. 2001), revg. on this issue,

T.C. Memo. 1998-374.    The Ninth Circuit is the circuit to which

this case would be appealable if it were appealable.      His

additional claim for the expenses of another studio in Idyllwild

is denied because as he put it:     “the entire sort of downstairs

is one long room that I use.”     Petitioner did not claim it was

used exclusively for a studio, and at a minimum he had to walk

through that room to get to the upstairs.

     Petitioner deducted $3,741 for repairs.      Petitioner had all

the bills concerning repairs to his cello.      This included new

strings, rehairing the bow, related adjustments, and a new

bridge.     Petitioner is entitled to deduct this amount.

     Petitioner claimed $2,707 for supplies.      He conceded he

could provide documentation only for $2,689.72.      Part of this
                                - 14 -

expense related to a tour he produced with Ensemble Con Brio

(Ensemble), a German chamber orchestra.      He provided brochures

for the concert programs.   These were printed on a computer.     He

paid postage to send them out.    Petitioner toured with Ensemble

playing the “Haydn” concerts.    Petitioner was the soloist on this

tour.   They recorded their performance at the end of the tour.

Petitioner is entitled to deduct the revised amount for supplies.

     The claimed $10,135 for travel was also with Ensemble.     The

travel was for the rental of vans to transport the groups and for

airline fare to reach destinations.      Petitioner also claimed a

deduction for automobile expenses and automobile insurance.

    Unfortunately for petitioner, Congress has passed section 274

with respect to traveling expenses (including meals and lodging

while away from home), and listed property.      As detailed above,

section 274(d) imposes stringent substantiation requirements for

the deduction of these expenses.    Petitioner did not meet the

strict substantiation rules of section 274.      He is not entitled

to a deduction for these expenses.

     The claimed deduction of $1,969 is for meals petitioner ate.

Based on petitioner’s testimony, we find this to be a non-

deductible personal expense under section 262.      As the Court said

at trial:   “Not everything in life is deductible.”

     The deduction for other expenses represents various items.

Petitioner testified that $566 was for the purchase of CDs,
                               - 15 -

books, DVDs, and sheet music, all of which related to his

profession.   A $670 charge was for new publicity shots.    The

foregoing items are deductible.    Attending various concerts is a

nondeductible personal expense.    Sec. 262.   Petitioner is

entitled to deduct the union dues he paid of $3,415 and business-

related bank fees of $1,679.

      All other determinations by respondent are sustained.

      Section 7491(c) places the burden of production on

respondent with respect to the liability of any individual for

any penalty, addition to tax, or additional amount.     Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).    To meet his burden of

production, respondent must come forward with sufficient evidence

indicating that it is appropriate to impose the relevant penalty.

Id.   The burden of proof remains on the taxpayer with respect to

issues such as reasonable cause or substantial authority.      Id.

Because petitioner untimely filed his 2000 return, respondent has

satisfied his burden of production with respect to the addition

to tax under section 6651(a)(1).    Id. at 447.   Respondent has

satisfied his burden of production with respect to the accuracy-

related penalty under section 6662(a) because petitioner took

inconsistent positions on his return and amended return.

      Section 6651(a)(1) provides for an addition to tax for

failure to file a Federal income tax return by its due date,

determined with regard to any extension of time for filing
                                - 16 -

previously granted, unless such failure was due to reasonable

cause and not willful neglect.     The addition is 5 percent of the

amount of tax required to be shown on the return, with 5 percent

added for each additional month that the return is late, not to

exceed 25 percent in total.

     Section 6081 provides that an extension may be granted for

the filing of a return.    Petitioner received an extension to file

his return to August 15, 2001.     Nevertheless, he did not file a

return until November 21, 2001.     Petitioner offered no

explanation for his late filing.     Respondent is sustained on this

issue.

     No penalty shall be imposed under section 6662(a) with

respect to any portion of an underpayment if it is shown that

there was reasonable cause and that the taxpayer acted in good

faith.   See sec. 6664(c).    Whether a taxpayer acted with good

faith depends upon the facts and circumstances of each case.       See

sec. 1.6664-4(b)(1), Income Tax Regs.     Reliance on the advice of

a professional tax adviser constitutes reasonable cause and is in

good faith if, under all the circumstances, the reliance was

reasonable and the taxpayer acted in good faith.     United States

v. Boyle, 469 U.S. 241, 251 (1985).

     Petitioner supplied his accountant with complete and

accurate information.     Petitioner relied totally on Mr. Henry

Orloff, his accountant, to prepare his income tax return.     Mr.
                               - 17 -

Orloff was experienced in tax matters and held himself out as a

tax practitioner.   Petitioner reasonably relied on his advice,

and we find that he is not liable for the penalty under section

6662(a).    Woody v. Commissioner, 19 T.C. 350, 355 (1952).

     Contentions we have not addressed are irrelevant, moot, or

without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                          Decision will be entered

                                     under Rule 155.
