                  T.C. Summary Opinion 2001-61



                     UNITED STATES TAX COURT



               SHAWNEE E. TEFTELLER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13578-99S.                    Filed April 23, 2001.


     David R. Reid, for petitioner.

     James A. Kutten, for respondent.



     GOLDBERG, 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 Rule references are to the Tax

Court Rules of Practice and Procedure.
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     Respondent determined a deficiency in petitioner’s Federal

income tax for the taxable year 1993 in the amount of $2,072.

     After a concession by respondent,1 the issues remaining for

decision are:   (1) Whether settlement proceeds received in 1993

by petitioner are includable in gross income arising from her

employment or are gross receipts or sales income reportable on

Schedule C, Profit or Loss From Business; (2) whether legal fees

and costs associated with the settlement are itemized deductions

properly claimed on Schedule A, Itemized Deductions, or ordinary

and necessary business expenses deductible on Schedule C; and (3)

whether a payment of $3,728.65 to petitioner’s former spouse,

Steven E. Anderson (Mr. Anderson), is deductible on petitioner’s

Schedule C.   The first two issues turn on whether petitioner was

an independent contractor for the period August 14, 1987, through

February 29, 1988.

Background

     The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time the petition

was filed, petitioner resided in Hillsboro, Illinois.

     Petitioner specializes in the field of modeling.   She has an

associate’s degree and about 5 years of internal training with


     1
          Respondent concedes that for 1993, petitioner is
entitled to deduct additional Schedule C, Profit or Loss From
Business, expenses of $2,740, which were raised for the first
time at trial, for “Shawnee Studios”, a modeling consulting
service in business during 1993.
                                 - 3 -

Model Merchandising, Inc. (MMI) of New York.      Beginning in 1983,

petitioner was employed by Gilbert Gans (Mr. Gans) in a modeling

agency located in St. Louis, Missouri.      While under Mr. Gans’

employment, petitioner was trained in various aspects of the

modeling business.    During all relevant times, Mr. Gans’ modeling

agency was associated with other entities and franchise holders,

including, inter alia, MMI, Community Vocational Schools of

Louisiana, Inc., Model Management, Agency, Inc., National

Educational Acceptance Corporation, and Community Vocational

Schools, Inc.

     From August 1987 through April 1988, petitioner moved to New

Orleans, Louisiana, to operate a modeling studio known as John

Casablancas Career Center (studio).      The record is unclear

regarding to what extent the studio was owned by Mr. Gans

individually, or with an associated group of entities.

     Also in August 1987, petitioner, Mr. Anderson, Mr. Steve

Brown (Mr. Brown), and Mr. Gary Knox (Mr. Knox) began the

formation of an entity known as Neena Mosha,2 for the purpose of

purchasing the studio from Mr. Gans and/or his other associated

entities.3    Petitioner testified that a sales contract for the



     2
             Neena Mosha means “little sweetheart” in the Cherokee
language.
     3
          The record is unclear as to the intended entity
petitioner, Mr. Anderson, Mr. Brown, and Mr. Knox were attempting
to form, or whether the formation process was completed.
                               - 4 -

purchase of the studio was drafted and reviewed by the Neena

Mosha “investors”.   Petitioner recalled seeing the draft on two

occasions; however, the draft of the sales contract was destroyed

during a home fire and was never executed by the interested

parties.

     In New Orleans, petitioner used an office apartment to

conduct business for the studio.   Petitioner testified that a

business telephone line was installed, and any pertinent business

correspondence was mailed and received at that location.

Petitioner offered consulting services to Avante Studios in Cedar

Rapids, Iowa, and Franchise Business International in Los

Angeles, California.

     Around April of 1988, Neena Mosha’s “investors” began to

experience some difficulties: petitioner and Mr. Anderson were

having marital problems, and Mr. Knox and Mr. Brown became

unavailable due to personal tax problems.   Petitioner ceased

operations in New Orleans, and the studio was not purchased from

Mr. Gans.   A dispute arose between petitioner and Mr. Gans as to

payment for the services petitioner rendered.   On August 28,

1988, petitioner (formerly known as Shawnee Anderson) filed a

civil lawsuit against Community Vocational Schools of Louisiana,

Inc., Model Management Agency, Inc., National Educational

Acceptance Corporation, Community Vocational Schools, Inc., and

Gilbert J. Gans, in the Circuit Court of St. Louis County,
                               - 5 -

Missouri, case No. 582034 (collectively Mr. Gans and his related

businesses).

     Petitioner and Mr. Gans and his related businesses executed

a written Release and Settlement Agreement on April 5, 1993.     A

settlement check of $15,000 (settlement award), payable to

petitioner and her attorney William Moench (Mr. Moench), was

issued pursuant to the Release and Settlement Agreement on June

2, 1993.   Petitioner’s attorney’s fees were $6,542.70 ($5,000

plus $1,542.70 costs).   Petitioner received two checks from Mr.

Moench’s client trust account, dated June 17, 1993, of $3,728.65

and $4,728.65.   The first check payable to petitioner was

earmarked for “Steve Anderson interest in Gans settlement” and

allegedly paid to Mr. Anderson.

     Previously, on March 2, 1989, petitioner filed a petition

for dissolution of her marriage to Mr. Anderson, in the Circuit

Court of the Sixth Judicial District of Macon County, Illinois.

Petitioner’s Judgment of Dissolution of Marriage (dissolution

judgment) was issued on February 7, 1990.

     Petitioner filed her 1993 Federal income tax return on

October 17, 1994.   The settlement proceeds were not reported

thereon, nor were corresponding deductions claimed for attorney’s

fees and costs or payments to Mr. Anderson.   An amended income

tax return, Form 1040X, was allegedly prepared and signed by the

return preparer and petitioner on or about December 27, 1997.
                               - 6 -

Respondent does not have an original or copy of the Form 1040X on

file with the Internal Revenue Service.   At trial, petitioner

gave a second Form 1040X, signed on March 6, 2000, to respondent.

Petitioner reported the settlement proceeds of $15,000 on her

Schedule C, as gross income, on each Form 1040X.   Petitioner

further deducted, on each Form 1040X, attorney’s fees and costs,

related to the litigation, under legal and professional services

on Schedule C.   However, on the Form 1040X signed on March 6,

2000, petitioner further deducted an amount paid to Mr. Anderson

from the settlement award.

     In a notice of deficiency, respondent determined that

settlement proceeds of $15,000 received by petitioner were fully

includable in gross income and attorney’s fees and costs

associated with the litigation were Schedule A miscellaneous

itemized deductions, subject to the 2-percent limitation under

section 67.   Lastly, respondent determined that petitioner is not

entitled to deduct payments made to her former husband from the

settlement award.

Independent Contractor or Employee

     To determine whether a taxpayer is an independent contractor

or an employee, common-law rules apply.   See Weber v.

Commissioner, 103 T.C. 378, 387 (1994), affd. per curiam 60 F.3d

1104 (4th Cir. 1995).   Courts consider various factors to

determine whether an employment relationship exists between the
                                 - 7 -

parties, including:    (1) The degree of control exercised by the

principal; (2) which party invests in work facilities used by the

individual; (3) the opportunity of the individual 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; and (7) the relationship the

parties believed they were creating.     See id.   All the facts and

circumstances of each case should be considered.     See id.

     The right of control is ordinarily the crucial factor in

determining whether an employer-employee relationship exists.

See Matthews v. Commissioner, 92 T.C. 351, 361 (1989), affd. 907

F.2d 1173 (D.C. Cir. 1990).     To retain the requisite control over

the details of an individual’s work, the principal need not stand

over the individual and direct every move made by the individual.

See Weber v. Commissioner, supra at 388.

     Petitioner failed to establish that she had sufficient

control over the type of work or services she performed for Mr.

Gans and his related businesses at the time the services were

rendered to be classified as an independent contractor.     There is

scant evidence in this case besides petitioner’s own testimony.

It is well settled that we are not required to accept a

taxpayer’s self-serving testimony in the absence of corroborating

evidence.    See Niedringhaus v. Commissioner, 99 T.C. 202, 212

(1992).     Furthermore, the record is unclear as to the nature of
                                - 8 -

her relationship with Mr. Gans and his related businesses.

     Petitioner contends that her alleged involvement with Neena

Mosha is sufficient to establish that she was not an employee of

Mr. Gans and his related businesses, but rather an employee or

agent of Neena Mosha.    However, there are no records showing that

Neena Mosha was ever formed or that it conducted any viable

business.4    Petitioner maintains that the documentary evidence

was destroyed in the fire.    She seems to further argue that

because she had viewed the document on at least two separate

occasions before the fire, that should suffice to prove the

existence of Neena Mosha, and thus her status as an independent

contractor.    We disagree.

     Assuming the purported sales contract existed, it is not the

only reliable evidence establishing the existence of an entity.

The record is severely lacking other forms of documentary

evidence corroborating the existence and/or operation of Neena

Mosha: for example, business cards; business bank accounts and

checks; business stationery; invoices for services rendered;

utility bills, including telephone bills; office supply

purchases; State business franchise tax filings; or testimony

from the alleged “investors” or business associates that Neena

Mosha provided consulting services (i.e., Avante Studios and


     4
          Petitioner testified that she invested $25,000 in Neena
Mosha in 1987 but provided no documentation to prove such
investment.
                               - 9 -

Franchise Business International).

     Petitioner next argues that having the right to pick and

choose the jobs of her choice demonstrates she had control over

her services.   However, petitioner failed to establish the

details of control she had over any job.    For instance,

petitioner’s services were negotiated in contracts with Mr. Gans

and his related businesses, but she failed to produce the

contracts at trial.   Without the contracts in the record for our

review, we cannot assume that petitioner had the requisite

control over her services.

     Finally, petitioner’s argument that consulting for a number

of companies demonstrates a lack of continuity in the employer-

employee relationship is without merit.    In Kelly v.

Commissioner, T.C. Memo. 1999-140, this Court found that working

for a number of employers during a tax year does not necessitate

treatment as an independent contractor.

     Petitioner’s failure to establish a record with any

corroborating evidence militates against her case.    Without the

contracts before us, between either petitioner and Mr. Gans and

his related businesses or petitioner and other companies (i.e.,

Avante Studios), we cannot find that their provisions corroborate

petitioner’s claim that she was an independent contractor.    In

sum, petitioner has not demonstrated that she is entitled to

treatment as an independent contractor.    Consequently, we find
                                - 10 -

that petitioner was an employee of Mr. Gans and his related

businesses.

Settlement Award

     Based upon the above finding, we must next decide how the

settlement award is reportable on petitioner’s income tax return

for 1993.

     At trial, petitioner conceded that the settlement award

should be reported on petitioner’s 1993 Federal income tax

return.   However, petitioner contends that it is properly

reported as Schedule C income, as reflected on both amended

returns, Forms 1040X, rather than as ordinary income.

     It is clear that the lawsuit initiated by petitioner against

Mr. Gans and his related businesses was for unpaid compensation

for services which she rendered.    Because petitioner was not an

independent contractor during the relevant period, as noted

above, she is not entitled to report the settlement proceeds as

income on her Schedule C; rather, it is includable in gross

income as from other sources.

     Respondent is sustained on this issue.

Attorney’s Fees and Costs

     To determine whether legal expenditures are business or

personal expenditures, one looks to the “origin and character of

the claim with respect to which an expense was incurred”.     United

States v. Gilmore, 372 U.S. 39, 49 (1963). “Litigation expenses
                             - 11 -

are deductible if the suit against the taxpayer ‘arises in

connection with’ or ‘proximately results from’ the taxpayer’s

business or profit-seeking activity.”   O’Malley v. Commissioner,

91 T.C. 352, 362 (1988)(quoting United States v. Gilmore, 372

U.S. at 48).

     Although employment-related legal fees are deductible under

section 162 or 212, if the taxpayer’s trade or business consists

of the performance of services as an employee, then the expenses

are not deductible from gross income.   Instead, they are treated

as a miscellaneous itemized deduction, subject to the limitations

of section 67(a).

     Petitioner contends that she filed the State court lawsuit

in her capacity as an independent contractor, individually or on

behalf of Neena Mosha, and that the origin and nature of the

claim clearly arose in connection with this business activity.

See also Silberman v. United States, 40 Fed. Cl. 895 (1998).     As

noted above, we found that petitioner was an employee of Mr. Gans

and his related businesses and not an independent contractor.

Therefore, petitioner is not entitled to deduct legal expenses

arising from the settlement on her Schedule C but rather her

legal fees and costs are deductible on Schedule A as an itemized

deduction, subject to limitations.

Settlement Portion to Former Spouse

     Petitioner contends that $3,728.65 of the settlement award
                               - 12 -

was paid to her former husband, Mr. Anderson,5 pursuant to the

dissolution judgment.6    Petitioner’s contention rests on a theory

that the litigation against Mr. Gans and his related businesses

was brought on behalf of Neena Mosha and Mr. Anderson as partners

of Neena Mosha.

     We find petitioner’s agency argument is without merit.

Petitioner was the sole party filing suit against Mr. Gans and

his related businesses.    The record lacks any corroborating

evidence that Mr. Anderson or the other alleged partners of Neena

Mosha were involved with the litigation.    As discussed above,

there is also some doubt that the entity Neena Mosha existed at

any time relevant to this case.

     Therefore, based upon the entire record, we find that

petitioner is not entitled to a deduction of $3,728.65 as payment

to Mr. Anderson.    Respondent is sustained on this issue.

     We have considered all arguments made by the parties, and,

to the extent not discussed above, conclude they are irrelevant

or without merit.



     5
          Respondent argues, and we agree, that petitioner has
failed to substantiate any payment to Mr. Anderson.
     6
          The dissolution judgment stated the following: “That
the issue of the lawsuit involving Neena Mosha is reserved.”
Without further explanation or action by the Circuit Court of the
Sixth Judicial Circuit, Macon County, Illinois, we find that the
dissolution judgment does not mandate, as petitioner suggests, a
distribution of a portion of the settlement proceeds to Mr.
Anderson in any capacity.
                            - 13 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

                                       Decision will be entered

                                  under Rule 155.
