                  T.C. Summary Opinion 2009-14



                       UNITED STATES TAX COURT



          ANTHONY D. AND MISTY L. HOUGH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13031-07S.             Filed January 28, 2009.



      Anthony D. and Misty L. Hough, pro sese.

      Farhad Asghar and Daniel W. Layton, for respondent.



      GERBER, Judge:   This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect when the petition was filed.    Pursuant to section




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2005, the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                 - 2 -

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.     Respondent determined a $7,918 income tax

deficiency and a $1,584 accuracy-related penalty under section

6662(a) for petitioners’ 2005 tax year.     The income tax

deficiency was based upon a $28,370 adjustment for unreported

income and self-employment tax on that amount.     Petitioners have

conceded the $28,370 adjustment.     The issues remaining for our

consideration are whether petitioner husband was an employee or

self-employed for 2005 and whether petitioners are liable for

the accuracy-related penalty.2

                             Background

        Petitioners resided in California at the time their

petition was filed.     Mr. Hough earned his living as a plumber.

During 2001 he went to work for Jesse Waddell, who ran a

plumbing business named Arrowhead Plumbing (Arrowhead).       Mr.

Waddell would obtain plumbing jobs (typically new construction),

and he would assign Mr. Hough to perform plumbing work.

Arrowhead had a business office, and each workday Mr. Hough

would go either to the office for an assignment or to an

existing assigned jobsite.     Mr. Hough was an experienced and


    2
      The notice of deficiency contained the determination that
petitioners were not entitled to the earned income credit. With
petitioners’ concession that the $28,370 is income, petitioners
also concede the earned income credit because their income
exceeds the range within which that credit applies. See sec.
32(a)(1).
                               - 3 -

skilled plumber and did not need much supervision.    On larger

jobs, Mr. Waddell (who was also a plumber) would work on the

site with Mr. Hough.

      Mr. Hough worked for Mr. Waddell only when Arrowhead had

plumbing jobs.    Accordingly, the work was continuous for the

period of time that Arrowhead obtained plumbing jobs.    During

2005 Mr. Hough worked for Arrowhead for about one-half of the

year.    Mr. Waddell would pay Mr. Hough every other week using an

hourly rate times the number of hours worked.

      Mr. Waddell and Mr. Hough had an unusual financial

arrangement.   Mr. Waddell assured Mr. Hough that he would take

care of all taxes on payments made to Mr. Hough and that Mr.

Hough would not have to report the payments as income.     Under

the terms of the arrangement Mr. Waddell would not claim a

deduction on his income tax return for payments to Mr. Hough and

would pay additional income tax, so that Mr. Hough was not

required to report the income.3   That arrangement continued from

2001 into 2005.   Accordingly, Mr. Hough did not report any

income or wages received from Mr. Waddell for plumbing work from

2001 through 2005.




     3
      We are not required to address the bona fides or tax effect
of this arrangement because Mr. Waddell issued a Form
1099-MISC, Miscellaneous Income, to Mr. Hough for 2005, the year
in question.
                               - 4 -

     In 2005 while Mr. Hough was working for Arrowhead, Mr.

Waddell was advised by his accountant and tax preparer to have

Mr. Hough fill out a Form W-4, Employee’s Withholding Allowance

Certificate, which is used by employees to declare the number of

tax exemptions for purposes of withholding income tax.   Mr.

Hough did complete a Form W-4 for 2005 although it was

understood that they were continuing the same arrangement as in

prior years, where no taxes were withheld from payments made to

Mr. Hough and Mr. Waddell would report the income and claim no

deductions for the amounts paid to Mr. Hough.

     On April 14, 2006, after he had already filed his tax

return, Mr. Hough received a Form 1099-MISC, Miscellaneous

Income, from Arrowhead reflecting $28,370 of nonemployee income

for 2005.    Mr. Waddell changed his mind just before the due date

of Mr. Hough’s 2005 return because he was experiencing financial

difficulties and was not in a position to bear the additional

tax burden by not claiming amounts paid to Mr. Hough   as a

deduction.   Mr. Hough continued to believe that Mr. Waddell had

taken care of the taxes, and he did not report the $28,370 on

his 2005 income tax return or amend the return he had filed.

However, for 2005 Mr. Waddell claimed the $28,370 paid to Mr.

Hough as a deduction for labor in connection with his plumbing

business.
                              - 5 -

      Respondent sent petitioners a notice of deficiency

determining that the $28,370 was Mr. Hough’s income and that

self-employment tax was due on that amount.   Petitioners have

conceded that the $28,370 was income, but contend that Mr. Hough

was an employee of Mr. Waddell and is therefore not liable for

self-employment tax.   Further, petitioners contend that they are

not responsible for an accuracy-related penalty under section

6662(a).

                           Discussion4

     Mr. Hough worked for Mr. Waddell on plumbing jobs.    He

believed that he was Mr. Waddell’s employee and that Mr. Waddell

took care of all taxes arising from their employer-employee

relationship.   Respondent determined, for 2005, that Mr. Hough

was an independent contractor liable for self-employment tax and

not Mr. Waddell’s employee.

     Self-employment income has been explained, as follows:

          Section 1401 imposes a tax on self-employment
     income attributable to a taxpayer from any trade or
     business carried on by the taxpayer. Secs. 1401(a),
     1402(a) and (b); sec. 1.1401-1(a), Income Tax Regs.
     The term “trade or business” has the same meaning
     under section 1402(a), defining “net earnings from
     self-employment”, as under section 162. Sec. 1402(c);
     Bot v. Commissioner, 118 T.C. 138, 146 (2002), affd.
     353 F.3d 595 (8th Cir. 2003). “Trade or business”
     under section 162 has been interpreted to mean an
     activity conducted “with continuity and regularity”
     and with the primary purpose of making income or a
     profit. Commissioner v. Groetzinger, 480 U.S. 23, 35


     4
      There is no question in this case about who has the burden
of proof or whether the burden shifted under sec. 7491(a).
                               - 6 -

     (1987); Bot v. Commissioner, supra. The carrying on
     of a trade or business for purposes of self-employment
     tax generally does not include the performance of
     services as an employee. Sec. 1402(c)(2); Robinson v.
     Commissioner, 117 T.C. 308, 320 (2001).

Anderson v. Commissioner, 123 T.C. 219, 223 (2004), affd.

137 Fed. Appx. 373 (1st Cir. 2005).

     The question of whether an individual is an employee or

self-employed is factual.   Nationwide Mut. Ins. Co. v. Darden,

503 U.S. 318, 323 (1992).   Factors that have been considered by

courts in making this determination are:   (1) The skills

required; (2) the source of instrumentalities and tools;

(3) the location of the work; (4) the duration of the

relationship; (5) whether the business has the right to assign

additional projects to workers; (6) the extent of the worker’s

discretion over when and how long to work; (7) the method of

payment; (8) the worker’s role in hiring/paying assistants;

(9) whether the work is part of the regular work of the

business; (10) the providing of worker benefits; and (11) the

tax treatment of the worker.   Id. at 323-324.   No one factor is

dispositive and the various aspects of the relationship are

weighed and balanced to reach a result.    NLRB v. United Ins. Co.

of Am., 390 U.S. 254, 258 (1968).

     Mr. Hough possessed the skills to perform his job with

minimal supervision, and he provided his own tools.   The

supplies to complete the job were provided by Mr. Waddell, and
                              - 7 -

he also decided the location and the type of plumbing work to be

done by Mr. Hough.   The job assignments continued for extended

periods, and Mr. Hough exclusively worked for Mr. Waddell

regularly over a period of 5 years.   Mr. Waddell generally

directed Mr. Hough’s daily activities, deciding where he was to

work and the type of plumbing to be done.   The work Mr. Hough

performed was a regular part of Arrowhead’s business, and Mr.

Hough was paid an hourly wage biweekly.   Mr. Hough did not

receive any employee benefits, but he was not provided a

single Form W-2, Wage and Tax Statement, or Form 1099-MISC for

the first 4 years that he worked for Mr. Waddell.   It was only

on the last day for filing a 2005 tax return that Mr. Waddell

sent Mr. Hough a Form 1099.   When Mr. Hough began working for

Mr. Waddell during 2005, Mr. Waddell asked him to fill out a

Form W-4, which is intended for employees to advise their

employers of the number of dependency exemptions being claimed

for purposes of the withholding of income tax.

     Considering all of these factors, we find and hold that Mr.

Hough was Mr. Waddell’s employee and not liable for self-

employment tax for 2005.

     Respondent also determined an accuracy-related penalty with

respect to petitioners’ 2005 underpayment of tax.   Section

6662(a) and (b)(1) and (2) provides for a 20-percent penalty on

the underpayment of tax due to negligence, disregard of rules
                                - 8 -

and regulations, or a substantial understatement of income tax.

A substantial understatement exists if the understatement of

income tax exceeds 10 percent of the tax required to be shown or

$5,000.   Sec. 6662(d)(1)(A).   Petitioners’ concession of the

$28,370 of unreported income makes it clear that there was a

substantial understatement of income tax.

     Therefore the accuracy-related penalty would apply unless

petitioners demonstrate that the underpayment was due to

reasonable cause and that they acted in good faith.    Neonatology

Associates, P.A. v. Commissioner, 299 F.3d 221 (3d Cir. 2002),

affg. 115 T.C. 43 (2000).   Petitioners had filed their 2005

return before Mr. Waddell sent them a Form 1099-MISC reflecting

$28,370 of income.   They were therefore on notice that the

circumstances had changed from prior years, but they did nothing

to address this change.   For example, they did not make an

inquiry about the Form 1099-MISC or attempt to file an amended

return for 2005.

     In these circumstances petitioners did not have reasonable

cause, and they did not act in good faith.   Accordingly,

respondent’s determination of an accuracy-related penalty is

sustained.
                        - 9 -

To reflect the foregoing and concessions by the parties,


                                Decision will be entered

                         under Rule 155.
