                         T.C. Memo. 1999-140



                       UNITED STATES TAX COURT



                     PAULA M. KELLY, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 8983-97.              Filed April 29, 1999.


       Raymond B. Oothout, for petitioner.

       Louise R. Forbes, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION

       GOLDBERG, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.    Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.
                                2

     Respondent determined a deficiency in petitioner's Federal

income tax in the amount of $2,256 for the 1994 tax year.

     After a concession,1 the remaining issues for decision are:

(1) Whether petitioner is entitled to claim Schedule C expenses

for the 1994 tax year, and (2) whether petitioner is entitled to

an earned income credit for 1994.

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time the petition

was filed, petitioner resided in Milton, Massachusetts.

                        FINDINGS OF FACT

     In 1994, petitioner worked in the entertainment media

providing freelance makeup services for actors and models working

in film, television, theater, and still photography.   During this

time petitioner was also a member of the Makeup and Hair Stylists

Local Union 798 I.T.S.E. of New York, New York.

     Petitioner obtained work in the industry by reading various

trade publications and by contacting production companies

bringing theatrical productions to the Boston area.    Petitioner

also apparently obtained some work by referral.   Once petitioner

knew there would be work available on a certain date, petitioner

sent her resume to companies that might hire her.   Parties



1
     Respondent concedes that petitioner reported rental income
in the amount of $675 on Schedule C of petitioner's 1994 return.
                                 3

interested in petitioner's services negotiated a "deal memo" with

petitioner which included the daily rate for her first 8 hours of

work, overtime pay, break time, and whether a "kit"2 would be

provided by the company where she was working.   After being hired

and in order to receive remuneration, petitioner recorded her

time on a timesheet which she turned in to members of the

production staff.   Petitioner was usually paid on a weekly basis.

     Petitioner reported Schedule C income in the amount of

$23,519 on her 1994 income tax return.   Of this amount,

petitioner reported Form W-2 income in the amount of $20,218,

Form 1099 income in the amount of $2,626, and income from kit

rentals in the amount of $675.   Petitioner claimed 1994 Schedule

C deductions in the amount of $22,249.

     Petitioner was required to move suddenly in January of 1997,

during a time at which petitioner was also suffering from

depression.   As a result of both the unforeseen move and her

medical condition, petitioner's 1994 receipts for paid expenses,

among other items, were lost.

     In a notice of deficiency dated February 5, 1997, respondent

determined that petitioner's Form W-2 income did not qualify as

Schedule C statutory employee income and respondent, therefore,

disallowed all of petitioner's offsetting Schedule C deductions.



2
     Though it is unclear from the record, a "kit" apparently
refers to a makeup kit stocked with cosmetic supplies.
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                                OPINION

1.   Schedule C Expenses

      At trial, petitioner argued that she earned her 1994 income

in her capacity as an independent contractor, or, in the

alternative, as a statutory employee, even though most of her

1994 income was reported as employee wages on Forms W-2.

Therefore, as an independent contractor or as a statutory

employee, she properly reported her income and deducted her

business expenses on Schedule C.

      Deductions are a matter of legislative grace.   See New

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

taxpayer bears the burden of proving that she is entitled to her

claimed deductions.   See Welch v. Helvering, 290 U.S. 111, 115

(1933).

      Section 162(a) allows a taxpayer to deduct all ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on any trade or business.    No deduction is

allowed for personal, living, or family expenses.     See sec. 262.

       Taxpayers are required to maintain adequate records

sufficient to enable the Commissioner to determine the taxpayer's

correct tax liability.     See sec. 6001; see also Meneguzzo v.

Commissioner, 43 T.C. 824, 831-832 (1965); sec. 1.6001-1(a),

Income Tax Regs.
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     Generally, if a claimed business expense is deductible, but

the taxpayer is unable to substantiate it, the Court is permitted

to make as close an approximation as it can.     See Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930).     The estimate must have

a reasonable evidentiary basis.    See Vanicek v. Commissioner, 85

T.C. 731, 743 (1985).

     Section 274(d), however, requires strict substantiation of

certain expenses, including those incurred with respect to any

listed property as defined in section 280F(d)(4).     Listed

property includes any passenger automobile.     See sec.

280F(d)(4)(A)(i).    Section 274 supersedes the doctrine in Cohan

v. Commissioner, supra.    See sec. 1.274-5T(a)(4), Temporary

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

     A taxpayer is required to substantiate expenses for listed

property by establishing the amount, time, place, and business

purpose of the expense.    See sec. 274(d).   Even if such an

expense would otherwise be deductible, the deduction may still be

denied if there is insufficient substantiation to support it.

See sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985).

     A taxpayer must maintain adequate records with respect to

listed property.    See sec. 1.274-5T(c)(2)(i), Temporary Income

Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).     But where the

taxpayer establishes that the failure to produce adequate records
                                  6

is due to the loss of such records through circumstances beyond

the taxpayer's control, such as destruction by fire, flood,

earthquake, or other casualty, the taxpayer shall have a right to

substantiate such a deduction by reasonable reconstruction of her

expenditures or use.   See sec. 1.274-5T(c)(5), Temporary Income

Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985).

     Petitioner was unable to remember many details regarding her

claimed deductions.    Although both petitioner and her witnesses

testified that petitioner had once possessed receipts

substantiating her 1994 Schedule C deductions, neither

petitioner, her accountant, nor her attorney attempted to

reconstruct petitioner's claimed expenditures by contacting

businesses or financial institutions with which petitioner

conducted business in 1994.

     On the basis of the record, we find that petitioner did not

substantiate her claimed Schedule C expenses.    Therefore, we hold

that petitioner is not entitled to claim Schedule C deductions

for the 1994 tax year.    Respondent is sustained on this issue.

     In any event, the expenses incurred would not be allowable

on Schedule C because petitioner was not in business for herself,

as explained hereafter.

     In considering whether petitioner was an independent

contractor or an employee, we apply common-law rules.    Courts

consider various factors to determine whether an employment
                                  7

relationship exists between the 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 Weber v. Commissioner, 103 T.C. 378, 387

(1994), affd. per curiam 60 F.3d 1104 (4th Cir. 1995).   No single

factor dictates the outcome.   All the facts and circumstances

should be considered.   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.

     In this case, petitioner's services were fixed by a deal

memo which petitioner signed with each production company which

hired her.   The deal memo also fixed petitioner's compensation.

Depending on the circumstances, petitioner was variously paid an

hourly rate which may or may not have included overtime, a flat

rate, or a rate based on union guidelines.   The deal memo also
                                  8

covered the timing and length of allowable break time.

Additionally, petitioner was required to submit timesheets in

order to be paid.    The deal memo controlled where and when

petitioner reported for work and whether her principal would, or

would not, furnish petitioner's makeup kit.

       With regard to the control exerted by the principal,

petitioner was required to remain on the set for as long as her

services were needed.    Additionally, the company which hired

petitioner could require her to change an actor's makeup

according to the company's specifications.

       Petitioner also was aware that the production companies she

worked for would report her compensation as wage income on a Form

W-2.    At trial, petitioner submitted a document from FPS

Services, Inc., entitled:    Crossroads Films - Crew Payroll -

Information & Instructions.    The document contained the following

language:

       Independent Contractors/Corporations We do not pay
       Independent Contractors unless they are Incorporated.
       In order to be paid as a corporation, copies of your
       Articles of Incorporation or your Corporate Seal must
       be submitted. Once on file, they do not need to be
       resubmitted. Corporations can be paid on a timecard or
       their own invoice. IMPORTANT: The name of the
       Corporation, the Federal ID# AND the Name and Social
       Security # of the employee must be indicated. As a
       corporation you should have your own Worker's
       Compensation Insurance. If you do, please provide
       proof of it to FPS. If you don't FPS will provide it,
       charging Crossroads Films. Crossroads Films may ask
       that you reimburse them for this expense.
                                   9

      Petitioner was aware that she could have been treated as an

independent contractor if she had incorporated and that the

practice of requiring independent contractors to be incorporated

was common in the industry.   Of course, if petitioner had

incorporated and been treated as an independent contractor,

petitioner would then have been required to pay for her own

worker's compensation insurance.       Petitioner's testimony,

combined with the above document, clearly outlines the nature of

the relationship petitioner and her principal thought they had

created, that of employer/employee.

      Petitioner contends, in the alternative, that she was a

"statutory employee" pursuant to section 3121(d)(3), and, thus,

that she is still entitled to deduct her expenses on Schedule C.

We disagree.   Petitioner clearly does not meet the requirements

of section 3121(d)(3) as she was not engaged in work as an agent

driver, commission driver, insurance salesman, home worker, or

traveling salesman.   Furthermore, none of the Forms W-2 indicated

that petitioner was a "statutory employee".

      On the basis of the record, we find that petitioner was

hired as an employee in her profession as a makeup artist during

the 1994 tax year.

2.   Earned Income Credit

      An eligible individual is allowed an earned income credit

for the taxable year in an amount equal to the credit percentage
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of so much of the taxpayer's earned income as does not exceed the

earned income amount.   See sec. 32(a).   Earned income includes

wages, salaries, tips, and other employee compensation plus net

earnings from self-employment.   The amount of earned income

credit to which petitioner is entitled is a computational matter.

     On the basis of the record, we find that petitioner earned

gross income in the amount of $23,519 for the 1994 tax year and

that petitioner had one qualifying child in 1994.       Therefore,

based on statutory guidelines for the 1994 tax year, we find that

the earned income credit allowed would be $37.    Respondent is

sustained on this issue.

     To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.
