                          T.C. Summary Opinion 2013-87



                         UNITED STATES TAX COURT



   ROBERT G. FRANKLIN AND MARIANNE L. FRANKLIN, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 3991-11S.                         Filed November 4, 2013.



      Barbara R. Roller, for petitioners.

      Heather K. McCluskey, for respondent.



                              SUMMARY OPINION


      PANUTHOS, Chief Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed. Pursuant to section 7463(b), the decision to be entered is not

reviewable by any other court, and this opinion shall not be treated as precedent
                                        -2-

for any other case. 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 Tax Court Rules of Practice and Procedure.

      In a notice of deficiency dated November 15, 2010, respondent determined a

deficiency in petitioners’ 2008 Federal income tax of $19,485 and a section

6662(a) accuracy-related penalty of $5,201. After concessions,1 the issues for

decision are: (1) whether petitioners are entitled to business expense deductions

claimed on a Schedule C, Profit or Loss From Business, for expenses related to

Robert G. Franklin’s (petitioner’s) work with IndyMac Resources (IndyMac) and

Metrocities Mortgage, LLC, a Prospect Mortgage Company (Metrocities); and (2)

whether petitioners are liable for the accuracy-related penalty under section

6662(a). The business expense deduction issue in part depends on substantiation

of the claimed expenses and also on whether petitioner was an independent

contractor or an employee during 2008. If petitioner was an employee, the


      1
        Petitioners concede that they overstated their Federal income tax
withholding reported on Form W-2, Wage and Tax Statement, by $6,520 on their
2008 Federal income tax return. Petitioners also concede that they do not have
documentation to substantiate $30,290 of claimed deductions for Schedule C
expenses reported on their 2008 Federal income tax return. Petitioners concede
that to the extent the accuracy-related penalty is related to the overstated
withholding and the failure to provide documentation to support $30,290 of
claimed business expenses, the penalty is applicable.
                                         -3-

claimed expenses are subject to limitations and applicable reduction because of the

alternative minimum tax (AMT).2

                                     Background

      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.

Petitioners resided in California at the time the petition was filed.

      Petitioner has approximately 30 years of experience as a mortgage loan

consultant, helping clients qualify for loans. He began working as a real estate

agent in 1979 and became a loan officer in 1984. In 2007 petitioner was hired by

IndyMac Resources (IndyMac). Petitioner was initially hired as a producing

branch manager to manage loan officers and receive a percentage of the loan

officers’ production. Petitioner’s branch never employed any loan officers.

      As branch manager, petitioner received a monthly base salary of $4,000. He

was also eligible to receive a monthly profitability bonus equal to 10% of his

branch’s monthly profit as well as a commission for brokering certain loans.

Aside from the base salary, petitioner earned income from commissions and from

closing loans. On June 4, 2008, petitioner signed an Employee Agreement

      2
       If the Court concludes that petitioner is an employee, the application of the
AMT may result in a disallowance of petitioners’ claimed business expense
deductions. See secs. 55-59.
                                        -4-

Regarding Outside Sales Activities (agreement) with IndyMac. The agreement

classified petitioner as an outside sales employee and required him to spend over

50% of his time each workweek traveling and meeting with customers or potential

customers to sell IndyMac products and attending trade shows and sales

conferences to promote IndyMac products. On the same date petitioner also

signed a compensation plan agreement with IndyMac for the job “Retail Lending

Group West-Sales Manager”. The June 4 compensation plan provided that as

sales manager, petitioner could earn incentive compensation for selling certain

types of loans.

      Petitioner sold loan products for IndyMac but was not required to sell only

IndyMac products. He qualified clients for loans, put documentation together, and

submitted the loan packages to the underwriter. When petitioner was hired,

IndyMac did not advise him on how to get business for IndyMac, but IndyMac did

specify the manner in which the loan packages were to be submitted to the

underwriter. Petitioner had very few loans that were not accepted by underwriters.

When petitioner processed loans, he also followed guidelines set by Fannie Mae,

Freddie Mac, FHA, and VA, since they insured and guaranteed the loans.

      IndyMac did not have any offices near petitioner, so IndyMac provided him

an executive office suite in San Luis Obispo, which it obtained specifically for
                                        -5-

him. Petitioner did not have a personal receptionist; the suite was in a building

that housed attorneys’ offices, and the entire building shared a receptionist.

IndyMac paid the rent for the executive office suite, set up a server so that

petitioner had Internet service, and set up the computer and phone system for the

office. Petitioner also maintained a home office, which he used primarily in the

mornings and again in the evenings. IndyMac did not require petitioner to have a

home office.

      Although IndyMac provided petitioner with the executive suite, he did not

use it very often. Petitioner found business mainly from working in real estate

offices and going to multiple listing service (MLS) meetings. IndyMac also had

an internal lead program, which required petitioner to contact leads assigned to

him through the program within a certain timeframe and to create a lead in a

software program, Encompass, for each assigned lead.

      Petitioner’s employment and compensation agreements with IndyMac

specified that his employment with IndyMac was at will and that either petitioner

or IndyMac could terminate his employment at any time. Petitioner worked at

IndyMac until approximately July 11, 2008, when IndyMac was taken over by the

FDIC as an insolvent bank. Metrocities then acquired IndyMac, and on August 8,

2008, petitioner entered into a branch manager employment agreement
                                        -6-

(employment agreement) with Metrocities. Petitioner performed the same work at

Metrocities as a producing branch manager as he had at IndyMac, and Metrocities

maintained the same office that IndyMac had provided for petitioner.

      At Metrocities petitioner generated his own leads and obtained a list of

potential leads from a Web site that Metrocities maintained. Potential borrowers

could enter their information into the Web site, and then Metrocities’ loan officers

had access to the contact information and would follow up.

      Petitioner enrolled in health insurance plans at group rates through both

IndyMac and Metrocities, which he paid for, at least in part, out of his pretax

income. Petitioner received holiday pay from IndyMac during the first five

months of 2008, and his pay statements indicate that he earned vacation and sick

leave and used vacation leave during the year in issue. He also contributed to a

section 401(k) plan account while he worked at IndyMac.

      Petitioner’s employment agreement with Metrocities provided that he would

be paid incentive compensation in accordance with his compensation plan and that

he was eligible to participate in benefits programs that Metrocities maintained for

employees. The Metrocities employment agreement prohibited petitioner from

working for any other company engaged in the real estate finance business and

from originating or underwriting loans for any other lending institution while
                                         -7-

employed by Metrocities. Metrocities did not offer a section 401(k) plan, nor did

it provide holiday pay, sick pay, or vacation pay. Since petitioner did not earn

money at Metrocities unless he was working, he checked messages while he was

on vacation so that he would not miss any business opportunities.

      During 2008 petitioner worked approximately 80 hours a week. He worked

Monday through Friday and during the weekends, when real estate agents held

open houses. He attended many of the open houses in order to talk with potential

borrowers. At some large open houses, petitioner would have a barbecue. He

viewed the open houses as an opportunity to meet new borrowers who could

potentially provide him with business. Petitioner primarily spent his time working

in real estate offices, at lunches, and taking clients out in the evening.

      Every morning, petitioner watched financial television shows and then went

online to check the stock market. The stock market affected the interest rates on

loans, so petitioner watched the market in order to lock in loans at the best interest

rates for his customers.

      After checking the stock market each morning, petitioner emailed a daily

marketing update to several hundred real estate agents, past customers, and

borrowers. Petitioner was the in-house lender for Prudential Real Estate

(Prudential) on the central California coast, and he attended weekly office
                                        -8-

meetings at Prudential’s various offices. As the in-house lender, Prudential

allowed petitioner to enter its offices at any time and use its telephones and

copiers. Petitioner bought breakfast for attendees of the meetings to try to get

business from them. Some of the offices had only 20 people, and others had 40 to

50. Petitioner continued to go to Prudential’s offices after he began working at

Metrocities.

      Petitioner tried to have lunch every day with a new agent or customer in

order to create business relationships. He also went out for drinks, appetizers, or

dinner with realtors, sometimes bringing Mrs. Franklin if the realtor’s husband or

wife was also attending. It was important to petitioner to create relationships with

his clients, because once he established those relationships, the clients trusted him

and knew that he would help the clients’ customers. Petitioner did not have as

much business in 2008 because of financial turmoil. Despite losing business,

petitioner continued “the wining and the dining” because clients still expected it

and petitioner was concerned about establishing business relationships.

      Petitioner did not have any discussions with IndyMac or Metrocities about

whether he was a statutory employee. He chose to not have Federal income tax

withheld from his pay from IndyMac. Petitioner received Forms W-2 for tax year

2008, from IndyMac and Metrocities. The combined Forms W-2 reported that for
                                        -9-

2008, petitioner had “Wages, tips, other comp.” of $146,737.46. The Form W-2

from IndyMac reported that IndyMac withheld State income tax and Social

Security and Medicare taxes and that petitioner had a retirement plan but that

IndyMac did not withhold Federal income tax. The Form W-2 from Metrocities

reported that Metrocities withheld Federal and State income taxes and Social

Security and Medicare taxes. Neither IndyMac nor Metrocities reported on the

Forms W-2 that petitioner was a statutory employee.

      Petitioners jointly filed a Form 1040, U.S. Individual Income Tax Return,

for 2008, which was prepared by Barbara R. Roller, petitioners’ counsel in this

proceeding. Petitioners reported $33,077 on line 7, “Wages, salaries, tips, etc.”.

On an attached Schedule C petitioner reported his principal business or profession

as “Mortgage broker/loans” and reported gross receipts or sales of $113,660, a

portion of the wage amounts shown on the Forms W-2 that IndyMac and

Metrocities issued. Petitioner checked the box on line 1 of his Schedule C and

represented that his Forms W-2 identified him as a statutory employee. Petitioners

included with their 2008 return a statement regarding the transfer of a portion of

petitioner’s wages to Schedule C, asserting that $65,048.27 of the Form W-2

wages were transferred to Schedule C as self-employed gross receipts previously

subject to payroll tax withholding.
                                                 - 10 -

         Petitioners reported $70,617 of expenses related to petitioner’s work for

IndyMac and Metrocities on their Schedule C. Respondent disallowed all of the

claimed expense deductions for lack of substantiation. Petitioners concede that

they are unable to substantiate $30,289.73 of the reported expenses but assert in

their pretrial memorandum that they are entitled to deduct $40,327.27 of the

expenses reported on their Schedule C as follows:

                                           Reported on                      Petitioners’
             Expense                       Schedule C                      pretrial memo
 Advertising                                 $1,500                              $15.00
 Car and truck                                   6,595                          4,380.53
 Travel                                          3,800                          4,204.16
 Meals and entertainment                     27,425                        11,061.50
 Business use of home                            5,930                          4,950.29
                                             1                             2
 Other                                           25,367                        16,285.79

         1
         The $25,367 of “other expenses” on the Schedule C consists of $15,600 for business
gifts, $276 for fax telephone line, $1,104 for business telephone line, $142 for Pismo Coast
MLS, $684 for satellite fees, $499 for Internet access fees, $1,380 for postage, $792 for land
phone line, and $4,890 for other expenses of promotions and cellular telephone.
         2
        These other expenses consist of $3,858.86 for business gifts, $2,381.96 for cellular
telephone, $772.45 for home office telephone line, $1,133.60 for home office business line, $307
for home office fax line, $1,174.11 for home office satellite fees, $312.21 for XM satellite radio,
$2,743 for appraisal fee reimbursements to clients, $277.12 for multiple service listing fees, $249
for miscellaneous real estate expenses, $1,170.23 for office supplies, $408.63 for computer
expenses, $92.91 for telephone equipment, $258.98 for postage, $96 for bank charges for a
business checking account, and $480 for a limousine service.
                                         - 11 -

      In the notice of deficiency the IRS determined that petitioner was a common

law employee and therefore was not permitted to report income and expenses on

Schedule C. The explanation in the notice stated:

      Only statutory employee income can be offset by expenses reported
      on Schedule C, Profit or Loss From Business, or Schedule C-EZ.
      Since your employer did not indicate on Form W-2, Wage and Tax
      Statement, that you were a statutory employee, we cannot allow the
      expenses used to offset that income on Schedule C or Schedule C-EZ.

On the basis of these adjustments the IRS determined a deficiency for 2008 of

$19,485. The IRS further determined that petitioners are liable for the accuracy-

related penalty under section 6662(a).

                                    Discussion

      In general, the Commissioner’s determination set forth in a notice of

deficiency is presumed correct, and the taxpayer bears the burden of proving that

the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Pursuant to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances. Petitioners did not allege

that section 7491(a) applies. See sec. 7491(a)(2)(A) and (B). Therefore,

petitioners bear the burden of proof. See Rule 142(a).

      Each taxable year stands alone, and the Commissioner may challenge in a

succeeding year what was condoned or agreed to in a previous year. Auto. Club of
                                        - 12 -

Mich. v. Commissioner, 353 U.S. 180 (1957); Rose v. Commissioner, 55 T.C. 28

(1970). Thus, the IRS’ failure to challenge petitioner’s claimed statutory

employee status during the prior years does not entitle him to that status for the

year at issue.

I.    Employment Status

      The principal issue for decision is whether petitioners correctly reported

petitioner’s business expenses on Schedule C as those of a self-employed

individual rather than on Schedule A, Itemized Deductions, as itemized expenses,

as respondent contends they should have. The distinction matters because

Schedule A itemized deductions are subject to various limitations that do not

apply to Schedule C deductions.

      An individual performing services as an employee generally may deduct

expenses incurred in the performance of such services as miscellaneous itemized

deductions on Schedule A only to the extent the expenses exceed 2% of the

taxpayer’s adjusted gross income. Secs. 62(a)(2), 63(a), (d), 67(a) and (b), 162(a).

Itemized deductions may be limited under section 68 and may have alternative

minimum tax implications under section 56(b)(1)(A)(i).

      Independent contractors and self-employed persons may report their

compensation less related expenses on business income on Schedule C, thereby
                                       - 13 -

avoiding limitations on the deductibility of employee business expenses and other

itemized deductions reportable on Schedule A. See Weber v. Commissioner, 103

T.C. 378, 386 (1994), aff’d, 60 F.3d 1104 (4th Cir. 1995); Feaster v.

Commissioner, T.C. Memo. 2010-157. To be properly reported on Schedule C, a

taxpayer’s expenses must come from a trade or business of his or her own other

than that of being an employee. See Rosato v. Commissioner, T.C. Memo. 2010-

39. For this purpose, a statutory employee under section 3121(d)(3)(D) is not an

employee and may deduct business expenses on Schedule C. See Cole v.

Commissioner, T.C. Memo. 2006-44.

      An individual qualifies as a statutory employee under section 3121(d)(3)

only if the individual is not a common law employee pursuant to section

3121(d)(2). See Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 269

(2001); Rosemann v. Commissioner, T.C. Memo. 2009-185. Section 3121(d)

defines “employee”, in pertinent part, 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
             ***
                                        - 14 -

Because an individual qualifies as a statutory employee only if the individual is

not a common law employee, we will first decide whether petitioner was a

common law employee of IndyMac or Metrocities.

      Whether an individual is an employee or an independent contractor is a

factual question to which common law principles apply. Sec. 3121(d)(2);

Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992); Weber v.

Commissioner, 103 T.C. at 386; Prof’l & Exec. Leasing, Inc. v. Commissioner, 89

T.C. 225, 232 (1987), aff’d, 862 F.2d 751 (9th Cir. 1988). Factors that are

relevant in determining the substance of an employment relationship include: (1)

the degree of control exercised by the principal over the details of the work; (2)

the taxpayer’s investment in the facilities used in his or her work; (3) the

taxpayer’s opportunity for profit or loss; (4) the permanency of the relationship

between the parties; (5) the principal’s right of discharge; (6) whether the work

performed is an integral part of the principal’s regular business; (7) the

relationship the parties believe they are creating; and (8) the provision of

employee benefits. NLRB v. United Ins. Co., 390 U.S. 254, 258-260 (1968);

United States v. Silk, 331 U.S. 704, 716 (1947); Weber v. Commissioner, 103 T.C.

at 387; Prof’l & Exec. Leasing, Inc. v. Commissioner, 89 T.C. at 232; see also sec.
                                       - 15 -

31.3121(d)-(1)(c)(2), Employment Tax Regs. (setting forth criteria for identifying

employees under common law rules).

      We consider all of the facts and circumstances of each case, and no single

factor is determinative. Nationwide Mut. Ins. Co., 503 U.S. at 324; Ewens &

Miller, Inc. v. Commissioner, 117 T.C. at 270; Weber v. Commissioner, 103 T.C.

at 387. The factors are not necessarily weighted equally; they are considered

according to their significance in the particular case. Aymes v. Bonelli, 980 F.2d

857, 861 (2d Cir. 1992).

      A. Degree of Control

      Although not the exclusive inquiry, the degree of control exercised by the

principal over the worker is the most important consideration in determining the

nature of a working relationship. See Clackamas Gastroenterology Assocs., P.C.

v. Wells, 538 U.S. 440, 448 (2003); Leavell v. Commissioner, 104 T.C. 140, 149-

150 (1995). The degree of control necessary to find employment status varies

with the nature of the services provided by the worker. See Weber v.

Commissioner, 103 T.C. at 388; Potter v. Commissioner, T.C. Memo. 1994-356.

Where the inherent nature of the job mandates an independent approach, a lesser

degree of control exercised by the principal may result in a finding of an

employer-employee status. See Potter v. Commissioner, T.C. Memo. 1994-356;
                                       - 16 -

Bilenas v. Commissioner, T.C. Memo. 1983-661. To possess a degree of control

over a worker indicative of employment, the principal need not direct the worker’s

every move; it is sufficient if the right to do so exists. Weber v. Commissioner,

103 T.C. at 387; see sec. 31.3401(c)-1(b), Employment Tax Regs. Similarly, the

principal need not set the worker’s hours or supervise every detail of the work

environment to control the worker. Gen. Inv. Corp. v. United States, 823 F.2d

337, 342 (9th Cir. 1987).

      The inherent nature of petitioner’s position selling loan products calls for

him to follow an independent approach in making sales. However, both IndyMac

and Metrocities either exercised appropriate control over petitioner or had the

authority to exercise it in a manner suggesting that he was an employee of both

IndyMac and Metrocities. Petitioner was required to follow certain guidelines for

loans that he processed and was required to submit loan packages in the formats

specified by IndyMac and Metrocities. If petitioner did not comply with

IndyMac’s guidelines or meet its expectations, the compensation plan agreement

permitted IndyMac to take actions it deemed appropriate, including termination.

Petitioner’s employment agreement with Metrocities listed his duties and

responsibilities, and he agreed to comply fully with Metrocities’ policies and

procedures. Under the employment agreement, petitioner was not permitted to
                                         - 17 -

work simultaneously for any other company engaged in the real estate finance

business, and he had no authority to bind Metrocities without written consent of an

appropriate officer. This factor weighs heavily in favor of a finding that petitioner

was a common law employee of both IndyMac and Metrocities.

      B. Investment in Facilities

      Maintenance of a home office is consistent with independent contractor

status, although alone it does not constitute sufficient basis for a finding of

independent contractor status. See Colvin v. Commissioner, T.C. Memo. 2007-

157, aff’d, 285 Fed. Appx. 157 (5th Cir. 2008). Both IndyMac and Metrocities

provided petitioner with an office in which to conduct business. Petitioner

claimed a deduction for home office expenses for work done at his home, but

neither IndyMac nor Metrocities required him to maintain a home office. Since

IndyMac and Metrocities both provided an office to petitioner, this factor indicates

employee status.

      C. Opportunity for Profit or Risk of Loss

      The opportunity for profit or loss based on the worker’s own efforts and

skill indicates independent contractor status. Simpson v. Commissioner, 64 T.C.

974, 988 (1975); see also Rosato v. Commissioner, T.C. Memo. 2010-39. Earning

an hourly wage or fixed salary indicates an employer-employee relationship. See
                                       - 18 -

Robinson v. Commissioner, T.C. Memo. 2011-99 (citing James v. Commissioner,

25 T.C. 1296, 1300 (1956)), aff’d, 487 Fed. Appx. 751 (3d Cir. 2012).

      IndyMac paid petitioner a base salary of $4,000 per month, and he was also

entitled to a percentage of the proceeds from mortgage loans that he closed. Aside

from the base salary, petitioner was not guaranteed any compensation. Petitioner

asserts that the base salary was actually an incentive payment and that he stopped

receiving the base salary on or around June 4, 2008, when he signed the agreement

with IndyMac. Petitioner was not paid a fixed wage by Metrocities.

      Petitioner received a fixed salary for a portion of 2008, but for the

remainder of the year he was not paid a fixed salary. This factor indicates that

petitioner was a common law employee until June 1, 2008, when he stopped

receiving a fixed salary, and was an independent contractor thereafter. Id.

      D. Right To Discharge

      The principal’s retention of the right to discharge a worker is indicative of a

common law employer-employee relationship. See Weber v. Commissioner, 103

T.C. at 391. Both IndyMac and Metrocities considered petitioner an at-will

employee and retained the right to discharge him at any time. This factor weighs

in favor of common law employee status. See Kumpel v. Commissioner, T.C.

Memo. 2003-265.
                                       - 19 -

      E. Integral Part of Regular Business

      Where a type of work is part of the principal’s regular business, it is

indicative of employee status. See Simpson v. Commissioner, 64 T.C. at 989;

Rosemann v. Commissioner, T.C. Memo. 2009-185. The business of IndyMac

and Metrocities was the sale of mortgage loans, and petitioner sold mortgage loans

for both companies. Thus, the work petitioner performed was part of IndyMac’s

and Metrocities’ regular business, and this indicates common law employee status.

Id.

      F. Permanency of Relationship

      A continuing relationship indicates an employment relationship, while a

transitory relationship may be indicative of independent contractor status. Ewens

& Miller, Inc. v. Commissioner, 117 T.C. at 273. Petitioner worked at IndyMac

from May 8, 2007, until approximately July 11, 2008, when IndyMac was taken

over by the FDIC as an insolvent bank. On or around August 8, 2008, Metrocities

acquired IndyMac, and petitioner signed a new employment agreement with

Metrocities. Under the terms of petitioner’s Metrocities employment agreement,

he was prohibited from working for any other company engaged in the real estate

finance business and from originating or underwriting loans for any other lending

institution while he was employed by Metrocities. On the basis of the record, it
                                           - 20 -

appears that petitioner’s relationships with both IndyMac and Metrocities were

permanent and were indicative of common law employee status.

          G. Relationship Contemplated by the Parties

          The withholding of taxes is consistent with a finding that an individual is a

common law employee. See Packard v. Commissioner, 63 T.C. 621, 632 (1975);

Rosato v. Commissioner, T.C. Memo. 2010-39. Both IndyMac and Metrocities

issued Forms W-2 to petitioner for 2008. IndyMac did not withhold any Federal

income tax from petitioner’s pay, but it did withhold State income tax and Social

Security and Medicare taxes from his pay. Metrocities withheld Federal and State

income taxes and Social Security and Medicare taxes from his pay, indicating

common law employee status.

          Petitioner’s agreements to work for IndyMac and Metrocities were

evidenced by writings, and those employment agreements indicate that both

IndyMac and Metrocities considered him a common law employee. Furthermore,

petitioner never had any discussions with either IndyMac or Metrocities regarding

whether he was a statutory employee. This factor indicates common law employee

status.
                                          - 21 -

      H. Provision for Employee Benefits

      Provision of benefits such as health insurance, life insurance, paid vacation

leave, and retirement plans are indicative of an employment relationship. Weber

v. Commissioner, 103 T.C. at 393-394. Petitioner enrolled in health insurance

plans at a group rate through both IndyMac and Metrocities, which he paid for, at

least in part, out of his pretax income. Petitioner also contributed to a section

401(k) plan account while he worked at IndyMac. He also received holiday pay

during the first five months of 2008 at IndyMac. With respect to IndyMac, this

factor weighs in favor of common law employee status.

      Metrocities did not offer a section 401(k) plan, nor did it provide holiday

pay, sick pay, or vacation pay. With respect to Metrocities, this factor weighs in

favor of independent contractor status.

      I. Conclusion

      Considering the record and taking into account all the facts and

circumstances, we conclude that petitioner was a common law employee of both

IndyMac and Metrocities.

II. Business Expenses

      The Commissioner’s determinations are generally presumed correct, and the

taxpayer bears the burden of proving the determinations erroneous. Rule 142(a).
                                        - 22 -

The taxpayer bears the burden of proving that he is entitled to the deduction

claimed, and this includes the burden of substantiation. Id.; Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir.

1976). A taxpayer must substantiate amounts claimed as deductions by

maintaining the records necessary to establish he or she is entitled to the

deductions. Sec. 6001. Section 162(a) provides a deduction for certain business-

related expenses. In order to qualify for the deduction under section 162(a), “an

item must (1) be ‘paid or incurred during the taxable year,’ (2) be for ‘carrying on

any trade or business,’ (3) be an ‘expense,’ (4) be a ‘necessary’ expense, and (5)

be an ‘ordinary’ expense.” Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S.

345, 352 (1971); Deputy v. du Pont, 308 U.S. 488, 495 (1940) (to qualify as

“ordinary”, the expense must relate to a transaction “of common or frequent

occurrence in the type of business involved”). Whether an expense is ordinary is

determined by time, place, and circumstance. Welch, 290 U.S. at 113-114.

      If a taxpayer establishes that he or she paid or incurred a deductible business

expense but does not establish the amount of the expense, we may approximate the

amount of the allowable deduction, bearing heavily against the taxpayer whose

inexactitude is of his or her own making. Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930). In order for the Cohan rule to apply, there must be
                                        - 23 -

sufficient evidence in the record to provide a basis for the estimate. Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985). Certain expenses may not be estimated

because of the strict substantiation requirements of section 274(d). See sec.

280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per

curiam, 412 F.2d 201 (2d Cir. 1969).

      Section 274(d) applies to certain business expenses including, among other

things, expenses for gifts and listed property (e.g., automobile expenses, cellular

telephones, computer equipment, or any property of a type generally used for

purposes of entertainment, recreation, or amusement) and travel expenses

(including meals and lodging while away from home). Secs. 274(d),

280F(d)(4)(A). To substantiate a deduction attributable to listed property, a

taxpayer must maintain adequate records or present corroborative evidence to

show the following: (1) the amount of the expense; (2) the time and place of use

of the listed property; and (3) the business purpose of the use. Sec. 1.274-

5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

      A. Advertising

      On their 2008 Schedule C petitioners claimed, and respondent disallowed, a

deduction for $1,500 of advertising expenses. Petitioners assert that they are

entitled to a deduction for only $15 of advertising expenses. Petitioners provided
                                          - 24 -

a copy of a credit card statement showing a $15 charge for direct marketing

Internet. Petitioners have substantiated $15 of advertising expenses and are

entitled to a deduction in that amount.

      B. Car and Truck Expenses

      Petitioners assert that they are entitled to deductions totaling $4,380.53 for

car and truck expenses for two automobiles. Petitioners’ passenger automobiles

are listed property under section 280F(d)(4)(A)(i) and thus related expenses are

subject to the substantiation requirements of section 274(d). A taxpayer must

prove four elements to be allowed a deduction for listed property: (1) the amount

of each expenditure, (2) the amount of use, (3) the time of the expenditure or use,

and (4) the business or investment purpose of the expenditure or use. Sec. 1.274-

5T(b)(6), Temporary Income Tax Regs., supra. The amount of expenditure

concerns the amount of each separate expenditure with respect to an item of listed

property whereas the amount of use concerns the amount of each business or

investment use based on the appropriate measure and the total use of the listed

property for the taxable period. Sec. 1.274-5T(b)(6)(i)(A) and (B), Temporary

Income Tax Regs., supra. Additionally, a taxpayer must substantiate each element

by adequate records or by sufficient evidence corroborating his testimony. Sec.

1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
                                        - 25 -

To satisfy the adequate records standard, the taxpayer shall maintain an account

book, a diary, a log, a statement of expense, trip sheets, or a similar record and

other documentary evidence such as receipts. Sec. 1.274-5T(c)(2), Temporary

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

      Petitioner kept track of his automobile mileage using a daily mileage log

that he kept on his calendar. There are several problems with the mileage log.

First, the log notes only the number of miles driven each day and generally

includes no information regarding where petitioner drove, the purpose of the trip,

or his business relationship to the persons he visited. Second, it appears that

petitioner included in the mileage log the miles he drove commuting to and from

his office in San Luis Obispo. Third, petitioners used their cars for personal as

well as business purposes, but they did not maintain records allocating the

personal and business use of their cars.

      We believe petitioners both used their cars, at least to an extent, in the

conduct of a trade or business. The records that they maintained, however, are not

adequate to substantiate a deduction for car and truck expenses under section 274.

Consequently, we sustain respondent’s determination that petitioners are not

entitled to deduct any car and truck expenses for 2008.
                                        - 26 -

      C. Travel

      On their 2008 Schedule C petitioners claimed, and respondent disallowed, a

deduction for $3,800 in travel expenses. Petitioners assert that they are entitled to

a deduction of $4,204.16. These expenses are likewise subject to the strict

substantiation requirements of section 274(d).

      As substantiation for the travel expenses petitioners submitted credit card

statements showing charges for both domestic and foreign airline tickets and

hotels. Petitioner testified that he incurred travel expenses when he attended

education seminars that usually took place in California. Petitioner incurred

foreign travel expenses when he went to Spain with his daughter to visit former

exchange students that had stayed with petitioners. Petitioner deducted his foreign

travel expenses because he asserts that while he was in Spain, he discussed buying

properties in the United States with a couple of the families and “kind of pre-

qualified them * * * and showed them how they could go online to view properties

in the areas”.

      As petitioner did not offer detailed testimony regarding the location and

business nature of the domestic and foreign trips for which he claimed deductions,

the credit card statements he provided are not sufficient corroborating evidence to

substantiate the deduction under section 274(d). Consequently, we sustain
                                        - 27 -

respondent’s determination that petitioners are not entitled to a deduction for

travel expenses.

      D. Meals and Entertainment

      On their 2008 Schedule C petitioners claimed, and respondent disallowed, a

deduction for $27,425 in meals and entertainment expenses. Petitioners concede

that they are unable to substantiate a portion of the deduction and assert that they

are instead entitled to a deduction of $11,061.50.

      A deduction is not allowed for meals and entertainment expenses unless the

taxpayer properly substantiates: (1) the amount of such expense, (2) the time and

place of the expense, (3) the business purpose, and (4) the business relationship

between the taxpayer and the persons being entertained. Sec. 274(d).

      To substantiate their deduction for meals and entertainment expenses,

petitioners offered receipts for the business meals. The receipts generally identify

the place and date that each of the expenses were incurred. Some of the receipts

identify, in handwriting on the receipt, the name of the person with whom

petitioner dined, but they do not identify the relationship between him and the

person being entertained or the specific business purpose for the meal. Petitioners

are not entitled to any meals and entertainment expense deductions because the
                                       - 28 -

receipts provided do not meet the strict substantiation requirements of section

274(d). See Sanford v. Commissioner, 50 T.C. at 827-828.

      E. Business Use of Home

      Petitioners claimed, and respondent disallowed, a deduction of $5,930 for

business use of their home. In their pretrial memorandum, petitioners assert that

they are entitled to a deduction of $4,950.29 for business use of their home.

      In general, a taxpayer is not entitled to deduct any expenses related to the

use of a dwelling unit used by the taxpayer as a residence during the taxable year.

See sec. 280A. Expenses attributable to a home office are excepted from this

general rule, however, if the expenses are allocable to a portion of the dwelling

unit which is exclusively used on a regular basis as the principal place of business

for the taxpayer’s trade or business. See sec. 280A(c)(1); Lofstrom v.

Commissioner, 125 T.C. 271, 278 (2005). If the taxpayer is an employee, the

exception under section 280A(c)(1) will apply only if the home office is

maintained for the convenience of the employer. See Hamacher v. Commissioner,

94 T.C. 348, 353-354 (1990). An employee satisfies this requirement when the

employee maintains the home office as a condition of his employment or as

necessary for the functioning of the employer’s business or as necessary for the

employee to properly perform his duties. Id. at 358. The home office must not,
                                        - 29 -

however, “be ‘purely a matter of personal convenience, comfort, or economy’ with

respect to the employee.” Id. (quoting Sharon v. Commissioner, 66 T.C. 515, 523

(1976), aff’d, 591 F.2d 1273 (9th Cir. 1978)).

      Petitioner does not claim that the home office was used exclusively on a

regular basis as his principal place of business or that the home office was

maintained for the convenience of his employers. Petitioner’s employers did not

require him to maintain a home office. The fact that he used the home office for

business purposes is insufficient to allow any deduction attributable to that use.

See Lofstrom v. Commissioner, 125 T.C. at 278. Petitioners are not entitled to a

home office deduction for 2008, and respondent’s determination in this regard is

sustained.

      F. Other Expenses

             1. Business Gifts

      The heightened substantiation requirements of section 274 also apply to

business gifts. Sec. 274(d)(3). Petitioner introduced a list of the business gifts

that he gave to clients and realtors as well as corresponding receipts showing

purchase of the gifts as evidence in support of his claimed deductions for business

gifts for 2008. Petitioner explained the business purpose of the gifts and the

business relationships with the persons to whom the gifts were given. See sec.
                                        - 30 -

1.274-5T(b)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

Petitioner has substantiated $3,425 of business gifts and is entitled to a deduction

in that amount.3

             2. Cellular Telephone, Telephone, Internet, Fax, and Satellite
                Expenses

      Petitioners assert in the pretrial memorandum that they are entitled to

deductions of $2,381.96 for cellular telephone expenses, $772.45 for home office

telephone line expenses, $1,133.60 for home office business line expenses, $307

for home office fax line expenses, $1,174.11 for home office satellite fees, and

$312.21 for XM Satellite Radio expenses.

      Cellular phones are included in the section 280F definition of listed

property. Sec. 280F(d)(4)(v). Therefore, expenses attributable to cellular phones

are subject to the heightened substantiation requirements of section 274(d), which

require a taxpayer to substantiate (1) the amount of each use or expenditure, (2)

the time and place of the use or expenditure, and (3) its business purpose. Sec.

274(d)(4); sec. 1.274-5T(b)(6), Temporary Income Tax Regs., supra.




      3
       Petitioners asserted in their pretrial memorandum that they are entitled to a
deduction of $3,858.86 for business gifts, but several of the receipts and
statements they provided as substantiation were duplicative and had been included
twice in their calculation.
                                        - 31 -

      Petitioners introduced cellular phone bills from Verizon Wireless in support

of their claimed cellular phone expense deduction. Though petitioner credibly

testified about using his cellular phone for business, he did not substantiate the

expense within the meaning of section 274(d)(4) because he did not substantiate

the amount of time he used his cellular phone for business purposes, the time and

place of these uses, and the business purpose of these uses. Therefore, petitioners

are not entitled to a deduction for cellular phone expenses.

      Expenses for telephone service are deductible under section 162(a),

provided they are ordinary and necessary to the taxpayer’s trade or business.

See Vanicek v. Commissioner, 85 T.C. at 742. To the extent that telephone

expenses are attributable to nonbusiness use, they are nondeductible personal

living expenses. See sec. 262(a). Section 262(b) provides that the first telephone

line in a taxpayer’s residence will be treated as a personal expense. See Bogue v.

Commissioner, T.C. Memo. 2011-164, slip op. at 40, aff’d, 522 Fed. Appx. 169

(3d Cir. 2013).

      Petitioners assert in the pretrial memorandum that they are entitled to

deductions for a home office telephone line and a home office fax line. In support

of these telephone and fax expense deductions, petitioners introduced copies of

bank statements showing that they made payments on various dates to AT&T and
                                        - 32 -

copies of monthly statements from AT&T. These deductions and statements in

support of the deductions appear duplicative, and some of the payments may be

for a first residential telephone line, the expenses of which are per se

nondeductible pursuant to section 262(b). For these reasons, petitioners are not

entitled to deduct any amounts incurred for the home office telephone line or the

home office fax line.

      Petitioners assert they are entitled to a deduction for Internet access fees.4

The Court has characterized Internet expenses as utility expenses. Verma v.

Commissioner, T.C. Memo. 2001-132. Strict substantiation therefore does not

apply, and the Court may estimate petitioners’ deductible expenses provided that

the Court has a reasonable basis for making an estimate. Cohan v. Commissioner,

39 F.2d at 544; see Vanicek v. Commissioner, 85 T.C. at 742-743 (an estimate

must have a reasonable evidentiary basis). Petitioner presented credible testimony

that in 2008, the Internet service at his home was primarily for business use and

that any personal use was incidental. Using our best judgment, we hold that

petitioner is allowed a deduction of $377 for Internet service.




      4
      Petitioners introduced documents in support of their Internet expenses.
The amount in the documents is the same amount listed for “Home Office
Business Line” in petitioners’ pretrial memorandum.
                                          - 33 -

      Petitioners assert that they are entitled to a deduction for home office

satellite and/or cable fees. To support this deduction, petitioners submitted credit

card statements showing payments made to the Dish Network. Though petitioners

incurred these expenses during the year in issue, his testimony and the documents

submitted do not establish that the satellite and/or cable expenses for his entire

home are ordinary and necessary business expenses for a mortgage loan officer.

We sustain respondent’s determination disallowing the deduction for these

expenses.

      Petitioners also claimed a deduction for XM satellite radio in their vehicles.

Petitioners submitted checks payable to XM Satellite Radio to substantiate their

deduction. Though petitioner listened to the radio in his car to keep abreast of

relevant breaking news, the expense is inherently personal, and he has not

demonstrated that the radio expense was an ordinary and necessary business

expense. See sec. 262.

             3. Real Estate Expenses

      Petitioners assert that they are entitled to deductions of $2,743 for appraisal

fee reimbursements to clients, $277.12 for multiple service listing fees, and $249

for miscellaneous real estate expenses.
                                        - 34 -

      In support of their deduction for appraisal fee reimbursements to clients,

petitioners submitted copies of two checks totaling only $1,092. It is not clear to

whom the checks are payable or the purpose of the checks. Furthermore, they are

from petitioners’ joint bank account. Petitioners have not demonstrated that the

amounts paid were ordinary and necessary business expenses, and we sustain

respondent’s determination disallowing the deduction for appraisal fee

reimbursements.

      Petitioners claimed deductions for expenses of multiple service listing fees

and miscellaneous real estate expenses. To support these deductions, petitioners

submitted a copy of a bank statement showing a payment by check of $135

(petitioners did not show how this check was a related real estate or listing fee

expense or that it was otherwise ordinary and necessary), a check for $142.12

payable to Pismo Coast MLS, and a credit card statement showing a charge of

$249 to Consolidated Real Estate. We are satisfied that of these amounts $391.12

was for ordinary and necessary business expenses and that petitioners are entitled

to a deduction in that amount.
                                       - 35 -

             4. Office Supplies, Computer Expenses, Telephone Equipment,
                Postage, Bank Charges

      Petitioners assert they are entitled to a deduction of $1,170.23 for office

supplies. To support the deduction, petitioners submitted credit card statements

with handwritten notations of “office supplies” next to certain charges. Nothing in

the record establishes the expenses were ordinary and necessary for petitioner’s

business rather than personal. We sustain respondent’s determination disallowing

the deduction for office supplies.

      Petitioners’ pretrial memorandum asserts they are entitled to a deduction of

$408.63 for computer expenses. Petitioner did not provide any testimony

regarding these expenses, and the documents submitted to substantiate the

expenses are copies of credit card statements with handwritten notations of

“computer” next to certain charges. Petitioners have not established that the

computer expenses were ordinary and necessary rather than personal, and they are

not entitled to a deduction for computer expenses.

      Petitioners assert in their pretrial memorandum that they are entitled to a

deduction of $92.91 for telephone equipment. Petitioners did not submit any

documentation in support of this deduction, nor did petitioner provide any
                                       - 36 -

testimony regarding this expense. Petitioners have therefore not established that

they are entitled to a deduction for telephone equipment.

      Petitioners reported postage expenses of $1,380 on their Schedule C but in

their pretrial memorandum assert that they are entitled to a deduction for postage

expenses of only $258.98. In support of the deduction, petitioners submitted a

copy of a check, receipts from various post offices, and credit card statements with

charges at USPS. Petitioners have not established that these expenses were

ordinary and necessary rather than personal, and they are not entitled to a

deduction for postage.

      Petitioners’ pretrial memorandum asserts that they are entitled to a

deduction of $96 for bank charges for petitioner’s business checking account.

Petitioners submitted bank statements showing an $8 monthly maintenance

charge. Though petitioners may have had a separate account that petitioner used

for business expenses, both petitioners’ names appear on the checking account

statements they submitted for petitioner’s business checking account. Petitioners

have therefore not established that this expense was ordinary and necessary, and

they are not entitled to a deduction for petitioner’s business checking account fees.

      Petitioners also claimed a deduction of $480 for a limousine service.

Petitioners incurred the expense when they took a realtor and his wife to several
                                       - 37 -

wineries. Petitioner also provided a credit card statement showing a charge of

$480 to California Limousine. Though petitioners claimed this as an “other

expense”, this expense is really in the nature of an entertainment expense, which is

subject to the heightened substantiation requirements of section 274. To prove a

business expense for entertainment, the taxpayer must show: (1) the amount of the

expenditure; (2) the time and place of the entertainment; (3) the business purpose

for the entertainment; and (4) the taxpayer’s business relationship with the persons

entertained. Sec. 1.274-5T(b)(3), Temporary Income Tax Regs., 50 Fed. Reg.

46015 (Nov. 6, 1985). Petitioners did not provide all of the information required

to substantiate this expense and are not entitled to a deduction for the limousine

service.

      G. Conclusion

      On the basis of the foregoing, petitioners are entitled to deductions in the

following amounts: $15 for advertising, $3,425 for business gifts, $377 for

Internet service, and $391.12 for real estate expenses.

III. Accuracy-Related Penalty

      Section 6662(a) and (b)(1) and (2) imposes a penalty of 20% of the portion

of an underpayment of tax attributable to the taxpayer’s negligence, disregard of

rules or regulations, or substantial understatement of income tax. “Negligence”
                                       - 38 -

includes any failure to make a reasonable attempt to comply with the Code,

including any failure to keep adequate books and records or to substantiate items

properly. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. A “substantial

understatement” includes an understatement of income tax that exceeds the greater

of 10% of the tax required to be shown on the return or $5,000. See sec. 6662(d);

sec. 1.6662-4(b), Income Tax Regs.

      With respect to a taxpayer’s liability for any penalty, section 7491(c) places

on the Commissioner the burden of production, thereby requiring the

Commissioner to come forward with sufficient evidence indicating that it is

appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-

447 (2001). Once the Commissioner meets his burden of production, the taxpayer

must come forward with persuasive evidence that the Commissioner’s

determination is incorrect. See id. at 447; see also Rule 142(a); Welch v.

Helvering, 290 U.S. at 115.

      Petitioners claimed some deductions on their 2008 return that they are

unable to substantiate. See sec. 6662(b)(1); sec. 1.6662-3(b)(1), Income Tax

Regs. Therefore, respondent’s burden of production under section 7491(c) has

been satisfied.
                                        - 39 -

       The section 6662(a) accuracy-related penalty does not apply with respect to

any portion of an underpayment if the taxpayer proves that there was reasonable

cause for such portion and that he acted in good faith with respect thereto. Sec.

6664(c)(1). The determination of whether a taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circumstances, including the

taxpayer’s efforts to assess the proper tax liability; the knowledge and the

experience of the taxpayer; and any reliance on the advice of a professional, such

as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most

important factor is the taxpayer’s effort to assess the taxpayer’s proper tax

liability. Id.

       The underpayment at issue is attributable to respondent’s Schedule C

adjustments. We are satisfied that petitioners, who relied on their return preparer

and included with their return a statement disclosing the transfer of a portion of

petitioner’s wages to Schedule C, made a good-faith effort to properly determine

their 2008 Federal income tax liability. Accordingly, we hold that petitioners are

not liable for the section 6662(a) accuracy-related penalty for 2008 to the extent

that their counsel has not already conceded liability for the penalty as more fully

described supra note 1.
                            - 40 -

To reflect the foregoing,


                                          Decision will be entered under

                                     Rule 155.
