                   T.C. Summary Opinion 2001-2



                     UNITED STATES TAX COURT



        JACK S. MORRIS AND DOROTHY MORRIS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2886-00S.                   Filed January 4, 2001.


     Jack S. Morris, pro se.

     Gary M. Slavett, for respondent.



     PANUTHOS, Chief 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 years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
                               - 2 -

     All references to petitioner are to Jack S. Morris.

Respondent determined deficiencies in petitioners’ Federal income

taxes in the amounts of $3,563 and $4,744 for tax years 1996 and

1997, respectively.1   After concessions,2 the issues for decision

are: (1) Whether petitioner is a statutory employee; (2) whether

petitioner is entitled to an adjustment for cost of goods sold;

(3) whether petitioner is entitled to deductions for home office

expenses under section 280A; and (4) whether petitioner is

entitled to various Schedule C deductions.




     1
        After trial, the parties stipulated that petitioner
Dorothy Morris (now Dorothy Kirkpatrick) is entitled to relief
from joint liabilities determined for the 1996 and 1997 tax years
pursuant to sec. 6015(b).
     2
        Respondent concedes that petitioner is entitled to
deductions for union dues of $384 and $390 in 1996 and 1997,
respectively. Respondent concedes that petitioner paid $184 and
$210 for uniforms in 1996 and 1997, respectively. Sec. 67 imposes
a 2-percent floor of adjusted gross income on miscellaneous
itemized deductions. After concessions and our holdings, the
miscellaneous itemized deductions do not exceed the 2-percent
floor for 1996 and 1997.

     Respondent concedes that petitioner is entitled to
deductions for home mortgage interest of $13,908 and $13,750 for
1996 and 1997, respectively. On their Federal income tax
returns, petitioners deducted home mortgage interest of $9,482
and $9,375 for 1996 and 1997, respectively.

     Petitioners claimed a deduction of $1,200 in 1996 for legal
and professional services. Petitioner did not address this
deduction at trial. As a result, petitioner is deemed to have
conceded the item. See Rules 142(a), 149(b); Sundstrand Corp. v.
Commissioner, 96 T.C. 226, 344 (1991); Pearson v. Commissioner,
T.C. Memo. 2000-160.
                                 - 3 -

     Some of the facts have been stipulated, and they are so

found.   The stipulation of facts and the attached exhibits are

incorporated herein by this reference.     At the time of filing

their petition, petitioners resided in Costa Mesa, California.

     During the period at issue, petitioner worked for Interstate

Brands Co. (IBC) as a bakery deliveryman.     IBC is in the business

of producing and delivering baked goods.

     Petitioner delivered baked goods to IBC’s customers,

including Costco and the Claim Jumper restaurant.     Petitioner

drove a vehicle provided by IBC, and IBC paid for gas and

maintenance of the vehicle.     On a typical workday, petitioner

arrived at IBC between 3 a.m. and 4 a.m. and loaded IBC’s truck

with baked goods.     Petitioner delivered baked goods in a

territory assigned by IBC.     IBC also required petitioner to

deliver baked goods to certain customers pursuant to IBC’s

schedule.    For example, petitioner serviced 7-11 stores daily

pursuant to IBC’s rules.     Petitioner completed his route between

12 p.m. and 2 p.m.

     The working relationship between petitioner and IBC was

formalized in an agreement between the Local International

Brotherhood of Teamsters and IBC.    Petitioner received a base

salary and a commission on the net sales of baked goods he

delivered.    Petitioner did not pay for the product he delivered

to IBC’s customers.    IBC determined petitioner’s workdays, and he
                                 - 4 -

needed permission from an IBC supervisor to take a day off. IBC

paid petitioner for vacation and sick days.       Petitioner was

required by IBC to wear a uniform.       Petitioner punched a

timeclock at the beginning and end of each workday.      On Forms W-

2, Wage and Tax Statement, issued by IBC in 1996 and 1997,

petitioner was not listed as a statutory employee.

     During the period at issue, petitioners resided in a five-

bedroom house with their children.       The house also contained a

living room, kitchen, and bathrooms.      Petitioner designated one

of the bedrooms as a home office.    The room contained a desk,

telephone, and files.     In the home office, petitioner telephoned

bread orders to IBC.     Petitioner also designated his two-car

garage as a home office.     Petitioner parked his personal van in

the garage.   Petitioner maintained bread on racks in the garage

for certain customers.     Petitioner also stored tools, bicycles,

and other personal items in the garage.

     On his 1996 and 1997 Federal income tax returns, petitioner

indicated that he was a “statutory employee” and, therefore,

entitled to report income and expenses on Schedule C pursuant to

Rev. Rul. 90-93, 1990-2 C.B. 33.    The Schedules C included as

gross receipts the amounts reflected on the respective Forms W-2

issued by IBC.   Petitioner subtracted $5,914 and $5,544 in 1996

and 1997, respectively, for cost of goods sold for the stale or

damaged bakery goods petitioner returned to IBC.      The amounts for
                                 - 5 -

cost of goods sold reflected the industry average for stale and

damaged returns, and not the actual amount returned to IBC.

Petitioners also claimed Schedule C deductions for home office

expenses in the respective amounts of $7,919 and $9,433 for 1996

and 1997.    Petitioner claimed the following deductions related to

his vehicles on Schedule C:

     Claimed Deduction            1996                1997

     Car & truck expenses        $2,480              $2,559
     Taxes & licenses               —--               2,152
     Interest (other)             2,479               1,215
     Depreciation                 2,952               3,621
     Sec. 179 expenses              —--              10,000

On his Federal income tax returns, petitioner attributed a

business use for the vehicles of 71.12 percent for 1996 and 63.74

percent for 1997.

     Respondent determined that petitioner was a common-law

employee and, therefore, not permitted to report income and

expenses on Schedule C.     Respondent also determined that

petitioner is not entitled to any reduction for cost of goods

sold because petitioner was not in the business of selling baked

goods and, in any event, petitioner failed to substantiate any

purchases.   Respondent also contends that since petitioner was an

employee, petitioners do not qualify for the home office

deductions, as the home office was not maintained for the

convenience of the employer.     Respondent disallowed all of the

Schedule C deductions because the expenses were not ordinary and
                               - 6 -

necessary business expenses, and petitioner failed to

substantiate the expenses.

1.   Statutory Employee

     Petitioner contends that he was a statutory employee under

section 3121(d)(3)(A), as he was a commission-driver who

delivered bakery products.   Section 3121(d) defines “employee”

for employment tax purposes 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; or

                (3) any individual (other than an individual
           who is an employee under paragraph (1) or (2)) who
           performs services for remuneration for any
           person--

                     (A) as an agent-driver or commission-
                driver engaged in distributing meat products,
                vegetable products, bakery products,
                beverages (other than milk), or laundry or
                dry-cleaning services, for his principal;
                [Emphasis added.]

A taxpayer cannot be a “statutory employee” under section

3121(d)(3)(A) unless he is not a common-law employee under

section 3121(d)(2).   We therefore must decide whether petitioner

was a common-law employee or independent contractor, and
                                - 7 -

if he is an independent contractor, then he may qualify as a

“statutory employee”.    Lickiss v. Commissioner, T.C. Memo. 1994-

103.

       Whether an employer-employee relationship3 exists is a

question of fact.    See Air Terminal Cab, Inc. v. United States,

478 F.2d 575, 578 (8th Cir. 1973); Professional & Executive

Leasing, Inc. v. Commissioner, 89 T.C. 225, 232 (1987), affd. 862

F.2d 751 (9th Cir. 1988).    If an employer-employee relationship

exists, its characterization by the parties as some other

relationship is of no consequence.      See sec. 31.3121(d)-1(a)(3),

Employment Tax Regs.



       3
          Sec. 31.3401(c)-1(b), Employment Tax Regs., defines an
employer-employee relationship as follows:
          (b) Generally the relationship of employer and
     employee exists when the person for whom services are
     performed has the right to control and direct the
     individual who performs the services, not only as to
     the result to be accomplished by the work but also as
     to the details and means by which that result is
     accomplished. That is, an employee is subject to the
     will and control of the employer not only as to what
     shall be done but how it shall be done. In this
     connection, it is not necessary that the employer
     actually direct or control the manner in which the
     services are performed; it is sufficient if he has the
     right to do so. The right to discharge is also an
     important factor indicating that the person possessing
     that right is an employer. Other factors
     characteristic of an employer, but not necessarily
     present in every case, are the furnishing of tools and
     the furnishing of a place to work to the individual who
     performs the services. In general, if an individual is
     subject to the control or direction of another merely
     as to the result to be accomplished by the work and not
     as to the means and methods for accomplishing the
     result, he is not an employee.
                                - 8 -

     This Court looks to seven factors to determine the existence

of a common-law employer/employee versus an independent

contractor relationship: (1) The degree of control exercised by

the principal over the details of the work; (2) which party

invests in the facilities used in the work; (3) the opportunity

of the individual for profit or loss; (4) whether the principal

has the right to discharge the individual; (5) whether the work

is an integral part of the principal’s regular business; (6) the

permanency of the relationship; and (7) the relationship the

parties believe they are creating.      See Weber v. Commissioner,

103 T.C. 378, 387 (1994), affd. per curiam 60 F.3d 1104 (4th Cir.

1995); Professional & Executive Leasing, Inc. v. Commissioner, 89

T.C. at 232; Simpson v. Commissioner, 64 T.C. 974, 984-985

(1975); see also United States v. Silk, 331 U.S. 704, 716 (1947).

No single factor is dispositive, and we must look at all the

facts and circumstances in each case.     See Professional &

Executive Leasing, Inc. v. Commissioner, supra at 232; Simpson v.

Commissioner, supra at 985; Eren v. Commissioner, T.C. Memo.

1995-555, affd. 180 F.3d 594 (4th Cir. 1999).

     Although we review all of the factors, the “right to

control” is the crucial factor in determining the nature of a

working relationship.    Weber v. Commissioner, supra at 387;

Matthews v. Commissioner, 92 T.C. 351, 361 (1989), affd. 907 F.2d

1173 (D.C. Cir. 1990).   The degree of control is one of great
                                - 9 -

importance, though not exclusive.    See Atlantic Coast Life Ins.

Co. v. United States, 76 F. Supp. 627, 630 (E.D.S.C. 1948).     We

must examine both the right of control and the control actually

exercised by the potential employer.     See Radio City Music Hall

Corp. v. United States, 135 F.2d 715, 717 (2d Cir. 1943);

deTorres v. Commissioner, T.C. Memo. 1993-161.      The amount of

control necessary to find an employer-employee relationship

varies with different occupations.      See United States v. W.M.

Webb, Inc., 397 U.S. 179, 192-193 (1970); Reece v. Commissioner,

T.C. Memo. 1992-335.

     We discuss below the factors considered to decide whether

petitioner was a common-law employee or an independent

contractor.

     A.   Degree of Control

     IBC controlled the extent of petitioner’s territory.     IBC

required that petitioner deliver goods to certain customers on

specific days of the week.    IBC dictated the hours of work,

compensation, and leave.   IBC required petitioner to punch a time

clock when he began and ended a workday at IBC’s place of

business.   Petitioner needed IBC’s permission to take leave.

     B.   Investment in Facilities

     IBC paid for and supplied the goods petitioner delivered.

IBC provided petitioner with his delivery vehicle, and IBC paid
                                - 10 -

for all maintenance and fuel.    Petitioner did not have an

investment in either the goods delivered or the facilities.

     C.   Opportunity for Profit or Loss

     Petitioner received a commission for the baked goods he

delivered to IBC’s customers.    Petitioner also received a base

salary each week.   Although petitioner did not receive

commissions on the goods returned to IBC by its customers, IBC

ultimately was responsible for any losses for goods returned.

Therefore, petitioner did not have an opportunity for loss.

     D.   Right To Discharge

     The record is silent with respect to this factor.

     E.   Integral Part of Business

     IBC’s business was to produce, deliver, and provide baked

goods to various customers, such as Costco and the Claim Jumper.

IBC required drivers to deliver baked goods to IBC’s customers.

This type of work was clearly within the scope of IBC’s regular

business.

     F.   Permanency of Relationship

     The record is silent with respect to this factor.

     G.   Relationship Parties Believe They Created

     Petitioner believes that he was a statutory employee.    The

statutory employee box on the Form W-2 from IBC was not checked.

Further, IBC paid the applicable payroll taxes and did not issue

a Form 1099.   These factors indicate that IBC treated petitioner
                                - 11 -

as a common-law employee, as opposed to an independent contractor

or statutory employee.

     On balance, considering the record and weighing all of the

factors, we conclude that petitioner was a common-law employee

and not an independent contractor.       Since petitioner was not an

independent contractor, he therefore was not a statutory

employee.    See sec. 3121(d)(3); Lickiss v. Commissioner, T.C.

Memo. 1994-103.    Petitioner is not entitled to report gross

income and claim expenses on Schedule C.      Accordingly, we hold

for respondent.

2.   Cost of Goods Sold

     The cost of goods purchased for resale in a taxpayer’s

business is an offset to gross receipts in computing gross

income.     See Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661

(1987); Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477

(1977), affd. 630 F.2d 670 (9th Cir. 1980); Thorpe v.

Commissioner, T.C. Memo. 1998-123; sec. 1.61-3(a), Income Tax

Regs.   Although cost of goods sold is not a deduction and,

therefore, is not subject to the limitations on deductions, any

amount allowed as cost of goods sold must be substantiated.      See

sec. 6001; Ranciato v. Commissioner, T.C. Memo. 1993-536; sec.

1.6001-1(a), Income Tax Regs.

     Petitioner subtracted $5,914 in 1996 and $5,544 in 1997 for

cost of goods sold in IBC’s business.      For the same reasons as
                               - 12 -

fully set forth above, petitioner was not an independent

contractor but rather a common-law employee.   Thus, he is not

entitled to an adjustment for cost of goods sold.   Even if

petitioner were entitled to Schedule C treatment for income and

expenses, petitioner failed to produce any evidence of the cost

of goods sold in 1996 or 1997.   See Gibbs v. Commissioner, T.C.

Memo. 1988-491.    Further, petitioner did not purchase the goods

from IBC that IBC sold to its customers, and the amount listed as

cost of goods sold was merely an industry average of stale and

damaged returns.   Therefore, we hold for respondent.

3.   Home Office Deduction

     Section 280A(a) provides that an individual taxpayer is

generally not entitled to a deduction for a dwelling unit used by

the taxpayer as a residence during the taxable year.    Section

280A(c)(1), however, permits a deduction of expenses allocable to

a portion of the dwelling unit which is regularly and exclusively

used as either the principal place of business for any trade or

business of the taxpayer or as a place of business which is used

by clients or customers in meeting or dealing with the taxpayer

in the normal course of his trade or business.

     An employee is entitled to the deduction only if the office

is for the convenience of the employer.   See sec. 280A(c)(1).

This use has been found where the employee is required to

maintain the office as a condition of employment or when the home
                                - 13 -

office was necessary for the functioning of the employer’s

business or to allow the employee to perform his duties properly.

See Frankel v. Commissioner, 82 T.C. 318, 325-326 (1984); Green

v. Commissioner, 78 T.C. 428, 430 (1982), revd. on other grounds

707 F.2d 404 (9th Cir. 1983); Mathes v. Commissioner, T.C. Memo.

1990-483.   A deduction is not allowed when the employee maintains

the home office purely for his convenience, comfort, or economy.

See Sharon v. Commissioner, 66 T.C. 515, 523 (1976), affd. 591

F.2d 1273 (9th Cir. 1978).

     The facts in this case clearly demonstrate that petitioner

did not maintain a home office as his principal place of business

or as a place of business for meeting with clients or customers

in the normal course of business.    Additionally, petitioner

failed to establish that he was required to maintain an office

for the convenience of his employer.     IBC did not require

petitioner to maintain a home office in order to perform his

duties.   Petitioner testified that he used the home office as a

place to make telephone calls to IBC and load bread in his

personal vehicle.     Since petitioner failed to come within the

exception of section 280A(c)(1), we sustain respondent’s

disallowance of the claimed deductions for home office space for

both 1996 and 1997.
                              - 14 -

4. Schedule C Expenses/Deductions

     Although petitioner is not entitled to report deductions on

Schedule C, we look at the claimed amounts to consider whether

they may otherwise be deductible as miscellaneous itemized

deductions on Schedule A.   Section 162(a) permits a deduction for

the ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a trade or business.    Petitioner’s

trade or business is that of an employee for IBC.    Expenses that

are personal in nature are generally not allowed as deductions.

See sec. 262(a).   Deductions are a matter of legislative grace,

and taxpayers must comply with the specific requirements for any

deduction claimed.   See INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934).

     A taxpayer is required to maintain records sufficient to

establish the amount of his income and deductions.    See sec.

6001; sec. 1.6000-1(a), (e), Income Tax Regs.   A taxpayer must

substantiate his deductions by maintaining sufficient books and

records to be entitled to a deduction under section 162(a).

     When a taxpayer establishes that he has paid a deductible

expense but is unable to substantiate the exact amount, we are

permitted to estimate the deductible amount.    See Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).    We can

estimate the amount of the deductible expense only when the
                               - 15 -

taxpayer provides evidence sufficient to establish a rational

basis upon which the estimate can be made.   See Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985).

     Section 274(d) supersedes the general rule of Cohan v.

Commissioner, supra, and we cannot estimate the taxpayer’s

expenses with respect to certain items.   See Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d

201 (2d Cir. 1969).    Section 274(d) imposes strict substantiation

requirements for listed property (pursuant to sec. 280F(d)(4)).

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

46014 (Nov. 6, 1985).   In order to substantiate the amount of

expenses for listed property, a taxpayer must satisfy additional

factors, such as establishing the amount of business use for the

property, the amount of total use for such property, the amount

of each expenditure, and the investment or business purpose of

each use.    See sec. 1.274-5T(b)(6), Temporary Income Tax Regs.,

50 Fed. Reg. 46016 (Nov. 6, 1985).

     Expenses should be recorded at or near the time when the

expense is incurred.    See sec. 1.274-5T(c)(1), Temporary Income

Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).   The record must

contain sufficient information as to each element of every

business use, but the level of detail will vary with each factual

variation.   See sec. 1.274-5T(c)(2)(ii)(C)(1), Temporary Income

Tax Regs., 50 Fed. Reg. 46018 (Nov. 6, 1985).   For example, if a
                              - 16 -

taxpayer uses a vehicle for both business and personal purposes,

and he uses the vehicle for deliveries on a regular, established

route, then he may satisfy the adequate record requirement by

recording the total number of miles driven during the tax year,

the length of the route, and the date of each trip.    The date of

each trip should be recorded at or near the time of each trip.

In addition, the taxpayer could establish the date of each trip

with a receipt, record of delivery, or other documentary

evidence.   See sec. 1.274-5T(c)(2)(ii)(C)(1), Temporary Income

Tax Regs., 50 Fed. Reg. 46018 (Nov. 6, 1985).   If a taxpayer

cannot meet the requirements of section 274(d), then he is not

entitled to a deduction.

     A. Automobile Expenses

     Petitioner deducted the following amounts related to his

1995 Dodge van and 1997 Ford Mustang: $2,480 and $2,559 in 1996

and 1997, respectively, for car and truck expenses (mileage);

interest of $2,479 and $1,215 in 1996 and 1997, respectively; and

$2,152 for taxes and licenses in 1997.   Petitioner testified that

he used the van exclusively for the delivery of baked goods to

IBC’s customers on his days off and after hours.     Petitioner did

not testify as to the business use of the Mustang.    Petitioner

stated that when he purchased the Mustang, he stopped using the

van, as he did not need to deliver as much bread.     Petitioner
                              - 17 -

submitted mileage logs which list the monthly total of miles

driven.

     Petitioner failed to meet the stringent requirements of

section 274(d).   The mileage log does not contain the date of

each trip, nor does the log describe the business place or

purpose of each trip.   Petitioner also did not establish the

total use and business use of each vehicle.    The log merely

describes the monthly odometer readings.    The log does not appear

to be contemporaneously created, thus reducing its reliability.

The mileage log also conflicts with petitioner’s testimony and

his mileage statements on his Federal income tax returns for the

years at issue.   On his Federal income tax returns, petitioner

attributed a business use for the vehicles of 71.12 percent for

1996 and 63.74 percent for 1997.    We do not find petitioner’s

unsupported self-serving testimony to be credible.    See

Niedringhaus v. Commissioner, 99 T.C. 202, 219-220 (1992);

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).     Therefore,

petitioner is not entitled to deductions for the car and truck

expenses.

     B. Section 179

     Petitioner deducted $10,000 in 1997 under section 179 for

the purchase of his Ford Mustang.    Section 179(a) provides that a

taxpayer may elect to currently deduct the cost of tangible

personal property purchased during the taxable year for use in
                                 - 18 -

the active conduct of a trade or business.      In 1997, the

aggregate deduction limit of elected property under section

179(a) was $18,000.      If a property has both business and other

uses, then the taxpayer must establish that more than half of the

property’s use in the taxable year is for trade or business

purposes.    See secs. 274(d), 280F(d)(4); sec. 1.179-1(d)(1),

Income Tax Regs.

       Petitioner failed to establish that the Mustang was

predominantly used in his trade or business as an employee of

IBC.    Petitioner did not establish either the total use or the

business use of the vehicle.      The incomplete mileage log,

petitioner’s testimony, and the inconsistent statements from

petitioner’s 1997 Federal income tax return prevent us from

determining the amount of business use, if any, of the Mustang.

Therefore, we sustain respondent’s determination as to this

issue.

       C. Depreciation

       Petitioner deducted $2,952 and $3,621 in 1996 and 1997,

respectively, for depreciation of the Dodge van and Ford Mustang.

Section 167(a) permits a depreciation deduction for the

exhaustion and wear and tear of property used in the trade or

business.    Section 274(d) imposes a strict substantiation

requirement for deductions with respect to any listed property.
                              - 19 -

As we held above, petitioner failed to meet the requirements of

section 274(d).   According, we hold for respondent on this issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.4




     4
        The decision to be entered herein shall reflect that
petitioner Dorothy Morris is entitled to relief from joint
liabilities determined for 1996 and 1997 pursuant to sec.
6015(b).
