                  T.C. Summary Opinion 2006-109



                     UNITED STATES TAX COURT



          TUNJI AND CHRISTINA MABINUORI, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21877-04S.                 Filed 17 July 2006.


     Tunji and Christina Mabinuori, pro sese.

     Wesley F. McNamara, 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 year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
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     Respondent determined a $2,263 deficiency in petitioners’

Federal income tax for 2002 and a $453 accuracy-related penalty

under section 6662(a).   After concessions by the parties,1 the

issues for decision are:   (1) Whether petitioners’ gross income

includes $15 of wage income from Farmers Insurance Group

(Farmers); (2) whether petitioners’ gross income includes $3,845

of self-employment income from Metropolitan Property and Casualty

Insurance Company (MetLife); and (3) whether petitioners are

liable for an accuracy-related penalty under section 6662(a).

                            Background

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

found.   The stipulation of facts and the supplemental stipulation

of facts with attached exhibits are incorporated herein by this

reference.   Petitioners Tunji Mabinuori (Mr. Mabinuori) and

Christina Mabinuori (Mrs. Mabinuori) are married and resided in

Springfield, Oregon, when their petition was filed.   Unless

otherwise indicated, all references to petitioner are to Mr.

Mabinuori.

1.   Petitioner’s Involvement With Farmers

     1
       Petitioners concede they received and failed to report a
$1,844 State income tax refund. Petitioners assert in the
petition that they are entitled to deductions for “business
mileage” that were not claimed on their 2002 joint Federal income
tax return; however, petitioners did not pursue this argument at
trial, and we therefore consider the argument abandoned. See
Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4 (2001); Korchak
v. Commissioner, T.C. Memo. 2005-244 n.6. For convenience, we
address the parties’ additional concessions infra. Adjustments
not addressed herein are computational.
                                 - 3 -

     Petitioner sold insurance successfully for many years.      From

December 1997 to December 1999, petitioner worked for Farmers.

During his employment, Farmers advanced funds to petitioner to

help him establish a business office.    When his employment ended,

Farmers concluded petitioner was required to repay the advanced

funds.   Farmers recorded an account receivable from petitioner on

its books and sent him letters demanding repayment of the

advances.   Farmers calculated that, as of January 2002,

petitioner owed the company $16,644.74.

     For the taxable year 2002, Farmers issued petitioner a Form

1099-MISC, Miscellaneous Income, reporting $666.69 of nonemployee

compensation.   Petitioners did not receive payment, however,

because Farmers applied the $666.69 towards the aforementioned

account receivable.    Petitioners did not report the $666.69 on

their tax return.     Respondent initially determined that the

entire amount was includable in petitioners’ gross income, but

now concedes all but $15 of this adjustment.    The parties

stipulated that the $15 represents commission income.

2.   Petitioner’s Involvement With MetLife

     In or about July 2002, petitioner entered into a Special

Agent Auxiliary Agreement (the agreement) with MetLife.    The

agreement provided that petitioner would work as an independent

contractor for MetLife for a 10-to-14 week training period.

After that time, MetLife would either terminate the relationship

or offer petitioner permanent employment.    Petitioner completed
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the training period ahead of schedule and became a MetLife

employee on August 26, 2002.

     During the training period, petitioner received payments

totaling $2,160 from MetLife.   He received an additional payment

of $3,845 in September 2002.    Petitioner acknowledges receiving

these payments.   MetLife’s business records indicate the payments

represent petitioner’s earnings during the training period.

     For the taxable year 2002, MetLife issued petitioner both a

Form 1099-MISC, and a Form W-2, Wage and Tax Statement.    A letter

from a MetLife attorney explains that the Form 1099-MISC

represents petitioner’s earnings as an independent contractor

during the training period, whereas the Form W-2 represents

petitioner’s wage income after he became a MetLife employee.    The

Form 1099-MISC reports nonemployee compensation of $6,005,

representing the sum of the $2,160 and $3,845 payments.    The Form

W-2 reports wage income of $12,764, which is not in dispute.

     Petitioners did not receive the Form 1099-MISC or report the

$6,005 as income.   The Form 1099-MISC lists an address in Salem,

Oregon, where petitioners lived during the training period.

Petitioners did receive the Form W-2, which lists an address in

Springfield, Oregon, where petitioners lived when they filed

their 2002 tax return.   Petitioners attached the Form W-2 to

their tax return.   They also attached Forms W-2 from three other

payors, each of which lists the address in Springfield, Oregon.

     After petitioner received respondent’s notice of deficiency,
                                 - 5 -

he contacted MetLife to question the accuracy of the $6,005

figure.   Petitioner spoke to a number of MetLife employees, but

MetLife did not provide a copy of the Form 1099-MISC or other

relevant information until respondent served MetLife with a

subpoena before trial.

                               Discussion

1.   Income From Farmers

     Gross income includes all income from whatever source

derived unless excluded by a specific provision of the Internal

Revenue Code.    Sec. 61(a).   A taxpayer generally must report

income for the taxable year when actually or constructively

received.   Sec. 1.451-1(a), Income Tax Regs.

     In general, the taxpayer bears the burden of proving the

Commissioner’s determination is erroneous.     See sec. 7491(a);2

Rule 142(a).    When the Commissioner determines that a taxpayer

received unreported income, however, the Commissioner must

establish “‘some evidentiary foundation linking the taxpayer’” to

the income-producing activity or introduce substantive evidence

“‘demonstrating that the taxpayer received unreported income’”.

Krohn v. Commissioner, T.C. Memo. 2005-145 (quoting Weimerskirch


     2
       Sec. 7491 does not shift the burden of proof to respondent
because petitioners have neither alleged that sec. 7491 is
applicable nor established that they complied with the
requirements of sec. 7491(a)(2)(A) and (B) to substantiate items,
maintain required records, and fully cooperate with respondent’s
reasonable requests.
                               - 6 -

v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), revg. 67

T.C. 672 (1977), and Edwards v. Commissioner, 680 F.2d 1268, 1270

(9th Cir. 1982)).   The Commissioner need only provide a minimal

showing that the taxpayer failed to report income.    See Palmer v.

IRS, 116 F.3d 1309, 1312-1313 (9th Cir. 1997).    Once the

Commissioner provides the necessary evidentiary showing, the

taxpayer bears the burden of proving that the notice of

deficiency is arbitrary or erroneous.     See Cohen v. Commissioner,

T.C. Memo. 2001-249.

     Petitioner formerly worked for Farmers.    Although his

employment ended in 1999, petitioner testified that an insurance

salesman can earn commissions in later years based on renewals of

policies sold in earlier years.     At trial, petitioner appeared to

acknowledge that Farmers owed him such commissions.    We conclude

that respondent has established the necessary evidentiary

foundation linking petitioner to the income-producing activity.

Petitioner therefore bears the burden of proving that the notice

of deficiency is erroneous.   Id.    To attempt to meet this burden,

petitioner argues the $15 is not includable in gross income

because Farmers used that amount to offset the debt he reputedly

owed the company.

     Income is taxed to the taxpayer who earns it.     Commissioner

v. Culbertson, 337 U.S. 733, 739-740 (1949); Sparkman v.

Commissioner, T.C. Memo. 2005-136.     Lack of control over the

income earned does not justify its exclusion from gross income if
                               - 7 -

the earnings are used to pay an obligation of the taxpayer.    See

Tucker v. Commissioner, 69 T.C. 675, 678 (1978); Chambers v.

Commissioner, T.C. Memo. 2000-218, affd. 17 Fed. Appx. 688 (9th

Cir. 2001); sec. 1.61-12(a), Income Tax Regs.    A third party’s

payment of an obligation of the taxpayer is equivalent to the

taxpayer’s receipt of the income in the amount paid.    See Old

Colony Trust Co. v. Commissioner, 279 U.S. 716, 729-730 (1929);

Minor v. Commissioner, T.C. Memo. 1998-237.     Where the transfer

of funds at least partially discharges a legal obligation of the

taxpayer, the transfer is equivalent to receipt by the taxpayer.

See Helvering v. Horst, 311 U.S. 112, 116 (1940); Chambers v.

Commissioner, supra.   The fact that the transfer is involuntary,

such as by garnishment, has no significance.     Chambers v.

Commissioner, supra; Vorwald v. Commissioner, T.C. Memo. 1997-15.

Thus, the $15 is includable in petitioners’ gross income.

     Petitioner appears to argue that the above rule is

inapplicable because Farmers eventually acknowledged that

petitioner did not owe the company any money.    Thus, petitioner

contends, the $15 did not discharge a legal obligation but

instead was wrongfully withheld.   Petitioner did not introduce

credible evidence to support this contention, however, nor did he

otherwise demonstrate the $15 is excludable from gross income.

Accordingly, petitioner has failed to prove that respondent’s

determination is erroneous.   We therefore conclude the $15 is

includable in petitioners’ gross income.
                                - 8 -

2.   Income From MetLife

     Petitioner does not dispute that he received $6,005 from

MetLife.    Furthermore, he concedes the $2,160 he received during

the training period is self-employment income.      With respect to

the remaining $3,845, however, he contends this amount does not

represent earnings from the training period.      Petitioner believes

the $3,845 was reimbursement for the cost of establishing a

business office and, therefore, is excludable from gross income.

In the alternative, petitioner appears to contend that even if

the $3,845 is includable in gross income, it is wage income

rather than self-employment income because he received payment

after he became an employee.

     Under some circumstances, an employee’s gross income does

not include amounts received from his employer for reimbursement

of business expenses.   See, e.g., Biehl v. Commissioner, 118 T.C.

467, 473-474 (2002), affd. 351 F.3d 982 (9th Cir. 2003); Anaheim

Paper Mill Supplies, Inc. v. Commissioner, T.C. Memo. 1978-86;

sec. 1.162-17(b) and (c), Income Tax Regs.      In this case,

however, petitioner has failed to establish that the $3,845 was

reimbursement for business expenses.      To the contrary, MetLife’s

business records indicate the $3,845 was income that petitioner

earned during the training period.      To refute these documents,

petitioner offers only his uncorroborated testimony that one or

more MetLife employees told him the $3,845 was for office startup

expenses.   His testimony alone, however, does not overcome the
                                - 9 -

documentary evidence.   We therefore conclude that the $3,845

represents compensation earned during the training period.

     Section 1401 imposes a tax on self-employment income of

every individual for old age, survivors, and disability

insurance, and for hospital insurance.    Sec. 1401(a) and (b);

Schelble v. Commissioner, 130 F.3d 1388, 1391 (10th Cir. 1997),

affg. T.C. Memo. 1996-269.   Self-employment income is “the net

earnings from self-employment derived by an individual” during

the taxable year.   Sec. 1402(b).   The earnings of an insurance

agent who is an independent contractor generally are

self-employment income subject to self-employment tax.     Schelble

v. Commissioner, supra; Simpson v. Commissioner, 64 T.C. 974,

983-987 (1975); Erickson v. Commissioner, T.C. Memo. 1992-585,

affd. without published opinion 1 F.3d 1231 (1st Cir. 1993).

     Petitioner does not dispute that he was an independent

contractor during his training period with MetLife.    Accordingly,

any income petitioner earned during that time is subject to self-

employment tax.   Although petitioner did not receive the $3,845

until after he became an employee of MetLife, the income was

derived from self-employment.    See sec. 1402(b).   Accordingly,

the $6,005 is subject to self-employment tax.

3.   Whether Petitioners Are Liable for an Accuracy-Related
     Penalty Under Section 6662

     Respondent asserted an accuracy-related penalty against

petitioners as to each adjustment in the notice of deficiency.
                               - 10 -

Respondent now concedes that petitioners are not liable for the

penalty with respect to the $15 from Farmers.       Respondent

therefore asserts the penalty only with respect to the unreported

State income tax refund, see supra note 1, and the unreported

self-employment income from MetLife.

     Section 6662(a) provides in relevant part that a taxpayer

may be liable for a penalty of 20 percent of the portion of an

underpayment of tax attributable to negligence or disregard of

rules or regulations.    Sec. 6662(a) and (b)(1).    The term

“negligence” includes any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code.         Sec.

6662(c).   The term “disregard” includes any careless, reckless,

or intentional disregard.    Id.   Respondent has the burden of

production with respect to the accuracy-related penalty.         See

sec. 7491(c).

     An exception to the section 6662 penalty applies when the

taxpayer demonstrates:    (1) There was reasonable cause for the

underpayment, and (2) the taxpayer acted in good faith with

respect to the underpayment.    Sec. 6664(c).   Whether the taxpayer

acted with reasonable cause and in good faith is determined by

the relevant facts and circumstances on a case-by-case basis.

See Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec.

1.6664-4(b)(1), Income Tax Regs.    “Circumstances that may

indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of
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all the facts and circumstances, including the experience,

knowledge, and education of the taxpayer.”    Sec. 1.6664-4(b)(1),

Income Tax Regs.    The most important factor is the extent of the

taxpayer’s effort to assess the proper tax liability.

Stubblefield v. Commissioner, supra; sec. 1.6664-4(b)(1), Income

Tax Regs.

     With respect to the unreported State income tax refund,

petitioners acknowledge receipt of this income and that it was

“mistakenly” omitted from their 2002 tax return.    Petitioners did

not attempt to explain the reason for the omission.    We conclude

that respondent has met his burden of production and that

petitioners have not shown reasonable cause for their failure to

report this item.

     With respect to the self-employment income, petitioners did

not receive the Form 1099-MISC, which was sent to their former

address.    We have held that failure to receive a Form 1099-MISC

does not necessarily constitute reasonable cause for failure to

report income.     See Goode v. Commissioner, T.C. Memo. 2006-48;

Brunsman v. Commissioner, T.C. Memo. 2003-291 (taxpayer “did not

need to receive a Form 1099-MISC to be alerted to the fact that

he received compensation from * * * [a third party] for his

services.”).     In this case, however, we find it significant that

petitioners received a Form W-2 from MetLife.    Petitioners may

not have understood the distinction between wage income and self-

employment income; i.e., that they should have received a Form
                              - 12 -

1099-MISC for the earnings during the training period.    Thus,

petitioners could have reasonably concluded the Form W-2 reported

the entire earnings from MetLife in 2002.    It is arguable that

petitioners should have noticed their gross income was

understated by $6,005.   However, petitioners believed that a

significant portion of this amount was reimbursement for office

expenses and, therefore, excludable from gross income.    The facts

present a close question, but viewing the record as a whole, we

conclude that petitioners have demonstrated reasonable cause for

failing to report the self-employment income and that they acted

in good faith.   See sec. 6664(c).   Accordingly, they are not

liable for the accuracy-related penalty with respect to this

adjustment.
                             - 13 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                       Decision will be entered

                                  under Rule 155.
