                  T.C. Memo. 1996-389



                UNITED STATES TAX COURT



PAUL E. HATHAWAY AND BRENDA J. HATHAWAY, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 19122-93.                    Filed August 21, 1996.



     Petitioner husband (P) was a traveling sales
representative in 1989 and 1990 for a company that
manufactured and distributed men's clothing (T). T did
not control, and did not have the right to control, the
manner or means by which P solicited sales. P had a
substantial investment in facilities and bore
substantially all the expenses of his sales activities.
P also bore the risk of loss from his sales activities.
P and T had a permanent working relationship, although
terminable at the will of either party. P received
employee-type benefits from T.

      Held: P was an independent contractor and was not
an employee in 1989 and 1990. Sec. 62(a)(1), I.R.C.
1986.


Walter T. Hart, for petitioners.

Jeffrey A. Schlei, for respondent.
                               - 2 -


             MEMORANDUM FINDINGS OF FACT AND OPINION

     CHABOT, Judge:   Respondent determined deficiencies in

Federal individual income tax1 against petitioners as follows:

               Year                    Deficiency

               1989                     $10,286
               1990                      11,652

     After concessions by both sides,2 the issue for decision is

whether petitioner Paul E. Hathaway, hereinafter sometimes

referred to as Hathaway, a traveling sales representative, was a

common law employee, a statutory employee, or an independent

contractor in 1989 and 1990.




1
     Of the total deficiencies determined, $9,023 for 1989 and
$9,414 for 1990 are alternative minimum tax under sec. 55; the
remaining amounts are income tax under sec. 1.

     Unless indicated otherwise, all section and subtitle
references are to sections and subtitles of the Internal Revenue
Code of 1986, as in effect for the years in issue.
2
     The parties reached the following agreements. For 1989, if
respondent's determination is sustained, then (1) petitioners may
claim a Schedule C expense deduction in the amount of $15,551
(see sec. 62(a)(2)), (2) petitioners may claim on Schedule C cost
of goods sold in the amount of $8,260, (3) petitioners may claim
a net (i.e., after subtracting 2 percent of adjusted gross
income) Schedule A business expense deduction in the amount of
$58,469, and (4) petitioners may claim a Schedule A medical
expense deduction in the amount of $615.23. For 1990, if
respondent's determination is sustained, then (1) petitioners may
claim a Schedule C expense deduction in the amount of $10,270,
(2) petitioners may claim a Schedule A interest expense deduction
in the amount of $109, and (3) petitioners may claim a net
Schedule A business expense deduction in the amount of $68,110.
                                 - 3 -

                          FINDINGS OF FACT

     Some of the facts have been stipulated; the stipulations and

the stipulated exhibits are incorporated herein by this

reference.

     When the petition was filed in the instant case, petitioners

resided in Urbandale, Iowa.

                              Background

     Beginning in 1969, and during the years in issue, Hathaway

was a traveling sales representative for The Apparel Group, Ltd.,

and its predecessor companies.    Enro Shirt Co., Inc., Damon

Creations, Inc., and Carnegie Creations d/b/a B.D. Baggies were

part of The Apparel Group, Ltd.    The term TAG will be used

hereafter to apply to the Apparel Group, Ltd., its predecessors,

and its constituents, or any of them.      Petitioner Brenda J.

Hathaway did not work outside the home in 1989 and 1990.

     During the years in issue, TAG was in the business of

manufacturing clothing, wholesale distribution and warehousing of

domestic and imported men's clothing, and retail sales of

clothing.    Hathaway was a traveling sales representative in

wholesale distribution of men’s clothing to retail customers, and

was employed by TAG to work for an indefinite period of time.

     Hathaway’s fall sales season began in mid-January and ran

through mid-June.    His spring sales season began in mid-August

and ran through the end of November.
                               - 4 -

     During the years in issue, TAG had about 23 sales

representatives.   TAG hired only professional, experienced sales

representatives and had a very low turnover rate for sales

representatives.   Most of TAG’s sales representatives had been

with TAG for more than 20 years.

     TAG assigned sales territories to its sales representatives.

These sales territories were exclusive.   If a sales

representative other than the one assigned to a territory made a

sale in that territory, then the sales representative to whom the

territory was assigned would receive the commission for that

sale.   Before 1990, Hathaway’s assigned sales territory was

Kansas, Nebraska, and Iowa.3   Early in 1990, Hathaway’s sales

territory was expanded to include North and South Dakota,

Wyoming, and about 70 percent4 of Minnesota.   Hathaway

effectuated most of his sales when traveling in this territory.


3
     Before TAG hired Hathaway, Hathaway was living in Lexington,
Kentucky, and was another company’s sales representative for
Kentucky and southern Indiana. Hathaway originally was expected
to replace either TAG’s southern California sales representative
or TAG’s Seattle, Washington, sales representative. However,
when Hathaway came on board, TAG’s Oklahoma sales representative
was ill. Hathaway was assigned to learn the Oklahoma territory,
and the southern California and Seattle plans were scratched.
After the previous Oklahoma sales representative died, that man’s
brother, who had the Iowa territory, was asked to take over
Oklahoma and Hathaway was asked to take over Iowa.
4
     The parties stipulated that Hathaway’s assigned sales
territory included 60 percent of Minnesota. Our finding,
contrary to the stipulation, is in accord with Hathaway’s trial
testimony, which was not objected to at the trial. This factual
point does not affect our analysis or conclusions.
                               - 5 -

He also maintained showrooms, see infra, where he solicited

sales.

     During the years in issue, TAG did not require its sales

representatives to use particular sales techniques or to use

specific materials in making sales presentations or finding

customers.   TAG did not give any sales training to Hathaway

during the years in issue, or at any previous time.   TAG sales

representatives used their own creativity and experience to

create sales.   TAG did not have the right to change the method by

which its sales representatives solicited sales.   TAG did not

mandate the time during which its sales representatives were to

solicit sales or the portion of their assigned territories on

which they were to concentrate; sales representatives used their

own business judgment regarding the scheduling of their time.

TAG did not provide leads on prospective customers to its sales

representatives; sales representatives were not required to

pursue or report on leads.   Most of Hathaway’s customer base was

generated through his efforts; there were very few TAG customers

in the Iowa-based territory when Hathaway took it over in 1969.

     TAG had two sales meetings each year and encouraged, but did

not require, its sales representatives to attend those sales

meetings.

                      Sales Procedure Manual

     TAG provided a sales procedure manual to its sales

representatives.   The sales procedure manual details the way in
                               - 6 -

which orders are to be placed with TAG, but does not describe the

manner in which sales representatives are to solicit sales.

     In 1970 or 1971, when there was a change in TAG’s ownership,

a sales procedure manual was given to Hathaway.   Parts of the

sales procedure manual were revised from time to time.    The

version of the sales procedure manual that was in effect during

the years in issue was last revised in January 1984.    Hathaway

did not consult the sales procedure manual from about January

1984, until well after the end of the years in issue.

     The sales procedure manual states that sales representatives

are asked to submit their schedules, and must submit their

vacation requests, to the national sales manager.   However, these

provisions were not followed by TAG’s sales representatives, nor

were these requirements enforced by TAG.   The sales procedure

manual also states that sales representatives are not authorized

to accept cancellations of orders or agree to returns, and that

TAG reserves the right to refuse any return that does not have an

authorized return sticker.   In practice, however, TAG accepted

their sales representatives’ recommendations as to cancellations

and returns.

                     Communication With TAG

     Hathaway communicated to TAG the orders he had solicited by

writing these orders on a scratch pad, then forwarding the
                                - 7 -

scratch pad entries to his order writers.   The order writers then

documented the orders on forms provided by TAG, and sent the

forms to TAG.   When a TAG sales representative opened a new

account, the sales representative was required to fill out a

credit report for that prospective customer.     TAG sales

representatives were not required to submit to TAG any other

types of reports.

     Apart from placing orders, Hathaway communicated with TAG on

an irregular basis; he spoke to TAG’s comptroller and national

sales manager primarily when he had a problem with a customer.

Hathaway also called on TAG’s national sales manager, for

example, to meet with a potential customer's upper-level

management when he closed a contract with a major company.     TAG’s

national sales manager had final approval when a special

arrangement with respect to price, service, or advertising was

requested by a major company.   Events such as these might cause

Hathaway to communicate with TAG as often as three times in a

week, or as rarely as once a month.

                     Compensation and Benefits

      TAG paid its sales representatives on a commission basis,

calculated on the amount and cost of merchandise shipped by TAG,

not based on the orders a sales representative placed with TAG.

The commissions a sales representative earned were put into a

reserve.   TAG then paid its sales representatives a draw against

the previously earned commissions in the reserve on a semimonthly
                                 - 8 -

basis.    On a semiannual basis, August 15 and February 15, any

commissions exceeding the draw, less items bought from TAG, see

table infra p. 11, were paid to the sales representative.     In the

rare situation when a sales representative had not earned any

commissions, and thus would not have any commissions in reserve,

that sales representative ordinarily would not receive a

semimonthly draw.

     TAG issued to Hathaway Forms W-2 showing compensation paid

in the amounts of $102,837.28 and $129,283.50 for 1989 and 1990,

respectively.   TAG withheld Federal income taxes and Social

Security (F.I.C.A.) taxes from these amounts.     TAG also issued to

Hathaway Forms 1099 showing noncash items provided by TAG in the

amounts of $23,277.56 and $19,219.11 for 1989 and 1990,

respectively.   See table infra p. 11.

     Hathaway participated in TAG’s pension plan and TAG provided

to Hathaway long-term disability insurance and life insurance,

all fully funded by TAG.     TAG also funded two-thirds of his

medical insurance benefits.

                               Expenses

     During the years in issue, Hathaway and TAG’s other sales

representatives were responsible for paying their own expenses

for traveling, lodging, telephone, and food.     However, TAG paid

part of Hathaway’s moving expenses in 1969 when he relocated to

Iowa.    See supra note 3.   TAG, TAG sales representatives, and

retail distributors of TAG merchandise shared the expense of
                                - 9 -

advertising.   TAG provided its sales representatives with order

forms, swatch cards, and envelopes preaddressed to TAG; TAG did

not supply its sales representatives with any other materials or

equipment, nor did TAG reimburse its sales representatives for

business-related expenses.   Hathaway    spent about $1,500-$2,200

per year for all of his "tools of the trade", such as sample

cases, hanging bags, traveling racks, business cards, and

stationery.

     Hathaway incurred the costs of maintaining business

quarters, one located at his home in Iowa and another at the

Hyatt Regency Mart in Minneapolis, Minnesota.     He invested about

$18,500 to build and furnish a 650-square-foot dual-purpose

office and showroom onto his house.     In the showroom, Hathaway

had forms, display tables, and full glass racks.     He used the

showroom to display TAG's merchandise to customers in Iowa.       In

the office, Hathaway had a desk, computer and printer tables,

bookshelf system, computer, printer, fax machine, copy machine,

and filing cabinets.   During the last 6 months of 1990, Hathaway

sublet showroom and office space in the Hyatt Regency Mart in

Minneapolis from another TAG sales representative at a rate of

$315 per month.    He spent about $8,500 to outfit the Minneapolis

facility with display and office equipment.     On November 26,

1990, Hathaway entered into a direct lease of a suite in the same

Minneapolis facility, for a term from January 20, 1991, through

August 31, 2000.
                               - 10 -

     Hathaway incurred the cost of going to 22 apparel shows per

year, where he displayed TAG merchandise and solicited orders.

These apparel shows cost Hathaway between $250-$600 per show for

showroom rental fees and promoters' fees.      Hathaway’s total

costs, including hiring assistants to help set up displays, may

have run to $2,000 for some shows.      Hathaway also paid $75 per

year to be a member of the Bureau of Wholesale Sales

Representatives.   Membership in this organization was required in

order to participate in certain apparel shows.

     TAG's sales representatives also incurred the cost of hiring

people to assist them in their sales activities.      During the

years in issue, Hathaway employed order writers and people to

assist him at apparel shows.   TAG knew that their sales

representatives hired assistants and encouraged their sales

representatives to do so; however, TAG did not screen assistants

hired by their sales representatives.

     Hathaway spent a total of $84,763 and $84,847 for these

business expenses in 1989 and 1990, respectively.

     In addition to the above expenses, Hathaway bought sales

materials and equipment from TAG.    TAG then deducted the costs of

those items from the commissions that TAG paid to Hathaway on a

semiannual basis, and TAG issued to Hathaway Forms 1099 in the

amounts of these costs.   The following table lists the costs of

items Hathaway bought from TAG in 1989 and 1990.
                                     - 11 -
1989

Item                      Enro            B.D. Baggies
Samples                $13,748.68         $5,305.07
Co-op Advertising        2,526.28            --
Sales Aids                 --              1,006.15
Sample Insurance           100.00            --
Office Supplies             21.50            --
Swatch Book                288.00            --
Personal Invoices          109.68           172.20

       Total                              23,277.56

1990

Item                    Enro/Damon        Neckwear          B.D. Baggies
Samples                 $10,791.65        $1,229.41         $5,915.87
Co-op Advertising           237.60           --                105.61
Sample Insurance            225.00           --                --
Swatch Book                 288.00           --                --
Mdse Giveway                185.80           --                --
Johnston Chargeback         117.00           --                --
Billonier's Label Charge    --               123.17            --

       Total                                                19,219.11


       Hathaway ran the risk of incurring a loss.         As explained

supra, TAG sales representatives' commissions were a function of

what TAG shipped, as opposed to orders placed.           Thus, if the

costs a TAG sales representative incurred in soliciting sales

were greater than the commissions generated, because for whatever

reason an order was not shipped, then that sales representative

operated at a loss.      TAG did not reimburse its sales

representatives for such losses.

       A TAG sales representative also could incur a loss as the

result of guaranteeing an account.            As explained supra, TAG sales

representatives were required to submit to TAG credit reports on

prospective customers.      TAG then checked the prospective

customer's credit history, and if favorable, extended credit to
                                - 12 -

that customer, bore any risk of loss, and received payment on the

account.   On some occasions TAG asked Hathaway if he would be

willing to guarantee a prospective customer’s credit.      Over the

years, there were three occasions when Hathaway guaranteed a

prospective customer’s credit and payment was not forthcoming;

Hathaway had to bear the losses resulting from his guarantees.

                      Sales For Other Companies

     Some of TAG's sales representatives also handled lines of

merchandise from other companies.    TAG knew that some of its

sales representatives handled other lines of merchandise, but did

not actively discourage this practice.      Sales representatives for

TAG, however, were permitted to handle other manufacturers’ lines

of merchandise only if those lines did not conflict with any line

of TAG merchandise.   TAG management made the decision as to

whether a line of merchandise was conflicting.

     In 1989 and 1990, while Hathaway was a sales representative

for TAG, he also handled a gloves line for Gates-Mills, Inc., for

which he received commissions in the amounts of $14,693.94 and

$5,000 in 1989 and 1990, respectively.      Gates-Mills, Inc., is

unrelated to TAG.   TAG knew that Hathaway handled the sale of

apparel for other manufacturers.

                              Termination

     TAG could have terminated Hathaway’s position as a sales

representative at any time.    Likewise, Hathaway could have

terminated his position with TAG at any time.      However, if a
                                - 13 -

sales representative terminated his or her services, or if TAG

dismissed a sales representative, then that sales representative

would receive commissions on only 85 percent of that sales

representative's as-yet-unshipped orders.    TAG retained the

commissions on 15 percent of unshipped orders to cover the cost

of orders that may be held back for credit reasons, or for any

other reason the order might be unshippable.

                             Tax Returns

     Petitioners filed initial and amended joint tax returns for

1989 and 1990.   On their initial 1989 and 1990 tax returns,

petitioners reported most of Hathaway’s TAG sales representative

expenses as employee business expenses itemized on Schedule A.

Petitioners filed their amended 1989 and 1990 tax returns on July

17, 1991.   On these amended tax returns, petitioners shifted the

business expenses from Schedule A to Schedule C and explained as

follows:    “TAXPAYER, PAUL E. HATHAWAY, IS A FULL-TIME TRAVELLING

SALESMAN AS DESCRIBED IN SECTION 3121(d)(3) OF THE INTERNAL

REVENUE CODE AND HE IS THEREFORE NOT AN EMPLOYEE FOR PURPOSES OF

SECTIONS 62 AND 67.”

     TAG withheld $3,604.80 and $3,924.45 as F.I.C.A. taxes from

the commission compensation TAG paid to Hathaway for 1989 and

1990, respectively.    Petitioners did not show any self-employment

tax liabilities on their initial 1989 and 1990 tax returns.     Sec.

1402(b)(1).

                       ULTIMATE FINDING OF FACT
                              - 14 -

     Hathaway was an independent contractor in 1989 and 1990.

                              OPINION

     Hathaway’s status as either an independent contractor,

statutory employee, or common law employee determines whether

petitioners properly deducted all of Hathaway’s trade or business

expenses “above the line” (sec. 62(a)(1)5, as in petitioners’


5
     Sec. 62(a) provides, in pertinent part, as follows:

     SEC. 62.   ADJUSTED GROSS INCOME DEFINED.

          (a) General Rule.--For purposes of this subtitle
     [subtitle A, income taxes], the term "adjusted gross income"
     means, in the case of an individual, gross income minus the
     following deductions:

               (1) Trade and business deductions.--The deductions
          allowed by this chapter * * * which are attributable to
          a trade or business carried on by the taxpayer, if such
          trade or business does not consist of the performance
          of services by the taxpayer as an employee.

               (2) Certain trade or business deductions of
          employees.--

                     (A) Reimbursed expenses of employees.--The
                deductions allowed by part VI (section 161 and
                following) which consist of expenses paid or
                incurred by the taxpayer, in connection with the
                performance by him of services as an employee,
                under a reimbursement or other expense allowance
                arrangement with his employer. The fact that the
                reimbursement may be provided by a third party
                shall not be determinative of whether or not the
                preceding sentence applies.

                     (B) Certain expenses of performing artists.--
                The deductions allowed by section 162 which
                consist of expenses paid or incurred by a
                qualified performing artist in connection with the
                performances by him of services in the performing
                arts as an employee.
                                                    (continued...)
                               - 15 -

amended tax returns), or whether petitioners are required to

deduct substantially all of those expenses (see supra note 2)

“below the line”, as in petitioners’ initial tax returns.    See

sec. 62(a)(2).    More than 80 percent of the deficiencies in

dispute in the instant case results from the impact of this issue

on the calculation of the alternative minimum tax.    Sec.

56(b)(1)(A)(i); see supra note 1.    Substantially all the

remainder of the deficiencies results from the application of the

2-percent floor on miscellaneous itemized deductions.    Sec. 67.

Unlike the usual situation in employment-status cases, respondent

does not contend, even in the alternative, that Hathaway is

subject to self-employment taxes.    Sec. 1401.

     Petitioners contend that Hathaway was a statutory employee

under section 3121(d)(3)(D) in 1989 and 1990, and thus, by

operation of Rev. Rul. 90-93, 1990-2 C.B. 33, petitioners

properly reflected Hathaway’s business-related income and

expenses on Schedule C in calculating adjusted gross income under

section 62(a)(1).    In the alternative, petitioners contend that

Hathaway was an independent contractor in 1989 and 1990, also

entitling petitioners to use Schedule C to reflect Hathaway’s

business-related income and expenses in calculating adjusted

gross income under section 62(a)(1).




5
 (...continued)
                              - 16 -

     Respondent contends that Hathaway was a common law employee

in 1989 and 1990, and thus was required to report his income as

wages and to deduct allowable expenses as itemized deductions

subject to the limitations of section 67.

     We agree with petitioners that Hathaway was an independent

contractor.

     Although paragraphs (1) and (2) of section 62(a) make the

income tax treatment of a taxpayer’s trade or business expense

deductions depend on whether the taxpayer is “perform[ing] * * *

services * * * as an employee”, subtitle A does not define

“employee”.   Under these circumstances, we apply common law rules

to determine whether an individual is an employee.   Nationwide

Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-325 (1992); Weber v.

Commissioner, 103 T.C. 378, 386 (1994), affd. 60 F.3d 1104 (4th

Cir. 1995).   In making this determination, we look to the general

common law of agency and not the law of any particular State.

Nationwide Mut. Ins. Co. v. Darden, 503 U.S. at 323 n.3 (citing

with approval Community for Creative Non-Violence v. Reid, 490

U.S. 730, 740 (1989)).

     Whether a taxpayer is an independent contractor or a common

law employee is a question of fact, Wolfe v. United States, 570

F.2d 278, 281-282 (8th Cir. 1978); Weber v. Commissioner, 103

T.C. at 386, or a mixed question of fact and law.    Professional &

Executive Leasing, Inc. v. Commissioner, 862 F.2d 751, 753 (9th

Cir. 1988), affg. 89 T.C. 225 (1987).
                              - 17 -

     Petitioners have the burden of proving error in respondent’s

notice of deficiency determination that Hathaway was a common law

employee.   Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933); Professional & Executive Leasing, Inc. v. Commissioner,

89 T.C. at 231.

     Among the relevant factors in determining the nature of an

employment relationship are the following: (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 taxpayer's opportunity for profit or loss; (4) the permanency

of the relationship between the parties to the relationship; (5)

the principal's right of discharge; (6) whether the work

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

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

the provision of benefits typical of those provided to employees.

NLRB v. United Insurance Co., 390 U.S. 254, 258-259 (1968);

Professional & Executive Leasing, Inc. v. Commissioner, 862 F.2d

at 753, 89 T.C. at 232; Weber v. Commissioner, 103 T.C. at 387;

Simpson v. Commissioner, 64 T.C. 974, 984-985 (1975).6   No one


6
     In self-employment tax cases we apply common law principles
to determine whether the taxpayer is an employee because the
statute directs us to do so. Sec. 1402(d); sec. 3121(d)(2);
Simpson v. Commissioner, 64 T.C. 974, 984 (1975). The instant
case is not a self-employment tax case; rather, it is a sec.
62(a) case. See supra text at note 5. Sec. 62(a) does not
involve a statutory instruction to use common law principles. We
use common law principles in the instant case for the reasons
explained by the Supreme Court in Nationwide Mut. Ins. Co. v.
                                                   (continued...)
                                - 18 -

factor is determinative; rather, all the incidents of the

relationship must be weighed and assessed.     Nationwide Mut. Ins.

Co. v. Darden, 503 U.S. at 324; NLRB v. United Insurance Co., 390

U.S. at 258; Azad v. United States, 388 F.2d 74, 76 (8th Cir.

1968); Weber v. Commissioner, 103 T.C. at 387.

A.   Degree of Control

     The principal's right to control the manner in which the

taxpayer's work is performed ordinarily is the single most

important factor in determining whether a common law employment

relationship exists.     Azad v. United States, 388 F.2d at 76;

Leavell v. Commissioner, 104 T.C. 140, 149 (1995); Weber v.

Commissioner, 103 T.C. at 387.    In order for a principal to

retain the requisite control over the details of a taxpayer's

work, the principal need not stand over the taxpayer and direct

every move made by that person.     Weber v. Commissioner, 103 T.C.

at 388; Professional & Executive Leasing, Inc. v. Commissioner,

89 T.C. at 234; Simpson v. Commissioner, 64 T.C. at 985.     In



6
 (...continued)
Darden, 503 U.S. 318, 323-325 (1992). Thus, Darden and Simpson,
illustrate two different routes, applicable to different types of
cases, that lead to the same result--that is, that common law
principles are to be used to determine whether a person is an
employee, in both sec. 62(a) cases and self-employment tax cases.
Once we arrive at the conclusion that common law principles are
to be used in the instant sec. 62(a) case, it is evident that the
self-employment tax statute is in pari materia with sec. 62(a)
for this purpose and it is appropriate to use self-employment tax
case opinions in the instant case to analyze what common law
principles mean as applied to the question of whether an
individual is a common law employee.
                                - 19 -

addition, the degree of control necessary to find employee status

varies according to the nature of the services provided.       Weber

v. Commissioner, 103 T.C. at 388.     Finally, we must consider not

only what actual control is exercised, but also what right of

control exists as a practical matter.      Professional & Executive

Leasing, Inc. v. Commissioner, 862 F.2d at 754, 89 T.C. at 233-

234; Weber v. Commissioner, 103 T.C. at 387-388.

     TAG did not control, or have the right to control, the

manner in which Hathaway conducted his sales activities, the

means by which Hathaway solicited sales, or the results to be

obtained.   TAG did not require its sales representatives to use

particular sales techniques or specific materials in making sales

presentations or finding customers.      TAG did not provide sales

training or require its sales representative to attend sales

meetings.   TAG's sales representatives were left entirely to

their own devices with respect to the manner in which they

solicited sales and the scheduling of their time.      TAG did not

provide leads to its sales representatives, nor did TAG require

its sales representatives to pursue or report on leads.

Importantly, TAG did not have the right to change the method by

which its sales representatives solicited sales.

     TAG did not require reports from its sales representatives,

nor did TAG prohibit its sales representatives from carrying

other, non-conflicting lines of merchandise.      See Simpson v.

Commissioner, 64 T.C. at 987.    Sales representatives hired
                              - 20 -

assistants at their own discretion and incurred the cost of

paying those assistants.

     Respondent overstates the role of the sales procedure

manual, contending that the sales procedure manual dictates the

manner in which sales representatives are to carry out their

sales activities.   The sales procedure manual details the

procedure for submitting orders to TAG; it does not provide

direction with respect to the manner in which TAG's sales

representatives are to solicit sales.

     We recognize that the sales procedure manual states that

sales representatives are to submit their schedules and vacation

requests to the national sales manager; however, these

requirements are toothless, as they are not followed by TAG sales

representatives, nor are they enforced by TAG.    Hathaway

testified that the requirement that sales representatives submit

their 4-week schedules every 2 weeks to the national sales

manager is unworkable, as he usually is not able to predict where

he is going to be in a given week.     These requirements also lack

substance in light of the fact that sales representatives use

their own business judgment with respect to the scheduling of

their time and the fact that sales representatives occasionally

miss sales meetings because they are on vacation.    Further, even

if these requirements were followed and enforced, they would not

represent control by TAG with respect to the manner or means by

which sales representatives solicit sales.
                              - 21 -

     Likewise, even if TAG enforced the requirements that sales

representatives not accept unauthorized cancellations or agree to

returns, those requirements would not represent control by TAG

with respect to the manner or means by which its sales

representatives solicited sales.   In those respects the sales

procedure manual's statements on cancellations and returns are

parallel to the sales manual's instructions for the placing of

orders with TAG.

     We reject respondent's contention that Hathaway was under

the supervision of TAG's national sales manager.   The national

sales manager's role was not so much to supervise sales

representatives as it was to be a status representative for TAG

when dealing with the upper-level management of major companies

or when a sales representative had a problem with a customer.

TAG's national sales manager facilitated sales, he did not

supervise or direct the sales activities of TAG's sales

representatives.

     We also reject respondent's contention that TAG's assignment

of exclusive sales territories to its sales representatives

represents control by TAG.   At least part of the reason that the

sales territories were exclusive was to protect each sales

representatives' earning capacity, and thus support the profits

of TAG.
                              - 22 -

     TAG's lack of control and lack of right to control the

manner and means by which Hathaway solicited sales strongly

support a finding that Hathaway was an independent contractor,

not an employee of TAG.

B.   Investment in Facilities and Sales Materials and Equipment

      Hathaway made a substantial investment in facilities and

bore substantially all the expenses of his sales activities.     The

record is not clear with respect to when the investment was made,

but Hathaway spent about $18,500 to build and furnish a dual-

purpose office and showroom onto his house.   Hathaway spent about

$10,000 in 1990 to rent and outfit a showroom in Minneapolis.

Hathaway spent $84,763 in 1989 and $84,847 in 1990 for sales

material and equipment, his business quarters, apparel shows, and

assistants.   In addition, Hathaway bought $23,277.56 and

$19,219.11 worth of sales material and equipment from TAG in 1989

and 1990, respectively.   See table supra p. 11.   TAG did not

reimburse Hathaway for any of these expenses.   TAG provided to

Hathaway minimal supplies, specifically order forms, swatch

cards, and envelopes preaddressed to TAG.

      Hathaway’s substantial investment in facilities and sales

material and equipment, especially relative to the minimal

supplies provided by TAG, supports a finding that Hathaway was an

independent contractor, not an employee of TAG.
                                - 23 -

C.   Opportunity For Profit or Loss

      Hathaway ran the risk of incurring a loss as the result of

his sales activities.   As explained supra, if a sales

representative incurred expenses to solicit sales and for some

reason the orders placed were unshippable, then the sales

representative would suffer a loss.      TAG did not reimburse its

sales representatives for such losses.      A TAG sales

representative also could suffer a loss as the result of

guaranteeing the credit of a customer who failed to make

payments.

      This factor supports a finding that Hathaway was an

independent contractor, not an employee of TAG.

D.   Permanency of the Relationship

      Hathaway had been a TAG sales representative since 1969 and

was hired by TAG to work for an indefinite period of time.      Most

of TAG's sales representatives had been with the company for over

20 years.

      The permanency of the relationship between TAG and TAG's

sales representatives would support a finding that Hathaway was

an employee of TAG.

E.   TAG's Right of Discharge

      The relationship between Hathaway and TAG was terminable at

the will of either party.   Some opinions regard this as an

indicator of employee status.    However, it is not clear in the

context of the instant case that TAG would not have the same
                                 - 24 -

right to discharge an independent contractor.        Thus, this element

appears to be of little significance in the instant case.

F.   Integral Part of Business

      TAG is in the business of wholesale distribution of domestic

and imported men's clothing.     TAG's sales representatives are

TAG's key connection with its customers.        This factor would

support a finding that Hathaway was an employee of TAG.

G.   Relationship TAG and Hathaway Believed They Had Created

      Hathaway and Arthur Penn, who had been a TAG sales

representative for 29 years and TAG's national sales manager and

senior vice president for 3 years, testified that as sales

representatives for TAG, they considered themselves independent

contractors, not employees of TAG.        Hathaway’s testimony,

however, is contradicted by the fact that petitioners initially

reported most of Hathaway’s business expenses on Schedule A.

      A letter dated March 1, 1990, written by TAG's controller,

Theresa Hinton, indicates that she was told by Rita Shumate, head

of TAG's auditing department, that Hathaway was an employee.

However, a letter dated March 21, 1990, also written by Theresa

Hinton, indicates that for the first quarter of 1987, TAG

considered Hathaway an "independent agent".        TAG issued to

Hathaway Forms W-2 and withheld Federal income taxes and F.I.C.A.

taxes from his commissions.    The withholding of subtitle C taxes

by TAG on behalf of Hathaway is consistent with a finding that
                              - 25 -

Hathaway was an employee of TAG.     Azad v. United States, 388 F.2d

at 78; Weber v. Commissioner, 103 T.C. at 392.

      Notwithstanding Hathaway’s and Arthur Penn's testimony and

Theresa Hinton’s March 21, 1990, letter, the bulk of the evidence

on this factor points to the conclusion that TAG and Hathaway

believed that they had created a employer-employee relationship.

This factor would support a finding that Hathaway was an employee

of TAG.

H.   Provision of Employee-Type Benefits7

      Hathaway participated in TAG's pension plan and TAG provided

to Hathaway long-term disability insurance and life insurance.

TAG also funded two-thirds of Hathaway’s medical insurance

benefits.

      The provision of these benefits would support a finding that

Hathaway was an employee of TAG.     NLRB v. United Insurance Co.,

390 U.S. at 259; Azad v. United States, 388 F.2d at 78; Weber v.

Commissioner, 103 T.C. at 393-394.

I.   Conclusion

      The relationship between Hathaway and TAG had aspects that

were characteristic of an employer and an employee and others



7
     On opening brief, respondent contends, for the first time,
that if Hathaway is not a common law employee, then the value of
any benefits provided by TAG to Hathaway would be taxable as
income to Hathaway. This matter has not been properly pleaded,
and, thus, we shall not consider it here. Markwardt v.
Commissioner, 64 T.C. 989, 997-999 (1975).
                             - 26 -

characteristic of a principal and an independent contractor.

After weighing the above factors, giving particular weight to (1)

the lack of control, and lack of right to control, that TAG had

over its sales representatives, and (2) Hathaway’s substantial

investments and unreimbursed expenses, we conclude that Hathaway

was an independent contractor, and not a common law employee in

1989 and 1990.

     We hold for petitioners on this issue.

     In Rev. Rul. 90-93, 1990-2 C.B. 34, respondent announced the

position that a person described in section 3121(d)(3), commonly

referred to as a “statutory employee”, is “not an employee for

purposes of sections 62 and 67.”   The parties cast much of their

presentation in terms of section 3121(d)(3).    Because of our

determination that in 1989 and 1990 Hathaway was an independent

contractor for purposes of section 62(a), Hathaway’s trade or

business expenses are deductible “above the line” on Schedule C,

and need not be relegated to Schedule A.    This result would not

be changed no matter how we were to rule on the section

3121(d)(3) issue, and so we decline to rule on that issue in the

instant case.



     To take account of the parties’ agreements,


                                           Decision will be entered

                                    under Rule 155.
