                       T.C. Memo. 2000-237



                     UNITED STATES TAX COURT



                KENNETH W. FRISCHE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 8919-98.                     Filed August 4, 2000.


     Kenneth W. Frische, pro se.

     Fred E. Green, Jr., for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge:   Respondent determined

deficiencies of $758, $1,823, and $1,862 in Federal income taxes,

respectively, for petitioner's 1994, 1995, and 1996 tax years and

the accuracy-related penalty under section 6662(a)1 in the

amounts of $365 and $372, respectively, for 1995 and 1996.


     1
          Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the years at issue.
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     The issues for decision are:   (1) Whether petitioner was

engaged in a trade or business as an independent contractor or as

an employee during the years at issue; (2) whether petitioner is

entitled, in connection with his activity, to a deduction for

meals for 1995 and 1996; and (3) whether petitioner is liable for

the section 6662(a) penalty for the years 1995 and 1996.2

     Some of the facts were stipulated.    Those facts and the

accompanying exhibits are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioner's

legal residence was Reno, Nevada.

     Petitioner was a process server.   He began this activity in

1983, when he lived in the San Francisco, California, bay area.

In 1987, he moved to Reno, Nevada, and continued the activity

there.   In 1998, he discontinued the activity and took a full-

time job with a gambling casino.

     In the Reno, Nevada, area, during the 3 years at issue,

petitioner's process-serving activity was conducted through the

Reno Carson Messenger Service (the Messenger Service) that was

owned by a third party.   Petitioner derived all of his process-

serving work from the Messenger Service.    Petitioner was required

to use his own vehicle and was assigned a certain geographic area



     2
          In the notice of deficiency, respondent disallowed a
deduction for utilities claimed by petitioner for 1994 and 1995.
At trial, petitioner conceded this adjustment.
                                - 3 -


in and around Reno, Nevada, for his process services.

     Petitioner considered himself an independent contractor for

tax purposes.   He reported his process-serving income and claimed

his expenses on his Federal income tax returns on a Schedule C,

Profit or Loss From Business.    Petitioner realized a net profit

for each of the years at issue.

     Petitioner's earnings from his activity were paid to him by

the Messenger Service.   For each year at issue, the Messenger

Service issued to petitioner Internal Revenue Service (IRS) Forms

W-2, Wage and Tax Statement, reflecting the amounts paid to

petitioner for his services.    The Forms W-2 classified

petitioner's remunerations as wages.    The Messenger Service

withheld Social Security and Federal income taxes on the

payments.   Petitioner, however, on his Federal income tax

returns, reported the Form W-2 amounts as gross income on

Schedule C.   Petitioner claimed deductions for expenses related

to his activity, consisting of car and truck expenses, meals and

entertainment, and utilities.    Although he realized a net profit

for each of the years at issue, petitioner did not include with

his returns the appropriate schedules for self-employment taxes.

     In the notice of deficiency, respondent determined that

petitioner was not an independent contractor but, rather, was an

employee and that his earnings from the Messenger Service

constituted salary or wages.    Respondent further determined that
                                - 4 -


the expenses incurred by petitioner in connection with his

activity constituted unreimbursed employee business expenses that

were deductible on Schedule A, Itemized Deductions, but subject

to the limitation of section 67(a).     For the 3 years at issue,

respondent allowed all the car and truck expenses claimed by

petitioner on his Schedule C as itemized deductions.     Similarly,

respondent allowed petitioner an itemized deduction for meals for

1994 but disallowed the amounts claimed for meals for 1995 and

1996.3    Respondent also disallowed utilities expenses claimed for

1994 and 1995, which petitioner conceded at trial.     See supra

note 2.

     With respect to the first issue, whether an individual is an

employee or an independent contractor is a factual question to be

answered using common-law principles.     See Nationwide Mut. Ins.

Co. v. Darden, 503 U.S. 318, 322-325 (1992); Professional &

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

affd. 862 F.2d 751 (9th Cir. 1988); Weber v. Commissioner, 103

T.C. 378, 386 (1994), affd. 60 F.3d 1104 (4th Cir. 1995).     In



     3
          At trial, respondent orally moved to increase the
deficiency for 1994 for the disallowance of $2,625 in meal
expenses, which respondent contends was erroneously allowed in
the notice of deficiency. Although the deductibility of meal
expenses is in part a legal question, the meal expenses for 1995
and 1996 were also disallowed for lack of substantiation. Since
petitioner had no knowledge prior to trial that respondent would
move to increase the deficiency for 1994, respondent's oral
motion will be denied.
                               - 5 -


determining the substance of an employment relationship some of

the factors to be considered include:   (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 hired party for profit or loss; (4) whether

the type of work is part of the principal's regular business; (5)

the permanency of the relationship between the parties to the

relationship; (6) whether the principal has the right to

discharge the individual; (7) whether the principal provides

benefits to the hired party typical of those provided to

employees; and (8) the relationship the parties believe they are

creating.   See Nationwide Mut. Ins. Co. v. Darden, supra at 322-

324; Professional & Executive Leasing, Inc. v. Commissioner,

supra at 232-233; Weber v. Commissioner, supra at 387.     No one

factor is determinative; rather, all the incidents of the

relationship must be assessed and weighed.   See Nationwide Mut.

Ins. Co. v. Darden, supra at 324.

     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 there is a common-law

employment relationship.   See Leavell v. Commissioner, 104 T.C.

140, 149 (1995).   However, the principal need not stand over the

taxpayer and direct every move.   Moreover, the degree of control

necessary to find employee status varies according to the nature
                                - 6 -


of the services provided.    Finally, the Court must consider not

only what actual control is exercised but also what right of

control exists as a practical matter.   See Hathaway v.

Commissioner, T.C. Memo. 1996-389.

     The Court finds it noteworthy that petitioner did not have

clients of his own.   Petitioner's sole income as a process server

came from the Messenger Service.   The Messenger Service

determined the geographic area that petitioner was to serve.    At

least one other person was a process server who worked a

different geographic area.   Petitioner was required to report or

make a return of his service activity to the Messenger Service.

Petitioner reported regularly, although not necessarily on a

daily basis, to a place maintained by the Messenger Service for

the conduct of its trade or business.   Although petitioner was

not provided a daily schedule of services to be made on any given

day, the Messenger Service determined the urgency or the priority

for certain services, and petitioner was required to report on

the results of his services.   On this record, the Messenger

Service retained the necessary control over petitioner's activity

consistent with an employer-employee relationship.   Although

petitioner was required to use his own vehicle to make his

services, he otherwise had no investment in the work facilities.

Petitioner was paid a specific amount for each service he made

plus mileage; consequently, he had no opportunity for profit or
                                 - 7 -


loss.   See Eren v. Commissioner, T.C. Memo. 1995-555.      The

service work petitioner performed was part of the regular

business of the Messenger Service.       The record indicates that the

Messenger Service had the right to discharge petitioner.

Finally, it is evident that petitioner and the Messenger Service

believed they had an employer-employee relationship because

petitioner's earnings each year were reflected by IRS Forms W-2

for salary or wages, a categorization that petitioner never

challenged.   The facts do not support a finding that petitioner

was an independent contractor.    Petitioner was an employee of the

Messenger Service.    Respondent is sustained on this issue.

     The second issue is with respect to deductions claimed by

petitioner for meals and entertainment on his 1995 and 1996

income tax returns.    On his returns, petitioner claimed, after

application of the 50-percent limitation provision of section

274(n), $2,800 and $1,650, respectively, for meals and

entertainment for 1995 and 1996, which respondent disallowed.

     The geographical area in which petitioner worked was the

city of Reno, points north and west of Reno, the Lake Tahoe area,

and occasionally east Reno.    None of these areas was at a

distance that required petitioner to incur an expense for

lodging.   Nevertheless, petitioner incurred expenses for meals.

Petitioner's position is that expenses for meals are deductible

while at work.   As he testified at trial, "The meal deduction
                                - 8 -


should be allowed whether I was away from home or not because I

was out there taking care of business.     I was in my car all day

long."

     Section 162(a)(2) allows the deduction of traveling

expenses, including meals, while away from home in the pursuit of

a trade or business.   For a taxpayer to be considered "away from

home" within the meaning of section 162(a)(2), the Supreme Court

has held that the taxpayer must be on a trip requiring sleep or

rest.    See United States v. Correll, 389 U.S. 299 (1967).    In

Barry v. Commissioner, 54 T.C. 1210 (1970), affd. per curiam 435

F.2d 1290 (1st Cir. 1970), this Court applied the Correll rule in

disallowing expenses for meals claimed by a taxpayer on 1-day

business trips that extended from 16 to 19 hours during which the

taxpayer rested briefly once or twice in his automobile but

always returned home without incurring an expense for lodging.

This Court held, in Barry, that the rest period required for the

deductibility of travel expenses requires a rest of sufficient

duration in time that necessitates the securing of lodging, and

that a mere pause in the daily work routine does not satisfy the

requirements of section 162(a)(2).      The rationale for allowance

of the deduction in away-from-home cases is the taxpayer's

significantly higher expenses incurred by reason of the lodging.

See United States v. Correll, supra at 304-305.      On the other

hand, where no lodging expense is incurred, the meal expenses
                               - 9 -


incurred by the taxpayer do not add to the taxpayer's business

expenses because such expenses result from the sort of rest that

anyone can, at any time, without special arrangement and without

special expense, take in his own automobile or office.   See Barry

v. Commissioner, supra at 1213; see also Siragusa v.

Commissioner, T.C. Memo. 1980-68, affd. without published opinion

659 F.2d 1062 (2d Cir. 1981); Strohmaier v. Commissioner, 113

T.C. 106, 115 (1999).

     Petitioner argued that he always claimed meals as a

deduction on his income tax returns and that, in 1987, while he

was a process server in San Francisco, California, his tax

returns for 1985 and 1986 were audited, and his meal expenses

were allowed as deductions.   He also was audited for his 1990,

1991, and 1992 tax years where the same issue was raised.    In

this audit, petitioner settled his case for $1,500, even though

respondent initially claimed he owed a deficiency of $5,000.

Petitioner did not offer any documentary evidence with respect to

either audit; consequently, the Court is unable to ascertain what

issues were involved or the basis upon which the expenses were

allowed.   It appears that, in both audits, petitioner settled at

the administrative level, and no court proceedings were ever

pursued.   Even if petitioner's expenses were allowed in prior

years under the same factual circumstances of this case, it is

well established that respondent is not estopped by an erroneous
                              - 10 -


application of the law by agents of the IRS.    See Estate of

Emerson v. Commissioner, 67 T.C. 612, 617-618 (1977); Automobile

Club of Michigan v. Commissioner, 353 U.S. 180 (1957).     The

Court, therefore, rejects petitioner's argument and holds that

petitioner's deductions for meals for the years 1995 and 1996 are

not deductible.   Respondent is sustained on this issue.

     Respondent determined that petitioner was liable for the

accuracy-related penalty under section 6662(a) for negligence or

disregard of rules or regulations under section 6662(b)(1).

     Section 6662(a) provides that, if it is applicable to any

portion of an underpayment in taxes, there shall be added to the

tax an amount equal to 20 percent of the portion of the

underpayment to which section 6662 applies.    Under section

6664(c), no penalty shall be imposed under section 6662(a) with

respect to any portion of an underpayment if it is shown that

there was a reasonable cause for such portion, and that the

taxpayer acted in good faith with respect to such portion.

     Section 6662(b)(1) provides that section 6662 shall apply to

any underpayment attributable to negligence or disregard of rules

or regulations.   Section 6662(c) provides that the term

"negligence" includes any failure to make a reasonable attempt to

comply with the provisions of the internal revenue laws, and the

term "disregard" includes any careless, reckless, or intentional

disregard of rules or regulations.     Negligence is the lack of due
                              - 11 -


care or failure to do what a reasonable and ordinarily prudent

person would do under the circumstances.    See Neely v.

Commissioner, 85 T.C. 934, 947 (1985).     It is well established

that the taxpayer bears the burden of proof on this issue.    See

Bixby v. Commissioner, 58 T.C. 757, 791 (1972).

     The determination of whether a taxpayer acted with

reasonable cause and in good faith depends upon the facts and

circumstances of each particular case.    See sec. 1.6664-4(b)(1),

Income Tax Regs.   Relevant factors include the taxpayer's efforts

to assess his or her proper tax liability, the knowledge and

experience of the taxpayer, and reliance on the advice of a

professional, such as an accountant.    See Drummond v.

Commissioner, T.C. Memo. 1997-71.    However, the most important

factor is the extent of the taxpayer's effort to determine the

taxpayer's proper tax liability.    See sec. 1.6664-4(b)(1), Income

Tax Regs.   An honest misunderstanding of fact or law that is

reasonable in light of the experience, knowledge, and education

of the taxpayer may indicate reasonable cause and good faith.

See Remy v. Commissioner, T.C. Memo. 1997-72.

     Petitioner did not directly address this issue at trial;

consequently, the Court decides the issue on the totality of the

evidence presented.   In that light, the Court notes that

petitioner conceded the disallowed utility expenses he had

claimed on his 1994 and 1995 returns.    Petitioner did not
                               - 12 -


maintain accurate books and records with respect to his claimed

meals and entertainment expenses that would satisfy the

substantiation requirements of section 274(d).     See sec. 6001;

sec. 1.6001-1(a), Income Tax Regs.      There is no evidence in the

record that petitioner relied on the advice of a professional,

such as an accountant.   Petitioner's obvious position, to be

surmised from the totality of his testimony, is that he relied on

two previous audits by the IRS in which the manner of reporting

his process-server income was accepted.     As noted earlier, no

documentary evidence was presented to show the basis upon which

these audits were settled.   In the second audit, petitioner paid

a deficiency of $1,500 that may or may not have been based on the

method of reporting his process-server income.     Finally,

petitioner was certainly on notice each year when he received IRS

Forms W-2 from the Messenger Service that clearly identified his

earnings as salary or wages.   Salary or wages do not constitute

self-employment income, nor is such income gross income from a

trade or business activity for purposes of Schedule C.     The Court

sustains respondent on this issue.



                                     An appropriate order and

                               decision will be entered.
