                       T.C. Memo. 1996-526



                     UNITED STATES TAX COURT



      JEFFREY S. KAISER AND GAIL F. KAISER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22283-94.                Filed November 27, 1996.



     Lawrence R. Jones, Jr., for petitioners.

     Audrey M. Morris, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     CARLUZZO, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and
                                   - 2 -

182.1       Respondent determined a deficiency in petitioners' 1991

Federal income tax in the amount of $1,121.

        The issue for decision is whether certain income earned by

Jeffrey S. Kaiser constitutes earnings from self-employment

within the meaning of section 1402, subject to tax imposed by

section 1401.

                             FINDINGS OF FACT

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

found.       Petitioners filed a joint Federal income tax return for

the year 1991 (the 1991 return).       Jeffrey S. Kaiser resided in

Dallas, Texas, and Gail F. Kaiser resided in Mesquite, Texas, at

the time that the petition was filed in this case.       References to

petitioner are to Jeffrey S. Kaiser.

        Petitioner has been employed as a police officer on a full-

time basis by the Dallas Police Department (the Department) since

1981.       During the year in issue he held the rank of sergeant.

In order for an individual to obtain employment as a police

officer in Texas, he or she must satisfy various requirements

established by Texas law, which include being issued a warrant of

appointment from a governmental entity authorized to do so.

        As a Dallas police officer, petitioner was subject to the

Department's rules and regulations published in general orders

        1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 3 -

and standard operating procedures.      The general orders and

standard operating procedures included not only the policies and

practices of the Department that Dallas police officers were

bound to follow in connection with their official

responsibilities, but also contained a code of conduct that

Dallas police officers were bound to honor whether on-duty or

off-duty.   If an off-duty police officer engages in a law

enforcement activity, such as making an arrest in connection with

a crime committed in the officer's presence, the officer's status

changes from off-duty to on-duty while the officer is engaged in

the law enforcement activity.   In this regard, Dallas police

officers are subject to the Department's general orders and

standard operating procedures on a 24-hour-per-day basis.        The

general orders and standard operating procedures apply to certain

aspects of a Dallas police officer's personal life, such as the

conditions under which the police officer is permitted to accept,

or engage in off-duty employment.    Violating a general order or

standard operating procedure could result in disciplinary action

against the police officer.

     Occasionally, private businesses or individuals (third-

parties) require the services of off-duty police officers for

traffic control, security, or other police-type services.        A

Dallas police officer is not permitted to engage in off-duty

employment unless he or she first receives approval from the

Department.   The Department maintains a roster of officers who
                                - 4 -

are interested in off-duty employment.    To obtain the services of

an off-duty Dallas police officer, the third party may call the

Department, or directly contact an officer about off-duty

employment, although Dallas police officers are not permitted to

commercially advertise their availability for off-duty

employment.    If the Department's approval has been obtained, the

decision to accept, or engage in off-duty employment is within

the discretion of the police officer.    The Department imposes no

obligation on its police officers to do so.

         The general orders provide the process that a Dallas

police officer must go through in order to obtain such approval.

The process differs depending upon whether the off-duty

employment involves police-type services or other types of

services.2    In either event, approval or denial of the

application or request depends upon various considerations, some

relating to the police officer and others to the nature of the

employment.3

     2
      With respect to police-type services, a Dallas police
officer must submit an "Application for Special Duty". This
application is subject to renewal and review on a monthly basis.
To engage in outside employment not involving police-type
services, the officer must submit a "Request for Permission for
Outside Employment, Other Than Police Duty". After initial
approval, the request is subject to renewal and review twice a
year.
     3
      In reviewing applications and requests for off-duty
employment, Department supervisors consider: Whether the off-
duty employment entails an excessive number of working hours in a
24-hour period; whether the off-duty employment would interfere
                                                   (continued...)
                              - 5 -

     During 1991 petitioner, after receiving permission from the

Department to do so, provided off-duty police-type services to

Presbyterian Hospital of Dallas, Northpark Mall, and the Parking

Company of America (the companies).   Petitioner voluntarily

accepted off-duty employment with these companies; he was not

obligated to do so as a Dallas police officer.   The Department

did not direct him to accept such employment, and would not have

disciplined him if he chose not to do so.   He could quit working

for, or be terminated by, these companies at any time.

Petitioner's off-duty work schedules were based upon the needs of

     3
      (...continued)
with the officer's assigned duties; the officer's attendance and
productivity records; the frequency of complaints against the
officer; whether the place of work is frequented by felons;
whether the nature of the work would bring discredit to the
Department; and whether the off-duty employment is political,
morally questionable, involves religious issues, conflicts with
police objectives, or is detrimental to the Department.
     Permission for off-duty employment is normally denied if,
for example, the officer is in training; the work is outside of
Dallas city limits; the officer is on limited duty status; the
principal business of the company involves the dispensing of
alcoholic beverages; the officer's supervisor determines the work
would limit the officer's effectiveness in discharging his
official duties; the work involves collecting bills or checks;
the work involves domestic difficulties; the work is for an
entity or company engaged in a labor dispute or political
controversy such that the officer's employment may be considered
an endorsement or condemnation by the Department of a position of
either party in a controversy; the work is for a public utility
corporation holding a franchise from the city; or the work
involves surveillance for a private security company,
investigative agency, or an individual. The Department may
terminate its approval of an officer's off-duty employment if any
of these conditions arise after the fact.
     If an officer fails to comply with the provisions of the
general orders, his or her supervisor may deny, suspend, or
restrict the off-duty employment privileges of the officer.
                                  - 6 -

the companies, taking into consideration petitioner's on-duty

hours.   The amount and method of petitioner's compensation were

agreed upon between each company and petitioner, without

involvement by the Department.     When petitioner performed

services for these companies, he wore his official uniform and

carried police-issued equipment such as handcuffs, gun, and night

stick.   The income that petitioner received from the companies

was not taken into account in the computation of the pension

benefits to which he was entitled as a Dallas police officer.

     During 1991, in addition to the income that petitioner

earned from the Department, he received compensation from the

companies in the following amounts:

                Presbyterian               $2,370
                North Park                 10,330
                Parking Company                76

The companies considered petitioner an independent contractor and

reported the compensation paid to him on Forms 1099-MISC.

Petitioners included the above compensation in the amount they

reported as wages on their 1991 return.     The Federal income tax

liability that petitioners reported on their 1991 return did not

include any amount attributable to the self-employment tax

imposed by section 1401.

     In the notice of deficiency respondent determined that the

compensation petitioner received from the companies was subject

to the self-employment tax and computed the deficiency here in

dispute accordingly.   Respondent's determination is based upon
                                 - 7 -

her conclusion that such compensation constitutes earnings from

self-employment within the meaning of section 1402.

                               OPINION

     In addition to other taxes, section 1401 imposes a tax upon

an individual's self-employment income.    This tax is commonly

referred to as the self-employment tax.    Ignoring exceptions not

applicable to this case, section 1402(b) defines self-employment

income as net earnings from self-employment.    Disregarding

irrelevant exceptions and inclusions, net earnings from self-

employment consist of the gross income derived by an individual

from any trade or business carried on by such individual, less

the allowable deductions that are attributable to such trade or

business.   Sec. 1402(a).   However, the self-employment tax

generally does not apply to compensation paid to an employee by

an employer.   Sec. 1402(c)(2) and (3).

     Petitioners contend that petitioner provided police-type

services to the companies as an employee of the Department, not

as an independent contractor.4    Consequently, according to

petitioners, the compensation that petitioner received from the

companies is not subject to the self-employment tax.

Respondent's determination to the contrary, having been made in a

notice of deficiency, is presumptively correct, and petitioners

     4
      Petitioners have expressly taken the position that
petitioner was not an employee of any of the companies during the
year in issue. Respondent apparently agrees, and we do not
consider this point in our opinion.
                               - 8 -

bear the burden of proving otherwise.   Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

     Whether an individual is compensated as an employee or an

independent contractor is normally considered a factual question,

the resolution of which is dependent upon the application of

certain common-law principles to the circumstances of the

particular situation.   Sec. 1402(d); sec. 3121(d)(2); sec.

31.3401(c)-1(d), Employment Tax Regs.; Nationwide Mut. Ins. Co.

v. Darden, 503 U.S. 318 (1992); Professional Executive Leasing,

Inc. v. Commissioner, 89 T.C. 225, 232 (1987), affd. 862 F.2d 751

(9th Cir. 1988).

     Petitioners first argue that as a matter of State law

petitioner must be considered an employee of the Department with

respect to the compensation he received from the companies.     In

support of this argument petitioners presented an explanation of

the process that an individual must go through in order to

qualify for employment as a police officer in Texas.   Based upon

our review of the Texas statutes called to our attention in

petitioners' brief, it appears that petitioners have accurately

outlined the process.   While we agree with petitioners that an

individual cannot be employed as a police officer unless the

relevant statutory scheme has been satisfied, we fail to see how

establishing this point advances petitioners' position in this

case.   Petitioners' argument is based upon their erroneous

assumption that petitioner was employed by the companies as a
                               - 9 -

police officer.   Obviously, the companies were not authorized to

issue warrants of appointment, a necessary event in order for an

individual to qualify for employment as a police officer in

Texas.   However, petitioner was hired by the companies to provide

police-type services, not as a police officer, although being an

active police officer might have been a necessary qualification

for the jobs.   Merely because the companies could not appoint and

hire petitioner as a police officer, does not mean that he could

not be hired as an independent contractor.   In Texas, a police

officer can be an employee of a police department and, during his

or her off-duty hours, provide police-type services as an

independent contractor to third-parties.    Cf. Hoechst Celanese

Corp. v. Compton, 899 S.W.2d 215 (Tex. Ct. App. 1994); City of

Dallas v. Half Price Books, Records, Magazines, Inc., 883 S.W.2d

374 (Tex. Ct. App. 1994); Tex. Rev. Civ. Stat. Ann. art.

4413(29bb), sec. 3(a) (West Supp. 1996).

     Petitioners next argue that because petitioner was in

uniform while working for the companies, he was acting in his

capacity as a police officer, and as such could only be

considered an employee of the Department.    Petitioners cite Wood

v. State, 486 S.W.2d 771 (Tex. Crim. App. 1972); Monroe v. State,

465 S.W.2d 757 (Tex. Crim. App. 1971); Thompson v. State, 426

S.W.2d 242 (Tex. Crim. App. 1968), in support of this argument.

Our reading of these cases differs significantly from

petitioners'.   These cases merely confirm a point that is not in
                                - 10 -

dispute in this case, namely, that the status of a police officer

changes from off-duty to on-duty if, while off-duty, the officer

observes criminal conduct and engages in a law enforcement

activity in response to such conduct.    This change in status

occurs, however, regardless of whether the police officer is

engaged in providing police-type services to a third party, or is

merely off-duty and happens to be in an area where and when his

or her services are required.    This change in status has no

bearing on whether a Texas police officer is prohibited as a

matter of law from earning and receiving compensation as an

independent contractor.

     Petitioners also argue, as a matter of fact, that under the

common-law principles relevant to such determinations, the level

of control that the Department exerted over the services that

petitioner provided to the companies renders him an employee of

the Department with respect to such services.5


     5
      The relevant factors in determining the characterization of
an employment relationship include: (1) The degree of control
exercised by the principal over the details of the work; (2) the
payee's investment in facilities; (3) the payee's opportunity for
profit or loss; (4) the permanency of the relationship between
the parties; (5) the principal's right of discharge; (6) whether
the work performed is an integral part of the principal's
business; (7) what relationship the parties believe they are
creating; and (8) whether nonmonetary benefits are involved.
NLRB v. United Ins. Co., 390 U.S. 254, 258-259 (1968); Simpson v.
Commissioner, 64 T.C. 974, 984-985 (1975); Feivor v.
Commissioner, T.C. Memo. 1995-107. No one factor is
determinative; rather all the incidents of the relationship must
be assessed and weighed. NLRB v. United Ins. Co., supra at 258.
                              - 11 -

     We have previously considered a similar argument presented

in the context of an identical issue in March v. Commissioner,

T.C. Memo. 1981-339.   In that case we acknowledged that the issue

is "not free from doubt", but held that the income earned by the

taxpayer, a Miami police officer, from off-duty employment was

subject to the self-employment tax imposed by section 1401.    We

based our holding in March primarily upon a finding that the

police department's control, which we characterized as

"incidental", over the taxpayer's off-duty jobs was not

sufficient to support a conclusion that the taxpayer was an

employee of the police department with respect to the off-duty

jobs.   The control that the Miami Police Department had over the

taxpayer's off-duty employment in March is similar, in source,

nature, and consequence to the control that the Department had

over petitioner's off-duty employment in this case.   As we

observed in March v. Commissioner, supra n.16:

          Petitioner correctly points out that the
     Department did wield and exercise a large degree of
     control over off-duty employment in that all such
     employment had to meet its approval. However, it is
     important to keep in mind that two types of jobs (on-
     duty jobs and off-duty jobs) exist simultaneously in
     this case. There is no dispute that an employer-
     employee relationship existed between petitioner and
     the Department with respect to his regular, on-duty
     job. In our opinion, the control vested in the
     Department with respect to off-duty employment relates
     solely to this on-duty, employer-employee relationship.
     It does not represent the Department's attempt to
     control the details of the off-duty employment. For
     example, Department approval of off-duty employment is
     directly attributable to the Department's desire to
     ensure the absence of any interference with an
                              - 12 -

     officer's on-duty activities and to preserve the
     Department's image. This type of broad control is
     qualitatively different from the type of direct,
     operational control implicit in the employer-employee
     relationship. See Party Cab Co. v. United States, 172
     F.2d 87, 92-93 (7th Cir. 1949). Similarly, we
     recognize that petitioner's off-duty activities may
     have been constrained by Department rules and
     regulations. The general application of those rules,
     however, relates to petitioner's status as a member of
     the Department and is not specifically aimed at
     controlling the details of petitioner's activities
     while working * * * [off-duty]. For example, the mere
     fact that petitioner might be reprimanded by the
     Department if he abandons his off-duty job without
     notice does not necessarily mean the Department
     controls his off-duty employment activities. Rather,
     any conduct unbecoming a police officer, such as
     abandoning a job, would presumably violate the
     Department's rules and regulations whether such conduct
     related to off-duty employment or not.

As in March, the incidental control that the Department had over

petitioner's off-duty employment is simply not sufficient to

support a finding that petitioner performed the off-duty services

for the companies as an employee of the Department.

     Nothing has been presented in this case that persuades us to

depart from our reasoning in March.    The facts in March are so

similar to the facts in this case that different results would

not be justified.

     Furthermore, we find petitioner's apparent obligation to

accept on-duty assignments to be in sharp contrast to the absence

of any such obligation with respect to off-duty employment.    The

Department had absolutely no control over petitioner with respect

to his decision to decline suitable employment offers from third

parties.   The Department's lack of control over this aspect of
                              - 13 -

petitioner's off-duty activities severely undermines petitioners'

position in this case.   Consequently, and for the reasons

expressed in March v. Commissioner, supra, we hold that the

earnings here in dispute were not received by petitioner as an

employee of the Department, but constituted earnings from self-

employment within the meaning of section 1402, subject to the tax

imposed by section 1401.

     To reflect the foregoing,

                                         Decision will be

                                    entered for respondent.
