                  T.C. Summary Opinion 2001-55



                     UNITED STATES TAX COURT



      JACK C. GOINS, SR. AND EDITH M. GOINS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 316-99S.                     Filed April 16, 2001.



     Jack C. Goins, Sr., pro se.

     D. Lyndell Pickett, for respondent.


     CARLUZZO, 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.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for 1993 and 1994.    Rule references are to

the Tax Court Rules of Practice and Procedure.   The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     Respondent determined deficiencies of $5,974 and $6,459, in

petitioners’ Federal income taxes for the years 1993 and 1994,

respectively.   For each year, the issues for decision are: (1)

Whether petitioners are entitled to trade or business expense

deductions in excess of the amounts allowed by respondent, and

(2) whether Jack C. Goins, Sr. performed services as an insurance

examiner for the Commonwealth of Kentucky as an independent

contractor or employee.

Background

     Some of the facts have been stipulated and are so found.

Petitioners filed a timely joint Federal income tax return for

each year in issue.    At the time the petition was filed, they

resided in Frankfort, Kentucky.    References to petitioner are to

Jack C. Goins, Sr.

     Petitioner began performing services for the Commonwealth of

Kentucky Department of Insurance (DOI) as a market conduct

examiner on April 1, 1969.    Over the years his position was

classified at times as an independent contractor and at times as

an employee.    His working arrangement with DOI ended on June 30,

1996.

     On July 3, 1996, petitioner filed a claim for unemployment

insurance benefits, claiming that he was laid off by his employer

on June 30, 1996.    After an administrative hearing before a
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referee and an appeal to the Kentucky Unemployment Insurance

Commission, petitioner was denied benefits on the basis of

insufficient base period wages.   Applying common-law factors

used in making such determinations, the Kentucky Unemployment

Insurance Commission found that “the services performed by * * *

[petitioner for the DOI] were performed as an independent

contractor” and that petitioner “was not an employee of” the DOI.

     The decision of the Kentucky Unemployment Insurance

Commission is based in part upon petitioner’s employment

relationship with the DOI during the years in issue.   For each of

those years the terms of that relationship are set forth in a

personal service contract.   Among other things, each contract

provides for:   (1) A term of 1 year, beginning on July 1 and

ending on June 30; (2) petitioner’s maximum annual fees for

services computed with reference to the maximum set on a daily

basis; and (3) reimbursement for traveling costs including a

fixed rate per diem amount depending, in part, upon distance

traveled.   Each contract specifically provides:

     The parties are cognizant that the State is liable for
     Social Security employer’s contributions and for making
     Social Security withholdings pursuant to 42 U.S. Code,
     Section 418 [Section 218 of the Social Security Act],
     relative to the compensation of the Second Party for
     this contract.
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Petitioner’s obligations under each contract are described as

follows:

     Performs market conduct examinations of insurance
     companies authorized to do business in Kentucky. Audit
     claims records, policy filings, rates, advertisements,
     and agent records for compliance with law. Prepares
     report of examinations and testifies in any formal
     proceedings resulting from examination.

     Usually, the examinations conducted by petitioner pursuant

to his contracts with the DOI took place at the offices of the

insurance company under examination where the records necessary

for the examination were stored; in most cases, the location was

not in Kentucky.   Each contract contemplated the examinations

would require petitioner to travel extensively, which he did

during each year in issue.

     For most audits, petitioner used his personally owned 1992

Cadillac to travel to the location where the insurance company

under audit was located.   Petitioner was reimbursed $.22 per mile

for the use of his car for trips to and from the location of the

audit.   If the audit was conducted within 200 miles of Frankfort,

petitioner was also entitled to mileage reimbursements for return

trips to Frankfort over the weekends.

     Petitioner was paid a per diem allowance for meals and

lodging while traveling away from Frankfurt on DOI business as

follows:
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     Distance        Days Paid           Rate Per Day

     < 50 miles      0                   0

     51-200 miles    5 (M-F)             $80 before 7/1/94
                                         $85 thereafter

     > 201 miles     7                   $80 before 7/1/94
                                         $85 thereafter

During 1993, petitioner received mileage reimbursements of

$1,570.80 and per diem payments of $27,920 (349 days x $80).

During 1994, petitioner received mileage reimbursements of

$1,430.38, and per diem payments of $23,375 ((170 days x $80) +

(115 days x $85)).   Petitioner was required to submit a travel

voucher to DOI, but was not required to submit receipts.

     Petitioners’ Federal income tax return for each year in

issue was prepared by a paid income tax return preparer.

Included with each return is a Schedule C, Profit or Loss From

Business.   On each Schedule C, petitioner’s business is described

as “Contract State Insurance Auditor”.       No income is reported on

either Schedule C; for each year the income paid to him by the

DOI was reported as wages, as evidenced by the issuance of Forms

W-2, Wage and Tax Statement.     The travel reimbursements paid to

petitioner during the years in issue are not included in the

income reported on the Forms W-2.

     The following deductions are claimed on the Schedules C:
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                             1993                  1994

     Gas & oil            $3,588.08             $3,458.83
     Lodging               7,547.28              7,478.77
     Depreciation            500.00              3,000.00
     Insurance               672.12                842.00
     Interest                 - 0 -              1,660.89
     Contract help         2,967.84              3,294.00
     Postage               2,341.70              1,435.76
     Rent & lease             - 0 -                126.00
     Supplies              1,431.11              2,175.31
     Taxes & lic.            130.00                195.00
     Airfare                 335.12                 - 0 -
     Meals                 6,818.06              2,714.36
     Telephone             1,604.80              2,349.16
     Cleaning svc.           865.63                874.18
     Car repair               - 0 -              1,325.61

     In the notice of deficiency, respondent disallowed all of

the deductions claimed on the Schedules C.    Respondent further

determined that petitioner performed services for the DOI as an

employee of the State rather than as an independent contractor.

Discussion

     Generally, section 162(a) allows a taxpayer to deduct “all

the ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”, including the

business of being an employee.    See Commissioner v. Flowers, 326

U.S. 465 (1946); Primuth v. Commissioner, 54 T.C. 374, 377

(1970).   In general, traveling expenses, including expenses for

meals and lodging, qualify for deduction if the expenses are:

(1) Reasonable and necessary; (2) incurred while the taxpayer is

“away from home”; and (3) directly connected to the conduct of

the taxpayer’s trade or business.     Sec. 162(a)(2); Commissioner
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v. Flowers, supra at 470.   If a taxpayer’s otherwise deductible

traveling expenses are reimbursed by his employer, the taxpayer

is entitled to a deduction only for amounts in excess of the

reimbursements, and only if properly substantiated.   See sec.

1.162-17(b)(3), Income Tax Regs.; sec. 1.274-5T(f)(2)(iii),

(5)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46028 (Nov. 6,

1985).

     Section 274(d) imposes stringent substantiation requirements

for deductions related to travel, entertainment, gifts, and

“listed property (as defined in section 280F(d)(4))”.   Otherwise

allowable deductions for these types of expenses are not allowed

unless:

     the taxpayer substantiates by adequate records or by
     sufficient evidence corroborating the taxpayer's own
     statement (A) the amount of such expense or other item,
     (B) the time and place of the travel, entertainment,
     amusement, recreation, or use of the facility or
     property, or the date and description of the gift, (C)
     the business purpose of the expense or other item, and
     (D) the business relationship to the taxpayer of
     persons entertained, using the facility or property, or
     receiving the gift. * * *

Sec. 274(d).

     To substantiate his traveling expenses, petitioner produced

a travel log and numerous credit card receipts.   According to

petitioner, expenses incurred in connection with his employment

with the DOI are recorded in the travel log.   On a day-by-day

basis, petitioner’s travel log lists expenses for breakfast,

lunch, dinner, business meals, entertainment, tips (generally for
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food service), hotel, coffee breaks, clerical assistance, gas,

parking, repairs, telephone, postage, laundry, gifts, supplies,

and medical.    The total amounts of these expenses form the basis

for the deductions claimed by petitioner on the Schedules C for

1993 and 1994.

     According to petitioner, he only claimed deductions for

meals and lodging while he was traveling away from Frankfurt to

conduct an audit.    Comparing petitioner’s travel log to various

credit card receipts indicates otherwise.    On numerous dates in

1993 and 1994, the receipts indicate that petitioner was in

Frankfort, while petitioner’s travel log indicates that

petitioner incurred (and apparently deducted) expenses for one or

more meals.    At trial, petitioner testified that on weekend

travel days he might be in Frankfort for some portion of the day

and in the city where the audit was being conducted for the

remaining portion.    His explanation might cover some of the

occasions, but many of the receipts indicate that petitioner was

in Frankfort on a day during the work week.    Under the

circumstances, we are unwilling to accept petitioner’s log as

adequate substantiation for the traveling expenses deducted on

the Schedules C.

     Nor do petitioner’s receipts provide adequate substantiation

of the traveling expense deductions claimed on the Schedules C.

The lodging receipts do not total anywhere near the amount
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petitioner deducted each year for that expense.    Moreover, some

of the receipts suggest that the expense incurred should not be

deductible at all.    For example, petitioner testified that the

only car he used to travel to the locations of the various audits

he conducted during the years in issue was a personally owned

Cadillac, but several repair bills refer to a Bonneville.      Also,

numerous receipts relate to the purchase of gasoline.    The

quantities of gasoline purchased suggest that the tank of the car

was being filled.    In some instances the receipts were produced

at the same filling station on the same day, sometimes within

minutes of each other.

     Petitioner contends that he is unable to substantiate all

his Schedule C deductions because many of his receipts were

destroyed in a flood in 1995.    Although petitioner established

that his residence suffered flood damages during that year, he

has not made any attempt to reasonably reconstruct those records

for 1993 or 1994.    Based upon what evidence was presented, we

think it highly unlikely that even if petitioner reconstructed

his traveling expenses, the total of such expenses would exceed

the amount of the reimbursements that he received from his

employer during the years in issue.

     Neither petitioner’s travel log nor the receipts introduced

into evidence during the trial constitute adequate substantiation

for the traveling expenses deducted on the Schedule C each year
                                - 10 -

in issue.   See sec. 274(d).    Consequently, petitioner is not

entitled to any of the traveling expense deductions claimed on

the Schedules C.   Respondent’s determinations in this regard are

therefore sustained.

     Other types of business expenses were deducted on the

Schedules C and disallowed by respondent.     Petitioner was not

entitled to reimbursement for these expenses.       We find that, for

the year 1993, petitioner is entitled to deductions for these

expenses as follows:

                 Type of Expense           Amount

                 Supplies                  $1,431
                 Depreciation                 500
                 Postage                       10
                 Taxes                         60
                 Telephone                    265
                 Total                      2,266

Because the record does not contain adequate substantiating

evidence of business expenses that petitioner may have incurred

in 1994, or any evidence from which we can reasonably estimate

such expenses, petitioners are not entitled to any business

expense deductions for the year 1994.

     Petitioner maintains that he provided services to the DOI

during the years in issue as an independent contractor.       All of

the deductions here in dispute were claimed on a Schedule C as

though petitioner were not an employee of the DOI during either

year in issue.
                                - 11 -

      To the extent that petitioner is entitled to any business

expense deductions, respondent argues that the deductions should

be treated as employee business expenses, deductible as

miscellaneous itemized deductions.       See secs. 62(a)(1) and (2),

67.   In support of this argument, respondent points out that

petitioner’s employment contracts with the DOI constitute

agreements entered into pursuant to section 218 of the Social

Security Act.   That being so, respondent relies upon section

3121(d)(4), which defines “employee” for purposes of the Federal

Insurance Contributions Act (FICA) as “any individual who

performs services that are included under an agreement entered

into pursuant to section 218 of the Social Security Act.”

Respondent apparently takes the position that an individual who

fits within the definition of employee for FICA purposes should

be treated as an employee for purposes of section 62.      We

disagree.

      In Hathaway v. Commissioner, T.C. Memo. 1996-389, we held

that a taxpayer described as an employee in section 3121(d)(3) is

not necessarily an employee for purposes of the treatment of the

taxpayer’s business expense deductions.      Instead, we concluded

that for such purposes, the distinction between an employee and

an independent contractor is made through the application of

common-law rules applicable in determining whether an employer-

employee relationship exists.    See id.
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     These common-law rules take into account the following

factors:    (1) The degree of control exercised by the principal,

(2) which party invests in work facilities used by the

individual, (3) the opportunity of the individual for profit or

loss, (4) whether the principal can discharge the individual,

(5) whether the work is part of the principal's regular business,

(6) the permanency of the relationship, and (7) the relationship

the parties believed they were creating.     See Weber v.

Commissioner, 103 T.C. 378, 387 (1994), affd. per curiam 60 F.3d

1104 (4th Cir. 1995).    No single factor dictates the outcome.

All the facts and circumstances should be considered.       See id.

      In this case, the Kentucky Unemployment Insurance

Commission applied the above factors and found that the services

performed by petitioner for the DOI were performed as an

independent contractor.     After examining all the facts and

circumstances in this case, we agree with the Commission’s

determination and find that, for purposes of section 62,

petitioner was an independent contractor during the years in

issue.     Accordingly, petitioner’s allowable business expense

deductions, as set forth above, are properly deducted on a

Schedule C.

     Reviewed and adopted as the report of the Small Tax Case

Division.
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     Based upon the foregoing and respondent’s agreement that

Edith M. Goins is entitled to relief under section 6015(b),

                                        Decision will be

                                   entered under Rule 155.
