                        T.C. Memo. 2004-92



                      UNITED STATES TAX COURT



            STEPHEN & DAWN DEL MONICO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9969-02.              Filed April 5, 2004.


     Elizabeth A. Maresca, Janelle Winston, and Judith Aarons,

for petitioners.

     William C. Bogardus, for respondent.



                        MEMORANDUM OPINION


     WOLFE, Special Trial Judge:   Respondent determined a

deficiency in petitioners’ Federal income tax for 1999 in the

amount of $3,476.   References herein to petitioner in the

singular are to Stephen Del Monico.   The issues for decision are:

(1) Whether petitioner had unreported compensation income from
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New Dimensions Distribution Services (“New Dimensions”), (2)

whether New Dimensions withheld Federal income tax with respect

to petitioner’s unreported compensation income, and (3) whether

petitioner’s unreported compensation income constitutes self-

employment income subject to the tax imposed by section 1401.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect at relevant times, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

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

When they filed their petition, petitioners resided in Pompton

Lakes, New Jersey.

     Petitioner was employed as a full-time dispatcher by New

Dimensions, a New Jersey long-haul trucking company, from January

9 through August 27, 1999.   Thereafter, under somewhat different

circumstances, petitioner also performed services as a dispatcher

for New Dimensions between August 28 and December 31, 1999.

Petitioner’s duties as a dispatcher included procuring loads to

be hauled, scheduling pickups and deliveries, and monitoring the

progress of the company’s trucks.   Petitioner also performed

miscellaneous office work for New Dimensions.   The terms under

which petitioner performed services for New Dimensions never were

set forth in a written agreement.
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     New Dimensions reported that it paid the following amounts

to petitioner in 1999:   (1) Gross wages in the amount of

$28,320, as reported on a Form W-2, Wage and Tax Statement

(Form W-2), and (2) nonemployee compensation in the amount of

$12,396, as reported on a Form 1099-MISC, Miscellaneous Income

(Form 1099).   Petitioners reported the $28,320 in wages on their

1999 Federal income tax return, but they did not report the

$12,396 in nonemployee compensation.   Petitioner claims that he

did not receive a copy of the Form 1099.

     The record clearly reflects that the $28,320 reported on

the Form W-2 issued to petitioner represents income earned by

the petitioner as an employee of New Dimensions between January

9 and August 27, 1999.   During this period, petitioner’s

paychecks were issued by Digit Payroll Corporation (“Digit”),

the company that processed New Dimensions’ payroll.    Copies of

petitioner’s weekly pay stubs from this period show that

petitioner received a gross salary of $885 per week.

Petitioner’s weekly net pay for this period was $737.28 after

withholding for Federal and New Jersey State income taxes,

Social Security, medicare, New Jersey disability and New Jersey

unemployment compensation taxes.   There is no dispute as to the

income reported on the Form W-2.

     The unreported income at issue in this case was paid to

petitioner during the final quarter of 1999, the 17 weekly pay
                               - 4 -

periods between September 3 and December 24, 1999 (referred to

herein as the “disputed pay period”).1    During the disputed pay

period, petitioner received weekly paychecks of approximately

$737.28 for most of the weeks in issue.    However, these

paychecks were drawn from New Dimensions’ general corporate

account and were not processed through Digit.    In contrast to

the paychecks issued by Digit, these paychecks were handwritten

and issued without pay stubs or any kind of receipt indicating

withholding for Federal or State income taxes or other required

purposes.    Each paycheck on its face showed that the entire

amount of the check was payable to petitioner and also contained

a notation, such as “pay,” “salary,” or “dispatcher” indicating

that the check was issued as compensation for services

performed.

     New Dimensions reported payment of $12,396 to petitioner

during the disputed pay period as nonemployee compensation on a

Form 1099 for 1999 and did not include this amount on

petitioner’s Form W-2 for 1999.    According to New Dimensions,

petitioner and the company agreed to change petitioner’s status

from employee to independent contractor for the disputed pay




     1
      The final weekly pay period of 1999 was the pay period
ending December 31. The corresponding pay date for this period
occurred in January 2000 and is not considered income earned in
1999.
                              - 5 -

period.   Federal income tax was not withheld from petitioner’s

compensation during the disputed pay period.

     Petitioners did not report the $12,396 in nonemployee

compensation on their 1999 Federal income tax return.    By

notice of deficiency issued on March 15, 2002, respondent

determined a deficiency in the amount of $3,476, based upon an

increase of $12,396 in gross income as reported by New

Dimensions on the Form 1099 and the imposition of a tax under

section 1401 on self-employment income (and the allowance of a

corresponding deduction for one-half of the self-employment tax

under section 164(f)).

     In the petition, petitioners claim that petitioner remained

an employee during the disputed pay period and thought that New

Dimensions continued to withhold Federal income tax on his

behalf.

Burden of Proof/Burden of Production

     The Commissioner’s determinations in a notice of deficiency

are presumed correct, and generally, the taxpayer must prove

those determinations wrong in order to prevail.   Rule 142(a)(1).

     Section 7491 provides that the burden of proof may shift to

the Commissioner if the taxpayer introduces credible evidence

with respect to any factual issue relevant to ascertaining a tax

liability, provided the taxpayer has substantiated all items at

issue and has generally maintained books and records with
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respect to the item at issue.    The Court finds it unnecessary to

decide whether the burden of proof has shifted to the

Commissioner under section 7491.    The record in this case is not

evenly weighted.   Instead, in our view the evidence, including

the credibility of witnesses, with respect to disputed facts is

clear, and this circumstance allows us to render a decision on

the merits based on the preponderance of the evidence, without

regard to the burden of proof.

     Under section 6201(d), the burden of production may shift

to the Commissioner where information returns, such as Forms

1099, serve as the basis for the determination of a deficiency.

If a taxpayer, in a court proceeding, asserts a reasonable

dispute with respect to the income reported on an information

return and fully cooperates with the Secretary (including

providing access for inspection of all witnesses, information,

and documents within the control of the taxpayer as reasonably

requested by the Secretary), the Commissioner shall have the

burden of producing reasonable and probative information in

addition to such information returns.   Sec. 6201(d); see Tanner

v. Commissioner, 117 T.C. 237 (2001), affd. 65 Fed. Appx. 508

(5th Cir. 2003); McQuatters v. Commissioner, T.C. Memo. 1998-88.

Assuming, arguendo, that petitioner did fully cooperate with the

Commissioner, the Court will examine whether the Commissioner

has satisfied his burden of production under section 6201(d).
                              - 7 -

The Commissioner has produced numerous paychecks issued to

petitioner by New Dimensions during the disputed pay period and

copies of petitioner’s bank statements in support of the Form

1099, but he acknowledges that several paychecks are missing.

As set forth below, the Court finds that the bank statements are

inconclusive, and the probative evidence supports only a finding

that petitioner earned $9,847.36 of the $12,396 reported on the

Form 1099.   Accordingly, we conclude that the Commissioner has

produced sufficient evidence to show that petitioner had

unreported income in 1999 and has satisfied his burden of

production to the extent of the paychecks produced in support of

the Form 1099, but he has not completely substantiated the full

amount reported on the Form 1099.

Unreported Income

     Section 61 provides that income from whatever source

derived, including compensation for services, must be included

in gross income.

     From the record in this case it is plain that petitioners

must have realized that they were severely understating their

income on their Federal income tax return for 1999.   Even if we

were to assume that petitioner did not receive a Form 1099 from

New Dimensions, a cursory review of his Form W-2 from New

Dimensions should have alerted petitioner to the fact that

$28,320 only represented approximately two-thirds of his total
                              - 8 -

income from New Dimensions in 1999.   Petitioner testified that

he just assumed that the amounts reported on the Form W-2 were

correct and said that he “didn’t really scrutinize [it] more

than taking a glance at it and giving it to my accountant.”     We

think that a reasonable and prudent taxpayer in these

circumstances would have noticed the discrepancy between the

amount of income he earned and the amount reported on the Form

W-2, and at least would have contacted New Dimensions to verify

the accuracy of the company’s information return.   The

difference between the amount on the Form W-2 and petitioner’s

actual receipts during 1999 was so great, and such a high

proportion of his total income, that we consider his explanation

entirely unbelievable.   Consequently, it is our view that,

without a satisfactory reason, petitioner reported on his

Federal income tax return for 1999 far less income than he

received during the year.

     At trial, petitioner acknowledged receiving compensation

throughout the disputed pay period.   However, he claimed that

the amount he actually earned and received was far less than

$12,396.

     Respondent produced copies of 15 relevant paychecks from

the disputed pay period in support of the Form 1099, but

respondent acknowledges that at least three checks are missing

from the record.   In sum, the 15 paychecks total $11,336.60, but
                              - 9 -

reimbursements for various business expenses were often

commingled with petitioner’s salary payments in these checks.

Separating amounts specifically designated as reimbursements

from these checks, these 15 checks total $9,847.36.     Eleven of

the 15 paychecks were issued for $737.28 (for a total of

$8,110.08 in compensation).   Other paychecks were paid in

amounts less than petitioner’s typical weekly salary of $737.28.

For the pay period ending September 10, 1999, petitioner

received a $400 paycheck dated September 16, 1999.    For the pay

period ending November 19, 1999, petitioner received a $600

paycheck dated November 26, 1999, with the following notation:

“payment - did not come in full week.”   Petitioner’s

compensation for the pay period ending October 22, 1999, was

paid with two separate checks dated October 22, 1999, for $200

and October 26, 1999, for $537.28 respectively.   In sum, these

15 paychecks clearly show that petitioner earned and received at

least $9,847.36 in compensation during the disputed pay period.

     Paychecks for the pay periods ending October 15, 1999,

October 29, 1999, and November 12, 1999, are missing from the

record.   Respondent claims that petitioner’s bank statements are

consistent with petitioner’s receiving compensation for these

three pay periods.   However, we find that petitioner’s bank

statements are inconclusive since petitioner often did not

deposit the full amount of his paychecks and because the account
                                - 10 -

was shared with his working wife.    Respondent had the burden to

produce probative evidence in support of the information return

under section 6201(d), and, since it is plausible that the

missing checks could have been due to petitioner’s missing work

without the benefit of sick leave, we decline to speculate as to

income represented by the alleged checks that are not in the

record.

     We find that petitioner’s gross income from New Dimensions

for the disputed pay period was $9,847.36.

Credit for Income Tax Withheld

     Income tax withheld from an individual’s wages is allowed

as a credit against the individual’s income tax liability, even

if the withheld tax is not actually paid over to the government

by the employer.   Sec. 31(a)(1); sec. 1.31-1, Income Tax Regs.

     Petitioner argues that his paychecks of approximately

$737.28 per week during the disputed pay period continued to

represent a gross salary of $885 per week as an employee.

Petitioner claims that although the checks do not include pay

stubs indicating any type of withholding for Federal income tax,

he believed that New Dimensions continued to withhold from his

wages.    As a result, petitioner claims that he is entitled to a

credit for the tax allegedly withheld by New Dimensions from his

wages under section 31(a)(1).
                              - 11 -

     Petitioner’s argument is not supported by the record.

Regardless of whether New Dimensions properly classified

petitioner as an independent contractor during this period (see

below), petitioner has not introduced credible evidence that New

Dimensions withheld income taxes from petitioner’s paychecks.

If an employer does not actually withhold taxes, the employee is

not entitled to a credit for amounts which should have properly

been withheld.   Edwards v. Commissioner, 39 T.C. 78, 83-84

(1962), affd. on this issue 323 F.2d 751 (9th Cir. 1963); Goins

v. Commissioner, T.C. Memo. 1997-521, affd. without published

opinion 151 F.3d 1029 (4th Cir. 1998).   The record indicates

that New Dimensions intended to treat petitioner as an

independent contractor for payroll purposes, and therefore did

not withhold taxes.   Petitioner’s paychecks ceased to include

pay stubs indicating that taxes were withheld, and New

Dimensions did not report wages paid or payroll taxes withheld

on its Form 941 for this period.   New Dimensions accounted for

petitioner’s compensation on a Form 1099.   Petitioner did not

introduce any evidence, aside from his self-serving,

uncorroborated testimony, in support of his claim that Federal

income tax was being withheld from his pay during the disputed

pay period.   It is well established that this Court is not bound

to accept a taxpayer’s self-serving, unverified, and
                              - 12 -

undocumented testimony.   Shea v. Commissioner, 112 T.C. 183, 189

(1999).

Self-Employment Tax

     In addition to the income tax imposed by section 1, section

1401(a) imposes a tax upon a taxpayer’s “self-employment

income.”   Section 1402(b) defines “self-employment income” as

“net earnings from self-employment.”    It is well established

that earnings derived from work as an independent contractor are

“self-employment income” subject to the self-employment tax.

Jackson v. Commissioner, 108 T.C. 130, 133-134 (1997); Turnidge

v. Commissioner, T.C. Memo. 2003-169.

     Petitioner contends that he performed services for New

Dimensions during the disputed pay period as an employee rather

than an independent contractor and is not liable for a self-

employment tax under section 1401(a).

     Whether an individual is an employee or an independent

contractor is a question of fact.   Secs. 3101, 3121(d)(2).    This

Court has listed seven factors that should be considered in

determining whether an individual is an employee:    (1) The

degree of control exercised over the details of the work; (2)

the individual’s investment in the work facilities; (3) the

individual’s opportunity for profit or loss; (4) whether the

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

principal’s right to discharge the individual; (6) the
                                - 13 -

permanency of the relationship; and (7) the relationship the

parties think they are creating.    Ewens and Miller, Inc. v.

Commissioner, 117 T.C. 263, 270 (2001); Profl. & Executive

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

862 F.2d 751 (9th Cir. 1988).    The factors should not be weighed

equally but should be weighed according to their significance in

the particular case.   Aymes v. Bonelli, 980 F.2d 857, 861 (2d

Cir. 1992); Youngs v. Commissioner, T.C. Memo. 1995-94.

     We begin by noting that we received vastly different

accounts from the parties regarding petitioner’s relationship

with New Dimensions during the disputed pay period.   New

Dimensions claims that petitioner’s status changed from employee

to independent contractor as a result of discussions between

petitioner and Larry Pierreport, New Dimensions’ co-owner and

vice president.   Andrea D’Acunto, New Dimensions’ co-owner and

president, testified that New Dimensions planned to terminate

petitioner’s services to help reduce the company’s operating

expenses.2   In an effort to retain his job, petitioner

volunteered to remain with the company as an independent

contractor, and New Dimensions agreed.   Under the terms of their

new oral agreement, petitioner agreed to accept a gross weekly

income of $737.28 (which equaled petitioner’s previous net

weekly salary after withholding) and forgo certain benefits,



     2
      New Dimensions began experiencing financial difficulties in
1999, and the company filed for bankruptcy in August 2000.
                              - 14 -

such as sick leave, which petitioner previously received.    Ms.

D’Acunto also testified that petitioner specifically agreed that

New Dimensions would not withhold any taxes from petitioner’s

paycheck, and that petitioner would “pay his own tax because we

couldn’t afford to do it anymore.”     Ms. D’Acunto testified that

after he became an independent contractor, petitioner’s job

duties as a dispatcher did not change significantly except that

petitioner began coming into work “when he felt like it” and was

permitted to work from home and did so on some occasions.

     Petitioner contends that he remained an employee throughout

1999 and was completely unaware of any changes to his status

during the disputed pay period.   In fact, petitioner flatly

denies that anyone at New Dimensions had approached him about

potentially losing his job or that he ever asked to change his

status.   Petitioner noticed that his paychecks during the

disputed pay period ceased to include pay stubs indicating the

withholding of taxes, but he testified that he did not worry

about the change because he was assured by New Dimensions that

“everything was going to remain the same.”    Petitioner argues

that he believed that New Dimensions continued to withhold taxes

from his paychecks during the disputed pay period.    As for his

typical work day, petitioner testified that his duties remained

the same throughout the year, and that he consistently worked

from 8 a.m. to 5:30 p.m.   Petitioner characterized his
                                - 15 -

relationship with New Dimensions as a good business

relationship, and he did not mention any changes in his status.

     On this record, we find it difficult to believe that

petitioner was completely unaware of the changes in the terms of

his status.    Not only were the petitioner’s paychecks issued

without pay stubs showing the withholding of taxes, but the

paychecks reflect the loss of sick leave benefits during the

disputed pay period.    In particular, his paycheck dated November

26, 1999, for $600 contained the following notation:    “payment -

did not come in full week”.    Since there is no evidence that

petitioner exceeded his allocated sick leave or paid vacation

period, we believe that petitioner did lose certain employee

benefits during the disputed pay period.    Petitioner must have

been fully aware of this change; workers generally do not ignore

changes in benefits.    Instead of receiving payroll checks with

businesslike withholding stubs from a payroll service,

petitioner started receiving handwritten checks.    Some of them

were dishonored by New Dimensions’s bank, and then petitioner

received makeup checks in amounts sufficient to cover the

penalties.    One check was marked: “pay + $78 Late Fee”.   Another

check was for $200 payable to “Cash” and marked on its face:

“Steve, towards pay - 10/22".    Others covered compensation for

petitioner as well as utility bills and bank payments.      There is

no possibility that petitioner was unaware of problems at New
                              - 16 -

Dimensions and changes in the way the company was conducting its

business.   Furthermore, we simply do not believe that petitioner

did not carefully examine his Form W-2 and consider the amount

of income he reported on his 1999 Federal income tax return in

view of all the changes that occurred with his paychecks during

the disputed pay period.

     Because of the inconsistencies in petitioner’s testimony,

we decline to believe him where his testimony conflicts with

other testimony or evidence concerning the terms of the work

between petitioner and New Dimensions.   We are not required to

accept at face value a taxpayer’s self-serving and

uncorroborated testimony, particularly where other and better

evidence concerning the point in question is available.    Wood v.

Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C.

593 (1964); Lewis v. Commissioner, T.C. Memo 1993-635.

     We now address the seven factors mentioned above as they

relate to the facts in the present case.   As we mentioned above,

these seven factors are not weighed equally, but should be

weighed according to their significance in a particular case.

Aymes v. Bonelli, supra; Youngs v. Commissioner, supra.    In the

present case, we are most influenced by the evidence that has

persuaded us that the parties intended to enter into a

principal-independent contractor relationship during the

disputed pay period.
                              - 17 -

     1.   Relationship the Parties Thought They Created

     Petitioner and Ms. D’Acunto presented conflicting testimony

in regard to petitioner’s work relationship during the disputed

pay period.   Ms. D’Acunto testified that New Dimensions and

petitioner agreed to change petitioner’s status from employee to

independent contractor during the disputed pay period.     As we

discussed above, we decline to accept petitioner’s testimony

that he was completely unaware of any changes in the terms of

his relationship with New Dimensions.    The evidence in this case

clearly shows that significant changes occurred in the parties’

relationship, and these changes are consistent with petitioner

becoming an independent contractor.    Petitioner’s paychecks

ceased to include pay stubs indicating the withholding of taxes,

and the change in petitioner’s paychecks is consistent with the

loss of benefits and changes in the manner in which the company

conducted its business.   We are convinced that the parties

intended to create an independent contractor relationship for

petitioner for the disputed pay period, and we believe this

factor is of great significance.

     2.   Degree of Control

     In many cases, the principal’s degree of control over the

details of a taxpayer’s work is the most important factor in

determining whether an employee relationship exists.      Matthews
                              - 18 -

v. Commissioner, 92 T.C. 351, 361 (1989), affd. 907 F.2d 1173

(D.C. Cir. 1990); Youngs v. Commissioner, T.C. Memo. 1995-94.

     In the present case, according to Ms. D’Acunto, a primary

difference in petitioner’s job during the disputed pay period

was that petitioner basically set his own work hours and was

allowed to work from home, which petitioner did on several

occasions.   Petitioner’s hours were a source of significant

tension between petitioner and New Dimensions.   The nature of

commercial trucking requires dispatchers to work early in the

morning as the best loads are often procured early in the day on

a first-come, first-served basis.    According to New Dimensions’

president, during the disputed pay period petitioner “more or

less started to come in when he felt like it”.   This diminution

in New Dimensions’s control over petitioner’s working hours was

significant.   Under these circumstances, we consider the degree

of control factor inconclusive for purposes of determining

petitioner’s status as an employee or independent contractor

during the brief disputed pay period.

     3.   Investment in Facilities

     Petitioner generally worked at the office furnished by New

Dimensions, but he was permitted to work from home during the

disputed pay period.   Overall, these circumstances support an

employer-employee relationship since petitioner only worked from

home on a small number of occasions.
                               - 19 -

     4.   Opportunity for Profit or Loss

     Petitioner was paid a set salary by New Dimensions.

However, New Dimensions was a small company, and petitioner

testified that he believed that he would prosper if New

Dimensions became a more successful company.   Furthermore,

petitioner, on several occasions, advanced business expenses on

behalf of New Dimensions in order to help the company develop

its business.   Petitioner was repaid for these expenses.   This

factor tends to favor an employer-employee relationship, but its

significance is mitigated by petitioner’s own belief that he

stood to prosper along with the company.

     5.   Right To Discharge

     We do not believe that this is a significant factor, as

either an employee or independent contractor, working under the

circumstances of this case, could be terminated at will or could

quit the company at will.   We accord this factor little weight.

     6.   Integral Part of Business

     Clearly, a dispatcher is an integral part of a trucking

company’s business.   This factor favors a finding that

petitioner was an employee.

     7.   Permanency of the Relationship

     Petitioner was not hired on a job-by-job basis, and a

dispatcher is necessary to the day-to-day operations of a

trucking company.   But there is no permanency of employment by a
                              - 20 -

company that is on the verge of bankruptcy.   We believe it is

fair to characterize the parties’ agreement to change the

petitioner’s status from employee to independent contractor as a

temporary arrangement resulting from the company’s financial

condition.   We conclude that this factor favors a finding that

petitioner was an independent contractor.

     After a careful review of the record as a whole, we

conclude that, as petitioner and New Dimensions intended,

petitioner performed services as an independent contractor

during the disputed pay period.   Accordingly, we hold that the

earnings in dispute are “net earnings from self-employment” for

purposes of section 1402(a), subject to the tax imposed on

“self-employment income” under section 1401(a).

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
