                         T.C. Memo. 1997-250



                       UNITED STATES TAX COURT



           JOHN E. AND CONCETTA LOZON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22764-94.                         Filed June 4, 1997.



     V. Jean Owens, for petitioners.

     G. Michelle Ferreira, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined the following

deficiencies in petitioners' Federal income taxes:

               Year                  Deficiency

               1989                    $1,843
               1990                     4,379
               1991                    10,784
                               - 2 -

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions, the issues for decision are:

     (1) Whether petitioners performed services for Allstate

Insurance Co. (Allstate) as employees or as independent

contractors during the years at issue; and, if we find that

petitioners were independent contractors, then

     (2) whether contributions made by Allstate to its pension

plan and the Sears (Allstate's parent company) Savings and Profit

Sharing Fund (hereinafter respectively referred to as the pension

plan and the profit sharing fund, and collectively as the plans)

on behalf of Mrs. Lozon are taxable to her when vested; and

     (3) whether petitioners should be credited with payroll

taxes withheld from their income by Allstate and with payroll

taxes paid by Allstate (employer's matching portion) in

calculating petitioners' self-employment tax liability.

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits, together with

a supplemental stipulation of facts, are incorporated herein by

this reference.   Petitioners resided in Gilroy, California, at

the time the petition in this case was filed.
                                - 3 -

     Mrs. Lozon (sometimes referred to as petitioner) has been

associated with Allstate since October 14, 1985, and Mr. Lozon

has been associated with Allstate since July 14, 1989, the

respective dates that they entered into Agent Employment

Agreements (AE agreements) with Allstate.    Petitioners' AE

agreements were, in all material respects, similar to the

agreement1 described in Butts v. Commissioner, T.C. Memo. 1993-

478, affd. per curiam 49 F.3d 713 (11th Cir. 1995).

     Petitioners were Neighborhood Office Agents (NOA's) during

the years in issue.2    The NOA concept was promoted by Allstate as

a means of becoming an entrepreneur, having one's own office, and

being one's own boss.    Petitioners' relationship with Allstate

was governed by the AE agreement and the Neighborhood Office

Agent Amendment to the Allstate Agent Compensation Agreement (NOA

amendment).   Such amendment was in all material respects similar

to the NOA amendment described in Butts v. Commissioner, supra.

     1
        The parties stipulated that "petitioner's Allstate Agent
Employment Agreement was in all material respects similar to Dan
Butts' Allstate Employment Agreement, as described in [Butts]."
In Butts v. Commissioner, T.C. Memo. 1993-478, affd. per curiam
49 F.3d 713 (11th Cir. 1995), the taxpayer entered into an
"Allstate Agent Compensation Agreement"; the opinion makes no
reference to an "Allstate Agent Employment Agreement". Although
petitioners later entered into an "NOA amendment to Allstate
Compensation Agreement", there is no reference in the record to
petitioners having entered into an "Allstate Compensation
Agreement". See infra. We interpret the parties' stipulation to
mean that petitioners' written agreements with Allstate were in
all material respects similar to the taxpayer's in Butts.
     2
        Unless otherwise indicated, descriptions of petitioners'
business pertain to the years in issue.
                                - 4 -

The NOA amendment provided that the AE agreement remained

unchanged, except as modified by the NOA amendment.    The NOA

amendment stated that petitioners continued to be full-time

employees of Allstate.

     The Neighborhood Office Agent Manual (NOA manual) was a

written text of rules and procedures provided by Allstate during

the 1989, 1990, and 1991 tax years.     The Allstate NOA manual was,

in all material respects, similar to the NOA manual described in

Butts v. Commissioner, supra.    Allstate gave petitioners a copy

of the NOA manual.   The NOA amendment provided that petitioners

remained under the supervision of sales management and would

attend Allstate training.   Petitioners believed that the NOA

manual was basic material on how to run a business, and, since

they knew how to run a business, Mr. Lozon discarded it.

      Petitioners' relationship with Allstate could be terminated

at will by either Allstate or petitioners.

     An Allstate agency manager performed annual business

analysis reviews (reviews) of petitioners.     These reviews rated

petitioners' productivity, quality, retention, program support,

customer service, administration, and overall role.    These

reviews rated petitioners on whether they exceeded, met, needed

improvement, or required immediate improvement in the categories

rated by the Allstate agency manager.     The reviews were 5-minute

meetings with the Allstate agency manager once a year in which
                                - 5 -

the discussion centered on whether the sales expectations for the

year had been met.

     The day-to-day business operations of petitioners' Allstate

insurance business and the day-to-day interactions of petitioners

with Allstate were essentially the same as the day-to-day

business operations and the day-to-day interactions of the

taxpayer and Allstate as described in Butts v. Commissioner,

supra.

     When she started her business, Mrs. Lozon searched for and

secured an office location.    Mrs. Lozon signed a lease (Allstate

approved the lease to assure that it had no liability on the

lease), set up an office, opened her doors, and started to

prospect for clients.   Mrs. Lozon advertised extensively in

newspapers and spent money, some of it reimbursed by Allstate, in

an effort to increase her business.     The business grew quickly,

and Mr. Lozon joined Mrs. Lozon in the business.    Mrs. Lozon

moved to a larger office in 1989 and incurred additional expenses

to remodel the new facility.

     Even while the business was growing, there was always a

possibility of petitioners' incurring a loss.    Commissions were

petitioners' only source of income.     Petitioners were permitted,

with Allstate's consent, to sell non-Allstate insurance products.

Petitioners personally bore the obligation to pay for most of

their business expenses, including office rent, utilities,

telephone, and personnel.   Petitioners were reimbursed by
                               - 6 -

Allstate for a percentage of their business expenses under a

formula known as the Office Expense Allowance (OEA).   Expenses

reimbursed from the OEA included the following:   (1) Support

staff; (2) sales location rent; (3) maintenance; (4) utilities;

and (5) telephones.   Allstate paid petitioners' malpractice

insurance and State licensing fees during 1989, 1990, and 1991.

     Allstate provided petitioners with some office furniture,

such as a desk, a side chair, a swivel chair, and a filing

cabinet.   The office furniture provided by Allstate to

petitioners was not petitioners' property but remained the

property of Allstate.   Allstate provided petitioners with

standard advertising signs, and they were also eligible to

participate in cooperative advertising through Allstate.

      The success of petitioners' business was due mainly to the

personality, ability to sell, entrepreneurial spirit, hard work,

knowledge of the product, and desire to succeed on the part of

the Lozons, particularly Mrs. Lozon.

     Since Allstate treated them as employees, petitioners were

allowed to participate in the Sears profit sharing fund.

Allstate made contributions of $89 and $139 on behalf of Mrs.

Lozon to the profit sharing fund for the years 1990 and 1991,

respectively.

     Allstate also allowed petitioners to participate in its

pension plan.   Allstate made contributions of $1,674 and $2,319

on behalf of Mr. Lozon into Allstate's pension plan for the years
                                 - 7 -

1990 and 1991, respectively.   Allstate made contributions of

$9,020 and $8,393 on behalf of Mrs. Lozon into Allstate's pension

plan for the years 1990 and 1991, respectively.    Mr. Lozon had no

vested interest in the pension plan during 1990 or 1991.    Mrs.

Lozon's vested interest in the plan was zero in 1989, $13,193 in

1990, and $16,843 in 1991.

     The payments made by Allstate on behalf of petitioners to

the plans for the years 1989, 1990, and 1991 were excluded from

petitioners' gross income (the payments were not reported on the

Forms W-2 given to petitioners, and petitioners did not report

the payments as income on their tax returns).

     Compensation paid to petitioners from Allstate in the

amounts of $164,998, $230,152, $255,993 was reported by Allstate

on Forms W-2 as wages paid to petitioners for 1989, 1990, and

1991, respectively.   Allstate withheld income and Social Security

taxes from petitioners' wages.    Petitioners reported these

amounts as wages on their 1989, 1990, and 1991 joint Federal

income tax returns (tax returns).

     Petitioners claimed business expenses in the amounts of

$72,204, $99,669, and $114,669 on Schedule C of their tax returns

for 1989, 1990, and 1991, respectively.

     Petitioners paid no self-employment tax for 1989, 1990, and

1991.

     On August 1, 1992, petitioners signed a Neighborhood

Exclusive Agency Agreement (NEA agreement) with Allstate which
                                - 8 -

superseded and replaced their prior AE agreement as amended by

the NOA amendment.    Under the NEA agreement, petitioners and

Allstate agreed that petitioners' association with Allstate would

be an independent contractor relationship effective August 1,

1992.                          OPINION

A.     Employee Versus Independent Contractor

       We have examined on three separate occasions whether

taxpayers working under similar NOA agreements are independent

contractors or employees.    Mosteirin v. Commissioner, T.C. Memo.

1995-367; Smithwick v. Commissioner, T.C. Memo. 1993-582, affd.

per curiam sub nom. Butts v. Commissioner, 49 F.3d 713 (11th Cir.

1995); Butts v. Commissioner, T.C. Memo. 1993-478, affd. per

curiam 49 F.3d 713 (11th Cir. 1995) (the Allstate cases).     The

parties agree that the facts of this case are essentially

indistinguishable from Butts v. Commissioner, T.C. Memo. 1993-

478.

       Although respondent argues that eight factors3 commonly

analyzed by the Tax Court support a holding that petitioners are

Allstate's employees, she focuses on Allstate's right to control

       3
        (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
individual for profit or loss; (4) whether the principal has the
right to discharge the individual; (5) whether the work is part
of the principal's regular business; (6) the permanency of the
relationship; (7) the relationship the parties believe they are
creating; and (8) whether fringe benefits are provided. Weber v.
Commissioner, 103 T.C. 378 (1994), affd. per curiam 60 F.3d 1104
(4th Cir. 1995).
                               - 9 -

petitioners based on the rules, regulations, and procedures set

forth in the NOA amendment and NOA manual.   Respondent argues

that Allstate's disciplinary procedures and annual reviews of

petitioners provided it with the opportunity to enforce its

rules, regulations, and procedures.

     Petitioners contend that this issue has already been decided

by this Court, that Butts and Smithwick control.   Respondent

counters that in prior cases (Butts, Smithwick, and Mosteirin)

"the Tax Court correctly articulated the applicable legal

standard in an employee versus independent contractor dispute as

one of the right to control", but did not apply the test

correctly.   Respondent is half-right.

     As the Court stated in Mosteirin:

           In Butts and Smithwick, we concluded that the
     taxpayers were professionals associated with Allstate
     as independent contractors * * *. In Butts we made
     detailed findings of fact and addressed the legal
     arguments at some length. We found: (1) The taxpayer
     exercised a high degree of control over the manner in
     which he operated his business; (2) the taxpayer
     personally incurred most of his business expenses; and
     (3) the taxpayer bore the burden of risk of loss from
     his business. In making these findings, we noted that
     we were not persuaded by the fact that the agreement
     between Allstate and the taxpayer referred to the
     taxpayer as an employee or the fact that the taxpayer
     reported his Allstate income as wages on his Federal
     income tax return. Rather, we focused on the actual
     contractual relationship between the contracting
     parties. * * * [Mosteirin v. Commissioner, supra at
     308.]

We dealt with respondent's assertion that the annual review

process showed that Allstate had the right to control NOA's in

Mosteirin:
                                - 10 -

     The actions taken by Allstate in the case at hand did
     not amount to the exercise of power by Allstate as to
     the affirmative manner in which petitioner tried to
     sell insurance to customers on a day-to-day basis, but
     were designed to deal prospectively with various
     quality issues and with specific quality problems after
     they had arisen. * * * [Id.]

     The above analysis holds true in this case.    The parties

have stipulated that this case has the same essential facts as

Butts.   We find that there are no essential facts in the instant

case distinguishable from those presented in Butts and no legal

arguments presented by respondent in the instant case that were

not addressed and rejected in Butts and Mosteirin.     Thus, on the

basis of our reasoning in Butts v. Commissioner, supra, as

adopted and applied in Smithwick v. Commissioner, supra, and

Mosteirin v. Commissioner, supra, we conclude that during the

years in issue petitioners were professionally associated with

Allstate as independent contractors.     In short, we decline

respondent's offer to revisit an area that has been so thoroughly

explored.

B.   Burden of Proof on Remaining Issues

     Unlike the prior Allstate cases,4 the ramifications of

petitioners' being treated as independent contractors--as opposed

to employees--are in dispute.    Issue number 2, supra and

discussed below, was raised by respondent in his answer to the

petition.   Consequently, respondent bears the burden of proof on

this issue.   Rule 142(a).

     4
         See infra.
                               - 11 -

C.   Taxability of Contributions by Allstate to the Plans

     1.     Petitioners' Arguments

     In response to respondent's position that Allstate's

contributions to the plans are includable in Mrs Lozon's gross

income for 1990 and 1991 to the extent the contributions were

vested during those years, petitioners point out that respondent

concedes that the pension plan was qualified under section 401

and the corresponding trust was exempt under section 501(a)

during the years at issue5.   Citing section 402(a), petitioners

argue that they should not be taxed until the proceeds are

distributed to them from the pension plan trust since Allstate

treated them as covered under the pension plan.   Petitioners

state "A subsequent reclassification of Mrs. Lozon as an

independent contractor had no effect on her participation in the

Plan since she continued to qualify as an agent of Allstate."

     Petitioners cite section 401(c) as authority for the

proposition that self-employed persons can be participants of

qualified plans.    Petitioners also argue that respondent did not

question the qualification status of plan participants when

contributions were made and that "It would be unjust to find that

such contributions that have not been distributed to

[petitioner], and will not be distributable to her until she

reaches retirement age, is [sic] taxable to her".




     5
          See infra note 6.
                               - 12 -

     Petitioners further argue that they could have had dual

status:   Independent contractors for income tax purposes and

employees for pension plan purposes.    Petitioners claim "In

essence, this Court has already considered the pension issue

[citing Butts v. Commissioner, supra] and, as dicta, agreed that

these NOA's may be employees 'for pension and fringe benefit

purposes' although they were independent contractors for the

expense deduction purposes."    Petitioners cite Ware v. United

States, 850 F. Supp. 602 (1994), affd. 67 F.3d 574 (6th Cir.

1995), as supporting the dual status concept.    As further support

for their dual status argument, petitioners argue that sections

7701(a)(20) and 401(c) allow full-time life insurance agents to

be treated as independent contractors for some purposes but as

employees for pension purposes and that cases involving

separation from service provide additional support.

     Petitioners further argue that section 83 does not provide

support for taxing them (as respondent argues) since section

83(e) provides that section 83 shall not apply to "a transfer to

or from a trust described in Section 401(a)".

     2.     Respondent's Arguments

     Respondent argues that petitioners cannot use section 402(a)

to defer recognition of income since they are not employees of

Allstate.    Section 402(a)(1) refers to "the amount actually
                               - 13 -

distributed to any distributee by any employees' trust described

in section 401(a)".   Respondent argues that petitioners cannot be

proper distributees of the trusts since petitioners are

independent contractors not employees.    In respondent's view the

trusts would violate the "exclusive benefit rule" provided for in

section 401(a)(2) if they included nonemployees such as

petitioners.   While agreeing that the pension plan and

corresponding trust were qualified6 for the years in issue and

the plans are not parties to this action, respondent nevertheless

argues that petitioners are not "qualified participants" in

either plan.

     Respondent argues that petitioners should be taxed pursuant

to section 83(a), which taxes property transferred to an employee

or an independent contractor in connection with the performance

of services.   In his reply brief, for the first time, respondent

contends that the economic benefit doctrine provides a legal

basis for taxing petitioner.

     Respondent further argues that petitioners may not be

independent contractors for income tax deduction purposes and

employees for pension plan purposes.    Respondent argues that

petitioners' reliance on Butts v. Commissioner, supra, and Ware

v. Commissioner, supra, is misplaced and that their reading of



     6
        Petitioners did not request such a finding of fact as to
the profit sharing fund. Respondent, however, does refer to "the
qualified plans at issue" on brief.
                               - 14 -

section 401(c) as supporting dual classification is erroneous.

Finally, respondent argues that the separation from service cases

are irrelevant to the case at hand.

     3.      Analysis

     Allstate included Mrs. Lozon in their pension plan and the

profit sharing fund because they considered her to be an

employee.7    We held, supra, that petitioners' relationship to

Allstate was that of an independent contractor and not that of an

employee.    Petitioners argue that Mrs. Lozon can, nevertheless,

avoid current taxation on amounts vested in the pension plan

because respondent agrees that the pension plan was qualified

under section 401 and the trust was exempt under section 501(a).

Respondent wants to remove the "bad apples" from Allstate's

pension plan "barrel" without advocating that the plans

themselves be disqualified.    As respondent states on brief, "The

qualified plans at issue defer the current receipt of income of

employee Agents of Allstate, but cannot defer income of non-

employee independent contractors."      Respondent, however, does not

suggest a statutory framework to remove the bad apples (the

people who have been mistakenly included in the pension plan).

     Respondent determined that the contributions made on behalf

of Mrs. Lozon should be income to her when vested.     Petitioners

     7
        The contributions made to the pension plan on behalf of
Mr. Lozon are not at issue because he was not vested during the
years in issue. Mr. Lozon did not participate in the profit
sharing fund.
                              - 15 -

argue that section 402(a), which governs the taxability of

beneficiaries of exempt trusts, provides that taxpayers should

not be taxed until they receive distributions from such trusts.

Petitioners cite section 1.402(a)-1(a)(1)(i), Income Tax Regs.,

which provides:

     Section 402 relates to the taxation of the beneficiary
     of an employees' trust. If an employer makes a
     contribution for the benefit of an employee to a trust
     described in section 401(a) * * * the employee is not
     required to include such contribution in his income
     except for the year * * * in which such contribution is
     distributed or made available to him. * * * [Emphasis
     added.]

     Since petitioner was not an employee of Allstate, the above

regulation does not apply to her.

     Respondent argues that section 83 provides the support for

taxing petitioner.   Section 83 reads, in part:

     SEC. 83. PROPERTY TRANSFERRED IN CONNECTION WITH
              PERFORMANCE OF SERVICES.

          (a) General Rule.--If, in connection with the
     performance of services, property is transferred to any
     person other than the person for whom such services are
     performed, the excess of--

               (1) the fair market value of such
          property (determined without regard to any
          restriction other than a restriction which by
          its terms will never lapse) at the first time
          the rights of the person having the
          beneficial interest in such property are
          transferable or are not subject to a
          substantial risk of forfeiture, whichever
          occurs earlier, over

               (2) the amount (if any) paid for such
          property,
                              - 16 -

     shall be included in the gross income of the person who
     performed such services in the first taxable year in
     which the rights of the person having the beneficial
     interest in such property are transferable or are not
     subject to a substantial risk of forfeiture, whichever
     is applicable. * * *

     Section 1.83-1(a)(1), Income Tax Regs., provides that such

property is not taxable under section 83 until it (1) has been

transferred, and (2) becomes substantially vested in such person.

Section 1.83-3(a), Income Tax Regs., provides that property is

transferred when the person acquires a beneficial ownership in

such property.   Section 1.83-3(e), Income Tax Regs., provides

that "property" under section 83 "includes a beneficial interest

in assets (including money) which are transferred or set aside

from the claims of creditors of the transferor, for example, in a

trust or escrow account."   The record as a whole establishes that

the contributions in issue were transferred in connection with

the performance of services by Mrs. Lozon.   It is stipulated that

Allstate made contributions under the profit sharing fund to a

trust for the benefit of Mrs. Lozon in the amounts of $89 in 1990

and $140 in 1991.   These amounts were vested when made.   It is

also stipulated that Allstate made contributions under its

pension plan to a trust for the benefit of Mrs. Lozon and that

she was vested in the amounts of $13,193 in 1990 and $16,843 in

1991.8   Therefore, unless an exception applies, Mrs. Lozon would


     8
         Mrs. Lozon had no portion of the pension plan vested in
1989.
                                 - 17 -

be taxable on $13,282 ($13,193 + $89) in 1990 and $3,790 ($16,843

- $13,193 + $140) in 1991.

     Section 83(e)(2) provides for an exception to the above

rule.   Respondent argues that the exception does not apply.     The

relevant portion of section 83(e) provides:

          (e) Applicability of Section.--This section shall
     not apply to--

                     *   *   *     *      *   *   *

                (2) a transfer to or from a trust
           described in section 401(a) * * *

     Section 401(a) provides, in part:

          (a) Requirements for Qualification.--A trust
     created or organized in the United States and forming
     part of a stock bonus, pension, or profit-sharing plan
     of an employer for the exclusive benefit of his
     employees or their beneficiaries shall constitute a
     qualified trust under this section--

                     *   *   *     *      *   *   *

                (2) if under the trust instrument it is
           impossible, at any time prior to the
           satisfaction of all liabilities with respect
           to employees and their beneficiaries under
           the trust, for any part of the corpus or
           income to be (within the taxable year or
           thereafter) used for, or diverted to,
           purposes other than for the exclusive benefit
           of his employees or their beneficiaries * * *

     Respondent argues that the trusts were in violation of

section 401(a)(2), and the section 83(e)(2) exception therefore

does not apply.   Respondent also argues that Mrs. Lozon was not a

"qualified participant" in the plan (a requirement of the pension

plan itself) since she was not an employee.       Respondent's
                               - 18 -

arguments are variations of the same theme, that "the fundamental

condition of income deferral in qualified plans [is] that such

deferral is accorded only to employee participants.    Sections

401(a), 401(b), 402."

     The section 83(e)(2) exception only requires that there be

"a transfer to or from a trust described in section 401(a)".

Respondent concedes that the pension plan and profit sharing fund

were qualified under section 401(a) and the respective trusts

were exempt under section 501(a) for all the years in issue.      We

have held, supra, that the contributions in issue were

transferred to the respective trusts in connection with the

performance of services by petitioner.    Consequently, the

requirements of section 83(e)(2) have been met; petitioner is

exempt from section 83(a).    Respondent cannot simultaneously

argue that the trusts were in violation of section 401(a)(2)

while conceding that the pension plan and profit sharing fund

were qualified plans under section 401(a).    The positions are

mutually exclusive; respondent is bound by his concession.

            Respondent, in his reply brief, argues that the

economic-benefit doctrine9 provides a legal basis for taxing

petitioner.    In Berkery v. Commissioner, 91 T.C. 179 (1988),

affd. without published opinion 872 F.2d 411 (3d Cir. 1989) we

stated:


     9
          This is sometimes known as the "economic-benefit theory".
                               - 19 -

          It is well established that respondent may rely
     upon a theory if [he] has provided petitioner with
     "fair warning" of [his] intention to proceed under that
     theory. Leahy v. Commissioner, 87 T.C. 56, 64 (1986);
     Schuster's Express, Inc. v. Commissioner, 66 T.C. 588,
     593 (1976), affd. per curiam 562 F.2d 39 (2d Cir.
     1977); Rubin v. Commissioner, 56 T.C. 1155, 1163
     (1971), affd. 460 F.2d 1216 (2d Cir. 1972). "Fair
     warning means that respondent's failure to give
     petitioner notice of [his] intention to rely on a
     particular theory in the statutory notice of deficiency
     or the pleadings, must not have caused harm or
     prejudice to petitioner in petitioner's ability to
     prepare [their] case." William Bryen Co. and
     Subsidiaries v. Commissioner, 89 T.C. 689 (1987). See
     also Schuster's Express v. Commissioner, supra at
     593-594; Rubin v. Commissioner, supra at 1163. In
     Leahy, we recognized that an argument may not be made
     for the first time on brief unless it is shown that
     there is neither surprise nor need for additional
     evidence to be presented. * * * [Fn. ref. omitted.]

     Respondent first made the economic-benefit argument in his

reply brief.   Respondent has not shown that there "was neither

surprise nor need for additional evidence to be presented."

Therefore, we will not consider this argument.

     As respondent has not proven that petitioner is taxable on

the contributions when vested, we hold for petitioners on this

issue.   We need not, therefore, address petitioners' dual status

arguments.

D.   Calculation of Self-Employment Taxes Due

     Allstate treated petitioners as employees during the years

in issue.    The Federal Insurance Contributions Act (FICA), secs.

3101-3125, 68A Stat. 415 (1954), taxes a portion of the wages

paid to an employee (FICA tax).   The portion of the wages taxed

is defined in section 3121(a).    Under FICA, the employer and the
                               - 20 -

employee each pays a like amount of tax.      See secs. 3101, 3111.

The employer withholds the employee's half of the FICA tax and

remits it, along with the employer's half, to the Treasury

Department.   See sec. 3102.   Allstate withheld FICA taxes from

petitioners and paid both halves over to the Treasury Department

for the years in issue.

     Independent contractors are not subject to the FICA tax;

however, they are subject to a Self-Employment Contributions Act

of 1954, secs. 1401-1403, 68A Stat. 353, tax (SECA tax).      See

secs. 1401, 1402.   The SECA tax is a different tax from the FICA

tax, though the SECA tax rate is equal to the sum of the employer

and employee tax rates under FICA.      The parties agree that if

petitioners are held to be independent contractors, then they are

liable for SECA tax on their net earnings.

     Petitioners argue that they owe no SECA tax because Allstate

and petitioners paid the full amount of the FICA tax due for the

years in issue and that amount equals the SECA tax due.

Petitioners also argue that their "wages" (compensation paid by

Allstate that was reported as wages) should be subtracted from

net earnings from self-employment to arrive at self-employment

income under section 1402(b), again resulting in no SECA tax due.

Petitioners finally cite the mitigation provisions of section

6521 for the proposition that they should be credited with

Allstate's share of the FICA taxes paid on petitioners' "wages".
                                - 21 -

     Respondent correctly points out that if petitioners are

considered to be independent contractors, then the compensation

paid to them by Allstate could not be considered FICA wages as

defined under section 3121(a).    Respondent argues that

petitioners cannot claim credit toward their SECA tax liability

for the "employer's" portion of the FICA taxes paid by Allstate.

Respondent further argues that petitioners may not reduce their

SECA tax liability by the "employee's" portion of the FICA taxes

erroneously paid on their behalf by Allstate unless the statute

of limitations has expired for petitioners' claim for refund of

the improperly paid FICA taxes, citing section 6521.

     Petitioners may not claim credit for Allstate's portion of

the FICA taxes.   Section 3111 imposes a tax on employers;

petitioners have no right to claim Allstate's potential tax

refund.   Section 6521 offers no support for petitioners' claim.

It deals exclusively with SECA tax and "the tax imposed by

section 3101 (relating to tax on employees under the Federal

Insurance Contribution Act)".    (Emphasis added.)   Cf. sec. 3111.

Petitioners have misread section 6521.

     Petitioners may not reduce their self-employment income by

the compensation paid them by Allstate under section 1402(b).

Section 1402(b) only allows such a reduction for "wages".

Section 3121(a) defines "wages" as "all remuneration for

employment".   "Employment", for this situation, is defined by

section 3121(b) as "any service, of whatever nature, performed
                               - 22 -

(A) by an employee".    (Emphasis added.)   Since petitioners were

not employees, they cannot have received wages from Allstate.

Again, petitioners have misread the statute.

     Other than section 6521, there is no authority for

offsetting SECA taxes with erroneously paid FICA taxes.     With

certain exceptions not relevant to this case, section 6521

provides for the mitigation of the effect of the expiration of

the period of limitations in certain cases in which

self-employment income is incorrectly classified as wages and

FICA taxes are paid (the case at bar), or wages are incorrectly

classified as self-employment income and self-employment taxes

are paid.    If the correction of the error would require the

refund or credit of one tax and the assessment of the other, and

if the period of limitations has expired as to only one of the

taxes in question, then the one tax may be credited against the

other despite the expiration of the period of limitations.

Section 6521(a) provides:

          (a) Self-Employment Tax and Tax on Wages.--In the
     case of the tax imposed by chapter 2 (relating to tax
     on self-employment income) and the tax imposed by
     section 3101 (relating to tax on employees under the
     Federal Insurance Contributions Act)--

                 (1) If an amount is erroneously treated
            as self-employment income, or if an amount is
            erroneously treated as wages, and

                 (2) If the correction of the error would
            require an assessment of one such tax and the
            refund or credit of the other tax, and
                             - 23 -

               (3) If at any time the correction of the
          error is authorized as to one such tax but is
          prevented as to the other tax by any law or
          rule of law (other than section 7122,
          relating to compromises),

     then, if the correction authorized is made, the amount
     of the assessment, or the amount of the credit or
     refund, as the case may be, authorized as to the one
     tax shall be reduced by the amount of the credit or
     refund, or the amount of the assessment, as the case
     may be, which would be required with respect to such
     other tax for the correction of the error if such
     credit or refund, or such assessment, of such other tax
     were not prevented by any law or rule of law (other
     than section 7122, relating to compromises).

     Respondent agrees, on brief, that petitioners may offset

their SECA tax liability by their portion of FICA tax payments to

the extent allowed by section 6521.    Consequently, we leave it to

the parties to compute the amount of the offset in their Rule 155

computation.

          To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.
