                  T.C. Summary Opinion 2002-47



                     UNITED STATES TAX COURT



          GEORGE A. AND HILDA QUINTERO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8364-00S.              Filed May 6, 2002.



     Larry Fedro, for petitioners.

     John T. Lortie, 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 1997.    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.
                                - 2 -

     Respondent determined an $8,780 deficiency in, and a $1,756

penalty under section 6662(a) with respect to petitioners’ 1997

Federal income tax.   The Court must decide:   (1) The amount of

compensation George A. Quintero earned and received from AAA

Transmissions Service Center of North Miami, Florida (AAA),

during 1997; (2) whether such compensation constitutes self-

employment income subject to the tax imposed by section 1401;

and (3) whether the underpayment of tax required to be shown on

petitioners’ 1997 Federal income tax return is a substantial

understatement of income tax.

Background

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

Petitioners are husband and wife.   They filed a timely joint 1997

Federal income tax return.   At the time the amended petition was

filed, petitioners resided in Pompano Beach, Florida.    References

to petitioner are to George A. Quintero.

     During 1997, petitioner was a student at the Ft. Lauderdale

campus of Keiser College.    From the beginning of the year until

sometime in December, he was also employed as a “trainee-helper”

by AAA, an automobile transmission repair shop.

     Petitioner was not a certified mechanic during 1997.    His

duties at AAA included the removal and replacement of automobile

transmissions, but he did not repair or rebuild transmissions.

When at work he wore a uniform provided by AAA, he used tools
                                - 3 -

borrowed from coworkers, and he was supervised by Stuart Smith,

AAA’s general manager.    As general manager, Mr. Smith performed

the majority of AAA’s bookkeeping functions, including the

preparation of monthly payroll sheets.

     Mr. Smith, on behalf of AAA, and petitioner signed an

“Independent Contractor Agreement”, dated December 15, 1996 (the

agreement).    According to the agreement, petitioner agreed to

perform services for AAA as an independent contractor and not as

an employee.

     Petitioner’s work schedule at AAA varied during 1997.      At

the direction of AAA, generally he worked 5 days a week, Monday

through Friday, during business hours.    Some weeks, he worked

“full-time” (40 or more hours), but often he worked fewer hours

because there was no work for him to do or so that he could

attend classes.    Petitioner’s work hours on any given day were

set by AAA and noted on a calendar maintained by a shop

supervisor.    Mr. Smith used the calendar to prepare monthly

payroll sheets that list the days and hours that petitioner

worked during 1997 and the amount of compensation he received.

AAA compensated petitioner at the rate of $13.63 per hour.      He

was paid in cash, usually once a week on Friday.    The monthly

payroll sheet indicates that petitioner was paid a total of

$23,552 according to the schedule included at appendix I.
                                - 4 -

     During 1997, petitioner maintained a checking account at

NationsBank (the checking account).     The checking account was not

a joint account.   He deposited some of his earnings from AAA into

the checking account.    During 1997, total deposits of $18,087

were made to the checking account as set forth in Appendix II.

     During 1997, Mrs. Quintero was employed part-time as a

housekeeper.   She earned wages of $10,237 from this position, as

reflected on a Form W-2 issued to her by her employer.

     AAA issued a Form 1099-MISC, Miscellaneous Income, reporting

nonemployee compensation earned by petitioner during 1997 in the

amount of $23,552.   AAA’s accountant prepared the Form 1099-MISC

based on information contained on AAA’s monthly payroll sheets.

     Petitioners’ 1997 return was prepared by H&R Block Eastern

Tax Service Inc.   The return lists Mrs. Quintero’s occupation as

“housekeeping” and petitioner’s as “unemployed”.    The only income

reported on petitioners’ 1997 return is the income earned by Mrs.

Quintero.   There is no income tax liability (either under section

1 or section 1401) reported on the return.    A refund of $3,656

attributable entirely to a section 32 earned income credit is

claimed on the return.

     In the notice of deficiency, respondent, relying upon the

Form 1099-MISC issued to petitioner by AAA, increased

petitioners’ income by $23,552.    Respondent further determined

that the compensation that petitioner received from AAA
                               - 5 -

constitutes self-employment income subject to tax under section

1401.   Respondent also determined that the underpayment of tax

required to be shown on petitioners’ 1997 is a substantial

understatement of income tax and imposed a penalty under section

6662(a).   Other adjustments made in the notice of deficiency are

not in dispute.

Discussion

1.   Unreported Income

     Petitioners acknowledge that petitioner received

compensation from AAA during 1997 that was not reported on their

1997 return but claim that petitioner received less than the

amount reported on the Form 1099-MISC issued by AAA.    According

to petitioners, AAA’s monthly payroll sheets, which were used to

prepare the Form 1099-MISC issued to petitioner, overstate the

number of hours petitioner worked during 1997 and, therefore,

overstate the compensation he was paid.

     On their 1997 return, petitioners expressly represented that

petitioner was unemployed during 1997 and implicitly represented

that he earned no income during that year.   Neither

representation is true.   In the petition filed in this case,

petitioners represent that their “records” indicate that

petitioner’s “gross” earnings from AAA during 1997 amounted to

less than $5,000.   If maintained, no such “records” were

presented at trial.   At trial, petitioners estimated that
                               - 6 -

petitioner’s earnings from AAA amounted to $6,350 (computed by

subtracting gifts from family members plus the income earned by

Mrs. Quintero reported on their 1997 return from the total

deposits made to the checking account).

     We consider petitioners’ various claims as to the amount of

income petitioner earned during 1997 against the amount reflected

on AAA’s records.1   The accuracy of AAA’s monthly payroll

records, although not beyond question, is supported by the

pattern of deposits into petitioner’s checking account.      All

things considered, we find AAA’s records more reliable than

petitioners’ various and inconsistent claims as to the amount of

compensation that petitioner received from AAA during 1997.

Accordingly, respondent’s determination that petitioner earned

and received compensation totaling $23,552 from AAA during 1997

is sustained.

2.   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.

Disregarding irrelevant exceptions, "self-employment income" is

defined as "net earnings from self-employment", which, in turn,

is defined as "the gross income derived by an individual from any


     1
       We note that at trial respondent did not exclusively rely
upon the Form 1099. AAA’s payroll records as well as the
testimony of the person responsible for maintaining those records
were also admitted into evidence. See sec. 6201(d).
                                 - 7 -

trade or business carried on by such individual, less the

deductions allowed * * * which are attributable to such trade or

business".   Sec. 1402(a) and (b).   Other than under circumstances

not present in this case, services performed by an individual as

an employee do not constitute a trade or business for self-

employment tax purposes.   Sec. 1402(c)(2).

     According to respondent, the compensation that petitioner

received from AAA during 1997 constitutes self-employment income

subject to tax under section 1401.       Petitioners, having failed to

report any such income on their 1997 return, did not report any

section 1401 tax on that return.     They now claim that petitioner

performed services for AAA during 1997 as an employee rather than

an independent contractor.

     The question of whether an individual performs services for

another as an employee or independent contractor is generally

considered a question of fact.     Packard v. Commissioner, 63 T.C.

621, 629 (1975).   In resolving such questions, this and other

Federal courts apply what is commonly referred to as the common

law test embodied in sections 31.3121(d)-1(c)(2) and 31.3401(c)-

1(b), Employment Tax Regs.   Matthews v. Commissioner, 907 F.2d

1173, 1178 (D.C. Cir. 1990), affg. 92 T.C. 351 (1989); Packard v.

Commissioner, supra.   An employee is defined as “any individual

who, under the usual common law rules applicable in determining

the employer-employee relationship, has the status of an
                                 - 8 -

employee”.    Sec. 3121(d)(2).   The relevant factors taken into

account to determine the status of an individual as an employee

or independent contractor include:       (1) The degree of control

exercised by the principal over the details of the work; (2)

which party invests in the facilities used in the work; (3) the

opportunity of the hired party for profit or loss; (4) whether

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

the permanency of the relationship between the parties to the

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

discharge the individual; (7) whether the principal provides

benefits to the hired party typical of those provided to

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

creating.    Profl. & Executive Leasing, Inc. v. Commissioner, 89

T.C. 225, 232 (1987), affd. 862 F.2d 751 (9th Cir. 1988); see

also United States v. Silk, 331 U.S. 704, 716 (1947).       Although

no single factor is determinative, “employer control over the

manner in which the work is performed * * * is the basic test.”
Gen. Inv. Corp. v. United States, 823 F.2d 337, 341 (9th Cir.

1987).

     Respondent’s position that petitioner was not an employee of

AAA during 1997 seems to be entirely based upon the agreement,

which, in fact, does undermine petitioners’ position to the

contrary.    Nevertheless, the application of the other relevant

factors leads to the conclusion that AAA possessed and exercised

sufficient control over the services performed by petitioner so
                               - 9 -

as to consider him an employee.   It follows that the compensation

that petitioner received from AAA during 1997 does not constitute

self-employment income within the meaning of section 1401.

3.   Substantial Understatement of Income Tax

     Section 6662(a) imposes an accuracy-related penalty of 20

percent of any portion of an underpayment of tax that is

attributable to a substantial understatement of income tax.

Sec. 6662(b)(2), (d).   An understatement of income tax is a

substantial understatement of income tax if it exceeds the

greater of $5,000 or 10 percent of the tax required to be shown

on the taxpayer’s return.   Sec. 6662(d)(1).

     Ignoring conditions not relevant here, for purposes of

section 6662, an understatement is defined as the excess of the

amount of the tax required to shown on the taxpayer’s return over

the amount of the tax which is shown on the return.   Sec.

6662(d)(2)(A).   In this case, for purpose of section 6662, the

amount of tax required to be shown on petitioners’ 1997 return is

$1,796.2   The amount of tax shown on the return is zero.3

Because the difference between these two amounts is less than



     2
       This is the sec. 1 income tax that results from including
in petitioners’ 1997 income the compensation that petitioner
received from AAA during that year.
     3
       Unlike the computation of a deficiency under sec. 6211 or
the computation of an understatement for purposes of sec. 6694,
the earned income credit claimed on petitioners’ 1997 return (and
disallowed in the notice of deficiency) is not taken into account
in the computation of the understatement of income tax for
purposes of sec. 6662.
                               - 10 -

$5,000, the underpayment of tax required to be shown on their

1997 return is not a substantial understatement of income tax.

Consequently, they are not liable for the accuracy-related

penalty imposed by section 6662(a).

     Reviewed and adopted as the report of the Small Tax Case

Division.

     Based on the foregoing,



                                           Decision will be entered

                                      under Rule 155.
                                     - 11 -

                                 Appendix I

     Summary of AAA’s Monthly Payroll Records for Petitioner

Week of:         Daily Hours Worked           Total Hours     Wages1

           Mon     Tues Wed    Thurs Fri

1/3/97     9.5     9.5   9.5   9.5    9.5        47.5         $647.43
1/10/97    9.5     9.5   9.5   9.5    9.5        47.5          647.43
1/17/97    9.5     9.5   9.5   9.5    9.5        47.5          647.43
1/24/97    9.5     9.5   9.5   9.5    9.5        47.5          647.43
1/31/97      6       9     9     5      5          34          463.42
                                                            $3,053.14

2/7/97       5       0     0     9    9.5        23.5         $320.31
2/14/97    9.5     9.5   9.5   9.5    9.5        47.5          647.43
2/21/97    9.5     9.5   9.5   9.5    9.5        47.5          647.43
2/28/97      0       0   9.5   9.5    9.5        28.5          388.46
                                                            $2,003.63

3/14/97    9.5     9.5   9.5   9.5    9.5        47.5         $647.43
3/21/97      0       0   9.5   9.5    9.5        28.5          388.46
3/28/97      0       5   9.5   9.5    9.5        33.5          456.61
                                                            $1,492.50

4/4/97       5       8   9.5 9.5      9.5        41.5         $565.65
4/11/97    9.5     9.5   9.5   8        0        36.5          497.50
4/18/97    9.5       0     0   0        0         9.5          129.49
4/25/97      0       0     0   0      9.5         9.5          129.49
                                                            $1,322.13

5/2/97       0     9.5   9.5   9.5    9.5          38         $517.94
5/9/97     9.5     9.5   9.5   9.5    9.5        47.5          647.43
5/16/97    9.5       6     0     8      0        23.5          320.31
5/23/97      0     9.5   9.5   9.5    9.5          38          517.94
5/30/97      0     9.5     9     9    9.5          37          504.31
                                                            $2,507.93

6/6/97       0     9.5   9.5   9.5    9.5          38         $517.94
6/13/97    9.5     9.5   9.5   9.5    9.5        47.5          647.43
6/20/97    9.5     9.5     9     9    9.5        46.5          633.80
6/27/97    9.5     9.5   9.5   9.5    9.5        47.5          647.43
                                                            $2,446.60

Week of:         Daily Hours Worked           Total Hours     Wages

     1
       Total hours multiplied by petitioner’s hourly rate of
$13.63.
                                   - 12 -


           Mon   Tues Wed    Thurs Fri

7/4/97       0   9.5   9.5   9.5    9.5          38       $517.94
7/11/97      0     0   9.5   9.5    9.5        28.5        388.46
7/18/97    9.5     0     9     9      9        36.5        497.50
7/25/97    9.5   9.5     0   9.5    9.5          38        517.94
                                                        $1,921.84

8/1/97     9.5     0   9.5   9.5    9.5          38       $517.94
8/8/97       0     0   5.5   9.5    9.5        24.5        333.94
8/15/97    9.5     9     9     9      0        36.5        497.50
8/22/97      0   9.5     0   9.5    9.5        28.5        388.46
8/29/97      9     0     0   9.5    9.5          28        381.64
                                                        $2,119.48

9/5/97     9.5     0   9.5     0    9.5       28.5        $388.46
9/12/97      9     0     0   9.5    9.5         28         381.64
9/19/97    9.5   9.5   9.5   9.5    9.5       47.5         647.43
9/26/97      0     0     0   9.5    9.5         19         258.97
                                                        $1,676.50

10/3/97    9.5   9.5   9.5   9.5    9.5       47.5        $647.43
10/10/97     9     9     0     0    9.5       27.5         374.83
10/17/97   9.5     0   9.5   9.5    9.5         38         517.94
10/24/97     0     7   5.5     9    9.5         31         422.53
10/31/97   9.5   9.5   9.5   9.5    9.5       47.5         647.43
                                                        $2,610.16

11/7/97    9.5   9.5   9.5   9.5    9.5       47.5        $647.43
11/14/97     0     0     0     8    9.5       17.5         238.53
11/21/97   9.5     0     0     0    9.5         19         258.97
11/28/97     0     0     0   9.5    9.5         19         258.97
                                                        $1,403.90

12/5/97    9.5   9.5   9.5     0    9.5         38        $517.94
12/12/97     3     0     6     7    9.5       25.5         347.02
12/19/97   9.5     0     0     0      0        9.5         129.49
                                                          $994.45

                             Total earnings for 1997 (rounded
                             to nearest dollar)            $23,552




                               Appendix II
                             - 13 -

    Schedule of Deposits into Petitioner’s Checking Account

Date of Deposit               Amount

Jan. 21                       $400

Feb.   4                       350
Feb.   12                      250
Feb.   18                      525
Feb.   26                      550

March 6                        360
March 19                       520

April   1                      550
April   8                      500
April   16                     400
April   21                     100

May 7                          350
May 13                         600
May 29                         550

June   5                       650
June   12                      450
June   18                      500
June   24                      550

July   14                      400
July   18                      495
July   23                      400
July   31                      400

Aug. 8                         400
Aug. 14                        400
Aug. 28                        440

Sept. 5                        380
Sept. 10                       480
Sept. 25                       817

Oct.   9                       600
Oct.   16                      530
Oct.   22                      460
Oct.   30                      500




Date of Deposit               Amount

Nov. 5                         560
          - 14 -

Nov. 25     800

Dec. 4      390
Dec. 8    1,000
Dec. 10     480
