                    T.C. Summary Opinion 2004-77




                     UNITED STATES TAX COURT



                MELINDA D. RIVERA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16971-02S.            Filed May 27, 2004.


     Melinda D. Rivera, pro se.

     Rebecca S. Duewer, for respondent.



      DEAN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.    Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue, and all 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 a deficiency in petitioner's Federal

income tax of $4,122 for 2000.    After concessions,1 the issues

remaining for decision are:    (1) Whether petitioner, during the

year at issue, was a statutory employee under section

3121(d)(3)(D); (2) whether petitioner is liable for self-

employment tax; and (3) whether petitioner is entitled to

deductions for either employee business expenses on Schedule A,

Itemized Deductions, or trade or business expenses on Schedule C,

Profit or Loss From Business, under section 162(a).

                              Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.    Petitioner

resided in Oakland, California, at the time the petition was

filed.

     Petitioner timely filed her Form 1040, U.S. Individual

Income Tax Return, for 2000.    Attached to the return were three

Forms W-2, Wage and Tax Statement, in petitioner's name reporting

wages as follows:

          Big Train, Inc.                  $35,142.29
          Peerless Coffee Co., Inc.          9,373.48
          George W. Riley Professional
            Beauty Center                      757.87




     1
      Petitioner conceded at trial that she was not a statutory
employee of her employers George Riley and Victoria's Secret.
Petitioner only worked for Victoria's Secret for only 1 day.
                                 - 3 -

     Box 15, which indicates "statutory employee" status, was not

checked on any of the Forms W-2.    Total wages reported on line 7

of the Form 1040 were $45,419.

     Petitioner filed with her return a Schedule C.   The Schedule

C reported business income of $45,419, expenses of $11,506, and

net profit of $33,913.

     Respondent sent to petitioner a statutory notice of

deficiency for tax year 2000 determining that petitioner is

liable for self-employment tax and is entitled to a deduction for

one-half that amount.

Big Train, Inc.

     Petitioner was hired in January 2000 by Big Train, Inc. (Big

Train), as their northern California sales representative.

Petitioner's employment with Big Train was terminated in August

2000.   During this period, petitioner's responsibilities included

outside sales and support for new and existing customers as well

as achieving the revenue growth and new store goals set by the

company.

Peerless Coffee Co.

     From about October through December 2000, petitioner worked

for the Peerless Coffee Co. (Peerless)   By letter dated September

26, 2000, Peerless offered petitioner employment on their sales

team.   The letter sets forth petitioner's salary and commission

and the availability of health benefits after the completion of a
                                 - 4 -

90-day probationary period.    The letter also states that

petitioner would be reimbursed at 26 cents per mile for mileage

driven and documented.     Peerless required that it be named as an

additional insured on petitioner's auto policy and that

petitioner provide them with certificates of insurance on a

regular basis.   Petitioner's monthly insurance billing statements

did not reflect Peerless as an insured.

                              Discussion

     The sole adjustment determined in the notice of deficiency

is that petitioner is liable for self-employment tax and entitled

to the corresponding deduction.    The issues regarding

petitioner's status as a statutory employee and her entitlement

to claim deductions on Schedule C were raised in her petition

herein and were argued by her at trial.    Respondent did not file

an answer, and his argument that petitioner is not entitled to

deduct business expenses on either Schedule C or Schedule A

because of lack of substantiation was raised for the first time

in his trial memoranda.2

     The Court finds on the basis of the entire record that

petitioner received adequate notice, and was not surprised or

unduly prejudiced by respondent's position.    Accordingly, the

Court deems the issues raised and tried by consent of the parties



     2
      This case was set for trial twice.    Respondent raised the
issue in both trial memoranda.
                              - 5 -

under Rule 41(b) and properly before the Court.   See Christensen

v. Commissioner, T.C. Memo. 1996-254, affd. without published

opinion 142 F.3d 442 (9th Cir. 1998).

     If sustained, respondent's disallowance of petitioner's

claimed deductions totaling $11,506 may result in a deficiency

higher than that determined in the notice of deficiency.    Section

6214(a) provides that this Court shall have jurisdiction to

redetermine the correct amount of the deficiency even if the

amount so redetermined is greater than the amount determined by

the Commissioner in the notice of deficiency if the Commissioner

asserts a claim at or before the hearing or rehearing.

Consistent with the general mandate of section 6214(a), this

Court generally will exercise its jurisdiction over an increased

deficiency only where the matter is properly pleaded.    Markwardt

v. Commissioner, 64 T.C. 989, 997 (1975); McGee v. Commissioner,

T.C. Memo. 2000-308 (citing Estate of Petschek v. Commissioner,

81 T.C. 260, 271-272 (1983), affd. 738 F.2d 67 (2d Cir. 1984)).

     Rule 41(b)(1), however, provides that when an issue not

raised in the pleadings is tried with the express or implied

consent of the parties, that issue is treated in all respects as

if it had been raised in the pleadings.   Thus, where the

Commissioner raises an issue that could result in an increased

deficiency without formally amending his pleading and that issue

is tried with the taxpayer's express or implied consent, the
                                - 6 -

requirement in section 6214(a) that the Commissioner make a claim

for the increased deficiency is satisfied.     See McGee v.

Commissioner, supra (citing Woods v. Commissioner, 91 T.C. 88, 93

(1988)); see also Pallottini v. Commissioner, 90 T.C. 498, 500

(1988).

     Taxpayers generally bear the burden of proving that the

Commissioner's determinations are incorrect.     Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933).     However, the

Commissioner bears the burden of proof in respect of any new

matter or increases in deficiency.      Rule 142(a); Powerstein v.

Commissioner, 99 T.C. 466, 473 n.4 (1992).     The resolution of the

remaining issues does not depend on which party has the burden of

proof.    The Court resolves those issues on the preponderance of

the evidence in the record; therefore section 7491 does not apply

here.

I.   Petitioner's Employment Status and Liability for Self-
     Employment Tax

     Adjusted gross income generally consists of gross income

less trade or business expenses, except in the case of the

performance of services by an employee.     Sec. 62.   With

exceptions not relevant here, an individual performing services

as an employee may deduct expenses incurred in the performance of

services as an employee only as miscellaneous itemized deductions

on Schedule A and then only to the extent such expenses exceed 2

percent of the individual's adjusted gross income.      Secs. 63(a),
                               - 7 -

(d), 67(a) and (b).   The deduction for business expenses under

section 162 is not enumerated in section 67(b) and thus is

included in miscellaneous itemized deductions.      Sec. 67.

     The Commissioner has ruled that an individual who is a

statutory employee under section 3121(d)(3), which relates to

employment taxes, is not an employee for purposes of sections 62

and 67, and, therefore, a statutory employee under section

3121(d)(3) is not subject to the section 67(a) 2-percent

limitation for expenses incurred by such employee in the

performance of services as an employee.   Rev. Rul. 90-93, 1990-2

C.B. 33.   Thus, an individual who is a statutory employee under

section 3121(d)(3) is allowed to deduct expenses from gross

income that otherwise would be subject to the 2-percent

limitation of section 67(a).

     An employee for employment tax purposes is defined in

pertinent part by section 3121(d) as follows:

          SEC. 3121(d). Employee.–-For purposes of this
     chapter, the term "employee" means--

                (1) any officer of a corporation; or

                (2) any individual who, under the usual
           common law rules applicable in determining the
           employer-employee relationship, has the status of
           an employee; or

                 (3) any individual (other than an individual
           who is an employee under paragraph (1) or (2)) who
           performs services for remuneration for any person
           * * *

                *     *   *    *    *     *     *
                               - 8 -

                     (D) as a traveling or city salesman,
                other than as an agent-driver or commission-
                driver, engaged upon a full-time basis in the
                solicitation on the behalf of, and the
                transmission to, his principal (except for
                side-line sales activities on behalf of some
                other person) of orders from wholesalers,
                retailers, contractors, or operators of
                hotels, restaurants, or other similar
                establishments for merchandise for resale or
                supplies for use in their business
                operations;

     if the contract of service contemplates that substantially
     all of such services are to be performed personally by such
     individual; except that an individual shall not be included
     in the term "employee" under the provisions of this
     paragraph if such individual has a substantial investment in
     facilities used in connection with the performance of such
     services (other than in facilities for transportation)
     * * *.


     An individual is a statutory employee under section

3121(d)(3) only if such individual is not a common law employee

under section 3121(d)(2).

     Whether an individual is a common law employee under section

3121(d)(2) is a question of fact.      Profl. & Executive Leasing,

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

(9th Cir. 1988); Simpson v. Commissioner, 64 T.C. 974, 984

(1975).   Among the relevant factors in determining the substance

of an employment relationship are the following:     (1) The degree

of control exercised by the principal over the details of the

work, (2) the taxpayer's investment in facilities, (3) the

taxpayer's opportunity for profit or loss, (4) permanency of the

relationship between the parties, (5) the principal's right of
                                 - 9 -

discharge, (6) whether the work performed is an integral part of

the principal's business, (7) what relationship the parties

believe they are creating, and (8) the provision of employee

benefits.    NLRB v. United Ins. Co., 390 U.S. 254, 258 (1968);

Garrett v. Phillips Mills, Inc., 721 F.2d 979, 981 (4th Cir.

1983); Simpson v. Commissioner, supra at 984-985; sec.

31.3121(d)-1(c)(2), Employment Tax Regs. (setting forth criteria

for identifying common law employees).       No one factor is

determinative.    Cmty. for Creative Non-Violence v. Reid, 490 U.S.

730, 752 (1989).    Instead, all the incidents of the relationship

must be assessed and weighted.     NLRB v. United Ins. Co., supra at

258; Simpson v. Commissioner, supra at 985.       The factors should

not be weighted equally but should be weighted according to their

significance in the particular case.        Aymes v. Bonelli, 980 F.2d

857, 861 (2d Cir. 1992); Matt v. Commissioner, T.C. Memo.

1990-209.

     A.     Degree of Control

     The control factor is the "crucial test" to determine the

nature of a working relationship.        Weber v. Commissioner, 103

T.C. 378, 387 (1994), affd. per curiam 60 F.3d 1104 (4th Cir.

1995).    The degree of control necessary to find employee status

varies with the nature of the services the worker provides.

See Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 270

(2001); Weber v. Commissioner, supra at 388.
                              - 10 -

     All that is necessary is that the principal have the right

to control the details of the person's work.   McGuire v. United

States, 349 F.2d 644, 646 (9th Cir. 1965); Thomas Kiddie, M.D.,

Inc. v. Commissioner, 69 T.C. 1055, 1058 (1978).     It is not

necessary for the principal actually to exercise that control.

Potter v. Commissioner, T.C. Memo. 1994-356.

     "Where the inherent nature of the job mandates an

independent approach, a lesser degree of control exercised by the

principal may result in a finding of an employer-employee

status."   Youngs v. Commissioner, T.C. Memo. 1995-94, affd.

without published opinion 98 F.3d 1348 (9th Cir. 1996); Potter v.

Commissioner, supra.

     To retain the requisite control over the details of an

individual's work, the employer need not stand over the

individual and direct every move made by the individual; it is

sufficient if the employer has the right to do so.     Weber v.

Commissioner, supra at 388.   Similarly, the employer need not set

the employee's hours or supervise every detail of the work

environment to control the employee.   Gen. Inv. Corp. v. United

States, 823 F.2d 337, 342 (9th Cir. 1987).   Workers who set their

own hours are not necessarily independent contractors.     Id.;

Ewens & Miller, Inc. v. Commissioner, supra at 270.

     The record shows that Peerless dictated petitioner's

compensation and expense reimbursement.   The description of
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petitioner's position with Big Train indicates that petitioner's

duties, performance goals, and sales territory were set by the

company's national sales manager.      Additionally, petitioner was

required to report the status of her accounts and work, as well

as her schedule, to the national sales manager.

     B.     Investment in Facilities

     The record does not contain any information as to

petitioner's working conditions while she was employed by

Peerless.    Petitioner testified that while employed by Big Train,

she worked mainly from her home and faxed or mailed her work and

expenses to them.    Petitioner has not provided any evidence as to

any expenditures she may have made to establish or conform a

workspace in her home in order to perform the duties of her job.

In any event, maintenance of a home office alone would not be a

sufficient basis for a finding that petitioner was an independent

contractor rather than an employee.      Lewis v. Commissioner, T.C.

Memo. 1993-635.

     C.     Opportunity for Profit or Loss

     Petitioner received a salary from Big Train as well as

commissions on her sales.    Big Train also paid some of her travel

expenses.

     Petitioner received a biweekly base salary from Peerless and

commissions on her sales.    Peerless also reimbursed petitioner

for her mileage.
                               - 12 -

     Compensation on a commission basis is entirely consistent

with an employer-employee relationship.    Texas Carbonate Co. v.

Phinney, 307 F.2d 289, 292 (5th Cir. 1962); Capital Life & Health

Ins. Co. v. Bowers, 186 F.2d 943 (4th Cir. 1951).

     While petitioner could conceivably have suffered some loss

as a result of her sales activities, she may still be an employee

under the common law test if her risk of loss was negligible.

Lewis v. Commissioner, supra; Radovich v. Commissioner, T.C.

Memo. 1954-220.

     Petitioner did not purchase or own the products she sold.

Given her guaranteed base salaries from her employers,

petitioner's risk of loss from her sales activities was

negligible at best.

     D.   Permanency of Relationship

     There is no information in the record with respect to this

factor.

     E.   Principal's Right To Discharge

     There is no information in the record with respect to this

factor as it pertains to Peerless; however, petitioner was

subject to a 90-day probationary period at the beginning of her

employment with the company.   Petitioner's employment with Big

Train, however, was terminated by Big Train in August 2000.    This

is consistent with employee status.
                                - 13 -

     F.     Integral Part of Business

     Peerless and Big Train are in the business of selling their

products.    Sales representatives, such as petitioner, are their

key connection with their customers.     This factor supports a

finding that petitioner was an employee of Peerless and Big

Train.    See Lewis v. Commissioner, supra.

     G.     Relationship Parties Believe They Created

     Petitioner believes that she was a statutory employee.       The

statutory employee boxes on the Forms W-2 from Peerless and Big

Train were not checked.    Further, Peerless and Big Train withheld

applicable payroll taxes and did not issue Forms 1099 to

petitioner.

     H.     Employee Benefits

     Peerless offered petitioner medical, dental, and vision

benefits upon completion of her 90-day probationary period.

There is no evidence in the record as to whether petitioner

received any benefits from Big Train.

     Considering the record and weighing all the factors, the

Court concludes that petitioner was a common law employee under

section 3121(d)(2) and, therefore, was not a statutory employee

under section 3121(d)(3).    Petitioner is not entitled to report

gross income and deduct expenses on Schedule C.     Respondent is

sustained on this issue.
                                - 14 -

      Further, the Court finds and holds that petitioner is not

liable for self-employment tax because of the exclusion accorded

employees by section 1402(c)(2).

II.   Petitioner's Deductions

      In light of the Court's holding that petitioner is not

entitled to deduct expenses on Schedule C, the Court must now

decide whether petitioner is entitled to deduct expenses incurred

in connection with her employment on her Schedule A.    See sec.

67(a).

      Deductions are a matter of legislative grace, and generally

the taxpayer bears the burden of proving the entitlement to any

deductions claimed.   See INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992).   In this case, however, the burden of proof is on

respondent because respondent raised a new matter and has

asserted an increased deficiency.    See Rule 142(a).   Respondent,

therefore, must prove that petitioner is not entitled to the

deductions she claimed on her return.

      Section 162(a) allows a taxpayer deductions for ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on a trade or business.    Generally, a taxpayer

must establish that expenses deducted pursuant to section 162 are

ordinary and necessary business expenses and must maintain

records sufficient to substantiate the amounts of the deductions

claimed.   Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.   Section
                              - 15 -

262, however, expressly provides that no deduction shall be

allowed for personal, living, or family expenses.

     The parties stipulated various copies of petitioner's

receipts, organized into the following categories:   (1) Parking;

(2) dry cleaning; (3) shopping; (4) postage; (5) parking and

taxis; (6) Staples and Kinko's; (7) meals; (8) Jiffy Lube; (9)

cellular telephone; (10) telephone; (11) Office Max; (12)

insurance; (13) vehicle registration; (14) Unocal (auto repair);

and (15) an airline ticket and receipt.    It is not apparent how,

or if, the expenses relate to petitioner's employment.

     Petitioner's receipts included expenditures for personal dry

cleaning, clothes, bicycle equipment, haircuts, and groceries.

She admitted that she did not keep any records as to her claimed

meals and travel expenses.   Respondent's counsel elicited

testimony from petitioner which demonstrated that petitioner was

unable to identify a business purpose for any of the expenses she

claimed as deductions.

     Petitioner testified that she put all her receipts in a box

and let her accountant sort them out.    Petitioner's accountant

admitted at trial that he mistakenly included in petitioner's

deductions expenses that were not deductible and that he agreed

with some of respondent's adjustments.
                             - 16 -

     The Court holds that respondent has carried his burden of

proving that petitioner is not entitled to the deductions claimed

on her return.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                   Decision will be entered

                              under Rule 155.
