                  T.C. Summary Opinion 2003-61



                     UNITED STATES TAX COURT



               EDWARD CHARLES JONES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9803-00S.              Filed May 27, 2003.



     Edward Charles Jones, pro se.

     Brook D. Remick, for respondent.



     COUVILLION, Special Trial Judge:     This case was heard

pursuant to section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1    The decision to be entered




     1
          Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
years at issue. Rule references are to the Tax Court Rules of
Practice and Procedure.
                                   - 2 -


is not reviewable by any other court, and this opinion should not

be cited as authority.

        Respondent determined a deficiency of $1,939 in petitioner’s

Federal income tax for 1998.       After concessions by petitioner,

the issue for decision is whether petitioner was an employee or

an independent contractor in connection with the performance of

services during 1998.2      The issue involves the question whether

petitioner’s home office expenses are deductible as trade or

business expenses on Schedule C, Profit or Loss From Business, as

petitioner claimed, or as unreimbursed employee business expenses

on Schedule A, Miscellaneous Itemized Deductions, as respondent

determined in the notice of deficiency.

     Some of the facts were stipulated.       Those facts, with the

annexed exhibits, are so found and are made part hereof.

Petitioner’s legal residence at the time the petition was filed

was Horseshoe Bay, Texas.

     Petitioner has a college degree in electrical engineering.

During his career, he worked for General Electric Corp. and IBM

Corp. (IBM).       Although he started as an electrical engineer, he

rose to the level of senior engineer/technical management by

1970.       He worked for IBM for 28 years.   Part of his work for IBM

        2
          Petitioner conceded issues relating to a passive
activity, deductions for real property taxes and home mortgage
interest expense, “other income”, and various computational
errors.
                               - 3 -


involved building computers for airplanes and submarines for the

U.S. Navy (the Navy).   In 1989, petitioner retired from IBM.   At

that time, petitioner was living in Manassas, Virginia.

     Before his retirement, petitioner had discussions with his

contacts in the Navy in which they indicated their desire to have

petitioner consult for them.   Approximately 2 years after

petitioner retired from IBM, he was contacted by Navy personnel

at Crystal City, Virginia, to discuss a formal consulting

arrangement.   Soon thereafter, petitioner attended a meeting with

a group of Navy personnel, including a captain who, during the

meeting, called in a representative of the Navy’s contract

administrator.   At that meeting petitioner negotiated to work on

a contract basis for the Navy at a rate of $50 per hour.     The

work would involve document review and extensive travel.

     The contract administrator for the Navy was a company called

Techmatics, which had headquarters in Fairfax, Virginia.     After

he commenced his services, petitioner submitted invoices to

Techmatics from time to time listing his hours and mileage.

Techmatics paid him by check for the hours worked and his

expenses.   The checks listed petitioner as a “vendor”.   For the

first several years of their affiliation, prior to 1998,

Techmatics reported these payments to petitioner on Forms 1099-

MISC, Miscellaneous Income, and petitioner reported the income on

his Federal income tax returns on Schedule C.
                                   - 4 -


       During 1996, petitioner moved to Texas.     That same year,

Techmatics facilitated a change in the way petitioner was paid.

To save overhead expenses, they requested that petitioner begin

submitting time cards instead of invoices.       Petitioner received

an offer letter for “a part-time position as a Principal

Engineer” from W.S. Szczypinski, executive vice president of

Techmatics, dated October 11, 1996.        The letter stated in part:

“As a non-exempt employee you may work no longer than 40 hours

per week without prior written authorization.”       The letter

further stated:       “As a part-time employee you may be eligible for

medical/life and dental benefits as outlined on the enclosed

benefits summary.       The 401(k) savings plan is also available to

you.       You will be paid through our payroll department on the 10th

and 25th of each month.”

       Petitioner agreed to this new arrangement and signed what

appeared to be a standard form employment agreement with

Techmatics (the agreement).3      The purpose of the agreement was

stated as follows:


       This Agreement sets forth certain acts during the employment
       relationship or following its termination that would be
       inconsistent with obligations of the Employee arising out of
       that relationship and with the position of trust and
       confidence in which the Employee is placed as a result of
       the relationship. The Company places a high degree of trust

       3
          The employment agreement does not reflect a signature
of anyone from Techmatics.
                                - 5 -


     and confidence in its employees and wants to make sure that
     the Employee knows what would be considered a breach of this
     trust, particularly in dealing with present and potential
     clients.


The agreement further stated:


     Company agrees to employ Employee for the term hereof, and
     Employee agrees to devote such time and effort as may be
     necessary for proper fulfillment of his/her duties and
     responsibilities to the business of the Company and to serve
     locally in any location as the Company may direct. Employee
     will be required to work normal business hours or such
     number of hours as his/her duties may require. Employee
     shall perform all assigned duties faithfully, diligently,
     and to the best of Employee’s ability during the term
     hereof.


The agreement provided for a probationary period, the ownership

and handling of proprietary information, the use of the

employee’s work product, noncompetition clauses, and other

language.   The agreement was silent as to the benefits petitioner

would receive.   It did not provide a term for the engagement

except that either party could terminate the agreement with 14

days written notice.   The agreement would terminate upon a breach

by either party or the death of petitioner, or with 30 days

notice to petitioner if an ownership change of the company

occurred.

     Petitioner signed the agreement on October 22, 1996.

Thereafter, petitioner submitted a time card every 2 weeks and

was paid from Techmatics’ common payroll system.   At this time
                                - 6 -


Techmatics began paying the employer’s share of Social Security

taxes on petitioner’s behalf.    However, Techmatics did not

provide any pension plan, major medical insurance, disability

insurance, flexible spending, life insurance, or other benefits

to petitioner.    Petitioner traveled extensively and submitted

travel vouchers for reimbursement of travel expenses.    After this

administrative change, Techmatics began reporting petitioner’s

compensation, for tax purposes, on Form W-2, Wage and Tax

Statement.

     Part of petitioner’s consulting services involved the

technical engineering design and manufacture of what was referred

to as advance signal processors.    He also helped implement a

program to assist the Navy in implementing off-the-shelf, rather

than custom-made, computer components.    Occasionally on such

projects, petitioner would take a leadership role, working with

Navy project managers and senior engineers.    At one point the

Navy provided him with a portable computer for use in his work,

which he returned.    Techmatics, by contrast, did not provide any

equipment to petitioner.

     Petitioner did not perform any services at Techmatics’

headquarters or offices.    His work was performed at home or at

the manufacturing or research sites involved in the Navy

projects.    The latter sites included the A&T Laboratory at

Murray, New Jersey, a manufacturing facility in Greensboro, North
                               - 7 -


Carolina, and various Navy bases.   The work he did at home

included long distance conference calls to discuss technical

issues, receiving and reviewing documents, and faxing documents

back and forth to his colleagues with comments.   When petitioner

moved to Texas in 1996, the Navy increased the travel budget on

petitioner’s projects in order to retain his services.   Even

after he moved, as he testified:    “[F]ax machines and emails and

telephones [proved] adequate to provide that service.    And most

of the other work was done, again, flying around the country.”

     Petitioner continued to perform such services through 1998.

In 1998, the major project petitioner was working on was

completed.   Thereafter, petitioner worked on smaller projects,

but the amount of available work waned.   Eventually, petitioner

was no longer providing any services or receiving compensation

from Techmatics, although his affiliation with Techmatics

continued.   In May 1998, Techmatics was acquired by Anteon Corp.

On March 31, 2000, a vice president of Anteon terminated the

company’s relationship with petitioner via a letter that stated,

in pertinent part:


     According to our records, you have been a “part time”
     employee with Anteon Corporation, Systems Engineering Group
     (formerly Techmatics Inc.) since November 1996. However,
     our records show that you have not worked for the company in
     calendar year 1999. Therefore, in keeping with Anteon
     Corporation’s standard practices, your employment will be
     discontinued effective April 1, 2000.
                                - 8 -


     No one from Techmatics or its successor, Anteon Corp.,

testified at trial.   However, the personnel file of petitioner

was obtained from Anteon through a subpoena duces tecum and

jointly submitted into evidence.    In addition to the employment

agreement and various correspondence, the records included Salary

Review Worksheets periodically prepared by Techmatics personnel

regarding petitioner.    These reviews reflected ratings in which

petitioner met or exceeded expectations.   The 1998 review

increased petitioner’s compensation from $50 to $52 per hour.

The records support petitioner’s assertion that he worked at home

but do not show whether Techmatics would have provided petitioner

with office space had he requested it.

     The compensation petitioner received from Techmatics during

1998 totaled $26,516, which was reflected on Form W-2.    That

income was reported by petitioner on his 1998 Federal income tax

return as wage and salary income.   However, petitioner also

included with his 1998 return a Schedule C in which he claimed as

deductions the expenses incurred in connection with his activity

with Techmatics.   The expenses totaled $13,480.   No gross

receipts were reported on Schedule C; however, a notation on the

income portion of Schedule C included the statement “See attached

–- W-2 -– Techmatics.”   Thus, the Schedule C reported a net loss

of $13,480; consequently, there was no computation of self-
                               - 9 -


employment tax.4   The $13,480 claimed as expenses on petitioner’s

Schedule C included $12,301 for home office expenses.5    In the

notice of deficiency, respondent determined that the claimed home

office expenses were unreimbursed employee business expenses that

were allowable as itemized deductions, subject to the limitations

of section 67, rather than as deductions related to a trade or

business activity.   Petitioner contends he was an independent

contractor and was not an employee of Techmatics.   Therefore, he

contends, the expenses are deductible as trade or business

expenses on Schedule C of his return.

     At the outset, the Court notes that only the 1998 year is

properly before the Court.   A valid notice of deficiency and a

timely filed petition are prerequisites to this Court’s

jurisdiction to redetermine a deficiency.   Secs. 6212 and 6213;

e.g., Pyo v. Commissioner, 83 T.C. 626, 632 (1984).   The burden

of proving that this Court has jurisdiction is on the taxpayer.

Cassell v. Commissioner, 72 T.C. 313, 317-318 (1979); Patz Trust

v. Commissioner, 69 T.C. 497, 503 (1977).   Moreover, each taxable




     4
          Petitioner also included two other Schedules C for two
other trade or business activities, with losses totaling $1,774.
These activities are not at issue in this case.
     5
          Petitioner made computational errors on his original
return but has conceded respondent’s computations. The amounts
of home mortgage interest and real estate taxes paid in 1998
attributable to his activity with Techmatics were $1,059 and $97,
respectively.
                               - 10 -


year stands alone.    Pekar v. Commissioner, 113 T.C. 158, 166 (1999).

     On his petition, petitioner referenced the years 1997 and

1998 as being at issue; however, the notice of deficiency makes

no determinations with respect to his 1997 tax year.    At trial,

petitioner argued that the Taxpayer Advocate office of the

Internal Revenue Service had represented to him that his passive

activity issue would be combined for 1997 and 1998 and contended

that respondent should be bound by his own standards as reflected

by such representations.   In spite of petitioner’s apparent

frustration, the fact remains that the notice of deficiency on

which this case is based addresses only petitioner’s 1998 tax

year.    The 1997 tax year is not before the Court, and, therefore,

this Court has no jurisdiction over that year.

     The issue for decision is whether petitioner was an employee

or independent contractor of Techmatics during 1998.6    Whether an

individual is an employee or independent contractor is a factual

question to which common law principles apply.    Nationwide Mut.

Ins. Co. v. Darden, 503 U.S. 318, 323 (1992); Weber v.



     6
          Sec. 7491, under certain circumstances, places the
burden of proof on respondent with respect to a taxpayer’s
liability for taxes in court proceedings arising in connection
with examinations commencing after July 22, 1998. The
examination of petitioner’s return commenced after July 22, 1998.
However, the parties did not address the applicability of sec.
7491 to this case. Therefore, the Court decides this case on a
preponderance of the evidence and without regard to the burden of
proof. See Kraus v. Commissioner, T.C. Memo. 2003-10.
                                - 11 -


Commissioner, 103 T.C. 378, 386 (1994), affd. 60 F.3d 1104 (4th

Cir. 1995); Profl. & Exec. Leasing, Inc. v. Commissioner, 89 T.C.

225, 232 (1987), affd. 862 F.2d 751 (9th Cir. 1988).     Factors

that are relevant in determining the substance of an employment

relationship include: (1) The degree of control exercised by the

principal over the details of the work; (2) the taxpayer’s

investment in the facilities used in his or her work; (3) the

taxpayer’s opportunity for profit or loss; (4) the permanency of

the relationship between the parties; (5) the principal’s right

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

of the principal’s regular business; (7) the relationship the

parties believe they are creating; and (8) the provision of

employee benefits.     NLRB v. United Ins. Co. of Am., 390 U.S. 254,

258 (1968); Weber v. Commissioner, supra at 387; Profl. & Exec.

Leasing, Inc. v. Commissioner, supra at 232; see also secs.

31.3121(d)-(1)(c)(2), 31.3401(c)-1(a) and (b), Employment Tax

Regs.

     No single factor is dispositive; the Court must assess and

weigh all incidents of the relationship.     Nationwide Mut. Ins.

Co. v. Darden, supra at 324.    The factors are not weighed

equally; they were weighed according to their significance in the

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

1992).   Moreover, while all of the above factors are important,

the right-to-control test is the “master test” in determining the
                               - 12 -


nature of a working relationship.     Matthews v. Commissioner, 92

T.C. 351, 361 (1989), affd. 907 F.2d 1173 (D.C. Cir. 1990);

accord Weber v. Commissioner, supra at 387.

     Both the control exercised by the alleged employer and the

degree to which the alleged employer may intervene to impose

control must be examined.    Radio City Music Hall Corp. v. United

States, 135 F.2d 715, 717 (2d Cir. 1943); Weber v. Commissioner,

supra at 387-388; deTorres v. Commissioner, T.C. Memo. 1993-161.

“[N]o actual control need be exercised, as long as the employer

has the right to control.”    Profl. & Exec. Leasing, Inc. v.

Commissioner, 862 F.2d at 753.     In order for an employer to

retain the requisite control over the details of an employee’s

work, the employer need not direct each step taken by the

employee.   Profl. & Exec. Leasing, Inc. v. Commissioner, 89 T.C.

at 234; Gierek v. Commissioner, T.C. Memo. 1993-642.     Further,

the exact amount of control required to find an employer-employee

relationship varies with different occupations.     United States v.

W.M. Webb, Inc., 397 U.S. 179, 192-193 (1970).    The threshold

level of control necessary to find employee status is in most

circumstances lower when applied to professional services than

when applied to nonprofessional services.     Azad v. United States,

388 F.2d 74, 76-77 (8th Cir. 1968); Profl. & Exec. Leasing, Inc.

v. Commissioner, 89 T.C. at 234.
                              - 13 -


     When taken as a whole, the record in this case supports

petitioner’s assertion that he was an independent contractor of

Techmatics and not an employee.    While petitioner was on the

payroll of Techmatics, he performed all of his services for the

U.S. Navy.   The Navy recruited him, arranged for him to work

through Techmatics, and provided him with various work spaces, a

travel budget, and computer equipment.    To the contrary,

Techmatics did not provide him office space or equipment.

Techmatics provided no benefits typical of those provided to

employees.   Further, the temporary or as-needed basis of

petitioner’s work is reflected by his work history, where he

worked steadily while certain Navy projects were ongoing but

discontinued working when no other projects replaced them.

     Moreover, petitioner believed he was an independent

contractor when he began his arrangement with Techmatics.    His

behavior was consistent with that belief; petitioner submitted

invoices for his time and expenses, was paid accordingly, and

reported his income accordingly.    The only change he contemplated

when he began submitting time cards instead of invoices in 1996

was to help Techmatics facilitate its payroll administration.      He

did not ask for, nor did he receive, additional employee benefits

other than Techmatics’ payments of Social Security taxes on his

behalf.   The employment agreement sheds little light on the

actual relationship from Techmatics’ view, and no one from
                              - 14 -


Techmatics testified at trial.    “A contract purporting to create

an employer-employee relationship will not control where the

common law factors (as applied to the facts and circumstances)

establish that the relationship does not exist.”     Profl. & Exec.

Leasing, Inc. v. Commissioner, 89 T.C. at 233.     It was

petitioner’s relationship with the Navy and the needs of the Navy

with respect to his projects that controlled the details of

petitioner’s services.

     In sum, the facts and circumstances do not indicate an

employer-employee relationship between petitioner and Techmatics.

The Court holds that petitioner was an independent contractor of

Techmatics during 1998.   Accordingly, petitioner is entitled to

deduct the claimed home office expenses as trade or business

expenses for the year at issue.   Petitioner is sustained on this

issue.7




     7
          As respondent has not sought to increase the deficiency
by the amount of self-employment tax due under sec. 1401(a) in
the event petitioner was found to have an independent contractor
relationship with Techmatics, the Court makes no allowance for
such an increase. Cf. Wickum v. Commissioner, T.C. Memo. 1998-
270. The amounts paid petitioner for his services nonetheless
represented gross receipts from a trade or business activity and
did not represent wages or salaries. These amounts should have
been reported on Schedule C of the return. As noted in the
opinion, however, Social Security taxes were withheld from the
compensation amounts paid to petitioner, and presumably
Techmatics also paid an equivalent amount in Social Security
taxes as a purported employer.
                            - 15 -


    Reviewed and adopted as the report of the Small Tax Case

Division.



                                       Decision will be entered

                                  under Rule 155.
