                           T.C. Memo. 2003-2



                     UNITED STATES TAX COURT



                JENNIFER L. RUSLEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6599-01.                Filed January 7, 2003.


     Jennifer L. Rusley, pro se.

     William W. Kiessling, for respondent.



                       MEMORANDUM OPINION


     WOLFE, Special Trial Judge:     This matter is before the Court

on petitioner’s motion for an award of administrative costs,

filed pursuant to section 7430 and Rules 230 through 233.    Unless

otherwise indicated, all section references are to the Internal

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

are to the Tax Court Rules of Practice and Procedure.
                               - 2 -

                            Background

     Petitioner timely filed her 1998 Federal income tax return

(return), reporting $14,379 of income and $6,918 of employment-

related expenses.   Petitioner reported her income, including her

W-2, Wage and Tax Statement, income from USA Mobile, and also her

employment-related expenses on Form 1040, Schedule C, Profit or

Loss From Business, (Schedule C).   She did not report her W-2

income on line 7 of Form 1040, U.S. Individual Income Tax Return,

nor did she report any employment-related expenses on Form 1040,

Schedule A, Itemized Deductions, (Schedule A).

     On October 3, 2000, respondent issued to petitioner a notice

of proposed changes (30-day letter), in which respondent proposed

to deny petitioner’s claimed Schedule C expense deductions and to

increase petitioner’s tax liability by $1,292, plus interest.

Petitioner’s first written response to respondent was a

handwritten letter (first letter), dated October 3, 2000,

stating, in part:

          On October 3, 2000, I spoke with * * * about the
     notice I received in the mail * * *. During our phone
     conversation he informed me on why the IRS had sent me
     this particular notice concerning my 1998 tax return.
          I, Jennifer Lynn Rusley, understand that my W2
     income should be on line 7 and that my expenses should
     be on Schedule A via 2106.

Respondent received this letter on October 6, 2000.   Petitioner

then sent to respondent a handwritten note (second letter) that

she wrote on a copy of the 30-day letter.   The second letter
                                 - 3 -

stated:

     These expenses [$6,918] are correctly reported on Sch.
     C because of my statutory employee status. I travel as
     an outside sales person and my car expenses are shown
     as other income on the Sch. C. I have requested a
     confirmation of my duties with my employer and should
     be receiving it shortly! Please hold this file until I
     can get this confirmation. I now feel that my income
     should not be on line 7!

Respondent received the second letter on December 13, 2000.

     As suggested in her second letter, petitioner obtained

another letter, dated January 11, 2001, and written by Chris

Bastin, District Manager of the Tennessee Region for Arch

Wireless (third letter).   The third letter purported to confirm

petitioner’s employment and stated, in part:

     The purpose of this letter is to verify that Jennifer
     Rusley worked for Arch Wireless as an Outside Account
     Executive from 7/15/97 to 10/9/98. During this time
     Jennifer’s responsibilities included outside business
     to business sales and service for new and existing
     customers.

Respondent received the third letter, but the record does not

establish how or when petitioner transmitted the letter or the

date of receipt by respondent.

     On February 20, 2001, respondent issued a statutory notice

of deficiency disallowing petitioner’s Schedule C expense

deductions.   On May 16, 2001, petitioner’s representative,

William De Montbreun, a certified public accountant, mailed a

petition to this Court by certified mail.   Both petitioner and

Mr. De Montbreun signed the petition, and it was filed on May 21,
                               - 4 -

2001.   In her petition, petitioner contends that she is entitled

to the Schedule C expense deductions because she is a statutory

employee under section 3121(d)(3).     At the time of filing,

petitioner resided in Nashville, Tennessee.

     Upon receipt of the petition this Court promptly informed

William De Montbreun that he could not be recognized as counsel

of record because he was not admitted to practice before the Tax

Court and that all communication would be directed to petitioner.

Respondent filed an Answer on July 17, 2001.     Petitioner then

sent a letter, dated July 18, 2001, to the Court affirming her

petition.   The Court treated the letter as an Amendment to

Petition and filed it on July 23, 2001.     Respondent then filed an

Answer to Amendment to Petition on August 8, 2001.

     After the issues had been joined, Appeals Officer Elaine

Rhoton contacted petitioner to arrange for a conference and then

met with petitioner’s representative, Mr. De Montbreun.     At this

meeting on October 16, 2002, Appeals Officer Rhoton reviewed the

information provided relating to petitioner’s employment status

during 1998, including a letter dated June 26, 2001, and written

by Daryl Neville, Human Resources Representative of Arch Wireless

(fourth letter).   The fourth letter, which previously had not

been shown to any representative of respondent, confirmed

petitioner’s employment and stated, in part:

          Jennifer Rusley * * * was employed by Arch
     Communications from July 15, 1997 through October 9,
                                - 5 -

     1998. During her employment with Arch, Jennifer held
     the position of Sales Executive in our Nashville, TN
     market.
          Jennifer’s responsibilities were to service
     existing business and to solicit new business in a
     defined territory within the Nashville area. The
     position was a business to business sales position,
     compensated with a base salary plus monthly
     commissions. Jennifer was engaged in travel within her
     assigned territory.
          Jennifer sold Arch products and services, and
     received the commission portion of her pay based upon
     the revenue she derived for the company.

The fourth letter provided respondent with a basis for

concession, and the parties entered into a settlement stipulation

on October 24, 2001.    This Court’s decision, pursuant to the

agreement of the parties, that there is no deficiency in income

tax due from petitioner was entered on October 26, 2001.

     On January 18, 2002, petitioner filed a Motion for

Administrative Costs, and the decision was vacated and set aside.

On March 19, 2002, respondent filed an Objection to Motion for

Administrative Costs.    On April 29, 2002, petitioner filed her

Response to Respondent’s Objection to Motion for Administrative

Costs.

                             Discussion

     The prevailing party in an administrative proceeding may

recover reasonable administrative costs.    Sec. 7430(a); Rule 231.

A judgment for administrative costs incurred in connection with

an administrative proceeding may be awarded if:    (1) The taxpayer

is the “prevailing party”; (2) the taxpayer did not unreasonably
                                - 6 -

protract the administrative proceeding; and (3) the

administrative costs are reasonable.    Sec. 7430(a), (c)(4),

(b)(3), (c)(2).   A taxpayer is the prevailing party only if:     (1)

The taxpayer substantially prevailed with respect to the amount

in controversy or as to the most significant issue or set of

issues presented; (2) the taxpayer satisfies the applicable net

worth requirement; and (3) the position of the United States in

the proceeding is not substantially justified.    Sec.

7430(c)(4)(A) and (B).

     In this case, we first address the question, whether the

position of the United States was substantially justified,

because the other issues need not be considered if respondent has

established that his position in the administrative proceedings

was substantially justified.

     Whether the position of the United States was substantially

justified turns on a finding of reasonableness, based upon all

the facts and circumstances, as well as the legal precedents

relating to the case.    Pierce v. Underwood, 487 U.S. 552, 565

(1988).   In deciding whether the Commissioner acted reasonably,

this Court must “‘consider the basis for the Commissioner’s legal

position and the manner in which the position was maintained’”.

Corkrey v. Commissioner, 115 T.C. 366, 373 (2000) (quoting Wasie

v. Commissioner, 86 T.C. 962, 969 (1986)).    The fact that the

Commissioner concedes a case is not determinative of the
                               - 7 -

reasonableness of the Commissioner’s position.   See Sokol v.

Commissioner, 92 T.C. 760, 767 (1989); Wasie v. Commissioner,

supra.   It is, however, “a relevant factor to consider in

deciding the degree of the Commissioner’s justification.”

Corkrey v. Commissioner, supra at 373.

      We review the Commissioner’s position as of the earlier of

the date of the receipt by the taxpayer of the notice of decision

by the Office of Appeals or the date of the notice of deficiency

to determine whether respondent was substantially justified with

respect to the recovery of administrative costs.   Sec.

7430(c)(7)(B).   Therefore, in the present case the relevant

inquiry, with respect to the recovery of the administrative

costs, is whether respondent had a reasonable basis for his

position disallowing petitioner’s Schedule C expense deductions

at the time of the issuance of the notice of deficiency (February

20, 2001).

      An individual’s adjusted gross income (AGI) is an

individual’s gross income less specified deductions, including

allowable deductions attributable to a trade or business carried

on by the taxpayer, if such trade or business does not consist of

the performance of services by the taxpayer as an employee.     Sec.

62.   Generally, miscellaneous itemized deductions, including

business expenses under section 162, are deductible from an

individual’s AGI only to the extent that the aggregate of those
                                - 8 -

deductions exceeds 2 percent of the individual’s AGI.      Sec. 67.

In this case, petitioner contends that her itemized deductions

for business expenses are not subject to the limitations imposed

by section 67 because, during the year in issue, with respect to

the amounts in issue, she was not an “employee” within the

meaning of section 62.

     For purposes of employment taxes, an “employee” includes

“any individual who, under the usual common law rules applicable

in determining the employer-employee relationship, has the status

of an employee”.   Sec. 3121(d)(2).     Common law employees are

described as follows:

     Generally such relationship exists when the person for
     whom services are performed has the right to control
     and direct the individual who performs the services,
     not only as to the result to be accomplished by the
     work but also as to the details and means by which that
     result is accomplished * * *.

Sec. 31.3121(d)-1(c)(2), Employment Tax Regs.      Although the

determination of employee status is to be made by common law

concepts, a realistic interpretation of the term “employee”

should be adopted, and doubtful questions should be resolved in

favor of employment.     Ewens & Miller, Inc. v. Commissioner, 117

T.C. 263, 269 (2001) (citing Breaux & Daigle, Inc. v. United

States, 900 F.2d 49, 52 (5th Cir. 1990)).

     Also for employment tax purposes, an “employee” is:

     Any individual * * * who performs services for
     remuneration * * * as a traveling or city salesman * *
     * engaged upon a full-time basis in the solicitation on
                                - 9 -

     behalf of, and the transmission to, his principal * * *
     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 * * *.

Sec. 3121(d)(3)(D).    An individual can be a “statutory employee”

under section 3121(d)(3) only if that individual is not a common

law employee under section 3121(d)(2).    Ewens & Miller, Inc. v.

Commissioner, supra.   Generally, as statutory employees under

section 3121(d)(3)(D), “City or traveling salesmen who sell to

retailers or to the others specified, operate off the premises of

their principals, and are generally compensated on a commission

basis”.   Sec. 31.3121(d)-1(d)(3)(iv)(a), Employment Tax Regs.

     A common law employee generally reports business expenses on

Schedule A, subject to limitations under section 67, but a

statutory employee under section 3121(d)(3)(D) is not an employee

for purposes of section 62 and may deduct business expenses on

Schedule C.   See sec. 3121(d); see also Prouty v. Commissioner,

T.C. Memo. 2002-175 (illustrating that a statutory employee may

reflect business income and expenses in full on Schedule C);

Lickiss v. Commissioner, T.C. Memo. 1994-103 (holding that the

taxpayer was a common law employee and that any related business

expenses were to be reported on Schedule A, subject to the

limitations under section 67); Rev. Rul. 90-93, 1990-2 C.B. 33

(holding that a statutory employee under section 3121(d)(3) for

employment tax purposes is not a common law employee for purposes
                                - 10 -

of section 62 and may deduct business expenses on Schedule C).

     Respondent contends that his position disallowing

petitioner’s claimed Schedule C deductions was substantially

justified during the administrative process.    We agree.

Petitioner filed her return, along with a Form W-2, listing

income from USA Mobile.   She also reported related business

expense deductions on Schedule C.    Petitioner has the

responsibility to substantiate her status as a statutory employee

so that she may report her deductions on Schedule C.      See sec.

6001; Higbee v. Commissioner, 116 T.C. 438, 440 (2001); sec.

1.6001-1(a), Income Tax Regs.    As a common law employee,

petitioner generally would be required to report her employee

business expense deductions on Schedule A.     In the absence of

further explanation on the return, or persuasive proof of

petitioner’s status as a statutory employee, respondent was

reasonable to challenge petitioner’s Schedule C expense

deductions.

     After respondent issued the 30-day letter, petitioner

attempted to explain her filing position to respondent.      Her

explanations, though, were inconsistent and did not support her

use of Schedule C.   In the first letter, petitioner contradicted

her filing position and stated that the Form W-2 income belonged

on line 7 with related expenses on Schedule A.     In the second

letter petitioner reversed her argument again to affirm her
                               - 11 -

original filing position.    She stated that the Form W-2 income

did not belong on line 7 and that the expenses were properly

reported on Schedule C.    On its face this position is confusing

and inconsistent.    Petitioner also stated in the second letter

that she would be forwarding to respondent a confirmation of her

duties from her employer.    Although petitioner obtained the third

letter that purported to confirm her employment and to support

her filing position, there is no evidence that respondent

received this letter prior to the issuance of the notice of

deficiency.1

     Moreover, even if respondent had received the third letter

before issuing the notice of deficiency, the third letter does

not provide persuasive support for petitioner’s contention.    The

third letter is written by a representative from Arch Wireless,

but petitioner’s tax return includes a Form W-2 from USA Mobile

as her employer.    The third letter merely states that petitioner

was an outside account executive employed by Arch Wireless for

part of 1998 and that her responsibilities included “outside

business to business sales and service for new and existing


     1
        Respondent states in the objection to motion, filed Mar.
19, 2002, that the letters dated Jan. 11, 2001, and June 26,
2001, from officials of petitioner’s employer were first
presented to a representative of respondent on Oct. 16, 2001.
Appeals Officer Elaine Rhoton did not recall receiving any
documents from petitioner prior to her meeting with Mr. De
Montbreun on Oct. 16, 2001. The two letters were stapled
together in the administrative file, and the Appeals Officer
believes that they both were received at the same time.
                              - 12 -

customers.”   The third letter does not establish that petitioner

performed all or substantially all her services off the premises

of her employer and does not explain whether petitioner was paid

by salary or commission or some combination of the two.   The

letter says nothing about the extent and nature of supervision of

petitioner in her work for Arch Wireless.   The third letter

simply does not establish whether petitioner was a common law

employee or was a statutory employee during 1998.

     We conclude that respondent had a reasonable basis in fact

and law for the position taken in the notice of deficiency.     At

the time of the issuance of the notice of deficiency, petitioner

had not established her status as a statutory employee entitling

her to report her business expense deductions on Schedule C.    The

fourth letter that petitioner ultimately presented to respondent

confirmed the details that formed the basis of respondent’s

concession to settle this matter.   Petitioner did not present the

fourth letter until after respondent issued the notice of

deficiency.   Therefore, under the circumstances of this case

respondent’s position was substantially justified.   Petitioner is

not the prevailing party under section 7430 and is not entitled

to an award of administrative costs.
                        - 13 -



To reflect the foregoing,

                                 An appropriate order will be

                            issued denying petitioner’s motion,

                            and decision will be entered in

                            accordance with the agreement of

                            the parties.
