                           T.C. Memo. 2010-1



                        UNITED STATES TAX COURT



         JAMES E. ANDERSON AND CHERYL J. LATOS, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent

                    CHERYL J. LATOS, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20460-03, 13006-05.    Filed January 4, 2010.



     James E. Anderson and Cheryl J. Latos, pro sese.

     Frank W. Louis, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:     The issue in these cases involves the

employment classification of a crew member of a fishing boat with

fewer than 10 members pursuant to section 3121(b)(20).1



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code.
                                   - 2 -

     Respondent determined income tax deficiencies and section

6662(a) accuracy-related penalties against James E. Anderson (Mr.

Anderson) and Cheryl Latos (petitioner) as follows:

                                             Penalty
     Year             Deficiency            Sec. 6662

     1999              $15,564                 -0-
     2000               16,511                 -0-
     2001               14,791                $1,463
     2002               12,839                 1,169

     The issues for decision are:

     (1)    Whether Mr. Anderson was self-employed on a fishing

boat under section 3121(b)(20) during 1999, 2000, 2001, and 2002.

We hold that he was; and

     (2)    whether petitioner is liable for section 6662 accuracy-

related penalties for 2001 and 2002.2      We hold that she is not.

     The Court granted respondent’s motion to dismiss for lack of

prosecution as to Mr. Anderson in docket No. 20460-03, which

involves 1999 and 2000, and granted respondent’s motion to

dismiss for lack of jurisdiction as to Mr. Anderson in docket No.

13006-05, which involves 2001 and 2002.

                           FINDINGS OF FACT

     Petitioners resided in Rhode Island at the time they filed

their petition in docket No. 20460-03.      Petitioner resided in


     2
      The petition in docket No. 20460-03 does not contest
respondent’s determination regarding unreported short-term
capital gain of $510 for 2000. The notices of deficiency allowed
unclaimed child tax credits for 1999, 2000, and 2001. Other
adjustments in the notices of deficiency are computational.
                                - 3 -

Rhode Island at the time she filed her petition in docket No.

13006-05.   Mr. Anderson and petitioner were married during the

years at issue and filed joint tax returns for those years.

     From 1997 through 2004 Mr. Anderson worked as a crew member

or as the captain of the fishing boat Elizabeth R.    When Mr.

Anderson worked on the boat, it had crews of fewer than five

people.   Mr. Anderson received a portion of the proceeds from the

sale of the boat’s catch as compensation for his services for

each voyage.   The proceeds from the boat’s catch on a voyage were

divided as follows:    (1) The boat’s expenses for fuel, ice, and

lubricating oil were subtracted from the gross proceeds from the

sale of the catch to determine the net proceeds from the voyage;

(2) the crew members, including the captain, were allocated 50

percent of the net proceeds (the crew members’ share); (3) the

boat owner and the captain were allocated 50 percent of the net

proceeds (the boat share); (4) the crew members’ share was

allocated among the crew members, including the captain, after

subtracting the crew’s expenses for food, payments to “lumpers”

(laborers employed to help unload the catch), and other

miscellaneous items.    In addition, in 2002, before the proceeds

were allocated between the crew members’ and the boat shares, 1

percent of the gross proceeds from the sale of the catch was paid

to three trade associations that performed lobbying services for

the fishing industry.   When Mr. Anderson worked as the captain of
                               - 4 -

the Elizabeth R., he received a percentage of both the crew

members’ share and the boat share.

     During 1999, 2001, and 2002 Mr. Anderson made and/or oversaw

repairs to the Elizabeth R., including rebuilding the engine and

replacing the engine, for which he received compensation of

$5,000, $2,000, and $6,000, respectively.    These repairs were

made between voyages of the Elizabeth R.     Rowell Fishing paid Mr.

Anderson for his repair services as follows:

               Date                        Amount

           June 4, 1999                    $1,000
           June 11, 1999                    1,000
           June 18, 1999                    1,000
           Sept. 3, 1999                    2,000
           Feb. 5, 2001                     1,000
           Feb. 10, 2001                    1,000
           Aug. 13, 2002                    1,200
           Aug. 21, 2002                    1,200
           Aug. 28, 2002                    1,200
           Sept. 4, 2002                    1,200
           Sept. 9, 2002                    1,200

     Before the years at issue the boat’s owner would perform the

repairs.   Following the boat owner’s death in May 1998 the boat’s

ownership passed to his wife Elizabeth Rowell, who owned the boat

through Rowell Fishing Industries, Inc. (Rowell Fishing).     After

Ms. Rowell’s husband’s death, Mr. Anderson offered to make and/or

oversee repairs to the Elizabeth R. and suggested an amount that

he would accept as compensation.   Because Ms. Rowell determined

that the amount Mr. Anderson suggested was about half the hourly

rate she would have to pay anyone else for the repairs, she
                               - 5 -

agreed that Mr. Anderson would make the repairs.   During his

conversation with Ms. Rowell about the repairs Mr. Anderson

indicated that he would terminate his relationship with the

Elizabeth R. and join the crew of another boat if not hired to

perform the repairs.   Mr. Anderson’s services with respect to the

repairs were unrelated to his fishing activities as a crew member

or the captain of the Elizabeth R., and he was not paid from the

division of the catch proceeds.

     Mr. Anderson did not receive any other payments for his

fishing activities during the years at issue.   For each year at

issue Rowell Fishing issued to Mr. Anderson a Form 1099-MISC,

Miscellaneous Income, reflecting “fishing boat proceeds” that Mr.

Anderson received for his work with respect to the Elizabeth R.

as follows:

               Year                       Income

               1999                      $77,477
               2000                       76,595
               2001                       69,742
               2002                       62,200

The above amounts for 1999, 2001, and 2002 included the

compensation that Mr. Anderson received for the repair services

he performed for the Elizabeth R. in addition to his portion of

the crew members’ and the boat shares from his fishing voyages.

     Mr. Anderson and petitioner reported the amounts shown on

the Forms 1099-MISC on their joint Federal income tax returns for

the years at issue as other income “Commercial Fishing Not
                                - 6 -

Reported on W-2”.3   The returns did not report any self-

employment tax due for any year at issue.

                               OPINION

     Section 1401(a) imposes a tax on the net earnings from self-

employment derived from any trade or business carried on by the

taxpayer.    Sec. 1402(a) and (b); sec. 1.1401-1(a), Income Tax

Regs.    The term “trade or business” when used in reference to

self-employment income includes services of crew members of a

fishing boat described in section 3121(b)(20).    Sec.

1402(c)(2)(F).

     Pursuant to section 3121(b)(20), crew members of a fishing

boat with fewer than 10 crew members are excepted from employment

status and are classified as self-employed for purposes of the

Self-Employment Contributions Act of 1954 where the crew members

receive a share of the boat’s catch or of the proceeds from the

sale of the catch as compensation for their fishing activities.

Sec. 3121(b)(20)(B).    The amount of a crew member’s share must

depend on the amount of the boat’s catch.    Sec. 3121(b)(20)(C).

Section 3121(b)(20)(A) provides a limited exception for cash

payments not dependent on the size of the catch that (1) do not

exceed $100 per trip, (2) are contingent on a minimum catch, and

(3) are paid solely for additional duties (e.g., as mate,



     3
      Mr. Anderson and petitioner’s tax returns for 2000 and 2002
report the amounts as $76,596 and $62,201, respectively.
                               - 7 -

engineer, or cook) for which additional cash remuneration is

traditional in the fishing industry.     Section 31.3121(b)(20)-

1(a)(1)(ii), Employment Tax Regs., classifies a crew member as

self-employed where the amount of the crew member’s share

“depends solely” on the amount of the boat’s catch.     This Court

has previously held that the crew members’ share depends on the

amount of the boat’s catch as required for self-employment status

under section 3121(b)(20) where the fishing boat’s operating

expenses for a voyage are subtracted from the proceeds of the

catch before the crew members’ share is determined.     Anderson v.

Commissioner, 123 T.C. 219, 240 (2004) (Anderson I), affd. 137

Fed. Appx. 373 (1st Cir. 2005).     We held that the “depends

solely” language of the regulation does not preclude the

subtraction of operating expenses when determining the crew

members’ share.   Id. at 238-239.

     Anderson I involved the same taxpayers as the present case

for tax year 1997.   We held that Mr. Anderson was self-employed

under section 3121(b)(20) for 1997.     To the extent that

petitioner asks the Court to reconsider its holding in Anderson

I, we find no error in our earlier holding.     Petitioner contends

that in Anderson I the Court misinterpreted a boat operator’s

reporting requirements under section 6050A with respect to

amounts paid to crew members described in section 3121(b)(20).

Petitioner argues that section 6050A precludes the subtraction of
                               - 8 -

operating expenses before determining the crew members’ share.

Section 6050A requires boat operators to submit to the Secretary

information returns with respect to compensation paid to crew

members described in section 3121(b)(20).   In Anderson I, the

Court interpreted section 6050A(a)(2) as requiring boat operators

to report each crew member’s percentage share of the catch only

where the crew member receives a share of the actual catch.

Anderson v. Commissioner, supra at 244; see sec. 6050A(a)(2).

Conversely, where the crew members receive a share of the

proceeds from the sale of the catch, the boat operator must

report only the amount of the proceeds that each crew member

receives and not the crew members’ percentage allocation of the

proceeds.   Anderson v. Commissioner, supra at 244.   Petitioner

argues that section 6050A requires boat operators to report the

applicable percentages for crew members who receive either a

share of the catch or a share of the proceeds.   Section 6050A has

no bearing on whether section 3121(b)(20) allows for the

subtraction of operating expenses from the sale proceeds before

determining the crew members’ share.   See Anderson v.

Commissioner, supra at 244.   Accordingly, there is no need to

reexamine the reporting requirements of section 6050A.

     Petitioner argues that Mr. Anderson’s compensation for the

years at issue differed from the compensation in Anderson I in

two material ways:   (1) Mr. Anderson’s receipt of compensation
                               - 9 -

for repair services in 1999, 2001, and 2002, and (2) the payment

of 1 percent of the gross proceeds from the sale of the catch to

trade associations in 2002 before determining the crew members’

share.   For 2000 Mr. Anderson did not receive any compensation

from Rowell Fishing in addition to his share of the proceeds from

the catch, which was determined in the same manner as his

compensation in Anderson I.   Accordingly, we hold under the

doctrine of issue preclusion that petitioner may not relitigate

Mr. Anderson’s self-employment classification for 2000.   See

Anderson v. Genuine Parts Co., 128 F.3d 1267, 1272-1273 (8th Cir.

1997).

A.   Compensation for Repair Services

     Petitioner argues that Mr. Anderson was not self-employed

for 1999, 2001, and 2002 because he received additional

compensation in excess of $100 for repair services with respect

to the Elizabeth R.   Petitioner argues that because of Mr.

Anderson’s receipt of this additional compensation, none of his

compensation from Rowell Fishing is self-employment income,

including his share of the proceeds from the catch.

     A crew member’s compensation does not depend solely on the

amount of the boat’s catch if the crew member has an agreement

with the boat owner that his remuneration is determined partially

or fully by a factor not dependent on the size of the catch.

Sec. 31.3121(b)(20)-1(a)(2), Employment Tax Regs.   The regulation
                                - 10 -

provides the following example of cash payments not dependent on

the amount of the catch:

     For example, if a boat is operated under a remuneration
     arrangement, e.g., a collective agreement which
     specifies that crew members, in addition to receiving a
     share of the catch, are entitled to an hourly wage for
     repairing nets, regardless of whether this wage is
     actually paid, then all the crew members covered by the
     arrangement are entitled to receive cash remuneration
     other than a share of the catch and their services are
     not excepted from employment by section 3121(b)(20).
     [Id.]

Where a crew member is entitled to receive any compensation with

respect to a voyage that does not depend on the size of the

catch, the crew member is treated as an employee with respect to

the entire amount of compensation paid (including the portion

based on the amount of the catch) for that voyage.    Id.; see Rev.

Rul. 77-102, 1977-1 C.B. 299.    A crew member may be classified as

self-employed under section 3121(b)(20) for one voyage and

classified as an employee for another voyage on the same boat

during the same taxable year.    Sec. 31.3121(b)(20)-1(a)(4),

Employment Tax Regs.

     Mr. Anderson received repair compensation over short periods

of 1 day to no more than 2 months during the years at issue.

Accordingly, if petitioner’s argument that Mr. Anderson received

the repair compensation as an employee is correct, it is likely

that receipt of the repair compensation would not affect Mr.

Anderson’s self-employment status with respect to most of his

fishing trips during the years at issue.    However, there is no
                              - 11 -

information in the record to associate the repair compensation

with particular voyages.   Petitioner does not argue that if we

find Mr. Anderson to be self-employed with regard to his voyages

as a crew member, he is nonetheless not liable for self-

employment tax on the additional repair remuneration because of a

separate employment contract with the Elizabeth R.’s owner.

     Respondent argues that section 31.3121(b)(20)-1(a)(2),

Employment Tax Regs., does not apply to Mr. Anderson’s

compensation because Rowell Fishing did not have an agreement

with Mr. Anderson with respect to the repair services.

Respondent asserts no agreement existed because Mr. Anderson

initiated his performance of the repairs and he did so

voluntarily.   Respondent also contends that Mr. Anderson did not

receive the compensation for the repairs in his capacity as a

crew member or as the captain of the Elizabeth R., and thus

section 3121(b)(20) does not apply to the repair compensation.

Rather, respondent argues that the compensation Mr. Anderson

received for the repair services was self-employment income under

the common law definition of employee versus independent

contractor.

     The operating crew of a boat includes “all persons on the

boat (including the captain) who receive any form of remuneration

in exchange for services rendered while on a boat engaged in

catching fish.”   Sec. 31.3121(b)(20)-1(a)(3), Employment Tax
                                - 12 -

Regs.     The boat owner testified that the repair services were

unrelated to Mr. Anderson’s fishing activities as a crew member

or as the captain of the Elizabeth R.     Petitioner did not produce

any contrary evidence.

        Mr. Anderson’s activities repairing and maintaining the boat

between voyages were not related to his activities as a crewman.

Mr. Anderson was engaged in two separate self-employment

activities:     (1) As a crewman whose remuneration was based on the

size of the catch; and (2) as a mechanic providing repair

services to the boat’s owner.

        We find the boat owner’s testimony that the repair services

were unrelated to Mr. Anderson’s fishing activities credible.

Mr. Anderson is not party to an agreement contemplated in section

31.3121(b)(20)-1(a)(2), Employment Tax Regs.     Mr. Anderson

provided repair services to the boat’s owner, but these repair

services were not part of one overall employment agreement.

Section 31.3121(b)(20)-1(a)(2), Employment Tax Regs., covers

agreements imposing maintenance requirements on the crew.       Here,

the services performed were not obligations of the crew; if Mr.

Anderson had not done the repair work at issue, the boat’s owner

would have hired an unrelated third party to do the work.       It was

only because Mr. Anderson offered to do the work and offered to

do the work at a lower cost than a third party would have that

the Elizabeth R.’s owner selected him.
                              - 13 -

B.   Payment to Trade Associations

     Petitioner argues that Mr. Anderson was not self-employed in

2002 because his pay did not depend solely on the size of the

catch.   Petitioner contends that Mr. Anderson’s pay did not

depend solely on the size of the catch because the payments to

the trade associations in 2002 are not the type of expense that

may be subtracted from gross proceeds before determining the crew

members’ share.   In Anderson I, the Court addressed expenses for

fuel, ice, and lubricating oil subtracted before determining the

crew members’ and the boat share and expenses for lumpers, food,

clothing, unidentified miscellaneous items, and unspecified

supplies subtracted from the crew members’ share.   Petitioner

argues that a boat operator cannot require crew members to pay a

portion of the proceeds from the catch for lobbying activities.

     Respondent equates the payments to the trade associations

with the other operating expenses of the boat, e.g., fuel, ice,

and lubricating oil, subtracted from gross proceeds from the sale

of the catch.   Respondent argues that Anderson I controls the

outcome for 2002.

     We agree with respondent.   This Court’s holding in Anderson

I did not set out an exclusive list of expenses that may be

subtracted from the gross sale proceeds yet still have

compensation depend solely on the proceeds of the catch.   In that

case Mr. Anderson argued that subtraction of fuel, ice, and
                               - 14 -

lubricating oil costs before division of the sale proceeds among

the crew members meant that his remuneration did not depend

solely on the size of the catch.    We rejected that argument and

found that a crewman was self-employed even if operating expenses

were subtracted from the gross proceeds before the net proceeds

were divided amongst the crew.    Nothing in that Opinion limited

our holding to situations in which only costs of fuel, ice, or

lubricating oil were subtracted before disbursement.   To the

extent petitioner is arguing that Mr. Anderson did not want to

pay the lobbying fees and thus they should not be taken into

account in determining whether he is liable for self-employment

tax, this argument has no bearing on Mr. Anderson’s

classification as self-employed.

       Mr. Anderson’s remuneration depended solely on the size of

the Elizabeth R.’s catch.    In Anderson I we held that the use of

the word “solely” in the regulations was to preclude “self-

employment status for crew members who receive additional

remuneration for services in the form of ‘any fee, hourly wage,

minimum for services,’ or ‘other cash or property independent of

the size of the catch’.”    Anderson v. Commissioner, 123 T.C. at

239.    Mr. Anderson’s remuneration for serving as a crew member on

the Elizabeth R. depended solely on the size of the boat’s catch,

and he did not receive any additional remuneration in the form of
                                 - 15 -

fees, hourly wages, minimums for services, or other cash or

property independent of the size of the catch.     Id. at 239.

      In conclusion, Mr. Anderson was self-employed in 1999, 2001,

and 2002 and is liable for self-employment tax.    Respondent’s

determinations are sustained.

C.   Accuracy-Related Penalty

      We next determine whether petitioner is liable for an

accuracy-related penalty.   Section 6662(a) and (b)(2) provides

that taxpayers will be liable for a penalty equal to 20 percent

of the portion of an underpayment of tax attributable to a

substantial understatement of income tax.    Section 6662(d)(1)(A)

provides that a substantial understatement of income tax exists

if the amount of the understatement exceeds the greater of (1) 10

percent of the tax required to be shown on the return or (2)

$5,000.    Section 7491(c) provides that the Commissioner bears the

burden of production respecting an individual’s liability for the

penalty.   As discussed above, we have upheld respondent’s

determinations of deficiencies in petitioner’s income tax;

respondent has thus met his burden of production.

      The section 6662 penalty is inapplicable to the extent the

taxpayer had reasonable cause for the understatement and acted in

good faith.   Sec. 6664(c)(1).    The determination of whether the

taxpayer acted with reasonable cause and in good faith is made on

a case-by-case basis, taking into account the relevant facts and
                                - 16 -

circumstances.     Sec. 1.6664-4(b)(1), Income Tax Regs.

“Circumstances that may indicate reasonable cause and good faith

include an honest misunderstanding of fact or law that is

reasonable in light of all of the facts and circumstances,

including the experience, knowledge, and education of the

taxpayer.”   Id.    Generally, the most important factor is the

extent of the taxpayer’s efforts to assess the proper tax

liability.   Id.    An honest misunderstanding of fact or law that

is reasonable in the light of the experience, knowledge, and

education of the taxpayer may indicate reasonable cause and good

faith.   Remy v. Commissioner, T.C. Memo. 1997-72.

     We find that petitioner had reasonable cause and acted in

good faith in not reporting the self-employment tax due.

Petitioner was reasonable in believing that Mr. Anderson was not

self-employed in the light of his performing additional repair

services for the Elizabeth R.’s owner.     Petitioner’s position

that the repair compensation was related to fishing income gains

additional plausibility from the fact that Mr. Anderson had told

Ms. Rowell that he would join another boat crew if he were not

chosen to perform the repairs.     Petitioner’s position is further

supported in regard to 2002 because in that year Mr. Anderson was

required to pay lobbying fees.     This additional subtraction was

not considered by this Court in Anderson I.     Further, all of Mr.

Anderson’s compensation as a crewman and for repairs was reported
                              - 17 -

to him and petitioner on a single Form 1099-MISC.   These factors

show that it was reasonable for petitioner to believe that the

1999, 2000, and 2001 tax years were not governed by our Opinion

in Anderson I.   We conclude that petitioner has demonstrated

reasonable cause for failing to report the self-employment tax

due and that she acted in good faith.   Accordingly, petitioner is

not liable for the accuracy-related penalty for either year.

     To reflect the foregoing,


                                         Decisions will be entered

                                    for respondent as to the

                                    deficiencies and for

                                    petitioner as to the accuracy-

                                    related penalties.
