Outside Sales: Statutory Employee or Common Law Employee?

Rosemann v. Commissioner, T.C. Memo. 2009-185 (T.C. 2009).

Mr. Rosemann performed outside sale for his employer. (3). He claimed he was a statutory employee, thus entitled to deduct his business expenses on Schedule C. (5). The I.R.S. disagreed. (5) And so did the Tax Court. (9).

Background

The taxpayer was an outside salesman for Cooper Container Corp. (3). He received a salary, commissions, paid vacation and sick leave, a 401(k), and a company car. (3-4). Further, his company reimbursed him for his travel expenses, including meals and mileage. (4). On his 2004 and 2005 tax returns, Mr. Rosemann deducted auto repair and maintenance expenses, depreciation, and section 179 expense.

Statutory Employee or Common Law Employee: Why Does it Matter?

Generally, an employee may deduct unreimbursed employment expenses on Schedule A subject to an overall 2-percent of adjusted gross income limitation. See secs. 62(a), 67(a). A statutory employee is not an employee for purposes of sec. 62. See sec. 3121(d); Prouty v. Commissioner, T.C. Memo. 2002-175. (7)

A statutory employee may properly reflect business income and expenses in full on Schedule C of Form 1040 . . . thereby avoiding the Schedule A limitations on the deduction of employee business expenses and the phaseout of itemized deductions. (6-7).

An individual qualifies as a statutory employee under section 3121(d)(3) only if he is not a common law employee under section 3121(d)(2).

The Tax Court uses eight factors to determine if Mr. Rosamenn is a common law employee or an independent contractor. (9).

1. The degree of control exercised by the principal
2. Which party invests in work facilities used by the individual
3. The opportunity of the individual for profit or loss
4. Whether the principal can discharge the individual
5. Whether the work is part of the principal's regular business
6. The permanency of the relationship
7. The relationship the parties believed they were creating
8. The provision of employee benefits

The Court Analyzes Each Factor

Degree of Control: Mr. Rosemann's schedule was flexible, but he was required to attend meetings, work a 40-hour week, produce results, and follow company policy. (9).

Investment in Facilities: Mr. Rosemann had none. He kept a home office, but the Court points out this is not enough. (10).

Opportunity for Profit or Loss: Commissions do not mean profit or loss. (10).

Right to Discharge: Cooper could fire Mr. Rosemann. (10).

Integral Part of Regular Business: Cooper makes containers. To stay in business, Cooper needs to sell those containers. Mr. Rosemann's work is more than integral. (11).

Permanency of Relationship: Mr. Rosemann was a twelve-year employee of Cooper. That sounds permanent. (11).

Relationship Parties Thought They Created: Just ask Mr. Rosemann's boss. (11).

Provision for Employee Benefits: Health insurance, life insurance, paid sick leave, retirement plan; these are commonly called "employee benefits."

It should be obvious that Mr. Rosemann loses 8-0. Consequently, Mr. Roseman must use Schedule A to deduct his expenses. (13).

My Notes

Most of the time taxpayers are going to lose this issue. In fact, the I.R.S. works with many States to uncover improper worker classification.

The Tax Court starts its opinion discussing the difference between a common law employee and a statutory employee. But then the Court switches to common law employee vs. independent contractor. This makes the opinion a bit confusing. The I.R.S. discusses the difference between a common law employee, a statutory employee, and an independent contractor here.

Comments

[neal elasky]

Why is statutory employee status so limited? The categories seem very arbitrary, and seemingly unfairly chosen. How were those categories selected?