Braddock v. Comm'r of Internal Revenue
| Decision Date | 26 December 1990 |
| Docket Number | Docket No. 19733-88. |
| Citation | 95 T.C. No. 45,95 T.C. 639 |
| Parties | CLAUDE E. BRADDOCK AND MICHELLEN BRADDOCK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner-husband, a U.S. citizen, was employed in the U.S. by Intelsat, an international organization which was not subject to Federal, State or local income, or social security taxes. While Intelsat was not subject to FICA taxes, its U.S. employees were subject to tax on their earnings as if received from self-employment under secs. 1401 et seq., I.R.C. Petitioner was compensated by Intelsat for his base salary, overtime, dependency, and transportation allowances, as well as all his Federal and District of Columbia income tax liabilities including self-employment tax. Petitioner contends that only his base salary and overtime are includable as ‘net earnings from self-employment‘ as defined in sec. 1402(b), I.R.C. and that compensation received for various income taxes are not from self-employment. HELD: It was the intent of Congress to tax petitioner's total compensation from Intelsat as if he were an employee subject to FICA tax. As such, all of his compensation from his employer, including the remuneration for taxes, is includable as net earnings from self-employment. HELD FURTHER: Additions to tax determined. Claude E. and Michellen Braddock, pro se.
Clement Shugarman, for the respondent.
This case was assigned to Special Trial Judge Helen A. Buckley pursuant to the provisions of section 7443A(b) of the Code 1 and Rule 180 et seq. 2 The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below.
OPINIONBUCKLEY, Special Trial Judge:
Respondent determined a deficiency in petitioners' Federal income tax for the year 1984 in the amount of $9,988.40 together with the following additions to tax:
+--------------------------------------------------------------+
¦Sec. 6651(a) ¦Sec. 6653(a)(1) ¦Sec. 6653(a)(2) ¦Sec. 6661 ¦
+--------------+-----------------+-----------------+-----------¦
¦$427.37 ¦$712.02 ¦1 ¦$2,497.10 ¦
+--------------+-----------------+-----------------+-----------¦
¦ ¦ ¦ ¦ ¦
+--------------------------------------------------------------+
After concessions by both parties, the issues remaining for decision are: (1) whether petitioner underpaid his self-employment taxes imposed by sections 1401 et seq., and (2) whether petitioners are liable for additions to tax under section 6651(a)(1) for failure to file a timely return, section 6653(a)(1) and (2) for negligent or intentional disregard of rules and regulations, and section 6661 for substantial understatement of income tax.
Petitioners have conceded respondent's determination insofar as it reflects deficiencies in and additions to tax attributable to an underpayment of section 1 tax (normal income tax). They contest only the amount of deficiency in and additions to tax attributable to the determined underpayment of self-employment tax under section 1401.
Some of the facts were stipulated and are so found. Petitioners filed a joint Federal income tax return for the year 1984 and resided in Washington, D.C. at the time they filed their petition herein. Hereafter, reference to petitioner in the singular denotes Claude E. Braddock.
During 1984, the International Telecommunications Satellite Organization (hereafter Intelsat) employed petitioner, a U.S. citizen, in the United States as a reprographic specialist. Intelsat is an international organization as defined in section 7701(a). It enjoys the privileges, exemptions, and immunities provided in the International Organization Immunities Act, codified at 22 U.S.C. section 288 (1988) et seq. By reason of the provisions of Internal Revenue Code sections 3101, 3111, and 3121(b)(15), Intelsat and its employees are not subject to social security taxes imposed by the Federal Insurance Contributions Act (FICA). In addition, Intelsat is not required to comply with Federal, State, or local tax withholding requirements. In order to place its U.S. citizen employees on a parity with its noncitizen employees, Intelsat recompenses its U.S. citizen employees for their Federal, State and local income taxes, and social security tax obligations.
Petitioner received various forms of remuneration from Intelsat in 1984, including a base salary, a dependency allowance, a transportation allowance, and overtime. In addition, Intelsat paid petitioner's 1984 estimated, and prior year's settlement of, Federal and District of Columbia income taxes. It also paid his 1984 estimated, and prior year's settlement of, self-employment taxes. The total amount paid to or on behalf of petitioner by Intelsat in 1984 was $41,306.23. The break-down is as follows:
+-------------------------------------------------------+
¦Base salary ¦$13,000.44¦
+--------------------------------------------+----------¦
¦Dependency allowance ¦3,050.00 ¦
+--------------------------------------------+----------¦
¦Transportation allowance ¦600.00 ¦
+--------------------------------------------+----------¦
¦Overtime ¦3,401.63 ¦
+--------------------------------------------+----------¦
¦1984 estimated Federal and D.C. income taxes¦8,552.00 ¦
+--------------------------------------------+----------¦
¦1984 estimated self-employment taxes ¦1,548.00 ¦
+--------------------------------------------+----------¦
¦1983 Federal and D.C. income tax settlements¦10,119.00 ¦
+--------------------------------------------+----------¦
¦1983 self-employment tax settlement ¦1,035.16 ¦
+--------------------------------------------+----------¦
¦Total ¦41,306.23 ¦
+--------------------------------------------+----------¦
¦ ¦ ¦
+-------------------------------------------------------+
The dependency allowance paid to petitioner was an additional amount of compensation for services to assist him in meeting the costs of raising each of his children. Similarly, the transportation allowance was additional compensation to assist in paying petitioner's cost of commuting to and from work.
On Schedule SE of petitioner's 1984 Federal income tax return he reported $15,227 of income subject to the self-employment tax. By notice of deficiency dated July 8, 1988, respondent determined that the entire remuneration of $41,306.23 received in 1984 was taxable self-employment income.
This issue is one of first impression. Petitioner's contention is that the recompense for taxes does not relate to his earnings from self-employment and must be excluded in determining the base for the tax. Respondent, on the other hand, contends that all compensation received results from petitioner's services for Intelsat and, as such, must be included as earnings from self-employment.
It is well established, and petitioner now concedes, that each of the items of his remuneration, including Intelsat's payment of his income taxes, represents gross income under section 61 and is subject to the normal income tax imposed by Chapter 1. Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929). Respondent argues that the same criteria apply in ascertaining what portion is includable in self- employment income taxable under section 1401.
The Code includes within the ambit of ‘self-employment‘ the services provided by employees to international organizations. Secs. 1402(b) and (c); Smart v. United States, 222 F. Supp. 65 (S.D.N.Y. 1963), affd. 332 F.2d 283 (2d Cir. 1964). Section 1402(a) defines ‘net earnings from self-employment‘ as ‘gross income derived by an individual from any TRADE OR BUSINESS carried on by such individual, less the deductions allowed by this subtitle.‘ (Emphasis supplied.)
Section 1402(c) defines ‘trade or business‘ and provides that such term does not include ‘(2) the performance of service by an individual as an employee, other than * * * (C) service described in section 3121(b)(11), (12), or (15) performed in the United States * * * by a citizen of the United States.‘ Described in section 3121(b)(15) is service performed in the employ of an international organization such as Intelsat. Accordingly, by virtue of section 1402(c)(2)(C), petitioners' service as an Intelsat employee is included in the ‘trade or business‘ definition and his earnings therefrom constitute net earnings from self-employment taxable under section 1401. Still, there remains the question of which items of compensation make up ‘net earnings from self-employment.‘
Respondent has considered this question and has issued two rulings holding that for employees regarded as self-employed under section 1401 et seq., employer payments of the employees' tax liabilities are includable in self-employment income. Rev. Rul. 84- 122, 1984-2 C.B. 184 (); and Rev. Rul. 68-507, 1968-2 C.B. 485 (). These rulings simply present respondent's view of the matter, and we are not bound by the position he has taken therein. Newberry v. Commissioner, 76 T.C. 441, 445 (1981); Lemery v. Commissioner, 54 T.C. 480, 489 (1970).
We are convinced that Congress intended for the term ‘wages‘ to be synonymous with ‘net earnings from self-employment‘ in cases such as that at bar. We reviewed the legislative history of the self- employment tax in Hornaday v. Commissioner, 81 T.C. 830 (1983). The tax was added to the Code by the Social Security Amendments Act of...
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