Thoma v. Commissioner of Internal Revenue, 052720 FEDTAX, 21922-15

Docket Nº:21922-15
Opinion Judge:MORRISON, JUDGE
Party Name:ROLAND J. THOMA AND DONNA M. THOMA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Roland J. Thoma and Donna M. Thoma, for themselves. Alexander R. Roche and Mayer Y. Silber, for respondent.
Case Date:May 27, 2020
Court:United States Tax Court
 
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T.C. Memo. 2020-67

ROLAND J. THOMA AND DONNA M. THOMA, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 21922-15

United States Tax Court

May 27, 2020

Roland J. Thoma and Donna M. Thoma, for themselves.

Alexander R. Roche and Mayer Y. Silber, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MORRISON, JUDGE

CONTENTS

FINDINGS OF FACT ............................................... 9

1. General background ............................................ 9

2. Mr. Thoma's work for Thoma & Hjerpe and biweekly payments for his accounting services ........................ 26

3. Mr. Thoma's sale of his interest in Thoma & Hjerpe and quarterly installment payments ............................. 29

4. Thoma & Hjerpe's SIMPLE IRA plan and Mr. Thoma's contributions to his SIMPLE IRA ................................. 32

5. Mr. Thoma and Mr. Hjerpe's falling out; Mr. Thoma's professional licensing authority complaint; Mr. Thoma's lawsuit for remaining quarterly installment payments; Mr. Thoma's unemployment benefits claim ...... 34

6. Tax reporting ................................................ 38

a. 2010 return ............................................. 38

b. 2011 return ............................................. 45

7. Notice of deficiency ........................................... 51

OPINION ........................................................ 55

I. Mr. Thoma's self-employment-tax liability for 2010 and 2011 ......... 56

A. The parties' positions ..................................... 59

B. Analysis: partnership and partner ........................... 64

1. Agreement governing Thoma & Hjerpe and conduct in executing its terms .................................. 66

2. Contributions to Thoma & Hjerpe ..................... 67

3. Control over income and capital of Thoma & Hjerpe and right to make withdrawals ................................ 68

4. Interest in net profits of Thoma & Hjerpe and obligation to share losses ....................................... 68

5. Whether Thoma & Hjerpe was conducted in the joint names of Mr. Thoma and Mr. Hjerpe ........................... 70

6. Thoma & Hjerpe federal tax returns; representation of joint venture ........................................... 70

7. Separate books for Thoma & Hjerpe .................... 72

8. Mutual control of, and responsibilities over, Thoma & Hjerpe ......................................... 72

C. Analysis: employee or independent contractor ................ 74

II. Mr. Thoma's business expenses .................................. 80

A. Mr. Thoma's expenses of working for Thoma & Hjerpe are deductible only as employee-business expenses. . .............. 83

B. The deductible amounts of Mr. Thoma's expenses of working for Thoma & Hjerpe are those determined in the notice of deficiency. . . . . . . 83

III. Mr. Thoma's health insurance expenses ........................... 87

IV. Mr. Thoma's SIMPLE IRA contributions .......................... 88

V. Quarterly installment payments during 2011 for the sale of Mr. Thoma's interest in Thoma & Hjerpe ............ 90

VI. Accuracy-related penalties ...................................... 95

A. Underpayment of tax for 2010 .............................. 97

B. Underpayment of tax for 2011 .............................. 98

C. Reasonable cause ........................................ 99

1. Treatment of Mr. Thoma as a partner of Thoma & Hjerpe. . 100

2. Mr. Thoma's unsubstantiated business expenses ......... 102

3. Gross profit percentage of 84.34% for 2011 ............. 103

The petitioners, Roland J. Thoma and Donna M. Thoma, filed joint income-tax returns for 2010 and 2011. On June 4, 2015, the respondent (hereinafter, the "IRS") issued a notice of deficiency to Mr. and Ms. Thoma determining income-tax deficiencies and accuracy-related penalties under section 6662(a), for tax years 2010 and 2011, as shown below.1

Year Deficiency Penalty sec. 6662(a)
2010 $3, 249 $650
2011 14, 660 2, 932
Mr. and Ms. Thoma filed a timely petition for redetermination of the income-tax deficiencies and accuracy-related penalties for both years under section 6213(a). We have jurisdiction under section 6214(a).2 There are six issues for decision. The issues and our holdings are summarized below. 1. Self-employment-tax liability and deduction for one-half of self-employment tax. The accounting firm of Thoma & Hjerpe paid Mr. Thoma for accounting services rendered in 2010 and 2011. These biweekly payments totaled $69, 156 in 2010 and $63, 299 in 2011. On their tax returns for 2010 and 2011 Mr. and Ms. Thoma took the position that Mr. Thoma was self-employed and that the biweekly payments constituted self-employment income for each year, such that Mr. Thoma was liable for self-employment tax. They also claimed an income-tax deduction for one-half of the self-employment tax they reported for Mr. Thoma for each year. The notice of deficiency determined that Mr. Thoma was not self-employed, but rather an employee. The notice of deficiency recharacterized the reported self-employment income as wages. It accordingly reduced self-employment income for each year to zero, reduced self-employment tax for each year to zero, and reduced the income-tax deduction for one-half of self-employment tax for each year to zero. We agree that Mr. Thoma was an employee and sustain the self-employment tax and one-half of self-employment tax deduction adjustments in the notice of deficiency. See infra part I, pp. 56-80. 2. Self-employed business-expense deductions. On their tax returns for 2010 and 2011 Mr. and Ms. Thoma claimed deductions of $7, 396 and $20, 867, respectively, for business expenses Mr. Thoma paid in rendering accounting services for Thoma & Hjerpe. They reported these deductions as affecting adjusted gross income ("AGI"), 3 which is consistent with the deductions being categorized under section 62(a)(1) as attributable to a taxpayer's business other than the business of providing services as an employee. The notice of deficiency determined that Mr. Thoma was an employee of Thoma & Hjerpe in 2010 and 2011, such that the expenses were not governed by section 62(a)(1) and not deductible in arriving at AGI. The notice of deficiency determined that Mr. Thoma's expenses of working for Thoma & Hjerpe were deductible only as unreimbursed-employee-business expenses under section 67(b). That deduction is a subset of the miscellaneous itemized deductions allowed under section 67(b). Under section 67(a), total miscellaneous itemized deductions are allowed only to the extent they exceed 2% of AGI. The notice of deficiency determined that the business expenses were deductible as miscellaneous itemized deductions in the reduced amounts of $7, 288 for 2010 and $14, 406 for 2011, before application of the 2% of AGI floor. We sustain the determination that the business expenses are deductible only as unreimbursed-employee-business expenses. See infra part II.A, p. 83. We also sustain the determination that the deductible amounts of Mr. Thoma's expenses of working for Thoma & Hjerpe are $7, 288 for 2010 and $14, 406 for 2011, before application of the 2% of AGI floor, as determined in the notice of deficiency. See infra part II.B, pp. 83-87. 3. Self-employed health insurance expense deductions. On their tax returns for 2010 and 2011 Mr. and Ms. Thoma claimed self-employed health insurance expense deductions under section 162(1). Section 162(1) allows self-employed taxpayers a deduction for the cost of "insurance which constitutes medical care", i.e., the cost of health insurance. Mr. and Ms. Thoma reported that Mr. Thoma paid health insurance expenses of $4, 648 for 2010 and $5, 580 for 2011. The notice of deficiency determined that Mr. Thoma was an employee of Thoma & Hjerpe and that the health insurance expenses were not properly deductible under section 162(1), but only as deductions for medical expenses under section 213(a). Section 213(a) allows a deduction for medical expenses, including health insurance expenses, but subject to a 7.5% of AGI floor. We sustain the determination regarding the tax treatment of Mr. Thoma's health insurance expenses. See infra part III, pp. 87-88. 4. Self-employed SIMPLE IRA contribution deductions. Mr. Thoma directly contributed $15, 711 to his SIMPLE IRA in 2010 and $14, 000 in 2011. Mr. and Ms. Thoma claimed deductions for those contributions. The notice of deficiency determined that the contributions were not deductible because Mr. Thoma was an employee of Thoma & Hjerpe. We sustain the determination that Mr. Thoma was an employee and sustain the disallowance of the SIMPLE IRA contribution deductions. See infra part IV, pp. 88-89. 5. Recovery of basis and character of 2011 installment sale payments. In 2008 Mr. Thoma sold his interest in Thoma & Hjerpe to Mr. Hjerpe. In 2011 he received installment sale payments from Mr. Hjerpe totaling $160, 000. On their 2011 tax return Mr. and Ms. Thoma reported that the $160, 000 installment sale payments were composed of $131, 637 in long-term capital gain, $3, 921 in taxable interest, and $24, 442 in tax-free recovery of basis. The notice of deficiency determined that the installment sale payments were instead composed of $134, 001 in long-term capital gain, $19, 700 in taxable interest, and $6, 299 in tax-free recovery of basis. We consider Mr. and Ms. Thoma to have eventually conceded that this determination is correct. Therefore, we sustain the determination regarding the recovery of basis and character of the 2011 installment sale payments. See infra part V, pp. 90-94. 6. Accuracy-related penalties. The notice...

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