T.C. Summary 2002-36



                     UNITED STATES TAX COURT



                 STEPHEN J. MAJOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3830-00S.              Filed April 4, 2002.



     Stephen J. Major, pro se.

     Rachael Zepeda, for respondent.


     GOLDBERG, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
                                   - 2 -

       Respondent determined a deficiency in petitioner’s 1997

Federal income tax in the amount of $7,562, and an accuracy-

related penalty under section 6662(a)(1) in the amount of $1,512.

       After concessions by petitioner,1 the issues for decision

are:       (1) Whether petitioner failed to report $24,000 on his 1997

Federal income tax return; (2) whether petitioner is subject to

the self-employment tax on this amount; and (3) whether

petitioner is liable for an accuracy-related penalty under

section 6662(a).

       Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.        At the time of filing the

petition, petitioner resided in Oro Valley, Arizona.

       During 1997, petitioner was a full-time employee of Quality

Screw & Nut Company (QSN) in its Tucson, Arizona, branch.

Petitioner was the general manager of the branch and conducted

regular business in Mexico on behalf of petitioner’s main client,

McCulloch Corporation (McCulloch).         McCulloch, based in Tucson,

Arizona, manufactured various power tools including gas and

electric chain saws, string trimmers, and blowers.        QSN provided

supplies, including screws and nuts, and logistics management for



       1
          Petitioner concedes that he failed to include $24 of
taxable interest received from Capital One Federal Savings Bank
and $48 of taxable interest received from DM-Federal Credit Union
in 1997.
                               - 3 -

McCulloch.   The supplies were sent to McCulloch’s plant in Mexico

where parts were assembled.   The parts were later shipped back to

the United States where end products were assembled.

Petitioner’s duties at QSN included overseeing the delivery of

QSN’s screws and nuts to McCulloch.    During 1997, petitioner

traveled to Mexico approximately once a week.    Petitioner also

managed nine Mexican national employees in Mexico.

     Petitioner testified that QSN received a 9-percent

management fee based upon the delivery of screws and nuts to

McCulloch’s plant in Mexico and the parts shipped back to the

United States for assembly.   Petitioner testified that any taxes

or fees paid to the Mexican taxing authorities were paid by

petitioner from the 9-percent management fee.    No contracts or

agreements between QSN and McCulloch were introduced at trial.

     During the year in issue, petitioner was a salaried employee

of QSN.   In addition to his regular salary, petitioner stipulated

that he received a monthly car allowance of $400, totaling $4,800

during 1997.   Petitioner also stipulated that he received a

monthly check from QSN of $2,000, totaling $24,000 during 1997.

Petitioner does not dispute that he deposited the $400 monthly

car allowance and $2,000 monthly check into his personal checking

account at DM-Federal Credit Union.

     Both the $400 monthly car allowance and $2,000 monthly check

were prepared by Ms. Jacqueline S. Udell (Ms. Udell) at QSN’s
                               - 4 -

headquarters located in Bensenville, Illinois.   Ms. Udell was

directed to write out the checks to petitioner by Mr. Art

Wondrasek (Mr. Wondrasek), the president of QSN.   Mr. Wondrasek

hired petitioner and generally approved all compensation packages

for QSN employees.

     In addition to petitioner’s regular salary, the monthly $400

car allowance, and monthly $2,000 check, petitioner also received

employee expense reimbursements directly from QSN’s headquarters

after submitting a detailed expense report or currency exchange

worksheet.   Reimbursement checks were routinely sent to each

branch in weekly packages with other checks.

     For 1997, QSN prepared a Form W-2, Wage and Tax Statement,

and 2 Forms 1099-MISC, Miscellaneous Income, reflecting

petitioner’s salary, car allowance of $4,800, and “commission”

income of $24,000, respectively.

     Petitioner timely filed his income tax return for the

taxable year 1997 reporting $57,090 in wages and the $4,800 car

allowance as gross receipts on his Schedule C, Profit or Loss

From Business.   Petitioner did not report as income the $24,000

from the $2,000 monthly check received during 1997 from QSN.

     In a notice of deficiency respondent determined that

petitioner failed to report the $24,000 as commission income

received during 1997, and, further, that the commission income is

subject to self-employment tax.    Respondent also determined that
                               - 5 -

petitioner was liable for an accuracy-related penalty due to a

substantial understatement of tax under section 6662(a) and

(d)(1).   Petitioner contends that he should not have to pay self-

employment tax since the $24,000 received was not commission

income, but rather reimbursements of other business expenses.

     We note that petitioner incorrectly reported the $4,800 car

allowance as gross receipts on his Schedule C.    Similarly,

petitioner deducted car/truck expenses of $10,395 on his Schedule

C, resulting in a net loss from business of $5,595.       We find that

these amounts should be reported on petitioner’s Schedule A,

Itemized Deductions, as an unreimbursed job expense subject to

the 2-percent floor of section 67.     By use of Form 2106, Employee

Business Expenses, we recharacterize the correct amount reported

on line 20 of petitioner’s Schedule A as follows:

     Vehicle Expenses                           $10,395
       Less:   Reimbursements received
               from employer                      4,800
     Net unreimbursed employee expenses          $5,595

     Respondent’s determination is presumed correct, and

petitioner bears the burden of proving that respondent’s

determination is erroneous.   Rule 142(a); Welch v. Helvering, 

, 115 (1933).2


     2
          Because petitioner failed to introduce any credible
evidence, he failed to meet the requirements of sec. 7491(a), as
amended, so as to place the burden of proof on respondent with
respect to any factual issue relevant to ascertaining liability
for the tax deficiency in issue. As to the accuracy-related
                                                   (continued...)
                                 - 6 -

Unreported Income

     Gross income includes all income from whatever source

derived.   Sec. 61(a).   Section 61(a)(1) specifically includes

income derived from compensation for services, including fees,

commissions, fringe benefits, and similar items.    It is required

under Federal law that taxpayers maintain adequate and accurate

tax records.   Sec. 6001; see also Jones v. Commissioner, 

, 1303 (10th Cir. 1990), affg. in part, revg. in part and

remanding T.C. Memo. 1988-373.

     Petitioner does not dispute that he received $24,000 from

QSN during 1997 in addition to his regular salary.    Petitioner

instead argues that respondent mischaracterized the checks as

commission checks, rather than reimbursements for other business

expenses; namely, out-of-pocket expenditures from business

dealings in Mexico with QSN’s client, McCulloch.

     The record consists of petitioner’s weekly expense reports

and currency exchange worksheets that he submitted to QSN’s

headquarters for reimbursements in 1997.    We find it puzzling

that petitioner failed to produce credit card statements,

receipts, expense records or logs, additional currency exchange

reports, independent testimony, or any other credible evidence to


     2
      (...continued)
penalty, we find that respondent has satisfied his burden of
production under sec. 7491(c) because the record shows that
petitioner failed to include the income on his return. Higbee v.
Commissioner, 

(2001).
                                - 7 -

show that these payments were related to “other” reimbursable

business expenses and not commission or other income from QSN.

Respondent presented extensive business records that petitioner

submitted to QSN’s headquarters to substantiate his expenses

which were reimbursed.    Petitioner suggests that there are other

records available at the branch level which could support his

contentions; however, he failed to introduce any of them at

trial.

     We note that the $2,000 monthly checks were paid regularly

and did not vary in amount from month to month, whereas the

employee expense reimbursement checks fluctuated by date and by

amount depending on the expense report submitted for that period.

     Without any corroborative evidence, we find that petitioner

failed to show that the $24,000 received from QSN during 1997 was

a reimbursement of employee expenses.    Accordingly, the $24,000

received from QSN is includable in gross income and properly

reported as “other income” on petitioner’s 1997 Form 1040.

Self-Employment Tax

     Section 1401 imposes a tax on an individual’s self-

employment income.    Self-employment income is defined as “net

earnings from self-employment”.    Sec. 1402(b).   The term “net

earnings from self-employment” is defined as an individual’s

gross income from a trade or business carried on by such

individual, less the deductions attributable to such trade or
                                - 8 -

business.    Sec. 1402(a).

       Respondent contends that petitioner is liable for the self-

employment tax because the $24,000 was commission income in

petitioner’s trade or business as a salesperson.     We disagree.

       For purposes of section 1401, “trade or business” shares the

same definition as when used in section 162.     Sec. 1402(c).

However, an exception exists where the performance of service is

by an individual as an employee.    Sec. 1402(c)(2).   Section

1.1402(c)-3, Income Tax Regs., states as follows:

       the performance of service by an individual as an
       employee, as defined in the Federal Insurance
       Contributions Act (chapter 21 of the Internal Revenue
       Code) does not constitute a trade or business within
       the meaning of section 1402(c) and section 1.1402(c)-1.
       * * *

Petitioner was a full-time, salaried employee of QSN during the

year in issue.    He did not engage in a trade or business subject

to the self-employment tax during the year in issue.

       Accordingly, petitioner is not subject to self-employment

tax.    Petitioner is sustained on this issue.

Section 6662(a)

       The last issue for decision is whether petitioner is liable

for an accuracy-related penalty pursuant to section 6662(a) for

the year in issue.    Section 6662(a) imposes a penalty of 20

percent of the portion of the underpayment which is attributable

to negligence or disregard of rules or regulations.     Sec.

6662(b)(1).    Negligence is the “‘lack of due care or failure to
                                - 9 -

do what a reasonable and ordinarily prudent person would do under

the circumstances.’”    Neely v. Commissioner, 

, 947

(1985) (quoting Marcello v. Commissioner, 

, 506 (5th

Cir. 1967), affg. in part and remanding in part on another issue

(1964) and T.C. Memo. 1964-299).      A “substantial

understatement” exists where the amount of the understatement

exceeds the greater of 10 percent of the tax required to be shown

on the return for the taxable year or $5,000.      Sec. 6662(d)(1).

     No penalty shall be imposed if it is shown that there was

reasonable cause for the underpayment and the taxpayer acted in

good faith with respect to the underpayment.      Sec. 6664(c).

     Petitioner failed to address the accuracy-related penalty

and offered no evidence that he had reasonable cause for the

underpayment.    Accordingly, we sustain respondent’s

determination.

     We have considered all arguments made by the parties, and,

to the extent not discussed above, conclude they are irrelevant

or without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                             Decision will be entered

                                        under Rule 155.