PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

ERTAN EREN; SUSAN EREN,
Petitioners-Appellants,

v.                                                                   No. 96-1620

COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

Appeal from the United States Tax Court.
(Tax Ct. No. 94-866)

Argued: December 2, 1996

Decided: June 14, 1999

Before WIDENER and MURNAGHAN, Circuit Judges, and
PHILLIPS, Senior Circuit Judge.

_________________________________________________________________

Affirmed by published opinion. Judge Widener wrote the opinion, in
which Judge Murnaghan and Senior Judge Phillips concurred.

_________________________________________________________________

COUNSEL

ARGUED: James D. McCarthy, Jr., Potomac, Maryland, for Appel-
lants. Patricia McDonald Bowman, Tax Division, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON
BRIEF: Loretta C. Argrett, Assistant Attorney General, Charles E.
Brookhart, Tax Division, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Appellee.

_________________________________________________________________
OPINION

WIDENER, Circuit Judge:

Petitioners Ertan and Susan Eren appeal a U.S. Tax Court decision
that Ertan Eren's 1989 income from the U.S. Department of State,
Office of Foreign Buildings Operations (FBO) did not qualify for the
foreign earned income exclusion of 26 U.S.C. § 911 (§ 911). The tax
court found that Eren's relationship with his employer was that of an
employee rather than an independent contractor, with the conse-
quence that he was not entitled to the § 911 exclusion. After review-
ing the record, we are of opinion that this ruling, that Eren was an
employee, was not clearly erroneous. We further find that the Erens'
remaining assignments of error are also without merit, and we affirm.

I.

Ertan Eren is an architect. He has worked exclusively for the Office
of Foreign Buildings since 1983. On March 6, 1984, he entered into
a personal service contract with that office to serve as a project man-
ager for improvements and repairs at the U.S. Embassy in Ankara,
Turkey. He worked there several years under modified versions of the
contract. In July 1988, FBO sent him to oversee construction of an
annex to the U.S. Embassy in Bogota, Colombia, under yet another
modified contract. Eren remained in Bogota until mid-1990.

In the mid-1980's, the Internal Revenue Service (IRS) reviewed
Foreign Buildings' employment tax practices. As a result, it deter-
mined that most of its over 350 personal service contractors had been
improperly characterized and should be reclassified as employees.
The Foreign Buildings Office issued two directives in 1987 requiring
that the contractors be treated as employees. An FBO memorandum
dated December 12, 1989 notified Eren that he should designate him-
self as an FBO employee, rather than an independent contractor, on
his 1989 federal income tax return. FBO also issued Eren a W-2 form
and withheld FICA tax of $3,604.80.

Eren instead filed as an independent contractor on his 1989 income
tax return and paid self-employment tax of $6,250. He excluded

                    2
$70,000 of the payments he received under the FBO contract for the
Bogota project on the basis of § 911's foreign earned income exclu-
sion. Section 911 excludes from gross income a qualified individual's
foreign earned income. 26 U.S.C. § 911(a)(1). Foreign earned
income, however, does not include amounts paid by the United States
or a United States agency to an employee thereof. 26 U.S.C. § 911(b)
(1)(B)(ii). Accordingly, Eren would qualify for a§ 911 exclusion if
he is classified as an independent contractor but not if classified as a
State Department employee. The IRS audited the Erens and deter-
mined a $15,459 deficiency for 1989 after concluding that Eren was
an FBO employee and therefore not entitled to a§ 911 exclusion.

The Erens appealed this determination to the U.S. Tax Court. The
tax court ruled in favor of the IRS. The court looked at seven factors
in determining the nature of the relationship between FBO and Eren:
(1) the degree of control exercised by FBO over Eren's work; (2)
Eren's lack of investment in his work facilities; (3) Eren's lack of
opportunity for profit or loss; (4) FBO and Eren's mutual right to ter-
minate the contract; (5) the fact that the Bogota project was within the
scope of FBO's regular business of constructing U.S. government
buildings overseas; (6) the relative permanency of Eren's relation-
ship with FBO; and (7) FBO's intention, at least by December 1989,
to create an employer-employee relationship. See Weber v. Commis-
sioner, 

, 1110 (4th Cir. 1995) (listing relevant factors).
The tax court characterized the first factor (the"right-to-control") as
the "master test," but also found that all seven factors weighed in
favor of classifying Eren as an employee rather than an independent
contractor. The court accordingly upheld the determination of the IRS
that the taxpayers were not entitled to a § 911 exclusion.

The Erens raise several issues on appeal. In addition to arguing that
the tax court erroneously classified Eren as an employee, the Erens
also challenge the court's refusal to admit certain items into evidence
and to award them attorney's fees and costs. The taxpayers' only
assignment of error meriting any extended discussion is their claim
regarding the determination of Eren's employment status.

II.

This court affirms a factual finding of the tax court unless it is
clearly erroneous. Hendricks v. Commissioner, 

, 97 (4th

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Cir. 1994). "[W]here there are two permissible views of the evidence,
the factfinder's choice between them cannot be clearly erroneous."

; Thomas v. Commissioner, 

,
1260 (4th Cir. 1986) (citing Anderson v. Bessemer City, 

(1985)). The determination of an individual's employment status is a
question of fact. 

. See also Opus 3 Ltd. v. Her-
itage Park, Inc., 

, 630 (4th Cir. 1996) (applying clearly
erroneous standard to employment status determination); Garrett v.
Phillips Mills, Inc., 

, 982 (4th Cir. 1983) (finding no
clear error in the district court's ultimate employment status conclu-
sion predicated on its findings of fact). Because§ 911 does not define
the term "employee," courts look to "the usual common law rules"
when distinguishing between employees and independent con-
tractors under federal tax law. Nationwide Mut. Ins. Co. v. Darden,

, 322-23 (1992); 

; Treas. Reg.
§ 31.3121(d)-1(c)(1).

We cannot say the tax court was clearly erroneous in applying the
relevant common law rules in this case. Eren asserts that he was not
under direct day-to-day control of FBO as an architect in the field.
However, the threshold level of control necessary to find employee
status is usually lower when applied to professional services than
when applied to nonprofessional services. Weber , 60 F.3d at 1111.
Here, Eren's contract provided that he "will inspect construction,
improvements and/or repairs at project sites and will be directly
responsible to FBO in the performance of his duties under this con-
tract." The contract also required Eren to "[p]erform appropriate func-
tions and obligations in accordance with procedures or other
directives issued by the Contracting Officer or his designee." He was
generally bound by the construction documents for the building and
could not exceed the budget. Moreover, FBO required Eren to follow
a Project Director's Handbook.

Eren contends that he had an unusual amount of discretionary
authority over the project's details. Nevertheless, Leroy Wallin, the
Bogota project's contracting officer at FBO in Washington, moni-
tored Eren's expanded authority and could either enlarge or limit it.
In addition, Wallin tracked Eren's activities through mandatory
monthly progress reports. Eren was also required to maintain a daily
log and to submit a telegraphic report monthly. While Eren could hire

                    4
and fire his own staff, the staff's contracts were with FBO and paid
by FBO.

Furthermore, FBO dictated Eren's hours and leave. He was paid
according to the federal government's Foreign Service Schedule. This
fixed salary was contingent on a minimum 40-hour work week rather
than the project's completion. Although he did not receive retirement
benefits, Eren was entitled to annual leave, sick leave, and home
leave. Five percent of his compensation was for his purchasing health
insurance. Moreover, the Department of State at one point required all
dependents, including Eren's wife, to leave Bogota due to political
unrest. FBO paid for her return trip. Although this is arguably a close
case, we cannot say from these facts that the tax court was clearly
erroneous in finding that FBO had the right to control Eren's activi-
ties.

Beyond the control test, the other factors discussed by the tax court
also weigh in favor of concluding that Eren was a State Department
employee. We note in particular the apparent permanency of the
employment relationship (as stated earlier, Eren has performed ser-
vices exclusively for FBO since 1983) and the conceded fact that
Eren was at no risk of suffering a loss as a result of his services for
FBO pursuant to his contract, other than suffering loss of payment on
the contract. Based on the record, we are of opinion that the tax court
did not commit clear error in concluding that Eren was an employee
rather than an independent contractor.

As an alternative basis for finding that Eren was an independent
contractor, the taxpayers claim Eren qualifies for the safe harbor pro-
vision regarding employment status found in § 530 of the Revenue
Act of 1978.1 Section 530, however, was meant to protect employers
who had consistently treated individuals as independent contractors
from being liable for employment taxes if the IRS reclassified the
individuals as employees. While inartfully worded, it applies in terms
" . . . for the purpose of applying such [employment] taxes for such
period with respect to the . . . [employer] . . . ." As stated in the legis-
lative history, the bill "does not change in any way the status, liabili-
ties, and rights of an individual whose employment status is at issue."
_________________________________________________________________
1 Not codified, found at 26 U.S.C.A. (1989), under § 3401, pp360-361.

                    5
H.R. Rep. No. 95-1748, at 7 (1978). See also Rev. Proc. 85-18, 1985-
1 C.B. 518, 519 (stating that § 530 affects employers' liabilities, not
workers', and does not convert workers from status of employee to
status of self-employed).

III.

The Erens' remaining assignments of error are also without merit.
The tax court was entitled to refuse to admit into evidence two docu-
ments proffered by the Erens. One exhibit included the activity record
and work papers of the IRS examining officer from the administrative
portion of this proceeding. These papers purportedly showed that the
IRS failed to consider the specific facts and circumstances of the
Erens' case in determining the deficiency. However, a trial before the
tax court is de novo, and the general rule is that it is a decision based
on the merits of the case and not on any record developed at the
administrative level. Gatlin v. Commissioner, 

, 923 (11th
Cir. 1985); Raheja v. Commissioner, 

, 66 (7th Cir. 1984).
We see no reason not to apply that rule here. Thus, the tax court was
within its discretion in determining that the proffered evidence was
not relevant.

The second refused exhibit comprised pages from Eren's daily log.
Although the Erens now claim this exclusion as error, at trial they
abandoned their efforts to have the document admitted. We will there-
fore not entertain this assignment of error.

Finally, the Erens' claim for attorneys fees and costs under 26
U.S.C. § 7430 also fails. They assert that they prevailed on a signifi-
cant issue by obtaining a refund of the self-employment tax Eren paid
in 1989. At trial, however, the IRS took the alternative positions that
the Erens were liable either for self-employment tax if Eren were
found to be an independent contractor or for FICA tax if he were
found to be an employee. Once the court ruled that Eren was an
employee, the IRS necessarily lost on the self-employment tax issue.
We are of opinion that the Erens are not prevailing parties under the
statute, for they have not substantially prevailed with respect to the
amount in controversy or with respect to the most significant issue
presented, whether or not Eren was an employee. 26 U.S.C.

                    6
§ 7430(c)(4)(A)(i). Accordingly, the Tax Court properly denied the
Erens' fees and costs claim.

The decision of the Tax Court is accordingly

AFFIRMED.2
_________________________________________________________________
2 Accord: Ahmed v. Commissioner, 147 F.3d (8th Cir. 1998).

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