Kershner v. Commissioner

Raymond E. Kershner and Lucile D. Kershner, Petitioners, v. Commissioner of Internal Revenue, Respondent Kershner v. Commissioner Docket No. 20321 United States Tax Court 14 T.C. 168; 1950 U.S. Tax Ct. LEXIS 281; February 6, 1950, Promulgated *281 Decision will be entered for the respondent. 1. The petitioner was employed as an agent of a life insurance company. He was required in the performance of his work to observe all currently existing rules and regulations of the company relating to such agents and worked under the supervision of, reported to, and at all times was responsible to the person in charge of the company's local office out of which petitioner worked. Held, that the petitioner was an employee. 2. In his return for the taxable year the petitioner elected to be taxed on adjusted gross income under section 400 of the Internal Revenue Code, using the optional standard deduction. Held, that such election was irrevocable. 3. In computing adjusted gross income received, as agent, from the insurance company, various deductions were taken as expenses incurred in connection therewith. Held (a) that none of the deductions are allowable under section 22 (n) (1), since the petitioner rendered service as an employee, (b) that none of the deductions claimed for travel, meals and lodging are allowable under section 22 (n) (2), since it is not shown that they were incurred while petitioner was away from home, *282 or if away from home, that they were incurred by him in the performance of his service as an employee, and (c) that none of the deductions are allowable under section 22 (n) (3), since it is not shown that the petitioner had a reimbursement or other expense allowance arrangement with the insurance company, within the meaning of that section. Raymond E. Kershner, pro se. Paul E. Waring, Esq., for the respondent. Turner, Judge. TURNER *168 The respondent determined a deficiency of $ 135 in the income tax of the petitioners for 1945. The only issue presented is the correctness *169 of the respondent's action in disallowing a deduction of $ 601.85 representing the total of various items taken as occupational expenses in computing adjusted gross income. FINDINGS OF FACT. The petitioners, husband and wife, filed their 1945 joint income tax return with the collector for the district of West Virginia. Since the return shows income reported by each of the petitioners and since the controversy herein relates only to the income of Raymond E. Kershner, he will be referred to as the petitioner. During 1945 the petitioner lived in Martinsburg, West Virginia, and was employed by the Metropolitan Life Insurance Co. whose home office is in New York City, as agent to sell life, accident, *284 health, and industrial insurance, the premiums on which are payable on a weekly or monthly basis. He had a license to sell life insurance anywhere in the State of West Virginia, but he was authorized to sell industrial insurance only within the city limits of Martinsburg. He made calls on persons insured for the purpose of collecting premiums. He solicited new insurance and took care of detail work such as completing death claims and servicing industrial and ordinary life insurance policies. The Metropolitan Life Insurance Co., sometimes hereinafter referred to as Metropolitan, had a district office in Hagerstown, Maryland, and a detached office in Martinsburg, West Virginia. The petitioner's headquarters were at the latter office, where he had a desk. Nine agents worked out of that office, working under an agent and an assistant superintendent. Richard A. Biggs was in charge of Metropolitan's Martinsburg office during 1945. He acted in a supervisory capacity over the petitioner and all others connected with that office. The petitioner reported to him and was responsible to him at all times. He furnished the petitioner sales help when needed and instructed him in new methods*285 of doing business. The petitioner's contract of employment made him responsible for the collection of premiums on policies in a certain area which is called his "debit." This area was comparatively small. The petitioner's "debit" territory was an apartment and business area wholly within the city limits of Martinsburg and the weekly premium on this "debit" business averaged from $ 150 to $ 200 per week. The petitioner reported at the company's office at 7:45 in the morning three days a week for the purpose of depositing with the company cashier the premiums collected by him since the last reporting day on the industrial insurance policies in his debit. The petitioner had nothing to do with running the office and did not perform any work *170 there. He was required to furnish Metropolitan an indemnity bond because he collected premiums. Pursuant to his contract, petitioner was to receive a "Weekly Salary" which in turn was controlled in amount by the commissions allowed on the business handled by him, the rate being 12 per cent on the weekly industrial debits and 4 1/3 per cent on monthly payments. It was provided, however, that the "Weekly Salary" should not be less than *286 the "Minimum Weekly Salary" computed according to a designated formula. The above weekly payments as currently made were determined anew for each thirteen weeks or quarter-yearly period and the amount of such payments currently received for any given thirteen weeks was based upon the commissions actually earned during the thirteen weeks next preceding. In other words, there was no settling up at the end of the quarter, but the commissions actually earned during the quarter fixed the amount of the "Weekly Salary" to be received by the petitioner during the next quarter. Under his contract of employment the petitioner agreed to devote his full time to the service of Metropolitan and to the advancement of its business so long as he remained in its employ. He agreed to observe and to be bound by all the rules and regulations of Metropolitan then outstanding and as amended from time to time thereafter. His employment as agent and his contract of employment, as well as the duties and emoluments thereunder, might be revoked, terminated, changed, or modified at any time by Metropolitan in its discretion or at its option. Any question arising as to the interpretation of any part of the*287 contract of employment might be decided by Metropolitan and its decision was to be final and conclusive. The petitioner agreed to pay all expenses of every kind, including transportation, hotel, meals, postage, license fees, and telephone charges incurred by him in carrying on the work of his employment unless such expenses be specifically authorized in writing by the home office of Metropolitan. The petitioners filed their 1945 income tax return on Form 1040 and elected thereon to be taxed on their adjusted gross income in accordance with the provisions of Supplement T, section 400, of the Internal Revenue Code, as amended by section 5 (a) of the Individual Income Tax Act of 1944. The return showed the compensation received by petitioner, Raymond E. Kershner, from Metropolitan during 1945 as $ 3,491.54. From that amount was deducted $ 601.85 and an adjusted gross income of $ 2,889.69 was reported as received from Metropolitan. In determining the deficiency the respondent disallowed the deduction of $ 601.85 on the ground that, since the petitioner had elected to compute the tax by the table (using the optional standard deduction), no deduction was allowable for the expenses claimed*288 in computing adjusted gross income. *171 As disclosed by the return the deduction of $ 601.85 was composed of the following items: Gasoline, 265 gallons $ 59.58 Oil 12.27 Anti-freeze 5.56 Repairs and parts 55.44 Car license and use tax 20.80 Garage 48.00 Depreciation on car 125.00 Total 326.65 Portion of total car expenses applicable to business -- 94 per cent of $ 326.65 $ 307.05 Meals while out of town 17.65 Business entertainment 63.75 Hotel lodging 3.50 Parking meter 77.97 Taxi 1.25 Magazines, books and publications 5.75 West Virginia license, R. & R. service and indemnity bond 15.50 Business cards and taxes 8.41 Tips, office flower fund, etc 28.15 Telephone and telegraph 41.07 Postage 8.01 Stationery 10.27 Typewriter repairs 6.80 Adding machine service 6.73 Total [sic] 601.85 The petitioner used his own car in his work in Martinsburg. Any use of it in his work outside of Martinsburg was on isolated trips. Of the item of $ 17.65 for meals while out of town, $ 2 was for meals on a trip to a meeting in Atlantic City of a group of Metropolitan agents, $ 2 was for meals in Hagerstown, $ 2 for meals in Baltimore, and the balance*289 is unexplained. With the exception of $ 5 paid for tickets of the petitioner and his wife to a social gathering in honor of an assistant manager, the item of $ 63.75 for business entertainment is unexplained. The $ 3.50 for hotel lodging was incurred in connection with petitioner's attendance at a party in Hagerstown for the employees of Metropolitan's district office. The amount of $ 77.97 for parking meter was expended in meters in Martinsburg for parking petitioner's car while he was making calls in the course of his work. The taxi item of $ 1.25 was also spent within the city limits of Martinsburg. In connection with his work the petitioner expended $ 5.75 for insurance and trade magazines and publications to keep informed generally as to his work. The cost of the petitioner's West Virginia license as an insurance agent was $ 5. He paid for his indemnity *172 bond to Metropolitan. He also purchased a Research and Review (R & R) service, which was a tax report service relating to life insurance. The character of the items and the amounts composing the item of business cards and taxes is not disclosed. The item of tips, office flower fund, etc., $ 28.15, represented*290 voluntary contributions made by the petitioner to a fund maintained in the Martinsburg office for use in the case of death or hospitalization of persons in the organization there. Of the item of $ 41.07 for telephone and telegraph, $ 1 was for telegraph expenses and the balance represents the total of the bills for the year for the use of the telephone in the petitioner's home. In addition to being used by the petitioner in his work, the telephone was used by him and his wife for their own personal affairs. The petitioner does not know how the amount of $ 8.01 for postage was ascertained. The items, stationery $ 10.27 and typewriter repairs $ 6.80 are unexplained. In connection with his work the petitioner used an adding machine, which he had checked periodically. For that service he paid $ 6.73. OPINION. Supplement T, section 400, of the Internal Revenue Code, as amended by section 5 (a) of the Individual Income Tax Act of 1944, provides that, in lieu of the tax imposed by sections 11 and 12, taxpayers whose adjusted gross income is less than $ 5,000 may elect to be taxed on their net income in accordance with provisions of that supplement. Section 22 (n) of the code defines*291 "adjusted gross income" as used in chapter 1 to mean the gross income minus: (1) Trade and business deductions. -- The deductions allowed by section 23 which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee; (2) Expenses of travel and lodging in connection with employment. -- The deductions allowed by section 23 which consist of expenses of travel, meals, and lodging while away from home, paid or incurred by the taxpayer in connection with the performance by him of services as an employee; (3) Reimbursed expenses in connection with employment. -- The deductions allowed by section 23 (other than expenses of travel, meals, and lodging while away from home) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer; * * * * Section 23 provides in part as follows: In computing net income there shall be allowed as deductions: (a) Expenses. -- (1) Trade or business expenses. -- (A) In General. -- All the ordinary*292 and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable *173 allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. * * * * (2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. Taking the position that during 1945 his employment with Metropolitan was that of an independent contractor, the petitioner contends that the deductions taken by him are allowable under the provisions of section 23 (a) (1) and (2), and that the provisions of section 22 (n) have no application*293 here. The respondent contends that the petitioner was an employee of Metropolitan and that, since the petitioners elected to be taxed on their adjusted gross income, they are bound by their election, and that accordingly in computing adjusted gross income they are entitled, if substantiated, only to the deductions provided for in section 22 (n) (2). In A. P. Dowell, Jr., 13 T. C. 845, we were called upon to distinguish between the relationship of employee and that of independent contractor. There we said: * * * Such a relationship [employee] exists where the employer retains the right to direct the manner in which the business is to be done, as well as the result to be accomplished. Singer Manufacturing Co. v. Rahn, 132 U.S. 518, 523. An "independent contractor" is most frequently defined as one who contracts to do certain work according to his own methods and without being subject to the control of his employer, except as to the product or result of his work. 27 Am. Jur., Independent Contractor, § 2, p. 481. The petitioner herein worked under the supervision of, reported to, and at all times was responsible to *294 Biggs, whom Metropolitan had placed in charge of its Martinsburg office. In the performance of his work petitioner was required to observe all the currently existing rules and regulations of Metropolitan relating to such agents as the petitioner. On the showing made it is apparent that the petitioner performed his work under the supervision and control of his employer and, therefore, was an employee and not an independent contractor. The situation here is unlike that in Irene L. Bell, 13 T. C. 344, in which it was held that she was an independent contractor. There the taxpayer performed her work without supervision or control and called upon the company only for the purpose of reporting the results of her work. Numerous cases have been decided in which the status of an insurance agent has been decided or dealt with to some extent. Most of such cases which have been called to our attention have been personal injury cases, where some person injured in an automobile accident *174 with the insurance agent has sought to hold the insurance company liable. The conclusions reached have been based on the facts in each particular case, and in most, *295 if not all, of them there has also been present the question whether, even though it be held that the status of the agent was that of employee, the company at the instant of the act or neglect had the right and power to direct and control the said employee in the performance of the act in which he was then engaged. The results have been varied. Vert v. Metropolitan Life Insurance Co., 117 S. W. (2d) 252; Atlas Life Insurance Co. v. Foraker, 165 Pac. (2d) 323; Reiling v. Missouri Insurance Co., 153 S. W. (2d) 79; Dillon v. Prudential Insurance Co., 75 Cal. App. 266; 242 Pac. 736; Burdo v. Metropolitan Life Insurance Co., 4 N. Y. S. (2d) 819; and Miller v. Metropolitan Life Insurance Co., 134 Ohio St. 289; 16 N. E. (2d) 447; Amstutz v. Prudential Insurance Co., 136 Ohio St. 404; 26 N. E. (2d) 454; and Salmi v. New Era Life Association, 267 N. W. 880.*296 In the Metropolitan Life Insurance Co. and Prudential Insurance Co. cases, supra, it would seem that the employment has been more closely under the control of the company and the results have been in the direction of an employer-employee relationship. In any event it is our opinion that the evidence in the instant case requires that conclusion here. Since the petitioners elected to be taxed for 1945 under section 400 of the code, their election is irrevocable. Sec. 23 (aa) (3) (C), I. R. C. Cf. Henry C. Warren, 13 T. C. 205. Accordingly they are limited as to deductions to the standard deduction to which section 400 gives effect and those items which under section 22 (n) are to be subtracted from gross income in computing adjusted gross income. Under section 22 (n) (1) no allowance can be made for the expenses here claimed, since the services rendered by petitioner were rendered in the capacity of an employee, and, further, there is no showing of any "reimbursement or other expense allowance arrangement" to which section 22 (n) (3) would apply. The only question remaining is whether certain of the items claimed fall within the provisions*297 of section 22 (n) (2), which provides for the subtraction from gross income of amounts allowed as deductions by section 23 for expenses of travel, meals, and lodging while away from home paid or incurred by the taxpayer in connection with the performance by him of services as an employee. For the purposes of the statute, a taxpayer's home means his place of business, employment, or post or station at which he is employed. Commissioner v. Flowers, 326 U.S. 465; Moses Mitnick, 13 T. C. 1; Walter M. Priddy, 43 B. T. A. 18; Mort L. Bixler, 5 B. T. A. 1181. The petitioner's residence, as well as his principal employment, was within the city limits of Martinsburg, and for present purposes that city is to be regarded as his home. While he testified to making occasional *175 trips into the surrounding country, he was unable to state the frequency of them or to relate any of them to the taxable year. So far as disclosed, all of the deductions taken for expenditures in connection with the use of his automobile related to his work within Martinsburg and consequently*298 were not an expense of travel while away from home. Respecting deductions for meals in Atlantic City and Baltimore and for meals and lodging in Hagerstown we are unable to determine from the evidence whether such expenditures were incurred by petitioner in the course of the performance of his duties as an employee of Metropolitan. So far as shown, they may have been incurred chiefly or wholly for social purposes. In the situation presented, we are unable to conclude that any of the deductions taken by petitioner for expenses of travel, meals, and lodging fall within the provisions of section 22 (n) (2). Decision will be entered for the respondent.