The opinion
T.C. Summary Opinion 2009-53
UNITED STATES TAX COURT
WALTER N. MAIMON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8008-07S. Filed April 20, 2009.
John E. Fulker and Robert A. McCarthy, for petitioner.
Gary R. Shuler, Jr. and Matthew J. Fritz, for respondent.
GOEKE, Judge: This case is before the Court pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
at the time the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined an $11,793 Federal income tax
deficiency for 2004. The issues for decisions are: (1) Whether
petitioner was an independent contractor for 2004 entitled to
report income and expenses on a Schedule C, Profit or Loss From
Business; and (2) should we determine that petitioner is an
employee, whether petitioner is entitled to miscellaneous
itemized deductions of $24,615 for 2004.
Background
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Petitioner resided in Ohio at
the time of filing his petition.
Petitioner is a medical doctor and specializes in head and
neck surgery, otolaryngology, and facial plastic surgery. During
2004 petitioner provided medical services to patients through
Dayton Head and Neck Surgeons, Inc. (DHN). Petitioner’s
biographical information is listed on DHN’s Web site under the
Web page designated “Physicians and Professional Staff”.
Petitioner joined DHN as a shareholder in 1999. Before joining
DHN, petitioner was in sole practice for approximately 10 years.
On July 1, 2001, petitioner and seven other doctors executed
a shareholders’ agreement and close corporation agreement
(shareholder agreement) with each doctor an equal shareholder.
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The physician shareholders of DHN had different areas of
specialty and organized DHN to share overhead and operating
expenses and agreed to share revenues equally. On that same
date, petitioner executed an employment agreement with DHN
effective until June 30, 2004. Thereafter, the employment
agreement would be automatically renewed for additional 1-year
terms unless the employee resigned, died, became disabled, or was
terminated by DHN. The employment agreement expressly identified
petitioner as an “employee” of DHN and provided that he agreed to
serve as an officer and member of the board of directors. The
terms of the employment agreement provided:
the Employee shall, under the supervision of the
physician members of the Corporation’s Board of
Directors, devote his working time, skill and
experience to advancing and rendering profitable the
interests of the Corporation * * *.
The employment agreement placed additional requirements on
petitioner relating to: (1) Maintaining and improving DHN’s
standing within the community; (2) maintaining telephone service
and other appropriate equipment at his residence; (3) attending
annual continuing education courses; and (4) maintaining hospital
staff privileges. The employment agreement provided that DHN
would reimburse petitioner for the costs of continuing education
courses, hospital staff dues, professional societies,
professional publications, and other professional expenses in
accordance with policies established by the board of directors.
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The employment agreement also provided for paid vacation leave
for petitioner and required DHN to maintain malpractice insurance
on petitioner.
Under the terms of the employment agreement, petitioner
agreed that all patients that he treated were regarded as DHN’s
patients and all records and files, including patient files, were
considered the property of DHN. Petitioner further agreed that
DHN was entitled to “receive any and all fees arising out of his
rendition of medical services.” DHN agreed to pay petitioner an
annual base salary of $253,000 with increases set by the board of
directors. Petitioner’s annual base salary in 2004 remained at
$253,000. Petitioner was also eligible to receive annual
bonuses. The bonus was based on DHN’s net annual profits and not
on petitioner’s individual performance. The employment agreement
provided that petitioner would receive the same amount of total
annual compensation, consisting of the base salary and bonus, as
the other physician shareholders. Finally, under the terms of
the employment agreement, petitioner would receive “supplemental
bonus compensation” of $30,076 during the period ending December
31, 2004, in consideration of petitioner’s senior status with
DHN.
During 2001 through 2007 DHN employed receptionists to
schedule patient appointments for its doctors, processed
insurance claims for patients, billed and collected money from
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patients for medical services its doctors and medical staff
performed, accepted assignments for all Medicare and Medicaid
patients, required new patients to complete paperwork relating to
patient information and insurance information, and required
returning patients to complete a health history form, including
for petitioner and petitioner’s patients. By signing the
paperwork, the patient authorized DHN: (1) To provide diagnostic
and treatment services to the patient; (2) to submit claims to
the patient’s insurance carrier or its intermediaries for all
covered services the doctor rendered and authorized and directed
the patient’s insurance carrier to issue payment directly to DHN;
and (3) to furnish complete information to the patient’s
insurance carrier or its intermediaries regarding services
rendered. DHN provided patients, including petitioner’s, with a
“Notice of Privacy Practices” and required them to sign a
“Privacy Practices Acknowledgement”. Petitioner had a personal
scheduler assigned to him who scheduled his appointments and
surgical procedures. Although petitioner chose this person, the
person was paid by DHN. Petitioner managed his patient records
and provided billing codes to DHN’s billing staff to prepare
patient billing statements.
DHN leased real properties where it provided medical
services at five office locations in Ohio. In 2004 petitioner
saw patients at two of these office locations--in Centerville,
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Ohio, and Dayton, Ohio. Petitioner performed surgery at Miami
Valley Hospital and Kettering Medical Center. DHN also leased
medical, communication, and computer equipment and other fixtures
for use at its office locations. In 2004 DHN maintained office
hours on Monday through Friday from 8:30 a.m to 5 p.m.
Petitioner was required to work nine half-day shifts, or 4-1/2
days, per week during these set office hours. Petitioner could
choose his half-day off each week. Petitioner was required to be
on call on a rotating basis to accept assignments DHN scheduled
at night and on Sundays and holidays. Petitioner could pay
another doctor from DHN to take his turn on call. The doctors
were not required to see a specific number of patients. The
number of patients per hour varied among the doctors and depended
in part on the doctor’s specialty. Petitioner was paid a
prorated portion of his annual salary biweekly and received the
same amount of compensation regardless of the number of patients
that he saw during the biweekly pay period.
The shareholder and employment agreements provided that DHN
had the right to terminate petitioner upon a vote of all, except
one, of the shareholders. The agreements did not require DHN to
have cause for petitioner’s termination. Upon termination,
petitioner had the right to a wage continuation payment of
$120,000 for past services, subject to certain conditions, in
addition to his accrued but unpaid base salary, a prorated annual
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bonus, and earned and unpaid balance of the supplemental bonus
compensation. The employment agreement required petitioner to
give DHN 60 days’ notice to terminate his relationship with DHN.
Petitioner’s failure to give 60 days’ notice could result in the
forfeiture of his right to payments upon termination.
Petitioner participated in DHN’s employee retirement benefit
plan. For 2004 DHN made contributions to the plan on
petitioner’s behalf. Petitioner did not report these
contributions as income for 2004. Nor did petitioner report
earnings on the account balance as income for 2004. For 2004
petitioner received paid vacation and holidays from DHN. DHN
also provided medical insurance and disability insurance to
petitioner and paid petitioner’s premiums for both policies
during 2004. DHN also paid the premiums for petitioner’s
malpractice liability insurance during 2004.
For 2004 petitioner received a Form W-2, Wage and Tax
Statement, from DHN reporting $409,300 in compensation paid to
petitioner as “Wages, tips, other compensation” in box 1. DHN
did not check the box on the Form W-2 to indicate that petitioner
was a statutory employee. In 2004 DHN withheld Federal, State,
and local income taxes and Social Security and Medicare taxes
from the compensation paid to petitioner. Petitioner did not pay
any self-employment taxes for 2004. Petitioner did not receive
compensation from any other source during 2004 for providing
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medical services, and petitioner did not perform medical services
for a fee outside of his relationship with DHN.
For 2004 petitioner filed a Form 1040, U.S. Individual
Income Tax Return, and left blank line 7 “Wages, salaries, tips,
etc.” He attached Schedule C to his 2004 return and reported
“physician” as his principal business or profession. On the
Schedule C petitioner reported gross receipts or sales of
$409,300, the wage amount shown on the Form W-2 DHN issued. He
checked the box to incorrectly indicate that the statutory
employee box was checked on his Form W-2.
During 2004 petitioner paid legal fees of $22,155 in
connection with a lawsuit filed against him, among others, for
medical negligence. In 2004 petitioner settled the lawsuit for
$1.4 million with his malpractice insurer’s agreeing to pay
$400,000 and petitioner’s agreeing to pay $1 million. Petitioner
paid the $1 million settlement during 2005. During 2004
petitioner paid membership dues of $440 to the American College
of Surgeons Professional Association. Petitioner reported total
expenses of $24,615, consisting of legal fees of $24,175 and
professional dues of $440, on the Schedule C.
In September 2006 petitioner requested that DHN issue an
amended Form W-2 for 2004. DHN’s business manager informed
petitioner that the issuance of an amended Form W-2 was not
appropriate, and petitioner did not receive the requested amended
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Form W-2 from DHN. For the years 2001 to 2003 and 2005 to 2006
petitioner received Forms W-2 from DHN reporting his compensation
as “Wages, tips, other compensation” and the withholding of
Federal, State, and local income taxes and Social Security and
Medicare taxes. For 2001 to 2003 petitioner reported the
compensation received from DHN on Form 1040, line 7, “Wages,
salaries, tips, etc.”, on Form 1040 and did not file a Schedule C
with his returns. For 2005 petitioner reported the compensation
received from DHN on line 7 “Wages, salaries, tips, etc.” and
attached a Schedule C to the return. The Schedule C did not
report any gross receipts or sales but claimed expenses of over
$1 million, including the $1 million settlement payment for the
medical negligence lawsuit. For 2006 petitioner attached a
Schedule C to his return and reported gross receipts and sales of
$507,944, which is $50 less than the amount shown as compensation
on his Form W-2 from DHN and claimed expenses of $992.
Petitioner checked the box on line 1 of the 2006 Schedule C to
incorrectly indicate that his Form W-2 identified him as a
statutory employee.
Discussion
Petitioner contends that he is an independent contractor for
Federal income tax purposes and is entitled to deduct business
expenses on Schedule C. An individual performing services as an
employee may deduct expenses incurred in the performance of
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services as an employee as miscellaneous itemized deductions on
Schedule A, Itemized Deductions, to the extent the expenses
exceed 2 percent of the taxpayer’s adjusted gross income. Secs.
62(a)(2), 63(a), (d), 67(a) and (b), 162(a). An individual who
performs services as an independent contractor is entitled to
deduct expenses incurred in the performance of services on
Schedule C and is not subject to the 2-percent limitation imposed
on miscellaneous itemized deductions. Although petitioner
claimed on his 2004 return that he was a statutory employee, he
has acknowledged that he does not qualify as a statutory employee
as defined in section 3121(d).
I. Employment Classification
Respondent contends that petitioner was an employee of DHN
because he was an officer of DHN and under the common law
definition of employee. Although petitioner agreed in his
employment and shareholder agreements to serve as an officer,
petitioner credibly testified that he did not in fact serve as an
officer during 2004. Neither the shareholder nor the employment
agreement assigned any official responsibilities to petitioner.
Respondent has not identified any such duties assigned to
petitioner. However, a determination of whether petitioner was
an officer is not necessary because we find below that he was a
common law employee of DHN.
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Whether an individual is an employee or an independent
contractor is a factual question to which common law principles
apply. Weber v. Commissioner, 103 T.C. 378, 386 (1994), affd. 60
F.3d 1104 (4th Cir. 1995). Guidelines for determining the
existence of an employment relationship are found in three
substantially similar sections of the regulations: Sections
31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1, Employment Tax
Regs., relating to FICA, FUTA, and income tax withholding,
respectively, that adopt the common law definition of an
employee. Under the common law, an employer-employee
relationship exists when the principal has the right to control
and direct the service provider, not only as to the result to be
accomplished but also as to the details and means by which that
result is accomplished. Secs. 31.3121(d)-1(c)(2), 31.3306(i)-
1(b), Employment Tax Regs.; see also sec. 31.3401(c)-1(b),
Employment Tax Regs. Factors that are relevant in evaluating
whether a worker is a common law employee or an independent
contractor include: (1) The degree of control the principal
exercised; (2) which party invests in work facilities the worker
used; (3) the worker’s opportunity for profit or loss; (4)
whether the principal can discharge the worker; (5) whether the
work is part of the principal’s regular business; (6) the
permanency of the relationship; and (7) the relationship the
parties believed they were creating. Ewens & Miller, Inc. v.
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Commissioner, 117 T.C. 263, 270 (2001); Weber v. Commissioner,
supra at 387. All of the facts and circumstance of each case are
considered, and no single factor is dispositive. Ewens & Miller,
Inc. v. Commissioner, supra at 270.
A. Degree of Control
While no single factor is dispositive, the degree of control
the alleged employer exercised over the details of the work is
the “crucial test” in determining employment status. Weber v.
Commissioner, supra at 387. An employment relationship exists
where the principal has the right to control the details, manner,
or method of the individual’s work. Sec. 31.3121(d)-1(c)(2),
Employment Tax Regs. In contrast, an independent contractor is
hired to accomplish a specific result, and the principal has the
right only to specify the result it desires. Id. It is not
necessary for the principal to actually exercise control; it is
sufficient if the principal has the right to control. Weber v.
Commissioner, supra at 387; Potter v. Commissioner, T.C. Memo.
1994-356. The employer need not stand over the individual and
direct every detail of the individual’s work. Weber v.
Commissioner, supra at 388.
Petitioner maintains that Ohio State law prohibits DHN from
exercising control over him in matters relating to patient care
and treatment. See Ohio Rev. Code Ann. sec. 1785.03 (LexisNexis
2004). DHN did not control or supervise petitioner’s medical
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judgment, including patient diagnoses, what medications to
prescribe, or what treatments or procedures to perform.
Petitioner had discretion to schedule the length of his patient
appointments, to consult with physicians outside of DHN, and to
determine whether to continue to treat a patient. Petitioner
also maintained the ability to choose outside pathologists,
laboratories, and other medical services and to choose the
hospitals or surgical centers where he would maintain hospital
privileges. Petitioner also chose the hospital personnel to
assist him, but neither petitioner nor DHN paid the hospital
staff.
The degree of control necessary to find employee status
varies with the nature of the services the worker provides. See
Ewens & Miller, Inc. v. Commissioner, supra at 270; Youngs v.
Commissioner, T.C. Memo. 1995-94, affd. without published opinion
98 F.3d 1348 (9th Cir. 1996). The threshold level of control
necessary to find employee status is lower when applied to
professional services than when applied to nonprofessional
services. Profl. & Executive Leasing, Inc. v. Commissioner, 89
T.C. 225, 234 (1987), affd. 862 F.2d 751 (9th Cir. 1988); James
v. Commissioner, 25 T.C. 1296, 1301 (1956). An alleged
employer’s control over professional services “must necessarily
be more tenuous and general than the control over nonprofessional
employees.” James v. Commissioner, supra at 1301.
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We do not agree that petitioner was not subject to DHN’s
control. Petitioner was required to work 4-1/2 days during
office hours DHN set. Although petitioner chose his half-day
off, he did not have the flexibility in his schedule that is
indicative of an independent contractor. The employment
agreement provided that petitioner would render medical services
“under the supervision of the physician members” of DHN.
Petitioner agreed that all patients belonged to DHN and was
required to submit patient records to DHN for billing and
insurance purposes. Petitioner did not provide medical services
outside of his relationship with DHN.
Although petitioner exercised his medical judgment when
rendering medical services, his methods were directed by
professional standards set by the medical community. Because of
the lower measure of control applicable to professionals, the
fact that DHN did not control his patient diagnoses and
treatments does not preclude a finding that DHN exercised
sufficient control over petitioner to establish an employment
relationship. See James v. Commissioner, supra; Chaplin v.
Commissioner, T.C. Memo. 2007-58. We find that DHN had a right
of control over petitioner sufficient to find an employment
relationship.
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B. Investment in Facilities
The fact that a worker provides his own equipment indicates
independent contractor status. Ewens & Miller, Inc. v.
Commissioner, 117 T.C. at 271. Petitioner provided medical
services only at offices DHN leased and at hospitals or surgical
facilities where he had staff privileges. The employment
agreement provided that DHN would pay for petitioner’s hospital
staff dues. Petitioner did not provide medical services outside
of facilities provided or paid for by DHN. DHN also provided
clerical, central billing, and purchasing staff.
Petitioner testified that he provided some specialized
equipment that he used to treat patients. However, DHN also
leased medical, communications, and computer equipment and other
fixtures for use in its office locations. Similarly, the
hospitals and medical centers where petitioner performed
procedures provided necessary equipment. Petitioner did not
quantify his investment in equipment relative to DHN’s. Any
investment by petitioner is offset by DHN’s investment in office
locations and equipment and payment of hospital dues. Moreover,
petitioner did not use the equipment to provide medical services
for a fee outside of his relationship with DHN. This factor
supports employment status.
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C. Opportunity for Profit or Loss
An opportunity for profit or loss indicates nonemployee
status. Simpson v. Commissioner, 64 T.C. 974, 988 (1975). On
the other hand, earning an hourly wage or fixed salary indicates
an employer-employee relationship exists. Kumpel v.
Commissioner, T.C. Memo. 2003-265.
Pursuant to the employment agreement, petitioner agreed that
DHN was entitled to any fees arising from his medical services.
The employment agreement guaranteed petitioner a base salary
regardless of the number of patients he saw or the amount of
medical fees he generated. There was no requirement to generate
a certain level of patient fees to receive a bonus or an increase
in base salary. Rather, petitioner received bonuses based on the
annual net profits of DHN and not on the amount of medical fees
he personally generated. The employment agreement provided that
each shareholder physician would receive the same amount of total
annual compensation. If petitioner increased the amount of
medical fees he generated, the increase would be shared equally
by all the doctors at DHN. His opportunity for profit was as a
shareholder of DHN rather than from rendering medical services.
Further, petitioner did not perform any medical services for a
fee outside of his relationship with DHN where he could have an
opportunity for profit.
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Petitioner had some risk of loss as a shareholder of DHN if
DHN operated at a loss. The fact that petitioner incurred an
individual loss on the settlement was a business decision he
made, but it supports a finding that he held a risk of loss.
Therefore, this factor on the whole favors independent contractor
status.
D. Right To Terminate the Relationship
In determining employment status, courts consider the manner in
which the relationship can be terminated; i.e., by one or both
parties, at any time, with or without notice. Ewens & Miller,
Inc. v. Commissioner, supra at 273. The right to discharge a
worker, and the worker’s right to quit, at any time indicate
employee status.
Under the terms of the shareholder and employment agreements
DHN had the right to discharge petitioner by vote of all except
one of the shareholders with or without cause and without notice.
Upon termination, DHN would be required to pay petitioner a “wage
continuation payment” of $120,000 for his prior services to DHN.
Similarly, petitioner could terminate his relationship with DHN
with or without cause although he was required to give 60 days’
notice of his resignation. A unilateral notice requirement on
the part of the worker does not support independent contractor
status. Chaplin v. Commissioner, supra (notice requirement did
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not indicate employee status). But see Levine v. Commissioner,
T.C. Memo. 2005-86 (notice by alleged employer supports
independent contractor status).
Petitioner’s right to receive a wage continuation payment
upon termination is at best a neutral factor. The employment
agreement provided that the payment would be for past services.
It would not constitute a payment for breach of contract or
petitioner’s right to perform future services under the contract.
Both parties to the employment agreement had the right to
terminate the relationship with or without cause, and DHN could
terminate the relationshipwithout notice. This factor supports a
finding of employment status.
E. Integral Part of Regular Business
Integration of a worker’s services into the business operations
of the alleged employer indicates employee status. DHN is in the
business of providing medical services. Petitioner, as a
physician member, is integrally involved in that business. This
factor supports a finding that petitioner was an employee of DHN.
F. Permanency of Relationship
A continuing relationship indicates an employment relationship
while a transitory relationship weighs in favor of independent
contractor status. Ewens & Miller, Inc. v. Commissioner, supra
at 273. The parties’ contemplation of a continuing relationship
indicates an employment relationship. Ellison v. Commissioner,
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55 T.C. 142, 155 (1970). In contrast, a relationship established
to accomplish a specified objective is indicative of an
independent contractor relationship. Id.
In his pretrial memorandum petitioner acknowledged that the
doctors at DHN intended a long-lasting relationship but argues
this fact is not significant. Petitioner had a long-term
relationship with DHN. He joined DHN as a shareholder in 1999.
The employment agreement contemplated an initial 3-year term with
automatic 1-year renewals thereafter. Given the continuing
nature of the relationship, this factor supports a finding of
employee status.
G. Intent of the Parties
The parties clearly intended to create an employment
relationship. The employment agreement expressly identified
petitioner as an employee of DHN. DHN reported petitioner’s
compensation on Form W-2 and withheld income, Social Security,
and Medicare taxes consistent with this expressed intent.
Petitioner did not make quarterly estimated tax payments. For
the years 2001 through 2003 DHN similarly reported petitioner’s
compensation on Forms W-2 and withheld taxes. For these years
petitioner reported his compensation from DHN as wages on line 7
of his Forms 1040 and did not report the income or his expenses
on Schedule C as he did for 2004.
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DHN provided employment benefits to petitioner, including
paid vacation and holidays, medical and disability insurance,
participation in a retirement plan, and malpractice insurance.
DHN also agreed to reimburse petitioner for the cost of
continuing education classes. Petitioner did not include in
gross income DHN’s contributions to his retirement account. DHN
refused to issue an amended Form W-2 to petitioner to indicate
that he was a statutory employee. This factor supports a finding
of an employment relationship.
H. Conclusion
We find that petitioner is a common law employee of DHN.
Petitioner entered into a contract with DHN that expressly
identified him as an employee. Consistent with that intent,
petitioner received a fixed salary without regard to the medical
fees he generated, received paid vacations, employee benefits,
and reimbursement for expenses, participated in an employee
retirement plan, and received Forms W-2 reporting his
compensation. Petitioner was required to work normal office
hours, maintained a long-term relationship with DHN, and did not
perform medical services for a fee except for his DHN patients.
DHN provided his office space, paid for hospital staff
privileges, and provided a substantial portion of his medical
equipment. Petitioner accepted his employee classification with
DHN for prior years as defined in the employment agreement but
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sought to change that treatment once faced with the enormous
expense from the employment-related lawsuit and settlement in
2004 and 2005. The fact that petitioner was a medical
professional with discretion to exercise his professional
judgment in patient care and treatment does not negate the strong
evidence that shows that he was a common law employee of DHN.
As a common law employee, petitioner must report his
compensation from DHN on Form 1040, line 7 and is not entitled to
deduct the claimed business expenses on Schedule C. He must
claim the expenses on Schedule A as unreimbursed employee
business expenses subject to the 2-percent limitation for
miscellaneous itemized expenses.
II. Miscellaneous Itemized Deduction
We find that petitioner has substantiated that he paid legal
fees of $22,155 and professional dues of $440 during 2004.
Petitioner is entitled to deduct these expenses incurred in
connection with his employment as itemized deductions subject to
the 2-percent limitation of section 67(a). However, the 2-
percent limitation denies any deduction of these expenses for
2004.
To reflect the foregoing,
Decision will be entered
for respondent.