T .C . Memo . 2007-58

T .C . Memo . 2007-58

UNITED STATES TAX COUR T

PHILIP T . AND MARY ELLEN CHAPLIN, Petitioners v .

COMMISSIONER OF INTERNAL REVENUE, Responden t

Filed March 12, 2007 .

Docket No . 9354-05 .

David R . Andelman

and

Juliette Galicia Pico , for

petitioners .

Nina P . Ching , for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINIO N

HAINES,

Judge : Respondent determined a deficiency in

petitioners' 2001 Federal income tax of $24,185 and an accuracyrelated penalty under section 6662(a) of $4,837 .1 The issues fo r

1 All section references are to the Internal Revenue Code,

(continued . . . )

SERVED

MAR 1 2 2001

- 2 decision are : (1) Whether petitioners are entitled to deduct

legal fees of $84,542 from their adjusted gross income pursuant

to section 62(a)(1), or whether petitioners must deduct the legal

fees as a miscellaneous itemized deduction under section 67 ; and

(2) whether petitioners are liable for an accuracy-related

penalty under section 6662(a) .

FINDINGS OF FAC T

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

The stipulation of facts, the supplemental stipulation of facts,'

and the attached exhibits are incorporated herein by this

reference . At the time they filed their petition, petitioners

resided in West Roxbury, Massachusetts .

Philip T . Chaplin (petitioner) is a professional fiduciary,

serving as a trustee of trusts and as an executor of estates .

Petitioner began his career with Minot, DeBlois & Maddison (MDM)

in 1979 . Before his employment with MDM, petitioner had no

experience with investment management or trust and estate

administration .

On October 27, 1983, Rice, Heard & Bigelow, Inc . (RHB), a C

corporation incorporated in the Commonwealth of Massachusetts,

was formed as a spinoff of MDM . Upon its incorporation,

petitioner went to work with RHB and participated in RHB' s

1( . . .continued)

as amended . Amounts are rounded to the nearest dollar .

- 3 profit-sharing plan . In 1986, petitioner became a director and

shareholder of RHB and purchased stock representing a 5-percent

share of RHB . In February 1987, petitioner was elected to RHB's

board of directors .

RHB was formed to provide administrative, management, and

investment services for fiduciaries and others, to the extent

permitted by law . RHB did not have trustee powers, was not a

trust company or bank, and was not registered under th e

Investment Advisers Act of 1940 . RHB could not be appointed to

serve as a corporate trustee . Instead, individual fiduciaries

associated with RHB were named and served as trustees in their

individual capacities . As the named trustees, the fiduciaries

were the legal owners of trust assets and had sole custody and

authority over the trust assets under their care .

Typically, only RHB's shareholders and directors served as

named trustees . Before being retained by a client, the

fiduciaries provided the prospective client with a fee schedule,

a fiduciary services statement, and a copy of the RHB trustees'

investment philosophy . If a new client did not like a particular

fiduciary, the client could chose from other fiduciaries at RHB .

There was an attempt amongst the fiduciaries to equalize their

workloads .

The fiduciaries released all trustee's fees paid to them to

RHB . RHB decided how to allocate those fees for paying expenses

- 4 and providing compensation . RHB paid the fiduciaries a salary

and withheld taxes including Social Security . RHB provided the

fiduciaries with general business liability insurance, workmen's

compensation, unemployment insurance, group life and disability

insurance, family health insurance, and subscriptions t o

professional publications . RHB also provided office space,

copiers, computer systems, and administrative support services .

RHB paid petitioner's expenses to become a chartered financial

analyst and reimbursed petitioner for any work-related travel

expenses . RHB also provided petitioner with a company credit

card .

RHB expected petitioner and other fiduciaries to kee p

regular hours and to work every business day . RHB also expected

petitioner and other fiduciaries to keep all fiduciaries apprised

of what they were doing . All correspondence with clients wa s

circulated among the fiduciaries .

Before petitioner became a shareholder and director of RHB,

Neil Rice (Mr . Rice), RHB's president, and Edward Heard (Mr .

Heard) served as petitioner's supervisors and mentors . All

supervised employees, including petitioner, were reviewed

annually by RHB . The reviews were used by RHB to determine any

salary increases and bonuses .

Upon his becoming a shareholder and director, petitioner and

RHB executed an "employment agreement" on December 11, 1986 . The

- 5 employment agreement provided in part :

AGREEMENT made * * * between Philip T . Chaplin of

Boston , Massachusetts ( the "Employee ") and Rice, Heard

& Bigelow , Inc ., a Massachusetts corporation (th e

"Employer") .

In consideration of the Employee's employment by

the Employer and the mutual covenants herein set forth,

Employer and Employee agree as follows :

1 . DUTIES . Employer hereby employs Employee

actively to engage in the practice of fiduciary

management and related duties . Employee accepts such

employment and agrees to perform all such duties of a

nature consistent with his training and experience

which may be assigned to him by Employer, and, subject

always to fiduciary constraints and to the direction

and control of the Board of Directors of Employer * * *

provided, however, that Employer agrees not to impose

upon Employee any duty or restriction in connection

with such performance which would cause any violation

of fiduciary standards set forth by law or by any

governing instrument under which Employee is to

function or any other ethical or legal obligation

imposed upon the members of the fiduciary profession in

jurisdictions in which the Employee shall practice .

2 . TERM . The employment shall commence as of the

date hereof, and shall continue until terminated as

hereinafter provided .

5 . EXTENT OF SERVICES, OUTSIDE FEES, ETC .

Employee shall devote his entire attention and energies

diligently and faithfully to Employer's business * * * .

Subject to fiduciary constraints, Employer shall

determine the specific duties to be performed by the

Employee, the means and manner by which those duties

shall be performed, and the extent by which those

duties shall be performed by other Employees of the

Employer . * * *

7 . TERMINATION . This Agreement may be terminated

by either party on not less than sixty (60) days prior

written notice . Notwithstanding the foregoing, the

Employer may terminate this Agreement without prior

notice in the event the Employee (i) commits any

dishonest or fraudulent act against the Employer ; or

(ii) willfully fails to perform substantially his

duties under this Agreement, other than by reason of

his mental or physical disability . * * *

Petitioner and RHB also executed a "stock purchase and

restriction agreement" (stock purchase agreement) on December 11,

1986 .

Petitioner received a paycheck from RHB every 2 weeks . In

addition to serving as a fiduciary, petitioner provided

administrative services to RHB . However, RHB did not break

petitioner's compensation down into payments for fiduciary and

nonfiduciary duties .

From 1988 to 1994, RHB's fiduciaries participated in two

committees, the investment strategy committee and the investment

committee . During that time, petitioner served as the discussion

leader of the investment strategy committee . The purpose of the

investment strategy committee was to discuss market trends and to

serve as a forum for the individual fiduciaries to discuss and

share opinions about appropriate investments .

The investment committee met weekly to review individual

trust accounts . The investment committee reviewed 20 to 30 trust

accounts per week . All trust accounts were reviewed three times

per year on a fixed schedule . The investment committee wa s

responsible for approving trades made by the fiduciaries while

- 7 serving as trustees . If the trades were not immediately

approved, the members of the investment committee would consult

with other trustees . If the investment committee objected to the

trade, the trade would not be placed even if the trustee of that

trust objected .

In 1991, Mr . Rice told petitioner that the fiduciaries were

expected to follow the majority vote of the investment committee .

Petitioner objected to the recommendations of the investmen t

committee to the extent that he believed the recommendations were

not in the best interest of a trust of which he was fiduciary or

violated his fiduciary duty to exercise independent judgment .

This conflict led to the deterioration of the relationship

between petitioner and RHB .

In order to prevent the termination of the employment

agreement, RHB compelled petitioner to obtain psychiatric

counseling in April 1992 . RHB paid for the counseling sessions ,

and it was up to Mr . Rice and the psychiatrist when the sessions

would end . Ultimately, petitioner saw the psychiatrist twice a

week for 1-1/2 years .

On November 17, 1994, Mr . Rice informed petitioner that RHB

would like to exercise the termination provision of the

employment agreement and backdate the notice to November 1, 1994,

so that it would be effective December 31, 1994 . Instead, on

November 17, 1994, petitioner delivered a written notice to RHB

- 8 that, pursuant to section 7 of the employment agreement, he was

terminating the employment agreement . On November 22, 1994, RHB

delivered a written notice to petitioner that, pursuant to

sections 1 and 7 of the employment agreement, RHB was terminating

the employment agreement for cause . Petitioner immediately

turned over his office keys and RHB credit card and left the

office . When petitioner returned to gather his belongings, he

was supervised by another fiduciary who had to approve what

petitioner took from the office .

When he left RHB, petitioner took with him the trust

accounts for which he served as the sole trustee . Petitioner

also took with him trust accounts for which he served as a

cotrustee where the other cotrustee determined that it was

appropriate to resign . Petitioner resigned from the remainder of

the trust accounts for which he served as a cotrustee .

In January 1995, petitioner began working at Woodstock Corp .

On October 4, 1999, petitioner joined Foster, Dykema, Cabot & Co .

(FDC) as its vice president and portfolio manager . As he had

done at RHB, petitioner remitted all trustee's fees to FDC, and

FDC paid petitioner a salary . Petitioner worked at FDC during

2001 .

On November 21, 1997, petitioner filed suit against RHB in

the U .S . District Court for the District of Massachusetts,

alleging various Federal and State claims . In 1999, the District

- 9 Court dismissed the Federal claims and declined to exercise

pendent jurisdiction over the State claims .

On October 20, 1999, petitioner filed a first amended

complaint against RHB, Mr . Rice, and Mr . Heard with the Superior

Court Division in Norfolk County, Massachusetts, alleging : (1)

Breach of contract--termination for refusal to breach duty to

trust beneficiaries ; (2) breach of contract--violation of 60-day

notice of termination provisions ; (3) breach of contract--breach

of covenant of good faith and fair dealing ; (4) wrongful

termination in violation of public policy ; (5) intentional

interference with advantageous relationships ; and (6) defamation .

In December 2002, the case was settled, RHB agreed to pay

petitioner $1,500,000, and all claims and counterclaims were

dismissed with prejudice .

Petitioners filed a joint Federal income tax return for

2001 . Petitioners reported wages of $218,453, of which $217,549

represented petitioner's salary from FDC . On an attached

Schedule C, Profit or Loss From Business, petitioners reported

gross income of $173,211, total expenses of $257,753, and a net

loss of $84,542 . The gross income represented trustee's fees

petitioner received while working at FDC . Because petitioner

remitted those payments to FDC, he also included the remittances

- 10 in his total expenses .2 The remainder of the total expenses

($84,542) was attributable to legal fees arising from

petitioner's lawsuit against RHB .

After deducting the business loss from their wages and other

sources of income, petitioners reported adjusted gross income of

$156,763 . Petitioners reported that they were not liable for any

alternative minimum tax (AMT) . After deducting itemize d

deductions and exemptions, petitioners reported total tax of

$23,216 and tax withheld of $46,245 and requested a refund of

$23,028 .

On February 22, 2005, respondent issued petitioners a notice

of deficiency, determining a deficiency in petitioners' 2001

Federal income tax of $24,185 and an accuracy-related penalty

under section 6662(a) of $4,837 . Respondent determined that

petitioners were not entitled to deduct legal fees of $84,542

from their adjusted gross income as an ordinary and necessary

business expense . Instead, respondent determined that the legal

fees were an unreimbursed employee expense relating t o

2 Even though petitioner had a similar arrangement with RHB

in that he remitted all trustee's fees to RHB, petitioners did

not report the trustee's fees and remittances in a similar manner

on their 1994 Federal income tax return . In fact, petitioners

did not report the trustee's fees as income in any manner and'did

not attempt to deduct the remittances . Instead, they reported

only the wages received from RHB as income . Likewise,

petitioners did not report the trustee's fees received or the

remittances made to Woodstock Corp . from 1995 through 1997 .

Petitioners did not begin reporting the trustee's fees and

remittances on a Schedule C until 1998 .

- 11 petitioner's employment by RHB . As such, respondent determined

that the legal fees were properly deductible as a miscellaneous

itemized deduction to the extent the fees exceeded 2 percent of

petitioners' adjusted gross income, or $77,180 . Becaus e

miscellaneous itemized deductions are not allowable for purposes

of the AMT, petitioners' legal fees deduction triggered an AMT

liability of $21,082 .

In response to the notice of deficiency, petitioners filed

their petition with this Court on May 20, 2005 .

OPINION

A.

Petitioners' Legal Fees Deductio n

The dispute in this case concerns the appropriate treatment

of the legal fees petitioners incurred in connection with

petitioner's lawsuit against RHB, Mr . Rice, and Mr . Heard .

Section 62(a)(1) provides that taxpayers are entitled to deduc t

from adjusted gross income "The deductions allowed by this

chapter * * * which are attributable to a trade or business

carried on by the taxpayer, if such trade or business does no t

consist of the performance of services by the taxpayer as an

employee ." Thus, legal fees may be deducted from adjusted gross

income if the fees are directly related to the taxpayer's trade

or business . See secs . 62(a)(1), 162 . However, if the

taxpayer's trade or business is that of being an employee, then

the legal fees will be subject to the limitation of section

- 12 62(a)(1) and will be treated as a miscellaneous itemized

deduction pursuant to section 67 .

The parties agree that petitioners are entitled to deduct

the legal fees as a trade or business expense under section 162 .3

The parties disagree, however, regarding the nature of

petitioner's relationship with RHB and the appropriate treatment

of the legal fees deduction . Petitioners argue that petitioner

was not an employee of RHB but was engaged in the trade or

business of being an independent professional fiduciary .

Petitioners assert that the lawsuit arose from petitioner's trade

or business of being an independent professional fiduciary,

entitling them to deduct the legal fees from their adjusted gross

income under section 62(a)(1) . Respondent argues petitioner was

an employee of RHB, and petitioners must deduct the legal fees as

a miscellaneous itemized deduction under section 67 because the

legal fees arose from petitioner's employment . See Alexander v .

3 Petitioners argue, under the origin of the claim test,

the legal fees are solely attributable to petitioner's fiduciary

services and are therefore deductible under sec . 162, citing

Quill v . Commissioner , 112 T .C . 325, 328-329 (1999) . The origin

of the claim test is typically used to determine whether legal

fees are deductible under sec . 162(a) (as a trade or business

expense) or sec . 212 (as a nonbusiness expense for the production

of income), or whether the legal fees are nondeductible personal

expenses . See United States v . Gilmore , 372 U .S . 39 (1963) ;

Quill v . Commissioner , supra . The origin of the claim test is

inapplicable to this case because the parties agree that the

legal fees are deductible under sec . 162(a) as a trade or

business expense . Instead, the dispute is over the nature of

petitioner's trade or business--whether he was an employee or an

"independent professional fiduciary" .

- 13 IRS , 72 F .3d 938, 944-947 (1st Cir . 1995), affg . T .C . Memo . 199551 . To determine the appropriate treatment of petitioners' legal

fees, we must determine whether petitioner was an employee of RHB

before his termination .

Although the income tax treatment of a taxpayer's trade or

business expense deductions depends on whether the taxpayer is

"[performing] * * * services * * * as an employee", subtitle A of

the Internal Revenue Code does not define "employee" . Under

these circumstances, we apply common law rules to determine

whether the taxpayer is an employee .

Nationwide Mut . Ins . Co . v .

Darden , 503 U .S . 318, 323-325 (1992) ;

Weber v . Commissioner , 103

T .C . 378, 386 (1994), affd . 60 F .3d 1104 (4th Cir . 1995) ;

Hathaway v . Commissioner , T .C . Memo . 1996-389 .

Whether an individual is an employee must be determined on

the basis of the specific facts and circumstances involved .

Profl . & Executive Leasing, Inc . v . Commissioner , 89 T .C . 225,

232 (1987), affd . 862 F .2d 751 (9th Cir . 1988) ;

Simpson v .

Commissioner , 64 T .C . 974, 984 (1975) . Relevant factors include :

(1) The degree of control exercised by the principal over the

details of the work ; (2) the relationship the parties believe

they are creating ; (3) whether the work is part of the

principal's regular business ; (4) which party invests in the

facilities used in the work ; (5) the individual's opportunity for

profit or loss ; (6) the permanency of the relationship and the

- 14 right to discharge ; and (7) the provision of benefits typical of

those provided to employees .

254, 258-259 (1968) ;

NLRB v . United Ins . Co . , 390 U .S .

Weber v . Commissioner ,

& Executive Leasing, Inc . v . Commissioner ,

supra at 387 ;

Profl .

supra at 232 . No one

factor is determinative ; rather, all the incidents of th e

relationship must be assessed and weighed .

Co . ,

NLRB v . United Ins .

supra at 258 .

1 .

Degree of Control Exercised by RH B

Although no single factor is dispositive, the test usually

considered fundamental is whether the alleged employer has the

right to control the activities of the individual whose status is

in issue .

Weber v . Commissioner ,

supra at 387 ;

Executive Leasing, Inc . v . Commissioner ,

Profl . &

supra at 232-233 . In

order for an employer to retain the requisite control over the

details of an employee's work, the employer need not stand over

the employee and direct every move made by the employee .

Weber

v . Commissioner ,

supra at 388 ;

Profl . & Executive Leasing, Inc .

v . Commissioner ,

supra at 234 ;

Simpson v . Commissioner ,

supra at

985 .

The threshold level of control necessary to find employee

status is generally lower when applied to professional services

than when applied to nonprofessional services .

Commissioner ,

supra at 388 ;

Weber v .

James v . Commissioner , 25 T .C . 1296,

1301 (1956) . In James v . Commissioner ,

supra at 1301, this Court

- 15 stated :

The methods by which * * * [professionals] work are

prescribed by the techniques and standards of their

professions . No layman should dictate to a lawyer how

to try a case or to a doctor how to diagnose a disease .

Therefore, the control of an employer over the manner

in which professional employees shall conduct the

duties of their positions must necessarily be more

tenuous and general than the control over

nonprofessional employees . Yet, despite this absence

of direct control over the manner in which * * *

[professionals] shall conduct their professional

activities, it cannot be doubted that many

[professionals] are employees .

Petitioners argue RHB did not have the right to control the

means and manner by which petitioner exercised his fiduciary

responsibilities . Petitioners assert that petitioner was

required by law to exercise his own independent judgment when

exercising his fiduciary duties and was subject only to the

requirements of law and the terms of the individual trust

documents .

It is inherent in the nature of many professions, including

petitioner's, that professional employees engaged in such

professions are subject to various requirements of law,

requirements of independent regulatory bodies, and other

fiduciary responsibilities which are beyond the control of their

employer . Because a lower standard applies to professionals, the

fact petitioner was required by law to exercise independent

judgment does not preclude RHB from exercising the requisite

- 16 control . See Weber v . Commissioner ,

Commissioner ,

supra at 388 ;

James v .

supra at 1301 .

Many of the facts and circumstances of this case demonstrate

RHB exerted control over petitioner . RHB, Mr . Rice, and Mr .

Heard supervised petitioner in the performance of his fiduciary

duties until he became a shareholder and director, and petitioner

was subject to annual review . Section 1 of the employment

agreement required petitioner to perform duties as assigned to

him by RHB and required him to perform such duties "subject

always to fiduciary constraints

and to the direction and control

of the Board of Directors of (RHBI " . (Emphasis added .) RHB

required petitioner to keep regular business hours . RHB required

petitioner to keep other trustees informed of what he was doing .

RHB's investment committee reviewed all trust accounts, including

those petitioner managed, three times per year and had to approve

trades made by the fiduciaries . If the investment committee

objected to the trade, the trade would not be placed even if the

trustee of that trust objected . In 1991, Mr . Rice told

petitioner that the fiduciaries were expected to follow the

majority vote of the investment committee . RHB required

petitioner to seek counseling, and Mr . Rice and the psychiatrist

determined when the counseling would end .

Petitioner often objected to the control asserted by RHB,

and this dispute apparently led to petitioner's termination and

- 17 the subsequent lawsuit . Nevertheless, we find RHB exercised the

requisite control over petitioner . This factor supports a

finding that petitioner was an employee of RHB .

2.

The Relationship the Parties Believe They Are Creating

Petitioners argue the parties intended to create a hybrid

relationship where : (1) The fiduciaries were the principal and

RHB was the agent because the fiduciaries paid RHB to provide

them with office space, equipment, and administrative services ;

and (2) to the extent the fiduciaries provided administrative

(nonfiduciary) services to RHB, the fiduciaries were employees of

RHB . Petitioners conclude that, because the lawsuit arose from

the first type of relationship, the legal fees were attributable

to his trade or business of being an independent professional

fiduciary and were not attributable to petitioner's employment by

RHB . Petitioners' argument is not supported by the record .

While petitioner and RHB did not enter into an employment

agreement until 1986, the nature of the relationship before 1986

indicates that the parties believed they were creating an

employer-employee relationship . Before being hired by MDM, RHB's

predecessor, petitioner had no experience serving as a fiduciary .

Petitioner received on-the-job training by MDM and RHB .

Petitioner was subject to supervision and annual review by RHB

and its shareholders and directors . These factors

are

more

consistent with an employer-employee relationship than with

- 18 petitioners' position that petitioner was the principal and RHB

was the agent .

The employment agreement demonstrates that the parties

intended to continue an employer-employee relationship after

petitioner became a shareholder . The employment agreement refer s

to RHB as the employer and petitioner as the employee . The

employment agreement provides petitioner "accepts such employment

and agrees to perform all such duties of a nature consistent with

his training and experience which may be assigned to him b y

* * * [RHB], and, subject always to fiduciary constraints and to

the direction and control of the Board of Directors of * * *

[RHB]" . The employment agreement also provides that petitioner :

shall devote his entire attention and energies

diligently and faithfully to * * * [RHB's] business

* * * . Subject to fiduciary constraints, * * * [RHB]

shall determine the specific duties to be performed by

the * * * [petitioner], the means and manner by which

those duties shall be performed, and the extent by

which those duties shall be performed by other

Employees of * * * [RHB] .

The employment agreement does not indicate that the parties

intended to establish a hybrid relationship . Instead, the

employment agreement indicates the parties intended to establis h

an employer-employee relationship, particularly in regard to

petitioner's performance of his fiduciary services .

This conclusion is supported by the manner in which RHB

treated petitioner . As described above, RHB exercised a

requisite level of control over petitioner . RHB paid petitioner

- 19 a salary, issued biweekly paychecks, and withheld taxes including

Social Security . The fact that the salary was not broken down

into payments for fiduciary and nonfiduciary services weighs

against petitioners' hybrid relationship argument .

This factor supports a finding that petitioner was an

employee of RHB .

3 .

Whether the Work Is Part of the Principal's Business

Petitioners argue that RHB was in the business of providing

individual fiduciaries,with office space, equipment, and

administrative services . Petitioners further argue that RHB

could not be in the business of providing fiduciary services

because it was not licensed to do so .

The parties stipulated and we so found that RHB was formed

to provide administrative, management, and investment services

for fiduciaries and others, to the extent permitted by law . This

does not establish that RHB's business was limited to providing

those services to individual fiduciaries . It is clear that RHB

was in the business of providing clients with fiduciary services .

The fact that RHB as an entity could not render fiduciary

services and that it relied on individual fiduciaries to provide

those services does not change the nature of its business .

Petitioner is a professional fiduciary . His services as such

were an integral part of RHB's business . This factor supports a

finding that petitioner was an employee of RHB .

- 20 4 .

Investment in Facilities Used in the Wor k

RHB provided petitioner with office space, copiers, computer

systems, and other equipment . Petitioners do not argue

petitioner made any investment in the facilities or equipment .

Petitioner argues this was "merely part of the arrangement among

the RHB trustees, and that was part of the administrative and

support services that RHB provided to the individual RHB

trustees ." Petitioner argues that the arrangement was entered

into by the "individual RHB trustees" to save administrative

costs . Regardless of why the arrangement was entered into, the

fact remains that RHB provided all of the facilities, equipment,

and administrative services . This factor supports a finding that

petitioner was an employee of RHB .

5.

Petitioner's Opportunity for Profit or Loss

Petitioners argue that "Petitioner's affiliation with RHB

greatly enhanced Petitioner's prospects for earning greater

trustee's fees vis-a-vis the trustee's fees he would earn if he

conducted his trustee business on his own ." Contrary to

petitioner's argument, petitioner's opportunity for profit was

limited . Petitioner's salary and bonuses were fixed by RHB, and

he was required to remit all trustee's fees to RHB . While

increased productivity could lead to a raise or larger bonuses in

the future, petitioner could not directly increase his profit by

earning additional trustee's fees . Petitioner did participate in

- 21 RHB's profit-sharing plan . However, such an arrangement may also

be found in employer-employee relationships and does not by

itself weigh in favor of petitioners' position .

There is no indication in the record that petitioner would

incur any loss if RHB ceased to be profitable . However,

petitioner could be held personally liable if he breached his

fiduciary duties to his clients . In this limited sense,

petitioner did bear some risk of loss .

This factor tends to support a finding that petitioner was

an employee of RHB, but its significance is mitigated by

petitioner's participation in RHB's profit-sharing plan and his

potential personal liability .

6.

The Permanency of the Relationship and the Right To

Discharg e

The permanency of a relationship indicates an employeremployee relationship, while a transitory relationship does not .

Levine v . Commissioner , T .C . Memo . 2005-86 ;

Hathaway v .

Commissioner , T .C . Memo . 1996-389 . Additionally, the right to

discharge a worker and the worker's right to quit at any time

indicate an employer-employee relationship .

Commissioner ,

supra .

Levine v .

Under the employment agreement, the

relationship between petitioner and RHB was indefinite, subject

to the termination provision . Under the termination provision,

RHB had the right to discharge petitioner with 60 days' notice

without cause or immediately with cause . Petitioner had the

- 22 right to quit upon giving 60 days' notice . This factor supports

a finding that petitioner was an employee of RHB .

7.

The Provision of Benefits Typical of Those Provided to

Employee s

RHB trained petitioner . RHB provided petitioner with

general business liability insurance, workmen's compensation,

unemployment insurance, group life and disability insurance,

family health insurance, and subscriptions to professional

publications . RHB paid for petitioner's expenses to become a

chartered financial analyst and reimbursed petitioner for any

work-related travel expenses . RHB also provided petitioner with

a company credit card . These benefits are typical of those an

employer provides to an employee . This factor supports a finding

that petitioner was an employee of RHB .

8 .

Petitioners' Other Argument s

Petitioners cite

Feivor v . Commissioner , T .C . Memo . 1995-

107, for the proposition that the fact a taxpayer reports his

business expenses on a Schedule C indicates that he is an

independent contractor and not an employee . Petitioners draw the

conclusion that, because they reported on a Schedule C the

trustee's fees petitioner received and remitted to FDC,

petitioner acted as an independent contractor and not an employee

in providing fiduciary services . How petitioners treated the

trustee's fees petitioner received and remitted to FDC has no

bearing on petitioner's relationship with RHB . In fact, while

- 23 petitioner was employed by RHB, petitioners did not report on a

Schedule C the trustee's fees received and remitted to RHB .

Instead, petitioners reported only the wages received .

Petitioners' argument is without merit .

Petitioners argue Griswold v . Dir . of Div . of Unemployment

Comp . & Div . of Employment Sec . , 53 N .E .2d 108, 109 (Mass . 1944),

and Rev . Rul . 58-5, 1958-1 C .B . 322, establish that petitioner,

as a professional fiduciary, will always be treated as being

engaged in the trade or business of being a fiduciary and can

never be an employee . In Griswold , the Supreme Judicial Court of

Massachusetts addressed whether a trustee was the employee of a

trust for purposes of Massachusetts unemployment compensation

laws . The court stated trustees "are the masters .and principals

in the business of the trust" and held "trustees are not

employees of such a trust ." Rev . Rul . 58-5,

supra,

addressed

whether income received by a fiduciary of a decedent's estate

should be considered in computing net earnings from selfemployment under the Self-Employment Contributions Act of 1954 .

The revenue ruling states that "Professional fiduciaries will

always be treated as being engaged in the trade or business of

being fiduciaries, regardless of the assets contained in the

estate ." Neither Griswold nor Rev . Rul . 58-5,

supra , establishes

that a professional fiduciary can never be an employee . Both

authorities deal with issues different from the issue in this

- 24 case--whether petitioner was an employee of RHB for purposes of

the income tax provisions of the Internal Revenue Code . Neither

authority has any bearing on this case .

9 .

Conclusio n

Despite petitioners' emphasis on petitioner's independent

fiduciary obligations, the record overwhelmingly supports a

finding that petitioner was an employee of RHB . The legal fees

arose from a lawsuit petitioner instituted in response to his

termination by RHB . Because the legal fees were directly

attributable to petitioner's employment and termination,

petitioners may not deduct the legal fees from their adjusted

gross income under section 62(a)(1) . Instead, the legal fees

must be treated as a miscellaneous itemized deduction pursuant to

section 67 . As a result, we sustain respondent's determination

and find a deficiency in petitioners' 2001 Federal income tax of

$24, 185 .

B.

Accuracy Related Penalty Under Section 6662(a)

Respondent determined petitioners are liable for an

accuracy-related penalty under section 6662(a) of $4,837 .

Petitioners argue they are not liable for an accuracy-related

penalty because they had substantial authority and a reasonable

basis for their position and they reasonably relied upon the

advice of a tax professional ; and because they are already

subject to AMT, it would be unfair to penalize them further .

- 25 Section 6662(a) imposes a penalty of 20 percent of the

portion of the underpayment to which section 6662 applies . As

relevant to this case, the penalty applies to any portion of the

underpayment that is attributable to a substantial understatement

of income tax . Sec . 6662(b)(2) . There is a "substantial

understatement of income tax" if the amount of the understatement

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

on the return or $5,000 . Sec . 6662(d)(1)(A) .

The Commissioner bears the burden of production with respect

to penalties . Sec . 7491(c) ;

Higbee v . Commissioner , 116 T .C .

438, 446-447 (2001) . Once the burden of production is met, the

taxpayer must come forward with evidence sufficient to show that

the penalty does not apply .

Higbee v . Commissioner ,

supra at

447 .

According to our determination above, the tax required to be

shown on petitioners' tax return was $47,512 . Ten percent of

that amount is less than $5,000 . Thus, petitioners'

understatement is substantial if it exceeds $5,000 . Petitioners

reported an income tax liability of $23,216, resulting in an

understatement of $24,296 . Respondent has satisfied his burden

of production by showing that petitioners' understatement of tax

was substantial .

For purposes of determining the accuracy-related penalty,

the amount of the understatement is reduced by the portion of the

- 26 understatement that was attributable to the tax treatment of an

item where : (1) The taxpayer had substantial authority for his

position ; or (2) the taxpayer had a reasonable basis for his

position, and he disclosed the relevant facts affecting that item

on his return . Sec . 6662(d)(2)(B) . Petitioners argue that, in

accordance with Griswold and Rev . Rul . 58-5,

supra , they had

substantial authority and a reasonable basis for their treatment

of the legal fees . As discussed above, neither authority

provides support for petitioners' contention that petitioner, as

a professional fiduciary, could never be an employee . Likewise,

neither authority provides support for petitioners' treatment of

the legal fees .

The accuracy-related penalty is not imposed with respect to

any portion of an underpayment if the taxpayer can establish he

acted with reasonable cause and in good faith . Sec . 6664(c)(1) .

Reliance upon the advice of a professional may demonstrate

a

taxpayer acted with reasonable cause and in good faith .

Neonatology Associates, P .A . v . Commissioner , 115 T .C . 43, 98-99

(2000), affd . 299 F .3d 221 (3d Cir . 2002) ;

Freytag v .

Commissioner , 89 T .C . 849, 888 (1987), affd . 904 F .2d 1011 (5th

Cir . 1990), affd . 501 U .S . 868 (1991) ; see sec . 1 .6664-4(c)(1),

Income Tax Regs . However, a taxpayer's reliance upon the advice

of a professional does not automatically constitute reasonable

cause .

Neonatology Associates, P .A . v . Commissioner ,

supra at

- 27 98-99 ; see sec . 1 .6664-4(c)(1), Income Tax Regs . For a taxpayer

to reasonably rely on the advice of a professional, the taxpayer

must show : (1) The adviser was a competent professional who had

sufficient expertise to justify reliance ; (2) the taxpaye r

provided necessary and accurate information to the adviser ; and

(3) the taxpayer actually relied in good faith on the adviser's

judgment .

Neonatology Associates, P .A . v . Commissioner ,

supra at

98-99 .

Petitioners argue they relied on the advice of a tax

professional in determining how to treat the legal fees .

However, petitioners did not call their tax professional as a

witness, nor did they introduce evidence which would allow the

Court to evaluate the tax professional's expertise . Because

petitioners have not established their tax professional was a

competent professional who had sufficient expertise to justify

reliance, petitioners have not shown they acted with reasonable

cause and in good faith . See sec . 6664(c)(1) ;

Associates, P .A . v . Commissioner ,

Neonatology

supra at 98-99 .

Finally, petitioners' argument that they should not be held

responsible for the accuracy-related penalty because they are

already being penalized by the AMT is without merit . This Court

has previously stated :

The unfortunate consequences of the AMT in various

circumstances have been litigated since shortly after

the adoption of the AMT . In many different contexts,

literal application of the AMT has led to a perceived

- 28 hardship, but challenges based on equity have been

uniformly rejected . * * *

* * * it "is not a feasible judicial undertaking

to achieve global equity in taxation * * * . And if it

were a feasible judicial undertaking, it still would

not be a proper one, equity in taxation being a

political rather than a jural concept ." * * * the

solution must be with Congress .

Speltz v . Commissioner , 124 T .C . 165, 176 (2005) (quoting Kenseth

v . Commissioner , 259 F .3d 881, 885 (7th Cir . 2001), affg . 114

T .C . 399 (2000)), affd . 454 F .3d 782 (8th Cir . 2006) ; see also

Alexander v . IRS , 72 F .3d 938 (1st Cir . 1995) ;

Okin v .

Commissioner , 808 F .2d 1338 (9th Cir . 1987), affg . T .C . Memo .

1985-199 ;

Warfield v . Commissioner , 84 T .C . 179 (1985) ;

Huntsberry v . Commissioner , 83 T .C . 742, 747-753 (1984) .

Petitioners' equity argument offers no relief from the accuracyrelated penalty .

For the above-stated reasons, we find petitioners are liable

for an accuracy-related penalty under section 6662(a) of $4,837 .

In reaching our holdings, we have considered all argument s

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit .

To reflect the foregoing,

Decision will . be entere d

for respondent .