O'Rourke v. Comm'r , 2009 Tax Ct. Summary LEXIS 26 ( 2009 )

T.C. Summary Opinion 2009-26
UNITED STATES TAX COURT
JOHN FRANCIS O’ROURKE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8691-07S. Filed February 25, 2009.
John Francis O’Rourke, pro se.
Jon D. Feldhammer, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect when the petition was filed.1 Pursuant to
section 7463(b), the decision to be entered is not reviewable by
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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any other court, and this opinion shall not be treated as
precedent for any other case.
Respondent determined deficiencies of $2,594 and $2,646,
respectively, in petitioner’s 2003 and 2004 Federal income taxes.
The issue for decision is whether petitioner is entitled to
exclude income earned working at the U.S. Embassy in Mexico City.
Background
Some of the facts have been stipulated, and we incorporate
the stipulation and the accompanying exhibits by this reference.
Petitioner lived in California when he filed the petition.
During 2003 and 2004 (the years in issue) petitioner resided
in Mexico City, Mexico, and worked continuously and exclusively
for the U.S. Drug Enforcement Agency (DEA) as an administrative
unit secretary in the DEA’s offices in the U.S. Embassy. The
U.S. Department of State paid petitioner for the work he
performed for the DEA at the Embassy.
Petitioner worked 8-hour days, 5 days a week, on a regular
schedule prescribed by the DEA. The U.S. Government provided
petitioner with the equipment and supplies required to perform
his job. Petitioner’s duties included typing travel orders and
job postings, making hotel and food reservations, arranging moves
and securing housing for DEA employees, and entering requests for
money into a proprietary DEA computer system that determined
whether the requested funds could be issued.
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Petitioner and the Government executed a contract which
referred to petitioner as a “Contractor” and provided for an
hourly rate of pay, five 8-hour days per week, and annual and
sick leave earned at the rate of 4 hours every 2 weeks.2 The
contract also stated that the Government would “withhold an
amount from the U.S. Citizen Contractor’s gross salary for
Federal withholding and FICA taxes”. Under the contract, either
party could terminate the contract on 15 days’ notice, and the
Government could terminate without advance notice upon
petitioner’s failure to fulfill any terms of the contract.
Petitioner’s work for the DEA did not provide any opportunity for
profit or loss outside the income and benefits enumerated in the
contract.
The U.S. Embassy distinguished between local hire
contractors, who received limited benefits, and direct hire
employees, who were DEA employees from the United States with the
full panoply of Federal employee benefits. The Embassy also
instructed its local hire contractors not to present themselves
as U.S. Government employees.
Petitioner did not pay any taxes to the Mexican Government
on his income from the DEA for 2003 or 2004. Petitioner timely
filed U.S. individual income tax returns for 2003 and 2004. On
2
The Contracting Officer of the U.S. Embassy in Mexico
City, Mexico, executed the contract on behalf of the U.S. Drug
Enforcement Agency.
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those returns petitioner reported his income from the DEA as
wages; included Forms 2555-EZ, Foreign Earned Income Exclusion;
excluded all of his income; and claimed refunds for all Federal
income taxes withheld.
Respondent issued a notice of deficiency disallowing
petitioner’s foreign earned income exclusion on the grounds that
his payments from the U.S. Department of State were not foreign
earned income but rather income from a U.S. source.
In his petition and at trial petitioner asserted that
because he was a contractor and not a regular employee of the
U.S. Government, he is entitled to the foreign earned income
exclusion.
Discussion
In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer bears
the burden of proving that these determinations are in error.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Pursuant to section 7491(a), the burden of proof as to factual
matters shifts to the Commissioner under certain circumstances.
Petitioner has neither alleged that section 7491(a) applies nor
established his compliance with its requirements. Petitioner
therefore bears the burden of proof.3
3
As the facts are not in dispute, the burden of proof does
not play a role in our findings or conclusions.
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Every citizen of the United States is subject to U.S. income
tax on his worldwide income. Sec. 1; sec. 1.1-1(b), Income Tax
Regs. Section 911(a) permits U.S. citizens residing and working
abroad to elect to exclude foreign earned income from U.S. income
taxation. However, “foreign earned income” does not include
amounts “paid by the United States or an agency thereof to an
employee of the United States or an agency thereof”. Sec.
911(b)(1)(B)(ii).
There is no dispute that petitioner worked for an agency of
the United States in 2003 and 2004 when he was a secretary in
Mexico City for the DEA and paid by the Department of State.
Thus, if petitioner was an employee, he is not entitled to
exclude this income. We must decide whether petitioner worked as
an independent contractor or as a contract employee.
Section 911 does not define “employee”. Accordingly, we
apply common law rules to determine whether a taxpayer is an
employee. See United States v. Silk, 331 U.S. 704 (1947);
Matthews v. Commissioner, 907 F.2d 1173, 1175 (D.C. Cir. 1990),
affg. 92 T.C. 351 (1989); Weber v. Commissioner, 103 T.C. 378,
386 (1994), affd. 60 F.3d 1104 (4th Cir. 1995).
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.
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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
right to discharge; and (7) the provision of benefits typical of
those provided to employees. NLRB v. United Ins. Co., 390 U.S.
254, 258-259 (1968); Weber v. Commissioner, supra at 387; Profl.
& Executive Leasing, Inc. v. Commissioner, supra at 232. No one
factor is determinative; rather, all the incidents of the
relationship must be assessed and weighed. NLRB v. United Ins.
Co., supra at 258.
1. Degree of Control Exercised by the DEA
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; Profl. &
Executive Leasing, Inc. v. Commissioner, supra at 232-233. An
employer can retain the requisite control over the details of an
employee’s work even without standing over the employee and
directing every move he makes. Weber v. Commissioner, supra at
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388; Profl. & Executive Leasing, Inc. v. Commissioner, supra at
234; Simpson v. Commissioner, supra at 985.
It is clear that petitioner performed his administrative
support work in the DEA’s offices in the U.S. Embassy, following
DEA’s procedures and guidelines, and that the DEA dictated the
days and hours petitioner worked. We conclude that the DEA
exercised the requisite control over petitioner, and this factor
supports a finding that petitioner was an employee of the
Government.
2. The Relationship the Parties Believed They Were Creating
The contract petitioner signed with the DEA labels
petitioner the “Contractor” for the purposes of that document.
Petitioner relies upon that label and the convention at the
Embassy to distinguish between the local hire contractors and
direct hire workers. Petitioner explained that even though he
was a U.S. citizen, he was “in many respects on the same level as
the Mexican contract employees.” Finally, he relies on
instructions he received not to refer to himself as a U.S.
Government employee.
The label used in the contract is “Contractor” not
“Independent Contractor”. The contract specifies that the
Government would withhold Federal income and employment taxes
from petitioner’s gross pay. Such withholding is inconsistent
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with the assertion that the parties intended petitioner to be an
independent contractor for U.S. income tax purposes.
This factor supports a finding that petitioner was a
contract employee; i.e., an employee operating under a contract.
3. Whether the Work Is Part of the Principal’s Business
Petitioner supported DEA operations by providing
administrative support in the DEA’s offices in the Embassy. This
support was in furtherance of the DEA’s mission, and this factor
supports a finding that petitioner was an employee.
4. Investment in Facilities Used in the Work
The DEA and the Embassy provided the office, tools, and
supplies required for petitioner to provide the administrative
support for which he contracted. Petitioner did not provide any
facilities or equipment. This factor supports a finding that
petitioner was an employee.
5. Petitioner’s Opportunity for Profit or Loss
Petitioner’s opportunity for profit was limited to the
hourly wage specified in the contract. This factor supports a
finding that petitioner was an employee.
6. The Permanency of the Relationship and the Right To
Discharge
Petitioner argues that his having a contract that expired
annually and would be renewed only if the budget permitted and
his not having the chance of promotion to direct hire status made
him an independent contractor and not an employee.
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The contract provided for renewal for additional periods at
the Government’s option and with the Contractor’s concurrence.
The contract also stated that either party could terminate the
agreement on 15 days’ notice and that the Government could
terminate without advance notice “upon the Contractor’s failure
to fulfill any terms of this contract”.
The permanency of a relationship indicates an employer-
employee 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. Levine v.
Commissioner, supra.
This factor supports a finding that petitioner was an
employee.
7. The Provision of Benefits Typical of Those Provided to
Employees
The Government trained petitioner and provided him with
annual leave, sick leave, and paid holidays. These benefits are
typical of those an employer provides an employee. The DEA did
not provide petitioner secure housing, health care, access to the
Embassy health unit, or certain other benefits provided to its
direct hire workers. Nevertheless, this factor supports a
finding that petitioner was an employee.
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Conclusion
Despite the fact that petitioner was treated differently
from direct hire employees, the record overwhelmingly supports a
finding that petitioner was an employee of the U.S. Government.
Accordingly, petitioner’s earnings from working for the DEA are
not foreign earned income. Sec. 911(b)(1)(B)(ii). Petitioner is
not entitled to exclude those wages for 2003 and 2004, and
respondent’s determination is sustained.4
To reflect our disposition of the issue,
Decision will be entered
for respondent.
4
Because petitioner did not pay income taxes to the
Government of Mexico in 2003 or 2004, and he seeks to exclude his
compensation from Federal income taxes as well, our comment in
Matt v. Commissioner, T.C. Memo. 1990-209, is equally apt here:
Finally, we note that the exclusion of foreign earned
income was designed to prevent United States Government
employees from escaping taxation on their income by both
the United States and the foreign governments. Soboleski
v. Commissioner, 88 T.C. 1024, 1030 (1987), affd. without
published opinion 842 F.2d 1292 (4th Cir. 1988). Congress
was concerned that section 911 not provide an
unjustifiable windfall for those individuals who paid
neither Federal nor foreign income taxes. See Smith v.
Commissioner, 77 T.C. 1181, 1185 (1981), affd. 701 F.2d
807 (9th Cir. 1983). Petitioner's position is precisely
that which Congress sought to preclude by enacting section
911(b)(1)(B)(ii); that is, she paid no foreign income
taxes in 1984 on her compensation from USAID and seeks to
avoid the payment of Federal income taxes as well by
excluding that compensation from her gross income.