Lose on the Numbers

Slawomir J. Fiedziuszko and Alicia M. Fiedziuszko, 2018 T. C. Memo. 75, filed 5/31/18, find themselves in a frustrating situation.

It’s Slawo’s story. He’s a consulting aerospace engineer, semi-retired from his old firm but gigging along, working from home, getting work from former employer via an employment agency and trying to hook up with other firms in the same line. His W-2s from the employment agency show “statutory employee” for the year immediately preceding year at issue, but not the year at issue.

Judge Pugh: “[Agency] processed Mr. Fiedziuszko’s pay for his work for [previous employer] and withheld Federal income tax as well as Social Security and Medicare taxes.  [Agency] did not offer medical or dental insurance, paid vacation leave, or reimbursement of Mr. Fiedziuszko’s expenses, but it did offer a deferred compensation plan.” 2018 T. C. Memo. 75, at p. 3.

The issue is Slawo’s Schedule C.  He took unreimbursed employee expenses without the 2% AGI limit and without the 3% – 80% phaseouts. This is OK if you’re a statutory employee, but not commonlaw Schedule A type.

Judge Pugh cruises through the factors, and Slawo wins.

“We find on the record before us that Mr. Fiedziuszko was not a common law employee of [former employer] and that he is instead a statutory employee.  While his Form W-2 for [year at issue] did not indicate that he was a statutory employee, we believe this to be a mistake.  Mr. Fiedziuszko’s Form W-2 for [immediately previous year] indicated that he was a statutory employee.  Nothing changed between [immediately previous year] and [year at issue]:  Mr. Fiedziuszko was providing services under the same consulting contract with [previous employer] in [year at issue] as he was in [immediately previous year].  Further, Mr. Fiedziuszko worked primarily from his home office rather than [previous employer’s] offices and produced reports and patents according to his assignments from [previous employer].  We therefore find that Mr. Fiedziuszko’s employment status did not change….

“We also conclude that both Mr. Fiedziuszko and [previous employer] intended to form an independent consulting relationship rather than a common law employee-employer relationship.  Mr. Fiedziuszko advertised his services to several satellite companies and was hired by [previous employer] through the temporary employment agency…with which [previous employer] works.  Their relationship was a temporary assignment that terminated in [year at issue].” 2018 T. C. Memo. 75, at pp. 12-13.

And the payment record for Slawo’s services also shows statutory employee earmarks.

Footnote- Note that the Tax Cuts and Jobs Act of 2017 eliminates unreimbursed employee business expenses deduction deducted as miscellaneous deductions subject to the 2% limitation. So what about those of statutory employees, not subject to the 2% AGI limitation and not reported on Schedule A?

But Slawo’s recordkeeping is, to put it charitably, sketchy. So his charitables mostly go by the board. Alicia’s weight-loss program, though Section 213 qualified, likewise founders for want of substantiation. His travel expenses hit the Section 274 landmine. And his pension withdrawal results in unreported income, as Slawo claims it was partially non-taxable, but can’t explain on what basis he reaches that conclusion.

IRS wins the reopener on the chops, sending in the Section 6751(b) Boss Hoss, so if the Rule 155 beancount shows Slawo was over the five-and-ten, Slawo will get hit.

The good-faith out avails him not. Slawo is a rocket scientist (aerospace engineer).

“Petitioners have not shown reasonable cause for the underpayment of tax…. They offered no explanation for their understatement and we conclude that petitioners’ attempt at substantiation, which came far after the return was filed, fell short of what was required.  Mr. Fiedziuszko’s level of sophistication would indicate a better understanding of the requirements than petitioners displayed. Further, some of Mr. Fiedziuszko’s testimony–particularly his testimony regarding his pension income–was not credible.” 2018 T. C. Memo. 75, at p. 28.