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Moonlightling Police Officer Was Independent Contractor Subject to Self-Employment Taxes (Parker's Federal Tax Bulletin: January 1, 2013)

A police officer who worked as a security guard off-duty did not satisfy the factors necessary to be considered an employee and, thus, was liable for self-employment taxes. Specks v. Comm'r, T.C. Memo. 2012-343 (12/11/12).

During 2008, Carnell Specks worked as a police officer for the Houston Police Department. He worked 2,171 hours that year for HPD. Carnell also provided security services to several businesses during his off-duty hours. While providing the security services, Carnell wore an HPD uniform and carried his personal firearm. The businesses for which Carnell provided the services did not train, supply, or equip him. He had an at-will relationship with each of the third parties.

One of the businesses paid Carnell almost $18,000 for 619 hours of security services. Another business paid him over $26,000 for approximately 1,000 hours of security services. All the businesses reported the amounts paid to him on Forms 1099-MISC. Carnell and his wife, Cheryl, owned and rented several properties during 2008. Carnell spent less than 750 hours on the rental activity and Cheryl, who had a full-time job, spent no time on the rental activity.

On their 2008 tax return, the Specks reported the income from Carnell's security services as other income. They also reported that they were engaged in rental real estate activities and claimed a loss of $52,000 from those activities.

The IRS determined that Carnell was subject to self-employment tax on his income from the security services and that the rental losses were not deductible because they were subject to the passive activity loss deduction rules. Carnell contended that he was an employee of the businesses and, thus, the amounts he received from the businesses were not subject to self-employment tax. He also argued that he was entitled to the real estate losses because he was a real estate professional.

The Tax Court held that Carnell was liable for self-employment tax and could not deduct the real estate losses. The court noted that whether an individual is an employee or an independent contractor depends on certain criteria determined by applying common law. The court examined the relevant criteria and found that the majority of the factors weighed in favor of Carnell being an independent contractor subject to self-employment tax. Specifically, the court found that the businesses did not have the requisite right to control Carnell in the performance of the security services, did not train or equip him, that he was not an essential part of the businesses, and that he did not receive benefits from the businesses.

With respect to the question of whether Carnell was a real estate professional, the court concluded that because Carnell worked less than 750 hours in the rental activity, he did not qualify as a real estate professional under Code Sec. 469. Thus, his real estate losses were denied.

Finally, the court concluded that the Specks were liable for the accuracy-related penalty. The court found that the Specks did not establish that the return preparer was a competent professional with significant expertise to justify reliance or that the Specks provided the return preparer all relevant information.

For a discussion of individuals subject to self-employment taxes, see Parker Tax ¶13,105.

(Staff Editor at Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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