Wendy J. Morello v. Commissioner of Revenue (September 8, 2104)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


WENDY J. MORELLO 	        	 v.      	COMMISSIONER OF REVENUE 
 							 	   
Docket No. C314603		            	Promulgated:			    
				   				September 8, 2014


This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39(c) from the refusal of the appellee, Commissioner of Revenue ("Commissioner" or "appellee"), to grant an abatement of personal income tax assessed to the appellant, Wendy J. Morello ("appellant"), for the yearly tax periods ending December 31, 2005, December 31, 2006 and December 31, 2007 ("tax years at issue").
Commissioner Scharaffa heard this appeal and was joined by Chairman Hammond and Commissioners Rose and Chmielinski in a decision for the appellee.  
These findings of fact and report are made pursuant to a request by the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.  


Wendy J. Morello, pro se, for the appellant.

Kevin M. Daly, Esq., David Berch, Esq., Arthur M. Zontini, Esq. and David T. Mazzuchelli, Esq. for the appellee

FINDINGS OF FACT AND REPORT
On the basis of the testimony and exhibits offered into evidence at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.
At all relevant times, the appellant was a resident of Massachusetts.  The appellant timely filed Massachusetts income tax returns for each of the tax years at issue.  On January 30, 2009, the Commissioner issued a Notice of Assessment ("NOA") as follows:
Tax year	Tax liability	Interest accrued
	
12/31/2005	$  714.00	$186.31	
12/31/2006	$1,033.00	$158.14	
12/31/2007	$  766.00	$ 44.98	

Total assessment:  	
$2,902.43		

On May 28, 2009, the appellant filed her abatement application with the Commissioner, seeking the abatement of taxes and corresponding interest resulting from the Commissioner's disallowance of her claimed business expense deductions.  On September 14, 2011, the Commissioner issued a Notice of Abatement Determination, denying the appellant's abatement application.  On November 9, 2011, the appellant seasonably filed her petition with the Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction over the instant appeal.
The issues raised in this appeal are whether the appellant was an independent contractor and therefore able to deduct the ordinary and necessary expenses incurred in carrying on her trade or business; or, in the alternative, if the appellant was an employee of Heritage, whether she qualified as a so-called "outside salesperson," as that term is defined for Massachusetts tax purposes, who was entitled to take as deductions her unreimbursed expenses related to her employment with Heritage. 
At all relevant times, the appellant worked as a loan originator for Heritage Mortgage Company, Inc. ("Heritage"), a Massachusetts mortgage company located in Hingham.  Heritage issued a Form W-2 to the appellant for each tax year at issue.  When the appellant filed her Massachusetts income tax returns for each tax year, she deducted various expenses on her Schedule Y that she claimed were unreimbursed business expenses.  The deducted expenses included: mileage, for her commute between her home in Peabody and Heritage's office in Hingham and for travel between Heritage's office and various outside appointments; meal and entertainment expenses; gifts for clients, including flowers, alcohol, gift certificates and tickets to sporting events; dry cleaning bills; cell phone bills; marketing fees from Loyalty Express; and bank fees.
The appellant presented her case in chief through her testimony and the submission of various documents.  The appellant testified that the nature of her work was as a licensed loan originator.  At all relevant times, Heritage was the appellant's "sponsor," a status which required Heritage to secure a bond on behalf of the appellant to protect the company against liability.  Heritage provided the appellant with a computer for her work and also allowed her access to Heritage's fax machine, so that clients were able to fax information to Heritage's office, where she would receive the loan applications and prepare the loan file for delivery to the lender.  Heritage also provided the appellant with the necessary training to begin her career as a loan originator.  
The appellant testified that when she began her career in December of 2004, she would travel to Heritage's Hingham office about two days a week for training with her colleague, a Heritage employee.  The appellant was not paid by Heritage during this training.  The appellant considered herself to be an independent contractor during the tax years at issue because, while she was required to be sponsored by a company, she was always free to disassociate herself from her sponsor and choose another sponsor, testifying that: "[m]y license is mine.  It follows me wherever I go."  Moreover, the appellant testified that she was not paid by Heritage as a typical employee with a regular salary.  Instead, upon the completion of a mortgage, Heritage paid her a portion of the compensation paid by the lender to Heritage.  
The appellant also compiled for herself a "book of business," a list of realtors and attorneys who would refer business to her.  When asked on cross-examination to whom the realtors made their referrals -- to the appellant or to Heritage -- the appellant replied, "To me."  She admitted that her business cards included Heritage's moniker, "because I have to work under somebody," but she ordered and paid for the business cards herself.  Furthermore, Heritage did not maintain any records of the appellant's client visits, nor did Heritage refer clients to her.  
The appellant testified that she frequently worked outside of Heritage's offices during the tax years at issue.  The appellant routinely spent time outside of the office engaged in client meetings and real estate closings.  The purpose of these meetings was to originate and complete a loan with Heritage, her sponsor.   The appellant testified that she also frequently visited with realtors and attorneys.  She explained that these visits were in the nature of sales calls engaged in to build her personal book of business.  She testified that, because she was responsible for generating her own clients and income, she worked very hard to create referrals for herself: "it took a good seven years to build a solid book of business."  The appellant did not, however, report any income on her Massachusetts tax returns for the tax years at issue related to the business of loan origination other than the income shown on her W-2s issued from Heritage.   
The appellant submitted into evidence a letter from John Trotman, Vice President of Heritage, to the Department of Revenue.  The letter states in pertinent part:  
This letter is to verify that Wendy Morello has been an employee of Heritage Mortgage Company, Inc. since December of 2004.  Her position here is a full time outside sales - Mortgage Loan Originator.  Wendy is NOT compensated with a base salary by Heritage Mortgage Company.  Her pay consists solely of a certain percentage of commission derived through closed mortgage loans. 

(Emphasis added).  The letter continues to state that the appellant "has waived her rights to receive medical benefits through Heritage Mortgage Company," explaining that the appellant receives these benefits through her spouse's employment.  
The appellee presented its case-in-chief through the testimony of Nora Petralia, the Tax Examiner who conducted the audit of the appellant, and the submission of documents, particularly those obtained through the audit.  Ms. Petralia testified that she considered the appellant to be an employee, not an independent contractor, primarily because, for each tax year at issue, she had received a Form W-2 from Heritage reporting her income and she had used Schedule Y to deduct her expenses, not Schedule C, which is used for self-employed taxpayers. 
Having determined that the appellant was an employee, Ms. Petralia next determined whether the appellant would qualify as an "outside salesperson" with Heritage.  The auditor classified the nature of the appellant's work outside of Heritage's office into two separate categories: (1) visits with realtors and attorneys; and (2) client meetings and real estate closings.  Ms. Petralia testified that she considered only the client meetings and real estate closings to be in the nature of outside sales, because these visits were performed with the intent of generating a sale -- a mortgage loan -- for Heritage.  Ms. Petralia thus determined that the appellant's visits with realtors and attorneys -- allegedly in furtherance of the appellant's personal book of business -- were not to be classified as outside sales activity.  
Ms. Petralia performed an analysis of the appellant's travel logs for the tax years at issue and, according to those logs, the appellant spent only about 13% to 15% of her time working on outside sales activities for Heritage in each of the tax years at issue, assuming that client meetings, visits to collect loan-origination documents, and closings qualified as outside sales activities but that meetings with realtors and attorneys did not.  In the alternative, even assuming that days spent with realtors and attorneys were outside sales activities, the auditor's analysis still demonstrated that the appellant spent less than 50% of her time outside of Heritage's offices during the tax years at issue.  The auditor's analysis is as follows:
Tax year	Total days worked	Days spent in client meetings and activities related to closings (outside sales activity)	Days for meetings with realtors and attorneys (not outside sales activity)	% of days spent on outside sales activity	Alternative calculation (including meetings with realtors and attorneys)	
2005	279	41	82	15%	     44%	
2006	282	41	96	15%	46.8%	
2007	344	43	116	13%	46.2%	

Because the appellant did not spend a majority of her time on outside sales activities, Ms. Petralia thus determined that the appellant was not an outside salesperson. Therefore, Ms. Petralia denied the deduction of the appellant's unreimbursed employee business expenses, including meals and entertainment, client gifts, cell phone bills and dry cleaning bills.  
Ms. Petralia further testified, however, that even if she had determined that the appellant met the qualifications of an independent contractor or outside salesperson, the appellant failed to substantiate the expenses.  The appellant's evidence to support her deductions consisted of credit card statements on which she circled or highlighted the expense in question and indicated that the expense was a "client gift" or "client meal."  However, Ms. Petralia testified that the appellant failed to identify a specific business-related purpose or business benefit derived for the expenses claimed.  Moreover, in some instances, the appellant failed to identify the individuals or her business relationship to them.  
Ms. Petralia further testified that she detected significant inconsistencies when certain meal receipts were compared with the appellant's travel logs for the same date.  For example, expenses for client meals did not correspond with entries in the appellant's travel log, which recorded the date of the visit to that client.  In other instances, a submitted expense indicated that it was billed to Heritage, and the appellant did not offer substantiating proof that she paid the bill and not Heritage, while in other instances Ms. Petralia found duplicate claims for gift expenses.  Ms. Petralia also testified that for several of the appellant's expenses, she failed to provide an explanation as to the business purpose of the deduction, and therefore, it was not possible for the auditor to determine if the expenses were business related or personal in nature. 
Finally, Ms. Petralia analyzed the appellant's mileage deductions.  Ms. Petralia deemed allowable only miles that the appellant had incurred in traveling from Heritage's office in Hingham to outside sales-related appointments that were specifically related to securing a mortgage with Heritage.  Ms. Petralia denied any mileage incurred traveling from the appellant's home to Heritage's office, because she considered those miles to be the appellant's commute to her place of employment.  She also denied mileage incurred in meeting with realtors and attorneys, because these were incurred in building the appellant's own book of business and were thus not sales-related activity for Heritage, the appellant's employer.  Ms. Petralia applied the standard mileage rate for each tax year to determine the allowed deduction.  Ms. Petralia's findings with respect to mileage deductions were as follows:
Tax year	Mileage reported by appellant	Mileage allowed by auditor	Mileage deduction
	
2005	19,856	9,697	$4,136	
2006	18,315	9,296	$4,137	
2007	23,429	10,395	$5,042	

The Board's findings.
On the basis of the evidence, the Board found that the appellant was not an independent contractor but was instead an employee of Heritage.  First, her tax returns, accompanying forms and payments were consistent with those of an employee:  she received and filed Forms W-2 that showed the wages she received from Heritage; she reported her expenses on Schedule Y, rather than Schedule C, which is used for self-employed taxpayers who do not receive wages reported on Forms W-2; and Heritage withheld taxes from the appellant's wages.  Heritage also provided training and sponsorship to the appellant, which included its obligation to provide a computer and a bond for liability until such time that she acquired a new sponsor.  Furthermore, Heritage described the appellant as its "employee" who worked "full time" and was entitled to but "waived her rights to receive medical benefits."  Heritage thus treated the appellant as an employee during the tax years at issue.  The Board found and ruled that these facts were consistent with the auditor's determination that the appellant was an employee of Heritage for tax purposes.
With respect to her activities of building her personal book of business, the appellant failed to produce adequate evidence establishing that she engaged in these activities on a sufficiently regular, consistent and continuous basis as required to meet the standard of a trade or business.  The appellant's travel logs and other records showed many internal inconsistencies and often failed to demonstrate that the meetings had a specific business purpose rather than being personal in nature.  Moreover, the appellant claimed no income from her activity of building her own personal book of referrals.  The only income that she reported on her Massachusetts tax returns relating to loan origination was from her employment with Heritage.  The Board thus found that, on the basis of the facts of record, the appellant failed to meet her burden of proving that she was engaged in a trade or business of being an independent loan originator.  On the basis of these findings, the Board thus ruled that the appellant was not an independent contractor during the tax years at issue.  
The Board next analyzed the appellant's employment duties to determine if she qualified as an "outside salesperson" with Heritage during the tax years at issue.  The Board first found that the appellant's visits constituting client meetings and real estate closings -- visits which were specifically designed to culminate in a mortgage through Heritage -- were to be treated as outside sales activity.  However, the visits with attorneys and realtors were not directly related to procuring a sale of a mortgage through Heritage; rather, they were related to the appellant building her own personal book of referrals.  The Board thus found that the appellant's visits to realtors and attorneys did not qualify as outside sales activity for her employment with Heritage.   
Considering the visits with clients and closings only as outside sales activity, the Board found that the percentage of time that the appellant spent on outside sales activity in each of the tax years at issue -- 15% in 2005 and 2006 and 13% in 2007 -- was insufficient for the appellant to be treated as an outside salesperson for tax purposes.  Therefore, the Board found that the appellee properly denied the deductions of unreimbursed employee business expenses. 
Finally, the Board determined that, as an employee, the appellant was entitled to deductions for transportation only between her regular place of employment, Heritage, and her outside meetings specifically related to the performance of her job with Heritage, that is, securing a client's mortgage through Heritage. This transportation included trips for client meetings, collecting documentation and attending real estate closings.  The Board found that the auditor correctly denied the deduction of mileage consisting of: (1) travel to and from Heritage's office and the appellant's home, as this constituted non-deductible commuting expenses; and (2) mileage consisting of travel to meet with attorneys and realtors, activity which was not required by Heritage but initiated by the appellant with the purpose of building her own personal book of business.  The Board further found that Ms. Petralia applied the appropriate mileage rates for the particular time periods.  The Board thus determined that the appellee properly determined the mileage deductions for the tax years at issue.
On the basis of the Board's findings, the Board ruled that the appellee properly denied the appellant's deductions for commuting costs and her other unreimbursed expenses related to her employment as an outside loan originator with Heritage for the tax years at issue.  The Board thus issued a decision for the appellee in the instant appeal.   
  
OPINION
Massachusetts adjusted gross income includes some but not all of the deductions allowable under the Internal Revenue Code ("Code").  G.L. c. 62, § 2(d).  Pursuant to G.L. c. 62, § 2(d)(1), a taxpayer may take "trade and business deductions," defined by Code § 62(a)(1) to include those deductions attributable to a trade or business conducted by the taxpayer, with the following caveat:  "if such trade or business does not consist of the performance of services by the taxpayer as an employee." (emphasis added).  
The appellant's first position is that she was mischaracterized as an employee instead of an independent contractor.  The reason for the appellant's contention in the present appeal is that § 2(d)(1) prohibits the deduction of employee business expenses, except for those that qualify under §2(d)(2).  
The uncontested facts in the present appeal indicate that: the appellant received Forms W-2 from Heritage; Heritage considered her a full-time employee; Heritage withheld taxes from the appellant's paychecks; the appellant claimed her unreimbursed expenses on Schedule Y rather than Schedule C; Heritage sponsored the appellant, which required Heritage to secure a bond insuring her work performance; Heritage provided the appellant with a computer and use of its fax machines to prepare her mortgage closings; and the appellant was admittedly entitled to participate in Heritage's employee benefits including health care coverage.  The Board found and ruled that these facts were consistent with the auditor's determination that the appellant was an employee.
Although the appellant claimed that she was working to develop her own personal book of business of referrals from attorneys and realtors, the appellant's documentation of her engagement in this activity was often inconsistent and often failed to demonstrate that the meetings had a specific business purpose as opposed to a personal nature.  The Board thus found that the appellant did not demonstrate a regularity or consistency with which she engaged in this activity.  She also did not claim any income from this activity.  The Board thus found and ruled that the appellant's claimed activity of building her own personal book of business did not rise to the level of a trade or business of being an independent mortgage originator.  See Melecio v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2013-745, 759 ("The United States Supreme Court has held that 'to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit.'") (quoting Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987)).  
"Deductions are to a large extent a matter of legislative grace."  Drapkin v. Commissioner of Revenue, 420 Mass. 333, 343 (1995).  Statutes "granting exemptions from taxation are therefore to be strictly construed."  South Boston Savings Bank v. Commissioner of Revenue, 418 Mass. 695, 698 (1994).  In the absence of unambiguous statutory language to the contrary, the Board is "reluctant to infer the existence of a State legislative intent which would require it to disregard the meaning established under Federal tax law of unambiguous, common statutory language."  B.W. Co. v. State Tax Commission, 370 Mass. 18, 22-23 (1976).  In the instant appeal, the Board found and ruled that the appellant did not present factors sufficient to prove her status as an independent contractor, either with Heritage or with regards to her activity of being an independent mortgage originator.  Accordingly, the Board found and ruled that the § 2(d)(1) prohibition against the deduction of employee-business expenses applied to the appellant.  
The only exception to the § 2(d)(1) denial of unreimbursed employee expenses is § 2(d)(2), which allows deduction of: (i) expenses for travel, meals and lodging incurred by the employee while away from home, and (ii) all federally deductible employee business expenses incurred by an employee "if such trade or business is to solicit, away from the employer's place of business, business for the employer."  The § 2(d)(2)(ii) category of taxpayer is commonly referred to as an "outside salesperson."  Department of Revenue Directive 89-1 ("DD 89-1") (citing Code § 162, Code § 67, and G.L. c. 62, § 2(d)(2)).  
The Board recently addressed the characteristics of an outside salesperson in Devine v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2012-821.  In Devine, a college adjunct professor who was paid on a per-course-taught basis contended that he qualified as an outside salesperson.  Because the colleges could cancel his courses for low enrollment, the professor testified that he engaged in what he called "solicitation" by distributing flyers and speaking with restaurant patrons and wait staff to promote enrollment in his courses.  Devine, Mass. ATB Findings of Fact and Reports at 2012-827.  However, the appellant failed to demonstrate that his employers required him to promote his courses or that he was paid specifically to do so; the Board found that any promotion of his courses by the appellant was engaged in not at the behest of his employer but at his own initiative.  Id. at 828-29.  Therefore, because solicitation was not part of the taxpayer's official job duties, the Board ruled that the appellant was not an outside salesperson for purposes of the Massachusetts income tax.  Id. at 829.
In the instant appeal, the Board found that the appellant's visits to meet with clients, collect documentation and attend real estate closings were undertaken at the behest of the appellant's employer, Heritage, and with the purpose of securing a client mortgage from Heritage.  Therefore, the auditor properly considered this travel to be outside sales activity related to the solicitation of "business for the employer."  By contrast, the visits with attorneys and real estate agents were not undertaken at the behest of Heritage but instead initiated independently by the appellant with the intent of building her own personal book of business.  These visits were not geared toward building "business for the employer" but instead were networking opportunities for the appellant.  Heritage did not pay or require the appellant to engage in personal networking or promotion of her own services, and therefore, these visits were akin to the personal promotional activity of the taxpayer in Devine.  
Thus, taking into account only the time related to client visits, documentation collection, and real estate closings, the Board determined that, according to the appellant's schedule as recorded in her travel logs, the appellant spent only a small portion of her total employment time on duties related to solicitation activities -- 15% in tax years 2005 and 2006 and 13% in 2007.  The Board found and ruled that this insignificant portion of her overall duties was not sufficient to qualify the appellant as an outside salesperson who regularly "solicit[ed] business for the employer away from the employer's place of business" for any of the tax years at issue.  Accordingly, the Board ruled that the Commissioner properly denied the appellant's employee-business-expense deductions for the tax years at issue.
While the appellant was not entitled to deduct her unreimbursed employee-business expenses for the tax years at issue, she was entitled to deduct the cost of certain transportation expenses incurred while performing her job.  See DD 89-1 (citing Code §§ 162, 67; G.L. c. 62, § 2(d)(2)(i)).  The Board ruled that the auditor properly determined that these transportation expenses included travel from Heritage's office to the locations of client meetings, visits to collect loan-origination documents and real estate closings, because these were performed at the behest of the appellant's employer and were designed to culminate in the sale of a client mortgage from Heritage.  Deductible transportation expenses did not include costs that the appellant incurred to network with attorneys and realtors to build her personal book of business or the costs to commute between the appellant's home and Heritage.  See Commissioner v. Flowers, 326 U.S. 465, 473-74 (1946) (expenses in commuting from home to work are personal in nature and therefore non-deductible). 

Conclusion
Based on the evidence presented, the Board found and ruled that the appellant failed to meet her burden of proving her entitlement to the deductions claimed.  On this basis, the Board decided this appeal for the appellee.

             				APPELLATE TAX BOARD



				  	By: _________________________________
					    Thomas W. Hammond, Jr., Chairman
A true copy,

Attest: _____________________________
             Clerk of the Board

 The copy of the Heritage letter submitted by the appellant was dated February 12, 2013.  The appellee submitted as evidence a letter with identical content but dated August 13, 2012.
 Ms. Petralia treated travel expenses separately, as described infra.  Compare G.L. c. 62, § 2(d)(2)(i) and G.L. c. 62, § 2(d)(2)(ii).
 While it was not necessary to its ruling, the Board also noted that the Commissioner would be within her authority to deny deductions based on lack of substantiation. See, e.g., Sharcar, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1998-198, 224 ("The Appellant has the burden of proof and the obligation to substantiate the deduction taken.").   

ATB 2014-539