Harold E. Nicholas - Page 7




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          Troy, New York.  Troy treated petitioner as a common law employee           
          on the Forms W-2 it issued to petitioner.  Petitioner does not              
          contest that classification.                                                
               While, under the nonexecuted employment agreement,                     
          petitioner was to be reimbursed for his expenses, it is                     
          undisputed that petitioner incurred expenses for which he was not           
          reimbursed.  On his income tax returns, petitioner claimed                  
          deductions for the expenses associated with his activities with             
          Empire on Schedule C, Profit or Loss From Business.  The returns            
          were prepared by petitioner’s accountant who had full knowledge             
          of all of the facts.  Respondent determined that these expenses             
          should be properly reported on Schedule A, Itemized Deductions,             
          as unreimbursed employee business expenses.                                 
                                     Discussion                                       
               There is no dispute that petitioner incurred the expenses              
          for the deductions he claimed.  Rather, the dispute focuses on              
          whether petitioner should be considered a common law employee or            
          a statutory employee.  If petitioner is characterized as a common           
          law employee, the deductions for his expenses are not deductible            
          in determining adjusted gross income, see sec. 62(a)(1), are                
          classified as “miscellaneous itemized deductions”, sec. 67(b),              
          and are limited “to the extent that * * * [they exceed] 2 percent           
          of adjusted gross income”, sec. 67(a).  In addition,                        
          miscellaneous itemized deductions are not deductible for                    






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