Hollywood Set Designer Entitled to Deduct Expenses as an Independent Contractor.

(Parker Tax Publishing January 27, 2016)

The Tax Court determined that a taxpayer who built and designed sets for advertisements and TV commercials was an independent contractor, and properly deducted his business expenses on a Schedule C. Quintanilla v. Comm'r, T.C. Memo. 2016-5.

Background

Jorge Quintanilla works in Southern California building sets for advertisements and TV commercials. He sometimes earns his money in his own name, and sometimes through his S corporation, Pre Call, Inc. All business inquiries go to the same cell phone number, and there is little practical difference between situations where Quintanilla works under his own name and those where he works through his corporation.

When hiring Quintanilla, production companies describe what they would like the set to look like, often sending a sketch and occasionally a verbal description. Quintanilla then becomes responsible for making the imagined set a reality. He has some discretion to alter the sketch to make it work. If a company doesn't provide a sketch, he creates one himself. Quintanilla has authority to hire workers to assist him.

Production companies expect Quintanilla to provide any tools he needs to complete a job. He has a large collection of tools, which he stores in two 40-foot steel containers that travel with him to jobsites. These containers are also packed with machinery that Quintanilla uses to fabricate pieces of sets on site.

Quintanilla sometimes is hired subject to hourly union scale rates set by collective bargaining. On other projects he sets his own rate depending on the job at hand. While some companies pay rent for the use of his tools, others do not, in which case he increases his hourly rate to compensate for their use. Some companies pay invoices that Quintanilla prepares based on his estimates, while others pay on the basis of hours billed and reported to them.

When a production company hires Quintanilla as an individual, it generally issues a Form W-2, typically listing a payroll company as the employer. Quintanilla often performs different jobs for different production companies while being paid by the same payroll company.

Quintanilla grossed more than $84,000 in 2009 and almost $90,000 in 2010, and reported his business expenses on Schedule C, claiming he was an independent contractor. The IRS disagreed, stating he was an employee, and determined that Quintanilla had deficiencies in both years.

Analysis

The Tax Court stated it looks to multiple factors to decide whether a worker has enough autonomy in his work to be an independent contractor, including:

(1) the degree of control exercised by the principal over the worker;

(2) the worker's investment in his workplace;

(3) his opportunity to make a profit or suffer a loss;

(4) whether the principal can fire him;

(5) whether the work is part of the principal's regular business; and

(6) the permanency of his relationship with the principal;

The Tax Court concluded that almost all the facts favored finding that Quintanilla was an independent contractor and not an employee.

The most important factor, the court said, was that Quintanilla had a large degree of control as to how to accomplish the tasks he had to do throughout the year. Regardless of whether a production company gave Quintanilla a sketch of the set, or whether it merely gave him a vision for the project, the court found he had a large degree of independence in determining how to accomplish the project. He ordered props and modified them to the specs, he had authority to hire additional workers as needed, and he had the authority not to use workers that weren't performing.

The court, citing Ewens & Miller, Inc., 117 T.C. 263 (2001), also noted the fact that a worker provides his or her own tools or owns a vehicle that is used for his work weighs toward finding him to be an independent contractor.

In regards to the third factor, the IRS argued that the real potential for profit or loss lies with the firms hired to plan marketing campaigns, and with the production companies that shoot commercials and ads, not with Quintanilla. The court disagreed, noting that production workers have some real risk of profit or loss; Quintanilla could accept or decline projects, and at times a production company would give a fixed fee and he would prepare a budget to see if he could perform the work for that amount.

The court did find that the production companies had the right to fire Quintanilla, but it was very seldom exercised. The court noted that because of the short-term nature of the jobs, if a production company or client were dissatisfied with someone's work, that person would generally just never get another request to work for that particular production company or client.

For the fifth factor, the court stated that, while work that is part of the principal's regular business indicates employee status, it was difficult to figure out exactly who the "principal" is on a commercial shoot and found the factor neutral.

Another factor, the court said, is the permanency of a working relationship - the more permanent the relationship, the likelier it shows an employer-employee relationship. The court found that, during the years at issue, Quintanilla worked on 80-100 jobs per year, with the longest commercial shoot being about one month, but most were shorter. The court said the fact that the jobs were so short-term suggested that Quintanilla was an independent contractor rather than an employee.

The court noted that although the usual factors did not help the IRS much, it did have a strong argument in that Quintanilla was a union member, and many of his jobs were priced at rates set through collectively bargained contracts. Union contracts, the court stated, typically provide that workers are employees and not independent contractors. However, Quintanilla explained that he joined unions mainly to obtain health insurance and that all of his jobs came from personal connections, not from a union call board.

After reviewing the factors, the Tax Court found that Quintanilla was an independent contractor, and thus he appropriately deducted his expenses on his Schedule C.

For a discussion of a worker's status as an employee or independent contractor, see Parker Tax ¶210,110. (Staff Editor 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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