Tax Rate of 131% ? - It Can Happen

Kevin L. Sherar, et ux. v. Commissioner, TC Summary Opinion 2011-44



I didn't know there was a way for somebody to be taxed 131% on income received, but Mrs. Sherar's attorney managed to find a way.  Linda Sherar was collecting workman's compensation insurance.  Her attorney advised her that she also qualified for Social Security disability payments.  She applied for them.  She received a check for $3,796.38.  Not a lot of money, but if it was laying on the street I would bend over to pick it up.  The reason that she didn't get much in Social Security disability is because her benefit was offset by the workman's compensation.  Here is where it gets ugly.  Workman's compensation payments are excluded from income.  Social Security payments are only partially excluded (85% included 15% excluded).  The 85% is applied to the entire benefit including the portion that was offset by workman's compensation.  So when the IRS looked at this they increased Mrs. Sherar's tax by $4,988.  The Court felt kind of bad for her, but couldn't do anything about it:

We acknowledge that Mrs. Sherar applied for Social Security benefits on the advice of counsel. We also acknowledge that if Mrs. Sherar had not applied for Social Security benefits, then her workers' compensation benefits would not have been subject to Federal income tax. See secs. 104(a)(1), 86(d)(3). Under the circumstances we can appreciate petitioners' dismay. Nevertheless, as the Supreme Court of the United States has instructed, we are duty bound to apply the law as written by Congress to the facts as they occurred and not as they might have occurred.

Freddie Stromatt, et ux. v. Commissioner, TC Summary Opinion 2011-42

I almost didn't bother with this one, but it is a fairly nice hobby loss case that was won by the taxpayers.  The IRS made an issue out of them putting that they were raising beef cattle on their Schedule F in the preliminary year when they just sold hay, but they did well on most of the factors.

In 1999 petitioners purchased an approximately 15-acre parcel of land near Dickson, Tennessee. Petitioner Edith Stromatt (Mrs. Stromatt) had retired before the land was purchased, and petitioner Freddie Stromatt (Mr. Stromatt) retired shortly thereafter.



In 2000 petitioners constructed a two-bedroom, one-bath house of approximately 792 square feet on the property. Mrs. Stromatt's father lived in the house from 2000 until his death in 2006. Petitioners did not live in the house or elsewhere on the property during the years at issue (2002-2004).

During 2000 and 2001 petitioners cleared the acreage, which had been untended for approximately 25 years and was overgrown with brush and trees, to prepare it for use as pasture, including the production of hay. Mr. Stromatt and Mrs. Stromatt's father operated the tractor and Bush Hog used for clearing the land, including pulling tree stumps. During 2001 and 2002 petitioners installed fencing and fertilized. This work was also performed by Mr. Stromatt and Mrs. Stromatt's father.


Petitioners harvested their first hay in 2001 and continued producing hay during the years at issue, harvesting it with rented equipment. Mr. Stromatt and Mrs. Stromatt's father performed this labor. Petitioners sold the hay, and these sales constituted the only income generated from the farming activity during the years at issue.

Petitioners first purchased cattle in 2005, acquiring six pregnant heifers. By the end of 2005 petitioners owned 17 head of cattle.


Mrs. Stromatt's father provided advice to petitioners on farming, including the number of cattle that could be supported on 15 acres of land.


Mrs. Stromatt's father was an experienced farmer, and Mrs. Stromatt grew up on a farm.

There were also substantiation issues which they probably should have settled at the agent level, but the Court was satisfied on that score also.

After weighing the regulatory factors and all other facts and circumstances, we conclude that petitioners engaged in their farming activity with an actual and honest profit objective. They and family members expended substantial amounts of physical labor to reclaim and fence land in an effort to establish a viable cattle operation. They did so at a pace that was not unreasonable in the circumstances, and they offset some losses by initially selling hay. They obtained knowledgeable advice. Their loss history was both brief (as of the close of the last year in issue) and not atypical for reclaiming land and establishing a cattle operation. The enterprise did not offer significant recreational opportunities


Jonathan C. Ladue, et ux. v. Commissioner, TC Summary Opinion 2011-41

This is about whether a deputy sheriff was subject to self-employment tax on pay that he received for "off duty services".  I've always heard this type of thing referred to as "pay details".  There is some support for the position that the deputy is functioning as an employee while on the assignment:

During 2007, petitioner was employed as a deputy sheriff by the Jacksonville Sheriff's Office (JSO). JSO permits deputies to provide off-duty services for entities other than JSO. JSO's General Order LIII. 10 (JSO General Order) contains detailed provisions that an officer must follow to obtain and maintain off-duty work.

Entities desiring to hire JSO deputies for off-duty services must submit an application to the Secondary Employment Unit of JSO. A JSO job scheduler acts as a liaison between JSO and the entity by completing the jobsite schedule for JSO employees working for a particular entity, “ensuring employee attendance is adhered to, and resolving employee/employer conflict when appropriate.” Entities that hire deputies for off-duty services are required to pay an administrative fee to JSO for each hour of off-duty service provided by each officer. Working while off duty is strictly voluntary; JSO deputies are not required to perform off-duty services.

The JSO General Order determines the off-duty minimum pay rate, limits the maximum monthly hours of off-duty work, and requires JSO deputies to wear their uniforms and monitor their police radios when providing off-duty law enforcement-related services. Deputies providing off-duty services are also subject to recall to regular duty by JSO. While working off duty, deputies are governed by all JSO policies, procedures, and directives, and the JSO Watch Commander may suspend a deputy's off-duty work if the work or the officer does not meet policy requirements

That was not enough for the Tax Court, though.

After considering these factors, as discussed below, we conclude that petitioner was not an employee of JSO but performed his off-duty services as an independent contractor.


First, petitioner's off-duty services were performed for, and were directly beneficial to, the third-party entity. See Milian v. Commissioner, supra (stating that performance of services by the employee for the employer is implicit in an employee relationship); March v. Commissioner, T.C. Memo. 1981-339 [¶81,339 PH Memo TC]. “Any benefit *** [the department] received by an increased police presence at petitioner's off-duty assignments was incidental and similar in nature to the benefit to a police department when officers increase the police presence in a community by driving their police cruisers home.”


A second factor of an employer-employee relationship is the ability to select and discharge at will. March v. Commissioner, supra. The mere approval from JSO to work off-duty jobs and the ability to suspend if department policies were not adhered to do not amount to the ability to hire and fire with regard to the off-duty positions.




Third, the source and method of payment may also help establish whether an employer-employee relationship exists. March v. Commissioner, supra. All of the third-party entities for which petitioner provided off-duty services operated separately from the city of Jacksonville and JSO; the third-party entities paid petitioner directly and treated him as an independent contractor, issuing him Forms 1099. The city of Jacksonville did not include off-duty pay in petitioner's Form W-2.


Slight changes in the way the pay details are structured would probably produce a different result.


CCA 201115022

If you think your joint account holder might be someone who is apt to be levied, it's time to get a separate account.

For purposes of determining ability to pay, ownership is presumed to be in equal shares unless the taxpayer demonstrates otherwise. See IRM 5.8.5.5. In the levy context, the Supreme Court held in the National Bank of Commerce case that where under state law the taxpayer has the unrestricted right to withdraw funds from a jointly held account a levy attaches to the entire account. The levy, however, is provisional and subject to a later claim by a codepositor that the money in fact belongs to him or her.