Taxpayer who worked for British Consulate was common law employee and ineligible to contribute to SEP

A taxpayer was not an “employer” under Code Sec. 401(c)(4) and was therefore barred from contributing to a SEP and deducting those contributions, according to the U.S. Court of Appeals in San Francisco (CA-9).

After working for the British Consulate General (BCG) in 2003, a taxpayer contributed a portion of his income to a simplified employee pension (SEP) and deducted the contribution on his 2003 tax return. The tax court found that, as a common law employee of the BCG, the taxpayer was not an “employer” under Code Sec. 401(c)(4) with respect to his BCG earnings, which barred him from contributing to a SEP and deducting contributions based on those earnings.

On appeal, the Ninth Circuit concluded that the tax court did not clearly err in holding that the taxpayer was a common law employee. Of particular importance, the appellate court found no clear error in the tax court’s determination that the taxpayer’s letter of appointment showed that the BCG had the right to exercise control over his work. Nor did the appellate court find clear error in the tax court’s determination that the letter of appointment failed to indicate that the BCG intended to hire the taxpayer as an independent contractor.

Because the taxpayer did not own any interest in the BCG, the taxpayer was not an “employer” under Code Sec. 401(c)(4), the appeals court held, and thus he was ineligible to contribute to a SEP and deduct contributions based on those earnings. Accordingly, the tax court’s holding was affirmed.

Source: Rosenfeld v. Commissioner of Internal Revenue (CA-9).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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