U.R. Neely v. Commissioner ( 2000 )

115 T.C. No. 21
UNITED STATES TAX COURT
U.R. NEELY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14936-98. Filed September 27, 2000.
By notice of determination issued in 1998, R
determined that three individuals who performed
services for P’s sole proprietorship in 1992 were
employees of the proprietorship during such year for
employment tax purposes. P filed a petition under sec.
7436, I.R.C., contesting R’s determination and further
contending that R’s determination was barred by the
expiration of the 3-year period of limitations on
assessment under sec. 6501(a), I.R.C. R contends that
the period of limitations remains open under sec.
6501(c), I.R.C., on account of P’s fraudulent conduct.
Held: Where the jurisdiction of the Court has
been properly invoked under sec. 7436, I.R.C., the
Court possesses jurisdiction to decide whether R’s
determination concerning worker classification is
barred by the expiration of the period of limitations
on assessment under sec. 6501, I.R.C.
Kirk A. McCarville, for petitioner.
John W. Duncan, for respondent.
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OPINION
VASQUEZ, Judge: Respondent issued to petitioner a notice of
determination concerning worker classification. Petitioner
contends that such determination was time-barred under section
6501(a).1 Respondent contends that the period of limitations on
assessment remains open, pursuant to section 6501(c), on account
of petitioner’s fraudulent conduct. The Court, sua sponte,
questioned whether we have jurisdiction to address these
arguments in the context of a case brought under section 7436.
For reasons discussed below, we hold that we possess such
jurisdiction.
Background
During 1992, petitioner operated a sole proprietorship (the
company) whose principal place of business was in Mesa, Arizona.2
Petitioner resided in Phoenix, Arizona, at the time the petition
herein was filed.
On June 11, 1998, respondent mailed to petitioner a Notice
of Determination Concerning Worker Classification Under Section
7436, in which respondent determined that three individuals who
performed services for the company during 1992 (the workers) were
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
2
At trial, petitioner testified that he no longer owned
the company. The record does not reflect, however, when
petitioner’s ownership interest terminated.
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employees of the company for purposes of Federal employment
taxes3 under Subtitle C (Employment Taxes and Collection of
Income Tax) of the Internal Revenue Code. The notice of
determination further provided that petitioner was not entitled
to “safe harbor” relief provided by section 530 of the Revenue
Act of 1978, Pub. L. 95-600, 92 Stat. 2763, 2885. Respondent
attached to the notice of determination a “Preliminary
Calculation of tax and additions to tax”, which set forth the
following amounts: (1) $20,154 for January 1 to December 31,
1992, under the Federal Insurance Contributions Act (FICA), ch.
736, secs. 3101-3128, 68A Stat. 415 (1954), and under the income
tax withholding provisions of sections 3401-3406; (2) $13,060 for
January 1 to December 31, 1992, under the Federal Unemployment
Tax Act (FUTA), ch. 736, secs. 3301-3311, 68A Stat. 439 (1954);
(3) $1,743 in section 6656 penalties for failure to make timely
deposits of taxes; and (4) $24,911 in section 6663 fraud
penalties.
On September 8, 1998, petitioner filed with the Court a
petition seeking our review of the notice of determination.4 In
3
For convenience, we use the term “employment taxes” to
refer to taxes under the Federal Insurance Contributions Act
(FICA), ch. 736, secs. 3101-3128, 68A Stat. 415 (1954), the
Federal Unemployment Tax Act (FUTA), ch. 736, secs. 3301-3311,
68A Stat. 439 (1954), and income tax withholding, secs. 3401-
3406.
4
The petition was actually filed by petitioner and
petitioner’s wife, Anne Neely. On May 14, 1999, respondent filed
(continued...)
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it, petitioner contends that (1) respondent erroneously
characterized the workers as employees, (2) respondent’s
determination of worker classification is barred by “all relevant
sections of the Internal Revenue Code pertaining to the
limitations on assessment and collection”,5 and (3) respondent
erroneously determined that petitioner’s failure to pay
employment taxes relating to the workers was due to fraud.6
In respondent’s answer to the petition, respondent argues
that his determination is not time barred because the general
4
(...continued)
a motion to dismiss for lack of jurisdiction as to Anne Neely on
the grounds that the notice of determination was not issued to
her and petitioner, but rather to petitioner alone. We granted
respondent’s motion.
5
On Aug. 4, 1992, petitioner filed Forms 941, Employer’s
Quarterly Federal Tax Return, for quarters ending Mar. 31, 1992,
and June 30, 1992. On Oct. 31, 1992, and Jan. 31, 1993,
petitioner filed Forms 941 for quarters ending Sept. 30, 1992,
and Dec. 31, 1992, respectively. Lastly, on Mar. 1, 1993,
petitioner filed Form 940-EZ, Employer’s Annual Federal
Unemployment (FUTA) Tax Return, for calendar year 1992.
Respondent does not dispute that the above-mentioned returns were
filed more than 3 years prior to the issuance of the notice of
determination in this case.
6
Petitioner also disputed the amounts of employment taxes
and the amounts of related penalties that were set forth in the
notice of determination. On Oct. 28, 1998, respondent filed a
motion to dismiss in part for lack of jurisdiction as to the
amounts of employment taxes and as to the amounts of related
penalties. The motion was scheduled for hearing, but following
the issuance of our opinion in Henry Randolph Consulting v.
Commissioner, 112 T.C. 1 (1999), the parties submitted a joint
report recommending that respondent’s motion be granted without a
hearing. The Court then granted respondent’s motion and
dismissed the case in part for lack of jurisdiction over the
amounts of employment taxes and the amounts of related penalties
proposed by respondent.
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3-year period of limitations under section 6501(a)7 does not
apply in this case. Respondent alleges that petitioner’s failure
to pay employment taxes with respect to amounts paid to the
workers during 1992 constituted (1) a willful attempt by
petitioner to defeat or evade employment taxes and (2) fraud with
an intent to evade tax. Accordingly, respondent contends that
the period of limitations in this case remains open pursuant to
either section 6501(c)(1) or section 6501(c)(2).
Prior to trial, the parties entered into a stipulation of
facts in which petitioner stipulated that the workers were
employees of the company during 1992 and that petitioner does not
qualify for relief under section 530 of the Revenue Act of 1978,
Pub. L. 95-600, 92 Stat. 2763, 2855.8 The matter for decision at
7
Sec. 6501(a) provides that, with respect to any tax
imposed by the Internal Revenue Code, “no proceeding in court
without assessment for the collection of such tax shall be begun”
following the expiration of the applicable period of limitations.
See also sec. 301.6501(a)-1(b), Proced. & Admin. Regs. As a
general rule, the period of limitations expires after 3 years
from the date on which the relevant tax return is filed. See
sec. 6501(a). Various exceptions to the 3-year period are found
in sec. 6501, including an unlimited limitations period under
sec. 6501(c)(1) for cases in which the filed return was false or
fraudulent with an intent to evade tax. See also sec.
301.6501(c)-1(a), Proced. & Admin. Regs.
8
That petitioner now concedes the merits of respondent’s
determination does not deprive the Court of jurisdiction. As we
stated in the income tax context in Hannan v. Commissioner, 52
T.C. 787, 791 (1969): “it is not the existence of a deficiency
but the Commissioner’s determination of a deficiency that
provides a predicate for Tax Court jurisdiction. * * * Indeed,
were this not true, then the absurd result would be that in every
case in which this Court determined that no deficiency existed,
(continued...)
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trial therefore was whether respondent’s determination of worker
classification was barred by expiration of the 3-year period of
limitations set forth in section 6501(a) or whether the period of
limitations remained open pursuant to section 6501(c) on account
of petitioner’s fraudulent conduct.
At commencement of trial, the Court raised the issue of
whether we had jurisdiction to decide whether a taxpayer in a
worker classification case had committed fraud for purposes of
determining whether the section 6501(c) exception to the general
3-year period of limitations on assessment applied. At that
time, both parties agreed that the Court possessed jurisdiction
to decide such issue. Following trial, the Court held the
conventional posttrial briefing in abeyance and ordered the
parties to identify by memoranda the legal authority which
establishes the jurisdiction of the Court to address matters
relating to the period of limitations on assessment in a worker
classification case brought under section 7436.
Discussion
It is well settled that this Court can proceed in a case
only if we have jurisdiction and that any party, or the Court sua
sponte, can question jurisdiction at any time, even after the
8
(...continued)
our jurisdiction would be lost.” Similarly, it is the
Commissioner’s determination of worker classification that
provides the predicate for our jurisdiction under sec. 7436. The
ultimate merits of such determination do not affect the Court’s
jurisdiction.
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case has been tried and briefed. See Romann v. Commissioner, 111
T.C. 273, 280 (1998); Normac, Inc. & Normac Intl. v.
Commissioner, 90 T.C. 142, 146-147 (1988); Brown v. Commissioner,
78 T.C. 215, 218 (1982). Although the parties agreed at trial
that the Court had jurisdiction to decide the issues relating to
the period of limitations on assessment in this case,
jurisdiction cannot be conferred upon the Court by agreement.
See Naftel v. Commissioner, 85 T.C. 527, 530 (1985).
Through his timely filed petition in response to
respondent’s notice of determination, petitioner invoked the
Court’s jurisdiction under section 7436. Section 7436(a) confers
upon this Court jurisdiction to determine whether service
providers are employees or independent contractors for purposes
of Subtitle C and whether section 530 of the Revenue Act of 1978
applies.9 Section 7436(d) further provides that the “principles”
9
Sec. 7436(a) provides:
SEC. 7436. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT
STATUS.
(a) Creation of Remedy.–-If, in connection with an
audit of any person, there is an actual controversy
involving a determination by the Secretary as part of
an examination that–-
(1) one or more individuals performing
services for such person are employees of
such person for purposes of subtitle C, or
(2) such person is not entitled to the
treatment under subsection (a) of section 530
of the Revenue Act of 1978 with respect to
(continued...)
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of sections 6213(a), (b), (c), (d) and (f), 6214(a), 6215,
6503(a), 6512, and 7481 are applicable in a proceeding brought
under section 7436 as if the Secretary’s notice of determination
were a notice of deficiency.
We previously examined the parameters of our jurisdiction
under section 7436 in Henry Randolph Consulting v. Commissioner,
112 T.C. 1 (1999). The taxpayer in that case contested not only
the Commissioner’s determination that various services providers
were employees for employment tax purposes, but also the amounts
of the employment taxes that were set out on schedules attached
to the Commissioner’s notice of determination. After analyzing
the provisions of section 7436 as well as its legislative
history, we concluded that the only grant of jurisdiction within
the section is found in section 7436(a). See Henry Randolph
Consulting v. Commissioner, supra at 4-6, 8. We further
concluded that jurisdiction granted by section 7436(a) is limited
to making the two determinations expressly set forth therein;
i.e., (1) proper classification of service providers and (2)
application of the safe harbor under section 530 of the Revenue
Act of 1978. See id. at 4-5. Accordingly, we held that we
9
(...continued)
such an individual,
upon the filing of an appropriate pleading, the Tax
Court may determine whether such a determination by the
Secretary is correct. Any such redetermination by the
Tax Court shall have the force and effect of a decision
of the Tax Court and shall be reviewable as such.
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lacked jurisdiction to decide the amounts of employment taxes at
issue if respondent’s determination as to worker classification
were sustained. See id. at 13.
Relying on our opinion in Henry Randolph Consulting,
respondent now argues that we lack jurisdiction to decide which
period of limitations applies under section 6501 and whether
respondent’s determination was made after the expiration of such
period, because such a decision would constitute a substantive
determination falling outside of the two determinations which the
Court is authorized to make under section 7436(a). We agree with
respondent that the issue of whether respondent’s determination
is barred by expiration of the period of limitations on
assessment under section 6501 constitutes a substantive matter,
as opposed to a plea to the jurisdiction of this Court. See
Genesis Oil & Gas, Ltd. v. Commissioner, 93 T.C. 562, 564 (1989);
Robinson v. Commissioner, 57 T.C. 735, 737 (1972); Badger
Materials, Inc. v. Commissioner, 40 T.C. 1061, 1063 (1963).
However, we do not share respondent’s belief that we lack
jurisdiction to address matters relating to the period of
limitations on assessment in the worker classification context.
The statute of limitations set forth in section 6501
constitutes a defense at bar (i.e., an affirmative defense) that
may be raised by the taxpayer in response to a determination made
by the Commissioner. See Rule 39; Genesis Oil & Gas, Ltd. v.
Commissioner, supra at 564. Once our jurisdiction has been
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properly invoked in a case, we require no additional jurisdiction
to render a decision with respect to such an affirmative defense.
See Genesis Oil & Gas, Ltd. v. Commissioner, supra at 564.
Rather, “When such a defense in bar is properly raised, we must
pass upon the merits of the issue after receiving evidence with
respect thereto”. Badger Materials, Inc. v. Commissioner, supra
at 1063. Accordingly, we hold that where the parties are
properly before the Court in an action brought under section
7436, the Court possesses jurisdiction to address issues relating
to the period of limitations under section 6501 that are properly
raised by the parties.
In this case, our jurisdiction over the parties under
section 7436 was invoked through petitioner’s timely filed
petition seeking review of respondent’s notice of determination.
When petitioner pleaded as an affirmative defense in his petition
that respondent’s determination as to worker classification was
barred by expiration of the 3-year period of limitations under
section 6501(a), we required no additional jurisdiction to
address such issue. Furthermore, when respondent alleged in his
answer that the period of limitations in this case remained open
pursuant to section 6501(c) on account of petitioner’s fraudulent
conduct, we required no additional jurisdiction to decide whether
the circumstances described in section 6501(c) were present in
this case.
We have considered respondent’s other arguments in favor of
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a holding that we lack jurisdiction over issues relating to the
period of limitations in this case, and to the extent not
discussed herein find them to be without merit.
In accordance with our holding, we shall order the parties
to proceed with briefing the subject matter of the trial.
To reflect the foregoing,
An appropriate order will be
issued.