HI-Q Personnel, Inc. v. Commissioner

132 T.C. No. 13UNITED STATES TAX COURT
HI-Q PERSONNEL, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22101-04. Filed May 4, 2009.
P corporation provided skilled and unskilled
laborers for casual employment (temporary laborers) to
more than 250 client companies. P gave temporary
laborers the option of being paid by check or in cash.
For those paid in cash, P failed to withhold Federal
income taxes and pay either the employer or employee
portions of FICA taxes (together, employment taxes) for
all taxable quarters in 1995, 1996, 1997, and 1998. In
2002, P’s president and sole shareholder, N, pleaded
guilty to failing to withhold and pay the employment
taxes and to conspiracy to defraud the United States.
R determined P was liable for the employment taxes
under secs. 3402, 3102, and 3111, I.R.C., and imposed
fraud penalties under sec. 6663(a), I.R.C. R argues
that N’s guilty plea collaterally estops P from denying
its responsibility for paying the employment taxes and
from denying fraud. In the alternative, R argues that
P is the employer of the temporary laborers and for
that reason is liable for the employment taxes and
fraud penalties. P argues that R’s determinations were
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not timely because R did not make them within the 3-
year period of limitations in sec. 6501(a), I.R.C.
1. Held: P is collaterally estopped from denying
its responsibility for paying the employment taxes.
2. Held, further, P is the statutory employer of
temporary laborers under sec. 3401(d)(1), I.R.C., and
therefore is liable for paying the employment taxes.
3. Held, further, P is liable for fraud penalties
under sec. 6663(a), I.R.C.
4. Held, further, R’s determinations were timely
under sec. 6501(c)(1), I.R.C., because P filed false or
fraudulent returns.
Mark E. Cedrone, for petitioner.
Linda P. Azmon, for respondent.
HALPERN, Judge: The petition in this case was filed in
response to a Notice of Determination of Worker Classification
(the notice) regarding petitioner’s liabilities pursuant to the
Federal Insurance Contributions Act (FICA) and for Federal income
tax withholding (together, employment taxes) for all taxable
quarters in 1995, 1996, 1997, and 1998. After concessions,1 the
following questions remain.
(1) Is petitioner collaterally estopped from denying that
it was responsible for paying the employment taxes?
(2) Has respondent properly determined that the workers
identified in the notice as “Temporary Laborers” should be
1
Principally, petitioner concedes that it is not entitled
to relief under sec. 530 of the Revenue Act of 1978, Pub. L. 95-
600, 92 Stat. 2885, as amended.
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legally classified as petitioner’s employees for each taxable
quarter in 1995, 1996, 1997, and 1998?
(3) Is petitioner liable for the employment taxes?
(4) Is petitioner liable for fraud penalties?
(5) Have the periods of limitations for assessing and
collecting the employment taxes expired?
A table setting forth the employment taxes and fraud
penalties respondent determined is attached to this report as an
appendix.
Unless otherwise stated, all section references are to the
Internal Revenue Code (the Code) in effect for the taxable
quarters in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
FINDINGS OF FACT
Some facts are stipulated and are so found. The stipulation
of facts, with accompanying exhibits, is incorporated herein by
this reference. At the time the petition was filed, petitioner’s
principal place of business was in Philadelphia, Pennsylvania.
Background
Beginning in 1995 and extending through 1998, petitioner
operated an employment service that provided skilled and
unskilled laborers for casual employment (temporary laborers) to
more than 250 client companies (clients) for a fee. Clients paid
petitioner by check for the services of temporary laborers, and
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petitioner offered temporary laborers the choice of being paid by
check or of being paid in cash (temporary laborers paid by check
and temporary laborers paid in cash, respectively). Petitioner
included temporary laborers paid by check on its regular payroll
and treated them as its employees for employment tax purposes.
Petitioner disregarded temporary laborers paid in cash for
employment tax purposes. To remain competitive in recruiting
temporary laborers, petitioner honored temporary laborers’
choices as to how to be paid. In placing temporary laborers with
clients, petitioner did not distinguish between temporary
laborers paid by check and temporary laborers paid in cash.
During the taxable quarters here in issue, petitioner paid
$14,845,019 to temporary laborers paid in cash.
During those periods, Luan Nguyen (Mr. Nguyen) was president
of petitioner and its sole shareholder. As more fully explained
infra, Mr. Nguyen was indicted on, and pleaded guilty to, Federal
criminal charges in connection with the failure to pay employment
taxes with respect to the $14,845,019 paid to temporary laborers
paid in cash.
Petitioner’s Client Contracts
Petitioner’s relationship with its clients was established
by contract. A typical client contract (client contract)
included the following provisions:
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1. Hi-Q will provide to CLIENT the following
classifications of temporary employees at the rates set
forth.
SERVICE RATE
GENERAL LABOR $9.00 per/hr
* * * * * * *
2. The hourly rate of payment for services listed
above shall be paid by CLIENT to Hi-Q, per hour, per
employee. * * *
3. Payment shall be made in full, to Hi-Q by
check within 7 days from the date of the invoice
rendered by Hi-Q. * * *
* * * * * * *
5. CLIENT agrees not to advance any money, goods
or services to Hi-Q employees without Hi-Q’s prior
written consent. CLIENT agrees not to leave CLIENT’S
premises with any cash, negotiable instrument, or other
valuable items thereon * * * unattended in the presence
of any Hi-Q employees or [to] entrust the same to the
care, custody and control of any Hi-Q employees without
Hi-Q’s prior written consent.
6. CLIENT will not authorize Hi-Q employees to
operate any vehicle without Hi-Q’s prior written
consent. * * *
7. In the unlikely event that the services of a
Hi-Q employee prove unsatisfactory, Hi-Q shall
immediately provide a replacement. * * *
8. Hi-Q shall promptly pay all employees, and
shall make all federal, state and local payroll tax
deductions, deposits and payments as required by law.
* * * * * * *
10. Hi-Q shall provide worker’s compensation
insurance coverage for all employees and provide
evidence of same to CLIENT.
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11. Upon notification to Hi-Q by CLIENT and
written consent of Hi-Q, CLIENT shall have the right to
hire any Hi-Q employee who has worked for CLIENT for a
period in excess of 520 consecutive hours or 13
consecutive weeks, at no fee or commission paid to Hi-
Q. However, upon employing any Hi-Q employee prior to
completion of 520 consecutive hours, CLIENT agrees to
pay to Hi-Q a fee of ten (10%) percent of employee’s
annual salary, i.e. 2080 hours [at] employee’s starting
hourly rate paid by CLIENT to employee.
12. If without Hi-Q’s prior written consent, any
employee referred to CLIENT by Hi-Q is employed by
CLIENT, or by another division, subsidiary or affiliate
of CLIENT, within six (6) months from the last date
said employee was on Hi-Q’s payroll and working for
CLIENT, CLIENT agrees to pay to Hi-Q a fee of ten (10%)
percent of employee’s annual salary, i.e. 2080 hours at
employee’s starting hourly rate paid by CLIENT to
employee.
Petitioner’s Business
Petitioner employed job counselors responsible for all
aspects of recruiting temporary laborers. Job counselors
recruited temporary laborers through newspaper advertisements and
referrals. Job counselors interviewed each temporary laborer and
performed background checks by calling the laborer’s prior
employer or listed reference. After recruiting a temporary
laborer, job counselors matched the laborer with an appropriate
position according to the laborer’s qualifications and the job
descriptions clients provided. Before placing a temporary
laborer with a client, petitioner required the laborer to
complete a job application. Approximately 80 to 90 percent of
the temporary laborers petitioner recruited chose to be temporary
laborers paid in cash.
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In its promotional material, petitioner made many promises
to clients. It stated that, by hiring temporary laborers through
petitioner, clients could avoid paying “Employee Tax” and “Social
Security”. It pledged to make “all federal, state and local
payroll tax deductions, deposits and payments as required by
law.” It represented that it was responsible for providing
workers’ compensation insurance for all temporary laborers. It
claimed that it “[offered] training to our employees on
computers, on job-specific work, languages, and specialized
industrial machinery”, and stated that, “if your location has no
access to public transit, we will provide HI-Q employees with
[free] transportation to your site.” Petitioner also promised
that clients could “easily” hire any temporary laborer, ensuring
that clients hired only “the best of the best” to their
“permanent staff.”
As stated, petitioner treated temporary laborers paid by
check as its employees for employment tax purposes. On its Forms
941, Employer’s Quarterly Federal Tax Return, it reported as
wages the amounts it paid those temporary laborers. For those
temporary laborers, it withheld Federal income taxes under
section 3402. It also withheld those temporary laborers’ shares
of FICA taxes under section 3102 and paid its own corresponding
share of FICA taxes under section 3111. In contrast, petitioner
did not require temporary laborers paid in cash to produce proper
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identification for Federal income tax purposes or to prepare the
documents necessary for payroll tax deductions. It did not issue
to temporary laborers paid in cash either Forms 1099-MISC,
Miscellaneous Income, or Forms W-2, Wage and Tax Statement.
To generate funds to pay temporary laborers paid in cash,
petitioner cashed some client checks at check-cashing agencies.
It did not record on its books the proceeds of those client
checks as business income or the payments to temporary laborers
paid in cash as payroll expenses. For the years in issue,
petitioner failed to report $14,845,019 as cash wages paid.
Clients could refuse the services of any temporary laborer,
and petitioner was contractually bound to provide a replacement
laborer on request. Nonetheless, petitioner retained the right
at any time to reassign any temporary laborer from one client to
another. Petitioner required temporary laborers unable to report
to a client’s premises for work to notify petitioner; petitioner,
in turn, notified the client.
Clients completed timesheets for petitioner showing the
hours temporary laborers worked. Petitioner billed clients for
temporary laborers’ services by means of invoices based on those
timesheets. Often, however, petitioner paid temporary laborers
before receiving payment from clients.
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Criminal Proceedings
Mr. Nguyen was a defendant in the criminal case of United
States v. Nguyen, docket No. 2:02CR745 (E.D. Pa., Nov. 6, 2002)
(the criminal case). On November 6, 2002, Mr. Nguyen was
indicted on 10 counts. Count 1 of the indictment charges a
violation of 18 U.S.C. sec. 371, Conspiracy to commit offense or
to defraud United States; counts 2 through 10 of the indictment
charge violations of section 7202, Willful Failure To Collect or
Pay Over Tax, and 18 U.S.C. sec. 2, Principals (viz., one who
aids and abets the commission of an offense against the United
States is punishable as a principal).2
In pertinent part, the indictment states:
COUNT ONE
(CONSPIRACY TO DEFRAUD THE UNITED STATES)
INTRODUCTION
THE GRAND JURY CHARGES THAT:
1. At all times relevant to this Indictment, Hi-Q
Personnel, Inc. (“Hi-Q Personnel”) was a corporation
doing business * * * as a temporary employment service
that supplied casual laborers to clients for a fee.
2
The taxable quarters in issue with respect to count 1 (the
16 quarters in 1995 through 1998) differ from the taxable
quarters in issue with respect to counts 2 through 10 (the 8
quarters in 1997 through 1998). The reason is that the period of
limitations for violations of sec. 7202 is 6 years. See sec.
6531(4). Thus Mr. Nguyen, indicted Nov. 6, 2002, could not be
charged with violations of sec. 7202 for returns filed before
November 1996.
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2. At all times relevant to this Indictment, LUAN
NGUYEN * * * was the president and sole shareholder of
Hi-Q Personnel.
3. At all times relevant to this Indictment,
PHUONG NGUYEN * * * was employed by Hi-Q Personnel and
responsible for the day-to-day operation of the
business, including, but not limited to, the
supervision of the preparation of the payroll[,]
including the cash payroll; the supervision of the
hiring of temporary laborers who were given the option
of being paid in cash; and the cashing of checks used
to pay the cash payroll.
4. At all times relevant to this Indictment, the
casual laborers supplied * * * to client businesses
were employees of Hi-Q Personnel. As part of its
business of providing laborers to its clients, Hi-Q
Personnel acknowledged and agreed in its contracts with
its clients that Hi-Q Personnel, and not the client,
was responsible for collecting, accounting for and
paying over to the United States all employment taxes.
5. [F]rom 1995 through 1998, Hi-Q Personnel
supplied temporary laborers to approximately 259 client
companies.
6. At all times relevant to this Indictment, LUAN
NGUYEN, * * * as the President and sole shareholder of
Hi-Q Personnel, was required by Title 26 of the United
States Code, to collect, truthfully account for, and
pay over to the United States, taxes imposed by Title
26, United States Code, namely Hi-Q Personnel’s
employees’ federal income tax withholdings * * * [and
FICA taxes,] ( * * * collectively referred to as
“employment taxes” * * *). In this regard, LUAN NGUYEN
* * * and Hi-Q Personnel were required truthfully to
account for and pay over the employment taxes each
quarter by filing * * * [Form 941] by reporting therein
the total wages paid to Hi-Q Personnel employees and
the amount of employment taxes due and owing to the
United States on those wages, and by paying employment
taxes due on those wages at the time the Form 941 was
filed * * *.
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THE TAX CONSPIRACY
7. [From January 1, 1995, through January 31,
1999, the defendants LUAN NGUYEN and PHUONG NGUYEN]
conspired and agreed together * * * to defraud the
United States concerning its governmental functions and
rights, by impeding, impairing, obstructing and
defeating the lawful governmental functions of the
Internal Revenue Service [IRS] * * * in the
ascertainment, computation, assessment and collection
of revenue, that is, the employment taxes due and owing
to the United States * * * from Hi-Q Personnel.
THE OBJECT OF THE CONSPIRACY
8. The object of the conspiracy was to prevent
the IRS from discovering the actual wages paid to the
employees of Hi-Q Personnel and from assessing and
collecting employment taxes due thereon.
MANNER AND MEANS
9. It was a part of the conspiracy that Hi-Q
Personnel contracted with various businesses in the
greater Philadelphia, Pennsylvania area to supply the
businesses with casual laborers * * *.
10. It was further a part of the conspiracy that
Hi-Q Personnel acknowledged and agreed in its contracts
with its clients that Hi-Q Personnel, and not the
client, was responsible for collecting, accounting for
and paying over to the United States all employment
taxes due on wages earned by the laborers.
11. It was further a part of the conspiracy that
defendants LUAN NGUYEN * * * and PHUONG NGUYEN * * *
caused Hi-Q Personnel * * * to give the laborers * * *
a choice to be paid either in cash, which they
understood to mean that there would be no employment
taxes withheld from their wages, or by check in which
case all appropriate payroll taxes would be collected,
accounted for, and paid over to the United States.
(a) When laborers * * * opted to be paid in
cash, they were not required to produce proper
identification for income tax purposes or prepare the
necessary documents for payroll tax deductions, and did
not receive * * * [a Form W-2] from Hi-Q Personnel.
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12. It was further a part of the conspiracy that
defendants LUAN NGUYEN * * * and PHUONG NGUYEN * * *
paid a substantial number of their employee laborers in
cash to conceal the true number and identities of the
employees, the amounts of cash wages paid to Hi-Q
Personnel’s employee laborers, and the fact that they
did not collect or account for the employment taxes due
on the cash wages paid.
13. It was further a part of the conspiracy that
to generate the cash needed to meet and facilitate the
concealment of its cash payroll, the defendants LUAN
NGUYEN * * * and PHUONG NGUYEN * * * used check cashing
agencies to cash checks obtained from their clients to
pay for the labor provided by Hi-Q Personnel.
* * * * * * *
14. It was further a part of the conspiracy that
to conceal the amount of employment tax due to the
United States, the defendants LUAN NGUYEN * * * and
PHUONG NGUYEN * * * substantially understated and
misrepresented the wages paid to the employees of Hi-Q
Personnel on the * * * [Forms 941] filed on behalf of
Hi-Q Personnel each quarter with the IRS during the
conspiracy.
15. It was further a part of the conspiracy that *
* * [from January 1, 1995, through January 31, 1999,]
the defendants LUAN NGUYEN * * * and PHUONG NGUYEN * *
* failed to account for, collect and pay over to the
IRS employment taxes in the approximate amount of
$3,326,054.48 on total unreported wages of
approximately $14,845,019.24.
OVERT ACTS
16. In furtherance of the conspiracy and to
accomplish its object, the defendants committed the
following overt acts * * *:
(a) [Between January 1, 1995, and December
31, 1998,] on different occasions, the defendants LUAN
NGUYEN * * * and PHUONG NGUYEN, * * * together and
separately, cashed corporate checks received from
client companies at check cashing agencies located in
Philadelphia, Pennsylvania.
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(b) [Between January 1, 1995, and December
31, 1998,] on different occasions, the defendants LUAN
NGUYEN * * * and PHUONG NGUYEN * * * caused Hi-Q
Personnel to pay employees of Hi-Q Personnel in cash at
the offices of Hi-Q Personnel.
(c) [T]he defendants LUAN NGUYEN * * * and
PHUONG NGUYEN * * * filed with the IRS in Philadelphia,
Pennsylvania a false Form 941 for * * * [each quarter,
sixteen in total, in taxable years 1995 through 1998,]
which substantially misrepresented the wages paid to
Hi-Q Personnel employees, each filing constituting a
separate overt act * * *[.]
* * * * * * *
All in violation of Title 18, United States Code,
Section 371.
* * * * * * *
[COUNTS TWO THROUGH TEN]
(FAILURE TO COLLECT, ACCOUNT FOR AND PAY OVER EMPLOYMENT TAXES)
THE GRAND JURY FURTHER CHARGES THAT:
1. Paragraphs 1 through 6 of Count One are
incorporated herein as if fully set forth.
2. [For the taxable quarters beginning December
31, 1996, and through the taxable quarter ending
December 31, 1998, defendant LUAN NGUYEN,] being a
person required under Title 26, United States Code, to
collect, account for and pay over taxes imposed by
Title 26, United States Code, did willfully fail to
collect and cause to be collected, truthfully account
for and cause to truthfully be accounted for, and pay
over and cause to be paid over to the United States,
federal income tax withholdings and * * * [FICA] taxes,
of approximately * * * [$2,224,384.73] due and owing to
the United States on taxable wages paid by Hi-Q
Personnel * * * to its employee laborers of
approximately * * * [$9,640,197.62].
All in violation of Title 26, United States Code,
Section 7202 and Title 18, United States Code, Section
2.
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On March 10, 2003, at the change of plea hearing, Mr. Nguyen
accepted the guilty plea agreement (the plea agreement), thereby
pleading guilty to all 10 counts in the indictment. On July 24,
2003, the U.S. District Court for the Eastern District of
Pennsylvania sentenced Mr. Nguyen to 150 months in prison and
$1,000 in special assessments, and, on October 10, 2003, the
court entered a judgment of conviction against him in the
criminal case.
The Notice
The notice states the amounts of employment taxes respondent
determined for the taxable quarters in issue along with the fraud
penalties he determined. See appendix. Respondent determined a
fraud penalty for each taxable quarter in issue.
The notice omits a list of the temporary laborers that
respondent determined to be petitioner’s employees during those
taxable quarters. That omission is explained as follows:
Please Note:
No individuals were listed * * * due to inadequate
records. While the books and records provided by the
Taxpayer did not identify each individual worker to be
reclassified [as an employee], the administrative file
contains sufficient evidence to support a class of
workers identified as “Temporary Laborers”.
OPINION
I. Introduction
Petitioner operated an employment service providing
temporary laborers to clients for a fee. Petitioner offered
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temporary laborers the option of being paid by check or in cash.
Petitioner included temporary laborers paid by check on its
regular payroll and treated them as its employees for employment
tax purposes. Petitioner disregarded temporary laborers paid in
cash for employment tax purposes.
Mr. Nguyen, petitioner’s president and sole shareholder, was
indicted on, and pleaded guilty to, various counts involving
conspiracy to defraud the United States and failure to pay
employment taxes with respect to the cash payments to temporary
laborers paid in cash.
The present action involves respondent’s attempts to collect
the unpaid employment taxes (and fraud penalties) from
petitioner.
We shall address the issues remaining for decision in the
order stated. Our authority to determine the employment
classification question here in issue and the proper amount of
employment tax is found in section 7436.
II. Issue Preclusion
A. Introduction
Relying on the doctrine of issue preclusion, respondent
argues that, as a result of the plea agreement, petitioner may
not contest its responsibility to pay the employment taxes here
in issue. Petitioner objects. We agree with respondent.
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B. The Doctrine of Issue Preclusion
In Monahan v. Commissioner, 109 T.C. 235, 240 (1997), we
stated:
The doctrine of issue preclusion, or collateral
estoppel, provides that, once an issue of fact or law
is “actually and necessarily determined by a court of
competent jurisdiction, that determination is
conclusive in subsequent suits based on a different
cause of action involving a party to the prior
litigation.” Montana v. United States, 440 U.S. 147,
153 (1979) (citing Parklane Hosiery Co. v. Shore, 439
U.S. 322, 326 n.5 (1979)). * * *
Under the doctrine of issue preclusion, or collateral
estoppel, (1) the issue to be decided in the second case must be
identical in all respects to the issue decided in the first case,
(2) a court of competent jurisdiction must have rendered a final
judgment in the first case, (3) a party may invoke the doctrine
only against parties to the first case or those in privity with
them, (4) the parties must have actually litigated the issue and
the resolution of the issue must have been essential to the prior
decision, and (5) the controlling facts and legal principles must
remain unchanged. See Jean Alexander Cosmetics, Inc. v. L’Oreal
USA, Inc., 458 F.3d 244, 249 (3d Cir. 2006); Monahan v.
Commissioner, supra at 240.
C. Discussion
1. Petitioner’s Argument
Petitioner does not dispute the second or fifth conditions.
Petitioner, however, contends the other three conditions are not
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satisfied, arguing that: (1) The fourth condition is not
satisfied because Mr. Nguyen pleaded guilty, and so did not
actually litigate any issue; (2) the first condition is not
satisfied because the issue before us is not identical to any
issue decided in the criminal case; and (3) the third condition
is not satisfied because petitioner is not in privity with Mr.
Nguyen. We disagree with all three arguments.
2. Issue Actually Litigated
A conviction based on a guilty plea is “nevertheless a
judgment on the merits sufficient for purposes of collateral
estoppel to preclude relitigation of issues determination of
which was essential to the conclusion reached.” Arctic Ice Cream
Co. v. Commissioner, 43 T.C. 68, 76 (1964); see De Cavalcante v.
Commissioner, 620 F.2d 23, 26-27 n.9 (3d Cir. 1980) (noting that
a guilty plea has collateral estoppel effect), affg. Barrasso v.
Commissioner, T.C. Memo. 1978-432.3 On October 10, 2003, the
U.S. District Court for the Eastern District of Pennsylvania
3
Petitioner relies on Bower v. O’Hara, 759 F.2d 1117, 1124-
1126 (3d Cir. 1985), for the proposition that a guilty plea is
insufficient for issue preclusion. The rule in Bower depends on
the underlying law (e.g., State law). See Anela v. City of
Wildwood, 790 F.2d 1063, 1068-1069 (3d Cir. 1986). The
controlling law in Bower was the organic statute of the U.S.
Virgin Islands. The controlling law here, however, is Federal
common law. For that reason we follow De Cavalcante v.
Commissioner, 620 F.2d 23, 26-27 n.9 (3d Cir. 1980), affg.
Barrasso v. Commissioner, T.C. Memo. 1978-432, in which the Court
of Appeals for the Third Circuit affirmed this Court’s decision
to give collateral estoppel effect to a taxpayer’s guilty plea in
Federal court. Bower is inapposite.
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convicted Mr. Nguyen after accepting his guilty plea. His
conviction is a judgment on the merits sufficient to preclude
relitigation of the issues involved in the criminal case.
3. Issue Identity
Mr. Nguyen pleaded guilty to the charge of willfully failing
to collect, truthfully account for, and pay employment taxes on
taxable wages petitioner paid temporary laborers paid in cash.
Specifically, Mr. Nguyen pleaded guilty to violating section 7202
and 18 U.S.C. sec. 2.4 5
Section 7202 refers to the willful
failure of any “person” required under the Code to collect,
account for, and pay over any tax imposed by the Code. The
requirement here was to collect and pay the employment taxes due
on wages petitioner paid the temporary laborers paid in cash. It
is the duty of the employer to collect, account for, and pay over
4
Sec. 7202, Willful Failure To Collect or Pay Over Tax,
provides:
Any person required under this title to collect,
account for, and pay over any tax imposed by this title
who willfully fails to collect or truthfully account
for and pay over such tax shall, in addition to other
penalties provided by law, be guilty of a felony * * *.
5
Tit. 18 U.S.C. sec. 2, Principals, provides:
(a) Whoever commits an offense against the United
States or aids, abets, counsels, commands, induces or
procures its commission, is punishable as a principal.
(b) Whoever willfully causes an act to be done
which if directly performed by him or another would be
an offense against the United States, is punishable as
a principal.
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both the employees’ and the employer’s FICA taxes and to withhold
income taxes. See secs. 3102(a) and (b) (employees’ FICA taxes),
3111 (employer’s FICA taxes), 3402 and 3403 (Federal income tax
withholding).
The reason Mr. Nguyen--and not petitioner--was charged with
the violation of section 7202 is that section 7343 defines
“person”, as used in section 7202, to include an officer or
employee of a corporation who, as such, is under a duty to
perform the act in respect of which the violation occurs. See
United States v. Thayer, 201 F.3d 214, 219-220 (3d Cir. 1999)
(“[T]he president and majority owner of * * * [employers] was
properly charged and convicted as a ‘person’ under § 7202.”).
Mr. Nguyen was an officer of petitioner (its president), and
petitioner does not claim Mr. Nguyen was an officer or employee
of any client. In other words, Mr. Nguyen was convicted of
failing in his duty to collect, account for, and pay the
employment taxes imposed by law on petitioner as the employer of
temporary laborers.
Petitioner argues, however, that Mr. Nguyen’s guilty plea is
consistent with the theory that the clients were the temporary
laborers’ employers. Petitioner relies on 18 U.S.C. sec. 2,
which “‘[abolished] the distinction between principals and
accessories in offenses defined in the laws of the United
States’”. United States v. Standefer, 610 F.2d 1076, 1082 (3d
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Cir. 1979) (quoting Rooney v. United States, 203 F. 928, 932 (9th
Cir. 1913)), affd. 447 U.S. 10 (1980). Under 18 U.S.C. sec. 2,
both those who commit crimes and those who aid and abet their
commission are principals. Id. at 1083. Petitioner argues that
Mr. Nguyen, although charged as a principal, in fact merely aided
and abetted the clients’ officers (the “true” principals under
sections 7202 and 7343) in their efforts to defraud the Internal
Revenue Service. We reject petitioner’s theory.
Petitioner’s argument is founded on the precept that a
guilty plea admits only the minimum facts necessary to sustain
the indictment’s charges. See, e.g., De Cavalcante v.
Commissioner, supra at 26-27 n.9. Petitioner, however, cites no
authority requiring us to ignore the indictment’s plain language.
In the criminal case, the ultimate issue was whether petitioner
filed false or fraudulent Forms 941 for the 16 taxable quarters
in 1995 through 1998 by failing to pay employment taxes on the
wages petitioner paid temporary laborers paid in cash. The
indictment not only lists the 16 dates petitioner filed the
“false” Forms 941 that “substantially misrepresented the wages
paid to Hi-Q Personnel employees”, but also describes
petitioner’s failure to provide temporary laborers with Forms W-
2. In that way, the indictment implicitly names petitioner as
the employer of the temporary laborers, because only their
employer must record their wages on its Forms 941 and issue them
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Forms W-2. Moreover, in several places, the indictment
explicitly refers to the temporary laborers as petitioner’s
employees. The indictment in no way suggests that any person or
entity other than petitioner was the employer of the temporary
laborers. The indictment itself is unequivocal: Petitioner was
the employer of the temporary laborers. Because that issue is
now before us, the issue in the criminal case and the issue in
this case are identical.
4. Privity
“A sole or controlling stockholder can be in privity with
his * * * closely held corporation.” Levitt v. Commissioner,
T.C. Memo. 1995-464, affd. without published opinion 101 F.3d 691(3d Cir. 1996). Petitioner argues that Mr. Nguyen and petitioner
are not in privity and relies on a flawed analogy between this
case and Am. Range Lines, Inc. v. Commissioner, 17 T.C. 764(1951), affd. on privity issue 200 F.2d 844 (2d Cir. 1952). In
Am. Range Lines v. Commissioner, supra at 771, after recognizing
that the “official acts” of a corporation could bind the
“individual stockholders in their capacity as such”, we declined
to allow the actions of “stockholders in their individual
capacity” to bind the corporation. That case is distinguishable
because of the capacity in which Mr. Nguyen was acting.
It is uncontroverted that Mr. Nguyen was petitioner’s
president and sole shareholder. Mr. Nguyen committed tax fraud
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on behalf of petitioner (not, as petitioner contends, in his
“individual capacity”), and his duty to file accurate Forms 941
arose directly from his position as president of petitioner.
Indeed, “a corporation can act only through its officers and * *
* it does not escape responsibility for the acts of its officers
performed in that capacity. Corporate fraud necessarily depends
upon the fraudulent intent of the corporate officer.” Federbush
v. Commissioner, 34 T.C. 740, 749 (1960), affd. 325 F.2d 1 (2d
Cir. 1963). Moreover, Mr. Nguyen did not benefit directly from
his crimes; rather, he acted to attract temporary laborers to
petitioner and thereby to make petitioner competitive. That is,
petitioner, and so Mr. Nguyen, “benefited by being able to stay
in business”. We reject petitioner’s analogy between this case
and Am. Range Lines, Inc. v. Commissioner, supra, and find that
petitioner and Mr. Nguyen are in privity.
D. Conclusion
The conditions for issue preclusion apply. In the criminal
case, Mr. Nguyen was convicted of failing in his duty to collect,
account for, and pay the employment taxes imposed by law on
petitioner as the employer of temporary laborers. Petitioner is
therefore precluded from denying that temporary laborers paid in
cash were its employees. As a corollary, petitioner is also
precluded from denying its liability for the payment of
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employment taxes with respect to those temporary laborers, as set
forth in the notice.
III. Statutory and Common Law Employers
A. Introduction
While we have held that petitioner is precluded from denying
its liability for the payment of employment taxes with respect to
temporary laborers paid in cash, the parties, particularly
respondent, devoted considerable argument to whether the evidence
(apart from that supporting issue preclusion) shows that
petitioner was the common law employer of the temporary laborers.
Even if we agreed with petitioner that it was not the common law
employer of the temporary laborers (which we do not6), petitioner
is nevertheless their statutory employer under section
3401(d)(1). See, e.g., Educ. Fund of the Elec. Indus. v. United
States, 426 F.2d 1053, 1057-1058 (2d Cir. 1970) (holding that
even though taxpayer was not common law employer, taxpayer was
statutory employer liable for withholding income taxes).
6
Were it pertinent to our decision, we would find that,
applying the factors courts generally use to determine whether an
individual is the common law employee of the person for whom he
performs services, e.g., degree of control, right to discharge,
permanency of the relationship, and the relationship the parties
intended to create, see Ewens & Miller, Inc. v. Commissioner, 117
T.C. 263, 270 (2001), the temporary laborers paid in cash were
petitioner’s, and not its clients’, common law employees.
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B. The Requirement To Pay Employment Taxes
Sections 3102, 3111, and 3402 require employers to withhold
FICA taxes and income taxes from wages they pay to employees, and
to pay their own share of FICA taxes. Section 3401(d) defines
“employer”, and provides in pertinent part:
SEC. 3401(d). Employer.--For purposes of this
chapter, the term “employer” means the person for whom
an individual performs or performed any service, of
whatever nature, as the employee of such person, except
that--
(1) if the person for whom the
individual performs or performed the services
does not have control of the payment of the
wages for such services, the term “employer”
* * * means the person having control of the
payment of such wages * * *
Although that definition is, by its terms, limited to chapter 24
of the Code, Collection of Income Tax at Source on Wages, the
Supreme Court has applied it also to chapter 21 of the Code,
FICA. See Otte v. United States, 419 U.S. 43, 51 (1974) (“The
fact that the FICA withholding provisions of the Code do not
define ‘employer’ is of no significance, for that term is not to
be given a narrower construction for FICA withholding than for
income tax withholding.”). The Supreme Court in Otte v. United
States, supra at 50, concluded that section 3401(d)(1) “obviously
was intended to place responsibility for withholding at the point
of control.”
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C. Control of the Payment for Services
Petitioner contends that the clients “determined how much
they would ultimately pay for any particular * * * [temporary
laborer].” If petitioner means that the clients determined how
much they paid petitioner for temporary laborers’ services, that
is uncontested and irrelevant. If petitioner means that the
clients determined how much petitioner in fact paid temporary
laborers, that is unsupported by any evidence in the record.7
Clients did nothing more than pay petitioner, according to rates
set in the client contracts, for the services temporary laborers
performed. Those rates included not only the gross wages of the
temporary laborers (that is, before employment taxes), but also a
fee for petitioner. Petitioner did not offer convincing evidence
that all clients knew what salaries temporary laborers received
or what fee petitioner earned.8 We find that petitioner set the
salaries of the temporary laborers and paid their wages. For
that reason, we find that petitioner controlled the payment of
wages for the services temporary laborers rendered for clients
and is, therefore, liable for all employment taxes associated
with those payments. See, e.g., Winstead v. United States, 109
7
Indeed, petitioner often paid temporary laborers before
receiving payment from clients.
8
Although some client contracts included an additional
markup as a fee (generally a percentage of the hourly rate),
petitioner failed to offer convincing evidence that it paid
temporary laborers in accordance with the contract terms.
- 26 -
F.3d 989, 991-992 (4th Cir. 1997) (holding that taxpayer who paid
day laborers directly from his personal checking account, even
though not their common law employer, was liable for Federal
Unemployment Tax Act (FUTA) taxes and for both the employer and
employee portions of FICA); Evans v. IRS (In re Sw. Rest. Sys.,
Inc.), 607 F.2d 1237 (9th Cir. 1979) (holding that control of
payment of wages made debtor--and not common law employers--
liable for Federal income tax withholding, FUTA taxes, and both
the employer and employee portions of FICA).
D. Conclusion
For the reasons stated, petitioner is the statutory employer
of the temporary laborers. Petitioner is thus liable for the
employment taxes as set forth in the notice. See Evans v. IRS
(In re Sw. Rest. Sys., Inc.), supra at 1240 (“[T]here is nothing
inequitable in the placing of such a burden upon a corporation
which voluntarily places itself in the position of handling the
wages and reporting the amounts due under the taxing statutes but
which then fails to deduct and remit the amounts required by
law.”).
IV. Amounts of Employment Taxes
In the petition, petitioner argues that the amount of
employment taxes due and owing on the $14,845,019 of unreported
cash wages should be offset by the earned income credits to which
temporary laborers paid in cash would have been entitled under
- 27 -
section 32 had they claimed those credits. Petitioner does not
renew that argument on brief, and, therefore, we shall consider
petitioner to have abandoned it. See Mendes v. Commissioner, 121
T.C. 308, 312-313 (2003) (“If an argument is not pursued on
brief, we may conclude that it has been abandoned.”).
Petitioner does, however, argue that respondent’s
determinations of employment taxes should be disregarded because
they are “arbitrary, capricious or without reasonable
foundation.”9 Petitioner so argues because respondent, claiming
in the notice that he lacked information about individual
laborers paid in cash, did not list those individuals but,
instead, referred to a group of “Temporary Laborers”. The
parties have stipulated the amount of unreported wages for each
taxable quarter and disagree only as to the withholding rate to
be applied to those wages. Respondent argues, and petitioner
does not disagree, that, for each taxable quarter, respondent
used the “actual” rate petitioner used in filing the Forms 941
for the corresponding quarter to report the wages of temporary
laborers paid by check. Since he used the same income tax
withholding rate petitioner used in filing its Forms 941,
respondent argues that his methodology was not arbitrary,
9
Respondent argues that petitioner is precluded from making
that argument because it was not raised in the petition. We deem
the petition amended and allow petitioner to make the argument.
See Rule 41(b).
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capricious, or without reasonable foundation. We agree with
respondent. We remind petitioner that it, not respondent, paid
some temporary laborers in cash, failed to require them to
produce proper identification for income tax withholding
purposes, and failed to have them prepare the necessary documents
for payroll tax deduction purposes. Given petitioner’s failure
to secure Forms W-4, Employee’s Withholding Allowance
Certificate, from the temporary laborers paid in cash, respondent
argues that he could have proposed an income tax withholding rate
of 28 percent.10 Instead, for each taxable quarter in issue,
respondent used the more favorable “actual” rate petitioner
itself used for income tax withholding purposes on its Forms 941.
See appendix.
We shall sustain the employment taxes respondent determined.
10
Although respondent did not cite the source of his
authority to propose an income tax withholding rate of 28
percent, we assume he relies on the Internal Revenue Manual
(IRM). 2 Audit, IRM (CCH) pts. 4.23.8.4, at 10,779-773-30 (Feb.
1, 2003) (Relief for Employer When Employees Have Paid Income Tax
on Wages), and 4.23.8.8, at 10,779-773-39 (Feb. 1, 2003)
(Computing Income Tax Withholding), direct respondent to compute
withholding either under existing law and regulations or using
sec. 31.3402(g)-1(a)(7)(iii), Employment Tax Regs., which
provides the appropriate flat withholding rates. See, e.g.,
Varjabedian v. United States, 339 F. Supp. 2d 140, 163-165 (D.
Mass. 2004). Petitioner’s failure to provide the necessary
information made a calculation under the former impossible.
Using the latter, the proper rate is 28 percent.
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V. Penalties for Fraud
A. Introduction
We next address whether, for each taxable quarter in issue,
petitioner is liable for the fraud penalty respondent determined.
Section 6663(a) provides: “If any part of any underpayment of
tax required to be shown on a return is due to fraud, there shall
be added to the tax an amount equal to 75 percent of the portion
of the underpayment which is attributable to fraud.”
“Fraud is defined as an intentional wrongdoing designed to
evade tax believed to be owing.” Neely v. Commissioner, 116 T.C.
79, 86 (2001). The Commissioner bears the burden of proving
fraud and must establish it by clear and convincing evidence.
See sec. 7454(a); Rule 142(b). To satisfy the burden of proof,
the Commissioner must show that (1) an underpayment in tax
exists, and (2) the taxpayer intended to conceal, mislead, or
otherwise prevent the collection of taxes. Neely v.
Commissioner, supra at 86. If the Commissioner establishes that
any portion of an underpayment is attributable to fraud, the
entire underpayment is treated as attributable to fraud, except
with respect to any portion of the underpayment that the taxpayer
establishes (by a preponderance of the evidence) is not
attributable to fraud. See sec. 6663(b).
In section IV. of this report we sustained the employment
taxes respondent determined, and we here find that the entire
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underpayment is attributable to fraud. Given Mr. Nguyen’s
conviction for conspiracy to defraud the United States, we agree
with respondent that petitioner is precluded from denying fraud.
Notwithstanding issue preclusion, we also find fraud by clear and
convincing evidence on the facts before us.
B. Fraudulent Intent
1. Issue Preclusion
Mr. Nguyen pleaded guilty to one count of defrauding the
United States in connection with his willful failure as an
officer of petitioner to collect, truthfully account for, and pay
the employment taxes here in issue. Thus, fraudulent intent to
evade the employment taxes was an element of the crimes of which
Mr. Nguyen was charged, pleaded guilty, and was convicted.
Mr. Nguyen’s fraudulent intent with respect to petitioner’s
employment tax obligations is imputed to petitioner. See Benes
v. Commissioner, 42 T.C. 358, 382 (1964) (“Where fraud is alleged
against a corporate taxpayer, the requisite proof of fraudulent
intent is to be found in the acts of its officers, inasmuch as
the corporation, being an artificial person created by law, can
have no separate intent of its own apart from those who direct
its affairs.”), affd. 355 F.2d 929 (6th Cir. 1966), overruled on
another issue by Truesdell v. Commissioner, 89 T.C. 1280 (1987).
A corporation can act only through its officers and cannot escape
- 31 -
responsibility for actions its officers perform in their official
capacity. Federbush v. Commissioner, 34 T.C. at 749. “Corporate
fraud necessarily depends upon the fraudulent intent of the
corporate officer.” Id. Moreover, Mr. Nguyen did not enrich
himself directly; rather, his dishonesty served petitioner’s
competitive purposes. Petitioner was able to offer temporary
laborers paid in cash, at the expense of the United States, a
wage undiminished by employment taxes, and to avoid paying its
own share of FICA taxes. Because Mr. Nguyen was acting as an
agent of petitioner, his principal, we may infer petitioner’s
fraudulent intent. See Benes v. Commissioner, supra at 382.
Petitioner’s president and sole shareholder was convicted of
conspiracy to defraud the United States by willfully failing to
comply with petitioner’s statutory obligation to collect, account
for, and pay employment taxes. That conviction precludes
petitioner from here denying its fraudulent intent.
2. Fraud on the Facts
Even if petitioner is not precluded from denying its
fraudulent intent, the facts independently support a finding of
fraud. Petitioner, acting through its agents, offered temporary
laborers cash wages not reduced by employment taxes. Petitioner
understood its employment tax obligations, as demonstrated by its
proper payment of employment taxes for temporary laborers paid by
check. To conceal its disparate employment tax treatment of
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temporary laborers according to their method of payment,
petitioner ignored temporary laborers paid in cash for all
business purposes. Petitioner conceded that it recorded on its
books neither the proceeds of client checks cashed at check-
cashing agencies as business income, nor the payments to
temporary laborers paid in cash as payroll expenses. In that
way, petitioner effectively hid 80 to 90 percent of its
workforce. Those actions strongly suggest that petitioner
intended to evade its legal obligation to treat temporary
laborers paid in cash as its employees for employment tax
purposes.11
To remain competitive, petitioner offered temporary laborers
the opportunity to receive cash wages. Petitioner needed to
supplement their net earnings either at its own expense or at the
expense of the U.S. Treasury. Petitioner chose the latter
course. As a bonus, petitioner evaded its own FICA obligations.
Petitioner argues that it simply honored the wishes of its
temporary laborers and lacked any fraudulent intent: “Each
worker determined whether he or she would be paid in cash.
11
We assume that, as a result of understating its business
income, petitioner evaded 80 to 90 percent of its corporate
income tax. We believe that any corporate income tax fraud was
part and parcel of an overall intent to defraud the Government.
Petitioner had to avoid both the income taxes and the employment
taxes due respondent to evade its responsibility to pay either.
The reporting of one would almost certainly have led respondent
to challenge the omission of the other.
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Petitioner did not determine who was to be paid in cash under any
scenario.” That may be true, but it is irrelevant; petitioner
knowingly ignored its obligation to withhold and to pay
employment taxes with respect to temporary laborers paid in cash.
We find that petitioner intended to evade its employment tax
obligations.
C. Conclusion
Because petitioner is liable for the underpayment of
employment taxes and intended to prevent the collection of those
taxes, petitioner is liable for the section 6663(a) fraud
penalties in their entirety.
VI. Period of Limitations
Because petitioner filed false or fraudulent returns, i.e.,
the false and fraudulent Forms 941, the usual 3-year period of
limitations of section 6501(a) does not apply. See sec.
6501(c)(1); Neely v. Commissioner, 116 T.C. at 85. Respondent’s
determinations were thus timely.
VII. Conclusion
We sustain respondent’s determinations of deficiencies in
and penalties with respect to petitioner’s employment taxes for
all taxable quarters in issue.
Decision will be entered
for respondent.
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APPENDIX
Federal Federal
Taxable Unreported withholding withholding tax FICA tax Sec. 6663(a)
quarter wages tax rate1 liability liability2 fraud penalties
1995 Q1 $550,300.17 0.0565 $31,091.96 $84,195.93 $86,465.91
Q2 578,706.40 0.0494 28,588.10 88,542.08 87,847.63
Q3 855,895.25 0.0510 43,650.66 130,951.97 130,951.97
Q4 734,370.85 0.0599 43,988.81 112,358.74 117,260.66
1996 Q1 669,742.84 0.0616 41,256.16 102,470.65 107,795.10
Q2 784,396.38 0.0643 50,436.69 120,012.65 127,837.00
Q3 1,031,409.80 0.0643 66,319.65 157,805.70 168,094.01
Q4 914,585.63 0.0746 68,228.09 139,931.60 156,119.77
1997 Q1 925,198.32 0.0818 75,681.22 141,555.34 162,927.42
Q2 982,099.62 0.0722 70,907.59 150,261.24 165,876.62
Q3 1,083,568.56 0.0732 79,317.21 165,785.99 183,827.40
Q4 1,003,822.37 0.0756 75,888.97 153,584.82 172,105.34
1998 Q1 1,202,354.30 0.0857 103,041.76 183,960.21 215,251.48
Q2 1,098,759.00 0.0791 86,911.84 168,110.13 191,266.48
Q3 1,202,302.80 0.0758 91,134.55 183,952.33 206,315.16
Q4 1,227,506.95 0.0801 98,323.30 187,808.56 214,598.90
1
To calculate for each taxable quarter the Federal withholding tax liability on the unreported wages petitioner paid to
temporary laborers paid in cash, respondent used the “actual” withholding rate petitioner calculated in its corresponding Forms 941,
which reported the wages and withholdings of temporary laborers paid by check.
2
Secs. 3101 and 3111 each required petitioner to pay 7.65 percent of total wages. Therefore the FICA taxes in the notice
represented 15.30 percent of the unreported wages.