DocketNumber: No. 2500-99
Judges: "Jacobs, Julian I."
Filed Date: 10/15/2001
Status: Precedential
Modified Date: 10/19/2024
2001 U.S. Tax Ct. LEXIS 45">*45 Decision will be entered for respondent and in accordance with the parties' stipulations as to amounts.
P, an S corporation, distributed all of its net income to
A, its sole shareholder and president. A performs substantial
services for P. On his Forms 1040, A reported P's net income as
nonpassive income from an S corporation.
R issued to P a Notice of Determination Concerning Worker
Classification Under Sec. 7436, determining that A was an
employee of P for purposes of Federal employment tax.
HELD: A is an employee of P for purposes of Federal
employment tax pursuant to
Tax Regs., because A is an officer who performs substantial
services for P and receives remuneration for those services.
HELD, FURTHER, P is not entitled to relief pursuant to sec.
530 of the Rev. Act of 1978, Pub. L. 95-600, 92 Stat. 2763,
2885, because P did not have a reasonable basis for not treating
A as an employee.
117 T.C. 141">*142 2001 U.S. Tax Ct. LEXIS 45">*46 OPINION
JACOBS, JUDGE: This case is before the Court on a petition for redetermination of a Notice of Determination Concerning Worker Classification Under Section 7436 (Notice of Determination). It was submitted to the Court fully stipulated under Rule 122. The sole issue to be decided is whether Kenneth K. Sadanaga, D.V.M. (Dr. Sadanaga), is an employee of petitioner for the period at issue (each of the four quarters of 1994, 1995, and 1996) for purposes of Federal employment taxes. 1
Rule references are to the Tax Court Rules of Practice and Procedure, and except as otherwise noted, section references are to the Internal Revenue Code in effect for the years at issue.
BACKGROUND
The stipulation of facts and the attached exhibits2001 U.S. Tax Ct. LEXIS 45">*47 are incorporated herein. The stipulated facts are hereby found.
Petitioner is an S corporation that was incorporated in Pennsylvania on May 22, 1991. At the time the petition was filed, petitioner's principal place of business was in Malvern, Pennsylvania. Petitioner's only business is providing consulting and surgical services to veterinarians. Dr. Sadanaga is petitioner's sole shareholder and serves as its president, petitioner's only officer.
Since petitioner's incorporation, all of its income has been generated from the consulting and surgical services provided by Dr. Sadanaga to Veterinary Orthopedic Services, Ltd. (Orthopedic). During the period at issue, Dr. Sadanaga spent at least 33 hours per week providing consulting and surgical services on behalf of petitioner. He performed surgeries at the Veterinary Referral Center in Frazer, Pennsylvania, and consulted with veterinarians in their offices or his home.
Dr. Sadanaga is the only person with signature authority on petitioner's bank account. Dr. Sadanaga handled all of petitioner's correspondence and performed all administrative tasks on behalf of petitioner. Petitioner did not make regular 117 T.C. 141">*143 payments to Dr. Sadanaga; rather, 2001 U.S. Tax Ct. LEXIS 45">*48 Dr. Sadanaga withdrew money from petitioner's bank account at his discretion.
Petitioner received a Form 1099-MISC, Miscellaneous Income, from Orthopedic reporting "non-employee compensation" during each of the quarters at issue. The Forms 1099-MISC reported that Orthopedic paid petitioner $ 125,152.63 in 1994, $ 225,469.24 in 1995, and $ 212,863 in 1996. Petitioner reported the amount reflected on the Forms 1099-MISC as its total gross receipts on its Form 1120S, U.S. Income Tax Return for an S Corporation, for 1994, 1995, and 1996.
On Forms 1120S, petitioner reported net income from its trade or business for 1994, 1995, and 1996 in the respective amounts of $ 83,995.50, $ 173,030.39, and $ 161,483.35. Petitioner paid these amounts to Dr. Sadanaga, and reported these amounts as Dr. Sadanaga's share of its income on Schedules K-1, Shareholders' Shares of Income, Credits, Deductions, etc., of the Forms 1120S. Petitioner reported on Schedules M-2, Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders' Undistributed Taxable Income Previously Taxed, of the Forms 1120S, that the amounts it paid to Dr. Sadanaga were distributions other than dividend distributions2001 U.S. Tax Ct. LEXIS 45">*49 paid from accumulated earnings and profits.
Petitioner did not issue a Form 1099-MISC or a Form W-2, Wage and Tax Statement, to Dr. Sadanaga for 1994, 1995, or 1996. Nor did petitioner file a Form 941, Employer's Quarterly Federal Tax Return, or a Form 940, Employer's Annual Federal Unemployment Tax Return, for any quarter during the period at issue. On Schedules E, Supplemental Income and Loss, of Dr. Sadanaga's 1994, 1995, and 1996 Forms 1040, U.S. Individual Income Tax Returns, Dr. Sadanaga reported his share of petitioner's income (as indicated on the Schedules K-1) as nonpassive income from an S corporation.
Dr. Sadanaga was a full-time employee of Bristol-Myers Squibb Co. (Bristol-Myers). He reported wages from Bristol Myers of $ 91,212.18 in 1994, $ 95,891.15 in 1995, and $ 102,031.14 in 1996. In 1994, 1995, and 1996, Bristol-Myers withheld Social Security taxes from Dr. Sadanaga.
Respondent began an audit of petitioner's return for 1995 in May 1997. On October 22, 1997, Revenue Agent James Tepper, and petitioner's accountant, Joseph Grey, met to discuss the audit. Revenue Agent Orville Surla joined Revenue 117 T.C. 141">*144 Agent Tepper and Mr. Grey to discuss whether Dr. Sadanaga was an2001 U.S. Tax Ct. LEXIS 45">*50 employee of petitioner in 1995. Mr. Grey asserted that Dr. Sadanaga was not an employee of petitioner and that the distribution to him from petitioner represented his share of petitioner's net income. Mr. Grey objected to any assessment of Federal employment taxes against petitioner. Because Mr. Grey and Revenue Agent Tepper could not reach any agreement with respect to the Federal employment tax issue, the issue was referred to Revenue Agent Surla.
On March 16, 1998, respondent sent petitioner a 30-day letter, proposing adjustments to petitioner's Federal employment taxes for each of the four quarters of 1994, 1995, and 1996. On April 3, 1998, petitioner submitted to respondent a letter protesting the proposed adjustments.
On October 5, 1998, respondent sent petitioner a letter advising that there would be no change resulting from the audit of petitioner's Form 1120S for 1995. On November 17, 1998, respondent issued to petitioner a Notice of Determination, in which respondent determined that (1) Dr. Sadanaga was an employee of petitioner for purposes of Federal employment taxes, and (2) petitioner was not entitled to "safe harbor" relief from these taxes as provided by
DISCUSSION
Petitioner contends that Dr. Sadanaga was not its employee and that it properly distributed its net income to Dr. Sadanaga, as its sole shareholder, pursuant to
With respect to the case at hand, Dr. Sadanaga is an officer of petitioner, and therefore he is an employee of petitioner under the general rule of
Petitioner contends that the amounts paid to Dr. Sadanaga were distributions of its corporate net income, rather than wages. Petitioner posits that as an S corporation it passed its net income to Dr. Sadanaga, as its sole shareholder, pursuant to
Dr. Sadanaga performed substantial services on behalf of petitioner. The characterization of the payment to Dr. Sadanaga as a distribution of petitioner's net income is but a subterfuge for reality; the payment constituted remuneration for services performed by Dr. Sadanaga on behalf of petitioner. An employer cannot avoid Federal employment taxes 117 T.C. 141">*146 by characterizing compensation paid to its sole director and2001 U.S. Tax Ct. LEXIS 45">*54 shareholder as distributions of the corporation's net income, rather than wages. Regardless of how an employer chooses to characterize payments made to its employees, the true analysis is whether the payments represent remuneration for services rendered.
Dr. Sadanaga's reporting the distributions as nonpassive income from an S corporation has no bearing on the Federal employment tax treatment of those wages. He was petitioner's sole source of income. And as petitioner's sole full-time worker he must be treated as an employee.
Despite our determination that Dr. Sadanaga is an employee of petitioner, and that the payments to him from petitioner are wages subject to Federal employment taxes,
(1) In general. -- If
(A) for purposes of employment taxes, the taxpayer did
not treat an individual as an employee for any period
* * *, and
(B) in the case of periods after December 31, 1978,
all Federal tax returns (including information returns)
required to be filed by the taxpayer with respect to such
individual for such period are filed on a basis consistent
with the taxpayer's treatment of such individual as not
being an employee,
then, for purposes of applying such taxes for such period with
respect to the taxpayer, the individual shall be deemed not to
be an employee unless the taxpayer had no reasonable basis for
not treating such individual as an employee.
Here, the first of the two conditions is satisfied. Petitioner did not treat Dr. Sadanaga as an employee during the period in issue. Since its incorporation, petitioner filed its tax returns reflecting all withdrawals by Dr. Sadanaga2001 U.S. Tax Ct. LEXIS 45">*56 as distributions of petitioner's income, not wages.
However, the second condition of
Section 3 of
(A) judicial precedent or published rulings, whether or not
relating to the particular industry or business in which the
taxpayer is engaged, or technical2001 U.S. Tax Ct. LEXIS 45">*57 advice, a letter ruling, or a
determination letter pertaining to the taxpayer; or
(B) a past Internal Revenue Service audit (not necessarily
for employment tax purposes) of the taxpayer, if the audit
entailed no assessment attributable to the taxpayer's employment
tax treatment of individuals holding positions substantially
similar to the position held by the individual whose status is
at issue * * *; or
(c) long-standing recognized practice of a significant
segment of the industry in which the individual was engaged
* * *.
A taxpayer who fails to meet any of the safe havens is still entitled to relief if the taxpayer can demonstrate, in some other manner, a reasonable basis for not treating the individual as an employee. Id.
Here, petitioner asserts that its position is supported by the following excerpt from
[It is] improper to treat income earned by a corporation through
its trade or business as though it were earned directly by its
shareholders, even when, as here, the shareholders'2001 U.S. Tax Ct. LEXIS 45">*58 services
help to produce that income. An S corporation's income passes
through to its shareholders not because they helped to create
that income, but because they are shareholders.
The excerpt relied upon by petitioner does not support petitioner's position. Respondent is not attempting to treat petitioner's income as though the income were earned directly by Dr. Sadanaga. Rather, the issue in this case is 117 T.C. 141">*148 whether the distributions paid to Dr. Sadanaga are wages paid to Dr. Sadanaga as an employee of petitioner.
Petitioner asserts that
2001 U.S. Tax Ct. LEXIS 45">*60 Petitioner also relies on
Petitioner attempts to distinguish the facts in this case from cases holding that officers who performed substantial services for an S corporation are employees for purposes of Federal employment taxes. In
Petitioner also misstates the findings and conclusions of this Court in
117 T.C. 141">*150 Petitioner next cites for support the following excerpt from
Finally, petitioner argues that
In
Neither the election by the corporation as to the manner in
which it will be taxed for Federal income tax purposes nor the
consent thereto by the stockholder-officers has any effect in
determining whether they are 117 T.C. 141">*151 employees or whether payments made
to them are "wages" for Federal employment tax purposes.
In
In this case, respondent's position is supported by the plain language of the statute, the applicable Treasury regulations, published revenue rulings, and cases interpreting the applicable statutes. Petitioner's position is inconsistent with the weight of authority.
Petitioner argues that Dr. Sadanaga paid the maximum FICA tax required by law in each year at issue and that respondent is attempting to assess additional tax on Dr. Sadanaga in the form of withholding taxes. This argument is simply a "red herring". For Federal employment tax purposes, the taxable wage base applies separately to each employer. Thus, if an employee receives wages from more than one employer, the annual wage limitation does not apply to the aggregate compensation received. The employee however may be eligible for a credit or refund of the excess employee portion of the FICA tax that applies with respect to wages in excess of the applicable wage base.
We have considered all of petitioner's arguments, and, to the extent2001 U.S. Tax Ct. LEXIS 45">*66 not specifically addressed, we find them unpersuasive or irrelevant.
_______________
After the petition was filed in this case, Congress amended section 7436(a) to provide this Court with jurisdiction to determine the correct amounts of Federal employment taxes that relate to the Secretary's determination concerning worker classification. See Community Renewal Tax Relief Act of 2000 (CRTRA), Pub. L. 106- 554, sec. 314(f), 114 Stat. 2763A-643. That amendment was made retroactive to the effective date of section 7436(a). CRTRA sec. 314(g), 114 Stat. 2763A-643.
The parties filed a Stipulation of Settled Issues setting forth the proper amount of Federal employment taxes owed by 117 T.C. 141">*152 petitioner in the event we find that Dr. Sadanaga is petitioner's employee for purposes of Federal employment taxes (which we do). The amount so stipulated will be reflected in our decision document.
To reflect the foregoing,
Decision will be entered for respondent and in accordance with the parties' stipulations as to amounts.
1. For convenience, we use the term "Federal employment tax" to refer to taxes under secs. 3101-3125 (enacted as Federal Insurance Contributions Act (FICA), ch. 9, 53 Stat. 175 (1939)) and
2. There are some exceptions to this definition that are not relevant to this case.↩
3. Keogh plans are retirement plans for self-employed individuals. A self-employed individual can deduct contributions to a qualified retirement plan up to a limit of 15 percent of his or her earned income. Sec. 404(a)(3)(A), (8)(D).↩