DocketNumber: No. 10368-01
Citation Numbers: 85 T.C.M. 927, 2003 Tax Ct. Memo LEXIS 48, 2003 T.C. Memo. 52
Judges: "Cohen, Mary Ann"
Filed Date: 2/26/2003
Status: Non-Precedential
Modified Date: 11/21/2020
*48 Decision entered for respondent.
Joseph H. O'Donnell, Jr., for petitioner.
Robin W. Denick, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: The petition in this case was filed in response to a Notice of Determination Concerning Worker Classification Under Section 7436 (notice of determination) regarding petitioner's liabilities pursuant to the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) for 1996, 1997, and 1998. The issues for decision are: (1) Whether Ronald A. Stark (Stark) was an employee of petitioner for Federal employment tax purposes during 1996 through 1998 and, if so, (2) whether petitioner is entitled to relief under section 530 of the Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2885, as amended (Section 530)).
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and*49 Procedure. For convenience, FICA and FUTA taxes are collectively referred to as employment taxes.
FINDINGS OF FACT
Some of the facts were deemed stipulated pursuant to Rule 91(f); certain additional facts have been stipulated by the parties. The stipulated facts are incorporated in our findings by this reference.
Petitioner's Organization and Operations
Stark has been in the home improvement business since 1963. After operating his business as a sole proprietorship from 1963 through 1986, Stark decided to incorporate for the purpose of obtaining the benefits of limited shareholder liability for debts of the corporation. Petitioner was incorporated in Pennsylvania on January 20, 1987, and has at all relevant times operated as an S corporation. Petitioner's principal place of business was located in New Hope, Pennsylvania, at the address of Stark's personal residence, when the petition was filed in this case.
Since its organization, petitioner has operated as a residential home improvement company, providing carpentry, siding installation, and general residential home improvement and construction services to the public. This activity was*50 and is petitioner's only business and only source of income. Stark has been the sole shareholder of petitioner from the time of its incorporation and throughout 1996, 1997, and 1998.
Stark has at all times served as petitioner's president and only officer. Minutes from petitioner's annual meetings of directors and shareholders reflect that, for each of the years in issue, Stark was elected president, vice president, secretary, and treasurer. Stark was also petitioner's sole director. During 1996, 1997, and 1998, Stark performed the following services for petitioner: (1) Solicited business on behalf of petitioner; (2) ordered petitioner's supplies; (3) entered into verbal and/or written agreements on behalf of petitioner; (4) oversaw the finances of petitioner; (5) collected moneys owed petitioner; (6) managed petitioner; (7) supervised work performed on behalf of petitioner; (8) acquired customers for petitioner; (9) performed all bookkeeping services for petitioner; and (10) made all hiring decisions and paid all individuals who performed services in connection with petitioner's residential home improvement business. Stark controlled the day-to-day activities of petitioner.
During 1996, 1997, and*51 1998, all moneys that were paid on accounts receivable of petitioner were deposited into petitioner's checking account. Stark was the only person with signature authority on petitioner's account. Petitioner did not make regular payments at fixed times to Stark for his services. Rather, Stark obtained funds from petitioner's bank account to pay himself as his needs arose. Petitioner neither classified any payment as a dividend nor distributed any dividends to shareholders from 1996 through 1998.
Petitioner's Tax Reporting
Petitioner filed Forms 1120S, U.S. Income Tax Return for an S Corporation, and related schedules, for 1987 through 1995. On these returns, petitioner did not report treating Stark, or any other individual, as an employee of petitioner.
Petitioner filed a Form 1120S for each of the years 1996, 1997, and 1998. Petitioner reported ordinary income from its trade or business of $ 10,866.14, $ 14,216.37, and $ 7,103.60 for 1996, 1997, and 1998, respectively. Petitioner claimed no deduction either for compensation of officers or for salaries and wages. Schedules K-1, Shareholder's Share of Income, Credits, Deductions, etc., attached to the returns show $ 10,866.14 for*52 1996, $ 14,216.37 for 1997, and $ 7,103.60 for 1998 as the pro rata share of, and as a property distribution other than a dividend to, Stark. Petitioner's Forms 1120S were signed by Stark as president and by Joseph M. Grey (Grey) as preparer.
During the period from 1996 to 1998, petitioner did not issue any Forms 1099-MISC, Miscellaneous Income, or Forms W-2, Wage and Tax Statement, to Stark. Throughout the years in issue, petitioner did not report paying Stark a salary or wages for work he performed on behalf of petitioner. Petitioner did issue separate Forms 1099-MISC in 1996, 1997, and 1998 reporting nonemployee compensation to a number of individuals other than Stark, presumably independent contractors hired to perform various aspects of petitioner's remodeling work.
Petitioner did not file a Form 941, Employer's Quarterly Federal Tax Return, for any quarter in 1996, 1997, or 1998 or a Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, for 1996, 1997, or 1998.
Stark's Tax Reporting
For each of the years 1996, 1997, and 1998, Stark timely filed a Form 1040, U.S. Individual Income Tax Return. On these returns, Stark reported as ordinary income from "Rental real*53 estate, royalties, partnerships, S corporations, trusts, etc." $ 10,866.14, $ 14,216.37, and $ 7,103.60 for 1996, 1997, and 1998, respectively. Attached Schedules E, Supplemental Income and Loss, characterize the foregoing amounts as nonpassive income from Schedules K-1.
The Notice of Determination
Prior to the audit underlying the instant case covering 1996, 1997, and 1998, respondent neither audited petitioner for employment tax purposes nor challenged petitioner's treatment of Stark as other than an employee. Thereafter, on June 8, 2001, respondent sent to petitioner the notice of determination at issue in this proceeding. The notice was based on a determination that Stark was to be legally classified as an employee for purposes of Federal employment taxes and that petitioner was not entitled to relief from such classification pursuant to Section 530. Enclosed with the notice was a schedule setting forth petitioner's liabilities for FICA and FUTA taxes.
It is stipulated that, if the Court decides that Stark is to be classified as an employee for Federal employment tax purposes for all periods in 1996, 1997, and 1998, the amounts of taxes due and owing are as set forth in the*54 notice of determination. Conversely, if the Court decides that Stark should not be classified as an employee for any of the periods in issue, the parties agree that petitioner owes no employment taxes.
ULTIMATE FINDINGS OF FACT
Stark, as president of petitioner, performed more than minor services and received remuneration therefor.
Petitioner did not have a reasonable basis for failing to treat Stark as an employee during the years in issue.
OPINION
I.Statutory and Regulatory Provisions
Subtitle C of the Internal Revenue Code governs payment of employment taxes. In particular,
(1) any officer of a corporation; or
(2) any individual who, under the usual common law rules
applicable in determining the employer-employee relationship,
has the status of an employee; or
(3) any individual (other than an individual who is an employee
under paragraph (1) or (2)) who performs services for
remuneration for any person -- (A) as an agent-driver or
commission-driver * * *;
(B) as a full-time insurance salesman;
(C) as a home worker * * *; or
(D) as a traveling or city salesman * * *; * * *
[under specified conditions]; or
(4) any individual who performs services that are included under
an agreement entered into pursuant to section 218 of the Social
Security Act.
Regulations promulgated under
Generally, an officer of a corporation is an employee*56 of the
corporation. However, an officer of a corporation who as
such does not perform any services or performs only minor
services and who neither receives nor is entitled to receive,
directly or indirectly, any remuneration is considered not to be
an employee of the corporation. * * * [Sec. 31.3121(d)-1(b),
Employment Tax Regs.]
Identical language is also included in regulations promulgated under
Section 530 operates in enumerated circumstances to afford relief from employment tax liability, notwithstanding the actual relationship between the taxpayer and the individual performing services. The statute provides, in part:
SEC. 530. CONTROVERSIES INVOLVING WHETHER INDIVIDUALS ARE
EMPLOYEES FOR PURPOSES OF THE EMPLOYMENT TAXES.
(a) Termination of Certain Employment Tax Liability. --
(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*57 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.
(2) Statutory standards providing one method of satisfying the
requirements of paragraph (1). -- For purposes of paragraph
(1), a taxpayer shall in any case be treated as having a
reasonable basis for not treating an individual as an employee
for a period if the taxpayer's treatment of such individual for
such period was in reasonable reliance on any of the following:
(A) judicial precedent, published rulings, technical advice with
respect to the taxpayer, or a letter ruling to the taxpayer;
(B) a past Internal Revenue Service*58 audit of the taxpayer in
which there was no assessment attributable to the treatment (for
employment tax purposes) of the individuals holding positions
substantially similar to the position held by this individual;
or
(C) long-standing recognized practice of a significant segment
of the industry in which such individual was engaged.
In specified circumstances, Section 530(e)(4) places the burden of proof on the Commissioner with respect to certain issues under Section 530, but this provision does not affect our analysis here. Section 530(e)(4) applies only to periods after December 31, 1996, so has no bearing on petitioner's liabilities for 1996. Small Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1122(b)(3), 110 Stat. 1767. For subsequent periods, a taxpayer desiring to take advantage of Section 530(e)(4) first must establish a prima facie case that it was reasonable not to treat an individual as an employee and must have fully cooperated with the Secretary. Because, as explained in detail below, petitioner did not establish a prima facie case that its treatment of Stark was reasonable, the burden of proof remains on*59 petitioner with respect to 1997 and 1998 as well.
In contending that Stark should not be classified as an employee under the FICA and FUTA provisions of the Internal Revenue Code, petitioner focuses on Stark's status as an S corporation shareholder and alleged lack of status as a common law employee. We briefly address these contentions seriatim.
1. Contentions Regarding S Corporation Shareholders
Petitioner cites
2. Contentions Regarding Common Law Employment
Petitioner contends that "employee" as used throughout
The statutory definition of "employees" as including
officers of a corporation will not be so construed as to mean
that an officer is an employee per se. Only such officers as
work for it in fact are to be so included and, in determining
whether an officer is an employee within the meaning of the
statutes the usual employer-employee tests are to be applied.
* * *
Petitioner further emphasizes that common law focuses on whether the alleged employer held the right to control the details of the work performed by the individual and argues that petitioner had neither the authority nor the ability to exert control over Stark. There exist, however, at least two fatal defects in petitioner's arguments in this regard.
First, from the standpoint of statutory construction, the premise underlying petitioner's position finds no support either*62 in the structure of the text or in the
Moreover,
Even though an absence of control is shown, and this as we have
noted has not been done, the force of the factor is diminished
to near de minimis by the fact that * * * [the service provider]
himself was a member of the Board of Directors, a Vice
President, and the executive of the Company in charge of its
sales and the development of its markets. * * * [Id. at
292.]
Hence, critical components of the analysis in
Second, from a factual standpoint, even if the common law control factor were pertinent to our evaluation, petitioner*64 has failed to establish a lack of control over Stark in the performance of his services. As in
3. Application of
On the basis of the foregoing analysis, application of
Furthermore, although
Section 530 affords relief from employment tax liability, notwithstanding an adverse classification, where the following three requirements*66 are satisfied: (1) The taxpayer has not treated the individual, or any individual holding a substantially similar position, as an employee for any period; (2) the taxpayer has consistently treated the individual as not being an employee on all tax returns for periods after December 31, 1978; and (3) the taxpayer has a reasonable basis for not treating the individual as an employee. Sec. 530(a)(1), (3). With respect to the case at bar, respondent has conceded that petitioner meets the first of the above requirements and does not argue that petitioner fails to meet the second. Rather, the parties dispute whether petitioner had a reasonable basis for not treating Stark as an employee.
Concerning the existence of a reasonable basis for purposes of Section 530(a)(1), Section 530(a)(2) sets forth three statutory safe havens. Reliance upon any of the circumstances enumerated in subparagraph (A), (B), or (C) of Section 530(a)(2) is deemed sufficient to establish the requisite reasonable basis.
Subparagraph (A) lists judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer. The amended petition alleges:
The Petitioner*67 did not treat its Sole Shareholder, Ronald A.
Stark, as an employee during any part of 1996, 1997 and 1998,
and the reasonable basis for not treating Ronald A. Stark as an
employee for the said periods is based on judicial precedent
contained in the opinion of the 5th Circuit Court of Appeals in
(5th Cir.), cert denied,
On brief, petitioner reiterates reliance on
For the reasons previously discussed,
Moreover, even if we were to assume arguendo that the cited cases could offer a reasonable basis for treating an officer as a nonemployee, petitioner has failed to establish reliance on the claimed precedent as a factual matter. To fall within the safe harbors of Section 530(a)(2), the taxpayer must have relied on the alleged authority during the periods in issue, at the time the employment decisions were being made. The statute does not countenance ex post facto justification. See 303
Until a few months before trial, petitioner did not purport to rely on Section 530 or the bases described therein and expressly disclaimed any dependence on the statute. Petitioner's present claim of reliance is not credible. At trial, Stark testified as a witness but presented no evidence that he was aware of
Petitioner proposed to call Grey, the accountant who advised petitioner and prepared petitioner's tax returns. Grey was not allowed to testify in this case because he had not been listed as a witness in petitioner's trial memorandum, in violation of this Court's Standing Pre-Trial Order. See Rule 131(b). His testimony, in any event, would not have made a difference. See
The same result obtains with respect to subparagraphs (B) and (C). The parties have stipulated that respondent did not audit petitioner for employment tax purposes prior to the examination underlying the present case. Petitioner therefore*71 cannot show reliance on a past audit under Section 530(a)(2)(B). Likewise, petitioner has adduced no evidence of conventions in the residential home improvement industry to establish longstanding industry practice under Section 530(a)(2)(C). The safe havens of Section 530(a)(2) are therefore inapplicable on the record before us.
In seeking to establish a reasonable basis for Stark's treatment apart from the safe havens, petitioner quotes from the following definition of "employment status" in Section 530(c)(2): "The term 'employment status' means the status of an individual, under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee)." Petitioner apparently believes that the purported lack of common law control makes its treatment of Stark reasonable within the meaning of Section 530 and that the above definition supports this view.
Again, however, petitioner's approach is contrary to controlling statutes and to the facts of this case. As a matter of construction, Section 530(c)(2) defines employment status for purposes of certain provisions of Section 530*72 not germane here. It does not purport to override or interpret the definition of "employee" in
Lastly, in connection with Section 530, petitioner raises a due process argument. This issue has never been properly pled by petitioner. Rather, petitioner mentioned due process in its motion for leave to file an amended petition, did not allege a due process violation in the amended petition itself, and argued the matter only on brief. Generally, issues not properly raised prior to briefing will not be considered when to do so would prevent the opposing party from*73 presenting evidence that might have been offered if the issue had been timely raised.
Section 530(e)(1) provides that the Internal Revenue Service "shall, before or at the commencement of any audit inquiry relating to the employment status of one or more individuals who perform services for the taxpayer, provide the taxpayer with a written notice of the provisions of this section." Small Business Job Protection Act of 1996 sec. 1122(a), 110 Stat. 1766. On brief, petitioner alleges that it learned of the existence of Section 530 only through the June 8, 2001, notice of determination, which postdated by a substantial margin the commencement on August 6, 1999, of the underlying employment tax audit. Petitioner then states:
the inaction of Respondent in not providing the required notice
to Petitioner is a serious Constitutional violation of due
*74 process, and Petitioner moves this Court to allow Petitioner to
recover its legal fees, since the conduct of the Respondent is
so egregious in this matter.
To the extent that petitioner's due process contentions take the form of a claim for litigation or administrative costs and fees under section 7430, such claim is premature.
Furthermore, even if petitioner's allegations might be read as a plea encompassing other remedies, petitioner has failed to show that its situation satisfies the prerequisites for relief under the
The above analysis is consistent with our recent jurisprudence on the notice provision contained in section 3463(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 767. In
Thus, failure to comply with certain procedural notice requirements does not rise to the level of a denial of due process where, as here, the taxpayer's opportunity to present its position is not prejudiced.
We hold that Stark is an employee of petitioner pursuant to
To reflect the foregoing,
Decision will be entered for respondent and in accordance with stipulations as to amounts.
Riland v. Commissioner , 79 T.C. 185 ( 1982 )
Joseph M. Grey Pub. Accountant, P.C. v. Comm'r , 119 T.C. 121 ( 2002 )
Select Rehab, Inc. v. United States , 205 F. Supp. 2d 376 ( 2002 )
Automated Typesetting, Inc. v. United States , 527 F. Supp. 515 ( 1981 )
Texas Carbonate Company v. R. L. Phinney, District Director ... , 307 F.2d 289 ( 1962 )
Docket No. 97-6066 August Term, 1997 , 181 F.3d 272 ( 1999 )
Antonio R. Durando Naomiann N. Durando v. United States , 70 F.3d 548 ( 1995 )
Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., ... , 959 F.2d 16 ( 1992 )
Moline Properties, Inc. v. Commissioner , 63 S. Ct. 1132 ( 1943 )
Smith v. Commissioner , 114 T.C. 489 ( 2000 )