Ewens and Miller, Inc. v. Commissioner , 117 T.C. No. 22 ( 2001 )

117 T.C. No. 22UNITED STATES TAX COURT
EWENS AND MILLER, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13069-99. Filed December 11, 2001.
P manufactured bakery products. P had workers who
produced its product (CPWs and BWs), delivered its
product (RDs), and marketed its product (OSWs).
In 1992, P “converted” all its employees to
independent contractors. R issued P a Notice of
Determination Concerning Worker Classification Under
Section 7436 determining that the CPWs, BWs, RDs, and
OSWs were employees for purposes of Federal employment
tax, that P was not entitled to relief pursuant to sec.
530 of the Revenue Act of 1978, Pub. L. 95-600, 92
Stat. 2763, 2885, and that P was liable for penalties
pursuant to sec. 6656, I.R.C.
On Sept. 28, 1999, R filed a motion to dismiss for
lack of jurisdiction as to the amounts of employment
taxes and related penalties. On Oct. 26, 1999,
following this Court’s decision in Henry Randolph
Consulting v. Commissioner, 112 T.C. 1 (1999), we
granted R’s motion.
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Subsequent to the trial in this case, Congress
amended sec. 7436(a), I.R.C., to provide this Court
with jurisdiction to decide the correct amounts of
employment taxes that relate to the Secretary’s
determination concerning worker classification.
Community Renewal Tax Relief Act of 2000 (CRTRA), Pub.
L. 106-554, sec. 314(f), 114 Stat. 2763. The amendment
to sec. 7436, I.R.C., was made retroactive to the
effective date of sec. 7436(a), I.R.C. CRTRA sec.
314(g).
Held: pursuant to sec. 7436(a), I.R.C., this
Court has jurisdiction over additions to tax and
penalties found in subtitle F, chapter 68, including
deciding the proper amounts of such additions to tax
and penalties, related to taxes imposed by subtitle C
with respect to worker classification or sec. 530
treatment determinations.
Held, further, The CPWs, BWs, and OSWs are
employees of P pursuant to sec. 3121(d)(2), I.R.C.,
because they were common law employees.
Held, further, the RDs are employees of P pursuant
to sec. 3121(d)(3)(A), I.R.C., because they were
statutory employees.
Held, further, P is not entitled to relief
pursuant to sec. 530 of the Revenue Act of 1978, Pub.
L. 95-600, 92 Stat. 2763, 2885.
Roger Miller (an officer), for petitioner.
Denise G. Dengler, for respondent.
VASQUEZ, 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). Unless otherwise indicated, all section
references are to the Internal Revenue Code in effect for the
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year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
The issues for decision are: (1) Whether the workers1
performing services for petitioner were employees during 1992;
(2) whether petitioner is entitled to “safe harbor” relief as
provided by section 530 of the Revenue Act of 1978, Pub. L. 95-
600, 92 Stat. 2763, 2885 (section 530); and (3) whether our
jurisdiction to decide the proper amount of employment taxes2
provides the Court with jurisdiction to decide the proper amount
of additions to tax and penalties related to employment tax
arising from worker classification or section 530 treatment
determinations.
FINDINGS OF FACT
Petitioner was a Virginia corporation that had its principal
place of business in Lorton, Virginia. At the time it filed its
petition, petitioner had terminated its corporate status. Prior
to and during 1992, petitioner manufactured bakery products such
as cookies, brownies, and cinnamon buns.
Peter Ewens (Ewens) was the president, and Roger Miller
1
Respondent concedes that the “consultant/outside
professional service workers” were not employees of petitioner.
2
For convenience, we use the term “employment taxes” to
refer to taxes under the Federal Insurance Contributions Act, ch.
736, secs. 3101-3128, 68A Stat. 415 (1954), the Federal
Unemployment Tax Act, ch. 736, secs. 3301-3311, 68A Stat. 439
(1954), and income tax withholding, secs. 3401-3406.
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(Miller) was the vice president of petitioner. Ewens ran
petitioner on a day-to-day basis and controlled petitioner’s
operations. Miller was a financial adviser to petitioner.
During its operation, Miller was at petitioner’s plant
approximately once a month.
Miller was a C.P.A. who had his own company that prepared
tax returns.3 Miller prepared petitioner’s Federal corporate
income tax returns for 1991 and 1992. He also signed
petitioner’s Federal employment tax returns for 1992.
Petitioner had several categories of workers including
bakery personnel and production workers (bakery workers), cash
payroll workers, route distributors/sales people (route
distributors), and outside sales workers.
The bakery workers worked at petitioner’s plant. Using
equipment and supplies provided by petitioner, they mixed dough,
and baked and packaged petitioner’s products. Although
petitioner did not set the bakery workers’ hours, each day a
certain amount of production had to be completed, and the bakery
workers could not leave until the production quota was met.
Petitioner paid the bakery workers a fixed amount based on the
amount of product they produced.
Prior to 1992, petitioner treated the bakery workers as
3
Miller also was a graduate of Brooklyn Law School;
however, he never practiced law. Miller was also a former IRS
auditor.
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employees. In 1991, petitioner issued the bakery workers Forms
W-2, Wage and Tax Statement. In 1992, 30 out of petitioner’s 37
bakery workers received Forms 1099. Of the seven who did not
receive a Form 1099, only two earned less than $600.4
The cash payroll workers were a family of six or seven
individuals known as “the Rusli group”. The Rusli group was not
a corporation. The Rusli group worked for petitioner for a
number of years prior to 1992. The Rusli group performed the
same work as the bakery workers. Since 1987, pursuant to a
written agreement between the Rusli group and petitioner, the
Rusli group also supervised the bakery workers. In 1992,
petitioner did not issue Forms 1099 to any of the cash payroll
workers.
The route distributors transported petitioner’s product from
its plant to individuals or businesses who purchased the product.
Some route distributors bought the product and resold it for a
higher price; others worked on a commission basis. The route
distributors drove their own vehicles. Petitioner did not set
the hours the route distributors worked.
In 1991, petitioner issued at least one route distributor,
4
Petitioner, however, did issue Forms 1099 to six bakery
workers who earned less than $600.
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Frank Barranco, a Form W-2. In 1992, petitioner did not issue
Forms 1099 to any of petitioner’s 21 route distributors.5
The outside sales workers were individuals who marketed
petitioner’s product. They had their own vehicles, and
petitioner did not set their hours. When an outside sales worker
sold a product, he was paid a commission. Petitioner had the
right to hire and fire the outside sales people.
In 1991, petitioner issued at least two outside sales
workers, Terre Cone and Terry McKnight, a Form W-2. In 1992, two
of petitioner’s five outside sales workers received Forms 1099.
Of the three who did not receive a Form 1099, two earned less
than $600.
On November 4, 1991, petitioner issued a memorandum from
Ewens to the staff. The memorandum stated: (1) The company had
treated certain workers as employees and others as independent
contractors; (2) beginning January 1, 1992, petitioner would
discontinue its production function and would subcontract its
entire operations to outside groups or individuals; (3)
individuals who wanted to continue their association with
petitioner would be required to sign a statement in which they
accepted responsibility for all of their own payroll taxes; (4)
individuals would be issued Forms 1099 instead of Forms W-2; and
5
Only 5 of the 21 route distributors earned less than $600.
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(5) employees not wishing to become independent contractors would
be discharged prior to January 1, 1992.
After January 1, 1992, there was no change in the activities
petitioner’s workers performed (i.e., in 1992, the workers did
much of the same work). The reason petitioner wanted to convert
its employees to independent contractors was to protect
petitioner from lawsuits6 and to have better control over the
activities of its workers. Petitioner was advised by an attorney
to convert the employees to independent contractors to limit
petitioner’s liability. Petitioner continued directly paying its
workers.
Several of petitioner’s checks issued to its workers, and
signed by Miller, in 1992 bear the notation “payroll”.
Additionally, there was a debit slip dated July 3, 1992, for
petitioner’s bank account that noted that cash was withdrawn for
payroll.
For 1991, petitioner reported salaries and wages of $196,433
on its Federal corporate income tax return, and it issued 51
Forms W-2 to its employees reporting total wages of $196,432.60.
Petitioner also reported $81,143 of subcontractual labor, and it
issued 10 Forms 1099-MISC reporting total payments of $37,930.74.
6
In 1991, some of petitioner’s workers were stealing and
sabotaging its products. There were walnut shells in the cookies
and nails in the brownies. Consumers of petitioner’s products
had retained attorneys and were suing petitioner.
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For 1992, petitioner reported no salaries and wages on its
Federal corporate income tax return. Petitioner reported
$115,287 of subcontractual labor, and it issued 36 Forms 1099-
MISC reporting total payments of $115,287.05.
Petitioner filed Forms 941, Employer’s Quarterly Federal Tax
Return, for the four quarters of 1992 and reported no wages
subject to withholding, no withheld income tax, no Social
Security tax, and no Medicare tax. Petitioner’s Form 941 for the
last quarter of 1992 reported that the date final wages were paid
was December 31, 1991, that it had no employees, and that it was
out of business. Petitioner’s Form 940, Employer’s Annual
Federal Unemployment (FUTA) Tax Return, for 1992 also reported no
wages, that petitioner had no employees, and that it was out of
business.
Respondent determined that the bakery workers, cash payroll
workers, route distributors, and outside sales workers were
employees for employment tax purposes for 1992. Respondent
further determined that petitioner was not entitled to section
530 relief for any of these workers. Respondent also determined
penalties pursuant to section 6656.
OPINION
I. Jurisdiction Over Amounts
In its petition, petitioner disputed the amounts of the
employment taxes and penalties that were set forth on the
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schedule accompanying the Notice of Determination. In keeping
with our decision in Henry Randolph Consulting v. Commissioner,
112 T.C. 1 (1999) (holding that we did not have jurisdiction
regarding employment tax liabilities), prior to trial we granted
respondent’s motion to dismiss for lack of jurisdiction as to the
amounts of employment taxes and related penalties.
This case was tried prior to Congress’s amendment of section
7436(a) that provided this Court with jurisdiction to decide the
correct amounts of employment taxes which relate to the
Secretary’s determination concerning worker classification.
Community Renewal Tax Relief Act of 2000 (CRTRA), Pub. L. 106-
554, sec. 314(f), 114 Stat. 2763. The amendment to section 7436
was made retroactive to the effective date (August 5, 1997) of
section 7436(a). CRTRA sec. 314(g); Taxpayer Relief Act of 1997,
Pub. L. 105-34, sec. 1454(a), 111 Stat. 1055.
The amendment providing us with jurisdiction regarding the
amount of employment tax does not explicitly state whether we
have jurisdiction to decide the proper amount of additions to tax
and penalties related to employment tax arising from worker
classification or section 530 treatment determinations. This is
an issue of first impression.
Section 6665(a)(2) provides that, except as otherwise
provided, any reference in Title 26 to a tax imposed by Title 26
shall be deemed also to refer to the additions to tax, additional
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amounts, and penalties provided by chapter 68 of subtitle F. The
section 6656 penalty is found in chapter 68 of subtitle F and
applies in the case of a failure to deposit by the date
prescribed therefor “any amount of tax imposed by this title”
(i.e., Title 26). Section 7436(e) provides that the term
“employment tax” means any tax imposed by subtitle C. Section
7436(e) does not exclude additions to tax or penalties from the
definition of employment tax.
Therefore, we hold that we do have jurisdiction over
additions to tax and penalties found in chapter 68 of subtitle F
(sections 6651 through 6751), including deciding the proper
amount of such additions to tax and penalties, related to taxes
imposed by subtitle C with respect to worker classification or
section 530 treatment determinations.
II. Employees v. Independent Contractors
Respondent’s determinations are presumptively correct, and
petitioner bears the burden of proving that those determinations
are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933). This principle applies to the Commissioner’s
determination that a taxpayer’s workers are employees. Boles
Trucking, Inc. v. United States, 77 F.3d 236, 239-240 (8th Cir.
1996). If an employer-employee relationship7 exists, its
7
Secs. 31.3121(d)-1(c)(2), 31.3306(i)-1(b), Employment Tax
Regs., define an employer-employee relationship as follows:
(continued...)
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characterization by the parties as some other relationship is of
no consequence. Sec. 31.3121(d)-1(a)(3), Employment Tax Regs.
For the purposes of employment taxes, the term “employee”
includes “any individual who, under the usual common law rules
applicable in determining the employer-employee relationship, has
the status of an employee”. Sec. 3121(d)(2); accord sec.
3306(i). Although the determination of employee status is to be
made by common law concepts, a realistic interpretation of the
term “employee” should be adopted, and doubtful questions should
7
(...continued)
Generally such relationship exists when the person
for whom services are performed has the right to
control and direct the individual who performs the
services, not only as to the result to be accomplished
by the work but also as to the details and means by
which that result is accomplished. That is, an
employee is subject to the will and control of the
employer not only as to what shall be done but how it
shall be done. In this connection, it is not necessary
that the employer actually direct or control the manner
in which the services are performed; it is sufficient
if he has the right to do so. The right to discharge
is also an important factor indicating that the person
possessing that right is an employer. Other factors
characteristic of an employer, but not necessarily
present in every case, are the furnishing of tools and
the furnishing of a place to work, to the individual
who performs the services. In general, if an
individual is subject to the control or direction of
another merely as to the result to be accomplished by
the work and not as to the means and methods for
accomplishing the result, he is an independent
contractor. * * *
See also sec. 31.3401(c)-1(b), Employment Tax Regs. (using
virtually identical language).
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be resolved in favor of employment. Breaux & Daigle, Inc. v.
United States, 900 F.2d 49, 52 (5th Cir. 1990).
Section 3121(d) also defines an “employee” for employment
tax purposes as (1) an individual who performs services for
remuneration as a agent-driver or commission-driver engaged in
distributing meat products, vegetable products, bakery products,
beverages (other than milk), or laundry or dry cleaning services
and (2) a traveling or city salesman, other than an agent-driver
or commission-driver, engaged on a full-time basis in the
solicitation on behalf of, and the transmission to, his principal
of orders from wholesalers, retailers, restaurants, or other
similar establishments for merchandise for resale. Sec.
3121(d)(3)(A) and (D). A worker can be a “statutory employee”
under section 3121(d)(3) only if he is not a common law employee
under section 3121(d)(2). We therefore first must decide whether
petitioner’s workers were common law employees, and if they were
not then we shall decide whether they were statutory employees.
Lickliss v. Commissioner, T.C. Memo. 1994-103.
A. Whether Petitioner’s Workers Were Common Law Employees
This Court considers the following factors to decide whether
a worker is a common law employee or an independent contractor:
(1) The degree of control exercised by the principal; (2) which
party invests in work facilities used by the individual; (3) the
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.opportunity of the individual for profit or loss; (4) whether
the principal can discharge the individual; (5) whether the work
is part of the principal’s regular business; (6) the permanency
of the relationship; and (7) the relationship the parties
believed they were creating. Weber v. Commissioner, 103 T.C.
378, 387 (1994), affd. per curiam 60 F.3d 1104 (4th Cir. 1995).
All the facts and circumstances of each case are considered, and
no single factor is dispositive. Id.
1. Degree of Control
The degree of control necessary to find employee status
varies with the nature of the services provided by the worker.
Id. at 388. To retain the requisite control over the details of
an individual’s work, the principal need not stand over the
individual and direct every move made by the individual; it is
sufficient if he has the right to do so. Id.; see sec.
31.3401(c)-1(b), Employment Tax Regs.
Similarly, the employer need not set the employee’s hours or
supervise every detail of the work environment to control the
employee. Gen. Inv. Corp. v. United States, 823 F.2d 337, 342
(9th Cir. 1987). The fact that workers set their own hours does
not necessarily make them independent contractors. Id.a. Bakery Workers and Cash Payroll Workers
Petitioner controlled where the bakery workers and cash
payroll workers worked, what products they used to complete their
work, and how much product they had to produce. Petitioner also
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determined the amount they were paid. On this record,
petitioner’s control of the bakery workers and cash payroll
workers is consistent with an employer-employee relationship.
b. Route Distributors
The record does not establish that petitioner controlled to
whom the route distributors sold petitioner’s product or where
the product was sold. It is unclear whether petitioner or the
route distributor decided how the route distributor was to be
compensated (whether on a commission basis or through purchase
and resale of the product at a higher price). Petitioner did not
set the route distributors’ hours. On the record, this factor is
not indicative of an employer-employee relationship.
c. Outside Sales Workers
The record does not establish that petitioner controlled to
whom the outside sales workers marketed petitioner’s product or
where they marketed the product. Outside sales workers could
hire substitutes and assistants to perform this work.
Petitioner did not set the outside sales workers’ hours. On the
record, this factor is not indicative of an employer-employee
relationship.
2. Investment in Facilities
The fact that a worker provides his or her own tools
generally indicates independent contractor status. Breaux &
Daigle, Inc. v. United States, supra at 53.
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a. Bakery Workers and Cash Payroll Workers
Petitioner supplied the facility, equipment, and goods the
bakery workers and cash payroll workers used to perform their
jobs. The bakery workers and cash payroll workers did not have
an investment in the goods or facilities. This is indicative of
an employer-employee relationship.
b. Route Distributors
Although some route distributors purchased petitioner’s
product for resale, rather than working on commission, they
returned the product they did not sell to petitioner. The route
distributors, however, owned their own vehicles. On this record,
we conclude that the route distributors did have an investment in
facilities.
c. Outside Sales Workers
The outside sales workers owned their own vehicles, and any
use of petitioner’s facilities was de minimis. On this record,
we conclude that this factor does not weigh against treating the
outside sales workers as independent contractors.
3. Opportunity for Profit or Loss
The bakery workers and cash payroll workers were paid based
on the amount of product produced (which petitioner determined),
and the outside sales workers received a commission when they
sold petitioner’s product. Some route distributors were paid a
commission for product they sold. Others purchased petitioner’s
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product and resold it; however, they were able to return any
product they did not sell.
4. Right To Discharge
a. Bakery Workers and Cash Payroll Workers
Pursuant to the written agreement between petitioner and the
cash payroll workers, the cash payroll workers had the right to
hire and supervise the bakery workers. The agreement, however,
is silent with respect to whether petitioner retained the right
to fire the bakery workers. Additionally, the record is silent
regarding petitioner’s right to discharge the cash payroll
workers.
b. Route Distributors
The record is silent with respect to this factor.
c. Outside Sales Workers
Petitioner had the right to hire and fire the outside sales
workers. This is indicative of an employer-employee
relationship.
5. Integral Part of Business
Petitioner’s business was manufacturing baked goods.
Petitioner hired the bakery workers and cash payroll workers to
produce the baked goods, the route distributors to deliver the
baked goods, and the outside sales workers to market the baked
goods. The work performed by each category of workers was within
the scope of petitioner’s regular business.
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6. Permanency of the Relationship
A transitory work relationship may point toward independent
contractor status. Herman v. Express Sixty-Minutes Delivery
Serv., Inc., 161 F.3d 299, 305 (5th Cir. 1998). If, however, the
workers work in the course of the employer’s trade or business,
the fact that they do not work regularly is not necessarily
significant. Avis Rent A Car Sys. v. United States, 503 F.2d
423, 430 (2d Cir. 1974) (transients may be employees); Kelly v.
Commissioner, T.C. Memo. 1999-140 (working for a number of
employers during a tax year does not necessitate treatment as an
independent contractor). In considering the permanency of the
relationship, we must also consider petitioner’s right to
discharge the worker, and the worker’s right to quit, at any
time.
a. Cash Payroll Workers
The cash payroll workers began working for petitioner in
1986. The relationship between petitioner and the cash payroll
workers was permanent as opposed to transitory.
b. Bakery Workers
At least 11 of the bakery workers worked for petitioner in
1991 and 1992. The record is silent regarding whether any of the
other 37 bakery workers working for petitioner in 1992 worked for
petitioner prior to 1992. On the basis of this record, we
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conclude that a significant number of the bakery workers had a
permanent, rather than transitory, relationship with petitioner.
c. Route Distributors
At least two of the route distributors worked for petitioner
in 1991 and 1992. The record is silent regarding whether any of
the other 21 route distributors working for petitioner in 1992
worked for petitioner prior to 1992.
d. Outside Sales Workers
At least two of the five outside sales workers worked for
petitioner in 1991 and 1992. According to Miller, petitioner had
a continuing relationship with the outside sales workers. On
this record, we conclude that the outside sales workers had a
permanent, rather than transitory, relationship with petitioner.
7. Relationship the Parties Thought They Created
a. Bakery Workers and Cash Payroll Workers
According to the November 1991 memorandum issued by
petitioner, starting in 1992 it would consider all workers
producing its product (which included the bakery workers and cash
payroll workers) independent contractors. None of the bakery
workers or cash payroll workers, however, testified regarding
what kind of relationship they thought they had with petitioner.
b. Route Distributors
Miller testified that petitioner did not consider the route
distributors to be employees or independent contractors. None of
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the route distributors, however, testified regarding what kind of
relationship they thought they had with petitioner.
c. Outside Sales
Miller filled out a questionnaire given to petitioner’s
workers, who were also his clients, by the IRS. For the two
outside sales workers who responded, Miller answered that they
thought they were independent contractors. None of the outside
sales workers, however, testified at trial.
8. Additional Factor
Petitioner argues that the route distributors carried
products of, the outside sales workers marketed products for, and
the cash payroll workers had contracts with, companies other than
petitioner. In Kelly v. Commissioner, supra, we held that
working for a number of employers during a tax year does not
necessitate treatment as an independent contractor.
9. Conclusion
After considering the record as a whole, weighing all of the
factors, and being cognizant that doubtful questions should be
resolved in favor of employment, we conclude that the cash
payroll workers, bakery workers, and outside sales workers were
common law employees. Upon the basis of this record, however, we
do not find the route distributors to be common law employees.8
8
Petitioner did not control the route distributors to the
same degree as it controlled the bakery workers and cash payroll
(continued...)
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Therefore, we must decide whether the route distributors were
statutory employees. See sec. 3121(d)(3); Lickliss v.
Commissioner, T.C. Memo. 1994-103.
B. Whether the Route Distributors Were Statutory Employees
For the purposes of employment taxes, the term “employee”
also includes individuals who perform services for remuneration
as an agent-driver or commission-driver engaged in distributing
bakery products. Sec. 3121(d)(3)(A). Substantially all of these
services must be performed personally by such individual. Sec.
3121(d)(3) (flush language). Individuals are not included in the
term “employee” under section 3121(d)(3) if the individual has a
substantial investment in the facilities used in connection with
the performance of such services (other than facilities for
transportation), or if the services are in the nature of a single
transaction. Id.The regulations provide that agent-drivers and commission-
drivers include individuals who operate their own truck, serve
customers designated by the person for whom they perform services
and customers solicited on their own, and whose compensation is a
8
(...continued)
workers. Unlike the bakery workers and cash payroll workers, the
route distributors had an investment in facilities. Unlike the
outside sales workers, the record did not establish that
petitioner had the right to hire and fire the route distributors.
Unlike the bakery workers, cash payroll workers, and outside
sales workers, the record did not establish that petitioner had a
permanent relationship with the route distributors.
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commission on their sales or the difference between the price
they charge the customers and the price they pay for the product
or service. Sec. 31.3121(d)-1(d)(3)(i), Employment Tax Regs.
The route distributors fit within the definition of agent-
driver and commission-driver provided in the Code and
regulations. They each performed substantially all the
distribution of bakery products for petitioner. The route
distributors did not have a substantial investment in the
facilities other than those used for transportation. The record
does not establish that their services were in the nature of a
single transaction. The route distributors served customers
designated by petitioner as well as those they solicited on their
own, and their compensation was either a commission on their
sales or the difference between the price they charged and the
price they paid for petitioner’s bakery products. Therefore, we
conclude that the route distributors were statutory employees.
III. Section 530
Congress enacted section 530 to alleviate what it perceived
as the “overly zealous pursuit and assessment of taxes and
penalties against employers who had, in good faith, misclassified
their employees as independent contractors.” Boles Trucking,
Inc. v. United States, 77 F.3d at 239. Thus, despite our
conclusion that the cash payroll workers, bakery workers, route
distributors, and outside sales workers were employees of
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petitioner, and that the payments to them from petitioner were
wages subject to Federal employment taxes, section 530 allows
petitioner relief from employment tax liability if two conditions
are satisfied. Section 530(a)(1) provides in relevant part:
(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.
Section 530(a)(3) further clarifies section 530(a)(1) by
providing that if the “taxpayer (or a predecessor)” treated any
individual holding a “substantially similar position as an
employee”, then section 530 relief is not available to the
taxpayer. Sec. 530(a)(1), (3). We note that the statute does
not require the individuals to be identical; rather, the analysis
focuses on whether individuals were in substantially similar
positions.
For purposes of section 530(a)(1), a taxpayer is treated as
having a reasonable basis for not treating an individual as an
- 23 -
employee if the taxpayer’s treatment of the individual was in
reasonable reliance on (1) judicial precedent, (2) published
rulings, (3) technical advice with respect to the taxpayer, (4) a
letter ruling to the taxpayer, (5) a past IRS audit 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 (6) a longstanding
recognized practice of a significant segment of the industry in
which the individual was engaged. Sec. 530(a)(2); Veterinary
Surgical Consultants, P.C. v. Commissioner, 117 T.C. ___, ___
(2001) (slip op. at 10-11). 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. Veterinary Surgical
Consultants, P.C. v. Commissioner, supra at ___ (slip op. at 11).
A. Application of Section 530(a)(1)
Prior to 1992, petitioner treated all of its production
workers (cash payroll workers and bakery workers) as employees.
Prior to 1992, petitioner treated at least one route distributor
and at least two outside sales workers as employees. Miller
testified that many of petitioner’s workers were employees in
1991.
In 1992, petitioner did not file Forms 1099 for (1) seven
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bakery workers, (2) any of the cash payroll workers,9 (3) any of
the route distributors, and (4) three outside sales workers.10
Petitioner did not demonstrate that it reasonably relied
upon judicial precedent, published rulings, technical advice, a
letter ruling, or a past audit. Petitioner argues that it relied
on a longstanding practice in the industry in which it was
engaged--“co-packing”.
“Co-packing” is where a company does not produce its product
itself; it hires others to produce its goods for it. Petitioner
presented no evidence, however, on how the practice of co-packing
related to the treatment of its workers as employees.
Furthermore, petitioner did not offer any witnesses to testify
about an industry practice of co-packing and the treatment of
“co-packers” as independent contractors. See, e.g., Gen. Inv.
Corp. v. United States, 823 F.2d at 341.
Additionally, petitioner did not demonstrate, in some other
manner, a reasonable basis for not treating the bakery workers,
cash payroll workers, route distributors, and outside sales
workers as employees. We conclude that petitioner had no
reasonable basis for treating the bakery workers, cash payroll
9
Miller agreed with the revenue officer who testified at
trial that the cash payroll workers were not a corporation.
10
We note that only 7 of these 38 workers earned less than
$600. See sec. 6041 (information returns required for payments
of $600 or more); sec. 1.6041-1, Income Tax Regs.
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workers, route distributors,11 and outside sales workers as
independent contractors.12
B. Conclusion
In Erickson v. Commissioner, 172 Bankr. 900, 913 (Bankr. D.
Minn. 1994), the court noted:
The essence of the safe harbor provision is to
grant protection to the taxpayer who has consistently
treated workers as independent contractors but has not
been previously challenged by the IRS. In effect,
where the taxpayer’s filings have put the IRS on notice
and the IRS has not acted without delay, the taxpayer
must be shielded from the compounding effects of the
error.
In the case before us, petitioner is not in a position to receive
the protections provided by Congress because petitioner did not
satisfy the requirements of section 530(a)(1). We conclude that
petitioner is not entitled to section 530 relief for any of its
bakery workers, cash payroll workers, route distributors, or
outside sales workers.
To reflect the foregoing,
An appropriate order
will be issued.
11
We note that Miller testified that he was aware of
regulations that provided that the route distributors should be
categorized as employees.
12
We note that Miller testified that he knew that the
conversion of the workers from employees to independent
contractors was not done correctly and that “it would screw up
the issue for payroll taxes”.