T.C. Summary Opinion 2001-10
UNITED STATES TAX COURT
WILEY L. BARRON, CPA, LTD., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14168-99S. Filed February 7, 2001.
Wiley L. Barron (an officer), for petitioner.
Ann L. Darnold, for respondent.
ARMEN, Special Trial Judge: This case is before the Court
on a petition for a redetermination of a Notice of Determination
Concerning Worker Classification Under Section 7436.1 The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority. See sec. 7436(c).
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
- 2 -
In the Notice of Determination Concerning Worker
Classification Under Section 7436 (notice of determination),
respondent determined: (1) For 1994 through 1996, Wiley L. Barron
is to be legally classified as one of petitioner’s employees for
purposes of Federal employment taxes under subtitle C of the
Internal Revenue Code; and (2) petitioner is not entitled to
relief from this classification under section 530 of the Revenue
Act of 1978. These determinations have given rise to the
following three issues for decision by the Court:
(1) Whether the statute of limitations bars assessment of
petitioner’s employment tax liabilities for the taxable periods
in issue. We hold that it does not.
(2) Whether Wiley L. Barron was an employee of petitioner
for the taxable periods in issue. We hold that he was.
(3) Whether petitioner is eligible for relief pursuant to
section 530 of the Revenue Act of 1978, Pub. L. 95-600, 92 Stat.
2885. We hold that petitioner is not eligible for such relief.
Background
Most of the facts have been stipulated, and they are so
found. The stipulated facts and attached exhibits are
incorporated herein by this reference.
Petitioner’s sole office was located in Pine Bluff,
Arkansas, at the time that its petition was filed with the Court.
- 3 -
A. Wiley L. Barron, CPA, Ltd.
Wiley L. Barron, CPA, Ltd. (petitioner) is an S corporation
that was formed on or about January 2, 1990. Since the date of
its inception, petitioner has been engaged in the business of
providing accounting services.
Wiley L. Barron (Mr. Barron) is, and has been for many
years, a certified public accountant (C.P.A.). Mr. Barron is
petitioner’s president and sole shareholder, and he is the only
C.P.A. who performs services for petitioner. The only other
individuals who perform services for petitioner are two employees
who provide clerical and support services.2
As petitioner’s president, Mr. Barron exercises exclusive
authority over all of petitioner’s affairs. He is solely
responsible for making management decisions and for controlling
and directing every facet of petitioner’s business.
B. Petitioner’s Income Tax Returns
Petitioner filed Form 1120S (U.S. Income Tax Return for an S
Corporation) for each of the calendar years 1994, 1995, and 1996.
On Schedule M-2 of these returns, petitioner reported
distributions other than dividend distributions in the following
amounts:
2
The status of these two service providers as employees of
petitioner is not in issue.
- 4 -
Year Distribution
1994 $56,352
1995 53,257
1996 83,341
C. Form W-2
In 1994, Mr. Barron received a salary from petitioner in the
amount of $2,000. In contrast, Mr. Barron did not receive a
salary from petitioner in either 1995 or 1996.
For 1994, petitioner issued Form W-2 (Wage and Tax
Statement) to Mr. Barron. The Form W-2 was issued in respect of
the salary paid to Mr. Barron for that year. The form reflects
the payment of wages and the withholding of taxes as follows:
Wages/Withholding Amount
Wages, tips, other compensation $2,000
Federal income tax withheld -0-
Social Security wages 2,000
Social Security tax withheld 124
Medicare wages and tips 2,000
Medicare tax withheld 29
State wages, tips, etc. 2,000
State income tax withheld -0-
The payment of wages and the withholding of taxes were for the
fourth quarter of 1994.
Petitioner did not issue a Form W-2 to Mr. Barron for either
1995 or 1996.3
3
The record suggests that other than for $2,000 of
compensation in 1994, Mr. Barron reported income from petitioner
as passthrough of S corporation income, pursuant to sec. 1366, on
Part II of Schedule E (Supplemental Income and Loss) of his
individual income tax returns. We note that a shareholder’s
share of an S corporation’s income is not subject to self-
employment tax. See Durando v. United States, 70 F.3d 548, 550
(continued...)
- 5 -
D. Employment Tax Returns
Petitioner timely filed Forms 941 (Employer’s Quarterly
Federal Tax Return) for the calendar quarters of 1994, 1995, and
1996.
On its Form 941 for the fourth quarter of 1994, petitioner
included in the line for “Total wages and tips subject to
withholding plus other compensation” the $2,000 reported as wages
on the Form W-2 issued to Mr. Barron for 1994. Similarly, in
each of the lines for “Taxable social security wages” and
“Taxable Medicare wages and tips”, petitioner included the
$2,000. Finally, the amount reported by petitioner as “Total
taxes” for the quarter included the Social Security and Medicare
taxes withheld from Mr. Barron’s wages.
Except for the $2,000 reported as wages on the Form W-2
issued to Mr. Barron for 1994, which amount was reported on Form
941 for the fourth quarter of 1994, petitioner did not include
any amount in respect of Mr. Barron on Form 941 for any calendar
quarter of 1994, 1995, or 1996.
Petitioner also timely filed Forms 940 (Employer’s Annual
Federal Unemployment (FUTA) Tax Return) for 1994, 1995, and 1996.
On its Form 940 for 1994, petitioner included in the line
for “Total taxable wages” the $2,000 reported as wages on the
3
(...continued)
n.5, 552 (9th Cir. 1995).
- 6 -
Form W-2 issued to Mr. Barron for 1994, and petitioner computed
its liability for FUTA tax accordingly.
Except for the $2,000 amount reported as wages on the Form
W-2 issued to Mr. Barron for 1994, which amount was reported on
Form 940 for 1994, petitioner did not include any amount in
respect of Mr. Barron on Form 940 for 1994, 1995, or 1996.
E. Employment Tax Examination
In 1997, respondent commenced an examination of petitioner’s
employment tax liabilities.
In May 1997, petitioner executed Form SS-10 (Consent to
Extend the Time to Assess Employment Taxes), agreeing to extend
through July 31, 1998, the period of limitations for assessing
additional FUTA tax liability reportable on Form 940 for the
calendar year 1994. Respondent executed the consent in June
1997.
In February 1998, petitioner executed another Form SS-10,
this time agreeing to extend through April 15, 1999, the period
of limitations for assessing (1) additional FUTA tax liability
reportable on Form 940 for the calendar year 1994 and (2)
additional employment tax liabilities reportable on Form 941 for
each of the four calendar quarters of 1994. Respondent also
executed the consent in February 1998.
Based on statistical data compiled by Robert Half
International, Inc., respondent’s employment tax agent proposed
- 7 -
that reasonable compensation for a C.P.A. in Arkansas like Mr.
Barron with petitioner’s type of practice for 1994, 1995, and
1996 would be $45,000, $47,500, and $49,000, respectively. In
view of the fact that petitioner had only reported compensation
paid to Mr. Barron for the fourth quarter of 1994 in the amount
of $2,000, respondent’s agent further proposed increases in
petitioner’s employment taxes, and additions to tax under section
6656 for failure to make deposit of taxes, for the calendar
quarters in, and the calendar years of, 1994, 1995, and 1996.
On February 20, 1998, petitioner executed Forms 2504
(Agreement to Assessment and Collection of Additional Tax and
Acceptance of Overassessment), agreeing to the immediate
assessment and collection of the increases in its employment
taxes and additions to tax under section 6656, as proposed by
respondent’s employment tax agent. On March 30, 1998, respondent
assessed these increases in petitioner’s employment taxes and
additions to tax.
F. Petitioner’s Offer in Compromise
On December 8, 1998, respondent received from petitioner
Form 656 (Offer in Compromise). The Offer in Compromise, which
was submitted by petitioner on the basis of doubt as to
liability, encompassed petitioner’s employment tax liabilities
for the calendar quarters in, and the calendar years of, 1994,
1995, and 1996.
- 8 -
The Offer in Compromise provided, in relevant part, as
follows:
By submitting this offer, I/we understand and agree to
the following conditions:
* * * * * * *
(m) The offer is pending starting with the date an
authorized IRS official signs this form and accepts
my/our waiver of the statutory periods of limitation.
The offer remains pending until an authorized IRS
official accepts, rejects or acknowledges withdrawal of
the offer in writing. * * *
(n) The waiver and suspension of any statutory periods
of limitation for assessment and collection of the
amount of the tax liability described * * * [above],
continues to apply: while the offer is pending (see (m)
above) * * * and for one additional year beyond each of
the time periods identified in this paragraph.
On December 14, 1998, an authorized official signed the
Offer in Compromise on behalf of respondent and accepted the
waiver of the statutory period of limitations set forth in
paragraph (m) of the offer.
G. Abatement of the March 30, 1998 Employment Tax Assessment
On May 3, 1999, respondent abated the assessment made
against petitioner on March 30, 1998, for employment taxes and
additions to tax under section 6656. Respondent took this action
after discovering that the Forms 2504 executed by petitioner on
February 20, 1998, did not include the waiver paragraph required
by Notice 98-43, 1998-2 C.B. 207.4
4
Notice 98-43, 1998-2 C.B. 207, sets forth new procedures
(continued...)
- 9 -
H. Rejection of Petitioner’s Offer in Compromise
By letter dated May 13, 1999, respondent rejected
petitioner’s Offer in Compromise. The letter stated in relevant
part as follows:
This refers to your offer of $500.00, submitted to
compromise your unpaid employment tax liabilities for
the tax periods shown above.
4
(...continued)
under section 7436 for processing employment tax cases involving
worker classification and sec. 530 of the Revenue Act of 1978.
Notice 98-43 provides in relevant part as follows:
AGREED SETTLEMENTS
If the taxpayer wishes to settle the worker
classification and ¶ 530 issues on an agreed basis
before issuance of a Notice of Determination, the
taxpayer must formally waive the restrictions on
assessment contained in §§ 7436(d)(1) and 6213. This
will generally be accomplished by execution of an
agreed settlement that contains the following language:
I understand that, by signing this
agreement, I am waiving the restrictions on
assessment provided in sections 7436(d) and
6213(a) of the Internal Revenue Code of 1986.
The Service will not assess employment taxes
attributable to worker classification or § 530 issues
unless either the Service has issued a Notice of
Determination to the taxpayer and the 90-day period for
filing a Tax Court petition has expired or,
alternatively, the taxpayer has waived the restrictions
on assessment. If the Service erroneously makes an
assessment of taxes attributable to worker
classification and § 530 issues without first either
issuing a Notice of Determination or obtaining a waiver
of restrictions on assessment from the taxpayer, the
taxpayer is entitled to an automatic abatement of the
assessment. However, once any such procedural defects
are corrected, the Service may reassess the employment
taxes to the same extent as if the abated assessment
had not occurred.
- 10 -
We are sorry, but your offer is rejected because
the tax is held to be legally due and an amount larger
than the offer appears to be collectible. We do not
have authority to accept an offer in these
circumstances.
I. The Notice of Determination
On May 24, 1999, respondent sent to petitioner a Notice of
Determination Concerning Worker Classification Under Section
7436. The notice determined that Mr. Barron should be classified
as an employee for purposes of Federal employment taxes under
subtitle C of the Internal Revenue Code for the calendar quarters
in, and the calendar years of, 1994, 1995, and 1996. The notice
also determined that petitioner was not entitled to treatment
under section 530 of the Revenue Act of 1978 with respect to Mr.
Barron.5
On August 24, 1999, petitioner filed a petition under
section 7436 contesting respondent’s determinations.
5
The determinations made by respondent in the Notice of
Determination reflect petitioner’s liabilities as originally
proposed by respondent’s employment tax agent, described supra in
E.
- 11 -
Discussion
Issue 1: Statute of Limitations6
Petitioner contends that assessment and collection of any
additional employment tax liability for the taxable periods in
issue is barred by the statute of limitations. We disagree for
the following reasons.
As a general rule, section 6501(a) requires that any tax be
assessed within 3 years after the return was filed. Section
6501(b) sets forth rules providing when a return is deemed to
have been filed.
As applicable herein, in the case of FUTA taxes reportable
on Form 940, a return is due on or before January 31 of the year
following the calendar year for which the return is required.
See sec. 6071(a); sec. 31.6071(a)-1(c), Employment Tax Regs. See
also sec. 31.6011(a)-3, Employment Tax Regs., regarding the
requirement for filing such a return. However, in case of an
early return, the return is deemed to have been filed on the last
day prescribed therefor. See sec. 6501(b)(1).
6
At the time of trial, as well as when the posttrial
briefs were filed, the Court had not yet decided whether issues
related to the statute of limitations were cognizable in an
action for redetermination of employment status. Subsequently,
it was decided that when the jurisdiction of the Court has been
properly invoked pursuant to sec. 7436, the Court may properly
decide whether the issuance of the Commissioner’s notice of
determination is barred by the expiration of the period of
limitations under sec. 6501. See Neely v. Commissioner, 115 T.C.
287 (2000).
- 12 -
As applicable herein, in the case of FICA taxes reportable
on Form 941, the return is due on or before the last day of the
first calendar month following the calendar quarter for which the
return is required. See sec. 6071(a); sec. 31.6071(a)-1(a),
Employment Tax Regs.; see also sec. 31.6011(a)-1, Employment Tax
Regs., regarding the requirement for filing such a return.
However, if a return for a calendar quarter is filed before April
15 of the following calendar year, the return shall be deemed to
have been filed on April 15 of the following calendar year. See
sec. 6501(b)(2).
Also relevant to our discussion is section 6501(c)(4), which
provides an exception to the general rule of section 6501(a)
prescribing a 3-year period of limitations. Thus, as relevant
herein, section 6501(c)(4) provides that where, before the
expiration of the period of limitations otherwise applicable to
the assessment of a tax, both the taxpayer and the Commissioner
have consented in writing to its assessment after such time, the
tax may be assessed at any time before the expiration of the
period agreed upon. In addition, the period so agreed upon may
be further extended by subsequent agreements made in writing
before the expiration of the period previously agreed upon. See
sec. 6501(c)(4).
Further relevant to our discussion is section 6503(a)(1).
That section, as applicable to the present action by virtue of
- 13 -
section 7436(d)(1), provides that the issuance of a notice of
determination serves to suspend the running of the period of
limitations on assessment for the period during which the
Commissioner is prohibited from making the assessment, and for 60
days thereafter. The period during which the Commissioner is
prohibited from making the assessment begins on the date on which
the notice of determination is issued and, if an action for
redetermination of employment status is commenced, ends on the
date on which the decision of this Court becomes final. See
sections 6213(a) and 7481, as applicable to the present action by
virtue of section 7436(d)(1).
We now apply these principles to the taxable periods in
issue.
A. 1994 and 1995
The regular 3-year period of limitations for assessment of
employment taxes reportable on Form 941; i.e., FICA taxes, for
the calendar quarters ended March 31, June 30, September 30, and
December 31, 1994, expired on April 15, 1998. Prior to that
date, however, both petitioner and respondent executed Form SS-10
(Consent to Extend the Time to Assess Employment Taxes), agreeing
to extend the period of limitations to April 15, 1999.
The regular 3-year period of limitations for assessment of
employment taxes reportable on Form 941 for the calendar quarters
ended March 31, June 30, September 30, and December 31, 1995,
- 14 -
expired on April 15, 1999.
The regular 3-year period of limitations for assessment of
unemployment tax reportable on Form 940, i.e., FUTA tax, for the
calendar year 1994, expired on January 31, 1998. Prior to that
date, however, both petitioner and respondent executed Form SS-
10, agreeing to extend the period of limitations to July 31,
1998. Prior to this second date, however, both petitioner and
respondent executed Form SS-10, agreeing to extend the period of
limitations to April 15, 1999.
The regular 3-year period of limitations for assessment of
unemployment tax reportable on Form 940 for the calendar year
1995, expired on January 31, 1999.
On December 14, 1998, prior to the expiration of the
foregoing periods of limitations, one of respondent’s authorized
officials signed the Offer in Compromise that petitioner had
submitted earlier that month with respect to (inter alia)
petitioner’s employment tax liabilities for the calendar quarters
in, and the calendar years of, 1994 and 1995. This action by
respondent’s authorized official served to suspend the running of
the period of limitations on assessment of petitioner’s
employment tax liabilities that were covered by the offer. As
applicable herein, such suspension extended from December 14,
1998, through May 13, 1999; i.e., the date on which respondent
rejected the offer, and for 1 thereafter.
- 15 -
By virtue of the above-described waivers (Forms SS-10) and
Offer in Compromise (Form 656), respondent’s issuance of the
notice of determination on May 24, 1999, occurred before the
expiration of the period of limitations on assessment of
petitioner’s employment taxes for periods ending in 1994 and
1995. Accordingly, the statute of limitations does not bar
assessment of employment taxes for those periods.
Petitioner contends that the abatement on May 3, 1999, of
the employment tax assessment (see Background, supra, section G.)
served to annul the waiver provisions of the Offer in Compromise.
We disagree. Petitioner in fact executed Form 656 and thereby
agreed to the suspension of the period of limitations with
respect to the employment taxes that were subject to the offer.7
B. 1996
The regular 3-year period of limitations for assessment of
employment taxes reportable on Form 941; i.e., FICA taxes, for
the calendar quarters ended March 31, June 30, September 30, and
December 31, 1996, expired on April 15, 2000. The regular 3-year
7
At trial, petitioner introduced a document dated June 13,
2000, purporting to withdraw the Offer in Compromise previously
submitted in Dec. 1998. In petitioner’s view, withdrawal of the
offer would serve to negate the waiver of the statute of
limitations therein. However, petitioner may not, by such simple
expedient, eliminate the consequences of its action in submitting
the offer. More precisely, paragraph (m) of the offer
specifically states that the offer remains pending “until an
authorized IRS official * * * acknowledges withdrawal of the
offer in writing.”
- 16 -
period of limitations for assessment of unemployment tax
reportable on Form 940; i.e., FUTA tax, for the calendar year
1996, expired on January 31, 2000.
On May 24, 1999, well before the earlier of January 31,
2000, and April 15, 2000, prior to the expiration of the
foregoing periods of limitations, respondent sent to petitioner
the Notice of Determination of Worker Classification Under
Section 7436. Thereafter, on August 24, 1999, petitioner filed
its petition under section 7436 commencing the present action
for redetermination of employment status.
The issuance of the notice of determination served to
suspend the running of the period of limitations. Likewise, the
commencement of the action for redetermination serves to further
suspend the running of such period. Accordingly, and contrary to
petitioner’s protestations to the contrary, it is clear that the
statute of limitations does not bar assessment of employment
taxes for periods ending in 1996.
Issue 2: Whether Mr. Barron Is An Employee
Chapter 21 of subtitle C of the Internal Revenue Code
imposes the FICA tax, and chapter 23 of subtitle C of the
Internal Revenue Code imposes the FUTA tax. For purposes of
chapter 21, section 3121(d)(1) specifically includes within the
definition of the term “employee” any officer of a corporation.
For purposes of chapter 23, and as relevant herein, section
- 17 -
3306(i) provides that the term “employee” has the meaning
assigned to such term by section 3121(d).
Section 31.3121(d)-1(b), Employment Tax Regs., which is
applicable to chapter 21 of subtitle C, provides in relevant part
as follows:
Generally, an officer of a corporation is an
employee 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. * * *
See also sec. 31.3306(i)-1(e), Employment Tax Regs., for the same
provision applicable to chapter 23 of subtitle C.
In the present case, Mr. Barron was the only C.P.A. who
performed services for petitioner, and indeed, Mr. Barron was the
only individual who performed professional services for
petitioner. Further, as petitioner’s president, Mr. Barron
exercised exclusive authority over all of petitioner’s affairs,
and he was the individual who was solely responsible for making
management decisions and for controlling and directing every
facet of petitioner’s business. Under these facts, it is clear
that Mr. Barron is not excluded from the general rule of sections
31.3121(d)-1(b), and 31.3306(i)-1(e), Employment Tax Regs., that
a corporate officer is an employee. See secs. 3121(d)(1),
3306(i). We hold, therefore, that as a corporate officer who
performed substantial services for petitioner, Mr. Barron is an
- 18 -
employee whose compensation is subject to FICA and FUTA taxes.
See Spicer Accounting, Inc. v. United States, 918 F.2d 90, 92-93
(9th Cir. 1990); Western Mgmt., Inc. v. United States, 45 Fed.
Cl. 543 (2000); Darrell Harris, Inc. v. United States, 770 F.
Supp. 1492, 1496-1497 (W.D. Okla. 1991); Radtke v. United States,
712 F. Supp. 143, 145 (E.D. Wis. 1989), affd. per curiam 895 F.2d
1196 (7th Cir. 1990).
Issue 3: Whether Petitioner Is Eligible for Section 530 Relief
Notwithstanding our conclusion that Mr. Barron is an
employee, section 530 of the Revenue Act of 1978, Pub. L. 95-600,
92 Stat. 2763, 2885 (section 530), as amended, would relieve
petitioner of employment tax liability for the periods in issue
if the requirements of section 530 are satisfied. Subsection (a)
of that section provides in relevant part as follows:
(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 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.
- 19 -
* * * * * * *
(3) Consistency required in the case of prior tax
treatment.–-Paragraph (1) shall not apply with respect
to the treatment of any individual for employment tax
purposes for any period ending after December 31, 1978,
if the taxpayer (or a predecessor) has treated any
individual holding a substantially similar position as
an employee for purposes of the employment taxes for
any period beginning after December 31, 1977.
Petitioner does not satisfy the requirements of section 530
and is therefore not eligible for relief under that section for
at least the following two reasons.
First, section 530(a)(1)(A) conditions the applicability of
relief to the situation where “the taxpayer did not treat an
individual as an employee for any period”. Section 530(a)(3)
clarifies this requirement by providing that for periods after
December 31, 1977, if “the taxpayer (or a predecessor) has
treated any individual holding a substantially similar position
as an employee”, then section 530 relief is not available to the
taxpayer. Thus, if the taxpayer treats any service provider as
an employee for any period after December 31, 1977, then the
taxpayer is precluded from obtaining section 530 relief with
respect to a similarly situated service provider in any
subsequent taxable period. See Lowen Corp. v. United States, 785
F. Supp. 913, 916 (D. Kan. 1992), affd. sub nom. Eastern Inv.
Corp. v. United States, 49 F.3d 651 (10th Cir. 1995). A
fortiori, if the taxpayer treats a particular service provider as
an employee for any period after December 31, 1977, then the
- 20 -
taxpayer is precluded from obtaining section 530 relief with
respect to that particular service provider in any subsequent
taxable period.
In order to satisfy the substantive consistency requirement
of section 530, petitioner would have to establish that it did
not treat Mr. Barron, or any service provider whose position was
substantially similar to Mr. Barron’s, as an employee for any
period after December 31, 1977. In the present case, Mr. Barron
is the only C.P.A. who provided services for petitioner and the
only individual who provided professional services for
petitioner. Accordingly, in order to satisfy the substantive
consistency requirement of section 530, petitioner would have to
establish that it never treated Mr. Barron as an employee.
However, Mr. Barron was treated as an employee in 1994 when: (1)
Petitioner issued Mr. Barron a Form W-2 for the taxable year
1994; (2) petitioner included Mr. Barron’s compensation on its
Form 941 for the fourth quarter of 1994 and computed its
liability for FICA tax accordingly; and (3) petitioner included
Mr. Barron’s compensation on its Form 940 for 1994 and computed
its liability for FUTA tax accordingly.
Because petitioner does not satisfy the substantive
consistency requirement, petitioner is not eligible for relief
under section 530.
- 21 -
Second, eligibility for relief under section 530(a)(1)
requires that the taxpayer have a reasonable basis for not
treating the service provider in question as an employee. This
requirement may be established by the particular facts and
circumstances of the case or by reference to one of the three
“safe harbors” described in section 530(a)(2).
We recognize that the Congress intended that “this
reasonable basis requirement be construed liberally in favor of
taxpayers.” H. Rept. 95-1748, 1978-3 C.B. (Vol. 1) 629, 633.
However, it has been held that an S corporation’s treatment of
its president as a shareholder, rather than as an employee, was
unreasonable within the meaning of section 530 where the
president “was, for all practical purposes, the central worker
for the taxpayer.” Spicer Accounting, Inc. v. United States, 918
F.2d 90, 95 (9th Cir. 1990). There the Court of Appeals
concluded that “it is clear that Mr. Spicer failed to satisfy
this [reasonable basis] standard, however liberally construed.”
Id. Similarly, because Mr. Barron was “the central worker” for
petitioner and provided substantial services, and further because
sections 3121(d)(1) and 3306(i) unambiguously state that a
corporate officer is an employee, we conclude that petitioner’s
treatment of Mr. Barron was unreasonable.
Petitioner relies on Durando v. United States, 70 F.3d 548
(9th Cir. 1995), in support of its treatment of Mr. Barron. That
- 22 -
case is clearly distinguishable, however, as demonstrated by the
fact that it neither cites Spicer Accounting, Inc. v. United
States, supra, nor involves section 530. Indeed, Durando v.
United States, supra, does not present any issue involving the
classification of a service provider and does not even involve
employment taxes. Rather, the case holds that passthrough income
from an S corporation may not be treated as net earnings from
self-employment for the purpose of a Keogh plan deduction.8
In view of the foregoing, we hold that petitioner is not
eligible for relief under section 530.
Conclusion
We have carefully considered remaining arguments made by
petitioner for a result contrary to that expressed herein and, to
the extent not discussed above, we consider those arguments to be
without merit.9
8
Although a shareholder of an S corporation may not
establish a Keogh plan, the Court of Appeals stated that the S
corporation may establish a retirement plan for its employees;
the Court of Appeals also quoted from one of the Commissioner’s
publications to the effect that an officer of an S corporation
who performs substantial services is an employee of the S
corporation. See Durando v. United States, 70 F.3d 548, 551 n.6
(9th Cir. 1995).
9
Among those arguments is petitioner’s allegation that
respondent’s brief was filed 1 day late and that “Respondent
should also be held to the rules.” Contrary to petitioner’s
allegation, respondent’s brief was timely filed pursuant to sec.
7502(a).
- 23 -
Reviewed and adopted as the report of the Small Tax Case
Division.
In order to give effect to the foregoing,
An appropriate order will
be issued.10
10
After this case was tried and the parties’ briefs were
filed, Congress amended sec. 7436(a) retroactively to confer
jurisdiction on this Court to determine “the proper amount of
employment tax”. Community Renewal Tax Relief Act of 2000, Pub.
L. 106-554, sec. 314(f), (g), 114 Stat. 2763. Having sustained
respondent’s notice of determination regarding the issues in
dispute at trial and on brief, we leave it to the parties in
their Rule 155 computation to specify the proper amount of
employment taxes to be reflected in the Decision to be entered in
this case.