CLARKE v. COMMISSIONER

T.C. Summary Opinion 2001-127

UNITED STATES TAX COURT

CHARLES R. CLARKE, d.b.a. MAXI’S TODAY’S HAIR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4627-98S. Filed August 17, 2001.

Charles R. Clarke, pro se.

Julie L. Payne, for respondent.

GOLDBERG, 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. 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). Unless otherwise indicated, subsequent section

references are to the Internal Revenue Code in effect for the

years in issue, and all Rule references are to the Tax Court
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Rules of Practice and Procedure.

Respondent issued a Notice of Determination Concerning

Worker Classification Under Section 7436 (notice of

determination), in which respondent determined: (1) Ten

individuals who performed services for Maxi’s Today’s Hair

(Maxi’s) during 1994, and four individuals who performed services

for Maxi’s during 1995 were employees of Maxi’s for purposes of

Federal employment taxes under subtitle C (Employment Taxes and

Collection of Income Tax) of the Internal Revenue Code; (2)

petitioner was not entitled to relief under subsection (a) of

section 530 of the Revenue Act of 1978 (section 530), as

amended,1 Pub. L. 95-600, 92 Stat. 2763, 2885, see sec.

7436(a)(2); and (3) petitioner was liable for additions to tax

under sections 6651(a)(1) and 6656(a).

Therefore, the issues in this case are: (1) Whether the

beauticians identified in the notice of determination were common

law employees of petitioner during 1994 and 1995; and, if so, (2)

whether petitioner is entitled to section 530 relief from

employment taxes stemming from the employment of the beauticians;

and (3) whether petitioner was liable for additions to tax under

sections 6651(a)(1) and 6656(a).

1
Sec. 530 of the Revenue Act of 1978 has been amended by
Pub. L. 96-167, sec. 9(d), 93 Stat. 1278; Pub. L. 96-541, sec. 1,
94 Stat. 3204; Pub. L. 97-248, sec. 269(c), 96 Stat. 552; Pub. L.
99-514, sec. 1706, 100 Stat. 2781; and Pub. L. 104-188, sec.
1122, 110 Stat. 1766.
 - 3 -

Background

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time the petition

was filed, petitioner resided in Federal Way, Washington.

In January 1994, petitioner purchased a nonoperating beauty

salon. Petitioner had no previous experience in owning or

operating a beauty salon and had no training in cutting hair.

Petitioner worked full time in the human resource department of a

company located in Bellevue, Washington. The salon was

approximately 1,100 square feet in area and was equipped with

hairdressing stations, or chairs, and other fixtures, including

equipment for shampooing and drying hair. At the time of

purchase, the salon had no employees and was not open for

business. In February 1994, petitioner hired the first

beautician and thereafter opened for business. Petitioner

advertised the salon’s services in newspapers and on the radio.

Maxi’s provided services for clients who made appointments with a

particular beautician or were walk-in customers. By the end of

the first quarter of 1994; i.e., March 31, 1994, petitioner had

hired three to four beauticians. Due to the high turnover in

this type of business, petitioner had approximately 20

beauticians working in Maxi’s during the years at issue, although
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only 10 beauticians2 worked for any substantial period. All of

the individuals listed in the notice of determination worked for

Maxi’s as beauticians for some period during 1994 and/or 1995.

During the first quarter of 1994, petitioner treated the

beauticians working for him as employees; i.e., petitioner

withheld Federal income taxes of $1,083.82. Of these amounts,

petitioner deposited $400.78 with the Government. Petitioner did

not file Form 940, Employer’s Annual Federal Unemployment (FUTA)

Tax Return, or Form 941, Employer’s Quarterly Federal Tax Return,

for any period during the years at issue. For the remaining 1994

tax year and for the entire 1995 tax year, petitioner did not

withhold any Federal income taxes, including employment taxes3

from amounts paid to the beauticians. The former owner of the

hair salon had treated beauticians working for the salon as

employees for Federal tax purposes.

Petitioner’s accountant, Fred C. Brents (Mr. Brents),

prepared Forms W-2, Wage and Tax Statement, for beauticians

2
These beauticians are identified in the notice of
determination. Although the identity of beauticians named in the
notice of determination, petitioner’s payroll records, and the
Forms W-2, Wage and Tax Statement, are inconsistent, petitioner
does not contest the identity of these individuals listed in the
notice of determination, and, therefore, we accept respondent’s
identification in the notice of determination. See Rule
34(b)(5).
3
For convenience, the term “employment taxes” refers to
taxes under the Federal Insurance Contributions Act (FICA), secs.
3101-3125, the Federal Unemployment Tax Act (FUTA), secs. 3301-
3311, and income tax withholding, secs. 3401-3406 and 3509.
 - 5 -

working at Maxi’s during the first quarter of 1994.4 The Forms

W-2 were not forwarded to the Social Security Administration or

the Internal Revenue Service (IRS) by petitioner or Mr. Brents.

In addition, petitioner did not provide Forms 1099 reflecting

amounts paid to the beauticians during the years at issue.5

Petitioner learned from others in the business that renting

chairs to beauticians was a common practice. Sometime during the

first quarter of 1994, petitioner and Mr. Brents spoke with a

representative of the State of Washington, Department of Labor

and Industry, which serves in an advisory capacity for small

businesses. After reviewing information provided by the

Washington Department of Labor and Industry, Mr. Brents advised

petitioner that it was appropriate to treat the beauticians as

independent contractors. Thus, beginning in the second quarter

of 1994, and throughout 1995, petitioner purportedly rented

chairs to the beauticians. Although petitioner believed that all

hired beauticians were independent contractors, written “rental

agreements” were not offered to each beautician who provided

4
We note that the record contains seven separate 1994
Forms W-2 for employees, which conflicts with petitioner’s
testimony that only the three or four beauticians hired during
the first quarter of 1994 were treated as employees.
5
Mr. Brents testified that the Forms 1099 were prepared
and furnished to each beautician; however, it was each
beautician’s responsibility to submit his or her respective Form
1099 to the Internal Revenue Service (IRS) with his or her
Federal income tax return. The purported Forms 1099 are not a
part of the record in this case.
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services to petitioner. A typical contract purportedly set a

flat fee for rental of a chair; however, according to

petitioner’s records, chair rental amounts fluctuated month-to-

month based upon the dollar amount of services rendered by each

beautician.

Petitioner required beauticians to have a beautician license

issued by the State of Washington prior to hiring. He did not

train or instruct beauticians how to cut or style hair.

Petitioner provided all equipment and beauty supplies or products

used by beauticians. On occasion a beautician brought and used

his or her own clippers, combs, brushes, etc.; however, it was

not required for a beautician to supply these items. If a

beautician modified a work station, petitioner would bear the

costs of such modification.

Petitioner set the base fee for all services provided by the

beauticians. Beauticians were required to use a common cash

register and to submit daily reports showing the fees collected

during the day. All credit card and check payments for services,

regardless of which beautician provided the services, were

payable to “C&M Enterprises”, a business owned and operated by

petitioner and his wife. Petitioner set Maxi’s hours of

operation; however, some beauticians were given keys to provide

services outside of normal business hours. Beauticians generally

set their own schedule, but petitioner required beauticians to be
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available during Maxi’s normal business hours to accommodate

walk-in customers. Beauticians were not precluded from working

for other salons. Petitioner could terminate a beautician’s

services at any time, and, on a few occasions, beauticians were

dismissed for providing poor service. Petitioner required all

beauticians to share reception duties, as needed.

Health and disability insurance benefits were not provided

by petitioner. Petitioner provided dental insurance for the

first quarter of 1994, although it was the beautician’s

responsibility to maintain premium payments thereafter. Vacation

and sick days were unpaid.

In the notice of determination respondent determined that

the beauticians listed therein were employees of Maxi’s, and that

petitioner was not entitled to relief under section 530 of the

Revenue Act of 1978. Respondent attached to the notice of

determination an Agreement to Assessment and Collection of

Additional Tax and Acceptance of Overassessment (Excise or

Employment Tax) (Form 2504) in which respondent proposed that

petitioner consent to immediate assessment and collection of

$12,716.19 in taxes, and $4,375.66 in section 6651(a)(1) and

6656(a) additions to tax, consisting of the following amounts:
 - 8 -

Sections
6651 &
6656
Amount of Additions
Tax Period Ended Kind of Tax and I.R.C. Section Tax to Tax
March 31, 1994 FICA - 3101, 3111, 3402, 3406, & $1,842.83 $612.19
3509
June 30, 1994 FICA - 3101, 3111, 3402, 3406, & 1,046.95 366.43
3509
September 30, 1994 FICA - 3101, 3111, 3402, 3406, & 863.56 302.25
3509
December 31, 1994 FICA - 3101, 3111, 3402, 3406, & 1,246.57 436.30
3509
December 31, 1994 FUTA - 3301, 3111, 3306, & 3405 1,604.49 561.57
March 31, 1995 FICA - 3101, 3111, 3402, 3406, & 1,470.00 514.50
3509
June 30, 1995 FICA - 3101, 3111, 3402, 3406, & 2,175.88 761.56
3509
September 30, 1995 FICA - 3101, 3111, 3402, 3406, & 710.99 248.85
3509
December 31, 1995 FICA - 3101, 3111, 3402, 3406, & 422.03 105.50
3509
December 31, 1995 FUTA - 3301, 3111, 3306, & 3405 1,332.89 466.51
Total: $12,716.19 $4,375.66

Independent Contractor vs. Employee

To determine whether a taxpayer is an independent contractor

or an employee, common law rules apply. Weber v. Commissioner,

103 T.C. 378, 387 (1994), affd. per curiam 60 F.3d 1104 (4th Cir.

1995). Courts consider various factors to determine whether an

employment relationship exists between the parties, including:

(1) The degree of control exercised by the principal; (2) which

party invests in work facilities used by the individual; (3) the

opportunity of the individual for profit or loss; (4) whether the
 - 9 -

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. Id. All the facts and circumstances of each

case should be considered. Id.

The right of control is ordinarily the crucial factor in

determining whether an employer-employee relationship exists.

Matthews v. Commissioner, 92 T.C. 351, 361 (1989), affd. 907 F.2d

1173 (D.C. Cir. 1990). 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. Sec. 31.3401(c)-

1(b), Employment Tax Regs.; see also Weber v. Commissioner, supra

at 388. 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). Moreover, the degree of control

necessary to find employee status varies according to the nature

of the services provided. Weber v. Commissioner, supra at 388;

see also Reece v. Commissioner, T.C. Memo. 1992-335.

Petitioner contends that he had no control over the

individual beauticians he hired; therefore they were independent

contractors. We disagree.

Taking the record as a whole, we find that the individuals
 - 10 -

listed in the notice of determination were employees in the years

at issue. We arrive at this conclusion based on the following

facts.

There is no evidence that the parties believed they were

creating an independent contractor relationship besides

petitioner’s self-serving testimony. Forms W-2 were purportedly

issued for tax year 1994 to individuals he treated as employees

during 1994. However, the record shows that Forms W-2 were also

issued to a number of beauticians, including those that provided

services after the first quarter of 1994. Contrary to Mr.

Brents’ testimony, there are no records of Forms 1099 issued to

any of the beauticians during 1994 or 1995, including those who

petitioner contends were independent contractors. No beauticians

testified at trial.

Petitioner relies on the terms of the purported chair rental

agreements to establish that the beauticians were independent

contractors. He also relies on these contracts to show the

parties’ intentions. At trial, petitioner referred to a number

of contracts he entered into with the various beauticians who

provided services for him during the years at issue, but failed

to produce any contracts. Without the contracts in the record

for our review, we cannot assume that petitioner created an

independent contractor relationship with the beauticians.

Petitioner had the authority to terminate a beautician for
 - 11 -

unsatisfactory services because the beautician “made the entire

place look bad”. Furthermore, despite the fact that beauticians

could set their own work schedule, petitioner required

beauticians to adjust their schedules to ensure walk-in customers

could be served.

Petitioner argues that the beauticians’ ability to work for

other salons demonstrates a lack of continuity in the employer-

employee relationship. We find this argument without merit. In

Kelly v. Commissioner, T.C. Memo. 1999-140, this Court found that

working for a number of employers during a tax year does not

necessitate treatment as an independent contractor.

After review of the entire record, we find that petitioner

failed to establish that the beauticians in question were

independent contractors. The weight of the evidence leads us to

conclude that the beauticians were petitioner’s employees during

the years at issue.

Section 530 of the Revenue Act of 1978

Section 530 of the Revenue Act of 1978 provides relief for

employers who mistakenly claim their employees as independent

contractors. In other words, even under our finding that the

beauticians were petitioner’s employees during the years at

issue, petitioner may not be liable for the employment taxes if

he falls under the safe harbor of section 530.

In order for petitioner to prevail, he must show the
 - 12 -

following: (1) Petitioner has not treated any of the beauticians

as employees for any period; (2) petitioner has filed all Federal

tax returns (including information returns) with respect to each

beautician on a basis consistent with petitioner’s treatment of

such individual as not being an employee; and (3) petitioner has

a reasonable basis for not treating the beauticians as an

employee. Revenue Act of 1978, sec. 530(a)(1), (3), 92 Stat.

2885, 2886.

Petitioner failed to meet the technical requirements of

section 530. First, petitioner conceded that he treated the

beauticians as employees for the first quarter of 1994, thus

violating the first requirement that the beauticians were not

treated as employees at any time. Section 530(a)(3) further

clarifies this requirement 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. Revenue Act of 1978, sec. 530(a)(1),

(3), 92 Stat. 2885, 2886. In the present case, petitioner also

conceded that his predecessor treated her beauticians as

employees, albeit they were not the same individuals working

under petitioner,6 although petitioner did not consistently treat

6
We note that the statute does not require the
individuals to be identical under predecessor and petitioner;
rather, the analysis focuses on whether individuals were in
substantially similar positions under both circumstances.
 - 13 -

the beauticians under his management as employees.

Second, petitioner failed to file the requisite Federal tax

returns, including information returns, as required under section

530(a)(1)(B). Petitioner conceded that Forms 1099 and Forms W-2

were not filed with the IRS. The record is also clear that

petitioner failed to file Forms 940 and 941. Although petitioner

relies on Mr. Brents’ testimony that the Forms 1099 and Forms W-2

were prepared and delivered to each beautician, we do not find

Mr. Brents’ self-serving testimony credible. It is well settled

that we are not required to accept the self-serving testimony of

petitioner or his accountant in the absence of corroborating

evidence. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

Finally, petitioner may be afforded relief under section 530

if he had a reasonable basis for not treating the beauticians as

employees. This requirement may be established if petitioner’s

treatment of the individual beautician was based on any of the

following: (1) Judicial precedent, published rulings, technical

advice to the employer, or a letter ruling to the employer; (2)

past examination of the employer by the IRS in which there was no

assessment attributable to the treatment for employment tax

purposes of individuals holding positions substantially similar

to the position held by this individual; or (3) longstanding

recognized practice of a significant segment of the industry in

which the individual was engaged. Sec. 530(a)(2).
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The record is devoid of any evidence that petitioner relied

on a prior decision, in any form, or audit conducted by the IRS

to support his claim for relief. Petitioner’s testimony that he

researched the utility of chair rental agreements by speaking to

hired beauticians or other salons in the area does not meet the

burden of establishing an industrywide practice of treating

beauticians as independent contractors. Petitioner did not offer

any witnesses to testify about an industry practice of renting

chairs to beauticians and treating them as independent

contractors. See, e.g., Gen. Inv. Corp. v. United States, 823

F.2d.

Petitioner’s final contention is that although he did not

meet the statutory requirements of section 530, he is entitled to

relief because he “complied with the spirit of section 530". We

recognize that section 530 was enacted by Congress to alleviate

what it perceived as overzealous tax collection activity by the

IRS. See Boles Trucking, Inc. v. United States, 77 F.3d 236, 239

(8th Cir. 1996); Ren-Lyn Corp. v. United States, 968 F. Supp.

363, 366 (N.D. Ohio 1997). In Erickson v. Commissioner, 172

Bankr. 900, 912 (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.
 - 15 -

In the case before us, it is clear that petitioner is not in a

situation tantamount to the protections intended by Congress.

Petitioner contends that he should not be responsible for

the beauticians’ taxes because “[the beauticians] didn’t choose

to file their taxes, and I don’t feel that I should be burdened

with their taxes.” Congress has provided a statutory safe harbor

for taxpayers in petitioner’s situation. Petitioner could have

avoided this result had he complied with these requirements.

Because the safe harbor of section 530 does not provide

relief to petitioner, and in accord with our finding above that

the beauticians were petitioner’s employees rather than

independent contractors, we hold that petitioner is liable for

the employment taxes due as stated in the notice of

determination. Respondent is sustained on this issue.

Sections 6651 and 6656

Respondent determined additions to tax for failure to timely

file tax returns and make timely deposits on tax liability

pursuant to sections 6651(a)(1) and 6656(a).

Section 6651(a)(1) imposes an addition to tax for failure to

timely file a tax return. The addition to tax is equal to 5

percent of the amount of the tax required to be shown on the

return if the failure to file is not for more than 1 month. Sec.

6651(a)(1). An additional 5 percent is imposed for each month or

fraction thereof in which the failure to file continues, to a
 - 16 -

maximum of 25 percent of the tax. Id.

Section 6656(a) imposes an addition of tax for failure to

deposit any amount of tax with a Government depository. As

relevant herein, the addition to tax is equal to 10 percent if

the failure is for more than 15 days. Sec. 6656(b)(1)(A)(iii).

Both sections 6651(a)(1) and 6656(a) impose liability unless

“such failure is due to reasonable cause and not due to willful

neglect”. “Willful neglect” means a “conscious, intentional

failure or reckless indifference.” United States v. Boyle, 469

U.S. 241, 245 (1985). Reasonable cause is found if the taxpayer

exercised ordinary business care and prudence but was

nevertheless unable to perform its tax obligations in a timely

manner. Brewery, Inc. v. United States, 33 F.3d 589, 592 (6th

Cir. 1994); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

Petitioner advanced no reasons why his employment tax

returns for the years at issue were not filed timely or why he

failed to pay and deposit the employment taxes. Respondent,

therefore, is sustained on the additions to tax under sections

6651(a)(1) and 6656(a).

We have considered all arguments by the parties, and, to the

extent not discussed above, conclude they are irrelevant or

without merit.

Reviewed and adopted as the report of the Small Tax Case

Division.
- 17 -

Decision will be entered

for respondent.