Mike J. Graham Trucking, Inc. v. Comm'r

T.C. Memo. 2003-49

UNITED STATES TAX COURT

MIKE J. GRAHAM TRUCKING, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4799-00. Filed February 26, 2003.

Joseph H. O’Donnell, Jr., for petitioner.

Linda P. Azmon, 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 1995, 1996, and 1997. The issues for decision
 - 2 -

are: (1) Whether Michael J. Graham (Graham) was an employee of

petitioner for Federal employment tax purposes during 1995

through 1997 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

Procedure. For convenience, FICA and FUTA taxes are collectively

referred to as employment taxes.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner’s Organization and Operations

Petitioner is an S corporation that was incorporated in

Pennsylvania on or about July 29, 1991. At all relevant times,

petitioner’s principal place of business was located in Bensalem,

Pennsylvania.

Since its organization, petitioner has operated as a

trucking company. This activity was and is petitioner’s only

business and only source of income. Ownership of petitioner from

the time of its incorporation and throughout 1995, 1996, and 1997

has been distributed as set forth below:
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Shareholder Number of Shares

Michael J. Graham 60
Reva G. Graham 15
Bethann Graham 25

Reva G. Graham (Mrs. Graham) and Bethann Graham are the wife and

daughter, respectively, of Graham.

Graham has at all times served as petitioner’s president.

During 1995, 1996, and 1997, Graham performed the following

services for petitioner: (1) Drove a truck on behalf of

petitioner; (2) solicited business on behalf of petitioner;

(3) ordered petitioner’s supplies; (4) entered into verbal and/or

written agreements on behalf of petitioner; (5) oversaw the

finances of petitioner; (6) collected moneys owed petitioner; and

(7) managed petitioner. Throughout this period, Graham worked

approximately 40 hours per week for petitioner. No other person

performed any services on behalf of petitioner.

During 1995, 1996, and 1997, all moneys that were paid on

accounts receivable of petitioner were deposited into

petitioner’s checking account. Petitioner did not make regular

payments to Graham for his services. Rather, Graham obtained

funds from petitioner’s bank account as his needs arose and/or

paid personal expenses for himself and his family from such

account as he desired. Petitioner neither classified any payment

as a dividend nor distributed any dividends to shareholders from

1995 through 1997.
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Petitioner’s Tax Reporting

Petitioner timely filed Forms 1120S, U.S. Income Tax Return

for an S Corporation, and related schedules, for 1991, 1992,

1993, and 1994. On these returns, petitioner did not report

treating Graham, or any other individual, as an employee of

petitioner.

Petitioner filed a Form 1120S for each of the years 1995,

1996, and 1997. Petitioner reported ordinary income from its

trade or business of $14,261.62, $36,432.45, and $25,380.08 for

1995, 1996, and 1997, 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 the following

amounts as the pro rata share of, and as a property distribution

other than a dividend to, the stockholders:

Shareholder 1995 1996 1997

Graham and Mrs. Graham $10,696.21 $27,324.33 --
Graham -- -- $15,228.04
Mrs. Graham -- -- 3,807.01
Bethann Graham 3,565.41 9,108.12 6,345.03

Petitioner’s Forms 1120S were signed by Graham as president and

by Joseph M. Grey (Grey) as preparer.

During the period from 1995 to 1997, petitioner did not

issue any Forms 1099-MISC, Miscellaneous Income, or Forms W-2,

Wage and Tax Statement, to Graham. Since petitioner’s
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incorporation in 1991, petitioner has not reported paying Graham

a salary or wages for work he performed on behalf of petitioner.

Petitioner did not file a Form 941, Employer’s Quarterly

Federal Tax Return, for any quarter in 1995, 1996, or 1997 or a

Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax

Return, for 1995, 1996, or 1997. Throughout this period,

petitioner did not treat any individual as an employee.

The Grahams’ Tax Reporting

For each of the years 1995, 1996, and 1997, Graham and

Mrs. Graham filed a joint Form 1040, U.S. Individual Income Tax

Return. On these returns, Graham and Mrs. Graham reported as

ordinary income from “Rental real estate, royalties,

partnerships, S corporations, trusts, etc.” $10,696.21,

$27,234.33, and $19,035.05 for 1995, 1996, and 1997,

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

1995, 1996, and 1997, respondent neither audited petitioner for

employment tax purposes nor challenged petitioner’s treatment of

Graham as other than an employee. Thereafter, on February 23,

2000, respondent sent to petitioner the notice of determination

at issue in this proceeding. The notice was based on a
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determination that Graham 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.

The parties have stipulated that, if the Court decides that

Graham is to be classified as an employee for Federal employment

tax purposes for all periods in 1995, 1996, and 1997, the amounts

of taxes due and owing are as set forth in the notice of

determination. Conversely, if the Court decides that Graham

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

Graham, as president of petitioner, performed more than

minor services and received remuneration therefor.

Petitioner did not have a reasonable basis for failing to

treat Graham as an employee during the years in issue.

OPINION

I. Statutory and Regulatory Provisions

A. Subtitle C of the Internal Revenue Code

Subtitle C of the Internal Revenue Code governs payment of

employment taxes. In particular, sections 3111 and 3301 impose

taxes on employers under FICA (pertaining to Social Security) and
 - 7 -

FUTA (pertaining to unemployment), respectively, based on wages

paid to employees. The term “wages” as used in these statutes

generally encompasses “all remuneration for employment”. Secs.

3121(a), 3306(b). “Employee” is defined for purposes of FICA

taxes in section 3121(d), and, with modifications not germane

here, section 3306(i) makes this definition applicable for

purposes of FUTA taxes as well. Section 3121(d) provides:

SEC. 3121(d). Employee.--For purposes of this
chapter, the term “employee” means--

(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.
 - 8 -

Regulations promulgated under section 3121(d) clarify the

scope of the inclusion in paragraph (1) for corporate officers,

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. * * * [Sec. 31.3121(d)-
1(b), Employment Tax Regs.]

Identical language is also included in regulations promulgated

under section 3306. Sec. 31.3306(i)-1(e), Employment Tax Regs.

B. Section 530 of the Revenue Act of 1978

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 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,
 - 9 -

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 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 1995 and 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
 - 10 -

have fully cooperated with the Secretary. Because, as explained

in detail below, petitioner did not establish a prima facie case

that its treatment of Graham was reasonable, the burden of proof

remains on petitioner with respect to 1997 as well.

II. Classification of Graham for Employment Tax Purposes

A. Status Under FICA and FUTA Provisions

In contending that Graham should not be classified as an

employee under the FICA and FUTA provisions of the Internal

Revenue Code, petitioner focuses on Graham’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 sections 1366, 1372, and 6037(c) and

Durando v. United States, 70 F.3d 548 (9th Cir. 1995), presumably

in support of an argument that S corporation shareholders should

not be deemed employees. Sections 1366 and 6037(c) generally

require that income items of S corporations be passed through to

shareholders on a pro rata basis and reported by such

shareholders in a manner consistent with treatment on the

corporate return. These rules, however, pertain to calculation

of income tax liability under subtitle A and have no bearing on

computation of Federal employment taxes. Veterinary Surgical

Consultants, P.C. v. Commissioner, 117 T.C. 141, 145 (2001),

affd. sub nom. Yeagle Drywall Co. v. Commissioner, 54 Fed. Appx.
 - 11 -

100 (3d Cir. 2002). Furthermore, an employer cannot by the

expedient of characterizing moneys paid in remuneration for

services as distributions of net income, rather than as wages,

avoid FICA and FUTA liabilities. Id. at 145-146. Thus, as in

Veterinary Surgical Consultants, P.C. v. Commissioner, supra at

145-146, and Joseph M. Grey Pub. Accountant, P.C. v.

Commissioner, 119 T.C. 121, 128 (2002), we reject any suggestion

that petitioner’s passing through of its net income to Graham and

other shareholders precludes the finding of an employer-employee

relationship between petitioner and Graham. We likewise reject

as not germane to the question before us petitioner’s reliance on

section 1372, addressing fringe benefits under subtitle A, and

the reference to that statute in Durando v. United States, supra

at 551. See Veterinary Surgical Consultants, P.C. v.

Commissioner, supra at 147-148, 150.

2. Contentions Regarding Common Law Employment

Petitioner contends that “employee” as used throughout

section 3121(d) must be construed in a manner consistent with its

use in section 3121(d)(2), such that the usual common law rules

for determining existence of an employer-employee relationship

are to be taken into account. In support of this position,

petitioner quotes the following passage from Tex. Carbonate Co.

v. Phinney, 307 F.2d 289, 291-292 (5th Cir. 1962):

The statutory definition of “employees” as
including officers of a corporation will not be so
 - 12 -

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 did

not exercise control over Graham during any part of 1995, 1996,

or 1997. 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

in the structure of the text or in the Tex. Carbonate Co. v.

Phinney, supra, decision. Section 3121(d) is written in the

disjunctive, with each of the four paragraphs expressly separated

from the next by “or”. Accordingly, each paragraph affords a

separate and independent basis for deeming one engaged to perform

services an employee. Individuals described in paragraphs (1),

(3), and (4) of section 3121(d) are therefore frequently referred

to as “statutory” employees, subject to FICA and FUTA regardless

of their status under common law. See Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 126.

Moreover, Tex. Carbonate Co. v. Phinney, supra, is not

authority to the contrary. Significant regulatory and statutory

developments have occurred since the years in issue in that case.
 - 13 -

Given that sections 31.3121(d)-1(b) and 31.3306(i)-1(e),

Employment Tax Regs., were promulgated after those years and that

the FUTA definition of “employee” then in effect appears to have

contemplated a corporate officer who could be an independent

contractor under common law, see, e.g., sec. 1607(i), I.R.C.

1939, the Court of Appeals’ statements concerning common law

rules “may no longer be relevant.” Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 128 n.4. The opinion

in Tex. Carbonate Co. v. Phinney, supra at 291, recognized that,

regardless of the test purportedly being applied, “such officers

as work for * * * [a corporation] in fact” are included as

employees. The court also addressed the impact of an alleged

absence of control in that case, as follows:

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 Tex. Carbonate Co.

v. Phinney, supra, are consistent with the current regulatory

approach to officers and contrary to petitioner’s position.

Second, from a factual standpoint, even if the common law

control factor were pertinent to our evaluation, petitioner has

failed to establish a lack of control over Graham in the

performance of his services. As in Joseph M. Grey Pub.
 - 14 -

Accountant, P.C. v. Commissioner, supra at 128-129, to accept

petitioner’s contentions in this regard would be the equivalent

of disregarding the corporate form in which Graham chose to

conduct his business. Caselaw does not permit a taxpayer to use

his or her dual role as a shareholder of and service provider to

a corporation as grounds for ignoring the legal ramifications of

the business construct so selected. Moline Props., Inc. v.

Commissioner, 319 U.S. 436, 438-439 (1943); Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 129.

3. Application of Section 3121(d)(1)

On the basis of the foregoing analysis, application of

section 3121(d)(1) is not precluded or limited here by

considerations pertaining to Graham’s status as an S corporation

shareholder or under the common law. Section 3121(d)(1) and

sections 31.3121(d)-1(b) and 31.3306(i)-1(e), Employment Tax

Regs., specify that corporate officers are to be classified as

employees if they perform more than minor services and receive or

are entitled to receive remuneration. The overwhelming weight of

the evidence here shows that Graham’s activities vis-a-vis

petitioner met these criteria. (Accordingly, considerations with

respect to burden of proof do not affect our analysis on this

point.) Graham at all relevant times served as petitioner’s

president and worked approximately 40 hours per week for

petitioner in all aspects of petitioner’s trucking operations.
 - 15 -

As Graham testified, he is “a one man band” with respect to

petitioner’s business activities. Graham also obtained

remuneration from petitioner’s bank account as his needs arose.

Furthermore, although section 3121(d)(1) may be inapplicable

to the extent that an officer performs services in some other

capacity, i.e., as an independent contractor, petitioner does not

contend and offered no evidence that Graham worked for or was

engaged by petitioner in a capacity other than president. See

Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. at

129-130; Rev. Rul. 82-83, 1982-1 C.B. 151, 152. Hence, we

conclude that Graham was an employee of petitioner for employment

tax purposes, in accordance with section 3121(d)(1).

B. Availability of Section 530 Relief

Section 530 affords relief from employment tax liability,

notwithstanding an adverse classification, where the following

three requirements 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
 - 16 -

petitioner fails to meet the second. Rather, the parties dispute

whether petitioner had a reasonable basis for not treating Graham

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 second amended petition

alleges:

The Petitioner relies on judicial precedent in
satisfaction of the provisions of the said Section 530
which establishes reasonable basis for Petitioner’s
treatment of its majority shareholder and president,
Michael J. Graham, as a non-employee during all times
and all years * * *; the said judicial precedent relied
on by Petitioner is Texas Carbonate Company v. R.L.
Phinney, 307 F.2d 289 (5th Cir.), cert denied, 371 U.S.
(1962).

On brief, petitioner reiterates reliance on Tex. Carbonate Co. v.

Phinney, 307 F.2d 289 (5th Cir. 1962), and cites as well to

Automated Typesetting, Inc. v. United States, 527 F. Supp. 515

(E.D. Wis. 1981), in support of the premise that petitioner

reasonably looked to common law control concepts in classifying

Graham.
 - 17 -

For the reasons previously discussed, Tex. Carbonate Co. v.

Phinney, supra, does not afford a reasonable basis for disregard

of the explicit rules of section 3121(d)(1) and sections

31.3121(d)-1(b) and 31.3306(i)-1(e), Employment Tax Regs.

Equally unavailing in this regard is Automated Typesetting, Inc.

v. United States, supra. The District Court in that case simply

evaluated the employment relationship of the involved individuals

both through a common law analysis and through application of the

provisions relating to corporate officers. Id. at 519-522. In

deciding that the individuals qualified as employees under either

rubric, the court did not repudiate the statutory treatment of

corporate executives. Id. at 520, 522; see also Joseph M. Grey

Pub. Accountant, P.C. v. Commissioner, supra at 129 n.5.

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 W. 42nd St.

Enters., Inc. v. IRS, 181 F.3d 272, 277, 279 (2d Cir. 1999)

(reversing and remanding because it was “unclear from the record

whether * * * [the taxpayer] in fact relied on any specific
 - 18 -

industry practice in reaching its decision to treat its * * *

[workers] as non-employee tenants, let alone whether such

reliance was reasonable”); Select Rehab, Inc. v. United States,

205 F. Supp. 2d 376, 380 (M.D. Pa. 2002) (“The taxpayer must show

that it relied upon those grounds [alleged as a reasonable

basis], and that the reliance was reasonable.”); W. Va. Pers.

Servs., Inc. v. United States, 78 AFTR 2d 96-6600, at 96-6608,

96-2 USTC par. 50,554, at 85,919 (S.D. W. Va. 1996) (“The plain

meaning of section 530(a)(2) is that only evidence known to and

relied upon by the taxpayer is relevant. Facts that are learned

after the incorrect treatment of the employees * * * are not

facts that a taxpayer relied upon in making its original decision

regarding how to treat its employees.”).

Until shortly 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. The following colloquy

transpired at trial between Graham and counsel for respondent:

Q [Counsel for respondent] It’s my understanding
that Petitioner is contending that it relied on Texas
Carbonate versus Phinney as the basis for treating you
as other than an employee. Is that correct?

A [Graham] I don’t know nothing about this. I
don’t know.

Q You’re not familiar with the case Texas Carbonate
versus Phinney?

A No.
 - 19 -

Q Did you ever talk to anyone about that case?

A No.

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

Veterinary Surgical Consultants, P.C. v. Commissioner, T.C. Memo.

2003-48 (where Grey testified that he was unaware of the Tex.

Carbonate Co. v. Phinney, supra, case until posttrial briefing,

during the fall of 2001, in Joseph M. Grey Pub. Accountant, P.C.

v. Commissioner, 119 T.C. 121 (2002)). Petitioner failed to

establish that it relied on judicial precedent or, for that

matter, on any of the other sources specified in Section

530(a)(2)(A). Accordingly, we conclude that subparagraph (A)

does not aid petitioner here.

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

cannot show reliance on a past audit under Section 530(a)(2)(B).

Likewise, petitioner has adduced no evidence of conventions in

the trucking industry to establish longstanding industry practice
 - 20 -

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 Graham’s

treatment apart from the safe havens, petitioner quotes 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 Graham

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 not germane here.

It does not purport to override or interpret the definition of

“employee” in section 3121(d) and related regulations. Hence,

Section 530(c)(2) does not render it rational for petitioner to

have ignored the statutory mandate regarding corporate officers

and to have taken a position that was not otherwise supported by

authority. Petitioner also does not claim in actuality to have

relied on Section 530(c)(2) in deciding not to treat Graham as an
 - 21 -

employee in 1995, 1996, or 1997. We conclude and have found as a

fact that petitioner did not have a reasonable basis for failing

to characterize Graham as an employee. Consequently, relief from

employment tax liability is not available to petitioner under

Section 530.

C. Conclusion

We hold that Graham is an employee of petitioner pursuant to

section 3121(d)(1) and that petitioner is not entitled to relief

under Section 530. Accordingly, petitioner is liable for FICA

and FUTA taxes for the periods in issue as set forth in

respondent’s notice of determination and the parties’

stipulations.

To reflect the foregoing,

Decision will be entered for

respondent and in accordance with

the parties’ stipulations as to

amounts.