T.C. Memo. 2003-265
UNITED STATES TAX COURT
FREDERICK C. KUMPEL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14339-01. Filed September 10, 2003.
Frederick C. Kumpel, pro se.
Milton B. Blouke, 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 regarding petitioner’s
liabilities pursuant to the Federal Insurance Contributions Act
(FICA) and the Federal Unemployment Tax Act for 1993, 1994, 1995,
1996, and 1997. The issues for decision are whether Nanci Smith
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(Smith) and Teanna Mawson (Mawson) were employees of petitioner
for Federal employment tax purposes during 1993 through 1997;
whether petitioner is subject to the addition to tax for failure
to file Forms 941, Employer’s Quarterly Federal Tax Return, as
required under section 6651 for all four quarters of each of the
years in issue; and whether petitioner is subject to the addition
to tax for failure to make a deposit of FICA taxes as required
under section 6656 for the years in issue. Petitioner concedes
that he is not entitled to relief under section 530 of the
Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2885, as amended,
and he has not sought relief under section 3509, relating to the
wages paid during any of the four quarters of each of the years
in issue.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner’s principal place of business was in Bakersfield,
California, at the time the petition was filed.
In 1985, petitioner began practicing law as a licensed
attorney in California. From 1985 through 1993, petitioner
worked for private law firms in California on litigation matters.
While working with the law firm Young Wooldridge, petitioner met
Smith and trained her in spelling, typing, and court procedure.
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In 1993, petitioner began his own practice as a sole
practitioner. Petitioner’s practice included personal injury,
employment, real estate, and litigation. Prior to opening his
law practice, petitioner consulted a certified public accountant
who offered to get petitioner an employer identification number
(EIN). Petitioner did not obtain an EIN.
Once petitioner began practicing as a sole practitioner,
Smith contacted him requesting work. There was no written
employment contract, and petitioner agreed to allow Smith to set
her own work schedule at a rate of $10 per hour. Smith would
generally telephone petitioner when she was unable to come into
the office on a particular day. Petitioner required Smith to
keep track of the hours that she worked. Petitioner paid
membership dues to the Bakersfield Legal Secretaries Association
on behalf of Smith. Petitioner had the authority to fire Smith
at any time, and Smith could quit her job at any time. Smith was
free to accept another position if it would offer her more money.
Petitioner did not request that Smith work for him on
Saturdays or Sundays. From 1993 through 1997, Smith took a
2-week vacation each summer. Smith worked for third parties
while working for petitioner and sometimes completed work for
petitioner at her home.
During the initial years of the law firm’s existence,
petitioner operated his law practice out of his home, where Smith
performed her job duties. In 1994, petitioner began to rent
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office space. Smith used petitioner’s file cabinet, photocopier,
stationery, computer, and computer printer to perform tasks for
petitioner. Smith performed general typing, answered the
telephone, did bookkeeping, helped track expenses and pay bills,
ran errands, filed papers in court, and filed records for
petitioner. Smith answered petitioner’s telephone when she was
in the office, although she shared this responsibility with the
receptionist of the office space that petitioner rented.
Petitioner requested that Smith type mailing labels, form letters
for medical records, disputed billing letters, Judicial Council
forms, lists of closed cases, and billing statements. Smith did
not type any pleading for petitioner. Petitioner would review
Smith’s work for errors, and he instructed her to review his work
for errors. Smith also prepared invoices to be mailed to
clients.
Petitioner controlled the errands that Smith ran for
petitioner. Smith also purchased supplies for petitioner.
Petitioner reimbursed her for expenses that she incurred.
Petitioner controlled the method of handling his incoming
and outgoing office mail. Smith opened the incoming mail for
petitioner but did not sort it or discard any unsolicited mail.
If petitioner received a bill, he would place a note on it and
place it in the pile for unpaid bills. Smith paid the bills when
she was in the office. Smith handled outgoing mail. Petitioner
directed Smith as to whether to send mail by certified mail,
express mail, return receipt requested, or regular mail.
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Petitioner determined which enclosures were to be mailed with a
document, and Smith prepared the enclosures.
Petitioner controlled how and when a document was filed in a
court by his office. Smith filed petitioner’s pleadings with the
courts. Petitioner required Smith to retain an endorsed or “file
stamped” copy of each pleading that was filed.
Petitioner controlled where each document was to be filed in
the clients’ binders. Petitioner noted instructions on
particular documents explaining to Smith where documents should
be filed. Petitioner designated the file into which documents
should go and in what section of the file. Petitioner also
controlled when Smith would make photocopies of documents to be
used at trial.
Smith assisted petitioner in closing his legal files during
the years in issue. Petitioner controlled when each file was to
be closed and the method of closing the file. Smith prepared a
storage list of closed files. Petitioner would review the
storage list to ensure that he could find the closed files.
In 1997, Smith moved and terminated her working relationship
with petitioner. During the second quarter of 1997, petitioner
hired a college student, Mawson, on terms similar to those
involving Smith. Petitioner trained Mawson as to the work that
needed to be done at the law practice. Mawson arranged her work
schedule around her college classes. Mawson’s duties included
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running errands, filing, photocopying, preparing outgoing mail,
and tracking and paying bills.
Petitioner did not file Forms 941 for any of the years in
issue for either Smith or Mawson. Petitioner did not file any
Forms 1099-MISC, Miscellaneous Income, for the work that Smith
and Mawson performed. During the years in issue, petitioner
reported income from his law firm on a Schedule C, Profit or Loss
From Business. Petitioner reported payments to Smith and Mawson
as “negative receipts” on the Schedule C and failed to indicate
that deductions were being taken for payments made for
secretarial services.
OPINION
Employment Status
Whether an employer-employee relationship exists in a
particular situation is a factual question. Weber v.
Commissioner, 103 T.C. 378, 386 (1994), affd. per curiam 60 F.3d
1104 (4th Cir. 1995). 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);
sec. 3306(i). Section 31.3121(d)-1(c)(2), Employment Tax Regs.,
defines the common law employer-employee relationship as follows:
(2) 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
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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. * * *
Although the determination of employee status is to be made by
common law concepts, a realistic interpretation should be
adopted, and doubtful questions should be resolved in favor of
employment. Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263,
269 (2001).
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 the work facilities used by the individual;
(3) the 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. Id. at 270; Weber v.
Commissioner, supra at 387. All of the facts and circumstances
of each case are considered, and no single factor is dispositive.
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Ewens & Miller, Inc. v. Commissioner, supra at 270; Weber v.
Commissioner, supra at 387. Because we decide this case on the
preponderance of the evidence, we need not discuss the burden of
proof.
1. Degree of Control
The control factor is the “crucial test” to determine the
nature of a working relationship. Weber v. Commissioner, supra
at 387. The degree of control necessary to find employee status
varies with the nature of the services provided by the worker.
See Ewens & Miller, Inc. v. Commissioner, supra at 270; Weber v.
Commissioner, supra at 388. To retain the requisite control over
the details of an individual’s work, the employer need not stand
over the individual and direct every move made by the individual;
it is sufficient if the employer has the right to do so. 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). Workers who set their own hours are not
necessarily independent contractors. Id.; Ewens & Miller, Inc.
v. Commissioner, supra at 270.
Petitioner argues that “Smith and Mawson were subject to
control and direction of petitioner merely as to the result to be
accomplished by the work and not as to the means and methods to
accomplish the result”. Petitioner relies on Rev. Rul. 57-109,
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1957-1 C.B. 328, which determined that a part-time bookkeeper was
an independent contractor. In Rev. Rul. 57-109, the bookkeeper
worked without corporate direction or supervision over his work,
provided his own working papers, and paid his own expenses. The
company actually controlled the result of his work and not the
manner in which he completed it. Petitioner’s case is
distinguishable, in part, because of the level of control that
petitioner exercised over Smith and Mawson. Petitioner further
argues that he had no control over either Smith’s or Mawson’s
work because they were free to set their own hours and were able
to come and go as they pleased. This one aspect of the
relationship, even if true, is not determinative. Petitioner’s
proposed findings of fact recite many aspects of Smith’s and
Mawson’s job over which petitioner exercised control. Petitioner
agreed with respondent’s proposed findings of fact that
petitioner had the authority to control how any file was closed
by a secretary, to control what errands a secretary would run for
him, to control how and when a document was filed in a court, to
control how any incoming mail was handled, to control what went
into the outgoing mail and how it was sent, and to control what
documents were photocopied. In addition, petitioner states in
his brief that he had “authority to control the manner in which
Smith’s tasks were performed” subject to Smith’s schedule.
Petitioner emphasized at trial and in his brief that, if
Smith or Mawson were not in the office on a particular day, he
would complete the tasks that they normally would complete.
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Petitioner’s reliance on Smith’s and Mawson’s flexible schedules
is misplaced. The hours were flexible because of the agreement
between petitioner and the secretaries and not by unilateral
action by the secretaries. While Smith and Mawson were
performing services for petitioner, they were under the direct
control of petitioner, who determined the manner in which they
would perform their jobs. Petitioner controlled both Smith and
Mawson in the completion of their job functions in a manner
consistent with employee status.
2. Investment in Facilities
Respondent emphasizes that petitioner invested in the
facilities of the law practice, claiming deductions over the
years in issue of over $49,000 for supplies and office expenses
used by Smith and Mawson. Respondent also emphasizes that
petitioner reimbursed Smith for supplies she purchased for the
office.
In this case, petitioner supplied the office space, a
computer, and other equipment used by Smith and Mawson to perform
their functions. Although petitioner testified that Smith
sometimes worked from her home, her choice to work at home, using
her own computer, was her preference. It appears that Smith’s
work at home was de minimis as well as voluntary. Smith was not
required to make any investment. See, e.g., Weber v.
Commissioner, supra at 390. These facts are indicative of an
employer-employee relationship.
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3. Opportunity for Profit or Loss
Respondent argues that Smith and Mawson had no opportunity
for profit or loss beyond the $10 per hour that they earned for
work completed. Petitioner claims, without reason and contrary
to authority, that this factor is irrelevant to the analysis.
Because Smith and Mawson did not have an opportunity for profit
from petitioner’s law practice and because they were not at risk
for loss, this factor weighs in favor of an employer-employee
relationship. See, e.g., Weber v. Commissioner, supra at 391.
4. Right To Discharge
Respondent argues that petitioner had the right to discharge
Smith or Mawson at any time. Petitioner argues without evidence,
reason, or authority that Smith and Mawson could not be
discharged for “the reasons usually associated with the firing of
an employee”. The evidence shows that petitioner could discharge
either Smith or Mawson at any time, consistent with employee
status.
5. Integral Part of Business
Respondent emphasizes that the activities completed by Smith
and Mawson were all in relation to petitioner’s practice of law.
Petitioner admits on brief that Smith and Mawson “performed work
which was part of petitioner’s regular business”. He claims,
however, that Smith and Mawson were also free to work for other
people, complete school work, or handle family matters.
Petitioner’s claim is irrelevant to the analysis and lacks merit.
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During the years in issue, the functions that petitioner hired
Smith and Mawson to complete were functions of the operation of
his law practice, including filing court documents, photocopying,
running errands, and sending outgoing mail. These facts indicate
employee status.
6. Permanency of the Relationship
Smith worked for petitioner for 4 years, and Mawson worked
for petitioner for three quarters of 1997. Respondent asserts
that these time periods are sufficient to create a permanent
relationship. Petitioner argues that “there was never anything
permanent about the relationship with either Smith or Mawson.
The relationship was loose and transitory in every respect.”
A transitory work relationship may point toward independent
contractor status. See Ewens & Miller, Inc. v. Commissioner, 117
T.C. at 273. Smith, however, did not have a transitory
relationship with petitioner. Petitioner testified that Smith
could leave at any time for a better offer; however, this
possibility does not demonstrate a transitory relationship.
Although Smith and Mawson did not always work regular schedules
and Smith sometimes worked for third parties, they worked in the
course of petitioner’s regular business, and their respective
relationships with petitioner were not transitory in nature.
7. Relationship the Parties Thought They Created
Petitioner argued repeatedly at trial and on brief that he
intentionally established Smith and Mawson as independent
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contractors because he could not afford employees. Respondent
argues that Smith and Mawson should be considered employees of
petitioner despite the parties’ understanding to the contrary.
It is respondent’s position that, although petitioner informed
Smith and Mawson that they were independent contractors, this is
not a significant factor in the analysis because petitioner
failed to file Forms 1099-MISC for either secretary to
demonstrate an intent to treat Smith and Mawson as independent
contractors.
A contract between an employer and its staff establishing an
independent contractor relationship may be set aside if the
common law principles defining an employer-employee relationship
dictate otherwise. See Vizcaino v. U.S. Dist. Ct. for W. Dist.
of Wash. (In re Vizcaino), 173 F.3d 713, 716, 723 (9th Cir. 1999)
(applying common law analysis of Nationwide Mut. Ins. Co. v.
Darden, 503 U.S. 318, 323-324 (1992), in determining worker
classification). The parties’ characterization of the
relationship is not controlling. See Ewens & Miller, Inc. v.
Commissioner, supra at 268-269; sec. 31.3121(d)-1(a)(3),
Employment Tax Regs.
Petitioner did not follow consistent procedures in treating
Smith and Mawson as independent contractors, namely securing an
employer identification number and filing Forms 1099-MISC. The
record confirms that he and his secretaries intended to avoid
rules applicable to employees, but the intent was inconsistent
with the reality of their relationship. (His manner of reporting
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payments for secretarial services on his Schedules C suggests an
intention to conceal the relationship and the employment tax
issue.) Where, as here, common law factors compel a finding that
an employer-employee relationship exists, the parties’ intentions
to the contrary will not be given effect.
8. Conclusion
After considering all of the facts and circumstances in this
case, we conclude that both Smith and Mawson were employees of
petitioner during the years in issue.
Additions to Tax
Under section 6651, a taxpayer who fails to file timely or
fails to pay employment taxes shall be assessed an addition to
tax, unless it is shown that the failure is due to reasonable
cause and not due to willful neglect. See Conklin Bros. of Santa
Rosa, Inc. v. United States, 986 F.2d 315, 317 (9th Cir. 1993);
Charlotte’s Office Boutique v. Commissioner, 121 T.C. ___, ___
(2003) (slip op. at 30). To establish reasonable cause, the
taxpayer must show that ordinary business care and prudence were
exercised in providing for payment of the tax liability. Sec.
301.6651-1(c)(1) and (2), Proced. & Admin. Regs. Willful neglect
means a “conscious, intentional failure or reckless
indifference.” United States v. Boyle, 469 U.S. 241, 245-246
(1985).
Under section 6656, an addition to tax is imposed equal to
10 percent of the portion of an underpayment in tax that is
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required to be deposited if the failure to deposit is more than
15 days late. A taxpayer may avoid the addition to tax by
showing that the failure to deposit was due to reasonable cause
and not due to willful neglect. Sec. 6656(a); Charlotte’s Office
Boutique v. Commissioner, supra at ___ (slip op. at 31).
Petitioner asserts that he “refused to use” an employer
identification number and acknowledges the obligations of an
employer that he deliberately tried to avoid. Petitioner’s
position is essentially that he did not want to incur the
obligations of an employer and therefore did not comply with the
applicable law. Petitioner is liable for the additions to tax
under section 6651 and section 6656.
We have considered all arguments made by the parties. Those
arguments not discussed are irrelevant or without merit. To
reflect the foregoing,
Decision will be entered
for respondent.