Orion Contr. Trust v. Comm'r

T.C. Memo. 2006-211

UNITED STATES TAX COURT

ORION CONTRACTING TRUST, KEVIN PETER CARMEL, GENERAL MANAGER,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20633-04. Filed September 27, 2006.

Kevin Peter Carmel (General Trust Manager), for petitioner.

Denise G. Dengler, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: The petition in this case was filed pursuant

to section 7436 and Rule 291 in response to a Notice of
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Determination of Worker Classification, dated July 28, 2004.1

Respondent determined that, for purposes of Federal employment

taxes, petitioner’s workers were employees and petitioner owed

total employment taxes under subtitle C of the Internal Revenue

Code for the years 1996, 1997, and 1998 of $359,414.28 and

additions to tax under section 6651(f) of $269,560.71. The

issues for decision are:

(1) Whether the period of limitations for respondent’s

reclassification of individuals as petitioner’s employees has

passed. We hold that the period of limitations remains open;

(2) whether the workers listed in the notice of

determination were properly classified as employees for purposes

of Federal employment taxes. We hold that the identified

individuals were petitioner’s employees; and

(3) whether petitioner is liable for additions to tax for

the years 1996, 1997, and 1998 pursuant to section 6651(f). We

hold that petitioner is not so liable.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference. Orion

Contracting Trust (petitioner) is a trust organized under the

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.
 - 3 -

laws of the State of Florida and has its principal place of

business in Boynton Beach, Florida.

Petitioner was formed in October 1995 when Kevin Peter

Carmel and his brother-in-law, Pandelis Damigos, entered into a

contract with American Asset Protection to establish an asset

protection plan and create a common law trust. Carmel and

Damigos were appointed the general trust managers of petitioner

and thereafter operated their construction business through the

trust. The agreement with American Asset Protection included a

provision for the preparation of independent contractor

agreements for individuals providing services for petitioner.

Petitioner’s original trustees included John Ellis, who

later resigned as trustee before going to jail for his connection

with American Asset Protection; Sharon Alfonso, who resigned as

trustee shortly after the formation of petitioner; and Karen Clay

and Hilda Terrasi, who are the sisters of Carmel and Damigos,

respectively. None of the trustees of petitioner were involved

in the day-to-day operation of its business. In December 1995,

Ellis signed a durable power of attorney providing Carmel and

Damigos with the power and authority to do anything Ellis, as

trustee, was authorized to do.

During 1996, 1997, and 1998, petitioner operated a

construction and remodeling business doing work repairing and

patching concrete, mixing and applying concrete, and other
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construction work. During these years, petitioner paid several

individuals to assist in its business who provided petitioner

with both skilled and unskilled labor. These individuals

performed work repairing and patching concrete, waterproofing

concrete, and other construction work. Some of the workers

provided their own hammers and Skil-saws. The rest of the

supplies and materials, including the concrete used by the

workers, were provided by petitioner.

These individuals were under the direction and control of

petitioner, with petitioner’s managers, Carmel and Damigos,

responsible for their management and supervision. The

individuals worked at more than one location for petitioner

during the years 1996, 1997, and 1998, and petitioner decided

which location to send the individuals to. Many of the

individuals worked for petitioner during all 3 years in question.

Petitioner paid these individuals, by cash and check, almost

weekly. Petitioner did not provide any benefits and did not

treat any of the individuals as employees for 1996, 1997, or

1998. Petitioner did not file any Forms W-3, Transmittal of Wage

and Tax Statements, with accompanying Forms W-2, Wage and Tax

Statement, with the Social Security Administration for 1996,

1997, or 1998. Petitioner did not file any Forms 1096, Annual

Summary and Transmittal of U.S. Information Returns, with

accompanying Forms 1099, with the Internal Revenue Service (IRS)
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for 1996, 1997, or 1998. Petitioner did not file any Forms 941,

Employer’s Quarterly Federal Tax Return, for any periods in 1996,

1997, or 1998 with the IRS with respect to these workers, nor did

petitioner file any Forms 940, Employer’s Annual Federal

Unemployment Tax Return, for 1996, 1997, or 1998. Finally,

petitioner did not file any Forms 1041, U.S. Income Tax Return

for Estates and Trusts, for 1996, 1997, or 1998.

Respondent’s examination of petitioner was itself a product

of the income tax examinations of petitioner’s managers, Carmel

and Damigos, when they both failed to file income tax returns for

the 1996 and 1997 tax years. As part of the examination of

Carmel and Damigos, respondent requested that petitioner make its

books and records available for inspection. When petitioner

failed to provide respondent with any documents, respondent

summoned the records from the banks of both Carmel and

petitioner. Petitioner filed a motion to quash the summons.

This motion was later dismissed, and the bank records were

produced to respondent.

After respondent received petitioner’s records from the

banks, petitioner was referred within the IRS for an employment

tax examination. A notice of examination was sent to petitioner

on November 26, 2001, informing it of the examination and

requesting that petitioner make certain documents related to

petitioner’s business and workers available for inspection. This
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first letter was returned as undeliverable. Respondent then sent

out a postal tracer, and on January 11, 2002, respondent sent an

additional letter to petitioner again informing petitioner of the

examination and requesting that petitioner make certain documents

pertaining to its business and the workers in question available

for inspection. The letter also requested a meeting with

petitioner on January 31, 2002, to conduct an interview. After

sending the second letter, respondent followed up with a

telephone call to confirm the meeting and left a message on

petitioner’s answering machine to that effect.

When a representative of respondent arrived at the address

listed for petitioner on January 31, 2002, she was greeted by

Carmel’s wife. Neither Carmel nor Damigos was present. After

being contacted by his wife by telephone, Carmel informed the

representative that a response from petitioner to the notice had

already been mailed.

Ultimately, petitioner did not comply with respondent’s

request to make its documents available for inspection. At

trial, Carmel testified that the records were previously

subpoenaed by a Federal grand jury, and there is no evidence to

the contrary in the record.

Respondent then used the records previously summoned from

petitioner’s banks to help determine the status of petitioner’s

workers. Petitioner eventually did meet with respondent once for
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a closing conference after respondent issued a 30-day letter to

petitioner.

On July 28, 2004, respondent sent petitioner the Notice of

Determination of Worker Classification informing petitioner (1)

that the examined workers were employees, (2) that petitioner was

not entitled to relief under section 530(a) of the Revenue Act of

1978, Pub. L. 95-600, 92 Stat. 2885, as amended, and (3) that

petitioner owed additional employment taxes and additions to tax

under section 6651(f). Petitioner then timely filed a petition

with this Court under section 7436 alleging, among other things,

(1) that the workers cited in respondent’s notice of

determination were not employees of petitioner, (2) that the

period of limitations for the assessment of taxes referred to in

respondent’s notice of determination had expired, and (3) that

petitioner’s failure to file employment tax returns was not

fraudulent.

OPINION

I. Jurisdiction

At the outset, we briefly address petitioner’s contention

that this Court lacks jurisdiction.2 Under section 7436(a), this

2
Petitioner also offers several frivolous arguments
challenging respondent’s notice of determination. We decline to
parse through the specifics of petitioner’s arguments
characteristic of tax-protester rhetoric because doing so might
suggest that petitioner’s arguments possess some degree of
colorable merit. See Crain v. Commissioner, 737 F.2d 1417 (5th
(continued...)
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Court has jurisdiction to determine (1) whether an individual

providing services to a person is that person’s employee for

purposes of subtitle C, (2) whether the person, if in fact an

employer, is entitled to relief under section 530 of the Revenue

Act of 1978, and (3) the correct amount of employment taxes which

relate to the Commissioner’s determination concerning worker

classification. Thus, because respondent has issued a notice of

determination that the individuals in question were petitioner’s

employees and that petitioner owes employment taxes and additions

to tax with respect thereto, we have jurisdiction to hear

petitioner’s challenge to respondent’s determination.

II. Period of Limitations

Petitioner next argues that the notice of determination is

invalid because it was sent after the expiration of the period of

limitations.

Section 6501(a) provides: “Except as otherwise provided in

this section, the amount of any tax imposed by this title shall

be assessed within 3 years after the return was filed (whether or

not such return was filed on or after the date prescribed)”.

However, if the taxpayer fails to file a return, the Commissioner

may assess the tax at any time. Sec. 6501(c)(3).

2
(...continued)
Cir. 1984). To the extent petitioner attempts to state a claim
under sec. 7214, we are without jurisdiction to hear that claim.
See, e.g., Rice v. Commissioner, T.C. Memo. 1978-334.
 - 9 -

Petitioner did not file any employment tax returns for 1996,

1997, or 1998. Thus, the period of limitations on assessment of

employment taxes remains open indefinitely, and the notice of

determination sent by respondent was within the statutory limit.

III. Classification of Petitioner’s Workers

The employment tax sections of the Internal Revenue Code are

contained in subtitle C. Sections 3111 and 3301 impose taxes on

employers under the Federal Insurance Contributions Act (FICA)

and the Federal Unemployment Tax Act (FUTA). Section 3101

imposes a tax on employees under FICA based on their wages paid,

which the employer is required to collect under section 3102.

Under sections 3402 and 3403, employers are liable for

withholding from their employees’ wages the employees’ shares of

Federal income tax.

Respondent determined that petitioner’s workers were

employees for purposes of employment taxes and thus that

petitioner is liable for withholding the proper amounts of tax

under sections 3101, 3111, 3301, and 3402. Petitioner challenges

respondent’s classification of the individuals listed in the

notice of determination as employees of petitioner. Petitioner

maintains that these individuals were independent contractors,

and thus it was not responsible for withholding employment taxes.

Respondent’s determinations of fact are presumptively

correct, and petitioner bears the burden of proving, by a
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preponderance of the evidence, that those determinations are

erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). This rule also applies to the Commissioner’s

determination that a taxpayer’s workers are employees for the

purpose of employment taxes. Allen v. Commissioner, T.C. Memo.

2005-118. While petitioner bears the burden of proof, we decide

this case by the preponderance of the evidence. See Blodgett v.

Commissioner, 394 F.3d 1030, 1035 (8th Cir. 2005), affg. T.C.

Memo. 2003-212.

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”. Secs. 3121(d)(2),

3306(i); Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 269

(2001). Section 31.3121(d)-1(c)(2), Employment Tax Regs.,

defines the common law employer-employee relationship as follows:

Generally such relationship exists when the person
for whom services are performed has the right to
control and direct the individual who performs the
services, not only as to the result to be accomplished
by the work but also as to the details and means by
which that result is accomplished. That is, an employee
is subject to the will and control of the employer not
only as to what shall be done but how it shall be done.
In this connection, it is not necessary that the
employer actually direct or control the manner in which
 - 11 -

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. * * *

In deciding whether a worker is a common law employee or an

independent contractor, this Court considers: (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 that the parties believed

that they were creating. Ewens & Miller. Inc. v. Commissioner,

supra 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. Ewens & Miller. Inc. v.

Commissioner, supra at 270; Weber v. Commissioner, supra at 387.

While no single factor is dispositive, the degree of control

exercised by the principal over the details of the individual’s

work is one of the most important factors in determining whether

a common law employment relationship exists. See, e.g.,

Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S.
 - 12 -

440, 448 (2003); Leavell v. Commissioner, 104 T.C. 140, 149

(1995). All that is necessary is that the principal have the

right to control the details of the individual’s work. Ewens &

Miller, Inc. v. Commissioner, supra at 270.

Petitioner stipulated that the workers in question were

under its direction and control. Petitioner’s managers, Carmel

and Damigos, were responsible for their management and

supervision. When petitioner performed work at more than one

location during 1996, 1997, and 1998, petitioner determined which

location to send the workers to. At trial, petitioner’s manager

Carmel again testified that the workers were under the control of

petitioner on the jobs they were working on for petitioner.

Accordingly, this factor weighs heavily towards a finding that

petitioner’s workers were in fact employees and not independent

contractors.

Many of the other common law factors also evidence an

employer-employee relationship. For instance, the work performed

by these individuals was precisely of the type and kind

performed in the normal course of petitioner’s business--

repairing and waterproofing concrete.

Further, from the record of payments to these individuals

that respondent was able to compile, we find that many of the

individuals worked for petitioner for 2 or more years. Thus, we

find that the relationship between petitioner and the workers
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enjoyed a fair degree of permanency. Additionally, there was no

evidence that these individuals enjoyed the opportunity for

profit or loss beyond the work performed for, and hourly wage

paid by, petitioner. Finally, while Carmel testified that some

of the workers provided their own tools, including hammers and in

some cases Skil-saws, many of the materials needed for the work,

including the concrete, were provided by petitioner. These

factors all suggest to the Court that the individuals were in

fact employees of petitioner and not independent contractors.

In contrast, the only evidence before the Court to support a

finding that the workers were independent contractors is

petitioner’s intent to create such a relationship. The contract

Carmel and Damigos signed to form petitioner included a provision

for the preparation of independent contractor agreements. While

evidence of the parties’ understanding of the relationship is one

factor we consider, it is not enough to overcome the weight of

the other factors which clearly evidence an employer-employee

relationship. See, e.g., Kumpel v. Commissioner, T.C. Memo.

2003-265 (“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.”).
 - 14 -

Accordingly, we find that the individuals were employees of

petitioner for purposes of employment taxes.3

IV. Additions to Tax

Finally, we turn to the question of whether petitioner is

liable for additions to tax under section 6651(f) for the

fraudulent failure to file employment tax returns as respondent

has determined.

Section 6651(f) imposes an addition to tax of up to 75

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

where the failure to file the return is due to fraud. The

Commissioner bears the burden of proving fraud by clear and

convincing evidence. Sec. 7454(a); Rule 142(b); Clayton v.

Commissioner, 102 T.C. 632, 646, 652-653 (1994). We consider the

same factors under section 6651(f) that are considered in

imposing the fraud penalty under section 6663 and former section

6653(b). Clayton v. Commissioner, supra at 653; see also Neely

v. Commissioner, 116 T.C. 79, 85-86 (2001) (applying the

extensive body of law addressing fraud in the context of income,

estate, and gift taxes to the employment tax context).

3
Petitioner does not articulate a basis for relief under
sec. 530 of the Revenue Act of 1978, Pub. L. 95-600, 92 Stat.
2885. Even if petitioner had sought sec. 530 relief, such relief
would be denied because petitioner did not file any returns with
respect to the individuals in question as required by sec.
530(a)(1)(B).
 - 15 -

Fraud is defined as an intentional wrongdoing designed to

evade tax known or believed to be owing. Edelson v.

Commissioner, 829 F.2d 828, 833 (9th Cir. 1987), affg. T.C. Memo.

1986-223; Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir.

1986), affg. T.C. Memo. 1984-601. The existence of fraud is a

question of fact to be resolved upon consideration of the entire

record. DiLeo v. Commissioner, 96 T.C. 858, 874 (1991), affd.

959 F.2d 16 (2d Cir. 1992). Fraud is never presumed and must be

established by independent evidence that establishes fraudulent

intent. Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Fraud

may be proven by circumstantial evidence because direct evidence

of the taxpayer’s fraudulent intent is seldom available. Rowlee

v. Commissioner, 80 T.C. 1111, 1123 (1983). The taxpayer’s

entire course of conduct may establish the requisite fraudulent

intent. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992).

Courts have developed several indicia, or “badges of fraud”,

from which the requisite fraudulent intent can be inferred. They

include: (1) Failing to file tax returns, (2) understating

income, (3) concealing assets, (4) failing to cooperate with tax

authorities, (5) making frivolous arguments, (6) failing to make

estimated tax payments, (7) giving implausible or inconsistent

explanations of behavior, and (8) being convicted of willful

failure to file an income tax return. Douge v. Commissioner, 899

F.2d 164, 168 (2d Cir. 1990); Bradford v. Commissioner, supra at
 - 16 -

307. This list is nonexclusive. Niedringhaus v. Commissioner,

supra at 211. While no single factor is necessarily sufficient

to establish fraud, the existence of several indicia may

constitute persuasive circumstantial evidence of fraud. Petzoldt

v. Commissioner, 92 T.C. 661, 700 (1989).

Respondent first argues that petitioner’s failure to file

any employment tax returns for the workers in question is

evidence of fraud. The failure to file tax returns, even over an

extended period, does not per se establish fraud. Marsellus v.

Commissioner, 544 F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo.

1975-368. However, an extended pattern of failing to file tax

returns may be persuasive circumstantial evidence of fraud. Id.;

Grosshandler v. Commissioner, 75 T.C. 1, 19 (1980).

We find that petitioner’s failure to file employment tax

returns as evidence of fraud is mitigated by the technical nature

of the question of the employees’ status in this case. We do

note that petitioner also failed to file the required Forms 1099

for each of the alleged independent contractors who was paid more

than $600. While this failure is inconsistent with petitioner’s

position concerning the status of the workers, we do not find it

evidence of fraud. Accordingly, we find petitioner’s failure to

file employment tax returns is not compelling evidence of fraud

on these facts.
 - 17 -

Respondent next argues that petitioner’s attempts to impede

respondent’s determination of the proper classification of the

workers and the amount of taxes owed should be considered

evidence of petitioner’s fraudulent intent. We find petitioner’s

conduct with respect to the IRS, both before and after the

employment tax examination began, to be less than cooperative,

but there is no evidence that petitioner destroyed any evidence

or attempted to mislead respondent.

Further, respondent offered no evidence to contradict the

testimony of Carmel that the records of petitioner had been

previously produced to a grand jury at the time respondent sought

them. We find that this fact weakens any inference of fraud that

can be drawn from petitioner’s failure to produce its records or

more fully cooperate.

Accordingly, we find that the record lacks clear and

convincing evidence of fraud and conclude that section 6651(f) is

not applicable. Respondent has neither pleaded nor sought the

addition to tax under section 6651(a) in the alternative, and

thus we do not consider it.

V. Conclusion

Because the workers identified in respondent’s notice of

determination were under the direction and control of petitioner

and because several of the other indicia of a common law

employment relationship were present, we conclude that the
 - 18 -

workers in question were employees of petitioner and not

independent contractors. Respondent’s determinations with

respect to employment taxes for 1996, 1997, and 1998 are

sustained. Further, because we do not find clear and convincing

evidence of fraud, petitioner is not liable for additions to tax

under section 6651(f).

Accordingly, to reflect the foregoing,

Decision will be entered for

respondent as to the deficiency in

employment taxes and for petitioner

regarding the additions to tax

under section 6651(f).