T.C. Memo. 2007-66
UNITED STATES TAX COURT
PENO TRUCKING, INCORPORATED, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21070-03. Filed March 21, 2007.
Brent L. English, for petitioner.
Linda C. Grobe, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, 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 (FUTA) for 1997,
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1998, and 1999 and each of the quarters therein (periods at
issue).1
The issues for decision are: (1) Whether certain drivers
who operated petitioner’s trucks were employees of petitioner for
Federal employment tax purposes during the periods at issue 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 (act section 530).2
FINDINGS OF FACT
The parties’ stipulation of facts and the attached exhibits
are incorporated herein by this reference, and the facts
stipulated are so found. At the time the petition was filed,
petitioner’s principal place of business was in Warren, Ohio.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and Rule references are to
the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
2
This Court ordered the parties to file posttrial briefs.
Respondent did so; petitioner did not. Under these
circumstances, the Court may hold petitioner in default on all
issues for which it bears the burden of proof. See Stringer v.
Commissioner, 84 T.C. 693, 704-708 (1985), affd. without
published opinion 789 F.2d 917 (4th Cir. 1986); Furniss v.
Commissioner, T.C. Memo. 2001-137; McGee v. Commissioner, T.C.
Memo. 2000-308. However, we will decide this case on the record
as it stands. We base our understanding of petitioner’s position
on its petition, the stipulation of facts, and trial testimony.
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Petitioner was an S corporation incorporated in the State of Ohio
on December 23, 1993.3
A. Petitioner’s Business Operation
Petitioner was engaged in the business of operating a
trucking company to transport steel and other freight. Robert
Peno, Sr., and Joann Peno, husband and wife, were petitioner’s
sole shareholders and sole officers. Joann Peno was president,
and Robert Peno, Sr., was vice president.
During the periods at issue, petitioner owned approximately
15 tractor-trailers (trucks), which it leased to the Ohio
Transport Corp.4 (Ohio Transport) pursuant to written lease
agreements (leases). The leases required petitioner to transport
freight and perform related services for Ohio Transport within a
reasonable time in a safe, competent, lawful, and workmanlike
manner, inform Ohio Transport daily as to the vehicles’ locations
and the shipments being transported, and pay all costs of
operating the leased trucks and related equipment.
Under the leases, petitioner was required to provide drivers
to operate its trucks and be responsible for all work performed
by the drivers and to confirm their work was performed in
3
Although petitioner went out of business in 2003, it was
still an Ohio corporation in good standing when this petition was
filed.
4
Ohio Transport is an interstate motor carrier
headquartered in Ohio.
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accordance with the leases. Consequently, petitioner was
required to direct, supervise, pay, discipline, and discharge its
drivers.5 Petitioner was also responsible for determining the
days and hours per day the drivers worked, the routes traveled,6
and the order of picking up and delivery of shipments and
ensuring that the drivers had the appropriate commercial drivers’
licenses.7
The leases also required petitioner to submit completed
drivers’ logs to Ohio Transport and to “cooperate in the
preparation, carrying and preservation of manifestos, bills of
lading, way bills, freight bills, and other papers and records
respecting the lading and the use of equipment, all in accordance
with applicable laws and regulations”.
5
The leases required petitioner, not Ohio Transport, to
withhold and pay employment taxes for its drivers and pay the
premiums for workers’ compensation or employers’ liability
insurance to cover the drivers.
6
However, the parties stipulated that the drivers
determined the routes to travel, not petitioner.
7
Petitioner was required to confirm that the drivers
complied with all applicable laws, government rules, regulations,
and orders. Ohio Transport and its insurer also determined
whether the drivers had the appropriate credentials and driving
records to operate the leased equipment.
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As compensation, petitioner received 75 percent of the total
amount paid to Ohio Transport by its customers for each load
hauled by a leased truck.8
The leases required Ohio Transport to provide liability
insurance for petitioner’s trucks while they were “under
dispatch”.9 Otherwise petitioner provided the insurance. If a
driver intentionally damaged a truck or its cargo, he or she was
responsible for the damage, to the extent it was not insured.
B. Relationship Between Petitioner and Drivers
Petitioner entered into an agreement (agreement) with each
of its drivers during the periods at issue which expressly
provided that the drivers were independent contractors and not
employees. The agreement, in pertinent part, stated:
8
During the periods at issue, petitioner and Ohio Trucking
also had an oral agency agreement by which petitioner was paid a
9-percent agency fee on all loads it solicited from customers on
behalf of Ohio Transport. The 9-percent fee was over and above
the 75 percent Ohio Transport paid petitioner for each load
hauled under the leases. The drivers were paid no portion of the
separate 9-percent agency fee.
These loads were hauled by petitioner’s trucks or by
individuals who owned their own trucks (owner-operators). A
number of owner-operators hauled steel for Ohio Transport and
were dispatched by petitioner. The owner-operators’ employment
relationship with petitioner is not at issue in this case.
9
The term “under dispatch” means Ohio Transport had
contacted petitioner to haul a particular load, petitioner agreed
to haul the load, and the truck used to haul the load was: (1)
En route to pick up the load; (2) was picking up the load; (3)
was transporting the load; or (4) was returning to the location
where the truck was garaged having delivered the load.
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Peno Trucking Inc. and Operator agree and understand
that Operator is not an employee or agent of Peno
Trucking Inc. Operator is an independent contractor and
Peno Trucking Inc. shall not direct in any manner the
means or method by which Operator shall perform his
occupation. Operator understands that Peno Trucking
Inc. from time to time contracts with other persons or
corporations, to transport goods via Peno Trucking Inc.
trucks and equipment. While not an employee of such
other persons or corporations, Operator shall, at all
times applicable hereto, work at the direction and
control of such persons or corporations.
Peno Trucking Inc. agrees to pay Operator at the
percentage of * * * per total gross pay per load.
Additionally, Peno Trucking Inc. shall be responsible
for all maintenance of Peno Trucking Inc. equipment,
all fuel, oil, tolls, permits, and road fuel taxes
incurred by Operator on such dispatched trips in Peno
Trucking Inc. equipment.
Operator agrees and understands that he is solely
responsible for payment of all income and withholding
taxes, Social Security and unemployment compensation.
In accordance with the terms of this agreement, Peno
Trucking Inc. will supply Operator with an IRS Form
1099 at the end of each calendar year.
Operator understands and agrees that he cannot
obligate, contract or incur any indebtedness on behalf
of Peno Trucking Inc.
Petitioner’s drivers were not obligated to accept
petitioner’s request to transport a load, to work on any
particular day, or work any particular schedule. If a driver
chose not to haul a load or work for a period of time, he or she
was not disciplined or sanctioned. Petitioner and the drivers
were entitled to terminate their relationship at any time.
Petitioner provided all necessary equipment required to
secure the cargo hauled on its trucks. However, petitioner’s
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drivers were free to supply any additional equipment at their own
cost. Drivers paid for their own gloves, hand tools, and meals.
If a driver’s relationship with petitioner was severed, the
driver was free to take any equipment or accessories he or she
had provided.
Petitioner paid for all fuel, oil, highway use taxes, and
normal maintenance and repairs required to operate its trucks.
Petitioner was solely responsible for determining the nature and
timing of any repairs and/or maintenance of its trucks, and its
mechanics performed all the maintenance and repairs.10 The
drivers were not required to make any repairs or perform any
maintenance to the trucks, but they were obligated to comply with
the Federal motor carrier safety regulations, including those
provisions which required pretrip inspections.
Drivers were paid, on a weekly basis, between 23 percent and
27 percent of the 75 percent petitioner received for each hauled
load. The more loads a driver hauled each week, the more money
he or she earned.11
10
However, if a truck broke down in an area where it was
not feasible for petitioner to send one of its mechanics to make
repairs, or if the repairs needed were extensive, petitioner
hired a third party to make the repairs.
11
However, drivers were limited by the Federal motor
carrier safety regulations as to the amount of time they could
drive each day.
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During the periods at issue, petitioner filed Forms 1099-
MISC, Miscellaneous Income, for each of its drivers who worked
under the agreement.
In 1997, 1998, and 1999, respondent reclassified as
employees a total of 29, 24, and 21 drivers, respectively. Of
the drivers who were reclassified, 13 had contracted with
petitioner for more than 2 years and 4 had contracted with
petitioner for more than 3 years.
C. Day-to-Day Operations
When Ohio Transport had freight which needed to be
transported, ordinarily in the Midwest and frequently to States
adjoining Ohio, it or a mill12 working with Ohio Transport would
contact petitioner and instruct it as to the specifications of
the particular job. If petitioner had a truck available to haul
the load, it would offer the job to one of its drivers. If a
driver was unavailable or unwilling to accept the load, then the
load was offered to another driver.13
If a driver accepted the job, petitioner advised the driver,
in accordance with Ohio Transport’s or the mill’s directives, of
the time to pick up the load, the delivery location, and the
12
A mill was the facility where petitioner’s drivers would
travel to pick up a load of steel or other materials.
13
Petitioner also had the option of offering the load to
one, or more, of the owner-operators who had leased their trucks
to Ohio Transport.
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expected delivery time.14 The drivers carried beepers so that
petitioner could remain in contact while they were on the road.
Petitioner did not direct the routes drivers were to use in
either picking up or delivering loads.15 If a driver chose to
drive on a toll road, the driver was responsible for paying the
tolls.16 After a load was delivered, the driver could
immediately return to petitioner’s place of business with or
without a return load.17
D. Ohio Determination of Independent Contractor Status
On May 18, 1995, Richard Chatfield (Chatfield), one of
petitioner’s drivers, filed a claim with the Ohio Industrial
Commission (OIC) for workers’ compensation because of an injury
he suffered on May 2, 1995. By order dated October 25, 1995, the
Ohio Industrial Commission (OIC) disallowed Chatfield’s claim,
finding he was not an employee of petitioner on the date of
injury but an independent contractor who had failed to secure
14
The same information was provided to any owner-operator
who was offered, and accepted, an assignment to pick up and
transport a load.
15
However, the driver’s route was specified when Ohio
Transport obtained a special hauling permit to carry a load that
exceeded weight and/or width limitations.
16
Although the agreement stated petitioner would cover the
cost of toll roads, the parties stipulated that the drivers were
actually required to cover the costs of paying tolls.
17
Ordinarily, it was in petitioner’s and the driver’s best
interests for the driver to request petitioner to find a return
load.
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workers’ compensation for himself. The OIC order did not state
the basis for its determination.
On December 21, 1995, Chatfield filed an appeal in the Court
of Common Pleas, Trumball County, Ohio (court of common pleas).
By order dated August 21, 1996, pursuant to the journal entry of
the court of common pleas filed on June 18, 1996, the Bureau of
Workers’ Compensation (BWC) dismissed Chatfield’s appeal without
prejudice.
On June 26, 1997, another driver for petitioner, Kenneth G.
Jamison (Jamison), filed a claim for workers’ compensation
because of an injury he suffered on June 18, 1997. Basing its
decision upon a signed agreement between petitioner and Jamison
dated March 3, 1997, the BWC denied Jamison’s claim on August 25,
1997. Jamison appealed the denial of his claim to the OIC on
September 4, 1997. The OIC vacated the previous BWC order and
found without stating the grounds for its decision that Jamison
was an independent contractor who had not secured workers’
compensation for himself.
On December 16, 1997, Jamison filed an appeal in the court
of common pleas. On June 8, 1998, the court of common pleas
entered an order of voluntary dismissal without prejudice.
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OPINION
I. Employees v. Independent Contractors
Petitioner contends that for employment tax purposes during
the periods at issue the drivers of its trucks were independent
contractors, not employees.
The taxpayer has the burden of proving the existence of an
independent contractor relationship.18 See Rule 142(a); Ellison
v. Commissioner, 55 T.C. 142, 152 (1970). 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); secs. 31.3121(d)-1(c), 31.3306(i)-1,
Employment Tax Regs.
Whether an individual is a common law employee is a question
of fact, Ellison v. Commissioner, 55 T.C. 142, 152 (1970); sec.
31.3121(d)-1(c)(3), Employment Tax Regs., to be determined
applying the following factors: (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 to realize profit or loss; (4) whether the principal
can discharge the individual; (5) whether the work is part of the
18
Petitioner did not contend that the burden of proof was
placed upon respondent pursuant to act sec. 530(e)(4) as added by
the Small Business Job Protection Act of 1996, Pub. L. 104-188,
sec. 1122(b)(3), 110 Stat. 1767.
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principal’s regular business; (6) the permanency of the
relationship; and (7) the relationship the parties believed they
were creating, Ewens & Miller, Inc. v. Commissioner, 117 T.C.
263, 270 (2001); Weber v. Commissioner, 103 T.C. 378, 387 (1994),
affd. 60 F.3d 1104 (4th Cir. 1995); Potter v. Commissioner, T.C.
Memo. 1994-356. No single factor is dispositive. Ewens &
Miller, Inc. v. Commissioner, supra at 270. If an
employer-employee relationship exists, characterization by the
parties as some other relationship is immaterial. Sec.
31.3121(d)-1(a)(3), Employment Tax Regs.
A. Degree of Control
The “degree of control” test requires the Court to examine
not only the control exercised by an alleged employer, but also
the degree to which the alleged employer may intervene to impose
control. Weber v. Commissioner, supra at 387-388.
The agreement stated that “Peno Trucking Inc. shall not
direct in any manner the means or method by which Operator shall
perform his occupation” and “Operators shall, at all times
applicable hereto, work at the direction and control of” persons
or corporations petitioner contracts with to transport goods.
The stipulated facts and testimony clearly show otherwise.
Pursuant to the leases with Ohio Transport, petitioner was
responsible for hiring drivers, overseeing all work performed by
the drivers, confirming their work was performed in accordance
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with the leases, and directing, supervising, paying,
disciplining, and discharging the drivers.
Petitioner determined the days drivers could work and
controlled which loads the drivers would haul. Petitioner
required the drivers to have appropriate commercial drivers’
licenses, deliver the freight to certain places at certain times,
maintain driving logs and other documents, and carry beepers.19
Petitioner, not the drivers, determined whether truck repairs
were performed on the road or by its own mechanics and was
responsible for all truck maintenance costs incurred in
maintaining the trucks.
The fact that the drivers could choose the routes to take to
the specified destination, were liable to pay tolls, and could
stop and rest when desired does not mean petitioner did not
maintain the requisite control. For an employer-employee
relationship to exist, petitioner is not required to direct or
control the manner in which the services are performed, so long
as it has that right to do so if necessary. Sec.
31.3121(d)-1(c)(2), Employment Tax Regs.
It was unnecessary for petitioner to control the manner in
which the drivers completed their work because their work
19
At trial, Mr. Peno testified that petitioner did not
require its drivers to carry electronic communication devices.
However, a stipulated exhibit indicated petitioner required its
drivers to carry beepers, presumably so that it could maintain
contact while the drivers were on the road.
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required little supervision. See Day v. Commissioner, T.C. Memo.
2000-375. This factor indicates petitioner exercised control
over the drivers’ activities consistent with an employer-employee
relationship. See id.
B. Investment in Facilities
The fact that a worker provides his or her own tools
generally indicates a nonemployee status. Ewens & Miller, Inc.
v. Commissioner, supra at 271.
The drivers incurred some cost for tools and maintaining
their licenses.20 However, these costs were insignificant when
compared to petitioner’s substantial investment to acquire and
maintain the fleet of approximately 15 trucks. The drivers did
not pay any of the costs of operating the trucks or transporting
the freight. The agreement stated petitioner alone was
responsible for all maintenance of its equipment, all fuel, oil,
tolls,21 permits, and road fuel taxes incurred by the drivers on
dispatched trips while in petitioner’s trucks.
The relatively minor investment by the drivers and the
substantial investment by petitioner support an employer-employee
relationship.
20
The drivers provided their own hand tools and, at their
option, could provide ratchet binders to use rather than the snap
binders that were provided with the trucks.
21
Although the agreement stated petitioner would cover
those costs, the parties stipulated that the drivers were
actually required to cover the costs of paying tolls.
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C. Opportunity for Profit or Loss
A worker’s opportunity to earn a profit and assume risk of
loss may indicate a nonemployee status. Simpson v. Commissioner,
64 T.C. 974, 988 (1975). On the other hand, earning an hourly
wage or salary indicates an employer-employee relationship
exists. Del Monico v. Commissioner, T.C. Memo. 2004-92; Kumpel
v. Commissioner, T.C. Memo. 2003-265.
The drivers were not paid an hourly wage or salary. They
were paid 23 to 27 percent of the 75 percent petitioner received
per load hauled, and the amounts earned depended entirely upon
the number of trips they made. The drivers did not assume any
risk of loss. As stated in the agreement, a driver could not
incur any indebtedness on behalf of petitioner. This factor
indicates an employer-employee relationship.
D. Right To Discharge
Generally, an employers’ right to discharge an employee
indicates an employer-employee relationship. Sec. 31.3121(d)-
1(c)(2), Employment Tax Regs. The parties stipulated that
petitioner retained the right to discharge its drivers and the
drivers had a right to terminate their relationship with
petitioner. However, at trial Mr. Peno testified that he
personally would not terminate a driver; instead Ohio Transport
or the mills would ban the driver. Mr. Peno’s testimony as to
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this factor was self-serving and unreliable. This factor
indicates an employee-employer relationship.
E. Integral Part of Business
The drivers performed a service essential to petitioner’s
operation. The success of petitioner’s business depended, in
large part, upon the service performed by the drivers. Thus, the
drivers were an integral part of petitioner’s business. This
factor supports an employer-employee relationship. See Day v.
Commissioner, supra.
F. Permanency of the Relationship
A transitory work relationship may point toward a
nonemployee status. Ewens & Miller, Inc. v. Commissioner, 117
T.C. at 273. If, however, a person works in the course of the
employers’ trade or business, the fact that he does not work
regularly may be insignificant. Id.
The drivers worked in the course of petitioner’s business
rather than having a transitory relationship with petitioner.
This factor supports an employer-employee relationship. See id.
G. Relationship the Parties Thought They Created
Petitioner and its drivers entered into written agreements
which expressly provided that the drivers were independent
contractors. However, our findings with respect to the degree of
control exercised by petitioner, petitioner’s investment in the
trucks, the drivers’ lack of assumption of risk, the ability to
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discharge, the integration of the drivers into the business, and
the permanency of the relationship override any contrary
characterization contained in the agreement. See sec.
31.3121(d)-1(a)(3), Employment Tax Regs. Accordingly the Court
finds petitioner’s drivers were common law employees during the
periods at issue and, consequently, the payments to them during
these periods constituted wages subject to Federal employment
tax.
II. Whether Petitioner Is Eligible for Act Section 530 Relief
Petitioner contends it is entitled to relief pursuant to act
section 530. Congress enacted act section 530 to alleviate what
it perceived as the “‘overly zealous pursuit and assessment of
taxes and penalties against employers who had, in good faith,
misclassified their employees as independent contractors.’”
Ewens & Miller, Inc. v. Commissioner, supra at 276-277 (quoting
Boles Trucking, Inc. v. United States, 77 F.3d 236, 239 (8th Cir.
1996)). Act section 530(a)(1) shields a taxpayer who has
mistakenly not classified his workers as employees from
employment tax liability if the taxpayer had a reasonable basis
for not treating the workers as employees and has filed all
required Federal employment tax returns on a basis consistent
with this treatment. Petitioner never treated the drivers as
employees and consistently issued them Forms 1099-MISC. The
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question which remains is whether petitioner had a reasonable
basis for treating the drivers as nonemployees.
A taxpayer is treated as having a reasonable basis for not
treating an individual as an employee if the taxpayer reasonably
relied 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.
Sec. 530(a)(2).22
Petitioner’s sole contention is that it relied upon judicial
precedent in determining its drivers were independent
contractors, basing its decision on the court of common pleas’
rulings and the administrative and appeals decisions finding that
two of petitioner’s drivers were independent contractors.
22
A taxpayer who fails to come within any of the safe
harbors is still entitled to relief if the taxpayer can
demonstrate, in some other manner, a reasonable basis for not
treating the individual as an employee. Veterinary Surgical
Consultants, P.C. v. Commissioner, 117 T.C. 141, 147 (2001),
affd. sub nom. Yeagle Drywall Co. v. Commissioner, 54 Fed. Appx.
100 (3d Cir. 2002).
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For a taxpayer to have a reasonable basis for not treating
an individual as an employee under the judicial precedent safe
harbor, the judicial precedent relied upon must have evaluated
the employment relationship through a Federal common law
analysis. See sec. 3121(d); Nu-Look Design, Inc. v.
Commissioner, T.C. Memo. 2003-52, affd. 356 F.3d 290 (3d Cir.
2004); secs. 31.3121(d)-1(c), 31.3306(i)-1, Employment Tax Regs.
To come within the safe harbor, “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.” Nu-Look Design, Inc.
v. Commissioner, supra.
The record does not indicate that the BWC, the OIC, or the
court of common pleas evaluated the employment relationships of
petitioner’s former drivers, Chatfield and Jamison, through a
common law analysis. Only the BWC’s vacated order in the Jamison
case indicated the grounds for its decision: “The signed
agreement by and between Peno Trucking Inc. and the Injured
Worker dated 3/3/97.” Moreover, nothing in the record indicates
the rulings concerning Jamison and Chatfield were relied upon at
the time petitioner’s employment decisions were made. Petitioner
failed to establish that it relied upon judicial precedent or
otherwise provided a reasonable basis to disregard section
3121(d)(2) and sections 31.3121(d)-1(c) and 31.3306(i)-1,
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Employment Tax Regs. Therefore this Court finds petitioner is
not entitled to act section 530 relief for its drivers.
The Court, in reaching its holding, has considered all
arguments made and concludes that any arguments not mentioned
above are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.