T.C. Memo. 2007-346
UNITED STATES TAX COURT
JUAN RAMIREZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12139-06. Filed November 26, 2007.
Juan Ramirez, pro se.
Milton B. Blouke and Michael W. Berwind, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: The petition in this case was filed in
response to a Notice of Determination of Worker Classification
regarding petitioner’s liabilities pursuant to the Federal
Insurance Contributions Act (FICA) and the Federal Unemployment
Tax Act (FUTA) for quarterly periods of 2003. After concessions,
the issues for decision are:
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(1) Whether Alfredo L. Hernandez, Carlos Ramirez, and
Raul Ramirez were employees of petitioner’s waterproofing
business or independent contractors during 2003;
(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 (Revenue Act section 530);
(3) whether petitioner is subject to the addition to
tax under section 6651 for failing to file Form 940,
Employer’s Annual Federal Unemployment (FUTA) Tax Return,
and Form 941, Employer’s Quarterly Federal Tax Return, for
the periods in issue; and
(4) whether petitioner is subject to the addition to
tax under section 6656 for failing to make deposits of FICA
taxes for the periods in issue.
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the year 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 resided in California at the time he filed his
petition. For purposes of trial only, this case was consolidated
with a related Federal income tax case at docket No. 12141-06.
From 1999 through 2003, petitioner operated a waterproofing
business as a sole proprietorship called J.R. Waterproofing.
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Petitioner’s business generally provided waterproofing services
of decks, shower stalls, and stairways. Alfredo L. Hernandez
(Hernandez), Carlos Ramirez, and Raul Ramirez (collectively,
workers) all worked on a regular basis for petitioner at J.R.
Waterproofing in 2003. Hernandez is petitioner’s brother-in-law,
Carlos Ramirez is petitioner’s nephew, and Raul Ramirez is
petitioner’s brother. The duties of petitioner’s workers
generally involved picking up materials for a job at petitioner’s
residence and transporting them to a particular job site,
cleaning and preparing the surface of a job site, cutting stucco,
providing flashing, installing drains, laying burlap and
fiberglass, and installing mastic and several coats of waterproof
materials.
Petitioner controlled each job site, delegated
responsibilities, and directed each of his worker’s actions to
varying degrees based on the individual worker’s respective
experience. Although the workers often used their own tools to
perform jobs for petitioner, petitioner provided all materials
for each job and reimbursed his workers for expenses incurred on
the job. The materials for each job were generally picked up at
petitioner’s house by the workers, although petitioner also sent
the workers to other locations to pick up materials, for which
petitioner had already paid. Petitioner maintained three trucks
for his waterproofing business in 2003, and his workers often
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used the trucks to drive to various job sites and to perform
their duties. Petitioner also provided all three workers with
cell phones and cell phone service in 2003.
Petitioner’s workers were usually paid standard amounts on a
weekly basis throughout 2003. Raul Ramirez was paid by check,
mostly in $600 and $700 amounts. Carlos Ramirez was usually paid
$500 by check. Hernandez was usually paid by check in November
and December 2003 in amounts slightly more or less than $500.
Petitioner also paid Hernandez $7,550 in cash throughout 2003.
Petitioner provided bonus checks to all three workers on
December 24, 2003. Generally, petitioner’s payments to his
workers were based on work performed, but he paid his workers the
same basic amount weekly even when there was a lack of work in
his waterproofing business in general or a lag in the amount of
work required of them individually.
Petitioner employed an accountant to prepare his Federal
employment tax forms and returns for 2003. Petitioner filed
Forms 1099-MISC, Miscellaneous Income, reporting nonemployee
compensation payments made to his workers in 2003. Petitioner
provided the information and documents that his accountant used
in preparing his returns.
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OPINION
I. Employment Status
Under subtitle C of the Internal Revenue Code, an employer
is obligated both to pay certain employment taxes imposed on
employers and also to withhold from employees’ wages certain
taxes imposed on employees. Sections 3111 and 3301 impose the
employer-level taxes under FICA (pertaining to Social Security)
and FUTA (pertaining to unemployment), respectively, based on
wages paid to employees (employment taxes). Section 3101 imposes
a FICA tax at the employee level as well, which section 3102
requires the employer to collect from the employee’s wages.
Section 3402 requires an employer to withhold from his employee’s
wages the employee’s share of Federal income tax, and section
3501 requires the employer to deposit amounts withheld with the
Treasury of the United States. If the employer fails to withhold
as required, he is liable for the amounts owed by the employee,
but required to be withheld by the employer. Sec. 3403.
With regard to 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); accord sec.
3306(i). Sections 31.3121(d)-1(c)(2) and 31.3306(i)-1(b),
Employment Tax Regs., define an “employer-employee relationship”
as follows:
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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
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 of 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. * * *
See also sec. 31.3401(c)-1(b), Employment Tax Regs.
We consider the following factors in deciding 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 worker; (3) the
opportunity of the worker for profit or loss; (4) whether the
principal can discharge the worker; (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. Ewens & Miller, Inc. v. Commissioner, 117 T.C.
263, 270 (2001); Weber v. Commissioner, 103 T.C. 378, 387 (1994),
affd. per curiam 60 F.3d 1104 (4th Cir. 1995). We consider all
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of the facts and circumstances of each case, and no single factor
is determinative. Ewens & Miller, Inc. v. Commissioner, supra at
270; Weber v. Commissioner, supra at 387.
Although not the exclusive inquiry, the degree of control
exercised by the principal over the worker is the crucial test in
determining the nature of a working relationship. See Clackamas
Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440, 448
(2003); Matthews v. Commissioner, 92 T.C. 351, 361 (1989), affd.
907 F.2d 1173 (D.C. Cir. 1990). To retain the requisite degree
of control over an employee, the employer need not direct the
employee’s every move; it is sufficient if he has the right to do
so. Weber v. Commissioner, supra at 387; see sec. 31.3401(c)-
1(b), Employment Tax Regs. In this case, petitioner controlled
each job site, delegated responsibilities, and directed each of
his worker’s actions to varying degrees based on the individual
worker’s respective experience. This factor denotes the
existence of an employment relationship.
If a worker provides his own tools to perform a task for his
principal, this may indicate that the worker is an independent
contractor. See Breaux & Daigle, Inc. v. United States, 900 F.2d
49, 53 (5th Cir. 1990) (citing United States v. Silk, 331 U.S.
704, 706 (1947)). In this case, although the workers often used
their own tools to perform jobs for petitioner, petitioner
provided all materials for each job and reimbursed his workers
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for expenses incurred on the job. The materials for each job
were generally picked up at petitioner’s house by the workers,
although petitioner also sent them to other locations to pick up
materials, for which petitioner had already paid. Petitioner
maintained three trucks for his waterproofing business in 2003,
and his workers often used the trucks to drive to various job
sites and to perform their duties. Petitioner also provided all
three workers with cell phones and cell phone service in 2003.
These facts show that petitioner provided the general work
facilities for his workers. This factor denotes an employment
relationship.
We have held that, where a worker earns a salary and is
reimbursed for any expenses, he is not in a position to increase
his profit by his own actions and is not at a risk for loss. See
Weber v. Commissioner, supra at 390-391. In this case,
petitioner testified that, after netting out the cost of
materials, he split the payments he received from customers for
particular jobs among himself and his workers. Petitioner has
provided no documentation or testimony regarding how these
calculations were made or how he kept track of amounts owed to
the workers on particular jobs. The workers were usually paid
standard amounts on a weekly basis throughout 2003. With only
minor variance, Raul Ramirez was paid by check in mostly $600 and
$700 amounts. Carlos Ramirez was usually paid $500 by check.
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Hernandez was paid by check in November and December 2003 in
amounts slightly more or less than $500. Petitioner also paid
Hernandez $7,550 in cash throughout 2003. Petitioner’s payments
to his workers were based on work performed generally, but he
paid his workers the same basic amount weekly even when there was
a lack of work in his waterproofing business in general or a lag
in the amount of work required of them individually. Petitioner
also provided bonus checks to all three workers on December 24,
2003. Petitioner’s workers generally received the same regular
payments regardless of how much money was being taken in by
petitioner from his customers. This lack of an opportunity for
profit or loss on the part of petitioner’s workers is consistent
with an employment relationship.
Petitioner maintained a substantial degree of control over
his workers and the job sites in general. The most reasonable
inference from the evidence is that he would have been able to
hire or fire his workers at will, regardless of whether he ever
exercised that right.
Petitioner’s regular business was the waterproofing industry
with which he and his workers were involved during 2003.
Petitioner’s workers were regularly employed by petitioner in
2003 and worked on petitioner’s many different job sites
throughout the year. Although the workers asserted at trial that
they were independent contractors, their testimony on other
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aspects of their working relationships with petitioner generally
reveals that their practices and expectations with regard to
their jobs were those of employees, not of independent
contractors.
On review of the entire record and weighing of the factors
discussed above, we conclude that petitioner’s workers were
employees during 2003.
II. Revenue Act Section 530 Relief
Notwithstanding the existence of an employer-employee
relationship, Revenue Act section 530 operates in enumerated
circumstances to afford relief from employment tax liability.
Revenue Act section 530 provides in relevant 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,
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.
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(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.
Respondent does not dispute that petitioner meets the first two
requirements of Revenue Act section 530(a)(1). Petitioner has
never treated any of his workers as employees for Federal
employment tax purposes, and he has timely filed all required
returns for the periods in issue and for prior periods on a basis
consistent with his treatment of the workers as independent
contractors. However, respondent argues that petitioner did not
have a reasonable basis for treating his workers as independent
contractors instead of employees, and thus fails the third
element of the Revenue Act section 530(a)(1) test.
Under Revenue Act section 530(e)(4), the burden of proof is
placed on respondent if, in addition to cooperating with
reasonable requests from respondent, petitioner establishes a
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prima facie case that it was reasonable not to treat an
individual as an employee for employment tax purposes. Small
Business Job Protection Act of 1996, Pub. L. 104-188, sec.
1122(a), 110 Stat. 1766 (adding subsection (e) to Revenue Act
section 530). Because, as explained below, petitioner has failed
to establish a prima facie case that his treatment of his workers
for employment tax purposes was reasonable, respondent does not
bear the burden of proof in this case.
Revenue Act section 530(a)(2) sets forth three statutory
safe harbors for purposes of establishing reasonable basis.
Reasonable reliance upon any of the circumstances enumerated in
subparagraph (A), (B), or (C) of Revenue Act section 530(a)(2) is
deemed sufficient to establish the requisite reasonable basis.
With regard to Revenue Act section 530(a)(2)(A), petitioner has
presented no judicial precedent, published ruling, technical
advice, or letter ruling on which he relied in treating his
workers as independent contractors. With regard to subparagraphs
(B) and (C), petitioner has not provided evidence that there was
a past employment tax audit in which his classification of the
workers was not challenged, nor has he provided evidence that
treating the workers as independent contractors was in accordance
with a long-standing practice within the waterproofing industry.
The safe havens of Revenue Act section 530(a)(2) are therefore
inapplicable on the record before us. We conclude that
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petitioner had no reasonable basis for failing to characterize
his workers as employees. Consequently, relief from employment
tax liability is not available to petitioner under Revenue Act
section 530.
III. Additions to Tax
Respondent determined an addition to tax under section
6651(a)(1) for the periods in issue in 2003. Section 6651(a)(1)
provides for an addition to tax of 5 percent of the tax required
to be shown on the return for each month or fraction thereof for
which there is a failure to file, not to exceed 25 percent.
However, the addition to tax for failure to file is not imposed
if it is shown that the failure to file did not result from
willful neglect and was due to reasonable cause. See United
States v. Boyle, 469 U.S. 241, 245 (1985). To prove reasonable
cause, the taxpayer must show that he exercised ordinary business
care and prudence but nevertheless could not file the return when
it was due. See Crocker v. Commissioner, 92 T.C. 899, 913
(1989); sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Respondent
also determined an addition to tax under section 6656 with regard
to petitioner’s tax liability. Section 6656 imposes an addition
to tax equal to 10 percent of the portion of an underpayment in
employment tax that is required to be deposited if the failure to
deposit is more than 15 days. A taxpayer may also avoid the
addition to tax under section 6656 if his failure to deposit was
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due to reasonable cause and not willful neglect. Charlotte’s
Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 109 (2003),
affd. 425 F.3d 1203 (9th Cir. 2005).
Under section 7491(c), respondent has the burden of
production with regard to additions to tax and must come forward
with sufficient evidence indicating that it is appropriate to
impose an addition to tax. Higbee v. Commissioner, 116 T.C. 438,
446 (2001). Because it is undisputed that petitioner filed no
employment tax returns and deposited no employment taxes with the
Treasury, respondent has carried the burden of production under
section 7491(c) with regard to the additions to tax under both
section 6651 and section 6656.
Petitioner claims that he had reasonable cause for failing
to file his returns and to deposit employment taxes due because
he relied upon his tax return preparer to prepare his tax returns
properly. However, petitioner has not established that he sought
specific advice from his return preparer regarding the legal
status of his workers for employment tax purposes or that he
provided his return preparer with all relevant information
regarding the nature of their employment. Also, petitioner did
not call his return preparer as a witness. Petitioner has not
established reasonable cause for his failure to file returns or
his failure to deposit, and respondent’s determinations with
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respect to the additions to tax under sections 6651(a)(1) and
6656 are sustained.
IV. Conclusion
We hold that Hernandez, Carlos Ramirez, and Raul Ramirez
were employees of petitioner during the periods in issue and that
petitioner is not entitled to relief under Revenue Act section
530. Accordingly, petitioner is liable for FICA and FUTA taxes
for the periods in issue as determined by respondent. We also
hold that petitioner is liable for the additions to tax
determined by respondent pursuant to sections 6651(a)(1) and
6656.
To reflect the foregoing,
Decision will be entered
for respondent.