T.C. Memo. 2013-64
UNITED STATES TAX COURT
MIECZYSLAW KUREK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5459-11. Filed February 28, 2013.
Mark S. Goldstein, for petitioner.
Joan Casali, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KERRIGAN, Judge: This case is before the Court on a petition for
redetermination of employment status. Respondent issued a Notice of
Determination of Worker Classification (notice of determination) for tax year 2005
regarding petitioner’s liabilities under the Federal Insurance Contribution
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[*2] Act (FICA), income tax withholding (ITW) imposed by sections 3401 through
3406, and the Federal Unemployment Tax Act (FUTA). Respondent determined
deficiencies with respect to petitioner’s Federal employment and unemployment tax
as follows:
Tax period ended Type of tax Amount
3/31/05 FICA $7,613.85
6/30/05 FICA 4,917.72
9/30/05 FICA 7,644.47
12/31/05 FICA 3,898.12
12/31/05 ITW 6,743.46
12/31/05 FUTA 8,572.37
Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect for the year at issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Respondent has conceded all additions to tax and penalties. The issues
remaining for consideration are (1) whether the workers listed in the notice of
determination should be legally classified as petitioner’s employees or as
independent contractors for all taxable periods in tax year 2005 and (2) whether
petitioner is entitled to relief under the Revenue Act of 1978, Pub. L. No. 95-600,
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[*3] sec. 530, 92 Stat. at 2885, as amended (section 530), which in certain
circumstances deems an individual not to be an employee.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. We incorporate by
reference the stipulation of facts and the attached exhibits.
Petitioner resided in New York at the time he filed the petition. During the
year in issue petitioner was the sole proprietor of KMA Construction. KMA
Construction made improvements to the interior of homes, such as kitchens,
bathrooms, and floors. KMA Construction engaged in installing tile, sheetrock,
doors, and windows, as well as painting and carpentry.
In tax year 2005 petitioner, through KMA Construction, worked on
approximately 20 to 30 projects in residences in Brooklyn, New York. Some
projects overlapped, and there were some gaps between projects. When petitioner
had time, he did the labor himself. Petitioner also hired the following individuals
(collectively, workers) to work for KMA Construction during the following
quarters of 2005:
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[*4] First Second Third Fourth
Individual quarter quarter quarter quarter
A.G. X X
B.S. X X X X
E.R. X X X X
G.P. X
J.P. X
L.K. X
M.K. X X
M.P. X X
P.B. X X X X
R.K. X X X X
R.U. X X X
R.P. X X
S.K. X X
S.Z. X X X
W.S. 1 X X X X
W.S. 2 X X X X
W.K. X X X X
W.R. X X
G.K. X X
D.M. X X X
K.T. X
K.M. X X X
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[*5] A.C. X X
J.O. X X
A.S. X X X
E.F. X
J.F. X
B.P. X X
S.G. X
Petitioner supervised the workers. He told the workers what work needed to
be done and set deadlines for the jobs. All workers worked on a project-to-project
basis; none worked full time for petitioner. The workers did not work under
business names or advertise to the public. Petitioner paid each worker a flat fee, as
negotiated for a particular job on a particular project. He paid each worker every
week according to the percentage of the work the worker completed. He paid the
workers by checks made out to them personally.
Petitioner also managed the day-to-day operations of KMA Construction.
Petitioner worked closely with the homeowner on each project. Petitioner discussed
with the homeowner the details of the work to be performed and the supplies
needed. Petitioner negotiated the cost of the project with the homeowner, factoring
in the payments that he negotiated with the workers. The homeowners paid
petitioner directly; the workers did not bill the homeowners for the work they
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[*6] performed. If there was a problem with the work, the homeowners spoke with
petitioner. Petitioner did not inform the homeowners that he would use
subcontractors or independent contractors.
The workers set their own hours and work schedules. Petitioner was at the
worksite only once a day or once every other day. Petitioner did not tell the
workers how to do their jobs, but he would replace workers if a deadline was
approaching or if a worker was holding up a job. If petitioner thought a worker was
doing the work improperly, he would order the worker to repair the problem or redo
the work. Petitioner testified that the workers were to bring in assistants, whom the
workers would have to pay themselves, but none of the workers used assistants.
Petitioner allowed the workers to work simultaneously on other projects with him or
with other construction groups. Petitioner required that the workers finish their
respective jobs by the deadlines he set.
The workers found their own transportation to the worksites. If a worker
was working on two of petitioner’s projects simultaneously, petitioner sometimes
drove the worker between the two worksites. The workers brought their own sets
of small tools, worth around $1,000, to the worksites. Petitioner did not reimburse
the workers for those tools. Petitioner bought or rented all larger tools, which he
left at the worksites. Petitioner purchased materials needed for the projects, and
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[*7] the homeowners would reimburse him. Occasionally, workers purchased
lightweight materials as needed during the project, and petitioner would reimburse
them.
Petitioner did not provide an office or any other facility for the workers.
Petitioner did not train the workers, and he did not offer them any employee
benefits. He did not provide sick or vacation pay, medical insurance, pension plans,
or other benefits. He did not carry unemployment insurance, severance pay, or
workers’ compensation insurance for the workers. Petitioner did not require the
workers to have any type of insurance or license.
Petitioner did not issue Forms 1099-MISC, Miscellaneous Income, or Forms
W-2, Wage and Tax Statement, to any of the workers for tax year 2005. He
likewise did not file Forms 941, Employer’s Quarterly Federal Tax Return, for any
quarters in tax year 2005 or a Form 940, Employer’s Annual Federal Unemployment
(FUTA) Tax Return, for tax year 2005. Petitioner did not pay any employment
taxes or remit periodic deposits for the workers.
On September 14, 2009, respondent prepared substitutes for returns for
petitioner’s Forms 941 for all quarters in tax year 2005 as well as a substitute for
return for petitioner’s Form 940 for tax year 2005. On December 13, 2010,
respondent sent petitioner the notice of determination.
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[*8] OPINION
I. Burden of Proof
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and a taxpayer bears the burden of proving those determinations
are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). This
principle applies to the Commissioner’s determination that a taxpayer’s workers are
employees. Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 268 (2001). If
an employer-employee relationship exists, its characterization by the parties as some
other relationship is immaterial. Sec. 31.3121(d)-1(a)(3), Employment Tax Regs.
Section 7491, which shifts the burden of proof to the Secretary in certain other
circumstances, does not apply to employment tax disputes. Sec. 7491(a)(1);
Charlotte’s Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 102 (2003), aff’d,
425 F.3d 1203 (9th Cir. 2005); Joseph M. Grey Pub. Accountant, P.C. v.
Commissioner, 119 T.C. 121, 123 n.2 (2002), aff’d, 93 Fed. Appx. 473 (3d Cir.
2004).
II. The Workers’ Legal Classification
Employers and employees are subject to “employment taxes”, i.e., FICA and
FUTA. FICA provides a Social Security tax payable by both employers and
employees. See secs. 3101, 3111. FUTA provides for unemployment taxes
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[*9] payable by employers. See secs. 3301-3311. Employers are required to
withhold FICA tax and Federal income tax on wage payments they make to their
employees. See secs. 3102, 3402. These employment taxes do not apply to
payments to independent contractors.
Whether an individual is an employee or an independent contractor is a
factual question to which common law principles apply. Weber v. Commissioner,
103 T.C. 378, 386 (1994), aff’d per curiam, 60 F.3d 1104 (4th Cir. 1995); see secs.
3121(d)(2), 3306(i). In determining whether a worker is an employee or an
independent contractor, the Court considers (1) the degree of control exercised by
the principal over the details of the work; (2) which party invests in the 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. at 270; Weber v. Commissioner, 103 T.C. at 387. All of
the facts and circumstances are considered, and no one factor dictates the outcome.
Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 270.
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[*10] A. Degree of Control
The right of the principal to exercise control over the agent, whether or not
the principal in fact does so, is the “crucial test” for the existence of an employer-
employee relationship. Weber v. Commissioner, 103 T.C. at 387; Atl. Coast
Masonry, Inc. v. Commissioner, T.C. Memo. 2012-233, at *15. Under the common
law, an employer-employee relationship exists when the principal has the right to
control and direct the service provider regarding the result and how the result is
accomplished. Secs. 31.3121(d)-1(c)(2), 31.3306(i)-1(b), 31.3401(c)-1(b)
Employment Tax Regs. The principal need not actually direct or control the manner
in which the services are performed; the principal need only have the right to do so.
See Weber v. Commissioner, 103 T.C. at 388; Twin Rivers Farm, Inc. v.
Commissioner, T.C. Memo. 2012-184, slip op. at 7. Similarly, the principal need
not set the worker’s hours or supervise every detail of the work environment to
control the worker. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 270 (citing
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.
Petitioner failed to prove that he did not have control over the workers.
Although the workers set their own hours, petitioner set deadlines and monitored
the work done, visiting the worksite daily or every other day. Petitioner (1) had
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[*11] the ultimate authority in instructing the workers with respect to what they
were do to; (2) had the right to approve the quality of their work; and (3) paid them
weekly rather than at the end of the project. See Atl. Coast Masonry, Inc. v.
Commissioner, at *15-*16. Moreover, only petitioner communicated with the
homeowner, and he alone was responsible for the success of the project. This factor
weighs heavily in favor of classifying the workers as employees.
B. Investment in Facilities
The fact that a worker provides his or her own tools generally indicates
independent contractor status. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at
271. Likewise, the fact that a worker provides his or her own goods indicates
independent contractor status. See id. Petitioner supplied all heavy tools, but the
workers owned the small tools they used to perform the bulk of their work.
Petitioner purchased all materials used by the workers, but often the homeowners
reimbursed him for the materials. See Atl. Coast Masonry, Inc. v. Commissioner, at
*16-*17. If a worker purchased any materials, petitioner would reimburse him.
Petitioner did not provide the workers with offices or any other facilities. This
factor weighs slightly in favor of classifying the workers as employees.
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[*12] C. Opportunity for Profit and Risk of Loss
Petitioner paid the workers a negotiated flat fee. This insulated the workers
from suffering a loss if the project went over budget and prevented them from
realizing profit if the project finished under budget. See id. at *16. The flat fee
payment also prevented workers from increasing their earnings from petitioner
through their efforts. This factor weighs in favor of classifying the workers as
employees.
D. Right To Discharge the Workers
Employers typically have the right to terminate employees at will. Ellison v.
Commissioner, 55 T.C. 142, 155 (1970); Atl. Coast Masonry, Inc. v.
Commissioner, at *18; John Keller, Action Auto Body v. Commissioner, T.C.
Memo. 2012-62, slip op. at 11. Although petitioner hired the workers on a project-
to-project basis, he could replace any worker who did not meet a deadline or did not
perform to petitioner’s satisfaction. This factor weighs in favor of classifying the
workers as employees.
E. Integral Part of the Business
When workers are an essential part of a taxpayer’s normal operations this
factor generally weighs in favor of an employee-employer relationship. See Atl.
Coast Masonry, Inc. v. Commissioner, at *18; John Keller, Action Auto Body v.
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[*13] Commissioner, slip op. at 12. Although petitioner performed some work
himself, the workers were an essential part of petitioner’s business. The record
indicates that without them, petitioner would not have had time to finish 20 to 30
projects in one year, while finding new projects and working closely with the
homeowners. This factor weighs in favor of classifying the workers as employees.
F. Permanency of the Relationship
A transitory work relationship may point toward independent contractor
status. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 273. In considering the
permanency of the relationship, we must also consider the principal’s right to
discharge the worker, and the worker’s right to quit, at any time. Id.; John Keller,
Action Auto Body v. Commissioner, slip op. at 13.
Petitioner engaged workers for only one project at a time. See Atl. Coast
Masonry, Inc. v. Commissioner, at *19. None of the workers worked full time; only
seven workers worked all four quarters. The workers were free to work on other
projects with petitioner or with other construction groups. Petitioner, however,
could discharge a worker at any time. This factor weighs slightly in favor of
classifying the workers as independent contractors.
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[*14] G. The Relationship the Parties Believed They Created
Both petitioner and witness Jan Pieniuk, one of the workers, credibly testified
that petitioner and the workers believed they created an independent contractor
relationship. This factor weighs in favor of classifying the workers as independent
contractors.
After weighing the above factors, we conclude that the workers listed in the
notice of determination were petitioner’s employees for tax year 2005.
III. Section 530 Relief
Section 530 may afford a taxpayer relief from employment taxes even if the
relationship between the principal and the worker would otherwise require the
payment of those taxes. Charlotte’s Office Boutique, Inc. v. Commissioner, 121
T.C. at 106. Section 530(a)(1) provides relief if the principal satisfies the
following requirements: (1) the principal has not treated the worker as an
employee for any period; (2) the principal has consistently treated the worker as not
being an employee on all tax returns for periods after December 31, 1978; and (3)
the principal had a reasonable basis for not treating the worker as an employee.
Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. at 130. The
principal must satisfy all three requirements to qualify for relief under section
530(a)(1). Id.
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[*15] Petitioner fails to meet the second requirement. For a taxpayer to consistently
treat the worker as an independent contractor on his or her tax returns, the taxpayer
must file Forms 1099-MISC as required by sections 6041(a) and 6041A(a). See
John Keller, Action Auto Body v. Commissioner, slip op. at 15 (noting that for tax
periods after December 31, 1978, section 530 affords relief only if the taxpayer filed
required tax or information returns and citing Gen. Inv. Corp. v. United States, 823
F.2d at 341); see also secs. 1.6041-1(a)(1) and (2), 1.6041-6, Income Tax Regs.
Petitioner never filed Forms 1099-MISC for any of the workers. Accordingly,
petitioner does not qualify for relief under section 530.
IV. Conclusion
We hold that the workers listed in the notice of determination were
petitioner’s employees for tax year 2005 and that he is liable for Federal
employment taxes as determined by respondent. Contentions we have not
addressed are irrelevant, moot, or meritless.
To reflect the foregoing and respondent’s concessions,
An appropriate decision will be
entered.