T.C. Memo. 2013-161
UNITED STATES TAX COURT
KADIMAH CHAPTER KIRYAT UNGVAR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27494-11. Filed July 1, 2013.
Kenneth H. Silverberg and Jason Gonzalez, for petitioner.
Linda P. Azmon, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KERRIGAN, Judge: Respondent issued a notice of determination of worker
classification regarding petitioner’s liabilities under the Federal Insurance
Contribution Act (FICA) and petitioner’s income tax withholding (ITW) imposed
by sections 3401 through 3406 for the last three quarters of tax year 2004 and all
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[*2] quarters in tax years 2005, 2006, and 2007 (taxable periods at issue).
Respondent reclassified four persons--Marcel Gross, Avrohom Zachariash,1 Mark
Knopfler, and Myron Schwartz--as petitioner’s employees for the taxable periods
at issue and determined deficiencies with respect to petitioner’s Federal
employment taxes as follows:
Tax period ended Type of tax Amount
6/30/04 FICA $39,100
6/30/04 ITW 63,888
9/30/04 FICA 3,380
9/30/04 ITW 10,500
12/31/04 FICA 4,688
12/31/04 ITW 16,126
3/31/05 FICA 4,284
3/31/05 ITW 7,000
6/30/05 FICA 5,355
6/30/05 ITW 8,750
9/30/05 FICA 2,295
9/30/05 ITW 3,750
12/31/05 FICA 2,068
12/31/05 ITW 5,000
1
We note that the stipulation of facts lists Mr. Zachariash’s first name as
Avrohom while the transcript of record lists it as Abraham.
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[*3] 3/31/06 FICA 2,295
3/31/06 ITW 3,750
6/30/06 FICA 2,907
6/30/06 ITW 4,750
9/30/06 FICA 3,060
9/30/06 ITW 5,000
12/31/06 FICA 5,814
12/31/06 ITW 9,500
3/31/07 FICA 3,978
3/31/07 ITW 4,977
6/30/07 FICA 3,443
6/30/07 ITW 4,2612
9/30/07 FICA 8,798
9/30/07 ITW 10,543
12/31/07 FICA 3,443
12/31/07 ITW 3,990
Respondent also determined that petitioner was liable for additions to tax
under section 6651(a)(1) and (2) and penalties under section 6656 as follows:
Additions to tax
Sec. Sec. Penalty
Year 6651(a)(1) 6651(a)(2) sec. 6656
2004 $30,978 $34,420 $2,358
2005 8,663 9,626 700
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[*4] 2006 8,342 9,192 704
2007 11,652 10,671 983
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the taxable periods at issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure. We round all monetary
amounts to the nearest dollar.
The parties have reached a settlement to legally classify Messrs. Gross,
Zachariash, and Knopfler as petitioner’s employees for the taxable periods at
issue. The parties have deemed that some of the amounts paid to Messrs. Gross,
Zachariash, and Knopfler are wages, and the parties have agreed that petitioner is
liable for tax under FICA and for ITW with respect to those wages. The parties
have also agreed that petitioner is liable for additions to tax under section
6651(a)(1) and penalties under section 6656 with respect to those wages.
Respondent has conceded that petitioner is not liable for additions to tax
pursuant to section 6651(a)(2) with respect to wages paid to all four workers,
including Mr. Schwartz.
The issues remaining for consideration are the following: (1) whether Mr.
Schwartz should be legally classified as petitioner’s employee for the taxable
periods at issue; (2) whether petitioner is entitled to relief under the Revenue Act
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[*5] of 1978, Pub. L. No. 95-600, sec. 530, 92 Stat. at 2885, as amended (section
530), which deems an individual not to be an employee in certain circumstances,
with respect to Mr. Schwartz; (3) whether petitioner is liable for additions to tax
under section 6651(a)(1) with respect to wages paid to Mr. Schwartz; and (4)
whether petitioner is liable for penalties under section 6656 with respect to wages
paid to Mr. Schwartz.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. Petitioner, a corporation
exempt from Federal taxation pursuant to section 501(c)(3), had its principal place
of business in New York at all relevant times.
Petitioner’s Incorporation
Petitioner was incorporated in New York on November 2, 1992, under
article 10 of the Religious Corporations Law of New York.
According to petitioner’s certificate of incorporation, petitioner was
organized to maintain a house of worship with a principal place of worship in
Brooklyn, New York. The certificate of incorporation states that petitioner was
“organized exclusively for one or more of the * * * purposes * * * specified in
Sec. 501(c)(3) of the Internal Revenue Code of 1954, and shall not carry on any
activities not permitted to be carried on by a corporation exempt from Federal
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[*6] income tax under Sec. 501(c)(3) of the Internal Revenue Code of 1954”. The
certificate of incorporation further states that “no part of * * * [petitioner’s] net
earnings * * * shall inure to the benefit of any member, trustee, director, officer of
the corporation, or any private shareholder (except that reasonable compensation
may be paid for services rendered to or for the corporation) and no member,
trustee, or officer shall be entitled to share in the distribution of any of the
corporate assets upon dissolution of the corporation.”
Petitioner’s original board of directors and trustees (board) included Mr.
Schwartz and Mr. Knopfler. Mr. Knopfler, who served as trustee director, was
trained as a certified public accountant. Mr. Schwartz resigned from his position
on the board in January 1998. Upon Mr. Schwartz’s resignation, Messrs. Gross
and Zachariash joined Mr. Knopfler as members of the board. Mr. Gross earned a
bachelor’s degree in accounting and ran his own accounting firm, which had other
exempt organizations as clients. Messrs. Gross, Zachariash, and Knopfler
remained on the board during the taxable periods at issue. Mr. Knopfler died in
2010.
Since incorporation petitioner has never filed any Federal income tax
returns, including Forms 1120, U.S. Corporation Income Tax Return, and Forms
990, Return of Organization Exempt From Income Tax. Likewise, petitioner has
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[*7] never filed any Federal employment tax returns, including Forms 941,
Employer’s Quarterly Federal Tax Return; Forms 940, Employer’s Annual Federal
Unemployment (FUTA) Tax Return; and Forms 945, Annual Return of Withheld
Federal Income Tax.
Rabbi Bernard J. Schwartz
Rabbi Schwartz was born in 1914. His son, Mr. Schwartz, was born in
1951. From 1965 through 1990 Rabbi Schwartz was the rabbi at Temple
Kadimah, an independent Jewish congregation unaffiliated with any other
synagogue. Temple Kadimah was located in a three-story building in Brooklyn,
New York. Rabbi Schwartz owned the building until 1993. While Rabbi
Schwartz was at Temple Kadimah, the first floor of the building operated as a
synagogue, the second floor operated as a Hebrew school, and the third floor
operated as a residence for Rabbi Schwartz, his wife, and Mr. Schwartz.
In 1990 Rabbi Schwartz retired from Temple Kadimah. He was not
employed as a rabbi by any organization after his retirement. Before he retired,
Rabbi Schwartz arranged for the funds in Temple Kadimah’s bank account to be
transferred to a bank account in petitioner’s name. Rabbi Schwartz was never
affiliated with petitioner. He never provided services to petitioner, he was never a
member of petitioner’s board, and he never possessed signatory authority over any
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[*8] of petitioner’s bank accounts. Rabbi Schwartz died in October 2005. Mr.
Schwartz died in January 2010.
Rabbi Menashe Klein
Rabbi Klein was well known in petitioner’s community and abroad. He was
a member of the Jewish Decisers and received questions throughout the world
about Jewish law and custom. Rabbi Klein presided over Khal Ungvar, an
incorporated congregation and synagogue legally distinct from petitioner. At all
relevant times Khal Ungvar was exempt from Federal income tax pursuant to
section 501(c)(3), and its principal place for the conduct and operation of religious
services and business operations was in Brooklyn, New York.
Khal Ungvar’s constitution and bylaws state that “[t]he objectives of Khal
Ungvar shall be exclusively religious, charitable and educationable within the
meaning of section 501(c)(3)” and that “the function of Khal Ungvar will be to
serve as a synagouge [sic].” Additionally, Khal Ungvar’s constitution and bylaws
state that Khal Ungvar may exercise the power, among other things, “[t]o solicit,
accept, receive, hold and administer funds exclusively for * * * [Khal Ungvar’s
stated objectives] and to that end, to take and receive by bequest, devise, gift or
benefit of trust (but not as trustee of any trust)”. Finally, Khal Ungvar’s
constitution and bylaws state that “Khal Ungvar shall not be conducted or
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[*9] operated for profit and no part of the net earnings of Khal Ungvar shall inure
to the benefit of any member or individual” and that “no part of the net earnings,
property or assets of Khal Ungvar shall be used other than for * * * [Khal
Ungvar’s stated objectives].”
Messrs. Gross, Zachariash, and Knopfler all had close relationships with
Rabbi Klein. Mr. Gross was one of Rabbi Klein’s former students. They had a
close business and familial relationship; they spoke at least once a week. Mr.
Zachariash was Rabbi Klein’s secretary. He has worked at Khal Ungvar for over
20 years.2 Mr. Zachariash compared his experience with Rabbi Klein to that of the
Papal secretary. Mr. Knopfler was one of Rabbi Klein’s former students as well as
his close disciple and adviser.
Rabbi Klein was never affiliated with petitioner. He never provided
services to petitioner, he was never a member of petitioner’s board, and he never
possessed signatory authority over any of petitioner’s bank accounts. Rabbi Klein
died in 2011.
2
At trial Mr. Zachariash testified that he worked for Kiryat Ungvar, an
Israeli nonprofit organization legally distinct from petitioner, but the rest of the
record, including the stipulation of facts, indicates that he worked for Khal
Ungvar.
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[*10] The Kings Point Residence
On November 19, 1992, petitioner purchased a residence in Kings Point,
New York (Kings Point residence). Mr. Schwartz found the Kings Point residence
for petitioner. Before the purchase Mr. Schwartz retained a real estate appraiser
who prepared a comparative sales analysis for him. Petitioner did not obtain a
mortgage or any type of loan to purchase the Kings Point residence, which had a
tennis court and a swimming pool. Soon after the purchase petitioner agreed to
lease the Kings Point residence to “the family of Rabbi Bernard J. Schwartz”,
which included Rabbi Schwartz’s wife and Mr. Schwartz, for a nominal fee on a
month-to-month basis.
Mr. Schwartz was responsible for maintaining the premises and property of
the Kings Point residence. He managed the property, landscaped, maintained the
pool, removed snow, made repairs, maintained the property’s heating and air
conditioning, and performed other general maintenance services. The bills related
to the Kings Point residence were in petitioner’s name. Mr. Schwartz paid those
bills on petitioner’s behalf with money from petitioner’s bank accounts.
Mr. Schwartz maintained homeowners insurance for the Kings Point
residence in his name from 1994 through 2004. During that time petitioner did not
maintain insurance coverage for the Kings Point residence in its own name. In
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[*11] October 1999 Mr. Schwartz applied for homeowners insurance with Royal
& Sunalliance. On the application for insurance Mr. Schwartz listed himself as
the owner and “T Kadimah Chapter” as a mortgage interest holder. “T Kadimah
Chapter” did not hold a mortgage interest in the Kings Point residence at that time.
In 2000 Mr. Schwartz (as “Rev. M. Jay Schwartz”) filed a Form RP-462,
Application for Exemption From Real Property Taxes for Property Used as
Residence of Officiating Clergy (“Parsonage” or “Manse”), with the New York
State Department of Taxation and Finance for the Kings Point residence. On the
application, under “name of religious corporation”, Mr. Schwartz wrote
petitioner’s name. In 2002 Rabbi Joel Weiss, in his capacity as a member of
petitioner’s board, filed a Form RP-420-a/b-Rnw-II, Renewal Application for Real
Property Tax Exemption for Nonprofit Organizations II--Property Use, with the
New York State Department of Taxation and Finance for the Kings Point
residence.
In 2003 Rabbi Schwartz moved to a nursing home, and Mr. Schwartz moved
to a new address. By that time, Rabbi Schwartz’s wife had passed away. Mr.
Schwartz continued to visit the Kings Point residence approximately three days
per week, using the pool during the summer and sleeping there at least one night
per week, through June 2004.
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[*12] Sale of the Kings Point Residence
At a time not specified in the record, Mr. Schwartz discussed the sale of the
Kings Point residence with Messrs. Gross and Knopfler. Mr. Schwartz then found
a buyer for the Kings Point residence. He also retained an appraiser and an
attorney to aid petitioner with the sale.
On January 6, 2003, petitioner entered into a contract to sell the Kings Point
residence. That same day members of petitioner’s board authorized the sale,
memorializing their unanimous consent in a document (unanimous written
consent). The board’s unanimous written consent stated that (1) petitioner no
longer maintained a viable congregation; (2) petitioner was affiliated with Khal
Ungvar, an active Jewish congregation incorporated under the Religious
Corporations Law of New York and exempt from Federal taxation pursuant to
section 501(c)(3); and (3) the proceeds from the sale of the Kings Point residence
should be distributed to Khal Ungvar.
Because petitioner is a religious corporation, the sale had to be approved by
the attorney general of New York. Mr. Schwartz retained an attorney on
petitioner’s behalf to aid petitioner with a petition for approval of sale. In its
petition for approval of sale petitioner requested leave to sell the Kings Point
residence, petitioner’s sole asset. Petitioner stated that it was contemplating
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[*13] dissolution after the sale and requested that it be allowed to distribute the
sale proceeds to Khal Ungvar. Petitioner further claimed that it operated as a
chapter of Khal Ungvar. On April 1, 2004, petitioner was granted leave to sell the
Kings Point residence. The order granting leave to sell required that petitioner
distribute the sale proceeds to Khal Ungvar upon petitioner’s dissolution. On June
3, 2004, the sale of the Kings Point residence closed.
Petitioner did not dissolve after the sale. At a time not specified in the
record, Messrs. Gross, Zachariash, and Knopfler agreed orally that petitioner
would place the proceeds from the sale of the Kings Point residence into its own
bank account. They also agreed that petitioner would pay Mr. Schwartz a monthly
stipend of approximately $5,000 per month. Messrs. Gross, Zachariash, and
Knopfler did not reduce this agreement to writing.
On June 14, 2004, petitioner deposited the sale proceeds into its bank
account. On September 27, 2004, petitioner began to write checks to Mr.
Schwartz. On December 10, 2004, Messrs. Knopfler and Zachariash authorized
Smith Barney to establish automatic fund transfers from petitioner’s bank account
to Mr. Schwartz’s personal bank account. On April 21, 2006, Messrs. Gross,
Zachariash, and Knopfler notified Smith Barney that they wished to temporarily
suspend the automatic fund transfers and to send Mr. Schwartz a monthly
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[*14] distribution of $5,000. Petitioner continued to write checks and transfer
funds to Mr. Schwartz through December 27, 2007.
For tax year 2004 petitioner made the following payments to Mr. Schwartz:
Date Amount
9/27 $5,000
9/27 7,000
10/8 5,000
12/2 5,000
12/2 5,000
12/22 5,000
Total 32,000
For tax year 2005 petitioner made the following payments to Mr. Schwartz:
Date Amount
1/27 $5,000
2/16 2,500
2/28 5,000
3/2 7,500
3/28 5,000
3/30 3,000
4/27 5,000
5/6 5,000
5/27 5,000
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[*15] 5/27 7,000
6/2 8,000
6/27 5,000
7/27 5,000
8/29 5,000
9/27 5,000
10/27 5,000
10/28 5,000
11/28 5,000
12/27 5,000
Total 98,000
For tax year 2006 petitioner made the following payments to Mr. Schwartz:
Date Amount
1/27 $5,000
2/27 5,000
3/27 5,000
4/27 5,000
5/26 5,000
6/27 5,000
7/28 5,000
8/2 5,000
8/28 5,000
9/27 5,000
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[*16] 10/27 6,000
11/2 10,000
11/27 6,000
12/27 6,000
12/29 10,000
Total 88,000
Finally, for tax year 2007 petitioner made the following payments to Mr.
Schwartz:
Date Amount
1/29 $6,000
2/9 5,000
2/27 7,500
3/27 7,500
4/27 7,500
5/29 7,500
6/27 7,500
7/27 7,500
8/27 7,500
9/27 7,500
10/29 7,500
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[*17] 11/27 7,500
12/27 7,500
Total 93,500
Petitioner paid Mr. Schwartz a total of $311,500 during the taxable periods
at issue. Petitioner did not file Forms W-2, Wage and Tax Statement, or Forms
1099-MISC, Miscellaneous Income, with respect to any of these payments.
The Fire at the Kings Point Residence
On January 17, 2004--after petitioner entered into a contract to sell the
Kings Point residence, but before petitioner was granted leave to sell it--a fire
occurred at the Kings Point residence. Mr. Schwartz retained an appraiser to
ascertain the extent of the damage caused by the fire. Mr. Schwartz filed a claim
with Royal & Sunalliance seeking payment for the damage to the Kings Point
residence from the fire. Royal & Sunalliance denied Mr. Schwartz’s claim on the
grounds that he made fraudulent statements and material misrepresentations on his
application for insurance.
On February 9, 2005, Mr. Schwartz filed suit in his individual capacity and
on behalf of petitioner against Royal & Sunalliance and Royal Indemnity Co. in
the Supreme Court of New York. Mr. Schwartz also filed suit in his individual
capacity and on behalf of petitioner against Fairmont Insurance Brokers, Ltd., in
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[*18] the Supreme Court of New York. The outcomes of those cases are not
relevant to this opinion.
OPINION
I. Legal Classification of Mr. Schwartz
A. 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(a)(1), which shifts the burden of proof to
the Secretary in certain other circumstances, does not apply to employment tax
disputes. Sec. 7491(a)(1); see also 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). Therefore, petitioner bears the
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[*19] burden of proving that Mr. Schwartz was not its employee during the taxable
periods at issue.
B. Mr. Schwartz as Petitioner’s Employee
Petitioner contends that the payments made to Mr. Schwartz were pursuant
to a trust that Rabbi Schwartz created for Mr. Schwartz’s benefit, rather than wage
payments to an employee or an independent contractor. We have determined that
this case can be decided on whether Mr. Schwartz can be classified as an
employee of petitioner. Therefore, we will not address the issue of whether a trust
was created.3
Employers and employees are subject to “employment taxes”, including
FICA. FICA provides a Social Security tax payable by both employers and
employees. See secs. 3101, 3111. Employers are required to withhold FICA tax
and Federal income tax on wage payments (i.e., ITW) that they make to their
employees. See secs. 3102, 3402. These employment taxes do not apply to
payments made to independent contractors.
Petitioner contends that Mr. Schwartz was not its employee and that Mr.
Schwartz’s actions were consistent with those of a homeowner rather than
3
Even though we will not discuss the issue of whether a trust was created,
we found it disconcerting that the testimony petitioner’s witnesses presented did
not support a requisite intent to create a trust, among other things.
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[*20] petitioner’s worker. Respondent contends that Mr. Schwartz was
petitioner’s property manager and that many of Mr. Schwartz actions with respect
to the Kings Point residence were performed on petitioner’s behalf using
petitioner’s funds. Respondent further contends that petitioner benefited from Mr.
Schwartz’s actions, which respondent claims were done in connection with
petitioner’s business of owning and maintaining a parsonage for Rabbi Schwartz
during his retirement.
The facts in this case and those of typical worker classification
controversies are strikingly dissimilar. See, e.g., Kurek v. Commissioner, T.C.
Memo. 2013-64 (holding that the taxpayer, the sole proprietor of a construction
company, failed to properly classify as employees the workers he hired to help him
complete construction projects); Specks v. Commissioner, T.C. Memo. 2012-343
(holding that the taxpayer husband, who provided security services to several
companies as a second job and was paid weekly by the companies, properly
classified himself as an independent contractor); Blodgett v. Commissioner, T.C.
Memo. 2012-298 (holding that the taxpayer husband, who served on the board of
trustees of a local bank for nearly 30 years and was issued a Form 1099-MISC for
the wage payments he received from the bank, was properly classified as an
independent contractor); Atl. Coast Masonry, Inc. v. Commissioner, T.C. Memo.
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[*21] 2012-233 (holding that the taxpayer failed to properly classify its corporate
officers, masons, and laborers as employees); Twin Rivers Farm, Inc. v.
Commissioner, T.C. Memo. 2012-184 (holding that the taxpayer, who hired two
men to work on its farm, failed to properly classify the workers as employees; the
taxpayer purchased workers’ compensation and employer’s liability insurance,
paid the workers weekly, and provided living quarters to the workers rent free).
Among other things, unlike in a typical worker classification controversy,
petitioner did not make payments to Mr. Schwartz while he was maintaining the
Kings Point residence;4 rather, petitioner made large payments to Mr. Schwartz
over the course of four years following the sale of the Kings Point residence.5
4
The record implies that Mr. Schwartz may have maintained the Kings Point
residence in exchange for living at the Kings Point residence rent free before
2003, when Mr. Schwartz moved to a new home. Taxable periods before 2004,
however, are beyond the scope of this case.
5
Pursuant to secs. 31.3121(a)-1(i) and 31.3401(a)-1(a)(5), Employment Tax
Regs., remuneration for employment may constitute wages even if the employer-
employee relationship no longer existed at the time of the remuneration between
the person in whose employ the services were performed and the individual who
performed them. Although the regulations themselves do not offer a limitation on
the amount of time that may pass between the end of the employment relationship
and the payment before the payment made is no longer remuneration, the
regulations provide an example of a gap of two weeks between employment and
payment. Secs. 31.3121(a)-1(i), Example, 31.3401(a)-(1)(a)(5), Example,
Employment Tax Regs.
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[*22] Whether an individual performing services for a principal is an employee
(rather than 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, 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. We consider all facts and circumstances; no one factor dictates
the outcome. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 270. Although
the determination of employee status is to be made by common law concepts, a
realistic interpretation of the term “employee” should be adopted, and doubtful
questions should be resolved in favor of employment in order to accomplish the
remedial purposes of the legislation involved. Id. at 269 (citing Breaux & Daigle,
Inc. v. United States, 900 F.2d 49, 52 (5th Cir. 1990)); see also Twin Rivers Farm,
Inc. v. Commissioner, slip op. at 6-7.
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[*23] 1. 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; see also Atl.
Coast Masonry, Inc. v. Commissioner, at *15. Under common law, an employer-
employee relationship exists when the principal has the right to control and direct
the worker regarding the result and how the result is accomplished. Secs.
31.3121(d)-1(c)(2), 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, 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.
There is no indication in the record that petitioner maintained any control
over Mr. Schwartz or could have directed or controlled Mr. Schwartz. Indeed,
there is no indication that Mr. Schwartz reported to petitioner or that petitioner
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[*24] maintained any oversight over Mr. Schwartz’s efforts or evaluated his work.
This factor weighs against classifying Mr. Schwartz as petitioner’s employee.
2. Investment in Facilities
Unlike in a typical worker classification case, Mr. Schwartz was the tenant
of the Kings Point residence, where respondent alleges most of Mr. Schwartz’s
services took place. However, the Kings Point residence was sold on June 3,
2004. Therefore, there were no facilities or equipment in which petitioner
invested for most of the taxable periods at issue. This factor is neutral.
3. Opportunity for Profit and Risk of Loss
The opportunity for profit or loss indicates nonemployee status. See
Simpson v. Commissioner, 64 T.C. 974, 988 (1975); see also Twin Rivers Farm,
Inc. v. Commissioner, slip op. at 9. The fact that a worker is insulated from
suffering a loss or prevented from realizing profit generally indicates that the
worker is an employee. See Kurek v. Commissioner, at *12; Atl. Coast Masonry,
Inc. v. Commissioner, at *16. As the sole owner of the Kings Point residence,
petitioner generally had the opportunity for profit and bore the risk of loss from
the sale of the Kings Point residence. However, the Kings Point residence was
sold in June 2004. We note, though, that petitioner was not engaged in any
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[*25] apparent trade or business during most of the taxable periods at issue. This
factor weighs against classifying Mr. Schwartz as petitioner’s employee.
4. Right To Discharge the Workers
Employers typically have the right to terminate employees at will. Ellison
v. Commissioner, 55 T.C. 142, 155 (1970); Kurek v. Commissioner, at *12.
Unlike a normal employer-employee situation, petitioner would not have been able
to terminate Mr. Schwartz. As the tenant of the Kings Point residence, Mr.
Schwartz would have had the right to continue to maintain the property. Had
petitioner wished to prevent Mr. Schwartz from maintaining the property,
petitioner likely would have had to evict Mr. Schwartz. Furthermore, we note that
for most of the taxable periods at issue, petitioner no longer owned the Kings
Point residence. This factor weighs against classifying Mr. Schwartz as
petitioner’s employee.
5. Integral Part of the Business
Employees are typically an essential part of a taxpayer’s normal operation.
Kurek v. Commissioner, at *12; see Atl. Coast Masonry, Inc. v. Commissioner, at
*18. Petitioner’s sole asset was the Kings Point residence until the sale, after
which its sole asset was the proceeds. Although petitioner claimed in its certificate
of incorporation that it was organized to maintain a house of worship, with a
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[*26] principal place of worship in Brooklyn, New York, the record reflects that
petitioner never operated the Kings Point residence (or any other building) as a
house of worship and that petitioner has never had a congregation. Instead, the
record reflects that petitioner owned and maintained the Kings Point residence as a
parsonage for Rabbi Schwartz and his family.
Petitioner did not maintain a business for the purposes of this factor test.
This factor is neutral.
6. Permanency of the Relationship
The permanency of a work relationship indicates employee status. See
Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 273 (noting that a transitory
work relationship may point toward independent contractor status); see also Twin
Rivers Farm, Inc. v. Commissioner, slip op. at 11. Mr. Schwartz’s relationship
with petitioner began when he was a member of petitioner’s original board. This
relationship ended when Mr. Schwartz resigned from his position in 1998, several
years before the taxable periods at issue. This factor weighs against classifying Mr.
Schwartz as petitioner’s employee.
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[*27] 7. The Relationship the Parties Believed They Created
Petitioner contends that the relationship created by the parties was not
intended to be that of an employer-employee. Petitioner contends that they created
a relationship in which petitioner supported Mr. Schwartz.
At trial Mr. Gross testified that he believed that Rabbi Klein promised Rabbi
Schwartz that he, Rabbi Klein, would take care of Mr. Schwartz with petitioner’s
funds. Specifically, Mr. Gross testified that “[Rabbi] Bernard Schwartz had an
only child, Myron, and the funds were considerable and he didn’t find a way that
this son is going to be able to support himself.6 And it was my understanding that
Rabbi Klein promised [Rabbi] Bernard Schwartz that he would take care of his son
from these funds.” Mr. Gross was not present when Rabbi Schwartz and Rabbi
Klein made this claimed agreement. When asked whether he discussed the claimed
agreement with Rabbi Klein, Mr. Gross stated: “I don’t know that we discussed it.
We had that common understanding. We worked together, you know. * * * We
discussed the Schwartzes, we discussed the house that was sold. We discussed that
Myron is, you know, knocking on our door wanting to know--how do we support
the guy? So this is what we did.”
6
Petitioner alleges that Mr. Schwartz’s weight left him unfit for
employment; however, petitioner acknowledges that Mr. Schwartz worked
periodically as a limo driver.
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[*28] Despite the contradictions in Mr. Gross’ testimony, the consistent thread is
that petitioner believed its duty was to support Mr. Schwartz. Although the
existence of this duty was highly questionable given petitioner’s exempt status, we
find that petitioner did not believe it had an employer-employee relationship with
Mr. Schwartz. This factor weighs against classifying Mr. Schwartz as petitioner’s
employee.
8. Conclusion
After weighing the above factors, we conclude that Mr. Schwartz was not
petitioner’s employee during the taxable periods at issue. It appears that
respondent was trying to fit a square peg into a round hole by arguing Mr.
Schwartz was an employee.
II. Additions to Tax and Penalties Under Sections 6651(a)(1) and 6656
Petitioner was not required to file any Federal employment tax returns or
make any required deposits for the taxable periods at issue with respect to Mr.
Schwartz because Mr. Schwartz was not petitioner’s employee during that time.
Accordingly, we hold that petitioner is not liable for additions to tax pursuant to
section 6651(a)(1) or for penalties under section 6656 for the taxable periods at
issue.
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[*29] III. Conclusion
We hold that Mr. Schwartz was not petitioner’s employee for the taxable
periods at issue and that petitioner is not liable for Federal employment taxes with
respect to Mr. Schwartz as determined by respondent. Because Mr. Schwartz was
not petitioner’s employee, section 530 relief is not applicable. We further hold that
petitioner is not liable for additions to tax pursuant to section 6651(a)(1) or
penalties pursuant to section 6656 for the taxable periods at issue with respect to
Mr. Schwartz. Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing and respondent’s concessions,
An appropriate decision
will be entered.