                NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 08a0597n.06
                            Filed: October 3, 2008

                                            No. 07-1869

                           UNITED STATES COURT OF APPEALS
                                FOR THE SIXTH CIRCUIT


PENO TRUCKING, INC.,                              )
                                                  )
       Petitioner-Appellant,                      )
                                                  )
v.                                                )    ON APPEAL FROM THE UNITED
                                                  )    STATES TAX COURT
COMMISSIONER              OF    INTERNAL          )
REVENUE,                                          )
                                                  )
       Respondent-Appellee.                       )
                                                  )
                                                  )

Before: NORRIS, BATCHELDER, and GIBBONS, Circuit Judges.

       JULIA SMITH GIBBONS, Circuit Judge. Petitioner-appellant Peno Trucking, Inc.

(“Peno Trucking”) appeals both the Tax Court’s classification of its truckers as employees and the

Tax Court’s determination that Peno Trucking was not entitled to relief from tax liability under § 530

of the Revenue Act of 1978. For the following reasons, we reverse the decision of the Tax Court.

                                                  I.

       Peno Trucking was incorporated in the State of Ohio on December 23, 1993. Its principal

place of business was in Warren, Ohio. Throughout the period in question, Peno Trucking was

incorporated as a Subchapter S Corporation under Internal Revenue Code §§ 1361 et seq. From

1997 through 1999, Robert Peno, Sr. and his wife, Joann Peno, together owned 100% of the stock



                                                 -1-
of Peno Trucking; Robert and Joann Peno were also the officers of the corporation, with Joann Peno

as the President and Robert Peno, Sr. as the Vice President.

       In its Memorandum Findings of Fact and Opinion, the Tax Court summarized the stipulated

facts regarding Peno Trucking’s business operations as follows:

       During the periods at issue, petitioner owned approximately 15 tractor-trailers
       (trucks), which it leased to the Ohio Transport Corp. (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 accordance with the leases. Consequently, petitioner was required to
       direct, supervise, pay, discipline, and discharge its drivers. Petitioner was also
       responsible for determining the days and hours per day the drivers worked, the routes
       traveled, and the order of picking up and delivery of shipments and ensuring that the
       drivers had the appropriate commercial drivers’ licenses.

       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”.

       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.

       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.

       The leases required Ohio Transport to provide liability insurance for petitioner’s
       trucks while they were “under dispatch”. 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.



                                                -2-
(footnotes omitted).

       Peno Trucking entered into an agreement with each of its drivers during the dates in question

which explicitly provided that the drivers were independent contractors and not employees. The

agreement stated, in part, as follows:

       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.

The Tax Court further explained the details of the relationship between Peno Trucking and the

drivers as follows:

       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 drivers were free to supply any additional equipment


                                                -3-
       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. 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.

       During the periods at issue, petitioner filed Forms 1099MISC, 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.

(footnotes omitted). The Tax Court also described Peno Trucking’s day to day operations as follows:

       When Ohio Transport had freight which needed to be transported, ordinarily in the
       Midwest and frequently to States adjoining Ohio, it or a mill 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.

       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 expected delivery time. 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. If a
       driver chose to drive on a toll road, the driver was responsible for paying the tolls.
       After a load was delivered, the driver could immediately return to petitioner’s place
       of business with or without a return load.

       During its years of operation, two of Peno Trucking’s drivers filed claims for workers’


                                                 -4-
compensation because they suffered injuries during the course of their trucking activities. On May

18, 1995, Richard Chatfield filed his claim for workers’ compensation. The Ohio Industrial

Commission (“OIC”), in an order dated October 25, 1995, disallowed Chatfield’s claim, finding that

he “was not an employee of [Peno Trucking] on the date of injury herein. [Chatfield] was an

independent contractor who had not secured Workers’ Compensation for himself.” The order did

not provide the basis for its determination. Chatfield’s appeal of the order was dismissed without

prejudice.

       Similarly, on June 26, 1997, Kenneth Jamison filed a claim for workers’ compensation

because of an injury he suffered during the course of his trucking activities. In an order dated August

25, 1997, the Bureau of Workers’ Compensation (“BWC”) denied Jamison’s claim, finding that

“[t]here is no proof of an employee/employer relationship between the injured worker and the listed

employer.” The BWC further explained that this decision was based on the signed agreement

between Jamison and Peno Trucking. Pursuant to Jamison’s appeal of the BWC order, the OIC

vacated the BWC order and found that “[Jamison] was an independent contractor who had not

secured Workers’ Compensation for himself.” The OIC did not explain the grounds of its decision

and simply stated that “All evidence in the file was considered.”

       On September 12, 2003, the Commissioner of Internal Revenue (the “Commissioner”) issued

Peno Trucking a Notice of Determination of Worker Classification. In that determination, the

Commissioner stated that certain identified drivers were in fact employees of Peno Trucking and not

independent contractors. In addition, the Commissioner concluded that Peno Trucking was not

entitled to relief from employment taxes under § 530(a) of the Revenue Act of 1978. The

Commissioner then went on to calculate the additional taxes owed by Peno Trucking. Peno


                                                 -5-
Trucking appealed the Commissioner’s determination pursuant to 26 U.S.C. § 7436. In that appeal,

Peno Trucking argued that the truck drivers in question were independent contractors and not

employees. In addition, Peno Trucking claimed that it had not treated the truckers in question as

employees, had filed all federal tax returns consistent with this treatment, and had a reasonable basis

for doing so – the order of the OIC concluding that both Chatfield and Jamison were not employees,

but independent contractors. Thus, Peno Trucking claimed its tax liability should have been

terminated under § 530 of the Revenue Act of 1978’s safe harbor provisions.

       The Tax Court found in favor of the Commissioner, concluding that the relevant factors

indicated the truckers in question were employees and not independent contractors. Furthermore,

the Tax Court found that Peno Trucking could not have reasonably relied upon the determination of

either the BWC or the OIC in treating the truckers as independent contractors because (1) “[t]he

record d[id] 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” and (2) “nothing in the record indicates the rulings concerning Jamison and Chatfield

were relied upon at the time petitioner’s employment decisions were made.” Peno Trucking appeals

the Tax Court’s decision.

                                                  II.

       As a general rule “[w]e review the tax court’s legal conclusions de novo and its factual

findings under the ‘clearly erroneous’ standard.” Zack v. Comm’r, 291 F.3d 407, 412 (6th Cir.

2002); Indmar Prods. Co. v. Comm’r, 444 F.3d 771, 777 (6th Cir. 2006) (“We review the Tax

Court’s factual findings for ‘clear error’ and its application of law de novo.”); MTS Int’l Inc. v.

Comm’r, 169 F.3d 1018, 1021 (6th Cir. 1999) (“This court reviews the tax court’s legal conclusions


                                                 -6-
de novo and its findings of fact under the ‘clearly erroneous’ standard.”). In turn, “[f]actual findings

are clearly erroneous if, based upon the entire record, the reviewing court is ‘left with the definite

and firm conviction that a mistake has been committed.’” Zack, 291 F.3d at 412 (quoting Sanford

v. Harvard Indus., Inc., 262 F.3d 590, 595 (6th Cir. 2001)). This tracks the language of 26 U.S.C.

§ 7482(a) which states “[t]he United States Courts of Appeals . . . shall have exclusive jurisdiction

to review the decisions of the Tax Court . . . in the same manner and to the same extent as decisions

of the district courts in civil actions tried without a jury . . . .” Cf. Freytag v. Comm’r, 501 U.S. 868,

891 (1991) (noting that the standard under 26 U.S.C. § 7482(a) “contrasts with the standard applied

to agency rulemaking”).

        Although this court has in the past applied the clearly erroneous standard to the employee-

independent contractor question, it has done so only when the dispute hinged primarily on factual

determinations. Lanigan Storage & Van Co. v. United States, 389 F.2d 337, 341 (6th Cir. 1968).

Indeed, in Lanigan Storage, this court cited precedent from the Ninth Circuit, which indicated that,

when courts below make findings on such issues “as a fact,” we review the conclusion for clear

error. Id. (emphasis in original) (citing McGuire v. United States, 349 F.2d 644 (9th Cir. 1965)).

And, only applying the clear-error standard to the factual determinations underlying the employee-

independent contractor distinction comports with both Lanigan Storage’s analysis of the tax court’s

role as factfinder and this court’s analysis of the distinction in other contexts. See, e.g., Trs. of the

Resilient Floor Decorators Ins. Fund v. A & M Installations, Inc., 395 F.3d 244, 249 (6th Cir. 2005)

(stating in the ERISA context that “[t]his court applies de novo review to the question of whether

an individual is an employee or an independent contractor”). We therefore review the facts

underlying the Tax Court’s determination that the truckers in question were employees for clear


                                                   -7-
error, while reviewing its legal conclusions de novo. But see Spicer Accounting v. United States, 918

F.2d 90, 92 (9th Cir. 1990) (“The determination of whether an employer-employee relationship

exists involves a mixed question of law and fact. However, since the determination is predominantly

one of fact, it is subject to a clearly erroneous standard of review.” (internal citation omitted)).

                                                  III.

          Employers are required to pay one half of the Federal Insurance Contributions Act, 26 U.S.C.

§§ 3101 et seq., (“FICA”) taxes assessed against their employees and withhold from “wages” the

amount of FICA taxes owed by the employees themselves. See Boles Trucking v. United States, 77

F.3d 236, 238 (8th Cir. 1996) (citing 26 U.S.C. §§ 3101, 3102(a), 3402(a)). In addition, employers

must pay Federal Unemployment Tax Act, 26 U.S.C. §§ 3301 et seq., (“FUTA”) taxes on the

“wages” paid to their employees. 26 U.S.C. § 3301; see also Boles Trucking, 77 F.3d at 238. For

the purposes of both FICA and FUTA taxes, “wages” is defined as “all remuneration for

employment.” 26 U.S.C. § 3121 (FICA); 26 § U.S.C. 3306 (FUTA). However, employers are not

required to pay and withhold FICA and FUTA taxes in connection with payments to independent

contractors. 26 C.F.R. 31.3121(d)-1 (FICA); 26 C.F.R. 31.3306(i)-1 (FUTA); see also, e.g., Hosp.

Res. Pers. v. United States, 68 F.3d 421, 424 (11th Cir. 1995); Breaux & Daigle, Inc. v. United

States, 900 F.2d 49, 52 (5th Cir. 1990); see generally United State v. Silk, 331 U.S. 704, 712-14

(1947).

          As a general rule, “the Commissioner’s determination of tax liability is entitled to a

presumption of correctness and . . . the burden is on the taxpayer to prove that the determination is

erroneous.” Boles Trucking, 77 F.3d at 239 (citing Helvering v. Taylor, 293 U.S. 507 (1935)). This

principle applies “to the Commissioner’s classification of a taxpayer’s workers as employees, i.e.,

                                                  -8-
once such a determination is made, it is the taxpayer’s burden to prove, by a preponderance of the

evidence, that its workers are or were independent contractors.” Id. Thus, in reviewing the Tax

Court’s conclusions, this court must determine whether the Tax Court clearly erred in concluding

that Peno Trucking had not demonstrated by a preponderance of the evidence that the truckers in

question were not employees, but instead independent contractors. See Van Camp & Bennion, 251

F.3d at 865.

       For the purposes of FICA, 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.” 26 U.S.C. § 3121(d)(2). The regulations promulgated pursuant to FICA and

FUTA provide some additional guidance as to the definition of an employer-employee relationship:

       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 to work, to the individual who performs the services. In general, if an
       individual is subject to the control or direction of another merely as to the result to
       be accomplished by the work and not as to the means and methods for accomplishing
       the result, he is an independent contractor. An individual performing services as an
       independent contractor is not as to such services an employee under the usual
       common law rules. Individuals such as physicians, lawyers, dentists, veterinarians,
       construction contractors, public stenographers, and auctioneers, engaged in the
       pursuit of an independent trade, business, or profession, in which they offer their
       services to the public, are independent contractors and not employees.

26 C.F.R. 31.3121(d)-1 (FICA); 26 C.F.R. 31.3306(i)-1 (FUTA).

       “The determination of an individual’s status as an employee or an independent contractor has

                                                 -9-
been the subject of numerous decisions. It is settled that each case must stand on its own facts, in

light of all the existing circumstances, and that no one facet of the relationship is generally

determinative.” Azad v. United States, 388 F.2d 74, 76 (8th Cir. 1968); see also Silk, 331 U.S. at

716. Despite this fact, “authorities seem to be in general agreement that an employer’s right to

control the manner in which the work is performed is an important if not the master test to be

considered in determining the existence of an employer-employee relationship.” Azad, 338 F.3d at

76. Nonetheless, courts typically consider the following factors in determining whether an employer-

employee relationship exists: “(1) The degree of control exercised by the principal over the details

of the work; (2) which party invests in the facilities used in the work; (3) the opportunity of the

individual for profit or loss; (4) whether or not the principal has the right to discharge the individual;

(5) whether the work is part of the principal’s regular business; (6) the permanency of the

relationship; and (7) the relationship the parties believe they are creating.” Weber v. Comm’r, 60

F.3d 1104, 1110 (4th Cir. 1995); Professional & Executive Leasing v. Comm’r, 89 T.C. 225, 232

(T.C. 1987) (listing the same seven factors); Avis Rent A Car System, Inc. v. United States, 503 F.2d

423, 428 (2d Cir. 1974) (listing the same seven factors); Pack v. United States, 434 F. Supp. 232,

234 (E.D. Tenn. 1977) (listing the same seven factors); see also Silk, 331 U.S. at 716. But see Doty

v. Elias, 733 F.2d 720, 723 (10th Cir. 1984) (“In applying this test, the courts generally focus on five

factors: (1) the degree of control exerted by the alleged employer over the worker; (2) the worker's

opportunity for profit or loss; (3) the worker’s investment in the business; (4) the permanence of the

working relationship; and (5) the degree of skill required to perform the work.”); Rev. Rul. 87-41,

1987-1 Cum. Bull. 296, 298-299 (compiling a list of twenty non-exhaustive factors when

determining whether an individual was an employee or independent contractor). Indeed, these were


                                                  -10-
the same seven factors considered by the Tax Court below. Thus, in order to review the Tax Court’s

opinion, we consider each of these seven factors in turn as they apply to the instant case.

       (1)     The degree of control exercised by the principal over the details of the work

       As noted above, an employer-employee relationship is generally assumed to exist where

“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.” 26 C.F.R.

31.3121(d)-1 (FICA); 26 C.F.R. 31.3306(i)-1 (FUTA). In other words, “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.” Id. “Thus, no actual control need be exercised, as long as the employer

has the right to control.” Professional & Executive Leasing v. Comm’r, 862 F.2d 751, 753 (9th Cir.

1988) (using a five-factor test); see also McGuire v. United States, 349 F.2d 644, 646 (9th Cir. 1965)

(“The absence of need to control should not be confused with the absence of right to control. The

right to control contemplated by the Regulations relevant here and the common law as an incident

of employment requires only such supervision as the nature of the work requires.”); Air Terminal

Cab, Inc. v. United States, 478 F.2d 575, 580 (8th Cir. 1973) (stating that “it is the right to control

which is determinative”).

       Moreover, “[w]here the nature of a person’s work requires little supervision, there is no need

for actual control.” Id; see also McGuire, 349 F.2d at 646 (noting that the work in question required

little supervision, but nonetheless the individuals in question were employees as the appellant

maintained the right to control their work). Furthermore, “The mere fact that the workers set their

own hours and determined when to take breaks did not make them independent contractors.”


                                                 -11-
General Inv. Corp. v. United States, 823 F.2d 337, 342 (9th Cir. 1987).

       In detailing the facts that supported its conclusion that Peno Trucking exercised control over

the truckers consistent with an employer-employee relationship, the Tax Court stated:

       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 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. 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.

(footnote omitted.) Peno Trucking contends that some of these factual conclusions are clearly

erroneous.

       First, Robert Peno, Sr., stated at trial that the truckers were not required to carry beepers to

stay in touch with him. However, two of the subcontract statements – both stipulated exhibits –

include charges for lost pagers or beepers. Given this evidence, the Tax Court concluded that Peno

Trucking “required its drivers to carry beepers, presumably so that it could maintain contact while

the drivers were on the road.” And, because of this evidence in the record, this conclusion is not

clearly erroneous. See Conti v. Comm’r, 39 F.3d 658, 664 (6th Cir. 1994) (noting that “the Tax

Court, like any other court, may disregard uncontradicted testimony by a taxpayer where it finds that

testimony lacking in credibility, or finds the testimony to be improbable, unreasonable or

questionable.” (internal quotation marks and citation omitted)).

       Second, Peno Trucking focuses on the fact that it did not control the rates for the freight



                                                -12-
hauled by the truckers; in turn, because the truckers’ income was a percentage of the income from

the freight hauled, Peno Trucking argues that it did not control the amount of income earned by its

truckers. However, this conclusion overlooks the fact that the different truckers received different

percentages of income from the hauled freight. It would appear that the truckers negotiated the rate

with Peno Trucking; in this way, Peno Trucking does appear to have controlled, to some degree, the

income of the truckers.

        Third, Peno Trucking emphasizes that the truckers could choose whether or not to accept a

particular load to haul. Thus, Peno Trucking argues that the truckers controlled their own work.

While this may be true, it also appears to be the case that once a trucker did agree to haul a particular

load, Peno Trucking controlled many of the conditions under which that hauling was done. Indeed,

in its lease with Ohio transport, Peno Trucking stated that it would be “solely responsible for

directing, supervising, paying, discharging, disciplining and otherwise controlling and such drivers,

helpers or other persons.” This representation by Peno Trucking to Ohio Transport gives strong

indication that Peno Trucking did in fact control the truckers in question.

        We therefore conclude that the Tax Court did not clearly err in determining that Peno

Trucking did exercise sufficient control over the truckers in question to indicate the existence of an

employer-employee relationship.

        (2)     Which party invests in the facilities used in the work

        “The fact that a worker provides his or her own tools generally indicates independent

contractor status.” Ewens & Miller, Inc. v. Comm’r, 117 T.C. 263, 271 (T.C. 2001) (citing Breaux

& Daigle, Inc. v. United States, 900 F.2d 49, 52 (5th Cir. 1990)).

        The Tax Court, in considering this factor, found the following facts:


                                                  -13-
       The drivers incurred some cost for tools and maintaining their licenses. 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.

(footnotes omitted.) In response, Peno Trucking emphasizes that the truckers could in fact provide

their own tools and would be entitled to take those tools with them if they chose to no longer drive

a Peno truck. In addition, the parties stipulated that the drivers were responsible for paying tolls

incurred en route to picking up a load for hauling. The Tax Court noted these facts, but nonetheless

concluded “[t]he relatively minor investment by the drivers and the substantial investment by

petitioner support an employer-employee relationship.” The Tax Court did not err in this evaluation.

As a result, this factor also supports the existence of an employer-employee relationship.

       (3)     The opportunity of the individual for profit or loss

       In evaluating this factor, the Tax Court stated the following:

       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.

Based on these facts, the Tax Court concluded that “[t]his factor indicates an employer-employee

relationship.” In doing so, the Tax Court clearly emphasized the fact that the truckers were not

exposed to risk of loss, while minimizing the import of the truckers’ ability to profit by pursuing

more hauling assignments. Emphasizing the risk of loss while minimizing the opportunity for profit

comports with analysis of this factor in Revenue Ruling 87-41 (1987):

       Realization of Profit or Loss. A worker who can realize a profit or suffer a loss as a


                                                -14-
       result of the worker’s services (in addition to the profit or loss ordinarily realized by
       employees) is generally an independent contractor, but the worker who cannot is an
       employee. For example, if the worker is subject to a real risk of economic loss due
       to significant investments or a bona fide liability for expenses, such as salary
       payments to unrelated employees, that factor indicates that the worker is an
       independent contractor. . . .

Id. (emphasis added). Indeed, the Tax Court has similarly emphasized the exposure to losses in

weighing this factor. See, e.g., Jones v. Comm’r, 94 T.C.M. (CCH) 230, 2007 Tax Ct. Memo

LEXIS 251, at *9 (2007); Hathaway v. Comm’r, 72 T.C.M. (CCH) 460, P53 (1996); Feivor v.

Comm’r, 69 T.C.M. (CCH) 2078, 1995 Tax Ct. Memo LEXIS 108, at *38-39 (1995). And, such an

analysis ensures that the mere fact that an employer links salary to performance does not militate

against finding that his workers are in fact employees. We therefore conclude that the Tax Court did

not clearly err in determining that this factor also indicates the existence of an employer-employee

relationship.

       (4)      Whether or not the principal has the right to discharge the individual

       As noted above, the right to discharge indicates the existence of an employer-employee

relationship. See, e.g., Air Terminal Cab, Inc., 478 F.2d at 581. In evaluating this factor, the Tax

Court made the following findings:

       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 this factor
       was self-serving and unreliable. This factor indicates an employee-employer
       relationship.

As this court has previously explained, “we give deference to the Tax Court’s credibility findings

because of the court’s opportunity to observe the witnesses and their demeanor when they testify.”

Conti v. Comm’r, 39 F.3d at 664. Thus, “ [o]nce the Tax Court finds that the taxpayer’s testimony


                                                 -15-
lacks credibility, if the taxpayer has offered no other evidence in support of his position, the Tax

Court has no choice but to rule for the Commissioner, since the taxpayer has failed to carry his

requisite burden of proof.” Id. (internal quotation and citation omitted). This is most notably the

case here where the transcript of Robert Peno’s testimony seems inconsistent on its face. Because

of the Tax Court’s credibility determination, this factor also supports a finding that an employer-

employee relationship existed.

       (5)     Whether the work is part of the principal’s regular business

       In its brief, Peno Trucking concedes that this factor supports a finding of an employer-

employee relationship.

       (6)     The permanency of the relationship

       According to the Tax Court, “[t]he drivers worked in the course of petitioner’s business

rather than having a transitory relationship with petitioner. This factor supports an

employer-employee relationship.” However, as Peno Trucking correctly notes, the truckers were not

required to work any particular hours or days. These facts make it somewhat difficult to determine

whether there was, in fact, a “permanent” relationship. That being said, such a determination is a

factual determination, which we review for clear error. Moreover, the absence of this factor has

limited import in effecting the employee-independent contractor analysis. See Avis Rent A Car

System, Inc. v. United States, 503 F.2d 423, 430 (2d Cir. 1974) (finding the individuals in question

to be employees despite their being transient and noting that the individuals in Silk were also

transient and still deemed by the Supreme Court to be employees). We therefore conclude that the

Tax Court did not clearly err in finding that this factor indicated the existence of an employer-

employee relationship.


                                               -16-
       (7)     The relationship the parties believe they are creating

       The record does provide evidence that Peno Trucking and its truckers believed they were

creating an independent contractor relationship. Most notably, the contracts between Peno Trucking

and its truckers specifically stated that the truckers were to be considered independent contractors.

However, as noted by the Tax Court, “[i]f the relationship of employer and employee exists, the

designation or description of the relationship by the parties as anything other than that of employer

and employee is immaterial. Thus, if such relationship exists, it is of no consequence that the

employee is designated as a partner, coadventurer, agent, independent contractor, or the like.” 26

C.F.R. 31.3121(d)-1(a)(3).

       In sum, the factors detailed above weigh heavily in favor of finding an employer-employee

relationship, combined with the fact that it is Peno Trucking’s burden to prove by a preponderance

of the evidence that the Commissioner erred in his assessment, see Boles Trucking, 77 F.3d at 239,

the beliefs of the parties simply cannot undermine the Tax Court’s conclusion. Therefore, based on

the factual and credibility determinations of the Tax Court, we conclude that the truckers in question

were employees of Peno Trucking.

                                                 IV.

       Despite the foregoing conclusions, Peno Trucking can still avoid liability under the safe

harbor provisions of § 530 of the Revenue Act of 1978.

       Section 530 of the Revenue Act of 1978 (“§ 530”) provides for the termination of tax liability

if “for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any

period”; “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


                                                -17-
treatment of such individual as not being an employee”; and the employer had a “reasonable basis

for not treating such individual as an employee.” Pub. L. No. 95-600, 92 Stat. 2763, 2885-86

(reproduced at 26 U.S.C. § 3401 note § 530 (a)(2)).1 Among the grounds giving rise to a such a

reasonable basis, § 530(a)(2) includes “judicial precedent, published rulings, technical advice with

respect to the taxpayer, or a letter ruling to the taxpayer . . . .” Id. at 2885. Whether Peno Trucking

can satisfy the “reasonable basis” requirement of § 530 is a question of law that we review de novo.

See Spicer Accounting v. United States, 918 F.2d 90, 94 (9th Cir. 1990) (applying de novo review

to whether the appellant had a “reasonable basis” for not treating the individuals in question as

employees); cf. United States v. Talley, 275 F.3d 560, 563 (6th Cir. 2001) (noting, in the Fourth

Amendment context, that “[t]he question of whether a belief is reasonable is one we review de novo,

since the reasonableness test is objective, not subjective”).

       Section 530 also provides a specific burden-shifting scheme: “If (i) a taxpayer establishes a

prima facie case that it was reasonable not to treat an individual as an employee for purposes of this

section, and (ii) the taxpayer has fully cooperated with reasonable requests from the Secretary of the

Treasury or his delegate, then the burden of proof with respect to such treatment shall be on the

Secretary.” Pub. L. No. 104-188, 110 Stat. 1755, 1767 (reproduced at 26 U.S.C. § 3401 note

§ 530(e)(4)(A)). It is the petitioner’s initial burden to establish his prima facie case by a

preponderance of the evidence. See Dains v. United States, Internal Revenue Service, 82 A.F.T.R.2d

(RIA) 5044, 1998 U.S. App. LEXIS 14924, at *21 (6th Cir. 1998) (applying a preponderance of the


       1
         Section 530 of the Revenue Act of 1978 was initially intended to provide interim tax relief.
However, although never codified, it was extended indefinitely by § 269 of the Tax Equity and Fiscal
Responsibility Act of 1982 (“TEFRA”), Pub. L. No. 97-248, 96 Stat. 324, 552. It is reproduced in
the notes following 26 U.S.C. § 3401. See also Springfield v. United States, 88 F.3d 750, 751 n.2
(9th Cir. 1996) (summarizing legislative history).

                                                 -18-
evidence standard to the reasonable basis showing under § 530); see also Springfield, 88 F.3d at 752-

53 (applying a preponderance of the evidence standard despite Congress’s “liberally construed”

directive).

        In the instant case, Peno Trucking argues that it has satisfied the requirements of § 530’s safe

harbor provision. As evidence of this claim, Peno Trucking notes that the Tax Court concluded that

“[Peno Trucking] never treated the drivers as employees and consistently issued them Forms 1099-

MISC.” This comports with the tax returns Peno Trucking provided the Commissioner for the years

in question, 1997-1999. Peno Trucking argues that the decisions of the OIC and the BWC issued

in response to the workers’ compensation claims of Chatfield and Jamison provided reasonable bases

for treating the truckers in question as independent contractors.

        We believe that Peno Trucking has clearly established a prima facie case that it was

reasonable not to treat the truckers in question as employees, thus shifting the burden of proof to the

Commissioner for the purposes of our § 530 analysis. Peno Trucking’s tax returns for the years in

question and representative contracts for the truckers in question constitute sufficient evidence to

make out a prima facie showing that it had always treated the truckers in question as independent

contractors and that it has always filed its tax returns in a manner consistent with this treatment.

        Although the reasonable basis requirement presents a somewhat more complex issue, the

legislative history for § 530 counsels finding that reliance on the decisions from the OIC and the

BWC satisfy this inquiry. Section 530 was originally passed “to provide interim relief for taxpayers

who are involved in employment tax status controversies with the Internal Revenue Service, and who

potentially face large assessments, as a result of the Service’s proposed reclassifications of workers

. . . .” H.R. Rep. No. 1748, 95th Cong., 2d Sess. 5, reprinted in 1978-3 C.B. 629, 632 [“House


                                                 -19-
Report”]. To that end, § 530 was intended to “grant[] relief if a taxpayer had any reasonable basis

for treating workers as other than employees.” Id. at 632-33. Most notably, Congress intended “that

this reasonable basis requirement be construed liberally in favor of taxpayers.” Id. at 633. As the

Ninth Circuit has stated, “[w]ithout question, Congress intended to protect employers who exercised

good faith in determining whether their workers were employees or independent contractors.”

General Inv. Corp. v. United States, 823 F.2d 337, 340 (9th Cir. 1987); see also McClellan v. United

States, 900 F. Supp. 101, 104-06 (E.D. Mich. 1995).

       Given this purpose, it is not surprising that other courts have construed this “reasonable

basis” standard as requiring reliance in-fact. See, e.g., 303 West 42nd St. Enters. v. IRS, 181 F.3d

272, 277 (2d Cir. 1999) (focusing its inquiry on whether there the appellant “in fact relied on” the

grounds alleged); Nu-Look Design, Inc. v. Comm’r, 85 T.C.M. (CCH) 927, 2003 Tax Ct. Memo

LEXIS 48, at *21 (2003) (“The statute does not countenance ex post facto justification.”).

Importantly, this requirement functions as a double-edged sword. While on the one hand, courts

must liberally construe potential grounds for reasonable reliance, courts must be extremely vigilant

in only applying the tax relief afforded by § 530 when “the taxpayer . . . relied on the alleged

authority . . . at the time the employment decisions were being made.” Veterinary Surgical

Consultants, P.C. v. Comm’r, 85 T.C.M. (CCH) 901, 2003 Tax Ct. Memo LEXIS 52, at *24-25

(2003); see also 303 West 42nd St. Enters., 181 F.3d at 277.

       In applying the reasonable basis requirement, the Tax Court concluded that reliance on the

decisions of the BWC and the OIC could not be considered reasonable. In reaching this conclusion,

the Tax Court cited Nu-Look Design, for the proposition that “[f]or a taxpayer to have a reasonable

basis for not treating an individual as an employee under the judicial precedent safe harbor, the


                                               -20-
judicial precedent relied upon must have evaluated the employment relationship through a Federal

common law analysis.” And, according to the Tax Court, “[t]he record does not indicate that the

BWC [or] the OIC . . . evaluated the employment relationships of petitioner’s former drivers,

Chatfield and Jamison, through a common law analysis.”2 We disagree with the Tax Court’s

conclusion.

       In doing so, we begin by noting that, although not part of the record before us, the Ohio

Board of Worker’s Compensation appears to employ a twenty-factor common-law test virtually

identical to the twenty-factor test outlined by Internal Revenue Service for determining whether

individuals       are     employees        or    independent         contractors.        Compare

http://www.ohiobwc.com/infostation/content/1/1.2/1.2.8.1.2.2.1.htm (stating that the Ohio BWC

uses the twenty-factor test outlined at O.R.C. § 4123.01(A)(1)(c)), and O.R.C. § 4123.01(A)(1)(c),

with Rev. Rul. 87-41; 1987-1 C.B. 296 (outlining the Internal Revenue Service’s twenty-factor

common law test). Indeed, at oral argument the Commissioner could not point to another

jurisdiction in the United States that uses a test for differentiating between employees and

independent contractors at odds with typical common-law tests. Thus, much of the Commissioner’s

argument stands on shaky ground.

       But more importantly, Nu-Look Design is clearly distinguishable from our own case. In Nu-

Look Design, the petitioners relied upon the language in previously decided cases, applying the logic

of those cases to their own. Nu-Look Design, 2003 Tax Ct. Memo LEXIS 48, at *21. In our own



       2
         The Tax Court also stated that it had no evidence that the Ohio Court of Common Pleas used
federal common law analysis. The record does not indicate that there ever was an adjudication of
any claims in the Court of Common Pleas, only that Chatfield filed an appeal of his independent
contractor designation and then withdrew that appeal on June 18, 1996.

                                                -21-
case, Peno Trucking received official determinations – the determinations of the OIC and the BWC

– as to the status of its truckers. Peno Trucking did not engage in the type of specious application

of prior case law that pervaded the arguments of the petitioner in Nu-Look Design. Indeed, Peno

Trucking’s reliance on the official determinations of the OIC and the BWC would seem to satisfy

the reasonable basis requirement.

       This is especially the case in circumstances like ours, where the individuals in question, while

ultimately determined to be employees, resemble independent contractors on many counts. It is in

such cases where courts can be confident that § 530 functions to advance its legislative purpose: “to

protect employers who exercised good faith in determining whether their workers were employees

or independent contractors.” General Inv. Corp., 823 F.2d at 340 (9th Cir. 1987).

       With the burden shifted, the Commissioner has not demonstrated that Peno Trucking does

not qualify for tax relief under § 530. See McClellan, 900 F. Supp. at 107 (“ Once the taxpayer has

made this prima facie showing, the burden then shifts to the IRS to verify or refute the taxpayer’s

explanation.”). The Commissioner has not presented any evidence of Peno Trucking’s treatment of

the truckers in question in a manner inconsistent with that of an independent contractor and the

Commissioner has not presented any tax returns, filed by Peno Trucking, that would be inconsistent

with its truckers’ independent contractor status. In addition, the Commissioner has not alleged that

Peno Trucking has failed to cooperate in any way with the reasonable requests made in the

underlying audit.

       The Commissioner does argue, however, that Peno Trucking could not have in fact relied

upon the decisions of the OIC and the BWC because those determinations came after the decision

to treat the truckers in question as independent contractors. This argument overlooks the factual


                                                -22-
record here. Although the decisions of the BWC and the OIC in response to Jamison’s workers

compensation claim were rendered in late 1997, too late to have actually served as the basis for Peno

Trucking’s employment decision, the OIC’s decision to treat Chatfield as an independent contractor

was rendered on October 25, 1995. Thus, Peno Trucking could have in fact relied upon the decision

of the OIC in making its employment decision for the years in question – 1997 though 1999 – to treat

its truckers as independent contractors.3 Indeed, Robert Peno, Sr., testified at trial that this was in

fact what he had done. The Commissioner has not provided any evidence to the contrary. Therefore,

pursuant to § 530, we conclude that Peno Trucking is eligible for relief from the tax liabilities

imposed upon it by the Commissioner.

                                                  V.

       For the foregoing reasons, we reverse the decision of the Tax Court.




       3
         The Commissioner, in his brief, seems to argue that the OIC’s decision in Chatfield’s case
could not have been relied upon because Chatfield could still have pursued an appeal of the OIC’s
decision in the Court of Common Pleas until June 18, 1997. While this may in fact have been the
case, the Commissioner fails to explain why the mere fact that Chatfield could have appealed the
decision of the OIC until June 18, 1997 should preclude Peno Trucking from relying on the decision
of the OIC prior to that point.

                                                 -23-
