                        T.C. Memo. 2007-346



                      UNITED STATES TAX COURT



                   JUAN RAMIREZ, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12139-06.              Filed November 26, 2007.



     Juan Ramirez, pro se.

     Milton B. Blouke and Michael W. Berwind, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   The petition in this case was filed in

response to a Notice of Determination of Worker Classification

regarding petitioner’s liabilities pursuant to the Federal

Insurance Contributions Act (FICA) and the Federal Unemployment

Tax Act (FUTA) for quarterly periods of 2003.   After concessions,

the issues for decision are:
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            (1) Whether Alfredo L. Hernandez, Carlos Ramirez, and

     Raul Ramirez were employees of petitioner’s waterproofing

     business or independent contractors during 2003;

            (2) whether petitioner is entitled to relief under

     section 530 of the Revenue Act of 1978, Pub. L. 95-600, 92

     Stat. 2885, as amended (Revenue Act section 530);

            (3) whether petitioner is subject to the addition to

     tax under section 6651 for failing to file Form 940,

     Employer’s Annual Federal Unemployment (FUTA) Tax Return,

     and Form 941, Employer’s Quarterly Federal Tax Return, for

     the periods in issue; and

            (4) whether petitioner is subject to the addition to

     tax under section 6656 for failing to make deposits of FICA

     taxes for the periods in issue.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the year in issue.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in California at the time he filed his

petition.    For purposes of trial only, this case was consolidated

with a related Federal income tax case at docket No. 12141-06.

     From 1999 through 2003, petitioner operated a waterproofing

business as a sole proprietorship called J.R. Waterproofing.
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Petitioner’s business generally provided waterproofing services

of decks, shower stalls, and stairways.    Alfredo L. Hernandez

(Hernandez), Carlos Ramirez, and Raul Ramirez (collectively,

workers) all worked on a regular basis for petitioner at J.R.

Waterproofing in 2003.    Hernandez is petitioner’s brother-in-law,

Carlos Ramirez is petitioner’s nephew, and Raul Ramirez is

petitioner’s brother.    The duties of petitioner’s workers

generally involved picking up materials for a job at petitioner’s

residence and transporting them to a particular job site,

cleaning and preparing the surface of a job site, cutting stucco,

providing flashing, installing drains, laying burlap and

fiberglass, and installing mastic and several coats of waterproof

materials.

     Petitioner controlled each job site, delegated

responsibilities, and directed each of his worker’s actions to

varying degrees based on the individual worker’s respective

experience.   Although the workers often used their own tools to

perform jobs for petitioner, petitioner provided all materials

for each job and reimbursed his workers for expenses incurred on

the job.   The materials for each job were generally picked up at

petitioner’s house by the workers, although petitioner also sent

the workers to other locations to pick up materials, for which

petitioner had already paid.    Petitioner maintained three trucks

for his waterproofing business in 2003, and his workers often
                                - 4 -

used the trucks to drive to various job sites and to perform

their duties.    Petitioner also provided all three workers with

cell phones and cell phone service in 2003.

     Petitioner’s workers were usually paid standard amounts on a

weekly basis throughout 2003.    Raul Ramirez was paid by check,

mostly in $600 and $700 amounts.    Carlos Ramirez was usually paid

$500 by check.    Hernandez was usually paid by check in November

and December 2003 in amounts slightly more or less than $500.

Petitioner also paid Hernandez $7,550 in cash throughout 2003.

Petitioner provided bonus checks to all three workers on

December 24, 2003.    Generally, petitioner’s payments to his

workers were based on work performed, but he paid his workers the

same basic amount weekly even when there was a lack of work in

his waterproofing business in general or a lag in the amount of

work required of them individually.

     Petitioner employed an accountant to prepare his Federal

employment tax forms and returns for 2003.    Petitioner filed

Forms 1099-MISC, Miscellaneous Income, reporting nonemployee

compensation payments made to his workers in 2003.    Petitioner

provided the information and documents that his accountant used

in preparing his returns.
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                              OPINION

I.   Employment Status

      Under subtitle C of the Internal Revenue Code, an employer

is obligated both to pay certain employment taxes imposed on

employers and also to withhold from employees’ wages certain

taxes imposed on employees.   Sections 3111 and 3301 impose the

employer-level taxes under FICA (pertaining to Social Security)

and FUTA (pertaining to unemployment), respectively, based on

wages paid to employees (employment taxes).    Section 3101 imposes

a FICA tax at the employee level as well, which section 3102

requires the employer to collect from the employee’s wages.

Section 3402 requires an employer to withhold from his employee’s

wages the employee’s share of Federal income tax, and section

3501 requires the employer to deposit amounts withheld with the

Treasury of the United States.    If the employer fails to withhold

as required, he is liable for the amounts owed by the employee,

but required to be withheld by the employer.   Sec. 3403.

      With regard to employment taxes, the term “employee”

includes “any individual who, under the usual common law rules

applicable in determining the employer-employee relationship, has

the status of an employee”.   Sec. 3121(d)(2); accord sec.

3306(i).   Sections 31.3121(d)-1(c)(2) and 31.3306(i)-1(b),

Employment Tax Regs., define an “employer-employee relationship”

as follows:
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     Generally such relationship exists when the person for
     whom services are performed has the right to control
     and direct the individual who performs the services,
     not only as to the result to be accomplished by the
     work but also as to the details and means by which that
     result is accomplished. That is, an employee is
     subject to the will and control of the employer not
     only as to what shall be done but how it shall be done.
     In this connection, it is not necessary that the
     employer actually direct or control the manner in which
     the services are performed; it is sufficient if he has
     the right to do so. The right to discharge is also an
     important factor indicating that the person possessing
     that right is an employer. Other factors
     characteristic of an employer, but not necessarily
     present in every case, are the furnishing of tools and
     the furnishing of a place of work, to the individual
     who performs the services. In general, if an
     individual is subject to the control or direction of
     another merely as to the result to be accomplished by
     the work and not as to the means and methods for
     accomplishing the result, he is an independent
     contractor. * * *

See also sec. 31.3401(c)-1(b), Employment Tax Regs.

     We consider the following factors in deciding whether a

worker is a common law employee or an independent contractor:

(1) The degree of control exercised by the principal; (2) which

party invests in the work facilities used by the worker; (3) the

opportunity of the worker for profit or loss; (4) whether the

principal can discharge the worker; (5) whether the work is part

of the principal’s regular business; (6) the permanency of the

relationship; and (7) the relationship the parties believed they

were creating.   Ewens & Miller, Inc. v. Commissioner, 117 T.C.

263, 270 (2001); Weber v. Commissioner, 103 T.C. 378, 387 (1994),

affd. per curiam 60 F.3d 1104 (4th Cir. 1995).   We consider all
                               - 7 -

of the facts and circumstances of each case, and no single factor

is determinative.   Ewens & Miller, Inc. v. Commissioner, supra at

270; Weber v. Commissioner, supra at 387.

      Although not the exclusive inquiry, the degree of control

exercised by the principal over the worker is the crucial test in

determining the nature of a working relationship.   See Clackamas

Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440, 448

(2003); Matthews v. Commissioner, 92 T.C. 351, 361 (1989), affd.

907 F.2d 1173 (D.C. Cir. 1990).   To retain the requisite degree

of control over an employee, the employer need not direct the

employee’s every move; it is sufficient if he has the right to do

so.   Weber v. Commissioner, supra at 387; see sec. 31.3401(c)-

1(b), Employment Tax Regs.   In this case, petitioner controlled

each job site, delegated responsibilities, and directed each of

his worker’s actions to varying degrees based on the individual

worker’s respective experience.   This factor denotes the

existence of an employment relationship.

      If a worker provides his own tools to perform a task for his

principal, this may indicate that the worker is an independent

contractor.   See Breaux & Daigle, Inc. v. United States, 900 F.2d

49, 53 (5th Cir. 1990) (citing United States v. Silk, 331 U.S.

704, 706 (1947)).   In this case, although the workers often used

their own tools to perform jobs for petitioner, petitioner

provided all materials for each job and reimbursed his workers
                               - 8 -

for expenses incurred on the job.    The materials for each job

were generally picked up at petitioner’s house by the workers,

although petitioner also sent them to other locations to pick up

materials, for which petitioner had already paid.    Petitioner

maintained three trucks for his waterproofing business in 2003,

and his workers often used the trucks to drive to various job

sites and to perform their duties.     Petitioner also provided all

three workers with cell phones and cell phone service in 2003.

These facts show that petitioner provided the general work

facilities for his workers.   This factor denotes an employment

relationship.

     We have held that, where a worker earns a salary and is

reimbursed for any expenses, he is not in a position to increase

his profit by his own actions and is not at a risk for loss.      See

Weber v. Commissioner, supra at 390-391.     In this case,

petitioner testified that, after netting out the cost of

materials, he split the payments he received from customers for

particular jobs among himself and his workers.     Petitioner has

provided no documentation or testimony regarding how these

calculations were made or how he kept track of amounts owed to

the workers on particular jobs.     The workers were usually paid

standard amounts on a weekly basis throughout 2003.     With only

minor variance, Raul Ramirez was paid by check in mostly $600 and

$700 amounts.   Carlos Ramirez was usually paid $500 by check.
                                 - 9 -

Hernandez was paid by check in November and December 2003 in

amounts slightly more or less than $500.    Petitioner also paid

Hernandez $7,550 in cash throughout 2003.    Petitioner’s payments

to his workers were based on work performed generally, but he

paid his workers the same basic amount weekly even when there was

a lack of work in his waterproofing business in general or a lag

in the amount of work required of them individually.    Petitioner

also provided bonus checks to all three workers on December 24,

2003.   Petitioner’s workers generally received the same regular

payments regardless of how much money was being taken in by

petitioner from his customers.    This lack of an opportunity for

profit or loss on the part of petitioner’s workers is consistent

with an employment relationship.

     Petitioner maintained a substantial degree of control over

his workers and the job sites in general.    The most reasonable

inference from the evidence is that he would have been able to

hire or fire his workers at will, regardless of whether he ever

exercised that right.

     Petitioner’s regular business was the waterproofing industry

with which he and his workers were involved during 2003.

Petitioner’s workers were regularly employed by petitioner in

2003 and worked on petitioner’s many different job sites

throughout the year.    Although the workers asserted at trial that

they were independent contractors, their testimony on other
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aspects of their working relationships with petitioner generally

reveals that their practices and expectations with regard to

their jobs were those of employees, not of independent

contractors.

      On review of the entire record and weighing of the factors

discussed above, we conclude that petitioner’s workers were

employees during 2003.

II.   Revenue Act Section 530 Relief

      Notwithstanding the existence of an employer-employee

relationship, Revenue Act section 530 operates in enumerated

circumstances to afford relief from employment tax liability.

Revenue Act section 530 provides in relevant part:

      SEC. 530. CONTROVERSIES INVOLVING WHETHER INDIVIDUALS
      ARE EMPLOYEES FOR PURPOSES OF THE EMPLOYMENT TAXES.

           (a) Termination of Certain Employment Tax
      Liability.--

           (1) In general.--If--

           (A) for purposes of employment taxes, the taxpayer
      did not treat an individual as an employee for any
      period, and

           (B) in the case of periods after December 31,
      1978, all Federal tax returns (including information
      returns) required to be filed by the taxpayer with
      respect to such individual for such period are filed on
      a basis consistent with the taxpayer’s treatment of
      such individual as not being an employee,

      then, for purposes of applying such taxes for such
      period with respect to the taxpayer, the individual
      shall be deemed not to be an employee unless the
      taxpayer had no reasonable basis for not treating such
      individual as an employee.
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          (2) Statutory standards providing one method of
     satisfying the requirements of paragraph (1).-- For
     purposes of paragraph (1), a taxpayer shall in any case
     be treated as having a reasonable basis for not
     treating an individual as an employee for a period if
     the taxpayer’s treatment of such individual for such
     period was in reasonable reliance on any of the
     following:

          (A) judicial precedent, published rulings,
     technical advice with respect to the taxpayer, or a
     letter ruling to the taxpayer;

          (B) a past Internal Revenue Service audit of the
     taxpayer in which there was no assessment attributable
     to the treatment (for employment tax purposes) of the
     individuals holding positions substantially similar to
     the position held by this individual; or

          (C) long-standing recognized practice of a
     significant segment of the industry in which such
     individual was engaged.

Respondent does not dispute that petitioner meets the first two

requirements of Revenue Act section 530(a)(1).   Petitioner has

never treated any of his workers as employees for Federal

employment tax purposes, and he has timely filed all required

returns for the periods in issue and for prior periods on a basis

consistent with his treatment of the workers as independent

contractors.   However, respondent argues that petitioner did not

have a reasonable basis for treating his workers as independent

contractors instead of employees, and thus fails the third

element of the Revenue Act section 530(a)(1) test.

     Under Revenue Act section 530(e)(4), the burden of proof is

placed on respondent if, in addition to cooperating with

reasonable requests from respondent, petitioner establishes a
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prima facie case that it was reasonable not to treat an

individual as an employee for employment tax purposes.      Small

Business Job Protection Act of 1996, Pub. L. 104-188, sec.

1122(a), 110 Stat. 1766 (adding subsection (e) to Revenue Act

section 530).   Because, as explained below, petitioner has failed

to establish a prima facie case that his treatment of his workers

for employment tax purposes was reasonable, respondent does not

bear the burden of proof in this case.

     Revenue Act section 530(a)(2) sets forth three statutory

safe harbors for purposes of establishing reasonable basis.

Reasonable reliance upon any of the circumstances enumerated in

subparagraph (A), (B), or (C) of Revenue Act section 530(a)(2) is

deemed sufficient to establish the requisite reasonable basis.

With regard to Revenue Act section 530(a)(2)(A), petitioner has

presented no judicial precedent, published ruling, technical

advice, or letter ruling on which he relied in treating his

workers as independent contractors.    With regard to subparagraphs

(B) and (C), petitioner has not provided evidence that there was

a past employment tax audit in which his classification of the

workers was not challenged, nor has he provided evidence that

treating the workers as independent contractors was in accordance

with a long-standing practice within the waterproofing industry.

The safe havens of Revenue Act section 530(a)(2) are therefore

inapplicable on the record before us.    We conclude that
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petitioner had no reasonable basis for failing to characterize

his workers as employees.    Consequently, relief from employment

tax liability is not available to petitioner under Revenue Act

section 530.

III.   Additions to Tax

       Respondent determined an addition to tax under section

6651(a)(1) for the periods in issue in 2003.    Section 6651(a)(1)

provides for an addition to tax of 5 percent of the tax required

to be shown on the return for each month or fraction thereof for

which there is a failure to file, not to exceed 25 percent.

However, the addition to tax for failure to file is not imposed

if it is shown that the failure to file did not result from

willful neglect and was due to reasonable cause.    See United

States v. Boyle, 469 U.S. 241, 245 (1985).     To prove reasonable

cause, the taxpayer must show that he exercised ordinary business

care and prudence but nevertheless could not file the return when

it was due.    See Crocker v. Commissioner, 92 T.C. 899, 913

(1989); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.    Respondent

also determined an addition to tax under section 6656 with regard

to petitioner’s tax liability.    Section 6656 imposes an addition

to tax equal to 10 percent of the portion of an underpayment in

employment tax that is required to be deposited if the failure to

deposit is more than 15 days.    A taxpayer may also avoid the

addition to tax under section 6656 if his failure to deposit was
                              - 14 -

due to reasonable cause and not willful neglect.    Charlotte’s

Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 109 (2003),

affd. 425 F.3d 1203 (9th Cir. 2005).

     Under section 7491(c), respondent has the burden of

production with regard to additions to tax and must come forward

with sufficient evidence indicating that it is appropriate to

impose an addition to tax.   Higbee v. Commissioner, 116 T.C. 438,

446 (2001).   Because it is undisputed that petitioner filed no

employment tax returns and deposited no employment taxes with the

Treasury, respondent has carried the burden of production under

section 7491(c) with regard to the additions to tax under both

section 6651 and section 6656.

     Petitioner claims that he had reasonable cause for failing

to file his returns and to deposit employment taxes due because

he relied upon his tax return preparer to prepare his tax returns

properly.   However, petitioner has not established that he sought

specific advice from his return preparer regarding the legal

status of his workers for employment tax purposes or that he

provided his return preparer with all relevant information

regarding the nature of their employment.    Also, petitioner did

not call his return preparer as a witness.   Petitioner has not

established reasonable cause for his failure to file returns or

his failure to deposit, and respondent’s determinations with
                               - 15 -

respect to the additions to tax under sections 6651(a)(1) and

6656 are sustained.

IV.    Conclusion

       We hold that Hernandez, Carlos Ramirez, and Raul Ramirez

were employees of petitioner during the periods in issue and that

petitioner is not entitled to relief under Revenue Act section

530.    Accordingly, petitioner is liable for FICA and FUTA taxes

for the periods in issue as determined by respondent.    We also

hold that petitioner is liable for the additions to tax

determined by respondent pursuant to sections 6651(a)(1) and

6656.

       To reflect the foregoing,


                                          Decision will be entered

                                     for respondent.
