                          T.C. Memo. 2012-62



                   UNITED STATES TAX COURT



       JOHN KELLER, ACTION AUTO BODY, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 28991-09.                          Filed March 8, 2012.



      R determined that 10 of P’s workers were employees rather than
independent contractors, and determined employment taxes and penalties
against P.

     Held: Seven of 10 workers listed in the notice of determination of
worker classification were independent contractors, and 3 were employees.

      Held, further, P is liable for an I.R.C. sec. 6651(a)(1) addition to tax
and an I.R.C. sec. 6656(a) penalty with respect to the three employees.
                                         -2-

      John Keller, pro se.

      Michael K. Park, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


      WHERRY, Judge: This case is before the Court on a petition for review of a

notice of determination of worker classification for petitioner’s 1998 tax year which

also determined that petitioner was liable for a $97,421.38 deficiency and $26,365

in penalties and additions to tax. The issues for decision are:

      (1) whether the workers listed in the notice of determination should be

legally classified as petitioner’s employees for Federal employment tax purposes;

      (2) whether petitioner is entitled to relief under the Revenue Act of 1978,

Pub. L. No. 95-600, sec. 530, 92 Stat. at 2885, as amended (section 530), which in

certain circumstances deems an individual not to be an employee;1

      (3) whether petitioner is liable for the employment taxes in the notice of

determination;




      1
       Unless otherwise indicated, all section references are to the Internal Revenue
Code of 1986, as amended and in effect for the taxable year at issue. The Rule
references are to the Tax Court Rules of Practice and Procedure.
                                          -3-

      (4) whether petitioner is liable for a section 6651(a)(1) addition to tax for

failing to file Forms 941, Employer’s Quarterly Federal Tax Return, and a Form

940, Employer’s Annual Federal Unemployment Tax Return;

      (5) whether petitioner is liable for a section 6656 penalty for failing to make

timely deposits of employment taxes.

                                FINDINGS OF FACT

      Some of the facts have been deemed stipulated pursuant to Rule 91(f) from

respondent’s request for admissions when petitioner did not respond to a motion to

show cause and the stipulated facts are so found. The stipulated facts, with

accompanying exhibits, are incorporated in our findings by this reference.2 At the

time the petition was filed, petitioner resided in California.

      Petitioner was a 50% partner in Action Auto Body (AAB), which operated a

paint and auto body shop. Petitioner’s uncle, David Keller, was the other 50%

partner. Petitioner managed the daily operations of the business. AAB had a

contract with Mercury Insurance to make estimates for repairs and then would often

repair those vehicles. AAB also took in business outside of Mercury.


      2
        At trial petitioner objected to many of the paragraphs in the stipulation of
facts and sought relief from the admissions, arguing that he did not respond in time
because “I’ve been medicated for neuropathy and I can’t think, I can’t read, I can’t
do driving [sic].” The Court denied petitioner’s motion for relief from stipulations.
                                           -4-

      On September 3, 2009, respondent sent petitioner a notice of determination of

worker classification for the 1998 tax year, determining that the following

individuals for the quarters listed were to be legally classified as his employees:

        Individual           1st Quarter    2d Quarter     3d Quarter     4th Quarter
 Kevin Walker                     x              x              x              x
 Tony Red                         x              x              x              x
 Alex Martinez                    x              x              x              x
 Javier Mendoza                   x              x              x              x
 Tom Thompson                     x              x
 Kurt Hirsh                       x              x              x              x
 Walter Black                     x
 Eric Mark                        x              x              x              x
 Lorna Dinger                                                                  x
 Nicole Gonzalez/                                                              x
  Sandoval

      For three years before opening AAB, petitioner and Tony Red worked

together repairing cars as independent contractors. Mr. Red was a mechanic and

also restored cars. Kevin Walker, Javier Mendoza, and Walter Black worked as

auto body repair technicians for AAB. Alex Martinez worked as a detailer for

AAB. Tom Thompson and Kurt Hirsch worked as auto body painters for AAB.

Each of these seven auto body workers had his own space on AAB’s premises to
                                         -5-

perform his work but did not pay any rent. Petitioner paid all of AAB’s auto

workers weekly by check; the amount varied depending on commissions and the

type of work they performed.

      Eric Mark started out by cleaning the shop and assisting other workers at

AAB and moved up to writing estimates for repairs. Mr. Mark received on-the-job

training from petitioner and the other technicians at AAB. Petitioner also paid Mr.

Mark weekly by check.

      Lorna Dinger and Nicole Gonzalez performed secretarial duties for AAB

such as serving as a receptionist, answering the phones, and filing. Petitioner paid

them weekly by check.

      Petitioner did not withhold any payroll tax from the amounts paid to any of

the workers at AAB and did not issue Forms W-2, Wage and Tax Statement, or

Forms 1099-MISC, Miscellaneous Income. AAB did not issue any employee

manuals, and no employment contracts were ever signed between the workers of

AAB and AAB.

                                     OPINION

I.    Burden of Proof

      As a general rule, the Commissioner’s determination of a taxpayer’s liability

is presumed correct, and the taxpayer bears the burden of proving that the
                                         -6-

determination is improper. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933); Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 268 (2001) (citing

Boles Trucking Inc. v. United States, 77 F.3d 236, 239-240 (8th Cir. 1996) (this

principle applies to determinations that a taxpayer’s workers are employees)).

However, pursuant to section 7491(a), the burden of proof on factual issues that

affect the taxpayer’s tax liability may be shifted to the Commissioner where the

“taxpayer introduces credible evidence with respect to * * * such issue .” The

burden will shift only if the taxpayer has, inter alia, complied with substantiation

requirements pursuant to the Code and “cooperated with reasonable requests by the

Secretary for witnesses, information, documents, meetings, and interviews”. Sec.

7491(a)(2)(B). Petitioner failed to cooperate, and the burden of proof remains on

him.

II.    The Workers’ Legal Classification

       Whether an individual is an independent contractor or an employee is a

question of fact. Weber v. Commissioner, 103 T.C. 378, 386 (1994), aff’d, 60 F.3d

1104 (4th Cir. 1995); Prof’l & Exec. Leasing, Inc. v. Commissioner, 89 T.C. 225,

232 (1987), aff’d, 862 F.2d 751 (9th Cir. 1988). Common law rules are applied to

determine whether an individual is an employee or an independent contractor. Secs.
                                          -7-

3121(d)(2), 3306(i); Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322-323

(1992).

      In determining whether a worker is a common law employee or an

independent contractor, the Court, inter alia, generally considers: “(1) The degree

of control exercised by the principal; (2) which party invests in work facilities used

by the individual; (3) the opportunity of the individual for profit or loss; (4) whether

the principal can 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 believed they were creating.” See Ewens & Miller, Inc. v.

Commissioner, 117 T.C. at 270; secs. 31.3121(d)-1(c)(2), 31.3401(c)-1(b),

Employment Tax Regs. . This list of factors is not exclusive, and other factors may

also be considered such as the provision of employee benefits. Weber v.

Commissioner, 103 T.C. at 387, 393-394; Prof’l & Exec. Leasing, Inc. v.

Commissioner, 89 T.C. at 232 (citing United States v. Silk, 331 U.S. 704, 716

(1947)). All of the facts and circumstances of each case are considered, and no

single factor is dispositive. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 270.
                                         -8-

A.    Degree of Control

      The right of the principal to exercise control over the agent, whether or not

the principal in fact does so, is the “crucial test” for the employer-employee

relationship. Weber v. Commissioner, 103 T.C. at 387. “The employment

relationship exists when the principal retains the right to direct the manner in which

the work is done, and to control the methods used in doing the work, and to control

the details and means by which the desired result is accomplished.” Ellison v.

Commissioner, 55 T.C. 142, 152-153 (1970). In order to show the requisite degree

of control, “the alleged employer need not ‘stand over the employee and direct

every move that he makes.’” Simpson v. Commissioner, 64 T.C. 974, 985 (1975).

      Petitioner argues that he could not control the persons working for AAB and

that they set their own hours and chose their own work. Petitioner credibly testified

that “each outside service provider provided an individual direct service, from

pinstriping to windows to glass to bumper repair to bumpers” and that the

individuals worked at their own pace with their own methods to create a finished,

deliverable product.
                                         -9-

      Petitioner did not control the workers engaged in the actual body work of

AAB. As the person for whom the services were performed, in order for the

workers to be employees petitioner needed to have

      “the right [whether or not exercised] 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. * * *”

See Simpson v. Commissioner, 64 T.C. at 984 (quoting section 31.3121(d)-1(c)(2),

Employment Tax Regs.). This was simply not the case for those persons engaged in

auto work at AAB.

      However, as to Mr. Mark and the two workers who performed secretarial

duties, the record is extremely sparse on petitioner’s ability to control. It seems to

show that petitioner had the right to control their work, and petitioner did not prove

that he did not control their work. Accordingly, this factor weighs heavily in favor

of independent contractor status for the auto workers and employee status for Ms.

Dinger, Ms. Gonzalez, and Mr. Mark.

      B.     Investment in Facilities

      The fact that a worker provides his or her own tools or owns a vehicle that is

used for work is indicative of independent contractor status. Ewens & Miller, Inc.
                                         - 10 -

v. Commissioner, 117 T.C. at 271-272 (citing Breaux & Daigle, Inc. v. United

States, 900 F.2d 49, 53 (5th Cir. 1990)). Additionally, maintenance of a home

office is consistent with, but not determinative of, independent contractor status.

Lewis v. Commissioner, T.C. Memo. 1993-635.

      Petitioner argues that each of the persons working at AAB owned his own

tools. Unfortunately, the stipulation of facts, which became absolute when

petitioner did not object to the Rule 91(f) motion, explicitly states that each of the

listed workers did not own his own tools. At trial petitioner did not present any

evidence contrary to the stipulation of facts besides his and Ms. Dinger’s testimony.

Ms. Dinger stated that the workers owned their own hand tools but explained that

AAB owned and maintained heavy equipment such as sprayers, a framing machine,

and lift equipment. This Court finds it especially unconvincing that the two workers

who performed secretarial tasks provided their own equipment. There is no

evidence whether any of the workers maintained a home office. The Court

concludes that this factor weighs in favor of an employer-employee relationship for

all of AAB’s workers.

      C.     Opportunity for Profit or Loss

      Compensation on a commission basis is entirely consistent with an

employer-employee relationship. Tex. Carbonate Co. v. Phinney, 307 F.2d 289,
                                        - 11 -

292 (5th Cir. 1962); Capital Life & Health Ins. Co. v. Bowers, 186 F.2d 943,

944-945 (4th Cir. 1951). However, compensation in the form of commissions can

also be indicative of independent contractor status. See Simpson v. Commissioner,

64 T.C. at 988. In Simpson the Court found, inter alia, that because the worker’s

opportunity for “profit or loss in any given year was solely dependent upon his own

efforts and skill” he was an independent contractor. Id. Petitioner paid the auto

body workers weekly with the amount depending on the commissions and the type

of work they performed. Although the auto workers were paid on the basis of their

own efforts and skill, they were not entirely dependent on themselves because

petitioner was responsible for finding most of the work. Nevertheless, the auto

body workers also obtained some of their own work independently from AAB.

There is no evidence in the record as to how the compensation of Mr. Mark and the

workers performing secretarial duties was determined. Accordingly, this factor is

neutral for the auto workers and weighs in favor of employee status for Ms. Dinger,

Ms. Gonzalez, and Mr. Mark.

      D.     Right To Discharge

      Employers typically have the power to terminate employees at will. Ellison v.

Commissioner, 55 T.C. at 155. At trial petitioner explained that as to the persons

working at AAB “could they be discharged by me? Absolutely. If I didn’t like
                                            - 12 -

their service or we were done for whatever reason”. Accordingly, the Court

concludes that this factor weighs in favor of an employer-employee

relationship.

      E.        Integral Part of Business

      Before the workers listed in the notice of determination began working at

AAB, petitioner performed all of the services himself. However, once the business

expanded, petitioner needed the flexibility of independent workers to handle the

varying types of jobs and numbers of cars. Because petitioner paid the auto workers

commissions based on the work they did, he could support different amounts of

business. As the business expanded the workers became an important part of AAB.

We note that when workers are an essential part of the taxpayer’s normal operations

the Court has found this factor to weigh in favor of an employer-employee

relationship. See Day v. Commissioner, T.C. Memo. 2000-375. However this case

is distinguishable from Day because petitioner’s main job was to estimate repairs for

Mercury Insurance, and he would then refer vehicles to the workers for repairs.

      The Court concludes that this factor is neutral. The business could have

survived without the workers; the workers had previously survived and in the future

could and did survive without AAB. Petitioner was capable of performing
                                         - 13 -

the services on his own and could have cut back the number of vehicles he took in

to accommodate his loss of workers. Alternatively he could have referred or

subcontracted the repair work out to other independent contractors. Therefore this

factor indicates neither independent contractor nor employee status.

      F.     Permanency of the Relationship

      A transitory work relationship may weigh in favor of independent contractor

status. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 273 (citing Herman v.

Express Sixty-Minutes Delivery Serv., Inc., 161 F.3d 299, 305 (5th Cir. 1998)).

The principal’s right to discharge the worker, and the worker’s right to quit, at any

time, is a factor. Id. The workers at AAB were all allowed to leave or quit at will,

and some did. They could also have been discharged at will. At least six body

workers left, and respondent treated them as independent contractors. Because both

independent contractors and employees can be terminated at will, we accord this

factor less weight. See Lewis v. Commissioner, T.C. Memo. 1993-635 (citing

Neely v. Commissioner, T.C. Memo. 1978-18). Accordingly, this factor weighs

slightly in favor of independent contractor status.

      G.     Relationship the Parties Thought They Created

      Petitioner certainly thought that he was creating independent contractor

relationships with workers at AAB. For three years before opening AAB,
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petitioner and Mr. Red had worked together repairing cars as independent

contractors. The former workers who testified seemed aware that petitioner

believed that they were independent contractors while working for him, and they

agreed. Thus, the Court concludes that both petitioner and the AAB workers listed

in the notice of determination intended to create independent contractor

relationships.

      H.     Provision of Employee Benefits

      Petitioner did not offer the workers listed in the notice of determination any

employee benefits. Benefits are typically provided to employees rather than

independent contractors. See Weber v. Commissioner, 103 T.C. at 393-394. When

AAB closed or a worker left, none of the workers claimed unemployment benefits

under California law. Accordingly, this factor tends to weigh in favor of

independent contractor status.

      I.     Conclusion

       After weighing the above factors, the Court concludes that the auto body

repair workers listed in the notice of determination were independent contractors

and Ms. Dinger, Ms. Gonzalez, and Mr. Mark were employees.
                                           - 15 -

III.     Section 530 Relief

         Respondent also determined that petitioner is not entitled to relief from

employee classification of its workers under section 530.

         Section 530(a)(1) provides that an individual will be deemed not to be an

employee of a taxpayer for purposes of applying employment taxes to that taxpayer,

if the taxpayer satisfies three requirements: (1) the taxpayer must not have treated

the individual as an employee for any period; (2) the taxpayer must have

consistently treated the individual as not being an employee on all tax returns for

periods after December 31, 1978; (3) the taxpayer must have had a reasonable basis

for not treating the individual as an employee. Joseph M. Grey Pub. Accountant,

P.C. v. Commissioner, 119 T.C. 121, 130 (2002), aff’d, 93 Fed. Appx. 473 (3d Cir.

2004).

         Respondent concedes that petitioner meets the first requirement because he

did not treat any of the workers as employees for any period. Respondent, however,

contends that petitioner failed to meet the second requirement because he never filed

Forms 1099-MISC for any of the workers in question as required by sections

6041(a) and 6041A(a). We note that “For tax periods after December 31, 1978,

relief under § 530 is available only if    * * * [the taxpayer] filed required tax or

information returns. § 530(a)(1)”. Gen. Inv. Corp. v. United States, 823 F.2d 337,
                                        - 16 -

341 (9th Cir. 1987). To qualify for relief under section 530(a)(1), a taxpayer must

satisfy all three requirements; and because we have found that petitioner fails to

meet the second requirement, he does not qualify for relief under section 530. See

Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. at 130.

IV.   Employment Taxes

      Because this Court found that three persons, Ms. Dinger, Ms. Gonzalez, and

Mr. Mark, listed in the notice of determination were his employees and he did not

present any evidence that the amounts of employment tax listed in the notice of

determination were incorrect, petitioner is liable for the employment taxes related to

those three employees.3

V.    Section 6651 Addition To Tax and Section 6656 Penalty

      Under section 6656(a), if a taxpayer fails to make a required deposit on the

date prescribed for that deposit, a penalty equal to the applicable percentage of the

amount of the underpayment, determined pursuant to section 6656(b), shall be

imposed. Section 6656(a) also provides that the penalty shall not be imposed if “it




      3
        We note that under sec. 3402(d) respondent will abate these taxes to the
extent that the employees paid the tax and petitioner shows the taxes have been paid
by these three employees. See Cain v. Commissioner, T.C. Memo. 2009-54; sec.
31.3402(d)-1, Employment Tax Regs.
                                          - 17 -

is shown that such failure is due to reasonable cause and not due to willful neglect”.

Likewise section 6651(a)(1) imposes an addition to tax for failure to timely file the

tax return.4 This addition to tax is also not to be imposed if the failure to pay was

due to reasonable cause and not willful neglect.

      Although we did find that certain of petitioner’s workers were independent

contractors and others were employees, we do not find that he had reasonable cause

for failing to make the required deposits and timely pay tax for the three employees.

As discussed supra petitioner did not issue a Form W-2 or a Form 1099-MISC to

any of his workers, and it would be inconsistent for us to find that petitioner did not

have reasonable cause for treating his employees as independent contractors but had

reasonable cause for failing to make the required deposits and timely pay tax.

Petitioner also did not provide any evidence of or explanation as to reasonable cause

at trial. Petitioner is liable for the section 6656(a) penalty and the section

6651(a)(1) addition to tax for the three workers that this Court has found to be

employees.




      4
       We note that if the taxpayer has failed to file a return the tax may be
assessed at any time. Sec. 6501(c)(3).
                                       - 18 -

      The Court has considered all of the parties’ contentions, arguments, requests,

and statements. To the extent not discussed herein, we conclude that they are

meritless, moot, or irrelevant.

      To reflect the foregoing,


                                                Decision will be entered under

                                      Rule 155.
