                       117 T.C. No. 22



                UNITED STATES TAX COURT



         EWENS AND MILLER, INC., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 13069-99.                     Filed December 11, 2001.


     P manufactured bakery products. P had workers who
produced its product (CPWs and BWs), delivered its
product (RDs), and marketed its product (OSWs).

     In 1992, P “converted” all its employees to
independent contractors. R issued P a Notice of
Determination Concerning Worker Classification Under
Section 7436 determining that the CPWs, BWs, RDs, and
OSWs were employees for purposes of Federal employment
tax, that P was not entitled to relief pursuant to sec.
530 of the Revenue Act of 1978, Pub. L. 95-600, 92
Stat. 2763, 2885, and that P was liable for penalties
pursuant to sec. 6656, I.R.C.

     On Sept. 28, 1999, R filed a motion to dismiss for
lack of jurisdiction as to the amounts of employment
taxes and related penalties. On Oct. 26, 1999,
following this Court’s decision in Henry Randolph
Consulting v. Commissioner, 112 T.C. 1 (1999), we
granted R’s motion.
                               - 2 -

          Subsequent to the trial in this case, Congress
     amended sec. 7436(a), I.R.C., to provide this Court
     with jurisdiction to decide the correct amounts of
     employment taxes that relate to the Secretary’s
     determination concerning worker classification.
     Community Renewal Tax Relief Act of 2000 (CRTRA), Pub.
     L. 106-554, sec. 314(f), 114 Stat. 2763. The amendment
     to sec. 7436, I.R.C., was made retroactive to the
     effective date of sec. 7436(a), I.R.C. CRTRA sec.
     314(g).

          Held: pursuant to sec. 7436(a), I.R.C., this
     Court has jurisdiction over additions to tax and
     penalties found in subtitle F, chapter 68, including
     deciding the proper amounts of such additions to tax
     and penalties, related to taxes imposed by subtitle C
     with respect to worker classification or sec. 530
     treatment determinations.

          Held, further, The CPWs, BWs, and OSWs are
     employees of P pursuant to sec. 3121(d)(2), I.R.C.,
     because they were common law employees.

          Held, further, the RDs are employees of P pursuant
     to sec. 3121(d)(3)(A), I.R.C., because they were
     statutory employees.

          Held, further, P is not entitled to relief
     pursuant to sec. 530 of the Revenue Act of 1978, Pub.
     L. 95-600, 92 Stat. 2763, 2885.



     Roger Miller (an officer), for petitioner.

     Denise G. Dengler, for respondent.



     VASQUEZ, Judge:   This case is before the Court on a petition

for redetermination of a Notice of Determination Concerning

Worker Classification Under Section 7436 (Notice of

Determination).   Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect for the
                              - 3 -



year in issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

     The issues for decision are:   (1) Whether the workers1

performing services for petitioner were employees during 1992;

(2) whether petitioner is entitled to “safe harbor” relief as

provided by section 530 of the Revenue Act of 1978, Pub. L. 95-

600, 92 Stat. 2763, 2885 (section 530); and (3) whether our

jurisdiction to decide the proper amount of employment taxes2

provides the Court with jurisdiction to decide the proper amount

of additions to tax and penalties related to employment tax

arising from worker classification or section 530 treatment

determinations.

                        FINDINGS OF FACT

     Petitioner was a Virginia corporation that had its principal

place of business in Lorton, Virginia.   At the time it filed its

petition, petitioner had terminated its corporate status.      Prior

to and during 1992, petitioner manufactured bakery products such

as cookies, brownies, and cinnamon buns.

     Peter Ewens (Ewens) was the president, and Roger Miller

     1
        Respondent concedes that the “consultant/outside
professional service workers” were not employees of petitioner.
     2
        For convenience, we use the term “employment taxes” to
refer to taxes under the Federal Insurance Contributions Act, ch.
736, secs. 3101-3128, 68A Stat. 415 (1954), the Federal
Unemployment Tax Act, ch. 736, secs. 3301-3311, 68A Stat. 439
(1954), and income tax withholding, secs. 3401-3406.
                                 - 4 -

(Miller) was the vice president of petitioner.     Ewens ran

petitioner on a day-to-day basis and controlled petitioner’s

operations.     Miller was a financial adviser to petitioner.

During its operation, Miller was at petitioner’s plant

approximately once a month.

     Miller was a C.P.A. who had his own company that prepared

tax returns.3    Miller prepared petitioner’s Federal corporate

income tax returns for 1991 and 1992.    He also signed

petitioner’s Federal employment tax returns for 1992.

     Petitioner had several categories of workers including

bakery personnel and production workers (bakery workers), cash

payroll workers, route distributors/sales people (route

distributors), and outside sales workers.

     The bakery workers worked at petitioner’s plant.     Using

equipment and supplies provided by petitioner, they mixed dough,

and baked and packaged petitioner’s products.     Although

petitioner did not set the bakery workers’ hours, each day a

certain amount of production had to be completed, and the bakery

workers could not leave until the production quota was met.

Petitioner paid the bakery workers a fixed amount based on the

amount of product they produced.

     Prior to 1992, petitioner treated the bakery workers as


     3
        Miller also was a graduate of Brooklyn Law School;
however, he never practiced law. Miller was also a former IRS
auditor.
                                 - 5 -

employees.   In 1991, petitioner issued the bakery workers Forms

W-2, Wage and Tax Statement.   In 1992, 30 out of petitioner’s 37

bakery workers received Forms 1099.      Of the seven who did not

receive a Form 1099, only two earned less than $600.4

     The cash payroll workers were a family of six or seven

individuals known as “the Rusli group”.      The Rusli group was not

a corporation.   The Rusli group worked for petitioner for a

number of years prior to 1992.    The Rusli group performed the

same work as the bakery workers.    Since 1987, pursuant to a

written agreement between the Rusli group and petitioner, the

Rusli group also supervised the bakery workers.      In 1992,

petitioner did not issue Forms 1099 to any of the cash payroll

workers.

     The route distributors transported petitioner’s product from

its plant to individuals or businesses who purchased the product.

Some route distributors bought the product and resold it for a

higher price; others worked on a commission basis.      The route

distributors drove their own vehicles.      Petitioner did not set

the hours the route distributors worked.

     In 1991, petitioner issued at least one route distributor,




     4
        Petitioner, however, did issue Forms 1099 to six bakery
workers who earned less than $600.
                                - 6 -

Frank Barranco, a Form W-2.    In 1992, petitioner did not issue

Forms 1099 to any of petitioner’s 21 route distributors.5

     The outside sales workers were individuals who marketed

petitioner’s product.    They had their own vehicles, and

petitioner did not set their hours.     When an outside sales worker

sold a product, he was paid a commission.    Petitioner had the

right to hire and fire the outside sales people.

     In 1991, petitioner issued at least two outside sales

workers, Terre Cone and Terry McKnight, a Form W-2.    In 1992, two

of petitioner’s five outside sales workers received Forms 1099.

Of the three who did not receive a Form 1099, two earned less

than $600.

     On November 4, 1991, petitioner issued a memorandum from

Ewens to the staff.    The memorandum stated:   (1) The company had

treated certain workers as employees and others as independent

contractors; (2) beginning January 1, 1992, petitioner would

discontinue its production function and would subcontract its

entire operations to outside groups or individuals; (3)

individuals who wanted to continue their association with

petitioner would be required to sign a statement in which they

accepted responsibility for all of their own payroll taxes; (4)

individuals would be issued Forms 1099 instead of Forms W-2; and




     5
         Only 5 of the 21 route distributors earned less than $600.
                               - 7 -

(5) employees not wishing to become independent contractors would

be discharged prior to January 1, 1992.

     After January 1, 1992, there was no change in the activities

petitioner’s workers performed (i.e., in 1992, the workers did

much of the same work).   The reason petitioner wanted to convert

its employees to independent contractors was to protect

petitioner from lawsuits6 and to have better control over the

activities of its workers.   Petitioner was advised by an attorney

to convert the employees to independent contractors to limit

petitioner’s liability.   Petitioner continued directly paying its

workers.

     Several of petitioner’s checks issued to its workers, and

signed by Miller, in 1992 bear the notation “payroll”.

Additionally, there was a debit slip dated July 3, 1992, for

petitioner’s bank account that noted that cash was withdrawn for

payroll.

     For 1991, petitioner reported salaries and wages of $196,433

on its Federal corporate income tax return, and it issued 51

Forms W-2 to its employees reporting total wages of $196,432.60.

Petitioner also reported $81,143 of subcontractual labor, and it

issued 10 Forms 1099-MISC reporting total payments of $37,930.74.



     6
        In 1991, some of petitioner’s workers were stealing and
sabotaging its products. There were walnut shells in the cookies
and nails in the brownies. Consumers of petitioner’s products
had retained attorneys and were suing petitioner.
                                 - 8 -

     For 1992, petitioner reported no salaries and wages on its

Federal corporate income tax return.      Petitioner reported

$115,287 of subcontractual labor, and it issued 36 Forms 1099-

MISC reporting total payments of $115,287.05.

     Petitioner filed Forms 941, Employer’s Quarterly Federal Tax

Return, for the four quarters of 1992 and reported no wages

subject to withholding, no withheld income tax, no Social

Security tax, and no Medicare tax.       Petitioner’s Form 941 for the

last quarter of 1992 reported that the date final wages were paid

was December 31, 1991, that it had no employees, and that it was

out of business.   Petitioner’s Form 940, Employer’s Annual

Federal Unemployment (FUTA) Tax Return, for 1992 also reported no

wages, that petitioner had no employees, and that it was out of

business.

     Respondent determined that the bakery workers, cash payroll

workers, route distributors, and outside sales workers were

employees for employment tax purposes for 1992.      Respondent

further determined that petitioner was not entitled to section

530 relief for any of these workers.      Respondent also determined

penalties pursuant to section 6656.

                              OPINION

I.   Jurisdiction Over Amounts

     In its petition, petitioner disputed the amounts of the

employment taxes and penalties that were set forth on the
                                - 9 -

schedule accompanying the Notice of Determination.   In keeping

with our decision in Henry Randolph Consulting v. Commissioner,

112 T.C. 1 (1999) (holding that we did not have jurisdiction

regarding employment tax liabilities), prior to trial we granted

respondent’s motion to dismiss for lack of jurisdiction as to the

amounts of employment taxes and related penalties.

     This case was tried prior to Congress’s amendment of section

7436(a) that provided this Court with jurisdiction to decide the

correct amounts of employment taxes which relate to the

Secretary’s determination concerning worker classification.

Community Renewal Tax Relief Act of 2000 (CRTRA), Pub. L. 106-

554, sec. 314(f), 114 Stat. 2763.   The amendment to section 7436

was made retroactive to the effective date (August 5, 1997) of

section 7436(a).   CRTRA sec. 314(g); Taxpayer Relief Act of 1997,

Pub. L. 105-34, sec. 1454(a), 111 Stat. 1055.

     The amendment providing us with jurisdiction regarding the

amount of employment tax does not explicitly state whether we

have jurisdiction to decide the proper amount of additions to tax

and penalties related to employment tax arising from worker

classification or section 530 treatment determinations.   This is

an issue of first impression.

     Section 6665(a)(2) provides that, except as otherwise

provided, any reference in Title 26 to a tax imposed by Title 26

shall be deemed also to refer to the additions to tax, additional
                                - 10 -

amounts, and penalties provided by chapter 68 of subtitle F.      The

section 6656 penalty is found in chapter 68 of subtitle F and

applies in the case of a failure to deposit by the date

prescribed therefor “any amount of tax imposed by this title”

(i.e., Title 26).    Section 7436(e) provides that the term

“employment tax” means any tax imposed by subtitle C.    Section

7436(e) does not exclude additions to tax or penalties from the

definition of employment tax.

      Therefore, we hold that we do have jurisdiction over

additions to tax and penalties found in chapter 68 of subtitle F

(sections 6651 through 6751), including deciding the proper

amount of such additions to tax and penalties, related to taxes

imposed by subtitle C with respect to worker classification or

section 530 treatment determinations.

II.   Employees v. Independent Contractors

      Respondent’s determinations are presumptively correct, and

petitioner bears the burden of proving that those determinations

are erroneous.    Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933).    This principle applies to the Commissioner’s

determination that a taxpayer’s workers are employees.    Boles

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

1996).    If an employer-employee relationship7 exists, its


      7
        Secs. 31.3121(d)-1(c)(2), 31.3306(i)-1(b), Employment Tax
Regs., define an employer-employee relationship as follows:
                                                   (continued...)
                              - 11 -

characterization by the parties as some other relationship is of

no consequence.   Sec. 31.3121(d)-1(a)(3), Employment Tax Regs.

     For the purposes of 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).   Although the determination of employee status is to be

made by common law concepts, a realistic interpretation of the

term “employee” should be adopted, and doubtful questions should



     7
      (...continued)

          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. * * *

See also sec. 31.3401(c)-1(b), Employment Tax Regs. (using
virtually identical language).
                              - 12 -

be resolved in favor of employment.    Breaux & Daigle, Inc. v.

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

     Section 3121(d) also defines an “employee” for employment

tax purposes as (1) an individual who performs services for

remuneration as a agent-driver or commission-driver engaged in

distributing meat products, vegetable products, bakery products,

beverages (other than milk), or laundry or dry cleaning services

and (2) a traveling or city salesman, other than an agent-driver

or commission-driver, engaged on a full-time basis in the

solicitation on behalf of, and the transmission to, his principal

of orders from wholesalers, retailers, restaurants, or other

similar establishments for merchandise for resale.   Sec.

3121(d)(3)(A) and (D).   A worker can be a “statutory employee”

under section 3121(d)(3) only if he is not a common law employee

under section 3121(d)(2).   We therefore first must decide whether

petitioner’s workers were common law employees, and if they were

not then we shall decide whether they were statutory employees.

Lickliss v. Commissioner, T.C. Memo. 1994-103.

     A.   Whether Petitioner’s Workers Were Common Law Employees

     This Court considers the following factors to decide 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 work facilities used by the individual; (3) the
                                   - 13 -

.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.        Weber v. Commissioner, 103 T.C.

378, 387 (1994), affd. per curiam 60 F.3d 1104 (4th Cir. 1995).

All the facts and circumstances of each case are considered, and

no single factor is dispositive.        Id.

            1.     Degree of Control

     The degree of control necessary to find employee status

varies with the nature of the services provided by the worker.

Id. at 388.      To retain the requisite control over the details of

an individual’s work, the principal need not stand over the

individual and direct every move made by the individual; it is

sufficient if he has the right to do so.        Id.; see sec.

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

     Similarly, the employer need not set the employee’s hours or

supervise every detail of the work environment to control the

employee.     Gen. Inv. Corp. v. United States, 823 F.2d 337, 342

(9th Cir. 1987).        The fact that workers set their own hours does

not necessarily make them independent contractors.        Id.

                   a.     Bakery Workers and Cash Payroll Workers

     Petitioner controlled where the bakery workers and cash

payroll workers worked, what products they used to complete their

work, and how much product they had to produce.       Petitioner also
                              - 14 -

determined the amount they were paid.     On this record,

petitioner’s control of the bakery workers and cash payroll

workers is consistent with an employer-employee relationship.

                b.   Route Distributors

     The record does not establish that petitioner controlled to

whom the route distributors sold petitioner’s product or where

the product was sold.   It is unclear whether petitioner or the

route distributor decided how the route distributor was to be

compensated (whether on a commission basis or through purchase

and resale of the product at a higher price).     Petitioner did not

set the route distributors’ hours.     On the record, this factor is

not indicative of an employer-employee relationship.

                c.   Outside Sales Workers

     The record does not establish that petitioner controlled to

whom the outside sales workers marketed petitioner’s product or

where they marketed the product.   Outside sales workers could

hire substitutes and assistants to perform this work.

Petitioner did not set the outside sales workers’ hours.    On the

record, this factor is not indicative of an employer-employee

relationship.

          2.    Investment in Facilities

     The fact that a worker provides his or her own tools

generally indicates independent contractor status.     Breaux &

Daigle, Inc. v. United States, supra at 53.
                              - 15 -

                a.   Bakery Workers and Cash Payroll Workers

     Petitioner supplied the facility, equipment, and goods the

bakery workers and cash payroll workers used to perform their

jobs.   The bakery workers and cash payroll workers did not have

an investment in the goods or facilities.    This is indicative of

an employer-employee relationship.

                b.   Route Distributors

     Although some route distributors purchased petitioner’s

product for resale, rather than working on commission, they

returned the product they did not sell to petitioner.   The route

distributors, however, owned their own vehicles.    On this record,

we conclude that the route distributors did have an investment in

facilities.

                c.   Outside Sales Workers

     The outside sales workers owned their own vehicles, and any

use of petitioner’s facilities was de minimis.   On this record,

we conclude that this factor does not weigh against treating the

outside sales workers as independent contractors.

           3.   Opportunity for Profit or Loss

     The bakery workers and cash payroll workers were paid based

on the amount of product produced (which petitioner determined),

and the outside sales workers received a commission when they

sold petitioner’s product.   Some route distributors were paid a

commission for product they sold.    Others purchased petitioner’s
                              - 16 -

product and resold it; however, they were able to return any

product they did not sell.

           4.   Right To Discharge

                a.   Bakery Workers and Cash Payroll Workers

     Pursuant to the written agreement between petitioner and the

cash payroll workers, the cash payroll workers had the right to

hire and supervise the bakery workers.    The agreement, however,

is silent with respect to whether petitioner retained the right

to fire the bakery workers.   Additionally, the record is silent

regarding petitioner’s right to discharge the cash payroll

workers.

                b.   Route Distributors

     The record is silent with respect to this factor.

                c.   Outside Sales Workers

     Petitioner had the right to hire and fire the outside sales

workers.   This is indicative of an employer-employee

relationship.

           5.   Integral Part of Business

     Petitioner’s business was manufacturing baked goods.

Petitioner hired the bakery workers and cash payroll workers to

produce the baked goods, the route distributors to deliver the

baked goods, and the outside sales workers to market the baked

goods.   The work performed by each category of workers was within

the scope of petitioner’s regular business.
                                - 17 -

          6.     Permanency of the Relationship

     A transitory work relationship may point toward independent

contractor status.     Herman v. Express Sixty-Minutes Delivery

Serv., Inc., 161 F.3d 299, 305 (5th Cir. 1998).    If, however, the

workers work in the course of the employer’s trade or business,

the fact that they do not work regularly is not necessarily

significant.     Avis Rent A Car Sys. v. United States, 503 F.2d

423, 430 (2d Cir. 1974) (transients may be employees); Kelly v.

Commissioner, T.C. Memo. 1999-140 (working for a number of

employers during a tax year does not necessitate treatment as an

independent contractor).    In considering the permanency of the

relationship, we must also consider petitioner’s right to

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

time.

                  a.   Cash Payroll Workers

     The cash payroll workers began working for petitioner in

1986.   The relationship between petitioner and the cash payroll

workers was permanent as opposed to transitory.

                  b.   Bakery Workers

     At least 11 of the bakery workers worked for petitioner in

1991 and 1992.    The record is silent regarding whether any of the

other 37 bakery workers working for petitioner in 1992 worked for

petitioner prior to 1992.    On the basis of this record, we
                               - 18 -

conclude that a significant number of the bakery workers had a

permanent, rather than transitory, relationship with petitioner.

               c.    Route Distributors

     At least two of the route distributors worked for petitioner

in 1991 and 1992.   The record is silent regarding whether any of

the other 21 route distributors working for petitioner in 1992

worked for petitioner prior to 1992.

               d.    Outside Sales Workers

     At least two of the five outside sales workers worked for

petitioner in 1991 and 1992.   According to Miller, petitioner had

a continuing relationship with the outside sales workers.    On

this record, we conclude that the outside sales workers had a

permanent, rather than transitory, relationship with petitioner.

          7.   Relationship the Parties Thought They Created

               a.    Bakery Workers and Cash Payroll Workers

     According to the November 1991 memorandum issued by

petitioner, starting in 1992 it would consider all workers

producing its product (which included the bakery workers and cash

payroll workers) independent contractors.    None of the bakery

workers or cash payroll workers, however, testified regarding

what kind of relationship they thought they had with petitioner.

               b.    Route Distributors

     Miller testified that petitioner did not consider the route

distributors to be employees or independent contractors.    None of
                               - 19 -

the route distributors, however, testified regarding what kind of

relationship they thought they had with petitioner.

                 c.   Outside Sales

     Miller filled out a questionnaire given to petitioner’s

workers, who were also his clients, by the IRS.   For the two

outside sales workers who responded, Miller answered that they

thought they were independent contractors.    None of the outside

sales workers, however, testified at trial.

          8.     Additional Factor

     Petitioner argues that the route distributors carried

products of, the outside sales workers marketed products for, and

the cash payroll workers had contracts with, companies other than

petitioner.    In Kelly v. Commissioner, supra, we held that

working for a number of employers during a tax year does not

necessitate treatment as an independent contractor.

          9.     Conclusion

     After considering the record as a whole, weighing all of the

factors, and being cognizant that doubtful questions should be

resolved in favor of employment, we conclude that the cash

payroll workers, bakery workers, and outside sales workers were

common law employees.   Upon the basis of this record, however, we

do not find the route distributors to be common law employees.8


     8
        Petitioner did not control the route distributors to the
same degree as it controlled the bakery workers and cash payroll
                                                   (continued...)
                                - 20 -

Therefore, we must decide whether the route distributors were

statutory employees.     See sec. 3121(d)(3); Lickliss v.

Commissioner, T.C. Memo. 1994-103.

     B.   Whether the Route Distributors Were Statutory Employees

     For the purposes of employment taxes, the term “employee”

also includes individuals who perform services for remuneration

as an agent-driver or commission-driver engaged in distributing

bakery products.     Sec. 3121(d)(3)(A).   Substantially all of these

services must be performed personally by such individual.     Sec.

3121(d)(3) (flush language).     Individuals are not included in the

term “employee” under section 3121(d)(3) if the individual has a

substantial investment in the facilities used in connection with

the performance of such services (other than facilities for

transportation), or if the services are in the nature of a single

transaction.   Id.

     The regulations provide that agent-drivers and commission-

drivers include individuals who operate their own truck, serve

customers designated by the person for whom they perform services

and customers solicited on their own, and whose compensation is a



     8
      (...continued)
workers. Unlike the bakery workers and cash payroll workers, the
route distributors had an investment in facilities. Unlike the
outside sales workers, the record did not establish that
petitioner had the right to hire and fire the route distributors.
Unlike the bakery workers, cash payroll workers, and outside
sales workers, the record did not establish that petitioner had a
permanent relationship with the route distributors.
                               - 21 -

commission on their sales or the difference between the price

they charge the customers and the price they pay for the product

or service.    Sec. 31.3121(d)-1(d)(3)(i), Employment Tax Regs.

     The route distributors fit within the definition of agent-

driver and commission-driver provided in the Code and

regulations.    They each performed substantially all the

distribution of bakery products for petitioner.    The route

distributors did not have a substantial investment in the

facilities other than those used for transportation.    The record

does not establish that their services were in the nature of a

single transaction.    The route distributors served customers

designated by petitioner as well as those they solicited on their

own, and their compensation was either a commission on their

sales or the difference between the price they charged and the

price they paid for petitioner’s bakery products.    Therefore, we

conclude that the route distributors were statutory employees.

III. Section 530

     Congress enacted section 530 to alleviate what it perceived

as the “overly zealous pursuit and assessment of taxes and

penalties against employers who had, in good faith, misclassified

their employees as independent contractors.”    Boles Trucking,

Inc. v. United States, 77 F.3d at 239.    Thus, despite our

conclusion that the cash payroll workers, bakery workers, route

distributors, and outside sales workers were employees of
                               - 22 -

petitioner, and that the payments to them from petitioner were

wages subject to Federal employment taxes, section 530 allows

petitioner relief from employment tax liability if two conditions

are satisfied.   Section 530(a)(1) provides in relevant part:

     (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.

     Section 530(a)(3) further clarifies section 530(a)(1) by

providing that if the “taxpayer (or a predecessor)” treated any

individual holding a “substantially similar position as an

employee”, then section 530 relief is not available to the

taxpayer.    Sec. 530(a)(1), (3).   We note that the statute does

not require the individuals to be identical; rather, the analysis

focuses on whether individuals were in substantially similar

positions.

     For purposes of section 530(a)(1), a taxpayer is treated as

having a reasonable basis for not treating an individual as an
                              - 23 -

employee if the taxpayer’s treatment of the individual was in

reasonable reliance on (1) judicial precedent, (2) published

rulings, (3) technical advice with respect to the taxpayer, (4) a

letter ruling to the taxpayer, (5) a past IRS audit of the

taxpayer if the audit entailed no assessment attributable to the

taxpayer’s employment tax treatment of individuals holding

positions substantially similar to the position held by the

individual whose status is at issue, or (6) a longstanding

recognized practice of a significant segment of the industry in

which the individual was engaged.   Sec. 530(a)(2); Veterinary

Surgical Consultants, P.C. v. Commissioner, 117 T.C. ___, ___

(2001) (slip op. at 10-11).   A taxpayer who fails to meet any of

the safe havens is still entitled to relief if the taxpayer can

demonstrate, in some other manner, a reasonable basis for not

treating the individual as an employee.   Veterinary Surgical

Consultants, P.C. v. Commissioner, supra at ___ (slip op. at 11).

     A.   Application of Section 530(a)(1)

     Prior to 1992, petitioner treated all of its production

workers (cash payroll workers and bakery workers) as employees.

Prior to 1992, petitioner treated at least one route distributor

and at least two outside sales workers as employees.   Miller

testified that many of petitioner’s workers were employees in

1991.

     In 1992, petitioner did not file Forms 1099 for (1) seven
                               - 24 -

bakery workers, (2) any of the cash payroll workers,9 (3) any of

the route distributors, and (4) three outside sales workers.10

     Petitioner did not demonstrate that it reasonably relied

upon judicial precedent, published rulings, technical advice, a

letter ruling, or a past audit.    Petitioner argues that it relied

on a longstanding practice in the industry in which it was

engaged--“co-packing”.

     “Co-packing” is where a company does not produce its product

itself; it hires others to produce its goods for it.    Petitioner

presented no evidence, however, on how the practice of co-packing

related to the treatment of its workers as employees.

Furthermore, petitioner did not offer any witnesses to testify

about an industry practice of co-packing and the treatment of

“co-packers” as independent contractors.    See, e.g., Gen. Inv.

Corp. v. United States, 823 F.2d at 341.

     Additionally, petitioner did not demonstrate, in some other

manner, a reasonable basis for not treating the bakery workers,

cash payroll workers, route distributors, and outside sales

workers as employees.    We conclude that petitioner had no

reasonable basis for treating the bakery workers, cash payroll



     9
        Miller agreed with the revenue officer who testified at
trial that the cash payroll workers were not a corporation.
     10
        We note that only 7 of these 38 workers earned less than
$600. See sec. 6041 (information returns required for payments
of $600 or more); sec. 1.6041-1, Income Tax Regs.
                                - 25 -

workers, route distributors,11 and outside sales workers as

independent contractors.12

     B.   Conclusion

     In Erickson v. Commissioner, 172 Bankr. 900, 913 (Bankr. D.

Minn. 1994), the court noted:

          The essence of the safe harbor provision is to
     grant protection to the taxpayer who has consistently
     treated workers as independent contractors but has not
     been previously challenged by the IRS. In effect,
     where the taxpayer’s filings have put the IRS on notice
     and the IRS has not acted without delay, the taxpayer
     must be shielded from the compounding effects of the
     error.

In the case before us, petitioner is not in a position to receive

the protections provided by Congress because petitioner did not

satisfy the requirements of section 530(a)(1).   We conclude that

petitioner is not entitled to section 530 relief for any of its

bakery workers, cash payroll workers, route distributors, or

outside sales workers.

     To reflect the foregoing,

                                          An appropriate order

                                     will be issued.




     11
        We note that Miller testified that he was aware of
regulations that provided that the route distributors should be
categorized as employees.
     12
        We note that Miller testified that he knew that the
conversion of the workers from employees to independent
contractors was not done correctly and that “it would screw up
the issue for payroll taxes”.
