                        T.C. Memo. 2003-52



                      UNITED STATES TAX COURT



               NU-LOOK DESIGN, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10368-01.           Filed February 26, 2003.



     Joseph H. O’Donnell, Jr., for petitioner.

     Robin W. Denick, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


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

response to a Notice of Determination Concerning Worker

Classification Under Section 7436 (notice of determination)

regarding petitioner’s liabilities pursuant to the Federal

Insurance Contributions Act (FICA) and the Federal Unemployment

Tax Act (FUTA) for 1996, 1997, and 1998.     The issues for decision
                                - 2 -

are:    (1) Whether Ronald A. Stark (Stark) was an employee of

petitioner for Federal employment tax purposes during 1996

through 1998 and, if so, (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 (Section 530).

       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.    For convenience, FICA and FUTA taxes are collectively

referred to as employment taxes.

                          FINDINGS OF FACT

       Some of the facts were deemed stipulated pursuant to Rule

91(f); certain additional facts have been stipulated by the

parties.    The stipulated facts are incorporated in our findings

by this reference.

Petitioner’s Organization and Operations

       Stark has been in the home improvement business since 1963.

After operating his business as a sole proprietorship from 1963

through 1986, Stark decided to incorporate for the purpose of

obtaining the benefits of limited shareholder liability for debts

of the corporation.    Petitioner was incorporated in Pennsylvania

on January 20, 1987, and has at all relevant times operated as an

S corporation.    Petitioner’s principal place of business was
                                - 3 -

located in New Hope, Pennsylvania, at the address of Stark’s

personal residence, when the petition was filed in this case.

     Since its organization, petitioner has operated as a

residential home improvement company, providing carpentry, siding

installation, and general residential home improvement and

construction services to the public.    This activity was and is

petitioner’s only business and only source of income.    Stark has

been the sole shareholder of petitioner from the time of its

incorporation and throughout 1996, 1997, and 1998.

     Stark has at all times served as petitioner’s president and

only officer.    Minutes from petitioner’s annual meetings of

directors and shareholders reflect that, for each of the years in

issue, Stark was elected president, vice president, secretary,

and treasurer.    Stark was also petitioner’s sole director.

During 1996, 1997, and 1998, Stark performed the following

services for petitioner:    (1) Solicited business on behalf of

petitioner; (2) ordered petitioner’s supplies; (3) entered into

verbal and/or written agreements on behalf of petitioner;

(4) oversaw the finances of petitioner; (5) collected moneys owed

petitioner; (6) managed petitioner; (7) supervised work performed

on behalf of petitioner; (8) acquired customers for petitioner;

(9) performed all bookkeeping services for petitioner; and

(10) made all hiring decisions and paid all individuals who

performed services in connection with petitioner’s residential
                                 - 4 -

home improvement business.   Stark controlled the day-to-day

activities of petitioner.

     During 1996, 1997, and 1998, all moneys that were paid on

accounts receivable of petitioner were deposited into

petitioner’s checking account.    Stark was the only person with

signature authority on petitioner’s account.      Petitioner did not

make regular payments at fixed times to Stark for his services.

Rather, Stark obtained funds from petitioner’s bank account to

pay himself as his needs arose.    Petitioner neither classified

any payment as a dividend nor distributed any dividends to

shareholders from 1996 through 1998.

Petitioner’s Tax Reporting

     Petitioner filed Forms 1120S, U.S. Income Tax Return for an

S Corporation, and related schedules, for 1987 through 1995.     On

these returns, petitioner did not report treating Stark, or any

other individual, as an employee of petitioner.

     Petitioner filed a Form 1120S for each of the years 1996,

1997, and 1998.   Petitioner reported ordinary income from its

trade or business of $10,866.14, $14,216.37, and $7,103.60 for

1996, 1997, and 1998, respectively.      Petitioner claimed no

deduction either for compensation of officers or for salaries and

wages.   Schedules K-1, Shareholder’s Share of Income, Credits,

Deductions, etc., attached to the returns show $10,866.14 for

1996, $14,216.37 for 1997, and $7,103.60 for 1998 as the pro rata
                               - 5 -

share of, and as a property distribution other than a dividend

to, Stark.   Petitioner’s Forms 1120S were signed by Stark as

president and by Joseph M. Grey (Grey) as preparer.

     During the period from 1996 to 1998, petitioner did not

issue any Forms 1099-MISC, Miscellaneous Income, or Forms W-2,

Wage and Tax Statement, to Stark.   Throughout the years in issue,

petitioner did not report paying Stark a salary or wages for work

he performed on behalf of petitioner.   Petitioner did issue

separate Forms 1099-MISC in 1996, 1997, and 1998 reporting

nonemployee compensation to a number of individuals other than

Stark, presumably independent contractors hired to perform

various aspects of petitioner’s remodeling work.

     Petitioner did not file a Form 941, Employer’s Quarterly

Federal Tax Return, for any quarter in 1996, 1997, or 1998 or a

Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax

Return, for 1996, 1997, or 1998.

Stark’s Tax Reporting

     For each of the years 1996, 1997, and 1998, Stark timely

filed a Form 1040, U.S. Individual Income Tax Return.   On these

returns, Stark reported as ordinary income from “Rental real

estate, royalties, partnerships, S corporations, trusts, etc.”

$10,866.14, $14,216.37, and $7,103.60 for 1996, 1997, and 1998,

respectively.   Attached Schedules E, Supplemental Income and
                                - 6 -

Loss, characterize the foregoing amounts as nonpassive income

from Schedules K-1.

The Notice of Determination

     Prior to the audit underlying the instant case covering

1996, 1997, and 1998, respondent neither audited petitioner for

employment tax purposes nor challenged petitioner’s treatment of

Stark as other than an employee.   Thereafter, on June 8, 2001,

respondent sent to petitioner the notice of determination at

issue in this proceeding.   The notice was based on a

determination that Stark was to be legally classified as an

employee for purposes of Federal employment taxes and that

petitioner was not entitled to relief from such classification

pursuant to Section 530.    Enclosed with the notice was a schedule

setting forth petitioner’s liabilities for FICA and FUTA taxes.

     It is stipulated that, if the Court decides that Stark is to

be classified as an employee for Federal employment tax purposes

for all periods in 1996, 1997, and 1998, the amounts of taxes due

and owing are as set forth in the notice of determination.

Conversely, if the Court decides that Stark should not be

classified as an employee for any of the periods in issue, the

parties agree that petitioner owes no employment taxes.

                      ULTIMATE FINDINGS OF FACT

     Stark, as president of petitioner, performed more than minor

services and received remuneration therefor.
                                - 7 -

      Petitioner did not have a reasonable basis for failing to

treat Stark as an employee during the years in issue.

                               OPINION

I.   Statutory and Regulatory Provisions

      A.   Subtitle C of the Internal Revenue Code

      Subtitle C of the Internal Revenue Code governs payment of

employment taxes.    In particular, sections 3111 and 3301 impose

taxes on employers under FICA (pertaining to Social Security) and

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

paid to employees.    The term “wages” as used in these statutes

generally encompasses “all remuneration for employment”.      Secs.

3121(a), 3306(b).    “Employee” is defined for purposes of FICA

taxes in section 3121(d), and, with modifications not germane

here, section 3306(i) makes this definition applicable for

purposes of FUTA taxes as well.    Section 3121(d) provides:

           SEC. 3121(d). Employee.--For purposes of this
      chapter, the term “employee” means--

                 (1) any officer of a corporation; or

                 (2) any individual who, under the usual
            common law rules applicable in determining the
            employer-employee relationship, has the status of
            an employee; or

                 (3) any individual (other than an individual
            who is an employee under paragraph (1) or (2)) who
            performs services for remuneration for any
            person--

                      (A) as an agent-driver or commission-
                 driver * * *;
                                - 8 -


                      (B) as a full-time insurance salesman;

                      (C) as a home worker * * *; or

                      (D) as a traveling or city salesman
                 * * *;

            * * * [under specified conditions]; or

                 (4) any individual who performs services that
            are included under an agreement entered into
            pursuant to section 218 of the Social Security
            Act.

     Regulations promulgated under section 3121(d) clarify the

scope of the inclusion in paragraph (1) for corporate officers,

as follows:

     Generally, an officer of a corporation is an employee
     of the corporation. However, an officer of a
     corporation who as such does not perform any services
     or performs only minor services and who neither
     receives nor is entitled to receive, directly or
     indirectly, any remuneration is considered not to be an
     employee of the corporation. * * * [Sec. 31.3121(d)-
     1(b), Employment Tax Regs.]

Identical language is also included in regulations promulgated

under section 3306.    Sec. 31.3306(i)-1(e), Employment Tax Regs.

     B.   Section 530 of the Revenue Act of 1978

     Section 530 operates in enumerated circumstances to afford

relief from employment tax liability, notwithstanding the actual

relationship between the taxpayer and the individual performing

services.    The statute provides, in part:

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

          (a) Termination of Certain Employment Tax
     Liability.--
                               - 9 -

          (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.

          (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.

     In specified circumstances, Section 530(e)(4) places the

burden of proof on the Commissioner with respect to certain

issues under Section 530, but this provision does not affect our

analysis here.   Section 530(e)(4) applies only to periods after
                                 - 10 -

December 31, 1996, so has no bearing on petitioner’s liabilities

for 1996.    Small Business Job Protection Act of 1996, Pub. L.

104-188, sec. 1122(b)(3), 110 Stat. 1767.     For subsequent

periods, a taxpayer desiring to take advantage of Section

530(e)(4) first must establish a prima facie case that it was

reasonable not to treat an individual as an employee and must

have fully cooperated with the Secretary.     Because, as explained

in detail below, petitioner did not establish a prima facie case

that its treatment of Stark was reasonable, the burden of proof

remains on petitioner with respect to 1997 and 1998 as well.

II.   Classification of Stark for Employment Tax Purposes

      A.    Status Under FICA and FUTA Provisions

      In contending that Stark should not be classified as an

employee under the FICA and FUTA provisions of the Internal

Revenue Code, petitioner focuses on Stark’s status as an

S corporation shareholder and alleged lack of status as a common

law employee.     We briefly address these contentions seriatim.

             1.   Contentions Regarding S Corporation Shareholders

      Petitioner cites sections 1366, 1372, and 6037(c) and

Durando v. United States, 70 F.3d 548 (9th Cir. 1995), presumably

in support of an argument that S corporation shareholders should

not be deemed employees.     Sections 1366 and 6037(c) generally

require that income items of S corporations be passed through to

shareholders on a pro rata basis and reported by such
                                - 11 -

shareholders in a manner consistent with treatment on the

corporate return.   These rules, however, pertain to calculation

of income tax liability under subtitle A and have no bearing on

computation of Federal employment taxes.    Veterinary Surgical

Consultants, P.C. v. Commissioner, 117 T.C. 141, 145 (2001),

affd. sub nom. Yeagle Drywall Co. v. Commissioner, 54 Fed. Appx.

100 (3d Cir. 2002).   Furthermore, an employer cannot by the

expedient of characterizing moneys paid in remuneration for

services as distributions of net income, rather than as wages,

avoid FICA and FUTA liabilities.    Id. at 145-146.   Thus, as in

Veterinary Surgical Consultants, P.C. v. Commissioner, supra at

145-146, and Joseph M. Grey Pub. Accountant, P.C. v.

Commissioner, 119 T.C. 121, 128 (2002), we reject any suggestion

that petitioner’s passing through of its net income to Stark

precludes the finding of an employer-employee relationship

between petitioner and Stark.    We likewise reject as not germane

to the question before us petitioner’s reliance on section 1372,

addressing fringe benefits under subtitle A, and the reference to

that statute in Durando v. United States, supra at 551.       See

Veterinary Surgical Consultants, P.C. v. Commissioner, supra at

147-148, 150.

          2.    Contentions Regarding Common Law Employment

     Petitioner contends that “employee” as used throughout

section 3121(d) must be construed in a manner consistent with its
                                - 12 -

use in section 3121(d)(2), such that the usual common law rules

for determining existence of an employer-employee relationship

are to be taken into account.    In support of this position,

petitioner quotes the following passage from Tex. Carbonate Co.

v. Phinney, 307 F.2d 289, 291-292 (5th Cir. 1962):

          The statutory definition of “employees” as
     including officers of a corporation will not be so
     construed as to mean that an officer is an employee
     per se. Only such officers as work for it in fact are
     to be so included and, in determining whether an
     officer is an employee within the meaning of the
     statutes the usual employer-employee tests are to be
     applied. * * *

Petitioner further emphasizes that common law focuses on whether

the alleged employer held the right to control the details of the

work performed by the individual and argues that petitioner had

neither the authority nor the ability to exert control over

Stark.   There exist, however, at least two fatal defects in

petitioner’s arguments in this regard.

     First, from the standpoint of statutory construction, the

premise underlying petitioner’s position finds no support either

in the structure of the text or in the Tex. Carbonate Co. v.

Phinney, supra, decision.    Section 3121(d) is written in the

disjunctive, with each of the four paragraphs expressly separated

from the next by “or”.   Accordingly, each paragraph affords a

separate and independent basis for deeming one engaged to perform

services an employee.    Individuals described in paragraphs (1),

(3), and (4) of section 3121(d) are therefore frequently referred
                              - 13 -

to as “statutory” employees, subject to FICA and FUTA regardless

of their status under common law.    See Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 126.

     Moreover, Tex. Carbonate Co. v. Phinney, supra, is not

authority to the contrary.   Significant regulatory and statutory

developments have occurred since the years in issue in that case.

Given that sections 31.3121(d)-1(b) and 31.3306(i)-1(e),

Employment Tax Regs., were promulgated after those years and that

the FUTA definition of “employee” then in effect appears to have

contemplated a corporate officer who could be an independent

contractor under common law, see, e.g., sec. 1607(i), I.R.C.

1939, the Court of Appeals’ statements concerning common law

rules “may no longer be relevant.”     Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 128 n.4.     The opinion

in Tex. Carbonate Co. v. Phinney, supra at 291, recognized that,

regardless of the test purportedly being applied, “such officers

as work for * * * [a corporation] in fact” are included as

employees.   The court also addressed the impact of an alleged

absence of control in that case, as follows:

     Even though an absence of control is shown, and this as
     we have noted has not been done, the force of the
     factor is diminished to near de minimis by the fact
     that * * * [the service provider] himself was a member
     of the Board of Directors, a Vice President, and the
     executive of the Company in charge of its sales and the
     development of its markets. * * * [Id. at 292.]
                               - 14 -

Hence, critical components of the analysis in Tex. Carbonate Co.

v. Phinney, supra, are consistent with the current regulatory

approach to officers and contrary to petitioner’s position.

     Second, from a factual standpoint, even if the common law

control factor were pertinent to our evaluation, petitioner has

failed to establish a lack of control over Stark in the

performance of his services.   As in Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 128-129, to accept

petitioner’s contentions in this regard would be the equivalent

of disregarding the corporate form in which Stark chose to

conduct his business.   Caselaw does not permit a taxpayer to use

his or her dual role as a shareholder of and service provider to

a corporation as grounds for ignoring the legal ramifications of

the business construct so selected.     Moline Props., Inc. v.

Commissioner, 319 U.S. 436, 438-439 (1943); Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 129.

          3.   Application of Section 3121(d)(1)

     On the basis of the foregoing analysis, application of

section 3121(d)(1) is not precluded or limited here by

considerations pertaining to Stark’s status as an S corporation

shareholder or under the common law.    Section 3121(d)(1) and

sections 31.3121(d)-1(b) and 31.3306(i)-1(e), Employment Tax

Regs., specify that corporate officers are to be classified as

employees if they perform more than minor services and receive or
                              - 15 -

are entitled to receive remuneration.   The overwhelming weight of

the evidence here shows that Stark’s activities vis-a-vis

petitioner met these criteria.   (Accordingly, considerations with

respect to burden of proof do not affect our analysis on this

point.)   Stark at all relevant times served as petitioner’s

president and worked in all significant aspects of petitioner’s

business operations.   Stark also obtained remuneration from

petitioner’s bank account as his needs arose.

     Furthermore, although section 3121(d)(1) may be inapplicable

to the extent that an officer performs services in some other

capacity, i.e., as an independent contractor, petitioner has

neither contended nor offered evidence that Stark worked for or

was engaged by petitioner in a capacity other than as an officer.

See Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119

T.C. at 129-130; Rev. Rul. 82-83, 1982-1 C.B. 151, 152.    Hence,

we conclude that Stark was an employee of petitioner for

employment tax purposes, in accordance with section 3121(d)(1).

     B.   Availability of Section 530 Relief

     Section 530 affords relief from employment tax liability,

notwithstanding an adverse classification, where the following

three requirements are satisfied:   (1) The taxpayer has not

treated the individual, or any individual holding a substantially

similar position, as an employee for any period; (2) the taxpayer

has consistently treated the individual as not being an employee
                              - 16 -

on all tax returns for periods after December 31, 1978; and

(3) the taxpayer has a reasonable basis for not treating the

individual as an employee.   Sec. 530(a)(1), (3).   With respect to

the case at bar, respondent has conceded that petitioner meets

the first of the above requirements and does not argue that

petitioner fails to meet the second.   Rather, the parties dispute

whether petitioner had a reasonable basis for not treating Stark

as an employee.

     Concerning the existence of a reasonable basis for purposes

of Section 530(a)(1), Section 530(a)(2) sets forth three

statutory safe havens.   Reliance upon any of the circumstances

enumerated in subparagraph (A), (B), or (C) of Section 530(a)(2)

is deemed sufficient to establish the requisite reasonable basis.

     Subparagraph (A) lists judicial precedent, published

rulings, technical advice with respect to the taxpayer, or a

letter ruling to the taxpayer.   The amended petition alleges:

          The Petitioner did not treat its Sole Shareholder,
     Ronald A. Stark, as an employee during any part of
     1996, 1997 and 1998, and the reasonable basis for not
     treating Ronald A. Stark as an employee for the said
     periods is based on judicial precedent contained in the
     opinion of the 5th Circuit Court of Appeals in Texas
     Carbonate Company v. R.L. Phinney, 307 F.2d 289 (5th
     Cir.), cert denied, 371 U.S. 940 (1962).

On brief, petitioner reiterates reliance on Tex. Carbonate Co. v.

Phinney, 307 F.2d 289 (5th Cir. 1962), and cites as well to

Automated Typesetting, Inc. v. United States, 527 F. Supp. 515

(E.D. Wis. 1981), in support of the premise that petitioner
                              - 17 -

reasonably looked to common law control concepts in classifying

Stark.

     For the reasons previously discussed, Tex. Carbonate Co. v.

Phinney, supra, does not afford a reasonable basis for disregard

of the explicit rules of section 3121(d)(1) and sections

31.3121(d)-1(b) and 31.3306(i)-1(e), Employment Tax Regs.

Equally unavailing in this regard is Automated Typesetting, Inc.

v. United States, supra.   The District Court in that case simply

evaluated the employment relationship of the involved individuals

both through a common law analysis and through application of the

provisions relating to corporate officers.    Id. at 519-522.   In

deciding that the individuals qualified as employees under either

rubric, the court did not repudiate the statutory treatment of

corporate executives.   Id. at 520, 522; see also Joseph M. Grey

Pub. Accountant, P.C. v. Commissioner, supra at 129 n.5.

     Moreover, even if we were to assume arguendo that the cited

cases could offer a reasonable basis for treating an officer as a

nonemployee, petitioner has failed to establish reliance on the

claimed precedent as a factual matter.   To fall within the safe

harbors of Section 530(a)(2), the taxpayer must have relied on

the alleged authority during the periods in issue, at the time

the employment decisions were being made.    The statute does not

countenance ex post facto justification.    See 303 W. 42nd St.

Enters., Inc. v. IRS, 181 F.3d 272, 277, 279 (2d Cir. 1999)
                             - 18 -

(reversing and remanding because it was “unclear from the record

whether * * * [the taxpayer] in fact relied on any specific

industry practice in reaching its decision to treat its * * *

[workers] as non-employee tenants, let alone whether such

reliance was reasonable”); Select Rehab, Inc. v. United States,

205 F. Supp. 2d 376, 380 (M.D. Pa. 2002) (“The taxpayer must show

that it relied upon those grounds [alleged as a reasonable

basis], and that the reliance was reasonable.”); W. Va. Pers.

Servs., Inc. v. United States, 78 AFTR 2d 96-6600, at 96-6608,

96-2 USTC par. 50,554, at 85,919 (S.D. W. Va. 1996) (“The plain

meaning of section 530(a)(2) is that only evidence known to and

relied upon by the taxpayer is relevant.   Facts that are learned

after the incorrect treatment of the employees * * * are not

facts that a taxpayer relied upon in making its original decision

regarding how to treat its employees.”).

     Until a few months before trial, petitioner did not purport

to rely on Section 530 or the bases described therein and

expressly disclaimed any dependence on the statute.   Petitioner’s

present claim of reliance is not credible.   At trial, Stark

testified as a witness but presented no evidence that he was

aware of Tex. Carbonate Co. v. Phinney, supra, or that anyone had

ever discussed the case with him.

     Petitioner proposed to call Grey, the accountant who advised

petitioner and prepared petitioner’s tax returns.   Grey was not
                                - 19 -

allowed to testify in this case because he had not been listed as

a witness in petitioner’s trial memorandum, in violation of this

Court’s Standing Pre-Trial Order.    See Rule 131(b).   His

testimony, in any event, would not have made a difference.    See

Veterinary Surgical Consultants, P.C. v. Commissioner, T.C. Memo.

2003-48 (where Grey testified that he was unaware of the Tex.

Carbonate Co. v. Phinney, supra, case until posttrial briefing,

during the fall of 2001, in Joseph M. Grey Pub. Accountant, P.C.

v. Commissioner, 119 T.C. 121 (2002)).     Petitioner failed to

establish that it relied on judicial precedent or, for that

matter, on any of the other sources specified in Section

530(a)(2)(A).   Accordingly, we conclude that subparagraph (A)

does not aid petitioner here.

     The same result obtains with respect to subparagraphs (B)

and (C).   The parties have stipulated that respondent did not

audit petitioner for employment tax purposes prior to the

examination underlying the present case.    Petitioner therefore

cannot show reliance on a past audit under Section 530(a)(2)(B).

Likewise, petitioner has adduced no evidence of conventions in

the residential home improvement industry to establish

longstanding industry practice under Section 530(a)(2)(C).    The

safe havens of Section 530(a)(2) are therefore inapplicable on

the record before us.
                               - 20 -

     In seeking to establish a reasonable basis for Stark’s

treatment apart from the safe havens, petitioner quotes from the

following definition of “employment status” in Section 530(c)(2):

“The term ‘employment status’ means the status of an individual,

under the usual common law rules applicable in determining the

employer-employee relationship, as an employee or as an

independent contractor (or other individual who is not an

employee).”   Petitioner apparently believes that the purported

lack of common law control makes its treatment of Stark

reasonable within the meaning of Section 530 and that the above

definition supports this view.

     Again, however, petitioner’s approach is contrary to

controlling statutes and to the facts of this case.    As a matter

of construction, Section 530(c)(2) defines employment status for

purposes of certain provisions of Section 530 not germane here.

It does not purport to override or interpret the definition of

“employee” in section 3121(d) and related regulations.    Hence,

Section 530(c)(2) does not render it rational for petitioner to

have ignored the statutory mandate regarding corporate officers

and to have taken a position that was not otherwise supported by

authority.    Petitioner also does not claim in actuality to have

relied on Section 530(c)(2) in deciding not to treat Stark as an

employee in 1996, 1997, or 1998.    We conclude and have found as a

fact that petitioner did not have a reasonable basis for failing
                               - 21 -

to characterize Stark as an employee.    Consequently, relief from

employment tax liability is not available to petitioner under

Section 530.

     Lastly, in connection with Section 530, petitioner raises a

due process argument.   This issue has never been properly pled by

petitioner.    Rather, petitioner mentioned due process in its

motion for leave to file an amended petition, did not allege a

due process violation in the amended petition itself, and argued

the matter only on brief.    Generally, issues not properly raised

prior to briefing will not be considered when to do so would

prevent the opposing party from presenting evidence that might

have been offered if the issue had been timely raised.    DiLeo v.

Commissioner, 96 T.C. 858, 891 (1991), affd. 959 F.2d 16 (2d Cir.

1992); Shelby U.S. Distribs., Inc. v. Commissioner, 71 T.C. 874,

885 (1979).    Here, however, even if we were to treat the due

process issue as appropriately before us, petitioner’s position

is without merit.

     Section 530(e)(1) provides that the Internal Revenue Service

“shall, before or at the commencement of any audit inquiry

relating to the employment status of one or more individuals who

perform services for the taxpayer, provide the taxpayer with a

written notice of the provisions of this section.”    Small

Business Job Protection Act of 1996 sec. 1122(a), 110 Stat. 1766.

On brief, petitioner alleges that it learned of the existence of
                                - 22 -

Section 530 only through the June 8, 2001, notice of

determination, which postdated by a substantial margin the

commencement on August 6, 1999, of the underlying employment tax

audit.   Petitioner then states:

     the inaction of Respondent in not providing the
     required notice to Petitioner is a serious
     Constitutional violation of due process, and Petitioner
     moves this Court to allow Petitioner to recover its
     legal fees, since the conduct of the Respondent is so
     egregious in this matter.

     To the extent that petitioner’s due process contentions take

the form of a claim for litigation or administrative costs and

fees under section 7430, such claim is premature.    Rule

231(a)(2), as pertinent here, specifies that the appropriate time

to seek recovery of legal costs follows service of a written

opinion.   See McWilliams v. Commissioner, 104 T.C. 320, 327

(1995); Groetzinger v. Commissioner, 87 T.C. 533, 548 (1986).

     Furthermore, even if petitioner’s allegations might be read

as a plea encompassing other remedies, petitioner has failed to

show that its situation satisfies the prerequisites for relief

under the Due Process Clause.    As this Court has noted, even in a

criminal context defendants are generally required to establish

actual prejudice in order to obtain due process relief.     Riland

v. Commissioner, 79 T.C. 185, 197-198 (1982) (involving a claimed

denial of due process on account of delay in issuance of the

subject deficiency notice).   The record in the instant case is

devoid of evidence of such prejudice.    Although petitioner was
                               - 23 -

made aware of Section 530 at least prior to filing its petition

with the Court, petitioner failed therein to raise the statute.

Nonetheless, petitioner was subsequently granted leave to file an

amended petition specifically to place at issue its right to

relief under Section 530.   The matter (of substantive relief

under Section 530(a), not, as previously noted, of a due process

violation based on Section 530(e)(1) notice procedures) therefore

was properly before the Court at trial, and petitioner was

afforded an opportunity to be heard.    Accordingly, no actual

prejudice was sustained.

     The above analysis is consistent with our recent

jurisprudence on the notice provision contained in section

3463(a) of the Internal Revenue Service Restructuring and Reform

Act of 1998, Pub. L. 105-206, 112 Stat. 767.    In Smith v.

Commissioner, 114 T.C. 489 (2000), affd. 275 F.3d 912 (10th Cir.

2001), we considered this requirement that the Commissioner

include on each notice of deficiency the last date for filing a

petition with the Tax Court.   We held that, where the

Commissioner failed to place such date on the notice, but the

taxpayers nonetheless received the notice and filed a petition in

a timely manner, the notice was valid.    Id. at 492.    In so

holding, we noted the absence of any delay prejudicial to the

taxpayers’ ability to petition the Court.    Id. at 491-492.
                                - 24 -

     Thus, failure to comply with certain procedural notice

requirements does not rise to the level of a denial of due

process where, as here, the taxpayer’s opportunity to present its

position is not prejudiced.

     C.   Conclusion

     We hold that Stark is an employee of petitioner pursuant to

section 3121(d)(1) and that petitioner is not entitled to relief

under Section 530.     Accordingly, petitioner is liable for FICA

and FUTA taxes for the periods in issue as set forth in

respondent’s notice of determination and relevant stipulations.

     To reflect the foregoing,


                                      Decision will be entered for

                                 respondent and in accordance with

                                 stipulations as to amounts.
