                               T.C. Memo. 2012-184



                         UNITED STATES TAX COURT



                TWIN RIVERS FARM, INC., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 14074-10.                          Filed July 2, 2012.



      Richard Militana, for petitioner.

      Linda E. Mosakowski, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      RUWE, Judge: The petition in this case was filed in response to respondent’s

notice of determination of worker classification (notice) dated March 24, 2010.

Petitioner seeks a redetermination of employment status pursuant to section
                                          -2-

7436.1 Respondent determined in the notice that petitioner, Twin Rivers Farm, Inc.

(Twin Rivers), owed employment taxes of $6,951.75, $9,430.20, and $9,430.20 for

the taxable years 2006, 2007, and 2008, respectively (years at issue). Respondent

also determined additions to tax under section 6651(a)(1) of $1,564.14, $2,121.80,

and $2,121.80 and penalties under section 6656 of $131.96, $179.01, and $179.01

for the taxable years 2006, 2007, and 2008, respectively.

      After concessions,2 the issues for decision are: (1) whether petitioner’s two

farm workers were employees for purposes of Federal employment taxes during the

years at issue, and (2) whether petitioner is liable for additions to tax and penalties

under sections 6651(a) (1) and 6656, respectively, for the years at issue.

                                FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated herein by this reference. At the time


      1
       Unless otherwise indicated, all section references are to the Internal Revenue
Code as amended and in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
      2
        Respondent concedes that petitioner is not liable for the addition to tax under
sec. 6651(a)(2) for the years at issue. In addition, in its pretrial memorandum
petitioner indicated that it would seek relief from Federal employment taxes under
the Revenue Act of 1978, Pub. L. No. 95-600, sec. 530, 92 Stat. at 2885. Petitioner
did not address that issue on brief and indicated at trial that it did not intend to
pursue that avenue for relief.
                                         -3-

the petition was filed, petitioner was an S corporation with its principal place of

business in Franklin, Tennessee.

      Petitioner was formed on October 11, 2005. From January 1, 2006, to

December 31, 2008 (years at issue), petitioner’s primary activity was the

raising, inventorying, training, marketing, and showing of horses for anticipated

sales, and/or anticipated prospective use for lessons and/or leasing of horses.

Petitioner’s sole owner and sole corporate officer was Diana Militana. Diana

Militana has been involved in the equestrian business at other locations and with

other entities. Diana Militana is married to Richard Militana.

      During the years at issue at least six horses were, for at least some time, kept

on property which petitioner had the right to occupy. The property on which

petitioner operates consists of approximately 114 acres and includes woods, a

meadow, a barn with a tack room, a metal corral, a house (in which the Militanas

lived), a trailer, cross fencing, and a fence surrounding the property. The house on

the property includes a stable office (which the Militanas used to work on

equestrian-related business) and is surrounded by grounds on which horses can be

displayed and observed from either the office or the front porch.

      During 2006 and continuing through 2007 and 2008 petitioner engaged two

farm workers, Adam Lopez Morales and Nallhelyo Ruiz (workers), to work on the
                                         -4-

property. The workers lived in the trailer on the property and do not appear to ever

have paid rent. For the years at issue petitioner purchased workers’ compensation

and employer’s liability insurance from American National Property and

Casualty.

       During the years at issue the workers’ job duties included: cleaning stalls, the

barn area, the barn offices, the rest room, and the tack room; grooming horses;

watering the horses; and moving the horses between pastures. The harnesses,

brushes and combs, shovels, pitchforks, wheelbarrow, manure spreader, and brooms

used to care for the horses and barn were all owned by petitioner.

       During the years at issue Mr. Morales was also primarily responsible for

cutting grass in the pastures and otherwise performing grounds-keeping-related

activities. Mr. Morales used weed whackers, a Bush Hog mower, a tractor, and

other equipment provided to him by petitioner to cut the grass in the pasture.

       On occasion the workers also repaired fences on the property. The materials

to maintain the fences were provided by either petitioner directly, or Mr. Morales

would pick them up at the store, sign for the materials, and have the bill sent to

petitioner.

       Petitioner paid to each worker weekly compensation by check signed by

Diana Militana in her capacity as president. Mr. Morales was paid $300 per week,
                                         -5-

and Mr. Ruiz was paid $150 per week. The workers were sometimes given

advances on their weekly compensation. When a worker received an advance on

his weekly compensation, his next several compensation checks were reduced to

repay petitioner for the advanced amount.

      With respect to the years at issue petitioner did not file with respondent any

Forms 943, Employer’s Annual Federal Tax Return for Agricultural Employees, or

Forms 941, Employer’s Quarterly Federal Tax Return. For the years at issue

petitioner did not make deposits of employment tax with respondent and has not

paid any of the employment tax liability that was determined in the notice. For the

years at issue petitioner did not file Forms 1099 with respect to the workers.

                                     OPINION

I. Employee Classification

      Respondent’s determinations are presumptively correct, and petitioner bears

the burden of proving that those determinations are erroneous. See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). This principle applies to the

Commissioner’s determinations that a taxpayer’s workers are employees. Boles

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

Miller, Inc. v. Commissioner, 117 T.C. 263, 268 (2001).
                                          -6-

      For 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);

see also sec. 3306(i); Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 269.

Whether an individual is an employee must be determined on the basis of the

specific facts and circumstances involved. Prof’l & Exec. Leasing, Inc. v.

Commissioner, 89 T.C. 225, 232 (1987), aff’d, 862 F.2d 751 (9th Cir. 1988);

Simpson v. Commissioner, 64 T.C. 974, 984 (1975). Relevant factors include: (1)

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

facilities used by the worker; (3) the opportunity of the 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 Avis Rent A Car Sys.,

Inc. v. United States, 503 F.2d 423, 429 (2d Cir. 1974); Ewens & Miller, Inc. v.

Commissioner, 117 T.C. at 270; Weber v. Commissioner, 103 T.C. 378, 387

(1994), aff’d per curiam, 60 F.3d 1104 (4th Cir. 1995). We consider all of the facts

and circumstances of each case, and no single factor is determinative. Ewens &

Miller, Inc. v. Commissioner, 117 T.C. at 270; Weber v. Commissioner, 103 T.C. at

387. Although the determination of employee status is to be made by common law
                                          -7-

concepts, a realistic interpretation of the term “employee” should be adopted, and

doubtful questions should be resolved in favor of employment in order to

accomplish the remedial purposes of the legislation involved. Breaux & Daigle, Inc.

v. United States, 900 F.2d 49, 52 (5th Cir. 1990); see Schramm v. Commissioner,

T.C. Memo. 2011-212; Donald G. Cave A Prof’l Law Corp. v. Commissioner, T.C.

Memo. 2011-48, aff’d, ___ Fed. Appx. ___ (5th Cir. Mar. 22, 2012).

      1. Degree of Control

      The degree of control that the principal exercises over the worker has been

referred to as the crucial test in making the determination. See Clackamas

Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440, 448 (2003); Rosato v.

Commissioner, T.C. Memo. 2010-39. The degree of control necessary to find

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

Weber v. Commissioner, 103 T.C. at 388; Potter v. Commissioner, T.C. Memo.

1994-356. To retain the requisite degree of control, the principal need not actually

direct or control the manner in which the services are performed; it is sufficient if

the principal has the right to do so. Weber v. Commissioner, 103 T.C. at 388;

Potter v. Commissioner, T.C. Memo. 1994-356; sec. 31.3401(c)-l(b), Employment

Tax Regs. A business can retain the requisite control over the details of a worker’s
                                         -8-

service without having to stand over the worker and direct every move made by that

worker. Prof’l & Exec. Leasing, Inc. v. Commissioner, 89 T.C. at 234.

      Diana Militana maintains that she did not exercise control over the workers.

However, the nature of the employment arrangement indicates that it is likely that

she had the right to exercise control, even if that right was not often exercised. The

workers were allowed to use petitioner’s farm equipment (including a tractor) and

supplies to maintain the appearance of the property. It is difficult to imagine that the

workers’ use of petitioner’s valuable equipment could not have been controlled by

petitioner in the event of misuse by the workers. Throughout the years at issue

Diana Militana was at the farm “most of the time” and, therefore, had the

opportunity to supervise the work being done on the farm. It is unlikely that if the

workers were careless in their use of the equipment petitioner would not have

exercised control over their activities. In addition, the workers were responsible for

performing services that could affect petitioner’s primary assets, its horses. That

petitioner would turn the responsibility of caring for the horses over to the workers

without retaining the right to control their work is implausible. As a result, we find

that this factor is supportive of the existence of an employer-employee relationship

between petitioner and the workers for the years at issue.
                                          -9-

      2. 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.

v. Commissioner, 117 T.C. at 271. Petitioner owned all of the equipment that the

workers used to perform their services including, but not limited to: the equipment

and supplies used to care for the horses and the pastures and to clean the stalls and

other rooms in the barn; the tractor used to maintain the grounds; and the trailer

where the workers lived. As a result, the workers had no financial investment in the

rendering of services to petitioner. Because petitioner made all of the investments in

the equipment supplied to the workers and provided them with everything needed to

perform their services, this factor is supportive of the existence of an

employer-employee relationship.

      3. Opportunity for Profit or Loss

      The opportunity for profit or loss indicates nonemployee status. Simpson v.

Commissioner, 64 T.C. 974, 988 (1975); Rosato v. Commissioner, T.C. Memo.

2010-39. During the years at issue, Mr. Morales was paid $300 per week and Mr.

Ruiz was paid $150 per week, regardless of the hours worked or their productivity.

Because petitioner provided the workers with all of the necessary equipment and

supplies for the job, the workers had no opportunity to make a profit with respect to
                                         - 10 -

the materials used on the job. Given the salarylike nature of the workers’ pay and

their lack of entrepreneurial risk or opportunity, this factor also indicates there was

an employer-employee relationship.

      4. Right To Discharge

      There is no evidence in the record of the existence of any formal or informal

agreement or contract that would preclude petitioner’s discharging the workers.

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

Commissioner, 55 T.C. 142, 155 (1970); Colvin v. Commissioner, T.C. Memo.

2007-157, aff’d, 285 Fed. Appx. 157 (5th Cir. 2008). Without evidence of any

limitation of that right, we conclude that this factor supports a finding of an

employer-employee relationship.

      5. Work Is Part of Principal’s Regular Business

      Work that is part of the principal’s regular business is indicative of employee

status. Simpson v. Commissioner, 64 T.C. at 989; Rosato v. Commissioner, T.C.

Memo. 2010-39. During the years at issue petitioner’s primary activity was the

raising, inventorying, training, marketing, and showing of horses for anticipated

sales, and/or anticipated prospective use for lessons and/or leasing of horses. The

work performed by the workers was at least an ancillary part of petitioner’s

business during the years at issue. The record indicates that the workers were not
                                          - 11 -

responsible for the marketing and sale of horses, nor were they responsible for the

training of horses. However, their services kept the farm presentable to potential

buyers, kept the grounds safe for the horses, and aided in the care of petitioner’s

primary assets. Given that the workers provided services which were supportive of

petitioner’s business, we find that this factor is also indicative of an

employer-employee relationship.

      6. Permanency of Relationship

      Permanency of a working relationship is indicative of an employer-

employee relationship. Rosemann v. Commissioner, T.C. Memo. 2009-185. In

contrast, a transitory work relationship may weigh in favor of independent

contractor status. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 273.

      Here, the workers were employed by petitioner throughout the years at issue.

Furthermore, the workers actually maintained their primary residence on petitioner’s

property in a trailer provided to them by petitioner. Although there is no evidence

of a contractual arrangement between petitioner and the workers creating an explicit

permanent employment relationship, the relationship in practice was certainly

ongoing. Because the workers were long-term employees who actually resided on

the farm, it cannot be said that the relationship was transitory or temporary.
                                           - 12 -

Therefore, we find that this factor is also supportive of an employer-employee

relationship.

         7. Relationship the Parties Thought They Created

         Petitioner contends that the relationship created by the parties was intended to

be that of a business and independent contractors. However, the relationship

between petitioner and the workers does not support such a characterization. The

record indicates that petitioner purchased workers’ compensation and employer’s

liability insurance for the years at issue. In addition, petitioner covered all of the

job-related expenses necessary for the workers to perform their duties. Petitioner

even provided a residence on the property for the workers and allowed the workers

to receive advances on their compensation. These actions are far more indicative of

an intention to create an employment relationship than they are of an intention to

create an independent-contractor relationship. Therefore, this factor also supports

the existence of an employer-employee relationship.

         On the basis of a careful consideration of the foregoing factors, in the light of

the facts and circumstances particular to this case, we hold that the workers were

petitioner’s employees for purposes of Federal employment taxes during the years at

issue.
                                          - 13 -

II. Additions to Tax Under Section 6651(a)(1)

      Respondent determined that for each year at issue petitioner is liable for an

addition to tax under section 6651(a) (1) for failure to timely file required tax

returns. Section 6651(a) (1) provides for an addition to tax for failure to timely file

a return. The addition to tax is equal to 5% of the tax required to be shown on the

return for each month or fraction thereof for which there is a failure to file, not to

exceed 25%. A taxpayer is not liable for an addition under section 6651(a)(1) if the

failure to timely file was due to reasonable cause and not due to willful neglect.

Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241, 245-246 (1985). To show

reasonable cause, the taxpayer must show that it could not file the return on time

even though it exercised ordinary business care and prudence. See Crocker v.

Commissioner, 92 T.C. 899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin.

Regs. “Willful neglect” means a “conscious, intentional failure or reckless

indifference.” Boyle, 469 U.S. at 245.

      Employers of agricultural workers must report employment taxes on Form

943. Sec. 31.6011(a)-1(a) (2)(ii), Employment Tax Regs. Petitioner has not filed

Forms 943 for any of the years at issue. Petitioner has submitted no credible

evidence that it exercised ordinary business care and prudence in its failure to file
                                         - 14 -

Forms 943 or that it could not file the returns when due.3 Accordingly, we find that

petitioner is liable for the addition to tax under section 6651(a)(1) for each of the

years at issue.

III. Penalties Under Section 6656

      Respondent determined that for each year at issue petitioner is liable for a

penalty under section 6656 for failure to make deposits of employment taxes. If a

taxpayer is more than 15 days late in depositing employment tax, section 6656

imposes a 10% penalty. Sec. 6656; see also Ewens & Miller, Inc. v. Commissioner,

117 T.C. at 268. The taxpayer is not liable for the section 6656 penalty if the late

deposit was due to reasonable cause and not due to willful neglect. Sec. 6656(a).




      3
        Petitioner contends that Diana Militana was involved in two previous tax
audits involving herself and businesses similar to petitioner’s operation and that
those businesses had workers performing the same services, under the same
conditions and payment schedules, as the workers hired by petitioner during the
years in issue. Petitioner contends that in both of the previous instances, the
workers were designated by Internal Revenue Service auditors as independent
contractors and not employees. Petitioner’s support for this contention is limited to
Mrs. Militana’s testimony. The record before us is insufficient to indicate with any
specificity the details of any previous audit determinations, the conclusions reached
by the auditors, or that the businesses involved were substantially similar to
petitioner’s. We also note that petitioner’s failure to file Forms 1099 is inconsistent
with its contentions regarding the prior audits.
                                         - 15 -

         Petitioner failed to make employment tax deposits. Petitioner submitted no

credible evidence that it exercised ordinary business care and prudence in its failure

to deposit employment taxes or that it could not make the deposits when due.

Accordingly, for each of the years at issue, we find that petitioner is liable for the

section 6656 penalty.

         In reaching our holdings herein, we have considered all arguments made, and

to the extent not mentioned above, we find them to be moot, irrelevant, or without

merit.

         To reflect the foregoing, including respondent’s concession,


                                                        Decision will be entered for

                                                  respondent as to the deficiencies,

                                                  additions to tax under section

                                                  6651(a)(1), and penalties under

                                                  section 6656 and for petitioner as to

                                                  the section 6651(a)(2) additions to tax.
