                            ___________

                            No. 95-1826

                            No. 95-2088
                            ___________

BOLES TRUCKING, INC.,            *
                                 *
     Appellee/Cross-Appellant,   *
                                 *   Appeal from the United
     vs.                         *   States District Court for
                                 *   the District of Nebraska
UNITED STATES OF AMERICA,        *
                                 *
     Appellant/Cross-Appellee,   *



                            ___________

                  Submitted:   January 11, 1996

                        Filed: February 22, 1996
                             ___________

Before BEAM and MORRIS SHEPPARD ARNOLD, Circuit Judges, and JONES,*
     Senior District Judge.

                            ___________

JONES, Senior District Judge


          This appeal involves the attempt by the United States to
collect employment taxes from plaintiff Boles Trucking, Inc.


     The appeal by the United States presents two issues: first,
what is the taxpayer's burden of proof when it asserts it had a
"reasonable basis" for improperly classifying employees as
independent contractors under Section 530 of the Revenue Act of
1978, 26 U.S.C. § 3401 note (Section 530) and secondly, whether the
evidence was sufficient to support the jury's finding of a


     *
      The HONORABLE JOHN B. JONES, Senior District Judge, United
States District Court for the District of South Dakota, sitting by
designation.
"reasonable basis". We find that the district court improperly
instructed the jury on taxpayer's burden of proof, and reverse and
remand on the appeal by the United States. In doing so, we do not
reach the sufficiency of the evidence claim made by the United
States.


     Taxpayer's cross-appeal presents the issue of whether the
district court properly assessed penalties against it because of
its failure to pay employment taxes on behalf of David B. Boles
(Boles), taxpayer's owner and president. We affirm on the issue
raised in the cross-appeal.


                               I.
     Taxpayer is a Nebraska corporation engaged in the business of
leasing truck tractors, or "power units," to interstate trucking
carriers. At all times relevant to this case, Boles was the sole
stockholder, director, and president of taxpayer. In the relevant
period from January 1984 through December 1987, taxpayer leased its
tractors to Bee Line Motor Express, Inc. or to its successor,
Cornhusker Motor Lines, Inc.       Under the terms of the lease
agreements taxpayer was to supply drivers with each leased tractor.

     Although the lease agreements provided that the drivers were
to be "employees" of taxpayer, during the years in question
taxpayer treated its drivers as independent contractors. For tax
purposes this means the taxpayer did not withhold any federal
income (withholding tax or "WT") or Federal Insurance Contributions
Act (FICA) taxes from the amount it paid to its drivers, nor did it
make any payments of Federal Unemployment Tax Act (FUTA) taxes to
the Internal Revenue Service. Rather than W-2's, taxpayer issued
Forms 1099 to its drivers each year.


     Boles was compensated by way of interest-free "loans against
future profits" instead being paid a salary or wages. Under this


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arrangement the taxpayer was not withholding income taxes or FICA
or FUTA taxes relative to Boles.     There was also evidence that
taxpayer paid many of Boles' personal living expenses and purchased
a Lincoln Continental automobile for Boles' exclusive use.


     Taxpayer underwent an employment tax examination in 1987 which
resulted in the Commissioner of the I.R.S. reclassifying the truck
drivers who worked for taxpayer as employees rather than
independent contractors. The I.R.S. subsequently made assessments
against the taxpayer for unpaid WT, FICA, and FUTA taxes, along
with interest and penalties for years 1984 through 1987.        The
assessments also reflected the I.R.S.'s determination that Boles
himself was an employee of taxpayer and that loans and other
payments he received were actually wages.


     In October 1991, taxpayer paid a small portion of the taxes,
interest and penalties allegedly owed and thereafter filed
administrative claims for a refund of the same.         After the
administrative claims were denied, taxpayer filed the present
action against the United States seeking a refund of the taxes,
interest, and penalties paid, along with a determination that it
was not liable for the remaining taxes, interest, and penalties
assessed against it. The United States filed a counterclaim for
the outstanding balance of the unpaid taxes, interest, and
penalties.   The issues tried to the jury were:     (1)    whether
taxpayer's drivers were employees or independent contractors; and
(2)    if taxpayer's treatment of its drivers as independent
contractors was erroneous, whether it had a reasonable basis for
such treatment pursuant to Section 530.2

      2
      The parties agreed prior to trial that the district court
would make the determination of whether the loans and other
benefits received by David Boles from taxpayer were, in fact,
taxable income. The parties further agreed that once the jury made
its determinations regarding the classification and section 530
issues, the district court would determine the amount of money, if
any, owed by the respective parties.

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                                3
     The jury found that taxpayer's drivers were employees. The
jury went on to find that taxpayer had a reasonable basis for not
treating the drivers as employees. When asked to state the basis
for its finding on the latter issue, the jury made check marks by
two of the four options; the long-standing practice of a
significant segment of the industry and the advice of a CPA or tax
return preparer.

                               II.
     Under the Internal Revenue Code, an employer is required to
pay one-half of the total FICA taxes assessed against its
employees, and withhold from paychecks those FICA taxes owed by the
employees themselves. 26 U.S.C. §§ 3101, 3102(a), 3402(a). Also,
the employer is obligated to pay FUTA taxes for its employees. 26
U.S.C. § 3101. However, these obligations are incumbent upon an
employer only if its workers are determined to be "employees" under
the Tax Code.


     Section 530 was created by Congress in 1978 to alleviate what
was perceived as overly zealous pursuit and assessment of taxes and
penalties against employers who had, in good faith, misclassified
their employees as independent contractors. In Re Rasbury, 130
B.R. 990 (Bankr. N.D. Ala. 1991).        The statute is a relief
provision and provides an alternative method by which to avoid
employment tax liability where a taxpayer cannot establish his
workers are or were independent contractors.     Section 530(a)(1)
provides in pertinent part that although a taxpayer mistakenly
classified its workers as other than employees, "the individual
[worker] shall be deemed not to be an employee unless the taxpayer
had no reasonable basis for not treating such individual as an
employee."

     The statute goes on to explain methods by which a taxpayer may
show it had a "reasonable basis" for the improper classification of
its workers. Section 530(a)(2) provides that reasonable reliance

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                                4
on any of three "safe harbors" or "safe havens" shall be treated as
a reasonable basis for not treating an individual as an employee.
The provision states:
           For the 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 addition to the three specific safe haven rules, a taxpayer
may take advantage of Section 530 by demonstrating that it had some
other reasonable basis for treating its workers as independent
contractors.   H.R. Rep. Not. 95-1748, 95th Cong., 2d Sess. 5
(1978), reprinted in 1978-3 C.B. (vol. 1) 629, 633 (hereinafter
House Report).   As stated in Rev.Proc. 85-18, 1 C.C. 518, Sec.
3.01(c), "A taxpayer who fails to meet any of the three 'safe
havens' may nevertheless be entitled to relief if the taxpayer can
demonstrate, in some other manner, a reasonable basis for not
treating the individual as an employee."

                               III.
     Despite the relative breadth and complexity of the employment
tax statutes discussed above, we are faced in the government's
appeal with the narrow question of what is the taxpayer's burden in
proving it had a reasonable basis for not treating its workers as
employees under Section 530.


     The district court instructed the jury that should it reach

                               -5-
                                5
the reasonable basis issue, the taxpayer was not required to prove
this issue by a preponderance of the evidence. The instruction
concluded, " To prove reasonable basis, [taxpayer] need only show
that the existence of a reasonable basis is just as likely true
than not true. In other words, even if the evidence weighs out
evenly, you must find that [taxpayer] had a reasonable basis for
not treating the drivers as its employees."


     The government contends these instructions erroneously shifted
the burden of proof on the issue to the government. While we are
not convinced the court's instruction actually shifted the burden
to the government, we nevertheless conclude the instruction
erroneously stated the taxpayer's burden.


     We start with the well-established principle that the
Commissioner's determination of tax liability is entitled to a
presumption of correctness and that the burden is on the taxpayer
to prove that the determination is erroneous. Helvering v. Taylor,
293 U.S. 507, 55 S. Ct. 287, 79 L. Ed. 212 (1935);           Day v.
Commissioner, 975 F.2d 534, 537 (8th Cir. 1992). It is further
well established that the quantum of proof required is that of a
preponderance of the evidence. Mattingly v. U.S., 924 F.2d 785,
787 (8th Cir. 1991). These general principles apply as well to the
Commissioner's classification of a taxpayer's workers as employees,
i.e., once such a determination is made, it is the taxpayer's
burden to prove, by a preponderance of the evidence, that its
workers are or were independent contractors. Beatty v. Halpin, 267
F.2d 561, 563 (8th Cir. 1959); Kiesel v. U.S., 545 F.2d 1144, 1146
(8th Cir. 1976). The district court's instructions in this regard
were correct and the jury found the taxpayer had not satisfied its
burden.


     The taxpayer sought relief via Section 530 urging that when
Section 530 is involved, a lesser standard of proof is permitted
for the taxpayer to prevail. It should first be noted that nothing

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                                6
in the text of Section 530 itself suggests that the taxpayer's
traditional burden is to be altered when applying this statute. As
previously indicted, Section 530 permits a taxpayer/employer who
had wrongly failed to treat its workers as employees for tax
purposes to avoid employment tax liability. This is done by the
taxpayer showing it had a "reasonable basis" for doing so. Under
the clear text of the statute, "reasonable basis" is what must be
proved by the taxpayer - it is not an expression regarding the
level of proof or quantum of evidence. Congress's silence as to an
altered burden must be taken as meaning the traditional burdens
apply, i.e., a taxpayer's reasonable basis must be proved by a
preponderance of evidence. See, Grogan v. Garner, 498 U.S. 279,
286, 111 S. Ct. 654, 659, (1991) (interpreting section 523 of the
Bankruptcy Code to require a defrauded creditor to prove his claim
by a preponderance of the evidence based on lack of Congressional
directives to the contrary).


     Nor does the legislative history of Section 530 lend support
to the notion that the traditional burden of proof is to be
altered.   There can be no doubt that Section 530 is provision
favorable to taxpayers and may serve to relive significant tax
burdens.    Section 530 was intended "[g]enerally, [to] grant[]
relief if a taxpayer had any reasonable basis for treating its
workers as other than employees. The committee intends that this
reasonable basis requirement be construed liberally in favor of the
taxpayers."    House Report at 631-32.   Taxpayer argues that the
statutory language and legislative history "demonstrates that
Congress fully intended that section 530 be interpreted and
enforced quite differently than the norm in other tax cases where
the Government is presumptively correct." We do not agree.


     Liberal construction of Section 530 is not inconsistent with
maintaining   the   taxpayer's   traditional   burden.      Liberal
construction may be effected in a variety of ways that have nothing
to do with the taxpayer's burden of proof, including: 1)

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                                7
consideration of a wide range of conduct serving to establish
reasonable basis; 2) broadly interpreting the scope of the safe
havens specifically enumerated in the statute; and 3) leniently
construing the term "reasonable."


     The taxpayer relies in part on Critical Care Register Nursing,
Inc. v. U.S., 776 F.Supp. 1025 (E.D.Pa. 1991). In Critical Care,
the United States moved for judgment notwithstanding the verdict
after a jury found that the taxpayer in that case had a reasonable
basis for treating its workers as independent contractors instead
of employees. Id. at 1028. While the court engaged in an extended
discussion of the statute and its relatively taxpayer-friendly
legislative history, there is no indication the court interpreted
Section 530 to alter the burden of proof or shift the burden to the
government.   To the contrary, it is apparent the evidence was
analyzed with the traditional preponderance standard being placed
on the taxpayer. For example, the court submitted the issue to the
jury via a special interrogatory which stated, "Has the plaintiff,
Critical Care, proved by a preponderance of the evidence that in
1982 and 1983 it had a reasonable basis for not treating the nurses
in question as employees...?" Critical Care, 776 F.Supp. at 1029
(emphasis added). Further, the court's holding based on the record
was that "there was more than sufficient evidence presented at
trial from which the jury could conclude that Critical Care
satisfied, by a preponderance of the evidence, the dictates of
Section 530(a)(1) as to a reasonable basis for not treating its
nurses as employees." Id. (emphasis added). The district court's
opinion in Critical Care does not support the jury instruction
given in the present case.


     REAG, Inc. v. U.S., 801 F.Supp. 494 (W.D. Okl. 1992), is also
cited by taxpayer as supporting its argument on this issue. In
that case the court noted that "REAG has carried its burden of
proof by a preponderance of the evidence on each of the three
independent grounds for demonstrating a reasonable basis for its

                               -8-
                                8
treatment of the Workers as independent contractors. However, REAG
is only required to carry its burden of proof by a lesser
standard." Id. at 500 (citing Critical Care, supra). By the REAG
court's reading, Section 530 and its legislative history required
the court to "... lower[] the hurdle of the taxpayer's burden of
proof."   Id.   The court articulated this "lesser standard" by
stating that "a taxpayer need only show a substantial rational
basis for its decision to treat the Workers as independent
contractors in order to prevail." Id. Language in the currently-
challenged instruction was likely derived from commentary found in
a footnote of the REAG case, which states in part:

     The Court is aware of the seemingly amorphous nature of
     a standard of review that is quantitatively less that a
     preponderance of the evidence. However, logically, the
     burden on the taxpayer must be some quantum more than the
     IRS' prima facia showing of correctness, but less than a
     preponderance. Certainly if the evidence weighted out
     evenly, then under such a standard the taxpayer would
     still prevail.

REAG, 801 F.Supp. at 500 note.


     We believe the REAG court misinterpreted Section 530 and its
legislative history and decided this issue wrongly. As previously
indicated, there is nothing in the statute or its legislative
history which supports the idea that the burden of proof under
Section 530 is different than other tax cases. "Rational basis"
for not treating workers as employees is what must be shown by the
taxpayer; "[Substantial] rational basis" is not the level of proof
required.   Under the present facts it was taxpayer's burden to
prove that its workers were properly classified as independent
contractors by a preponderance of the evidence. Failing that, it
became the taxpayer's burden to prove by a preponderance of the
evidence that it had a rational basis for improperly classifying
the workers. The district court's burden of proof instruction was
reversible error.



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                                  9
        This court has stated that "It has long been generally
recognized that it is reversible error to place the burden of proof
on the wrong party or to place an unwarranted burden of proof on
one party. Voight v. Chicago & Northwestern Railroad Co., 380 F.2d
1000, 1004 (8th Cir. 1967).

                                     IV.
     The taxpayer's cross-appeal alleges the district court
committed reversible error by imposing penalties on the taxpayer
for its failure to file tax returns attributable to "loans" or
other fringe benefits recharacterized as salary to David Boles.
The district court determined that David Boles was an employee of
the taxpayer and should have been treated as such for employment
tax purposes. Taxpayer does not challenge this determination. The
district court went on to impose additions to the taxes due for
taxpayer's failure to file returns or pay the taxes at the time
they were due. Taxpayer contends the imposition of penalties in
addition to the taxes was in error. We disagree.


     Where an employer fails to file timely employment or
unemployment tax returns or fails to make deposits of taxes, the
Code provides for additions to the tax in the way of penalties. 26
U.S.C. § 6651(a)(1), 26 U.S.C. § 6656(a). The addition to taxes
under § 6651 has been described as mandatory unless it is shown
that the taxpayer's actions were due to reasonable cause and not
due to willful neglect.         Id.; Rubber Research, Inc. v.
Commissioner, 433 F.2d 1402, 1407 (8th Cir. 1970). To escape the
penalties, "the taxpayer bears the heavy burden of proving both (1)
that the failure did not result from 'willful neglect,' and (2)
that the failure was 'due to reasonable cause.'" U.S. v. Boyle,
468 U.S. 241, 245, 105 S. Ct. 687, 689-90, 83 L. Ed. 2d 622 (1985);
Rubber Research, 433 F.2d at 1407.3


        3
            Regarding our standard of review on this issue, the Supreme
Court        has stated that "Whether the elements that constitute

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                                     10
     In this case the evidence showed that Boles was the sole owner
of the taxpayer, as well as serving as its president, secretary and
treasurer. In short, the evidence presented indicated that Boles
alone ran taxpayer in all respects, both day to day and long term.
During the time in question Boles did not draw a salary, but
instead caused taxpayer to make him interest-free loans by writing
checks payable to himself or to "cash" on taxpayer's checking
account.    Taxpayer also paid some of Boles' personal living
expenses and paid for an automobile for Boles' exclusive use.
Boles had no other employment other than with taxpayer, and his
sole source of income was the money he received from taxpayer.
Given its treatment of its drivers as independent contractors, the
taxpayer was operating as a corporation without any employees for
tax purposes.


     In an effort to establish reasonable cause and the lack of
willful neglect, the taxpayer argued below that he relied on the
advice of his tax preparers in not paying taxes attributable to
Boles' wages. The district court heard all of the evidence and
rejected this contention.


     Reasonable cause requires the taxpayer to demonstrate that he
exercised "ordinary business care and prudence" but nevertheless
was "unable to file the return within the prescribed time." 26
C.F.R. § 301.-6651(c)(1) (1984); U.S. v. Boyle, 105 S. Ct. at 690.
Additionally it was the taxpayer's burden to show that its actions
were not due to willful neglect, which has been interpreted as


'reasonable cause' are present in a given situation is a question
of fact, but what elements must be present to constitute
'reasonable cause' is a question of law." U.S. v. Boyle, 469 U.S.
241, 249, 105 S.Ct. 687, 692 n.8, 83 L. Ed. 2d 622 (1985) (emphasis
in the original). We construe the district court's decision as
analyzing whether the taxpayer presented evidence to establish the
presence of reasonable cause, and thus review the decision under
the clearly erroneous standard. It should be noted however that
our conclusion on this issue would be the same even if we reviewed
the issue de novo.

                               -11-
                                11
meaning   a   "conscious,    intentional   failure    or   reckless
indifference." U.S. v. Boyle, 105 S. Ct. at 690. While a taxpayer
may establish reasonable cause (and/or lack of willful neglect) by
showing that it reasonably relied on the advice of an accountant or
tax preparer, Chared Corp. v. U.S., 69-2 USTC ¶ 9535 (N.D. Tex.,
1969), aff'd. 446 F.2d 745 (5th Cir. 1971), ordinary business care
and prudence on the part of the taxpayer are still required.
Obviously, reliance on the advice of others must be reasonable to
make out a showing of reasonable cause. Boles received no income
other than that received from the taxpayer.      For the years in
question, Boles was running a corporation with no employees for
federal tax purposes. Under the facts of this case, we agree with
the district court that taxpayer failed to meet its burden of
showing reasonable cause. The district court's determination is
affirmed on this issue.

                                V.
     In conclusion, we affirm the judgment of the trial court
assessing penalties on taxpayer's failure to pay employment taxes
on the money and fringe benefits given to David Boles. We reverse
the judgment entered on the jury's verdict finding that taxpayer
had a reasonable basis for treating its drivers as independent
contractors, and we remand for a new trial on this issue.


     A true copy.


          Attest:


                CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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