                  T.C. Summary Opinion 2001-10



                     UNITED STATES TAX COURT



            WILEY L. BARRON, CPA, LTD., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14168-99S.                Filed February 7, 2001.


     Wiley L. Barron (an officer), for petitioner.

     Ann L. Darnold, for respondent.



     ARMEN, Special Trial Judge:   This case is before the Court

on a petition for a redetermination of a Notice of Determination

Concerning Worker Classification Under Section 7436.1    The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.   See sec. 7436(c).



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                                - 2 -

     In the Notice of Determination Concerning Worker

Classification Under Section 7436 (notice of determination),

respondent determined: (1) For 1994 through 1996, Wiley L. Barron

is to be legally classified as one of petitioner’s employees for

purposes of Federal employment taxes under subtitle C of the

Internal Revenue Code; and (2) petitioner is not entitled to

relief from this classification under section 530 of the Revenue

Act of 1978.    These determinations have given rise to the

following three issues for decision by the Court:

     (1) Whether the statute of limitations bars assessment of

petitioner’s employment tax liabilities for the taxable periods

in issue.    We hold that it does not.

     (2) Whether Wiley L. Barron was an employee of petitioner

for the taxable periods in issue.    We hold that he was.

     (3) Whether petitioner is eligible for relief pursuant to

section 530 of the Revenue Act of 1978, Pub. L. 95-600, 92 Stat.

2885.    We hold that petitioner is not eligible for such relief.

                             Background

     Most of the facts have been stipulated, and they are so

found.    The stipulated facts and attached exhibits are

incorporated herein by this reference.

     Petitioner’s sole office was located in Pine Bluff,

Arkansas, at the time that its petition was filed with the Court.
                                 - 3 -

A. Wiley L. Barron, CPA, Ltd.

     Wiley L. Barron, CPA, Ltd. (petitioner) is an S corporation

that was formed on or about January 2, 1990.    Since the date of

its inception, petitioner has been engaged in the business of

providing accounting services.

     Wiley L. Barron (Mr. Barron) is, and has been for many

years, a certified public accountant (C.P.A.).    Mr. Barron is

petitioner’s president and sole shareholder, and he is the only

C.P.A. who performs services for petitioner.    The only other

individuals who perform services for petitioner are two employees

who provide clerical and support services.2

     As petitioner’s president, Mr. Barron exercises exclusive

authority over all of petitioner’s affairs.    He is solely

responsible for making management decisions and for controlling

and directing every facet of petitioner’s business.

B. Petitioner’s Income Tax Returns

     Petitioner filed Form 1120S (U.S. Income Tax Return for an S

Corporation) for each of the calendar years 1994, 1995, and 1996.

On Schedule M-2 of these returns, petitioner reported

distributions other than dividend distributions in the following

amounts:




     2
        The status of these two service providers as employees of
petitioner is not in issue.
                                 - 4 -

                    Year        Distribution
                    1994          $56,352
                    1995           53,257
                    1996           83,341


C. Form W-2

     In 1994, Mr. Barron received a salary from petitioner in the

amount of $2,000.    In contrast, Mr. Barron did not receive a

salary from petitioner in either 1995 or 1996.

     For 1994, petitioner issued Form W-2 (Wage and Tax

Statement) to Mr. Barron.     The Form W-2 was issued in respect of

the salary paid to Mr. Barron for that year.         The form reflects

the payment of wages and the withholding of taxes as follows:

          Wages/Withholding                 Amount
          Wages, tips, other compensation   $2,000
          Federal income tax withheld          -0-
          Social Security wages              2,000
          Social Security tax withheld         124
          Medicare wages and tips            2,000
          Medicare tax withheld                 29
          State wages, tips, etc.            2,000
          State income tax withheld            -0-


The payment of wages and the withholding of taxes were for the

fourth quarter of 1994.

     Petitioner did not issue a Form W-2 to Mr. Barron for either

1995 or 1996.3


     3
        The record suggests that other than for $2,000 of
compensation in 1994, Mr. Barron reported income from petitioner
as passthrough of S corporation income, pursuant to sec. 1366, on
Part II of Schedule E (Supplemental Income and Loss) of his
individual income tax returns. We note that a shareholder’s
share of an S corporation’s income is not subject to self-
employment tax. See Durando v. United States, 70 F.3d 548, 550
                                                   (continued...)
                                 - 5 -

     D. Employment Tax Returns

     Petitioner timely filed Forms 941 (Employer’s Quarterly

Federal Tax Return) for the calendar quarters of 1994, 1995, and

1996.

     On its Form 941 for the fourth quarter of 1994, petitioner

included in the line for “Total wages and tips subject to

withholding plus other compensation” the $2,000 reported as wages

on the Form W-2 issued to Mr. Barron for 1994.   Similarly, in

each of the lines for “Taxable social security wages” and

“Taxable Medicare wages and tips”, petitioner included the

$2,000.   Finally, the amount reported by petitioner as “Total

taxes” for the quarter included the Social Security and Medicare

taxes withheld from Mr. Barron’s wages.

     Except for the $2,000 reported as wages on the Form W-2

issued to Mr. Barron for 1994, which amount was reported on Form

941 for the fourth quarter of 1994, petitioner did not include

any amount in respect of Mr. Barron on Form 941 for any calendar

quarter of 1994, 1995, or 1996.

     Petitioner also timely filed Forms 940 (Employer’s Annual

Federal Unemployment (FUTA) Tax Return) for 1994, 1995, and 1996.

     On its Form 940 for 1994, petitioner included in the line

for “Total taxable wages” the $2,000 reported as wages on the



     3
      (...continued)
n.5, 552 (9th Cir. 1995).
                                - 6 -

Form W-2 issued to Mr. Barron for 1994, and petitioner computed

its liability for FUTA tax accordingly.

     Except for the $2,000 amount reported as wages on the Form

W-2 issued to Mr. Barron for 1994, which amount was reported on

Form 940 for 1994, petitioner did not include any amount in

respect of Mr. Barron on Form 940 for 1994, 1995, or 1996.

E. Employment Tax Examination

     In 1997, respondent commenced an examination of petitioner’s

employment tax liabilities.

     In May 1997, petitioner executed Form SS-10 (Consent to

Extend the Time to Assess Employment Taxes), agreeing to extend

through July 31, 1998, the period of limitations for assessing

additional FUTA tax liability reportable on Form 940 for the

calendar year 1994.   Respondent executed the consent in June

1997.

     In February 1998, petitioner executed another Form SS-10,

this time agreeing to extend through April 15, 1999, the period

of limitations for assessing (1) additional FUTA tax liability

reportable on Form 940 for the calendar year 1994 and (2)

additional employment tax liabilities reportable on Form 941 for

each of the four calendar quarters of 1994.   Respondent also

executed the consent in February 1998.

     Based on statistical data compiled by Robert Half

International, Inc., respondent’s employment tax agent proposed
                              - 7 -

that reasonable compensation for a C.P.A. in Arkansas like Mr.

Barron with petitioner’s type of practice for 1994, 1995, and

1996 would be $45,000, $47,500, and $49,000, respectively.    In

view of the fact that petitioner had only reported compensation

paid to Mr. Barron for the fourth quarter of 1994 in the amount

of $2,000, respondent’s agent further proposed increases in

petitioner’s employment taxes, and additions to tax under section

6656 for failure to make deposit of taxes, for the calendar

quarters in, and the calendar years of, 1994, 1995, and 1996.

     On February 20, 1998, petitioner executed Forms 2504

(Agreement to Assessment and Collection of Additional Tax and

Acceptance of Overassessment), agreeing to the immediate

assessment and collection of the increases in its employment

taxes and additions to tax under section 6656, as proposed by

respondent’s employment tax agent.    On March 30, 1998, respondent

assessed these increases in petitioner’s employment taxes and

additions to tax.

F. Petitioner’s Offer in Compromise

     On December 8, 1998, respondent received from petitioner

Form 656 (Offer in Compromise).   The Offer in Compromise, which

was submitted by petitioner on the basis of doubt as to

liability, encompassed petitioner’s employment tax liabilities

for the calendar quarters in, and the calendar years of, 1994,

1995, and 1996.
                               - 8 -

     The Offer in Compromise provided, in relevant part, as

follows:

     By submitting this offer, I/we understand and agree to
     the following conditions:

                       *   *   *     *   *   *   *

     (m) The offer is pending starting with the date an
     authorized IRS official signs this form and accepts
     my/our waiver of the statutory periods of limitation.
     The offer remains pending until an authorized IRS
     official accepts, rejects or acknowledges withdrawal of
     the offer in writing. * * *

     (n) The waiver and suspension of any statutory periods
     of limitation for assessment and collection of the
     amount of the tax liability described * * * [above],
     continues to apply: while the offer is pending (see (m)
     above) * * * and for one additional year beyond each of
     the time periods identified in this paragraph.

     On December 14, 1998, an authorized official signed the

Offer in Compromise on behalf of respondent and accepted the

waiver of the statutory period of limitations set forth in

paragraph (m) of the offer.

G. Abatement of the March 30, 1998 Employment Tax Assessment

     On May 3, 1999, respondent abated the assessment made

against petitioner on March 30, 1998, for employment taxes and

additions to tax under section 6656.     Respondent took this action

after discovering that the Forms 2504 executed by petitioner on

February 20, 1998, did not include the waiver paragraph required

by Notice 98-43, 1998-2 C.B. 207.4


     4
         Notice 98-43, 1998-2 C.B. 207, sets forth new procedures
                                                    (continued...)
                              - 9 -

H. Rejection of Petitioner’s Offer in Compromise

     By letter dated May 13, 1999, respondent rejected

petitioner’s Offer in Compromise.   The letter stated in relevant

part as follows:

          This refers to your offer of $500.00, submitted to
     compromise your unpaid employment tax liabilities for
     the tax periods shown above.


     4
      (...continued)
under section 7436 for processing employment tax cases involving
worker classification and sec. 530 of the Revenue Act of 1978.
Notice 98-43 provides in relevant part as follows:

     AGREED SETTLEMENTS
          If the taxpayer wishes to settle the worker
     classification and ¶ 530 issues on an agreed basis
     before issuance of a Notice of Determination, the
     taxpayer must formally waive the restrictions on
     assessment contained in §§ 7436(d)(1) and 6213. This
     will generally be accomplished by execution of an
     agreed settlement that contains the following language:

               I understand that, by signing this
          agreement, I am waiving the restrictions on
          assessment provided in sections 7436(d) and
          6213(a) of the Internal Revenue Code of 1986.

          The Service will not assess employment taxes
     attributable to worker classification or § 530 issues
     unless either the Service has issued a Notice of
     Determination to the taxpayer and the 90-day period for
     filing a Tax Court petition has expired or,
     alternatively, the taxpayer has waived the restrictions
     on assessment. If the Service erroneously makes an
     assessment of taxes attributable to worker
     classification and § 530 issues without first either
     issuing a Notice of Determination or obtaining a waiver
     of restrictions on assessment from the taxpayer, the
     taxpayer is entitled to an automatic abatement of the
     assessment. However, once any such procedural defects
     are corrected, the Service may reassess the employment
     taxes to the same extent as if the abated assessment
     had not occurred.
                               - 10 -


          We are sorry, but your offer is rejected because
     the tax is held to be legally due and an amount larger
     than the offer appears to be collectible. We do not
     have authority to accept an offer in these
     circumstances.

I. The Notice of Determination

     On May 24, 1999, respondent sent to petitioner a Notice of

Determination Concerning Worker Classification Under Section

7436.    The notice determined that Mr. Barron should be classified

as an employee for purposes of Federal employment taxes under

subtitle C of the Internal Revenue Code for the calendar quarters

in, and the calendar years of, 1994, 1995, and 1996.   The notice

also determined that petitioner was not entitled to treatment

under section 530 of the Revenue Act of 1978 with respect to Mr.

Barron.5

     On August 24, 1999, petitioner filed a petition under

section 7436 contesting respondent’s determinations.




     5
        The determinations made by respondent in the Notice of
Determination reflect petitioner’s liabilities as originally
proposed by respondent’s employment tax agent, described supra in
E.
                              - 11 -

                            Discussion

Issue 1: Statute of Limitations6

     Petitioner contends that assessment and collection of any

additional employment tax liability for the taxable periods in

issue is barred by the statute of limitations.    We disagree for

the following reasons.

     As a general rule, section 6501(a) requires that any tax be

assessed within 3 years after the return was filed.    Section

6501(b) sets forth rules providing when a return is deemed to

have been filed.

     As applicable herein, in the case of FUTA taxes reportable

on Form 940, a return is due on or before January 31 of the year

following the calendar year for which the return is required.

See sec. 6071(a); sec. 31.6071(a)-1(c), Employment Tax Regs.      See

also sec. 31.6011(a)-3, Employment Tax Regs., regarding the

requirement for filing such a return.    However, in case of an

early return, the return is deemed to have been filed on the last

day prescribed therefor.   See sec. 6501(b)(1).



     6
        At the time of trial, as well as when the posttrial
briefs were filed, the Court had not yet decided whether issues
related to the statute of limitations were cognizable in an
action for redetermination of employment status. Subsequently,
it was decided that when the jurisdiction of the Court has been
properly invoked pursuant to sec. 7436, the Court may properly
decide whether the issuance of the Commissioner’s notice of
determination is barred by the expiration of the period of
limitations under sec. 6501. See Neely v. Commissioner, 115 T.C.
287 (2000).
                              - 12 -

     As applicable herein, in the case of FICA taxes reportable

on Form 941, the return is due on or before the last day of the

first calendar month following the calendar quarter for which the

return is required.   See sec. 6071(a); sec. 31.6071(a)-1(a),

Employment Tax Regs.; see also sec. 31.6011(a)-1, Employment Tax

Regs., regarding the requirement for filing such a return.

However, if a return for a calendar quarter is filed before April

15 of the following calendar year, the return shall be deemed to

have been filed on April 15 of the following calendar year.     See

sec. 6501(b)(2).

     Also relevant to our discussion is section 6501(c)(4), which

provides an exception to the general rule of section 6501(a)

prescribing a 3-year period of limitations.   Thus, as relevant

herein, section 6501(c)(4) provides that where, before the

expiration of the period of limitations otherwise applicable to

the assessment of a tax, both the taxpayer and the Commissioner

have consented in writing to its assessment after such time, the

tax may be assessed at any time before the expiration of the

period agreed upon.   In addition, the period so agreed upon may

be further extended by subsequent agreements made in writing

before the expiration of the period previously agreed upon.     See

sec. 6501(c)(4).

     Further relevant to our discussion is section 6503(a)(1).

That section, as applicable to the present action by virtue of
                                - 13 -

section 7436(d)(1), provides that the issuance of a notice of

determination serves to suspend the running of the period of

limitations on assessment for the period during which the

Commissioner is prohibited from making the assessment, and for 60

days thereafter.   The period during which the Commissioner is

prohibited from making the assessment begins on the date on which

the notice of determination is issued and, if an action for

redetermination of employment status is commenced, ends on the

date on which the decision of this Court becomes final.   See

sections 6213(a) and 7481, as applicable to the present action by

virtue of section 7436(d)(1).

     We now apply these principles to the taxable periods in

issue.

     A. 1994 and 1995

     The regular 3-year period of limitations for assessment of

employment taxes reportable on Form 941; i.e., FICA taxes, for

the calendar quarters ended March 31, June 30, September 30, and

December 31, 1994, expired on April 15, 1998.   Prior to that

date, however, both petitioner and respondent executed Form SS-10

(Consent to Extend the Time to Assess Employment Taxes), agreeing

to extend the period of limitations to April 15, 1999.

     The regular 3-year period of limitations for assessment of

employment taxes reportable on Form 941 for the calendar quarters

ended March 31, June 30, September 30, and December 31, 1995,
                              - 14 -

expired on April 15, 1999.

     The regular 3-year period of limitations for assessment of

unemployment tax reportable on Form 940, i.e., FUTA tax, for the

calendar year 1994, expired on January 31, 1998.   Prior to that

date, however, both petitioner and respondent executed Form SS-

10, agreeing to extend the period of limitations to July 31,

1998.   Prior to this second date, however, both petitioner and

respondent executed Form SS-10, agreeing to extend the period of

limitations to April 15, 1999.

     The regular 3-year period of limitations for assessment of

unemployment tax reportable on Form 940 for the calendar year

1995, expired on January 31, 1999.

     On December 14, 1998, prior to the expiration of the

foregoing periods of limitations, one of respondent’s authorized

officials signed the Offer in Compromise that petitioner had

submitted earlier that month with respect to (inter alia)

petitioner’s employment tax liabilities for the calendar quarters

in, and the calendar years of, 1994 and 1995.   This action by

respondent’s authorized official served to suspend the running of

the period of limitations on assessment of petitioner’s

employment tax liabilities that were covered by the offer.   As

applicable herein, such suspension extended from December 14,

1998, through May 13, 1999; i.e., the date on which respondent

rejected the offer, and for 1 thereafter.
                               - 15 -

     By virtue of the above-described waivers (Forms SS-10) and

Offer in Compromise (Form 656), respondent’s issuance of the

notice of determination on May 24, 1999, occurred before the

expiration of the period of limitations on assessment of

petitioner’s employment taxes for periods ending in 1994 and

1995.    Accordingly, the statute of limitations does not bar

assessment of employment taxes for those periods.

     Petitioner contends that the abatement on May 3, 1999, of

the employment tax assessment (see Background, supra, section G.)

served to annul the waiver provisions of the Offer in Compromise.

We disagree.    Petitioner in fact executed Form 656 and thereby

agreed to the suspension of the period of limitations with

respect to the employment taxes that were subject to the offer.7

     B. 1996

     The regular 3-year period of limitations for assessment of

employment taxes reportable on Form 941; i.e., FICA taxes, for

the calendar quarters ended March 31, June 30, September 30, and

December 31, 1996, expired on April 15, 2000.    The regular 3-year



     7
        At trial, petitioner introduced a document dated June 13,
2000, purporting to withdraw the Offer in Compromise previously
submitted in Dec. 1998. In petitioner’s view, withdrawal of the
offer would serve to negate the waiver of the statute of
limitations therein. However, petitioner may not, by such simple
expedient, eliminate the consequences of its action in submitting
the offer. More precisely, paragraph (m) of the offer
specifically states that the offer remains pending “until an
authorized IRS official * * * acknowledges withdrawal of the
offer in writing.”
                              - 16 -

period of limitations for assessment of unemployment tax

reportable on Form 940; i.e., FUTA tax, for the calendar year

1996, expired on January 31, 2000.

      On May 24, 1999, well before the earlier of January 31,

2000, and April 15, 2000, prior to the expiration of the

foregoing periods of limitations, respondent sent to petitioner

the Notice of Determination of Worker Classification Under

Section 7436.   Thereafter, on August 24, 1999, petitioner filed

its   petition under section 7436 commencing the present action

for redetermination of employment status.

      The issuance of the notice of determination served to

suspend the running of the period of limitations.   Likewise, the

commencement of the action for redetermination serves to further

suspend the running of such period.    Accordingly, and contrary to

petitioner’s protestations to the contrary, it is clear that the

statute of limitations does not bar assessment of employment

taxes for periods ending in 1996.

Issue 2: Whether Mr. Barron Is An Employee

      Chapter 21 of subtitle C of the Internal Revenue Code

imposes the FICA tax, and chapter 23 of subtitle C of the

Internal Revenue Code imposes the FUTA tax.   For purposes of

chapter 21, section 3121(d)(1) specifically includes within the

definition of the term “employee” any officer of a corporation.

For purposes of chapter 23, and as relevant herein, section
                              - 17 -

3306(i) provides that the term “employee” has the meaning

assigned to such term by section 3121(d).

     Section 31.3121(d)-1(b), Employment Tax Regs., which is

applicable to chapter 21 of subtitle C, provides in relevant part

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. * * *

See also sec. 31.3306(i)-1(e), Employment Tax Regs., for the same

provision applicable to chapter 23 of subtitle C.

     In the present case, Mr. Barron was the only C.P.A. who

performed services for petitioner, and indeed, Mr. Barron was the

only individual who performed professional services for

petitioner.   Further, as petitioner’s president, Mr. Barron

exercised exclusive authority over all of petitioner’s affairs,

and he was the individual who was solely responsible for making

management decisions and for controlling and directing every

facet of petitioner’s business.   Under these facts, it is clear

that Mr. Barron is not excluded from the general rule of sections

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

a corporate officer is an employee.    See secs. 3121(d)(1),

3306(i).   We hold, therefore, that as a corporate officer who

performed substantial services for petitioner, Mr. Barron is an
                             - 18 -

employee whose compensation is subject to FICA and FUTA taxes.

See Spicer Accounting, Inc. v. United States, 918 F.2d 90, 92-93

(9th Cir. 1990); Western Mgmt., Inc. v. United States, 45 Fed.

Cl. 543 (2000); Darrell Harris, Inc. v. United States, 770 F.

Supp. 1492, 1496-1497 (W.D. Okla. 1991); Radtke v. United States,

712 F. Supp. 143, 145 (E.D. Wis. 1989), affd. per curiam 895 F.2d

1196 (7th Cir. 1990).

Issue 3: Whether Petitioner Is Eligible for Section 530 Relief

     Notwithstanding our conclusion that Mr. Barron is an

employee, section 530 of the Revenue Act of 1978, Pub. L. 95-600,

92 Stat. 2763, 2885 (section 530), as amended, would relieve

petitioner of employment tax liability for the periods in issue

if the requirements of section 530 are satisfied.   Subsection (a)

of that section provides in relevant part as follows:

     (a) Termination of certain employment tax liability
     * * *.--
          (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.
                                 - 19 -

                     *   *   *     *      *   *   *

          (3) Consistency required in the case of prior tax
     treatment.–-Paragraph (1) shall not apply with respect
     to the treatment of any individual for employment tax
     purposes for any period ending after December 31, 1978,
     if the taxpayer (or a predecessor) has treated any
     individual holding a substantially similar position as
     an employee for purposes of the employment taxes for
     any period beginning after December 31, 1977.

     Petitioner does not satisfy the requirements of section 530

and is therefore not eligible for relief under that section for

at least the following two reasons.

     First, section 530(a)(1)(A) conditions the applicability of

relief to the situation where “the taxpayer did not treat an

individual as an employee for any period”.        Section 530(a)(3)

clarifies this requirement by providing that for periods after

December 31, 1977, if “the taxpayer (or a predecessor) has

treated any individual holding a substantially similar position

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

taxpayer.   Thus, if the taxpayer treats any service provider as

an employee for any period after December 31, 1977, then the

taxpayer is precluded from obtaining section 530 relief with

respect to a similarly situated service provider in any

subsequent taxable period.   See Lowen Corp. v. United States, 785

F. Supp. 913, 916 (D. Kan. 1992), affd. sub nom. Eastern Inv.

Corp. v. United States, 49 F.3d 651 (10th Cir. 1995).       A

fortiori, if the taxpayer treats a particular service provider as

an employee for any period after December 31, 1977, then the
                              - 20 -

taxpayer is precluded from obtaining section 530 relief with

respect to that particular service provider in any subsequent

taxable period.

     In order to satisfy the substantive consistency requirement

of section 530, petitioner would have to establish that it did

not treat Mr. Barron, or any service provider whose position was

substantially similar to Mr. Barron’s, as an employee for any

period after December 31, 1977.   In the present case, Mr. Barron

is the only C.P.A. who provided services for petitioner and the

only individual who provided professional services for

petitioner.   Accordingly, in order to satisfy the substantive

consistency requirement of section 530, petitioner would have to

establish that it never treated Mr. Barron as an employee.

However, Mr. Barron was treated as an employee in 1994 when: (1)

Petitioner issued Mr. Barron a Form W-2 for the taxable year

1994; (2) petitioner included Mr. Barron’s compensation on its

Form 941 for the fourth quarter of 1994 and computed its

liability for FICA tax accordingly; and (3) petitioner included

Mr. Barron’s compensation on its Form 940 for 1994 and computed

its liability for FUTA tax accordingly.

     Because petitioner does not satisfy the substantive

consistency requirement, petitioner is not eligible for relief

under section 530.
                               - 21 -

      Second, eligibility for relief under section 530(a)(1)

requires that the taxpayer have a reasonable basis for not

treating the service provider in question as an employee.      This

requirement may be established by the particular facts and

circumstances of the case or by reference to one of the three

“safe harbors” described in section 530(a)(2).

      We recognize that the Congress intended that “this

reasonable basis requirement be construed liberally in favor of

taxpayers.”   H. Rept. 95-1748, 1978-3 C.B. (Vol. 1) 629, 633.

However, it has been held that an S corporation’s treatment of

its president as a shareholder, rather than as an employee, was

unreasonable within the meaning of section 530 where the

president “was, for all practical purposes, the central worker

for the taxpayer.”   Spicer Accounting, Inc. v. United States, 918

F.2d 90, 95 (9th Cir. 1990).   There the Court of Appeals

concluded that “it is clear that Mr. Spicer failed to satisfy

this [reasonable basis] standard, however liberally construed.”

Id.   Similarly, because Mr. Barron was “the central worker” for

petitioner and provided substantial services, and further because

sections 3121(d)(1) and 3306(i) unambiguously state that a

corporate officer is an employee, we conclude that petitioner’s

treatment of Mr. Barron was unreasonable.

      Petitioner relies on Durando v. United States, 70 F.3d 548

(9th Cir. 1995), in support of its treatment of Mr. Barron.     That
                              - 22 -

case is clearly distinguishable, however, as demonstrated by the

fact that it neither cites Spicer Accounting, Inc. v. United

States, supra, nor involves section 530.   Indeed, Durando v.

United States, supra, does not present any issue involving the

classification of a service provider and does not even involve

employment taxes.   Rather, the case holds that passthrough income

from an S corporation may not be treated as net earnings from

self-employment for the purpose of a Keogh plan deduction.8

     In view of the foregoing, we hold that petitioner is not

eligible for relief under section 530.

                            Conclusion

     We have carefully considered remaining arguments made by

petitioner for a result contrary to that expressed herein and, to

the extent not discussed above, we consider those arguments to be

without merit.9




     8
        Although a shareholder of an S corporation may not
establish a Keogh plan, the Court of Appeals stated that the S
corporation may establish a retirement plan for its employees;
the Court of Appeals also quoted from one of the Commissioner’s
publications to the effect that an officer of an S corporation
who performs substantial services is an employee of the S
corporation. See Durando v. United States, 70 F.3d 548, 551 n.6
(9th Cir. 1995).
     9
        Among those arguments is petitioner’s allegation that
respondent’s brief was filed 1 day late and that “Respondent
should also be held to the rules.” Contrary to petitioner’s
allegation, respondent’s brief was timely filed pursuant to sec.
7502(a).
                             - 23 -

     Reviewed and adopted as the report of the Small Tax Case

Division.

     In order to give effect to the foregoing,



                                        An appropriate order will

                                   be issued.10




     10
        After this case was tried and the parties’ briefs were
filed, Congress amended sec. 7436(a) retroactively to confer
jurisdiction on this Court to determine “the proper amount of
employment tax”. Community Renewal Tax Relief Act of 2000, Pub.
L. 106-554, sec. 314(f), (g), 114 Stat. 2763. Having sustained
respondent’s notice of determination regarding the issues in
dispute at trial and on brief, we leave it to the parties in
their Rule 155 computation to specify the proper amount of
employment taxes to be reflected in the Decision to be entered in
this case.
