                        T.C. Memo. 2003-162



                      UNITED STATES TAX COURT



             WESTERN MANAGEMENT, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12686-99.              Filed June 3, 2003.



     Robert E. Kovacevich and Richard W. Kochansky, for

petitioner.

     Milton B. Blouke and Roger P. Law, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


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

response to a Notice of Determination Concerning Worker

Classification Under Section 74361 (notice of determination)


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
                                                   (continued...)
                                 - 2 -

relating to petitioner’s liabilities, pursuant to the Federal

Insurance Contributions Act (FICA) and the Federal Unemployment

Tax Act (FUTA), for 1994 and the first quarter of 1995 (period in

issue).   The issues for decision are whether:   (1) Robert E.

Kovacevich (Kovacevich) was petitioner’s employee for Federal

employment tax purposes, (2) 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), (3) petitioner owes

employment taxes pursuant to sections 3111 and 3301, and (4)

petitioner is liable for section 6656 and 6662(a) penalties.

                         FINDINGS OF FACT

     On October 1, 1981, Kovacevich incorporated petitioner as

Robert E. Kovacevich, P.S., a Washington C corporation, whose

name was subsequently changed to Western Management, Inc.    From

its incorporation and through the period in issue, petitioner’s

only source of income was from the provision of legal services,

and Kovacevich was petitioner’s sole shareholder, president, and

secretary-treasurer.   In 1981, petitioner’s board of directors

voted to pay Kovacevich $28,000 in 1982 and $60,000, annually,

thereafter.   Kovacevich designated the Seattle First National

Bank, Spokane and Eastern Branch (Seafirst), as the depository

for all of petitioner’s funds.    All moneys that were paid on



     1
      (...continued)
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -

petitioner’s accounts receivable were deposited in the Seafirst

account.

     Kovacevich worked 160 to 180 hours per month for petitioner

and performed all services necessary to generate gross receipts

on behalf of petitioner, including:    Paying creditors, hiring

employees, signing checks, determining employee compensation,

renewing petitioner’s malpractice insurance, and signing

petitioner’s Federal tax returns.   No other person performed

legal services on behalf of petitioner.

     Kovacevich received funds from petitioner as his needs arose

and was not compensated for his services at predetermined

intervals.   In 1994 and the first quarter of 1995, respectively,

petitioner paid Kovacevich $132,000 and $33,250.    Petitioner

issued checks to Kovacevich, his wife, and their creditors (e.g.,

Nordstrom, Teneff Jewelry, Fit and Hollywood, and National Golf),

and Kovacevich informed petitioner’s accountant and tax return

preparer, Bob Moe & Associates (Moe), that the payments were

draws.   Petitioner classified the payments as “loans” on its

corporate ledgers and did not file Forms 1099-MISC, Miscellaneous

Income, relating to the payments.   Petitioner also paid

Kovacevich’s law license renewal fees, office expenses, bar dues,

and health insurance premiums and deducted most of these expenses

on its corporate income tax returns.
                               - 4 -

     Kovacevich and his wife (Kovacevichs) maintained, at Farmers

and Merchant’s Bank, a personal line of credit.   On the corporate

ledgers, Moe listed the checks written to Farmers and Merchants

Bank and MBNA in the “Receivable from Officer” account.    These

checks had an “LN” memo description, indicating that the payment

related to a loan or the “Receivable from Officer” account.

     From 1982 through 1992, petitioner sponsored a defined

benefit plan for Kovacevich, its only participant.   In 1982 and

1984, petitioner contributed $46,473 and $81,822, respectively,

to the plan.

     Petitioner’s fiscal year ends on March 31.   On its corporate

income returns for 1994 and 1995, petitioner deducted officers’

compensation expenses in the amounts of $132,000 and $133,000,

respectively.   Kovacevich, in his capacity as president, amended

petitioner’s 1991 Form 941, Employer's Quarterly Federal Tax

Return, with the following statement:

     The amount of earnings of Employee Robert E. Kovacevich
     was not clear, hence was left off. The Employee paid
     all Income Tax due, hence the withholding is
     unnecessary. However the Social Security Tax is due.
     A completed W-2(c) term is included.

     On April 28, 1999, respondent sent petitioner a notice of

determination, in which respondent determined that Kovacevich was

an employee for Federal employment tax purposes and that

petitioner was not entitled, pursuant to section 530, to relief

from such classification.   Enclosed with the notice of
                                  - 5 -

determination was a schedule setting forth petitioner’s

liabilities as follows:

                             Addition to Tax             Penalty
Year        Deficiency          Sec. 6656               Sec. 6662
1994         $48,968              $611                   $9,794
1995          14,397               254                    3,133

       On September 21, 1999, the Court filed respondent’s Motion

To Dismiss In Part For Lack Of Jurisdiction And To Strike As To

The Amounts Of Employment Taxes And Additions To Tax Proposed For

Assessment By The Respondent (partial motion to dismiss).       On

October 12, 1999, the Court filed petitioner’s response to the

motion and granted the motion on October 14, 1999.       On October

17, 2000, the Court filed petitioner’s Motion To Dismiss For Lack

Of Jurisdiction And Judgment On The Pleadings (motion to

dismiss).    On October 17 and 18, 2000, the Court held proceedings

to determine whether petitioner properly classified Kovacevich as

an independent contractor and whether petitioner is entitled to

section 530 relief.      On December 21, 2000, Congress amended

section 7436(a) to provide this Court with jurisdiction to

determine the correct amounts of Federal employment taxes in

worker classification cases.      See Community Renewal Tax Relief

Act of 2000 (CRTRA), Pub. L. 106-554, sec. 314(f), 114 Stat.

2763A-643.    That amendment was retroactive to August 5, 1997.

CRTRA sec. 314(g), 114 Stat. 2763A-643.        On February 8, 2001, the

Court vacated its October 14, 1999, order of dismissal and denied
                                - 6 -

respondent’s motion.   On January 29, 2002, the Court held

proceedings to determine the correct amount of employment taxes.

     At the time the petition was filed, petitioner’s principal

place of business was Spokane, Washington.

                               OPINION

I.   Jurisdiction

     Petitioner contends that this Court lacks jurisdiction to

determine the correct amount of employment taxes because:

section 7436 was amended after this Court granted respondent’s

partial motion to dismiss, the notice of determination is

invalid, and no employment tax is due.

     A.   Our Decision To Vacate the October 14, 1999, Order Was
          Proper

     Petitioner contends that the Court improperly vacated its

October 14, 1999, order, which granted respondent’s partial

motion to dismiss.    Petitioner, relying on Plaut v. Spendthrift

Farm, 514 U.S. 211 (1995), contends that the Constitution’s

separation of powers principles and the Due Process Clause of the

Fifth Amendment prohibit the reopening of final judgments

relating to section 7436 cases.    Petitioner’s reliance on Plaut

is misplaced.   In Plaut, the action was dismissed, and the

judgment of dismissal became final prior to the enactment of the

applicable statute.    Specifically, the judgment of the District

Court dismissing that case with prejudice was entered on August
                               - 7 -

13, 1991, was not appealed, and became final 30 days later.

Legislation purporting to authorize the reopening of that final

judgment and the reinstatement of the complaint was signed into

law by the President on December 19, 1991.     The Supreme Court

held that the retroactive legislation was unconstitutional to the

extent it required Federal courts to reopen judgments that became

final before its enactment.   Plaut v. Spendthrift Farm, supra.

     Plaut is distinguishable because the amendment to section

7436 does not require the reopening of judgments which had become

final prior to the amendment’s enactment.     Cf. Plaut v.

Spendthrift Farm, supra at 214-217.     Vacating the order was

within our authority and consistent with the amendment and its

effective date.   See sec. 7436(a).    Moreover, our judgment in

this case is not yet final.   See sec. 7481(a); Rule 190(a).

Consequently, Plaut is inapplicable.     Accordingly, this Court’s

decision to vacate its October 14, 1999, order was proper.

Neely v. Commissioner, 116 T.C. 79, 84 n.6 (2001).

     B.   Notice of Determination

     Petitioner contends that the notice of determination is

invalid because “the unexplained arrows and rounding of * * *

[the amounts used to determine the deficiencies] indicate

vagueness.”   Challenges regarding the validity of a notice of

determination are analogous to such challenges to a notice of

deficiency.   Henry Randolph Consulting v. Commissioner, 113 T.C.
                               - 8 -

250 (1999) (holding that a notice of determination was not

invalid for failure to specify the names of the individuals whose

status had been determined pursuant to section 7436).   A notice

of deficiency is not “invalid for failure to explain the

adjustments, failure to cite statutory provisions on which

respondent relied, or inconsistencies in the notice [of

deficiency].”   Id. at 253; Campbell v. Commissioner, 90 T.C. 110

(1988); Mayerson v. Commissioner, 47 T.C. 340, 348-349 (1966).

There is no dispute that the name of the taxpayer, the affected

tax periods, and the amounts of the deficiencies are set forth in

the notice of determination.   Generally, the Court will not

examine respondent’s motives or procedure leading to his

determination relating to a notice of deficiency.   See Riland v.

Commissioner, 79 T.C. 185, 201 (1982); Greenberg's Express, Inc.

v. Commissioner, 62 T.C. 324, 327 (1974).   Similarly, petitioner

has not identified any reason to examine respondent’s motives or

procedure leading to his determination pursuant to section 7436.

     C.   Kovacevichs’ 1994 FICA Tax Payment

     On October 17, 2000, the Court filed petitioner’s motion to

dismiss on the ground that the Court lacks jurisdiction because

the Kovacevichs allegedly paid all of their 1994 FICA taxes.    Our

jurisdiction, pursuant to section 7436, is based upon whether

petitioner properly classified Kovacevich as an independent

contractor and whether petitioner is entitled to section 530
                                - 9 -

relief.    Henry Randolph Consulting v. Commissioner, supra.   In

addition, we have jurisdiction to determine petitioner’s

employment tax liability relating to amounts petitioner paid

Kovacevich in 1994 and 1995.   Sec. 7436(a).   Therefore,

petitioner’s motion to dismiss will be denied.

II.   Employment Status

      Sections 3111 and 3301 impose taxes on employers under FICA

and FUTA, respectively, based on wages paid to employees.

“Employee” is defined for purposes of the FICA tax in section

3121(d).   With certain modifications not germane here, this

definition applies for purposes of the FUTA tax as well.      Sec.

3306(i). Pursuant to section 3121(d)(2), the term “employee”

includes any individual who has the status of an employee under

the common law.   Paragraphs (1), (3), and (4) of section 3121(d)

delineate “statutory employees”.   These individuals are

considered employees regardless of their status under the common

law rules.   See Joseph M. Grey Pub. Accountant, P.C. v.

Commissioner, 119 T.C. 121, 126 (2002).    Any officer of a

corporation is a statutory employee, if such officer performs

substantial services for a corporation and receives remuneration

for those services.   See Veterinary Surgical Consultants, P.C. v.

Commissioner, 117 T.C. 141 (2001), affd. sub nom. Yeagle Drywall

Co. v. Commissioner, 54 Fed. Appx. 100 (3d Cir. 2002); sec.

3121(d)(1); sec. 31.3121(d)-1(b), Employment Tax Regs.
                              - 10 -

Kovacevich was a statutory employee because at all relevant times

he served as petitioner’s president and secretary-treasurer,

worked in all significant aspects of petitioner’s business,

performed substantial services for petitioner in his capacity as

an officer, and obtained remuneration for such services from

petitioner as his needs arose.2

III. Section 530 of the Revenue Act of 1978

     Section 530 provides relief from employment tax liability,

notwithstanding the actual relationship between the taxpayer and

the individual performing services.    Sec. 530(a).   The taxpayer,

however, must establish:   It did not treat the worker as an

employee, filed all returns for periods after December 31, 1978,

“on a basis consistent with the taxpayer’s treatment of such * *

* [worker] as not being an employee”, and had a reasonable basis

for not treating the worker as an employee.    Sec. 530(a)(1) and

(2); Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, supra

at 123.




     2
        Petitioner contends that the Court’s determination of
whether Kovacevich is an employee or independent contractor is
controlled by Clackamas Gastroenterology Associates, P.C. v.
Wells, 536 U.S. __, 123 S. Ct. 1673 (Apr. 22, 2003). We
disagree. In Clackamas, the Court simply held that in
determining whether four director-shareholder physicians were
employees or employers for purposes of the Americans with
Disabilities Act of 1990, “the common-law element of control is
the principal guidepost”. The Court did not consider whether
these individuals were employees or independent contractors for
FICA and FUTA purposes. For employment tax purposes, Kovacevich
is a statutory employee pursuant to sec. 3121(d)(1), and we need
not resort to the common-law principles considered in Clackamas.
                               - 11 -

      Petitioner treated Kovacevich as an employee.    Sec.

530(a)(1)(A).   Petitioner’s board of directors voted to pay

Kovacevich a $60,000 salary and issued a Form W-2, Wage and Tax

Statement, relating to 1991.   In addition, Kovacevich, in his

capacity as petitioner’s president, filed an amended Form 941 for

1991, with the following statement:

      The amount of earnings of Employee Robert E. Kovacevich
      was not clear, hence was left off. The Employee paid
      all Income Tax due, hence the withholding is
      unnecessary. However the Social Security Tax is due.
      A completed W-2(c) term is included. [Emphasis added.]

Furthermore, petitioner did not file Forms 1099 relating to

payments made to Kovacevich.   Sec. 530(a)(1)(B).     Thus,

petitioner fails the first two requirements and, accordingly, is

not entitled to relief.

IV.   Liability for Employment Tax

      Petitioner paid Kovacevich $132,000 and $33,250 in wages

during 1994 and the first quarter of 1995, respectively.      Because

we have determined that Kovacevich is an employee under sections

3121(d)(2) and 3306(i), petitioner is liable for FICA and FUTA

taxes as determined by respondent.      See secs. 3306(a)(1) and (b),

3111(a) and (b).

V.    Penalties Under Sections 6656 and 6662(a)

      Section 6656 imposes a penalty equal to 10 percent of the

portion of an underpayment in tax that is required to be

deposited if the failure to deposit is more than 15 days beyond

the prescribed deadline.   See sec. 6656(a); secs. 31.3402(b)-1,
                                - 12 -

31.3402(c)-1, Employment Tax Regs.       Petitioner has not

established reasonable cause for failing to make the required

deposits of tax.    Therefore, we sustain respondent’s

determination.   See Van Camp & Bennion v. United States, 251 F.3d

862 (9th Cir. 2001).

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the portion of an underpayment that is attributable

to negligence.     Petitioner’s contention that amounts paid to

Kovacevich were not wages is meritless.       See Van Camp & Bennion

v. United States, supra at 869 (stating that the reasonable basis

standard is not satisfied by “a return position that is merely

arguable or that is merely a colorable claim”); Spicer Accounting

Inc. v. United States, 918 F.2d 90 (9th Cir. 1990).       Petitioner

did not exercise due care in the filing of its return and thus is

liable for the section 6662(a) penalty.       Therefore, we sustain

respondent’s determination.

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,

                                      An order denying

                                 petitioner’s motion to dismiss

                                 will be issued, and decision will

                                 be entered under Rule 155.
