                        T.C. Memo. 2003-13



                      UNITED STATES TAX COURT



           RONALD McLEAN EASTERN VIDEO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7721-01.                Filed January 14, 2003.


     Ronald McLean, for petitioner.

     Michael K. Park, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     DAWSON, Judge:   This case was assigned to Special Trial

Judge John F. Dean pursuant to section 7443A(b)(5) and Rules 180,

181, and 183.1   The Court agrees with and adopts the opinion of

the Special Trial Judge, which is set forth below.


     1
        Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year and quarters at
issue, and Rule references are to the Tax Court Rules of Practice
and Procedure.
                                - 2 -

                OPINION OF THE SPECIAL TRIAL JUDGE

     DEAN, Special Trial Judge:    This case is before the Court on

a petition, as amended, under section 7436 as in effect at the

time the petition was filed.   The petition seeks review of a

notice of determination concerning worker classification.

     In a notice dated March 14, 2001, respondent determined

that:   (1) Felicia Reed, Andrea Trent, Shemeka Morgan, Eric

Patrick, Tracey Ashley, and Kathy Wayne (video workers) were

employees of Ronald McLean Eastern Video (petitioner) for Federal

employment tax purposes during each of the four quarters of the

calendar year 1996; and (2) petitioner is not entitled to relief

from Federal employment taxes as provided by section 530 of the

Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2885 (section 530),

as amended.   The reference here to employment taxes is to Social

Security taxes under the Federal Insurance Contributions Act

(FICA) and unemployment taxes under the Federal Unemployment Tax

Act (FUTA).

     The parties have stipulated that the amount of FUTA taxes

due if the video workers were employees is $387.     The issues

remaining for decision are:    (1) Whether the video workers were

common law employees of petitioner during the four quarters of

1996; and if so, (2) whether petitioner is entitled to section

530 relief from employment taxes due on wages paid to the video

workers.
                                - 3 -

     The stipulated facts and exhibits received into evidence are

incorporated herein by reference.    At the time the petition in

this case was filed, Ronald McLean (Mr. McLean), doing business

as Ronald McLean Eastern Video, resided in College Park, Georgia.

                           FINDINGS OF FACT

     During the quarters at issue, petitioner operated as a sole

proprietorship.    It operated as a video rental business from two

locations in Atlanta, Georgia, under the name Eastern Video.       Mr.

McLean filed a Form 1040, Individual Income Tax Return, for 1996

with a Schedule C, Profit or Loss From Business, in the name of

Eastern Video.    Among the items of expense reported on the

schedule were “contractual services” of $26,160 and wages of

$60,706.

     Petitioner issued Forms W-2, Wage and Tax Statement, to

three employees, Gladys Favors, Angela Trimble,2 and Kevin

Walton, for wages totaling $50,544 for 1996.    It also filed Forms

941, Employer’s Quarterly Federal Tax Return, and a Form 940,

Employer’s Annual Federal Unemployment (FUTA) Tax Return, for

1996 reporting total wages of $50,544 paid to employees.     The

three full-time employees performed whatever duties were required

to run the video stores.




     2
        The stipulation of facts refers to her as Angela “Halsey”
while the associated exhibit refers to her as Angela “Trimble”.
There is no explanation in the record for this discrepancy.
                                - 4 -

     The video workers were paid a total of $10,162 in income

reported by Forms 1099-MISC, Miscellaneous Income.     The video

workers were hired with the intent of having them collect late

fees and overdue video tapes, “lates”.    Because of bad

experiences in the past with hiring “outsiders” to collect his

“lates”, Mr. McLean decided “to hire some people and they’re

going to have to work within my operation.”

     Two of the six video workers, however, Tracey Ashley and

Eric Patrick, were teenagers who, according to Mr. McLean, were

“employees that worked” after school about 10 hours a week at the

“North Moreland” location.    They were not experienced at

collection work, and there was not much collection work being

done at their location.    Their primary function was not

collection.    Mr. McLean concedes that, with respect to the

teenagers, “to be perfectly honest with you, they could be

considered as W-2 employees.”

     The other four video workers were at the “Metropolitan”

location.    It is a free-standing building.   They worked in the

back where there were three desks, a storage area, a

refrigerator, and a water cooler.    There were phones and

computers.    They got the names of “lates” and nonreturns from

printouts made by petitioner.    All the video workers, including

those at the Metropolitan location, were paid by the hour.     They

used petitioner’s pencils, calculators, and telephones, and all
                                - 5 -

the expenses of collection were paid by petitioner.     The six

video workers had to sign in and out of work and had assigned

places of work in Mr. McLean’s office and at “the warehouse

area”.

     For videos that were up to 3 days late, the “regular

employees” would call the customer.     After that, the four

collection people would call.   If there was no response, they

would send a letter by regular mail.     Petitioner paid the

postage.   If after the first mailing there was no answer, the

video workers sent a letter by certified mail, the postage for

which was also paid by petitioner.      If there was no response 10

days after the mailing of the certified letter, the video workers

would prepare an application for a warrant.     Mr. McLean reviewed

the applications, which he was required to sign.     Then his

administrative assistant would file them.

     Tracey Ashley, one of the two teenagers who worked at the

North Moreland location, occasionally worked at Mr. McLean’s

location with one of three video workers from the Metropolitan

location, Felicia Reed, Eric Patrick, or Andrea Trent.     When one

of them worked at North Moreland, he did the same kind of work

Tracey Ashley was doing, regular video store employee duties.

     According to Mr. McLean, he treated the video workers as

contractors because “They could have used their own supplies,

utilities or whatever.”   He added the pay for his three employees
                              - 6 -

with that of the six video workers to come up with the deduction

for “wages” on Schedule C totaling $60,706.    The amount deducted

for “contractual services” pertained to amounts expended for both

inside and outside maintenance at the two video store locations.

                             OPINION

Employees or Independent Contractors

     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.3   As applicable to

the facts of this case, the term “employee” means an individual

who under the usual common law rules has the status of employee.

Secs. 3121(d), 3306(i); Nationwide Mut. Ins. Co. v. Darden, 503

U.S. 318, 323 (1992); Weber v. Commissioner, 103 T.C. 378, 386

(1994), affd. 60 F.3d 1104 (4th Cir. 1995); Profl. & Executive

Leasing, Inc. v. Commissioner, 89 T.C. 225, 232 (1987), affd. 862

F.2d 751 (9th Cir. 1988).

     Factors that are relevant in determining the substance of an

employment relationship include:   (1) The degree of control

exercised by the principal over the details of the work; (2) the

worker’s investment in the facilities used in his or her work;

(3) the worker’s opportunity for profit or loss; (4) the

permanency of the relationship between the parties; (5) the


     3
        Because sec. 7491 applies only to taxes imposed by
subtit. A or B, it is inapplicable in this case.
                               - 7 -

principal’s right of discharge; (6) whether the work performed is

an integral part of the principal’s regular business; (7) the

relationship the parties believe they are creating; and (8) the

provision, if any, of employee benefits.   NLRB v. United Ins. Co.

of Am., 390 U.S. 254, 258 (1968); United States v. Silk, 331 U.S.

704, 716 (1947); Weber v. Commissioner, supra at 387; Profl. &

Executive Leasing, Inc. v. Commissioner, supra at 232; see also

sec. 31.3121(d)-(1)(c)(2), Employment Tax Regs. (setting forth

criteria for identifying employees under the common law rules).

     No single factor is dispositive; the Court must assess and

weigh all incidents of the relationship.   Nationwide Mut. Ins.

Co. v. Darden, supra at 324.   The factors are not weighted

equally; they are weighted according to their significance in the

particular case.   Aymes v. Bonelli, 980 F.2d 857, 861 (2d Cir.

1992).

     While all of the above factors are important, the “right-to-

control test” is the “master test” in determining the nature of a

working relationship.   Matthews v. Commissioner, 92 T.C. 351, 361

(1989), affd. 907 F.2d 1173 (D.C. Cir. 1990).   Both the control

exercised by the alleged employer and the degree to which the

alleged employer may intervene to impose control must be

examined.   Radio City Music Hall Corp. v. United States, 135 F.2d

715, 717 (2d Cir. 1943); deTorres v. Commissioner, T.C. Memo.

1993-161.   “[N]o actual control need be exercised, as long as the
                                 - 8 -

employer has the right to control.”      Profl. & Executive Leasing,

Inc. v. Commissioner, 862 F.2d at 753.     In order for an employer

to retain the requisite control over the details of an employee’s

work, the employer need not direct each step taken by the

employee.     Profl. & Executive Leasing, Inc. v. Commissioner, 89

T.C. at 234; Gierek v. Commissioner, T.C. Memo. 1993-642.      The

employer need not set the employee’s hours or supervise every

detail of the work environment to control the employee.       Gen.

Inv. Corp. v. United States, 823 F.2d 337, 342 (9th Cir. 1987).

     Two of the six video workers at issue here, Tracey Ashley

and Eric Patrick, were teenagers who Mr. McLean testified were

“employees that worked” after school about 10 hours a week at the

North Moreland location.    They were paid by the hour and

performed assigned duties at the place of business.     They were

required to sign into and out from work.     Mr. McLean testified

that their primary function was not collection and admitted that,

“to be perfectly honest with you, they could be considered as W-2

employees.”    On the basis of the evidence in the record, the

Court concludes that Tracey Ashley and Eric Patrick were

employees of petitioner.

     The other four video workers worked mainly at the

Metropolitan location and primarily attempted to collect

petitioner’s “lates”.    They, too, were paid by the hour and were

required to sign in and out.    Petitioner supplied all the
                                - 9 -

necessary supplies and equipment for them to perform their

duties.   It paid all expenses required to attempt to collect the

lates.    Mr. McLean, and to some extent his administrative

assistant, supervised the process within which the video workers

worked.   At least three of the four were sometimes assigned to

work at the North Moreland location to perform duties the same as

or similar to those of the two teenage employees working at that

location.

     In this case the Court is satisfied that petitioner had the

authority to exercise, and did exercise, sufficient control over

the video workers to support a finding that it was their

employer.    See Potter v. Commissioner, T.C. Memo. 1994-356;

Bilenas v. Commissioner, T.C. Memo. 1983-661.    In addition, the

Court finds that:    (1) The investment in the facilities used in

the work of the video workers was made by petitioner; (2) the pay

of the video workers was fixed, thereby eliminating the

opportunity for “profit” or loss; (3) the work performed by the

video workers was an integral part of petitioner’s business; and

(4) petitioner considered them employees.    Indeed, Mr. McLean’s

testimony indicates that because of his prior bad experiences

with outside contractors his intent at the outset was to hire

employees to collect the “lates”.
                              - 10 -

     Accordingly, the Court finds that respondent’s determination

as to the classification of the workers in this case as employees

is correct.

Section 530

     Even though the Court finds that the six video workers were

employees, section 530 will relieve petitioner of employment tax

liability for the periods at issue if the requirements of section

530 are satisfied.   If petitioner shows that it:   (1) Has not

treated any of the video workers as employees for any period; and

(2) has filed all Federal tax returns (including information

returns) with respect to each video worker on a basis consistent

with its treatment of each individual as not being an employee,

petitioner will prevail unless it has no reasonable basis for not

treating the video workers as employees.    Revenue Act of 1978,

sec. 530(a)(1), (3), 92 Stat. 2885, 2886.

     Respondent concedes that Forms 1099 were timely filed for

each of the six video workers under consideration.    He alleges,

however, that the video workers performed substantially the same

duties as petitioner’s three full-time employees, yet were

treated as independent contractors.    He also alleges that

petitioner has failed to establish that it had any reasonable

basis to treat the video workers as independent contractors.      The

Court will consider first whether petitioner has failed to
                                - 11 -

establish that it had any reasonable basis to treat the six

workers as independent contractors.

     The statute provides a safe harbor so that a taxpayer shall

be treated as having a reasonable basis for not treating an

individual as an employee if he “reasonably relied” on:    (1)

Judicial precedent, published rulings, or technical advice or a

letter ruling issued to the taxpayer; (2) past audit treatment of

positions similar to those held by the individuals under

consideration; or (3) longstanding practice in the taxpayer’s

industry.

     A taxpayer who fails to dock his ship in any of the safe

harbors is still entitled to relief if he can demonstrate, in

some other manner, a reasonable basis for not treating the

individual as an employee.     Veterinary Surgical Consultants, P.C.

v. Commissioner, 117 T.C. 141, 147 (2001), affd. sub nom. Yeagle

Drywall Co. v. Commissioner,        Fed. Appx.     (3d Cir., Dec.

18, 2002).   Although the reasonable basis requirement is to be

construed liberally in favor of taxpayers, it is nevertheless

petitioner’s burden to show by a preponderance of the evidence

that it had a reasonable basis for its treatment of the video

workers as other than employees.4    Springfield v. United States,

     4
        Sec. 530(e)(4) places the burden of proof on the
Secretary with respect to certain aspects of sec. 530. Sec.
530(e)(4) applies to disputes involving periods after Dec. 31,
1996, and therefore does not apply to this case. Small Business
                                                   (continued...)
                             - 12 -

88 F.3d 750, 753 (9th Cir. 1996); Boles Trucking, Inc. v. United

States, 77 F.3d 236 (8th Cir. 1996).

     The only reasons articulated by Mr. McLean for treating the

six video workers as independent contractors are that “they could

have used their own supplies, utilities or whatever” and that he

had an agreement with them that they would “pay their own taxes”.

In the context of the facts of this case, these are not

reasonable bases on which to rely for the treatment of the video

workers as independent contractors instead of employees.   Hence

petitioner is not entitled to relief under section 530, and the

Court need not address respondent’s allegation that the video

workers performed substantially the same duties as petitioner’s

three full-time employees.

Amount of Taxes Due

     Because we have concluded that the six video workers were

petitioner’s employees, it follows that petitioner is liable for

FICA and withholding taxes of $1,085.36 and FUTA taxes of $387

for 1996.

                                   Decision will be entered

                              for respondent.




     4
      (...continued)
Job Protection Act of 1996, Pub. L. 104-188, sec. 1122(b)(3), 110
Stat. 1767.
