                        T.C. Memo. 2004-59



                      UNITED STATES TAX COURT



             BARIUM & CHEMICALS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5668-02.              Filed March 10, 2004.



     Keith W. Kern, for petitioner.

     Linda C. Grobe and William I. Miller, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


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

response to a Notice of Determination Concerning Worker

Classification Under Section 7436 (notice of determination)

regarding petitioner’s liabilities pursuant to the Federal

Insurance Contributions Act and the Federal Unemployment Tax Act

for 1996, 1997, 1998, and 1999.   The issue for decision is
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whether Virginia Exley (Exley) was an employee of petitioner for

Federal employment tax purposes during 1996 through 1999.

Petitioner concedes that it is not entitled to relief under the

Revenue Act of 1978, Pub. L. 95-600, sec. 530, 92 Stat. 2885, as

amended.    The parties stipulated that Exley was not an

independent contractor during 1996 through 1999.

     The parties agree that, if the Court determines that Exley

is classified as an employee of petitioner for purposes of

Federal employment taxes for all taxable periods ended June 30,

1996, through December 31, 1999, as set forth in the notice of

determination, petitioner is liable for the full amount of

employment taxes asserted in the notice of determination.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner is an Ohio corporation with its principal place of

business in Steubenville, Ohio.

Corporate Structure

     Petitioner, a manufacturer of specialty chemicals, was

incorporated on November 3, 1938, by Norbert Stern and Anna

Pavlik.    During 1996 through 1999, petitioner was owned by two

siblings as equal shareholders, Albert Pavlik, Jr. (A. Pavlik),
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and Eleanor Naylor (E. Naylor).    Petitioner’s board of directors

(board) consists of E. Naylor and her husband Douglas Naylor, Sr.

(D. Naylor), and A. Pavlik and his wife Eleanor Pavlik.      Since

the death of A. Pavlik’s and E. Naylor’s mother, Anna Pavlik, who

served as president from 1975 until 1987, petitioner has had no

president.    A. Pavlik is petitioner’s treasurer and vice

president of sales and is in charge of petitioner’s sales office.

D. Naylor is petitioner’s secretary and vice president of

purchasing.    E. Naylor is petitioner’s assistant treasurer and

assistant secretary and is in charge of the administrative

functions of petitioner, including accounting, bookkeeping, and

record keeping.

Exley’s Employment With Petitioner

     The employment taxes in issue in this case are based upon

payments made from 1996 through 1999 to Exley, who is A. Pavlik’s

daughter.    Exley worked for petitioner as an employee until 1978.

During Exley’s initial employment, she received full benefits and

training and was treated by petitioner as an employee.    Exley

then married and moved from Ohio with her husband.    Exley

returned to petitioner in 1993 to work in the sales office as an

administrative assistant.    Exley’s job included handling

paperwork, documenting orders, creating sales records and

reports, giving customers sales quotes, taking orders, and
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answering the telephone.   Exley also performed personal work for

A. Pavlik about 1 hour a week.

     A. Pavlik and his son Albert Daniel Pavlik (D. Pavlik)

assigned work to Exley, and A. Pavlik reviewed her work.

A. Pavlik set the hours to be worked by Exley.    Exley was

required to get permission from A. Pavlik to take time off from

work.

Petitioner’s Policy Regarding Rehiring Employees

     Petitioner adopted a number of employment policies, which

are included in petitioner’s employment handbook (handbook).

Petitioner’s handbook states:    “an employee that resigns or is

terminated will not be rehired.    It is Barium and Chemicals, Inc.

explicit policy not to rehire.”    Because of the split in

petitioner’s board between the Naylors and the Pavliks, the board

did not officially grant a waiver, or exception, to the

prohibition on rehiring employees when Exley rejoined petitioner.

Other employees were rehired over the years, some of whom were

rehired with board approval.

Exley’s Compensation and Tax Reporting

     E. Naylor did not recognize Exley as a “bona fide” employee

and did not include Exley in petitioner’s payroll.    When Exley

rejoined petitioner, A. Pavlik secured an additional corporate

checkbook in order to pay Exley her compensation and to pay

income tax withholding and Social Security taxes attributable to
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her compensation.   In petitioner’s books and records, E. Naylor

treated Exley’s compensation payments and the employer’s share of

Social Security taxes as increased loans to A. Pavlik.    A. Pavlik

withheld Federal income taxes and Social Security taxes

attributable to Exley’s compensation.   A. Pavlik also secured

Federal tax deposit coupons under petitioner’s employer

identification number and petitioner’s corporate name.    In order

to make the employment tax deposits, A. Pavlik used the address

of his personal residence on the Federal tax deposit coupons.

     A. Pavlik provided Exley with time cards to record the hours

that she worked, and he provided her with pay stubs.   He also

provided her with Forms W-2, Wage and Tax Statement, for 1993

through 1999.   The Forms W-2 reported the Federal income tax, the

Social Security tax, and the Medicare tax withheld for Exley.

The time cards, pay stubs, and Forms W-2 were slightly different

than the system maintained by E. Naylor for petitioner’s other

employees.

     Because E. Naylor did not recognize Exley as an employee,

Forms 940, Employer’s Federal Unemployment (FUTA) Tax Return, and

Forms 941, Employer’s Quarterly Federal Tax Return, as prepared

by E. Naylor’s administrative office, did not reflect Exley’s

compensation for 1993 through 1999.    The Forms 940 and Forms 941

did not show the employment tax liability resulting from Exley’s

compensation or the deposits made by A. Pavlik.   No unemployment
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tax deposits were made for Exley’s compensation.   Prior to the

quarter ended July 31, 1998, petitioner’s Forms 941 were signed

by A. Pavlik in his capacity as treasurer of petitioner.   The

Form 941 that was filed for the quarter ended June 30, 1998, was

originally signed by A. Pavlik, but his name was crossed out.

Deborah A. Venci’s (Venci) name replaced A. Pavlik’s on the

Form 941.   Venci signed petitioner’s Forms 941 that were filed on

and after October 16, 1998, in her capacity as safety officer of

petitioner.

     Because petitioner’s tax deposits exceeded the tax

liabilities that were assessed for the Forms 941 for all

quarterly periods that Exley received compensation, the Internal

Revenue Service refunded the excess of the deposits over the tax

assessed or applied the excess to other tax periods or applied

the excess to an “excess collections” account.

Petitioner’s Intrafamily Litigation

     There have been differences between the Naylors and the

Pavliks that have resulted in a series of lawsuits.   A constant

source of friction among petitioner’s directors has been the

employment of E. Naylor’s and A. Pavlik’s children.   E. Naylor’s

children, Venci and Linda Yanok (Yanok), and A. Pavlik’s

children, D. Pavlik, Carol Walden, and Exley, have worked for

petitioner at various times.   As of August 1, 1994, based on a

directive by E. Naylor, paychecks for all Pavlik and Naylor
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family members ceased.   In December 1994, D. Pavlik filed a

lawsuit in the Court of Common Pleas, Jefferson County, Ohio,

alleging that he was entitled to wages for services rendered from

August 1994 forward.

     On May 24, 1996, the family members and petitioner executed

a settlement agreement and release (settlement agreement).     On

May 24, 1996, the board adopted the settlement agreement without

holding a board meeting.   The settlement agreement provided for

payment of back compensation to all of the children, including

Exley.   One-half of the total amount was paid upon the execution

of the settlement agreement, and the remainder was paid in two

equal installments on March 31, 1997, and March 31, 1998.    Under

the settlement agreement, petitioner paid Exley compensation for

the period August 1, 1994, through March 31, 1996.   The

settlement agreement specially recited:

     disputes have existed and continue to exist between the
     directors concerning whether Virginia Exley could be
     hired without Board approval and regarding her past and
     present employment status with * * * [Barium and
     Chemicals, Inc.] which disputes are not being addressed
     by this Agreement.

The settlement agreement further provided that the family

members, including Exley, would continue to be paid compensation

from the date of the settlement agreement on a “going forward”

basis.   In addition, the settlement agreement restricted the

reimbursement of all expenses attributed to A. Pavlik, subjecting
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his expenses to approval by either E. Naylor or D. Naylor, from

August 1, 1994, forward.

     On August 19, 1996, family members filed cross-motions in

the Court of Common Pleas for Jefferson County, alleging

violations of the settlement agreement.    One of the issues raised

in the cross-motions was the payment of compensation to Yanok.

On August 20, 1996, the court ordered, in part, that A. Pavlik,

in his capacity as treasurer of petitioner, pay to Yanok

compensation for July and August 1996.    The court also ordered

A. Pavlik to discontinue a unilateral pay increase to Exley and

to reimburse petitioner for the amounts paid to Exley as a result

of the pay increase.

     On January 31, 1997, additional motions were filed regarding

disputes among the family members.    On February 28, 1997, the

Court of Common Pleas ordered, in part, as follows:

     Albert Pavlik, Jr., is enjoined from writing corporate
     checks for any payroll purpose * * * the Court ORDERS
     that all of the payroll related bills of the
     corporation shall be paid through Eleanor Naylor and
     those persons under her control with respect to the
     corporation.

On April 4, 1997, the Court of Common Pleas modified the

February 28, 1997, order as follows:

     With respect to the Naylors being the only ones
     permitted to write payroll checks as set forth in its
     last Order, said Order is modified to the extent that
     Albert Pavlik, Jr., may write payroll checks to
     Virginia Exley in view of the Naylors position that she
     is not a proper employee of the corporation. However,
     the said Albert Pavlik, Jr., shall provide the Naylors
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     with the amount of the checks and withholdings
     immediately upon issuing the same.

On April 16, 1997, the Court of Common Pleas modified the

April 4, 1997, order as follows:

     With respect to the Order of April 4, 1997, the same is
     hereby amended NUNC PRO TUNC to include the
     clarification that the payment of money to Virginia
     Exley by Albert Pavlik, Jr., is not to be interpreted
     in any way as modifying the settlement agreement as it
     applies to Virginia Exley and with respect to whether
     or not she is an employee of Barium and Chemicals, Inc.
     Albert Pavlik, Jr. has been paying Virginia Exley over
     the objection of the Naylors because of the Naylors’
     position that she is not an employee of the
     corporation. The authorization by the Court that
     Albert Pavlik, Jr., may continue to pay Virginia Exley
     is not now nor was it ever intended to modify or change
     in any way the positions of the respective parties.

                              OPINION

     Whether an employer-employee relationship exists in a

particular situation is a factual question.     Weber v.

Commissioner, 103 T.C. 378, 386 (1994), affd. per curiam 60 F.3d

1104 (4th Cir. 1995).   For the purposes of employment taxes, the

term "employee" includes "any individual who, under the usual

common law rules applicable in determining the employer-employee

relationship, has the status of an employee".    Secs. 3121(d)(2),

3306(i).   Section 31.3121(d)-1(c)(2), Employment Tax Regs.,

defines the common law employer-employee relationship as follows:

          (2) Generally such relationship exists when the
     person for whom services are performed has the right to
     control and direct the individual who performs the
     services, not only as to the result to be accomplished
     by the work but also as to the details and means by
     which that result is accomplished. That is, an
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     employee is subject to the will and control of the
     employer not only as to what shall be done but how it
     shall be done. In this connection, it is not necessary
     that the employer actually direct or control the manner
     in which the services are performed; it is sufficient
     if he has the right to do so. The right to discharge
     is also an important factor indicating that the person
     possessing that right is an employer. Other factors
     characteristic of an employer, but not necessarily
     present in every case, are the furnishing of tools and
     the furnishing of a place to work, to the individual
     who performs the services. In general, if an
     individual is subject to the control or direction of
     another merely as to the result to be accomplished by
     the work and not as to the means and methods for
     accomplishing the result, he is an independent
     contractor. * * *

     In deciding whether a worker is a common law employee or an

independent contractor, the following factors are considered:

(1) The degree of control exercised by the principal; (2) which

party invests in the work facilities used by the individual;

(3) the opportunity of the individual for profit or loss;

(4) whether the principal can discharge the individual;

(5) whether the work is part of the principal's regular business;

(6) the permanency of the relationship; and (7) the relationship

that the parties believed that they were creating.   Ewens &

Miller, Inc. v. Commissioner, 117 T.C. 263, 270 (2001); Weber v.

Commissioner, supra at 387.   All of the facts and circumstances

of each case are considered, and no single factor is dispositive.

Ewens & Miller, Inc. v. Commissioner, supra at 270; Weber v.

Commissioner, supra at 387.
                               - 11 -

     Petitioner argues that Exley was an employee of A. Pavlik

and not of petitioner.   To support this argument, petitioner

relies on Ohio law addressing the authority of directors of a

corporation to act on behalf of the corporation.   As a result,

petitioner argues that “the factors which are considered when a

determination is being made as to whether an individual is an

independent contractor or an employee are not involved”.

     Petitioner cites Campbell v. Hospitality Motor Inns, Inc.,

493 N.E.2d 239 (Ohio 1986), for the proposition that “the Supreme

Court of Ohio determined that an unauthorized employment contract

was not binding upon the corporation, unless the employment

contract was impliedly ratified by the board of directors”.     In

Campbell v. Hospitality Motor Inns, Inc., supra at 242, the court

reaffirmed the rule that an unauthorized contract may be

impliedly ratified where the directors have actual knowledge of

the facts and (1) accept and retain the benefits of the contract,

(2) acquiesce in it, or (3) fail to repudiate the contract within

a reasonable period of time.   Id.

     Respondent argues that Exley was an employee of petitioner

because:   (1) Petitioner had the right to control how Exley

performed the services; (2) petitioner invested in the work

facilities used by Exley; (3) Exley had no opportunity for profit

or loss; (4) petitioner had the power to discharge Exley;

(5) Exley’s work was part of petitioner’s regular business;
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(6) Exley’s employment relationship was permanent; and (7) Exley

and petitioner believed they were creating an employer-employee

relationship.   In discussing the factors enumerated above, and in

particular the factor regarding whether petitioner and Exley

believed they were creating an employer-employee relationship,

respondent contends that the “fact that Eleanor Naylor did not

intend that Virginia Exley be treated as an employee should not

be given effect when common law factors compel a finding that an

employee-employer relationship exists.”    We agree with

respondent.

     In its reply brief, petitioner admits:   (1) A. Pavlik had

the right to control how Exley performed her services, including

assigning work to Exley, reviewing her work, approving the hours

that she worked, and setting her salary; (2) the corporation’s

facilities were used by A. Pavlik to provide Exley with equipment

and supplies; (3) Exley had no opportunity for profit or loss;

(4) A. Pavlik had the right to discharge Exley; and (5) Exley’s

employment relationship was permanent.    Petitioner disputes,

however, that Exley’s work was a part of petitioner’s regular

business and that Exley and petitioner believed they were

creating an employer-employee relationship.

     With respect to petitioner’s claim that Exley’s work was not

part of petitioner’s business, A. Pavlik and D. Pavlik testified

without contradiction that Exley worked in petitioner’s sales
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department.   In particular, Exley’s work related to the sales

department’s activities of recording of sales, tracking and

confirming orders, and answering telephones.    Petitioner retained

the benefits of Exley’s employment with the corporation.

Petitioner and E. Naylor were aware that Exley was working for

the corporation and being paid compensation for her work.

Petitioner continued to allow Exley to be paid compensation, even

if it was paid indirectly through A. Pavlik.    The settlement

agreement, and subsequent amendments, provided Exley backpay and

continued her compensation in the future, while noting the

ongoing dispute over her status as an employee.

     With respect to the relationship the parties thought they

were creating, petitioner focuses on the lack of board approval

over Exley’s rehiring.   Petitioner also asserts that, because

Exley did not have the same benefits as other employees of

petitioner, she was not an employee.

     Even where parties expressly agree to create an arrangement

for compensation outside of the employer-employee relationship,

the evidence, and not characterization of the relationship by the

parties, determines employment tax liability.    See Charlotte’s

Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 105-106

(2003); Ewens & Miller, Inc. v. Commissioner, supra at 268-269;

sec. 31.3121(d)-1(a)(3), Employment Tax Regs.    A fortiori, an

ongoing family dispute cannot dictate Federal employment tax
                              - 14 -

consequences.   Exley was performing services for petitioner and

was compensated for those services.    Her compensation was

received because of her status as an employee.    Petitioner is

thus liable for employment taxes on her compensation.

     To reflect the foregoing,

                                           Decision will be entered

                                      for respondent.
