                        T.C. Memo. 2011-48



                      UNITED STATES TAX COURT



     DONALD G. CAVE A PROFESSIONAL LAW CORP., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2717-08.                Filed February 28, 2011.



     Jerry F. Pepper, for petitioner.

     Donna Mayfield Palmer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   This case is before the Court on a petition

for redetermination of employment status filed pursuant to

section 7436.1   In a notice of determination of worker


     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. All
                                                   (continued...)
                              - 2 -

classification (notice of determination) issued to petitioner,

respondent determined that Donald G. Cave (Donald Cave), Michael

L. Cave (Michael Cave), David LaHaye (Mr. LaHaye), Michael

Matthews (Mr. Matthews), and Renee Cooper Willis (Ms. Willis)

were petitioner’s employees for all taxable periods of calendar

years 2003 and 2004 and that petitioner was not entitled to

relief under the Revenue Act of 1978, Pub. L. 95-600, sec. 530,

92 Stat. 2885, as amended (act section 530).     Consequently,

respondent determined that petitioner was liable for employment

taxes2 and penalties in the following amounts:

                                                       Sec. 6656
              Tax          Quarter/Year     Amount      Penalty

     FICA,   withholding     3/31/2003     $13,774        $952
     FICA,   withholding     6/30/2003      15,085       1,015
     FICA,   withholding     9/30/2003      12,527       1,061
     FICA,   withholding    12/31/2003      11,727       1,022
     FUTA                         2003       2,170          87
     FICA,   withholding     3/31/2004      16,523       1,473
     FICA,   withholding     6/30/2004      19,416       1,557
     FICA,   withholding     9/30/2004      37,158       1,521
     FICA,   withholding    12/31/2004      17,784       1,247
     FUTA                         2004       2,170          87

     The issues for decision are:   (1) Whether petitioner is a

proper party before this Court; (2) whether Donald Cave, Michael



     1
      (...continued)
monetary figures have been rounded to the nearest dollar.
     2
      For convenience, we use the term “employment taxes” to
refer to taxes under the Federal Insurance Contribution Act
(FICA), secs. 3101-3128, and the Federal Unemployment Tax Act
(FUTA), secs. 3301-3311, and Federal income tax withholding,
secs. 3401-3406.
                               - 3 -

Cave, Mr. LaHaye, Mr. Matthews, and Ms. Willis were petitioner’s

employees for employment tax purposes in 2003 and 2004; (3)

whether petitioner is entitled to act section 530 relief; and (4)

whether petitioner is liable for the failure to deposit penalty

under section 6656.

                         FINDINGS OF FACT

I.   Background

     Some of the facts have been stipulated.     We incorporate the

stipulated facts into our findings by this reference.     On the

date the petition was filed, petitioner was a Louisiana

corporation with a principal place of business in Baton Rouge,

Louisiana.   On March 5, 2009, after the filing of the petition,

petitioner was dissolved under Louisiana law, and petitioner’s

assets were transferred to Cave Law Firm, L.L.C., which continued

petitioner’s business.

     Petitioner was incorporated on February 18, 1993, as a

Louisiana professional law corporation.     Petitioner’s business

consisted primarily of representing individuals injured in

accidents.   Fees generated from the provision of legal services

were petitioner’s only source of income in 2003 and 2004.3    All

attorney’s fees and reimbursements of case expenses were paid

directly to petitioner, which then paid a portion of the gross


     3
      Although petitioner handled most cases on a contingency
basis, Ms. Willis handled some family law matters on an hourly
basis in 2003 and 2004.
                               - 4 -

fee (generally one-half or one-third) to the attorney who handled

the case.

      Petitioner was an S corporation for Federal income tax

purposes in 2003 and 2004.   At all relevant times, Donald Cave

was petitioner’s president and sole shareholder.

II.   Donald Cave

      Donald Cave has been licensed to practice law in the State

of Louisiana since May 15, 1969, and he maintained an active

trial practice with petitioner in 2003 and 2004.     In addition,

Donald Cave performed the following services for petitioner in

2003 and 2004:

      (1) He selected the associate attorneys who would work for

petitioner;

      (2) he hired law clerks to provide legal services to

petitioner;

      (3) he hired petitioner’s support staff, which in 2003 and

2004 included an investigator, a receptionist, and several

secretaries;

      (4) he set the support staff members’ hours;

      (5) he determined whether petitioner’s workers would receive

bonuses and in what amounts;

      (6) he approved petitioner’s payroll; and

      (7) he decided whether to make advance payments or reimburse

petitioner’s workers for case-related and work-related expenses.
                               - 5 -

     In addition, Donald Cave owned the professional office

building in which petitioner’s principal place of business was

located and arranged for petitioner to lease space in the

building.   In 2003 and 2004 petitioner’s attorneys and support

staff occupied only 1 of the 12 office suites in the building,

and Donald Cave, as lessor, leased or held out for lease the

remaining office suites.

     Petitioner maintained several client trust accounts,

operating accounts, and banking lines of credit in 2003 and 2004.

Case recoveries generally were deposited into the client trust

accounts, which were under the control of Donald Cave.   In

addition, Donald Cave was one of only two authorized signatories

on petitioner’s checking accounts and was the only attorney

permitted to access any of petitioner’s banking lines of credit

in 2003 and 2004.

     Donald Cave delegated some of petitioner’s day-to-day

responsibilities to petitioner’s office manager, Elizabeth Wells

(Ms. Wells).   In 2003 and 2004 Ms. Wells’ responsibilities

included preparing petitioner’s payroll, drafting and signing

workers’ checks, maintaining petitioner’s books and records,

monitoring petitioner’s bank balances, interviewing potential

employees, and approving advance payment and reimbursement

requests for less than $100.
                               - 6 -

     Donald Cave received a portion of the fees generated in

cases he handled in 2003 and 2004.     He also received draws from

petitioner of $48,000 in 2003 and $360,000 in 2004.

III. The Associate Attorneys

     Donald Cave considered petitioner an “attorney incubator”

because he generally hired recent law school graduates with

little prior professional experience.    In 2003 and 2004 the

following attorneys (in addition to Donald Cave) worked for

petitioner:   Michael Cave, Mr. LaHaye, and Ms. Willis.     For

convenience, we will refer to Michael Cave, Mr. LaHaye, and Ms.

Willis collectively as the associate attorneys.    Michael Cave is

the son of Donald Cave.   Mr. LaHaye and Ms. Willis are not

related to Donald Cave.

     Each of the associate attorneys joined petitioner as a law

clerk before graduating from law school and continued to work for

petitioner as an attorney after graduating from law school and

passing the Louisiana bar exam.4   Petitioner treated the

associate attorneys as employees for employment tax purposes

during their tenures as law clerks.



     4
      Ms. Willis, admitted to the Louisiana bar on Oct. 8, 1993,
worked for petitioner as an associate attorney from that date
through 2005. Mr. LaHaye, admitted to the Louisiana bar on Oct.
18, 2002, worked for petitioner as an associate attorney from
that date through 2005. Michael Cave, admitted to the Louisiana
bar on Apr. 23, 1999, worked for petitioner as an associate
attorney until its dissolution, whereupon he began working for
Cave Law Firm, L.L.C.
                               - 7 -

     Petitioner did not require the associate attorneys to work

from petitioner’s principal office, to work set hours, or to

account for their time.5   Petitioner did not require the

associate attorneys to sign written contracts of employment or

association, nor did it require the attorneys to sign

noncompetition agreements.   The record contains no evidence,

however, that any of the associate attorneys either offered

services to or performed services for other law firms while they

worked for petitioner, nor is there any evidence in the record

that the associate attorneys offered their services to the public

other than as representatives of petitioner.

     None of the associate attorneys had any clients or cases

when they joined petitioner as attorneys, and Donald Cave

referred cases to them to help them develop their practices.    The

associate attorneys also occasionally worked on cases Donald Cave

was personally handling.   Donald Cave expected the associate

attorneys to generate new business for petitioner, and he

provided an incentive for them to do so.   In 2003 and 2004 the

associate attorneys received one-half of the gross fees collected

in cases they generated but only one-third of the gross fees

collected in cases referred to them by or on behalf of

petitioner.   The associate attorneys did not receive any other


     5
      Indeed, following the birth of her child in July 2003 Ms.
Willis worked part time from home for the rest of 2003 and
throughout 2004.
                                - 8 -

compensation from petitioner in 2003 or 2004.    The balance of the

fee remaining after payment of the associate attorney’s share

went to petitioner and was used to pay firm expenses, including

support staff salaries, telephone bills, and computer and

software expenses, and distributions to Donald Cave.

     When a new associate attorney joined petitioner, Donald Cave

recommended (but did not require) that the new attorney attend

seminars in maritime law and trial practice, suggested articles

for the new attorney to read, and asked the new attorney to

attend one or two of his trials.    Petitioner did not review

pleadings or correspondence prepared by the associate attorneys

in cases they generated but did review pleadings and

correspondence prepared by the attorneys in cases referred to

them.    Petitioner generally did not require the associate

attorneys to give oral or written status updates regarding their

cases but did require oral status updates in cases that were

independently generated by one of the associate attorneys and in

which petitioner had made an advance payment of case expenses.6



     6
      Although Ms. Willis testified that neither petitioner nor
Donald Cave reviewed any of the pleadings or correspondence she
prepared in 2003 and 2004 or required oral status updates in any
of the cases she handled, her testimony is not necessarily
inconsistent with the parties’ stipulation that petitioner
reviewed pleadings and correspondence and required oral status
updates in at least some cases. Indeed, Donald Cave testified
that by 2003 and 2004 Ms. Willis had developed her own clients
and that the matters she handled rarely, if ever, required
advances.
                                 - 9 -

Petitioner paid each of the associate attorneys a stipend during

the attorney’s first few months on the job but discontinued the

stipend once the attorney’s cases began generating fees.

     Petitioner did not require the associate attorneys to accept

or reject particular cases or kinds of cases, and at least one of

the associate attorneys, Michael Cave, rejected some of the cases

that Donald Cave referred to him.    However, Donald Cave could not

recall either of the other associate attorneys ever rejecting a

case he referred to him or her.

     Petitioner provided the associate attorneys with the

following:

     (1) Professional office space (including office furniture,

utilities, janitorial services, and security monitoring);

     (2) secretarial services;

     (3) letterhead and professional business cards identifying

the associate attorneys as petitioner’s attorneys;

     (4) computers, printers, telephones, copy machines, fax

machines, and other office equipment and supplies;

     (5) access to petitioner’s law library, Internet service,

and computer server;

     (6) premises liability insurance coverage; and

     (7) advances for certain case expenses.

To receive advances for case expenses, the associate attorneys

were required to make written requests.   As noted above, requests
                               - 10 -

for less than $100 could be approved by Ms. Wells, but requests

for more than $100 required Donald Cave’s authorization.

Petitioner recovered the advances when it received a recovery in

the case.    If a case did not result in a recovery, petitioner

absorbed the loss.

     Petitioner also paid or reimbursed the associate attorneys

for other work-related expenses in 2003 and 2004, including

mandatory Louisiana State Bar Association dues and disciplinary

assessments, the cost of 12.5 hours per year of continuing legal

education (CLE), and gasoline expenses.7   Petitioner also paid

Michael Cave’s and Mr. LaHaye’s automobile expenses in 2003 and

2004, including automobile payments, insurance premiums, and

repairs.    Donald Cave decided on a case-by-case basis whether to

pay an associate attorney’s automobile expenses.

     Petitioner did not maintain firmwide malpractice insurance

in 2003 and 2004 and did not pay or offer to pay the associate

attorneys’ malpractice insurance premiums.   Petitioner did not

offer the associate attorneys health or medical insurance, paid

vacation or sick leave, retirement contributions, student loan

repayment assistance, or child care allowances.




     7
      Petitioner paid the associate attorneys’ gasoline expenses
by issuing them credit cards that they could use to purchase
gasoline. It is not clear whether the associate attorneys could
also use the credit cards to pay other work-related expenses.
                               - 11 -

IV.   Mr. Matthews

      In January 1999 Donald Cave hired Mr. Matthews to provide

legal services to petitioner as a law clerk.    Mr. Matthews was

hired on a nonexclusive basis, meaning he was permitted to work

for other attorneys who were not associated with petitioner.    Mr.

Matthews also was allowed to pursue other business interests,

which included serving as a motorcycle safety training instructor

and as a consultant in litigation involving motorcycle accidents.

      Mr. Matthews’ work for petitioner in 2003 and 2004 consisted

primarily of doing legal research and preparing pleadings and

briefs for Donald Cave.    Mr. Matthews also worked on occasion for

the associate attorneys.

      Mr. Matthews was paid a set amount--generally $1,250 every

other week.   He also received bonuses from petitioner totaling

$4,000 in 2003.

      Mr. Matthews generally performed his work either at his home

or at petitioner’s office.    Petitioner provided Mr. Matthews with

most of the same amenities it provided to the associate

attorneys, including a shared office, office equipment and

supplies, Internet access, and access to petitioner’s law library

in 2003 and 2004.    Petitioner also reimbursed Mr. Matthews for

some of the expenses incurred in his work.    Petitioner did not

provide Mr. Matthews with secretarial services, letterhead, or
                                - 12 -

business cards and did not offer him health insurance, retirement

contributions, or other benefits.

     Mr. Matthews continued to work for petitioner until its

dissolution.   As of the trial date, Mr. Matthews did occasional

work for Cave Law Firm, L.L.C., but did not use or have access to

an office at the firm.

V.   Petitioner’s Tax Returns

     Petitioner filed Forms 1120S, U.S. Income Tax Return for an

S Corporation, for 2003 and 2004; Forms 941, Employer’s Quarterly

Federal Tax Return, for all quarters of 2003 and 2004; and Forms

940-EZ, Employer’s Annual Federal Unemployment (FUTA) Tax Return,

for 2003 and 2004.   Petitioner did not treat Donald Cave, the

associate attorneys, or Mr. Matthews as employees for employment

tax purposes on its 2003 and 2004 Federal tax filings.

Petitioner issued Forms 1099-MISC, Miscellaneous Income, to the

associate attorneys and to Mr. Matthews for 2003 and 2004.

Petitioner did not issue a Form W-2, Wage and Tax Statement, or a

Form 1099-MISC to Donald Cave for 2003 or 2004.

     Donald Cave believed it was appropriate for petitioner to

treat the associate attorneys and Mr. Matthews as independent

contractors because he did not have sufficient control over their

work.8   The record does not disclose, however, the basis on which


     8
      Donald Cave testified that his treatment of the associate
attorneys was affected by a prior audit in the early 1970s of a
                                                   (continued...)
                                - 13 -

Donald Cave determined it was appropriate for petitioner to treat

the associate attorneys, Mr. Matthews, and himself as independent

contractors.

     Richard Roberts (Mr. Roberts), the certified public

accountant who assisted in the preparation of petitioner’s 2004

Form 1120S, reviewed petitioner’s books and records and had

discussions with Donald Cave before preparing the return.    Mr.

Roberts agreed with Donald Cave that petitioner’s attorneys and

law clerks should be classified as independent contractors for

employment tax purposes but did not investigate the facts or do

any research to verify Mr. Cave’s position.

                                OPINION

I.   Proper Party

     As an initial matter, we must determine whether petitioner,

which was dissolved under Louisiana law after the filing of the

petition, is a proper party before the Tax Court.    The capacity

of a corporation to engage in litigation in the Tax Court shall

be determined by the law under which the corporation was

organized.     Rule 60(c); see also Bloomington Transmission Servs.,

Inc. v. Commissioner, 87 T.C. 586, 589 (1986).    Petitioner was a

Louisiana corporation before its dissolution.    Accordingly,


     8
      (...continued)
law firm with which he was then affiliated. However, the record
does not contain any details with respect to the prior audit,
including whether worker classification for employment tax
purposes was even an issue in the prior audit.
                                - 14 -

Louisiana law governs petitioner’s right to prosecute an action

in this Court.

      Louisiana law provides:   “Upon issuance of the certificate

of dissolution, the corporate existence shall cease as of the

effective date stated in the certificate, except for the sole

purpose of any action or suit commenced theretofore by, or

commenced timely against, the corporation.”    La. Rev. Stat. Ann.

sec. 12:148(C) (2010); see also Grubbs v. Gulf Intl. Marine,

Inc., 13 F.3d 168, 172 (5th Cir. 1994).    In Mayfair Sales, Inc.

v. Sams, 339 So. 2d 1277, 1279 (La. Ct. App. 1976), the court of

appeal of Louisiana explained:

           The purpose of * * * [La. Rev. Stat. Ann. sec.
      12:148(C)] is to allow for the extension of corporate
      existence to finalize litigation previously commenced
      by or against the corporation. Without this statute,
      unresolved claims by or against a corporate entity
      asserted prior to dissolution would abate upon
      dissolution of the corporation. [Citation omitted.]

      Petitioner commenced an action in this Court by filing a

petition.   Although petitioner was subsequently dissolved under

Louisiana law, petitioner is entitled under Louisiana law to

prosecute this action.   See La. Rev. Stat. Ann. sec. 12:148(C);

Grubbs v. Gulf Intl. Marine, Inc., supra.     Consequently,

petitioner is a proper party before the Court.

II.   Employees v. Independent Contractors

      Sections 3111 and 3301 impose FICA and FUTA taxes,

respectively, on employers on the basis of wages they pay to
                               - 15 -

employees.   Joseph M. Grey Pub. Accountant, P.C. v. Commissioner,

119 T.C. 121, 126 (2002), affd. 93 Fed. Appx. 473 (3d Cir. 2004).

Section 3121(d)(2) provides that for FICA tax purposes the term

“employee” includes any individual who has the status of an

employee under common law.   Section 3121(d)(1), (3), and (4)

describes other individuals who are considered employees for FICA

tax purposes regardless of their status under common law.

Individuals who are described in section 3121(d)(1), (3), and

(4), including an officer of a corporation, are commonly referred

to as “statutory” employees.   Joseph M. Grey Pub. Accountant,

P.C. v. Commissioner, supra at 126.     With certain exceptions not

relevant in this case, the section 3121(d) definition of

“employee” also applies for FUTA tax purposes.    Sec. 3306(i).

     For purposes of income tax withholding, the term “employee”

includes, inter alia, “an officer of a corporation.”    Sec.

3401(c).   The term also includes “every individual performing

services if the relationship between him and the person for whom

he performs such services is the legal relationship of employer

and employee.”   Sec. 31.3401(c)-1(a), Employment Tax Regs.     The

existence of an employer-employee relationship for income tax

withholding purposes is determined generally by reference to the

usual common law rules applicable in determining such

relationships.   See sec. 31.3401(c)-1, Employment Tax Regs.; see

also Rev. Rul. 75-343, 1975-2 C.B. 403.
                              - 16 -

     A.   Burden of Proof

     The Commissioner’s determinations are presumed correct, and

the taxpayer bears the burden of proving that they are incorrect.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).      This

principle applies to the Commissioner’s determinations that a

taxpayer’s workers are employees.     Ewens & Miller, Inc. v.

Commissioner, 117 T.C. 263, 268 (2001) (citing Boles Trucking,

Inc. v. United States, 77 F.3d 236, 239-240 (8th Cir. 1996)).

     B.   Whether Donald Cave Was Petitioner’s Employee

     An officer of a corporation who performs substantial

services for the corporation and receives remuneration for such

services is an employee for employment tax purposes.    Secs.

3121(d)(1), 3306(i); see also Veterinary Surgical Consultants,

P.C. v. Commissioner, 117 T.C. 141, 144-145 (2001), affd. sub

nom. Yeagle Drywall Co. v. Commissioner, 54 Fed. Appx. 100 (3d

Cir. 2002); sec. 31.3121(d)-1(b), Employment Tax Regs.    However,

an officer of a corporation who does not perform any services or

performs only minor services and who neither receives nor is

entitled to receive any remuneration, directly or indirectly, is

not an employee of the corporation.    Sec. 31.3121(d)-1(b),

Employment Tax Regs.   In Veterinary Surgical Consultants, P.C. v.

Commissioner, supra, we held that a surgeon who was the president

and sole shareholder of an S corporation and performed services

for the corporation was an employee for employment tax purposes.
                               - 17 -

See also Joseph M. Grey Pub. Accountant, P.C. v. Commissioner,

supra at 130.

     In 2003 and 2004 Donald Cave was petitioner’s president,

made virtually all corporate decisions with respect to

petitioner, received a percentage of the legal fees recovered in

cases he handled, and received draws from petitioner of $48,000

and $360,000 in 2003 and 2004, respectively.   These facts tend to

establish that Donald Cave was petitioner’s employee within the

meaning of section 3121(d)(1).

     There is no evidence in the record, such as a service

agreement, to support a finding that Donald Cave performed

services for petitioner in some capacity other than as president.

See Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, supra

at 129-130; see also Rev. Rul. 82-83, 1982-1 C.B. 151, 152 (“It

is a question of fact in all cases whether officers of a

corporation are performing services within the scope of their

duties as officers or whether they are performing services as

independent contractors.”).   Moreover, the management services

Donald Cave performed for petitioner were fundamental to

petitioner’s operations, and such services rarely are performed

by independent contractors.   See Rev. Rul. 82-83, supra, 1982-1

C.B. at 152.    Finally, the fact that Donald Cave delegated some

day-to-day responsibilities with respect to petitioner to Ms.

Wells is immaterial because the record reflects that Ms. Wells
                                - 18 -

was acting on Donald Cave’s behalf and she performed only those

tasks that Donald Cave delegated to her.9

     In summary, we conclude that Donald Cave was a statutory

employee of petitioner for employment tax purposes in 2003 and

2004.     See secs. 3121(d)(1), 3306(i); sec. 31.3121(d)-1(b),

Employment Tax Regs.

     C.      Whether the Associate Attorneys and Mr. Matthews Were
             Petitioner’s Employees

     Section 3121(d)(2) defines an employee as “any individual

who, under the usual common law rules applicable in determining

the employer-employee relationship, has the status of an

employee”.     See also sec. 3306(i).    The regulations provide

additional guidance with respect to a worker’s classification as

a common law employee.     Specifically, section 31.3121(d)-1(c)(2),

Employment Tax Regs., provides:

     [An employer-employee] 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. * * * [I]t 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


     9
      Even if we were to evaluate Donald Cave’s worker
classification taking into account only those services he
personally performed for petitioner, we would still conclude that
Donald Cave was petitioner’s employee in 2003 and 2004 because he
was petitioner’s president, he personally performed substantial
services for petitioner, and he received remuneration from
petitioner.
                             - 19 -

     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.    * * *

     Absent a stipulation to the contrary, this case is

appealable to the Court of Appeals for the Fifth Circuit.    See

sec. 7482(b)(1)(B).    The Court of Appeals for the Fifth Circuit

considers the following factors in deciding whether a worker is a

common law employee:   (1) The degree of control the principal has

over the worker, (2) the worker’s opportunity for profit or loss,

(3) the worker’s investment in facilities, (4) the permanence of

the relationship, and (5) the skill required in the operation.10

Breaux & Daigle, Inc. v. United States, 900 F.2d 49, 51 (5th Cir.

1990).    No single factor is determinative, all facts and

circumstances must be taken into account, and doubtful questions

should be resolved in favor of employee status.    Id. at 51-52.



     10
      This Court and the Internal Revenue Service use similar
tests. This Court considers: (1) The degree of control
exercised by the principal over the worker, (2) which party
invests in work facilities used by the worker, (3) the worker’s
opportunity for profit or loss, (4) whether the principal has the
right to discharge the worker, (5) whether the work is part of
the principal’s regular business, (6) the permanency of the
relationship, and (7) the relationship the parties believed they
were creating. See, e.g., Ewens & Miller, Inc. v. Commissioner,
117 T.C. 263, 270 (2001); see also Weber v. Commissioner, 103
T.C. 378, 387 (1994), affd. 60 F.3d 1104 (4th Cir. 1995). No
single factor is determinative, and all facts and circumstances
must be considered. Weber v. Commissioner, supra at 387. The
Internal Revenue Service applies a 20-factor analysis, which also
requires an examination of all relevant facts and circumstances.
See Rev. Rul. 87-41, 1987-1 C.B. 296, 298-299.
                                - 20 -

            1.   Degree of Control

     In determining the existence of an employer-employee

relationship, the crucial test is the principal’s right to

control the worker not only as to the result to be obtained but

also as to the manner in which the service is to be performed.

Weber v. Commissioner, 103 T.C. 378, 387, 390 (1994), affd. 60

F.3d 1104 (4th Cir. 1995); sec. 31.3121(d)-1(c)(2), Employment

Tax Regs.    The degree of control necessary to find an employer-

employee relationship varies depending on the nature of the

services provided by the worker.       Ewens & Miller, Inc. v.

Commissioner, 117 T.C. at 270.       The level of control necessary to

find employee status generally is lower when applied to

professionals than when applied to nonprofessionals.       Weber v.

Commissioner, supra at 388; James v. Commissioner, 25 T.C. 1296,

1301 (1956) (noting that “there are many eminent lawyers who are

full-time employees of corporations and who carry on their

professional work with a minimum of direct supervision or control

over their methods on the part of their employer”).

     In order for the principal to retain the requisite control

over the details of a worker’s work, it is not necessary that the

principal stand over the worker and direct every move made by the

worker.   Weber v. Commissioner, supra at 388; sec. 31.3121(d)-

1(c)(2), Employment Tax Regs.    Rather, the crucial test is

whether the principal had the right to impose control.       Weber v.
                                - 21 -

Commissioner, supra at 387-388.     In Weber v. Commissioner, supra

at 388-390, we concluded that the taxpayer, a United Methodist

Church minister, was subject to significant control where, inter

alia, he was required to perform numerous duties, lacked

authority to discontinue the church’s regular services, was

required to be “amenable” to the church’s governing authority,

and was subject to discipline, including termination, for

ineffectiveness or unfitness.    Conversely, in Simpson v.

Commissioner, 64 T.C. 974, 985-987 (1975), we concluded that the

taxpayer, an insurance agent, was not subject to significant

control where, inter alia, he set his own work schedule,

submitted no written reports, and was not provided with any

“leads” to help him sell insurance policies.

               a.   Associate Attorneys

     Whether petitioner had the right to control the details of

the associate attorneys’ work is an intensely factual question.

On the one hand, petitioner provided the associate attorneys with

minimal training and supervision.    Donald Cave suggested (but did

not require) that new attorneys attend one or two of his trials,

attend particular seminars, and read certain legal articles.    The

associate attorneys were not required to work from a particular

location, to work particular hours, or to account for their time.

The associate attorneys were not required to accept or reject
                               - 22 -

certain cases or kinds of cases and were free to reject cases

referred to them by Donald Cave.

     On the other hand, petitioner, acting through its president,

Donald Cave, controlled the assignment of cases to the associate

attorneys and determined whether the associate attorneys would be

reimbursed for case-related and other work-related expenses.

These facts are highly probative that petitioner had substantial

control over the manner in which the associate attorneys

performed their work.   Petitioner, acting through Donald Cave,

also reviewed pleadings and correspondence prepared by the

associate attorneys in at least some cases and required them to

give oral status reports in certain circumstances.    In addition,

Donald Cave made suggestions to the associate attorneys about how

to handle particular cases, and he expected the associate

attorneys to help out occasionally with cases he was personally

handling.    Finally, unlike the firm in Simpson v. Commissioner,

supra, which did not provide the taxpayer with any “leads” to

help him develop business, petitioner routinely referred cases to

the associate attorneys to help them generate fees and develop

practices.

     On balance, we conclude that the analysis regarding control

tips in favor of an employer-employee relationship.

Petitioner’s ability to affect the course of litigation by its

decisions regarding the funding of litigation, work assignments,
                              - 23 -

and working conditions, including the supervision of associate

attorneys who worked on cases generated by petitioner and/or

Donald Cave, weighs in favor of an employer-employee

relationship.   The independence of the associate attorneys in

dealing with cases they originated for petitioner11 is not

sufficient to overcome the control that petitioner exercised,

and had the right to exercise, over the operation of the firm

and the funding and conduct of firm litigation in general.

      This factor is indicative of an employer-employee

relationship.

                b.   Mr. Matthews

      Like the associate attorneys, Mr. Matthews was not required

to work from a particular location, to work particular hours, or

to account for his time.   But unlike the associate attorneys,

who were expected to generate cases and clients for petitioner


     11
      The Internal Revenue Service issued two revenue rulings
regarding the worker classification status of registered nurses
and practical nurses that discussed at least in part the effect
of a worker’s education and professional credentials. See Rev.
Rul. 75-101, 1975-1 C.B. 318; Rev. Rul. 61-196, 1961-2 C.B. 155.
Both revenue rulings state that whether a nurse is to be treated
as an independent contractor or as an employee depends on the
facts and circumstances of the case. Although both revenue
rulings conclude that registered nurses and practical nurses may
be considered as self-employed if they are engaged in private
duty nursing under circumstances where they function
independently as licensed professionals, the revenue rulings also
state that such nurses are employees if they are on the regular
staff of a hospital, clinic, nursing home, or physician and are
subject to the direction and control of those that engaged them.
The revenue rulings do not conflict with the conclusions we reach
in this case.
                              - 24 -

and who had discretion to manage their cases as they saw fit,

Mr. Matthews received all of his assignments directly from

Donald Cave or, in rare instances, from one of the associate

attorneys, and there is no evidence that Mr. Matthews was free

to reject assignments.

      This factor is indicative of an employer-employee

relationship.

           2.   Investment in Facilities

      The fact that a worker provides his or her own tools

generally indicates the worker is an independent contractor.

Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 271.

Conversely, the fact that a worker has no investment in the

facilities used in the work is indicative of an employer-

employee relationship.   See id.   Where the value of the tools

provided by the worker is minimal, this factor is not of great

weight.   See Breaux & Daigle, Inc. v. United States, 900 F.2d at

53.

                a.   Associate Attorneys

      Petitioner provided the associate attorneys with all of the

tools and facilities necessary to complete their work, including

office space, office furniture, computers, telephones, fax

machines, copying machines, and office supplies.   Petitioner

also provided the associate attorneys with secretarial services,

telephone and Internet service, and access to petitioner’s
                                  - 25 -

computer server, law library, and online legal research

services.    In some instances, petitioner even paid or reimbursed

the associate attorneys’ automobile expenses.    Although some of

the associate attorneys used their own funds to decorate their

offices or to set up home offices, there is no credible evidence

that the associate attorneys had more than a de minimis

investment in the facilities used in their work.    This factor is

indicative of an employer-employee relationship.

                 b.   Mr. Matthews

     Petitioner provided Mr. Matthews with most of the same

amenities it provided to the associate attorneys, including

office space, office furniture, a computer, office supplies and

equipment, and access to petitioner’s law library, online

research services, and computer server.    Although Mr. Matthews

sometimes worked from home, there is no evidence that he had a

significant investment in any of the facilities used in

connection with his work for petitioner in 2003 or 2004.    This

factor is indicative of an employer-employee relationship.

            3.   Profit or Loss

     A compensation arrangement in which an individual works on

commission may be indicative of an independent contractor

relationship.    See Simpson v. Commissioner, 64 T.C. at 988

(characterizing an individual as an independent contractor

where, inter alia, his “opportunity for, and the degree to which
                               - 26 -

he might make, a profit or loss in any given year was solely

dependent upon his own efforts and skill”).   Conversely, a

compensation arrangement in which an individual cannot increase

his profits through his own efforts and is not at risk for loss

is indicative of an employer-employee relationship.   See Juliard

v. Commissioner, T.C. Memo. 1991-230 (characterizing an

individual as an employee where, inter alia, he was paid a salary

and reimbursed for expenses incurred with respect to his work).

               a.   Associate Attorneys

     The associate attorneys’ compensation in 2003 and 2004

consisted of a percentage of the gross fees petitioner collected

in the cases they handled.    The percentage varied depending on

who secured the case.   Thus, the associate attorneys could

increase their profit by developing new clients and cases and by

securing larger fees in the cases they handled.   However, the

associate attorneys bore little, if any, risk of loss from

petitioner’s cases and clients that they handled, even if they

brought them into the firm.   Petitioner provided the associate

attorneys with virtually all of the tools, facilities, and

services necessary to complete their work.    Moreover, petitioner

paid or reimbursed the associate attorneys for most case-related

expenses and absorbed the loss if a case never generated a fee.

Petitioner also paid or reimbursed the associate attorneys for
                                  - 27 -

various other professional expenses, including Louisiana State

Bar Association dues, CLE courses, and voluntary professional

association memberships.

     In summary, the associate attorneys could increase their

profits through their own efforts and skill but bore no risk of

loss.     This factor is neutral.

                    b.   Mr. Matthews

        Unlike the associate attorneys, Mr. Matthews had no ability

to increase his profits by attracting new clients or securing

larger fees in the matters he worked on.       Instead, Mr. Matthews

was paid a flat amount to perform legal services for petitioner

and was reimbursed for the costs incurred in his work.      Thus, Mr.

Matthews could not increase his profits through his own effort

and skill and bore no risk of loss with respect to his work for

petitioner.       This factor is indicative of an employer-employee

relationship.

             4.     Permanence of the Relationship

                    a.   Associate Attorneys

        Petitioner did not require the associate attorneys to sign

written contracts of employment or covenants not to compete.

Nevertheless, the record reflects that the relationship between

petitioner and the associate attorneys was continuous,

permanent, and exclusive.      Ms. Willis worked for petitioner as

an attorney for 12 years, Mr. LaHaye worked for petitioner as an
                                - 28 -

attorney for 3 years, and Michael Cave had worked for petitioner

and its successor, Cave Law Firm, L.L.C., as an attorney for 10

years as of the trial date.     Although the associate attorneys

were not required to work exclusively for petitioner, there is

no credible evidence that any of the associate attorneys ever

provided or offered to provide services to another law firm

during the periods at issue, nor did they offer services

directly to the public other than in their capacity as attorneys

working for petitioner.     This factor is indicative of an

employer-employee relationship.

               b.   Mr. Matthews

     Although Mr. Matthews was not required to sign a written

contract of employment or a covenant not to compete, the record

reflects that Mr. Matthews’ relationship with petitioner was

permanent rather than temporary.    Indeed, as of the trial date

Mr. Matthews had been associated with petitioner and its

successor for around 10 years.    However, Mr. Matthews routinely

provided legal and other services to lawyers, law firms, and

organizations unaffiliated with petitioner, including

petitioner’s competitors.    This factor is neutral.

          5.   Skill Required in Operation

               a.   Associate Attorneys

     In Breaux & Daigle, Inc. v. United States, 900 F.2d at 52-

53, the Court of Appeals for the Fifth Circuit observed that a
                                   - 29 -

worker’s minimal skill argued against a finding of independent

contractor status.      “‘[T]he workers were not specialists called

in to solve a problem, but unskilled laborers who performed the

essential, everyday chores of * * * [the taxpayer’s]

operation.’”      Id. (quoting McLaughlin v. Seafood, Inc., 861 F.2d

450, 452 (5th Cir. 1988), modified 867 F.2d 875, 876-877 (5th

Cir. 1989).      Unlike the workers whose classification was at

issue in Breaux & Daigle, the associate attorneys were highly

educated professionals.      On the other hand, the associate

attorneys, who were newly licensed lawyers when first hired by

petitioner, were not specialists called in to solve a particular

problem but instead performed the essential, everyday

professional tasks in petitioner’s business.       This factor is

neutral.

                   b.   Mr. Matthews

     The preceding paragraph applies with equal force to Mr.

Matthews.    Although Mr. Matthews’ work for petitioner arguably

required less skill than the work performed by the associate

attorneys, Mr. Matthews was an educated and skilled professional

whose responsibilities included essential, everyday professional

tasks in petitioner’s business.        This factor is neutral.

            6.     Other Factors

     As noted above, in determining whether a worker is an

employee or an independent contractor for employment tax
                              - 30 -

purposes, no single factor is determinative, and all facts and

circumstances must be taken into account.   Some of the other

factors that the Court of Appeals for the Fifth Circuit and this

Court consider include whether the work is an integral part of

the principal’s business and whether the principal has the right

to discharge the worker.   See id. at 53; Weber v. Commissioner,

103 T.C. at 387.

                a.   Associate Attorneys

     Fees generated from the provision of legal services were

petitioner’s only source of income in 2003 and 2004.   Petitioner

hired the associate attorneys to provide legal services to

existing clients and to develop new clients.   The services the

associate attorneys provided petitioner in 2003 and 2004 were

therefore an integral part of petitioner’s business.   This

factor suggests the associate attorneys were petitioner’s

employees.

     The record does not contain any information regarding

whether petitioner had the right to discharge the associate

attorneys and, if so, whether there were any limitations on this

right.   This factor is neutral.

                b.   Mr. Matthews

     Mr. Matthews’ work was also an integral part of

petitioner’s business.   Although Mr. Matthews was a law clerk

rather than a licensed attorney, his responsibilities--
                                - 31 -

conducting legal research and drafting legal pleadings--were

crucial to petitioner’s law practice.       This factor suggests an

employer-employee relationship.

     The record does not contain any information regarding

whether petitioner had the right to discharge Mr. Matthews and,

if so, whether there were any limitations on this right.       This

factor is neutral.

          7.      Summary

                  a.   The Associate Attorneys

     In summary, we conclude on the basis of all of the relevant

facts and circumstances that the associate attorneys were

petitioner’s common law employees.       Three of the five specific

factors--degree of control, investment in facilities, and

permanence of the relationship–-indicate an employer-employee

relationship, and the remaining factors are neutral.      In

addition, the fact that the work performed by the associate

attorneys is an integral part of petitioner’s business supports

our conclusion.    Keeping in mind that petitioner bears the

burden of proof and that doubtful questions should be resolved

in favor of employer-employee status, we conclude that the

associate attorneys were petitioner’s employees for employment

tax purposes in 2003 and 2004.
                                - 32 -

                b.    Mr. Matthews

      Most of the five specific factors we considered are

indicative of an employer-employee relationship.    In particular,

petitioner’s control over Mr. Matthews’ work and compensation

arrangements strongly suggests that he was petitioner’s employee

in 2003 and 2004.    Keeping in mind that respondent’s

determinations are presumed correct, that petitioner has the

burden of proof, and that doubtful questions should be resolved

in favor of employment, and after considering all the facts and

circumstances, we conclude that Mr. Matthews was petitioner’s

employee for employment tax purposes in 2003 and 2004.

III. Act Section 530 Relief12

     When applicable, act section 530 relieves a taxpayer from

employment taxes, notwithstanding that the relationship between

the taxpayer and the individual performing services would

otherwise require payment of such taxes.    Charlotte’s Office

Boutique, Inc. v. Commissioner, 121 T.C. 89, 106 (2003), affd.

425 F.3d 1203 (9th Cir. 2005).    To qualify for act section 530

relief the taxpayer (1) must not have treated the individual as

an employee for any period, (2) must have consistently treated

the individual as not being an employee on all tax returns for

periods after December 31, 1978, and (3) must have had a

     12
      Petitioner suggested on brief that we need not reach the
merits of petitioner’s claim for act sec. 530 relief and made no
argument with respect to act sec. 530 relief.
                              - 33 -

reasonable basis for not treating the individual as an employee.

Act sec. 530(a)(1); Joseph M. Grey Pub. Accountant, P.C. v.

Commissioner, 119 T.C. at 130.

     A taxpayer is treated as having had a reasonable basis for

not treating an individual as an employee if the taxpayer’s

treatment of the individual was in reasonable reliance on (1)

judicial precedent, (2) published rulings, (3) technical advice

with respect to the taxpayer, (4) a letter ruling to the

taxpayer, (5) a past Internal Revenue Service audit of the

taxpayer that entailed no assessment attributable to the

taxpayer’s employment tax treatment of individuals holding

positions substantially similar to the position held by the

individual whose status is at issue, or (6) a longstanding

recognized practice of a significant segment of the industry in

which the individual was engaged.   Act sec. 530(a)(2);

Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C.

at 147; see also Ewens & Miller, Inc. v. Commissioner, 117 T.C.

at 276-277.   A taxpayer may also qualify for act section 530

relief if it establishes that it had some other reasonable basis

for treating its workers as independent contractors.    See, e.g.,

Images in Motion of El Paso, Inc. v. Commissioner, T.C. Memo.

2006-19.

     If a taxpayer establishes a prima facie case that it meets

the reporting consistency and substantive consistency
                                - 34 -

requirements of act section 530(a)(1), relied on one of the

reasonable basis safe harbors in act section 530(a)(2), and

cooperated with all reasonable requests from the Secretary, then

the burden shifts to the Commissioner to establish that the

taxpayer is not entitled to act section 530 relief.       Act sec.

530(e)(4) (added by the Small Business Job Protection Act of

1996, Pub. L. 104-188, sec. 1122(a), 110 Stat. 1766).       With this

background in mind, we now consider whether petitioner is

entitled to act section 530 relief with respect to any of the

workers that respondent determined were employees in 2003 and

2004.

        A.   Donald Cave

     Although act section 530(a) is not by its terms limited to

situations involving worker classification under common law, we

have held that act section 530 relief is not available with

respect to statutory employees.        Joseph M. Grey Pub. Accountant,

P.C. v. Commissioner, supra at 132-134; see also Charlotte’s

Office Boutique, Inc. v. Commissioner, supra at 109 n.10.

Donald Cave was petitioner’s statutory employee in 2003 and

2004.    See supra p. 18.   Consequently, act section 530 relief is

not available to petitioner with respect to Donald Cave.

     B.      The Associate Attorneys

     Respondent appears to concede that petitioner did not treat

any of the associate attorneys as employees for any period
                             - 35 -

during which they performed services for petitioner as

attorneys13 and that petitioner issued Forms 1099 to the

associate attorneys in 2003 and 2004.   However, petitioner has

not established that it relied on any of the authorities listed

in the act section 530(a)(2) safe harbor or that it had any

other reasonable basis for treating the associate attorneys as

independent contractors.

     Donald Cave testified at trial that he believed the

associate attorneys were appropriately classified as independent

contractors because he did not have control over them.     However,

there is no credible evidence that Donald Cave did any research

or conducted any meaningful investigation with respect to the

associate attorneys’ worker classification or that he relied on

the informed advice of Mr. Roberts.   On the contrary, the record

suggests that Mr. Roberts accepted Donald Cave’s conclusion that

the associate attorneys were independent contractors without

thoroughly investigating the issue.   Consequently, we conclude

that petitioner is not entitled to act section 530 relief with

respect to the associate attorneys.

     C.   Mr. Matthews

     Act section 530(a)(3) clarifies act section 530(a)(1) by

providing that act section 530 relief is not available “if the


    13
      As noted above, petitioner treated the associate attorneys
as employees during their tenures as law clerks.
                               - 36 -

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 treated Mr. Matthews as an independent

contractor in 2003 and 2004.     However, petitioner treated the

associate attorneys as employees during their tenures as law

clerks--when they held positions substantially similar to the

one Mr. Matthews held in 2003 and 2004.      Consequently, act

section 530 relief is not available to petitioner with respect

to Mr. Matthews.

IV.    Section 6656 Penalty

       Section 6656 imposes a penalty equal to 10 percent of the

portion of an underpayment of tax that is required to be

deposited, if the failure to deposit is for more than 15 days.

Charlotte’s Office Boutique, Inc. v. Commissioner, 121 T.C. at

109.    The taxpayer may avoid the penalty under section 6656 if

the taxpayer’s failure to deposit a tax was due to reasonable

cause and not willful neglect.     Id.   A taxpayer’s reliance on

the advice of a competent professional adviser may constitute

reasonable cause where the taxpayer establishes by a

preponderance of the evidence that:      (1) The adviser was a

competent professional who had sufficient expertise to justify

reliance, (2) the taxpayer provided the adviser with necessary

and accurate information, and (3) the taxpayer actually relied
                             - 37 -

in good faith on the adviser’s judgment.    Neonatology

Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd.

299 F.3d 221 (3d Cir. 2002); see also Charlotte’s Office

Boutique, Inc. v. Commissioner, supra at 110-111.

     Respondent has demonstrated that petitioner failed to

deposit employment tax with respect to Donald Cave, the

associate attorneys, and Mr. Matthews.    Consequently, petitioner

must come forward with evidence sufficient to persuade the Court

that respondent’s determination is incorrect.   See Higbee v.

Commissioner, 116 T.C. 438, 447 (2001).

     Petitioner has not offered any argument that respondent’s

determination of a penalty is incorrect or inappropriate, nor

has petitioner argued that its failure to deposit employment tax

was due to reasonable cause and not to willful neglect.

Petitioner does not argue that it relied on Mr. Roberts’ advice

and, in any event, petitioner has not established that it

provided him with all necessary and accurate information or

relied in good faith on his judgment.    Consequently, we sustain

respondent’s determination that petitioner is liable for the

section 6656 penalty for 2003 and 2004.

V.   Conclusion

     In summary, we hold that (1) petitioner is a proper party

before this Court, (2) Donald Cave, the associate attorneys, and

Mr. Matthews were petitioner’s employees for employment tax
                             - 38 -

purposes in 2003 and 2004, (3) petitioner is not entitled to act

section 530 relief, and (4) petitioner is liable for the section

6656 penalty.

     We have considered the remaining arguments of both parties

for results contrary to those expressed herein, and to the

extent not discussed above, we conclude such arguments are

irrelevant, moot, or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      for respondent.
