                        T.C. Memo. 2011-252



                      UNITED STATES TAX COURT



      D & R FINANCIAL SERVICES INCORPORATED, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22217-09.             Filed October 31, 2011.



     Ramces G. DuFresne (an officer), for petitioner.

     Donna Mayfield Palmer and Shelley T. Van Doran, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     MORRISON, Judge:   On June 12, 2009, respondent (“the IRS”)

mailed petitioner (“D&R”) a notice of determination concerning

worker classification for tax years 2005, 2006, and 2007.    The

notice listed D&R workers that the IRS determined were employees

rather than independent contractors, as D&R had treated them for
                                - 2 -

employment-tax1 purposes.    Because the IRS determined these

workers were employees, it determined (i) that D&R had

employment-tax deficiencies of $73,993.21 for 2005, $87,654.29

for 2006, and $86,633.76 for 2007 and (ii) that D&R was liable

for additions to tax and penalties of $19,889.88 for 2005,

$23,649.57 for 2006, and $23,170.04 for 2007.

     D&R timely filed a petition under section 7436(a) disputing

the IRS’s determinations.2    On December 7, 2010, trial was held

in Miami, Florida.   D&R called no witnesses and presented no

evidence beyond the stipulation.    D&R did not file a brief.

                         FINDINGS OF FACT

     The parties stipulated some facts; those facts are so found.

     D&R is a Florida corporation, incorporated in 1998.    During

the years at issue, its main office was in Miami, Florida.      One

of D&R’s main business activities was performing credit-repair

services.   The credit-repair services it performed consisted of

interviewing customers, reviewing customers’ credit reports, and

disputing inaccuracies in the customers’ credit reports with the


     1
      We use the phrase “employment tax” to refer to an
employer’s obligations (i) to withhold income tax from wages,
(ii) to pay the Federal Unemployment Tax Act tax, (iii) to pay
the employer’s share of the Federal Insurance Contributions Act
tax, and (iv) to withhold the employee’s share of the Federal
Insurance Contributions Act tax.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended and in effect for the years
at issue. Rule references are to the Tax Court Rules of Practice
and Procedure.
                                - 3 -

credit-reporting agencies.   D&R’s other main business activities

were selling credit-repair kits and selling credit-repair

distributorships.

     D&R had four groups of workers:    corporate officers,

advertising workers, office workers, and direct sellers.      The IRS

contends that the first three groups of workers were employees;

D&R contends that they were independent contractors.    The IRS

does not dispute D&R’s treatment of the fourth group (the direct

sellers) as independent contractors, so their classification is

not at issue.

     The first group of workers consisted of D&R’s corporate

officers, Nadja Roberts and Ramces DuFresne.    Roberts was D&R’s

vice president and treasurer.   DuFresne was D&R’s president and

general manager.    He managed day-to-day operations and worked 60

to 65 hours each week.   He interviewed job applicants, decided

which applicants to hire, and trained new workers.    He also

performed the more difficult credit-repair services.

     The second group of workers, the advertising workers,

distributed flyers advertising D&R’s business.

     The third group of workers, the office workers, worked in

D&R’s Miami office.   These workers performed the credit-repair

services discussed above; they also did clerical and data-entry

work.   D&R set their schedules; paid them an hourly rate; and
                               - 4 -

provided the equipment, supplies, and facilities for their work.

DuFresne supervised them and gave them regular evaluations.

     D&R did not file a Form 941, Employer’s Quarterly Federal

Tax Return, for any quarter during 2005, 2006, or 2007.      Nor did

it file a Form 940, Employer’s Annual Federal Unemployment (FUTA)

Tax Return, for 2005, 2006, or 2007.    The IRS prepared

substitutes for those returns on March 2, 2009.

     On June 12, 2009, the IRS mailed D&R a notice of

determination concerning worker classification.    The IRS

determined that for employment-tax purposes 22 workers in 2005,

29 workers in 2006, and 18 workers in 2007 were employees, not

independent contractors.   These individuals made up the three

groups of workers described above:     the two corporate officers,

DuFresne and Roberts; the advertising workers; and the office

workers.   The IRS also determined that D&R was not entitled to

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

600, 92 Stat. 2885, as amended, regarding those workers.3

     As a result of determining that the workers whose

classifications are at issue were employees, the IRS determined

that D&R had deficiencies (i) in income-tax withholding, (ii) in

Federal Unemployment Tax Act taxes, (iii) in Federal Insurance

Contributions Act taxes, and (iv) in Federal Insurance


     3
      If the requirements of the Revenue Act of 1978 are met,
workers are deemed not to be common-law employees for employment-
tax purposes. See infra pt. I.C.
                                 - 5 -

Contributions Act withholding.4       The IRS determined the following

deficiencies in income-tax withholding:

   Year     Quarter 1    Quarter 2      Quarter 3   Quarter 4      Total
   2005     $10,538.38   $15,489.01    $10,831.06   $12,263.96   $49,122.41
   2006      11,561.40   15,407.14      18,897.76   11,333.86    57,200.161
   2007      20,789.25    9,484.01      17,402.34   11,474.46    59,150.06

     1
      Although this amount is listed in the notice of
determination as $57,200.15, this appears to be an arithmetic
error.

The IRS determined the following deficiencies in Federal

Unemployment Tax Act taxes:     $2,960.20 for 2005, $4,266.02 for

2006, and $2,747.89 for 2007.        And the IRS determined the

following deficiencies in Federal Insurance Contributions Act

taxes and withholding:

   Year     Quarter 1    Quarter 2      Quarter 3   Quarter 4      Total
   2005     $6,449.48    $9,479.28      $3,166.75   $2,815.09    $21,910.60
   2006      7,075.58     9,429.17       6,777.23    2,906.14    26,188.12
   2007     12,723.02     5,804.22       3,562.43    2,646.14    24,735.81

     The IRS also determined that D&R was liable for additions to

tax and penalties.   The IRS determined that D&R was liable for

the following additions to tax under section 6651(a)(1):



     4
      Sec. 3402 requires employers to withhold income tax from
employee wages. The Federal Insurance Contributions Act
(i) taxes employers a percentage of wages paid, sec. 3111;
(ii) taxes employees a percentage of wages received, sec. 3101;
and (iii) requires employers to withhold the tax on employees
from employee wages, sec. 3102(a). The Federal Unemployment Tax
Act taxes employers a percentage of the wages paid. Sec. 3301.
                                 - 6 -

   Year      Quarter 1    Quarter 2   Quarter 3     Quarter 4     Total
   2005      $3,822.27    $5,617.86   $3,149.51     $4,058.84   $16,648.48
   2006       4,193.32     5,588.17      5,776.87   4,163.85    19,722.21
   2007       7,540.26     3,439.85      4,717.07   3,795.42    19,492.60

The IRS determined that D&R was liable for the following

additions to tax under section 6651(a)(2):

   Year      Quarter 1    Quarter 2   Quarter 3     Quarter 4     Total
   2005       $424.70      $624.21       $349.95    $450.99     $1,849.85
   2006        465.92       620.91        641.87     462.65      2,191.35
   2007        837.81       382.21        524.12     421.72      2,165.86

And the IRS determined that D&R was liable for the following

penalties under section 6656:

   Year      Quarter 1    Quarter 2   Quarter 3     Quarter 4     Total
   2005       $322.47      $473.96       $158.34    $436.78     $1,391.55
   2006        353.78       471.46        338.86     571.91      1,736.01
   2007        636.15       290.21        178.12     407.10      1,511.58

     D&R timely petitioned the Court under section 7436(a)

disputing these determinations.

                                OPINION

     We have jurisdiction under section 7436(a) to decide whether

the IRS’s determinations of worker classification are correct and

to decide the proper amount of employment tax5 resulting from

those determinations.     That jurisdiction extends to deciding

whether taxpayers are liable for related additions to tax and

penalties.   Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263,

     5
      See supra note 1.
                                 - 7 -

267-268 (2001); Charlotte’s Office Boutique, Inc. v.

Commissioner, T.C. Memo. 2004-43, affd. 425 F.3d 1203 (9th Cir.

2005).

I.   Deficiencies in Tax

     The IRS determined that D&R had deficiencies in income-tax

withholding, Federal Unemployment Tax Act taxes, Federal

Insurance Contributions Act taxes, and Federal Insurance

Contributions Act withholding.    D&R’s liability depends on

whether its workers were employees or whether it had a reasonable

basis for treating its workers as employees.6

     A.   D&R Has the Burdens of Production and Persuasion.

     D&R has the burden of production.    In exercising our

jurisdiction under section 6214 to redetermine deficiencies in

income tax, we generally presume that the IRS’s determinations

are correct.7   Welch v. Helvering, 290 U.S. 111, 115 (1933).   We

give the same presumption of correctness to the IRS’s

determinations of worker classification when exercising our


     6
      See supra notes 3 and 4.
     7
      An exception to this rule applies in unreported income
cases. See, e.g., Gatlin v. Commissioner, 754 F.2d 921, 923
(11th Cir. 1985) (citing Weimerskirch v. Commissioner, 596 F.2d
358 (9th Cir. 1979), revg. 67 T.C. 672 (1977)); see also sec.
6201(d). The rationale of the exception is “that a taxpayer
should not bear the burden of proving a negative (no unreported
income) if the Commissioner can present no substantive evidence
to support his deficiency claim.” Gatlin v. Commissioner, supra
at 923 (citing Cohen v. Commissioner, 266 F.2d 5, 12 (9th Cir.
1959)), affg. T.C. Memo. 1982-489. Neither the exception nor its
rationale is applicable here.
                                - 8 -

jurisdiction under section 7436(a).     See, e.g., Beatty v. Halpin,

267 F.2d 561, 564 (8th Cir. 1959) (worker classification case);

Orion Contracting Trust v. Commissioner, T.C. Memo. 2006-211

(worker classification case).   We do not require the IRS to

describe the factual predicates of its determinations in order to

benefit from the presumption.    Ocmulgee Fields, Inc. v.

Commissioner, 132 T.C. 105, 113 (2009) (income-tax deficiency

case), affd. 613 F.3d 1360 (11th Cir. 2010).    The effect of the

presumption is to give the taxpayer the burden of going forward

with evidence that the IRS’s determinations are wrong.      Fed. R.

Evid. 301 (“a presumption imposes on the party against whom it is

directed the burden of going forward with evidence to rebut or

meet the presumption”); Rockwell v. Commissioner, 512 F.2d 882,

885 (9th Cir. 1975) (income-tax deficiency case), affg. T.C.

Memo. 1972-133; Jackson v. Commissioner, 73 T.C. 394, 400 (1979)

(citing Barnes v. Commissioner, 408 F.2d 65 (7th Cir. 1969)

(income-tax deficiency case), affg. T.C. Memo. 1967-250).

     D&R also has the burden of persuasion.    Rule 142(a) states

that taxpayers generally bear the burden of proof.8    The burden


     8
      There are exceptions to this rule. For example, the IRS
bears the burden of proof for (i) new matters, (ii) increases in
deficiency, and (iii) affirmative defenses pleaded in the answer.
Rule 142(a). But none of these issues are involved here. And
although sec. 7491(a) can shift the burden to the IRS in cases
involving liability for taxes imposed by subtit. A or B, subtit.
C imposes the employment taxes at issue, so sec. 7491(a) cannot
shift the burden here. See, e.g., Joseph M. Grey Pub.
                                                   (continued...)
                                - 9 -

to which Rule 142(a) refers is the burden of persuasion.     Estate

of Gilford v. Commissioner, 88 T.C. 38, 51 (1987).     To satisfy

that burden for a particular fact, the taxpayer must prove that

fact by a preponderance of the evidence.    Id.   In other words,

the taxpayer must show that, on the basis of the evidence, the

fact is more probable than not.    Merkel v. Commissioner, 109 T.C.

463, 476 (1997) (citing 2 McCormick on Evidence, sec. 339, at 439

(4th ed. 1992)), affd. 192 F.3d 844 (9th Cir. 1999).

     B.     The Workers Whose Classifications Are at Issue Were
            Employees.

     Whether an employment relationship exists 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 employment

taxes at issue, the term “employee” includes (i) common-law

employees and (ii) so-called statutory employees,9 a category

including corporate officers that perform substantial services

for compensation.   See sec. 3121(d) (defining “employee” for

Federal Insurance Contributions Act purposes); sec. 3306(i)

(defining “employee” for Federal Unemployment Tax Act purposes by



     8
      (...continued)
Accountant, P.C. v. Commissioner, 119 T.C. 121, 123 n.2 (2002),
affd. 93 Fed. Appx. 473 (3d Cir. 2004).
     9
      Corporate officers that perform substantial services for
compensation--along with workers described by sec. 3121(d)(3) and
(d)(4)--are referred to as statutory employees. See, e.g.,
Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C.
121, 126 (2002), affd. 93 Fed. Appx. 473 (3d Cir. 2004).
                              - 10 -

reference to section 3121(d) except for section 3121(d)(4) and

(d)(3)(B) and (C)); sec. 3401(c) (including officers of a

corporation in the definition of “employee” for income-tax

withholding); sec. 31.3121(d)–1(b), Employment Tax Regs.; see

also Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 269;

Donald G. Cave a Profl. Law Corp. v. Commissioner, T.C. Memo.

2011-48.   The IRS asserts that DuFresne and Roberts were

statutory employees because they were officers of D&R.   The IRS

asserts that the remaining workers at issue were common-law

employees.

     The factors courts consider in determining whether the

relationship between a worker and a principal is a common-law

employment relationship include the following:   (i) whether the

relationship was permanent; (ii) whether the worker had an

opportunity for profit or loss; (iii) whether the principal had

the right to discharge the worker; (iv) whether the principal

invested in the facilities the worker used; (v) whether the work

was part of the principal’s regular business; (vi) whether the

principal could exercise control over the details of the work;

and (vii) whether the worker and the principal believed that they

were creating an employment relationship.   See, e.g., Weber v.

Commissioner, supra at 387.   No one factor is determinative; we

look at all relevant facts.   Id.
                              - 11 -

     Nothing in the record indicates that the workers whose

classifications are at issue were not employees.   D&R has not

shown that any of the factors suggest that any of those workers

were not employees.   Despite not having the burden of production,

the IRS offered evidence that the workers were indeed employees.

For example, the IRS introduced evidence suggesting that D&R

provided the facilities that the workers used; that the workers

had no opportunity for profit or loss; that the credit-repair

services performed by the office workers were part of D&R’s

regular business; and that D&R, through DuFresne, exercised

control over the details of the work performed by the office

workers.   Moreover, regarding DuFresne, the parties stipulated

that he was an officer of D&R and that he worked 60 to 65 hours

each week.

     Because D&R has met neither the burden of production nor the

burden of persuasion, we conclude that the workers whose

classifications are at issue were employees.

     C.    Section 530 of the Revenue Act of 1978 Does Not Relieve
           D&R From Liability.

     Regardless of the actual relationship between a worker and a

principal, if the principal had a reasonable basis for not

treating the worker as an employee and if the principal meets its

other requirements, section 530 of the Revenue Act of 1978 deems

the worker not to be a common-law employee of the principal.      The

principal bears the burden of proving that it is entitled to
                              - 12 -

relief.   Boles Trucking, Inc. v. United States, 77 F.3d 236,

239-241 (8th Cir. 1996).

     In its petition, D&R asserted that it “had a reasonable

basis for not treating the workers as employees” and that it was

entitled to relief under section 530 of the Revenue Act of 1978.

At trial,10 D&R neither identified that basis nor explained why

it was reasonable.   No evidence addressed these matters.   Thus

D&R failed to carry its burden.

     D.    Neither Section 3402 nor Section 3509 Reduces D&R’s
           Liability for Employment Taxes.

     In its petition, D&R asserted (i) that it “is entitled to

relief under IRC Section 3402” and (ii) that it “is entitled to

relief under IRC Section 3509 in that it has met all requirements

under that Section.”

     Section 3402 does not reduce D&R’s deficiencies.    Section

3402(d) relieves employers of liability for income-tax

withholding when employees pay the tax directly.   D&R offered no

evidence that the employees paid the taxes directly.

     Section 3509 does not reduce D&R’s deficiencies.    If an

employer meets its requirements, section 3509 reduces an

employer’s liability for income-tax withholding and for the

employee’s share of Federal Insurance Contributions Act taxes.



     10
      D&R did not file a brief; it did, however, make a closing
statement at trial. D&R did not address section 530 of the
Revenue Act of 1978 in its closing statement.
                                - 13 -

Section 3509 will not reduce an employer’s liability, however, if

the liability was due to “intentional disregard of the

requirement to deduct and withhold” employment taxes.    Sec.

3509(c).    D&R neither offered argument about section 3509 nor

offered any evidence that its liabilities were not due to

“intentional disregard of the requirement to deduct and withhold”

employment taxes.

      We therefore conclude that the IRS’s determinations of D&R’s

deficiencies in tax, which did not apply any reductions under

section 3402 or section 3509, are correct.

II.   Additions to Tax and Penalties

      The IRS has the burden of producing evidence that taxpayers

are liable for penalties and additions to tax.    Sec. 7491(c).

The IRS satisfies its burden by producing “sufficient evidence

indicating that it is appropriate to impose the relevant

penalty.”    Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

      Once the IRS satisfies its burden, taxpayers have the burden

of persuading the fact finder that they are not liable for the

penalty.    Id. at 446-447.   Furthermore, taxpayers bear the

burdens of production and persuasion on whether an exception

relieves them from liability.    See id. at 446 (stating that the

IRS “need not introduce evidence regarding reasonable cause,

substantial authority, or similar provisions”).
                                - 14 -

     A.     D&R Is Liable for Additions to Tax Under Section
            6651(a)(1).

     When a taxpayer fails to timely file certain returns,

including Forms 940 and 941,11 section 6651(a)(1) imposes an

addition to tax.    For each month the return is late, the addition

is 5 percent of the tax due,12 up to 25 percent.    Sec.

6651(a)(1).    Substitute returns filed by the IRS under section

6020(b) do not qualify as returns for section 6651(a)(1)

purposes.    Sec. 6651(g)(1).   Thus the filing of a substitute

return does not stop the accrual of additional amounts.

     A taxpayer is not liable for an addition under section

6651(a)(1) if the failure to timely file was due to reasonable

cause and not due to willful neglect.     Sec. 6651(a)(1).   To show

reasonable cause, the taxpayer must show that it could not file

the return on time even though it exercised ordinary business

care and prudence.    See Crocker v. Commissioner, 92 T.C. 899, 913

(1989); sec. 301.6651-1(c)(1), Proced. & Admin. Regs. “Willful


     11
      Sec. 6651(a)(1) imposes an addition to tax for failing to
file returns required to be filed under authority of ch. 61,
subch. A, pts. I and II. Sec. 6651(a)(1). The regulations under
sec. 6011 require employers to file Form 940 and Form 941. See
sec. 31.6011(a)-3(a), Employment Tax Regs. (requiring Form 940);
sec. 31.6011(a)-1(a)(1), Employment Tax Regs. (requiring Form
941). Sec. 6011 is part of subch. A, pt. II.
     12
      For sec. 6651(a)(1), the tax due is “the amount of tax
required to be shown on the return * * * reduced by the amount of
any part of the tax which is paid on or before the date
prescribed for payment of the tax and by the amount of any credit
against the tax which may be claimed on the return”. Sec.
6651(b)(1); see also sec. 301.6651-1(d), Proced. & Admin. Regs.
                               - 15 -

neglect” means a “conscious, intentional failure or reckless

indifference.”   United States v. Boyle, 469 U.S. 241, 245 (1985).

     D&R is liable for additions to tax under section 6651(a)(1).

The IRS met its burden by showing that D&R failed to file Forms

940 and 941 for the periods at issue.     See Ramirez v.

Commissioner, T.C. Memo. 2007-346 (finding that the IRS met its

burden where the employer failed to file returns).    D&R did not

show that it had reasonable cause for failing to file.

     B.    D&R Is Liable for Additions to Tax Under Section
           6651(a)(2).

     When a taxpayer fails to pay the amount shown on certain

returns, including Forms 940 and 941,13 section 6651(a)(2)

imposes an addition to tax.    Substitute returns filed by the IRS

under section 6020(b) are treated as returns for section

6651(a)(2) purposes.   Sec. 6651(g)(2).   Thus section 6651(a)(2)

imposes an addition to tax for failing to pay the amount shown on

a substitute return satisfying section 6020(b).    The addition is

one-half percent of the tax shown on the return for each month

(or fraction of a month) the taxpayer fails to pay, up to 25

percent.   Sec. 6651(a)(2).   The taxpayer is not liable for an

addition to tax under section 6651(a)(2) if the late payment was



     13
      Sec. 6651(a)(2) imposes an addition to tax for failing to
pay the amounts shown on the types of returns for which there is
a failure-to-file addition to tax under sec. 6651(a)(1). Sec.
6651(a)(1) imposes an addition to tax for failing to file Forms
940 and 941. See supra note 11 and accompanying text.
                               - 16 -

due to reasonable cause and not due to willful neglect.    Sec.

6651(a)(2).

     D&R is liable for additions to tax under section 6651(a)(2).

Where the taxpayer did not file a return, the IRS can satisfy its

burden of production with evidence that the IRS filed a

substitute return and that the taxpayer failed to pay the tax.

Wheeler v. Commissioner, 127 T.C. 200, 210 (2006), affd. 521 F.3d

1289 (10th Cir. 2008).    Under section 6020(b), a substitute

return is a set of documents signed by an authorized IRS employee

that (i) purports to be a return, (ii) identifies the taxpayer by

name, (iii) gives the taxpayer’s taxpayer identification number,

and (iv) has enough information to compute the taxpayer’s tax

liability.    Sec. 301.6020-1(b)(2), Proced. & Admin. Regs.   The

IRS produced documents meeting these requirements for each return

at issue (i.e., Forms 941 for each quarter and Forms 940 for each

year).    The parties do not dispute that D&R failed to pay the tax

shown on the substitute returns.    Thus the IRS has met its burden

of production.    D&R did not show that it had reasonable cause for

failing to pay.

     C.    D&R Is Liable for Penalties Under Section 6656.

     If a taxpayer is more than 15 days late in depositing

employment tax, section 6656 imposes a 10-percent penalty.      Sec.

6656; see also Ewens & Miller, Inc. v. Commissioner, 117 T.C. at

268; Ramirez v. Commissioner, supra.    The taxpayer is not liable
                              - 17 -

for the section 6656 penalty if the late deposit was due to

reasonable cause and not due to willful neglect.   Sec. 6656(a).

     D&R is liable for penalties under section 6656.   The IRS met

its burden by showing that D&R deposited no employment taxes for

the years at issue.   See Ramirez v. Commissioner, supra (finding

that the IRS met its burden by showing that the employer made no

deposits).   D&R did not show that it had reasonable cause for

failing to deposit employment taxes.

     To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.
