                               T.C. Memo. 2013-161



                         UNITED STATES TAX COURT



            KADIMAH CHAPTER KIRYAT UNGVAR, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 27494-11.                         Filed July 1, 2013.



      Kenneth H. Silverberg and Jason Gonzalez, for petitioner.

      Linda P. Azmon, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      KERRIGAN, Judge: Respondent issued a notice of determination of worker

classification regarding petitioner’s liabilities under the Federal Insurance

Contribution Act (FICA) and petitioner’s income tax withholding (ITW) imposed

by sections 3401 through 3406 for the last three quarters of tax year 2004 and all
                                        -2-

[*2] quarters in tax years 2005, 2006, and 2007 (taxable periods at issue).

Respondent reclassified four persons--Marcel Gross, Avrohom Zachariash,1 Mark

Knopfler, and Myron Schwartz--as petitioner’s employees for the taxable periods

at issue and determined deficiencies with respect to petitioner’s Federal

employment taxes as follows:

            Tax period ended       Type of tax           Amount
                 6/30/04              FICA               $39,100
                 6/30/04               ITW                63,888
                 9/30/04              FICA                 3,380
                 9/30/04               ITW                10,500
                12/31/04              FICA                 4,688
                12/31/04               ITW                16,126
                 3/31/05              FICA                 4,284
                 3/31/05               ITW                 7,000
                 6/30/05              FICA                 5,355
                 6/30/05               ITW                 8,750
                 9/30/05              FICA                 2,295
                 9/30/05               ITW                 3,750
                12/31/05              FICA                 2,068
                12/31/05               ITW                 5,000


      1
      We note that the stipulation of facts lists Mr. Zachariash’s first name as
Avrohom while the transcript of record lists it as Abraham.
                                       -3-

            [*3] 3/31/06              FICA                2,295
                  3/31/06             ITW                 3,750
                  6/30/06             FICA                2,907
                  6/30/06             ITW                 4,750
                  9/30/06             FICA                3,060
                  9/30/06             ITW                 5,000
                 12/31/06             FICA                5,814
                 12/31/06             ITW                 9,500
                  3/31/07             FICA                3,978
                  3/31/07             ITW                 4,977
                  6/30/07             FICA                3,443
                  6/30/07             ITW                4,2612
                  9/30/07             FICA                8,798
                  9/30/07             ITW                10,543
                 12/31/07             FICA                3,443
                 12/31/07             ITW                 3,990

      Respondent also determined that petitioner was liable for additions to tax

under section 6651(a)(1) and (2) and penalties under section 6656 as follows:

                             Additions to tax
                          Sec.              Sec.            Penalty
          Year         6651(a)(1)        6651(a)(2)        sec. 6656
          2004          $30,978           $34,420           $2,358
          2005              8,663            9,626             700
                                         -4-

        [*4] 2006          8,342                9,192             704
             2007         11,652               10,671             983

      Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the taxable periods at issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure. We round all monetary

amounts to the nearest dollar.

      The parties have reached a settlement to legally classify Messrs. Gross,

Zachariash, and Knopfler as petitioner’s employees for the taxable periods at

issue. The parties have deemed that some of the amounts paid to Messrs. Gross,

Zachariash, and Knopfler are wages, and the parties have agreed that petitioner is

liable for tax under FICA and for ITW with respect to those wages. The parties

have also agreed that petitioner is liable for additions to tax under section

6651(a)(1) and penalties under section 6656 with respect to those wages.

      Respondent has conceded that petitioner is not liable for additions to tax

pursuant to section 6651(a)(2) with respect to wages paid to all four workers,

including Mr. Schwartz.

      The issues remaining for consideration are the following: (1) whether Mr.

Schwartz should be legally classified as petitioner’s employee for the taxable

periods at issue; (2) whether petitioner is entitled to relief under the Revenue Act
                                        -5-

[*5] of 1978, Pub. L. No. 95-600, sec. 530, 92 Stat. at 2885, as amended (section

530), which deems an individual not to be an employee in certain circumstances,

with respect to Mr. Schwartz; (3) whether petitioner is liable for additions to tax

under section 6651(a)(1) with respect to wages paid to Mr. Schwartz; and (4)

whether petitioner is liable for penalties under section 6656 with respect to wages

paid to Mr. Schwartz.

                               FINDINGS OF FACT

      Some of the facts are stipulated and are so found. Petitioner, a corporation

exempt from Federal taxation pursuant to section 501(c)(3), had its principal place

of business in New York at all relevant times.

Petitioner’s Incorporation

      Petitioner was incorporated in New York on November 2, 1992, under

article 10 of the Religious Corporations Law of New York.

      According to petitioner’s certificate of incorporation, petitioner was

organized to maintain a house of worship with a principal place of worship in

Brooklyn, New York. The certificate of incorporation states that petitioner was

“organized exclusively for one or more of the * * * purposes * * * specified in

Sec. 501(c)(3) of the Internal Revenue Code of 1954, and shall not carry on any

activities not permitted to be carried on by a corporation exempt from Federal
                                          -6-

[*6] income tax under Sec. 501(c)(3) of the Internal Revenue Code of 1954”. The

certificate of incorporation further states that “no part of * * * [petitioner’s] net

earnings * * * shall inure to the benefit of any member, trustee, director, officer of

the corporation, or any private shareholder (except that reasonable compensation

may be paid for services rendered to or for the corporation) and no member,

trustee, or officer shall be entitled to share in the distribution of any of the

corporate assets upon dissolution of the corporation.”

        Petitioner’s original board of directors and trustees (board) included Mr.

Schwartz and Mr. Knopfler. Mr. Knopfler, who served as trustee director, was

trained as a certified public accountant. Mr. Schwartz resigned from his position

on the board in January 1998. Upon Mr. Schwartz’s resignation, Messrs. Gross

and Zachariash joined Mr. Knopfler as members of the board. Mr. Gross earned a

bachelor’s degree in accounting and ran his own accounting firm, which had other

exempt organizations as clients. Messrs. Gross, Zachariash, and Knopfler

remained on the board during the taxable periods at issue. Mr. Knopfler died in

2010.

        Since incorporation petitioner has never filed any Federal income tax

returns, including Forms 1120, U.S. Corporation Income Tax Return, and Forms

990, Return of Organization Exempt From Income Tax. Likewise, petitioner has
                                        -7-

[*7] never filed any Federal employment tax returns, including Forms 941,

Employer’s Quarterly Federal Tax Return; Forms 940, Employer’s Annual Federal

Unemployment (FUTA) Tax Return; and Forms 945, Annual Return of Withheld

Federal Income Tax.

Rabbi Bernard J. Schwartz

      Rabbi Schwartz was born in 1914. His son, Mr. Schwartz, was born in

1951. From 1965 through 1990 Rabbi Schwartz was the rabbi at Temple

Kadimah, an independent Jewish congregation unaffiliated with any other

synagogue. Temple Kadimah was located in a three-story building in Brooklyn,

New York. Rabbi Schwartz owned the building until 1993. While Rabbi

Schwartz was at Temple Kadimah, the first floor of the building operated as a

synagogue, the second floor operated as a Hebrew school, and the third floor

operated as a residence for Rabbi Schwartz, his wife, and Mr. Schwartz.

      In 1990 Rabbi Schwartz retired from Temple Kadimah. He was not

employed as a rabbi by any organization after his retirement. Before he retired,

Rabbi Schwartz arranged for the funds in Temple Kadimah’s bank account to be

transferred to a bank account in petitioner’s name. Rabbi Schwartz was never

affiliated with petitioner. He never provided services to petitioner, he was never a

member of petitioner’s board, and he never possessed signatory authority over any
                                         -8-

[*8] of petitioner’s bank accounts. Rabbi Schwartz died in October 2005. Mr.

Schwartz died in January 2010.

Rabbi Menashe Klein

      Rabbi Klein was well known in petitioner’s community and abroad. He was

a member of the Jewish Decisers and received questions throughout the world

about Jewish law and custom. Rabbi Klein presided over Khal Ungvar, an

incorporated congregation and synagogue legally distinct from petitioner. At all

relevant times Khal Ungvar was exempt from Federal income tax pursuant to

section 501(c)(3), and its principal place for the conduct and operation of religious

services and business operations was in Brooklyn, New York.

      Khal Ungvar’s constitution and bylaws state that “[t]he objectives of Khal

Ungvar shall be exclusively religious, charitable and educationable within the

meaning of section 501(c)(3)” and that “the function of Khal Ungvar will be to

serve as a synagouge [sic].” Additionally, Khal Ungvar’s constitution and bylaws

state that Khal Ungvar may exercise the power, among other things, “[t]o solicit,

accept, receive, hold and administer funds exclusively for * * * [Khal Ungvar’s

stated objectives] and to that end, to take and receive by bequest, devise, gift or

benefit of trust (but not as trustee of any trust)”. Finally, Khal Ungvar’s

constitution and bylaws state that “Khal Ungvar shall not be conducted or
                                         -9-

[*9] operated for profit and no part of the net earnings of Khal Ungvar shall inure

to the benefit of any member or individual” and that “no part of the net earnings,

property or assets of Khal Ungvar shall be used other than for * * * [Khal

Ungvar’s stated objectives].”

      Messrs. Gross, Zachariash, and Knopfler all had close relationships with

Rabbi Klein. Mr. Gross was one of Rabbi Klein’s former students. They had a

close business and familial relationship; they spoke at least once a week. Mr.

Zachariash was Rabbi Klein’s secretary. He has worked at Khal Ungvar for over

20 years.2 Mr. Zachariash compared his experience with Rabbi Klein to that of the

Papal secretary. Mr. Knopfler was one of Rabbi Klein’s former students as well as

his close disciple and adviser.

      Rabbi Klein was never affiliated with petitioner. He never provided

services to petitioner, he was never a member of petitioner’s board, and he never

possessed signatory authority over any of petitioner’s bank accounts. Rabbi Klein

died in 2011.




      2
        At trial Mr. Zachariash testified that he worked for Kiryat Ungvar, an
Israeli nonprofit organization legally distinct from petitioner, but the rest of the
record, including the stipulation of facts, indicates that he worked for Khal
Ungvar.
                                       - 10 -

[*10] The Kings Point Residence

      On November 19, 1992, petitioner purchased a residence in Kings Point,

New York (Kings Point residence). Mr. Schwartz found the Kings Point residence

for petitioner. Before the purchase Mr. Schwartz retained a real estate appraiser

who prepared a comparative sales analysis for him. Petitioner did not obtain a

mortgage or any type of loan to purchase the Kings Point residence, which had a

tennis court and a swimming pool. Soon after the purchase petitioner agreed to

lease the Kings Point residence to “the family of Rabbi Bernard J. Schwartz”,

which included Rabbi Schwartz’s wife and Mr. Schwartz, for a nominal fee on a

month-to-month basis.

      Mr. Schwartz was responsible for maintaining the premises and property of

the Kings Point residence. He managed the property, landscaped, maintained the

pool, removed snow, made repairs, maintained the property’s heating and air

conditioning, and performed other general maintenance services. The bills related

to the Kings Point residence were in petitioner’s name. Mr. Schwartz paid those

bills on petitioner’s behalf with money from petitioner’s bank accounts.

      Mr. Schwartz maintained homeowners insurance for the Kings Point

residence in his name from 1994 through 2004. During that time petitioner did not

maintain insurance coverage for the Kings Point residence in its own name. In
                                       - 11 -

[*11] October 1999 Mr. Schwartz applied for homeowners insurance with Royal

& Sunalliance. On the application for insurance Mr. Schwartz listed himself as

the owner and “T Kadimah Chapter” as a mortgage interest holder. “T Kadimah

Chapter” did not hold a mortgage interest in the Kings Point residence at that time.

      In 2000 Mr. Schwartz (as “Rev. M. Jay Schwartz”) filed a Form RP-462,

Application for Exemption From Real Property Taxes for Property Used as

Residence of Officiating Clergy (“Parsonage” or “Manse”), with the New York

State Department of Taxation and Finance for the Kings Point residence. On the

application, under “name of religious corporation”, Mr. Schwartz wrote

petitioner’s name. In 2002 Rabbi Joel Weiss, in his capacity as a member of

petitioner’s board, filed a Form RP-420-a/b-Rnw-II, Renewal Application for Real

Property Tax Exemption for Nonprofit Organizations II--Property Use, with the

New York State Department of Taxation and Finance for the Kings Point

residence.

      In 2003 Rabbi Schwartz moved to a nursing home, and Mr. Schwartz moved

to a new address. By that time, Rabbi Schwartz’s wife had passed away. Mr.

Schwartz continued to visit the Kings Point residence approximately three days

per week, using the pool during the summer and sleeping there at least one night

per week, through June 2004.
                                            - 12 -

[*12] Sale of the Kings Point Residence

      At a time not specified in the record, Mr. Schwartz discussed the sale of the

Kings Point residence with Messrs. Gross and Knopfler. Mr. Schwartz then found

a buyer for the Kings Point residence. He also retained an appraiser and an

attorney to aid petitioner with the sale.

      On January 6, 2003, petitioner entered into a contract to sell the Kings Point

residence. That same day members of petitioner’s board authorized the sale,

memorializing their unanimous consent in a document (unanimous written

consent). The board’s unanimous written consent stated that (1) petitioner no

longer maintained a viable congregation; (2) petitioner was affiliated with Khal

Ungvar, an active Jewish congregation incorporated under the Religious

Corporations Law of New York and exempt from Federal taxation pursuant to

section 501(c)(3); and (3) the proceeds from the sale of the Kings Point residence

should be distributed to Khal Ungvar.

      Because petitioner is a religious corporation, the sale had to be approved by

the attorney general of New York. Mr. Schwartz retained an attorney on

petitioner’s behalf to aid petitioner with a petition for approval of sale. In its

petition for approval of sale petitioner requested leave to sell the Kings Point

residence, petitioner’s sole asset. Petitioner stated that it was contemplating
                                        - 13 -

[*13] dissolution after the sale and requested that it be allowed to distribute the

sale proceeds to Khal Ungvar. Petitioner further claimed that it operated as a

chapter of Khal Ungvar. On April 1, 2004, petitioner was granted leave to sell the

Kings Point residence. The order granting leave to sell required that petitioner

distribute the sale proceeds to Khal Ungvar upon petitioner’s dissolution. On June

3, 2004, the sale of the Kings Point residence closed.

      Petitioner did not dissolve after the sale. At a time not specified in the

record, Messrs. Gross, Zachariash, and Knopfler agreed orally that petitioner

would place the proceeds from the sale of the Kings Point residence into its own

bank account. They also agreed that petitioner would pay Mr. Schwartz a monthly

stipend of approximately $5,000 per month. Messrs. Gross, Zachariash, and

Knopfler did not reduce this agreement to writing.

      On June 14, 2004, petitioner deposited the sale proceeds into its bank

account. On September 27, 2004, petitioner began to write checks to Mr.

Schwartz. On December 10, 2004, Messrs. Knopfler and Zachariash authorized

Smith Barney to establish automatic fund transfers from petitioner’s bank account

to Mr. Schwartz’s personal bank account. On April 21, 2006, Messrs. Gross,

Zachariash, and Knopfler notified Smith Barney that they wished to temporarily

suspend the automatic fund transfers and to send Mr. Schwartz a monthly
                                       - 14 -

[*14] distribution of $5,000. Petitioner continued to write checks and transfer

funds to Mr. Schwartz through December 27, 2007.

      For tax year 2004 petitioner made the following payments to Mr. Schwartz:

                            Date                 Amount
                             9/27                 $5,000
                             9/27                  7,000
                             10/8                  5,000
                             12/2                  5,000
                             12/2                  5,000
                           12/22                   5,000
                            Total                 32,000

      For tax year 2005 petitioner made the following payments to Mr. Schwartz:

                             Date                Amount
                             1/27                 $5,000
                             2/16                  2,500
                             2/28                  5,000
                              3/2                  7,500
                             3/28                  5,000
                             3/30                  3,000
                             4/27                  5,000
                              5/6                  5,000
                             5/27                  5,000
                               - 15 -

                  [*15] 5/27               7,000
                       6/2                 8,000
                     6/27                  5,000
                     7/27                  5,000
                     8/29                  5,000
                     9/27                  5,000
                    10/27                  5,000
                    10/28                  5,000
                    11/28                  5,000
                    12/27                  5,000
                     Total                98,000

For tax year 2006 petitioner made the following payments to Mr. Schwartz:

                     Date               Amount
                     1/27                $5,000
                     2/27                 5,000
                     3/27                 5,000
                     4/27                 5,000
                     5/26                 5,000
                     6/27                 5,000
                     7/28                 5,000
                      8/2                 5,000
                     8/28                 5,000
                     9/27                 5,000
                                     - 16 -

                      [*16] 10/27               6,000
                           11/2                10,000
                         11/27                  6,000
                         12/27                  6,000
                         12/29                 10,000
                          Total                88,000

     Finally, for tax year 2007 petitioner made the following payments to Mr.

Schwartz:

                           Date               Amount
                           1/29                $6,000
                            2/9                 5,000
                           2/27                 7,500
                           3/27                 7,500
                           4/27                 7,500
                           5/29                 7,500
                           6/27                 7,500
                           7/27                 7,500
                           8/27                 7,500
                           9/27                 7,500
                         10/29                  7,500
                                        - 17 -

                         [*17] 11/27                7,500
                             12/27                  7,500
                             Total                 93,500

      Petitioner paid Mr. Schwartz a total of $311,500 during the taxable periods

at issue. Petitioner did not file Forms W-2, Wage and Tax Statement, or Forms

1099-MISC, Miscellaneous Income, with respect to any of these payments.

The Fire at the Kings Point Residence

      On January 17, 2004--after petitioner entered into a contract to sell the

Kings Point residence, but before petitioner was granted leave to sell it--a fire

occurred at the Kings Point residence. Mr. Schwartz retained an appraiser to

ascertain the extent of the damage caused by the fire. Mr. Schwartz filed a claim

with Royal & Sunalliance seeking payment for the damage to the Kings Point

residence from the fire. Royal & Sunalliance denied Mr. Schwartz’s claim on the

grounds that he made fraudulent statements and material misrepresentations on his

application for insurance.

      On February 9, 2005, Mr. Schwartz filed suit in his individual capacity and

on behalf of petitioner against Royal & Sunalliance and Royal Indemnity Co. in

the Supreme Court of New York. Mr. Schwartz also filed suit in his individual

capacity and on behalf of petitioner against Fairmont Insurance Brokers, Ltd., in
                                       - 18 -

[*18] the Supreme Court of New York. The outcomes of those cases are not

relevant to this opinion.

                                     OPINION

I.    Legal Classification of Mr. Schwartz

      A.     Burden of Proof

      Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and a taxpayer bears the burden of proving those determinations

are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).

This principle applies to the Commissioner’s determination that a taxpayer’s

workers are employees. Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 268

(2001). If an employer-employee relationship exists, its characterization by the

parties as some other relationship is immaterial. Sec. 31.3121(d)-1(a)(3),

Employment Tax Regs. Section 7491(a)(1), which shifts the burden of proof to

the Secretary in certain other circumstances, does not apply to employment tax

disputes. Sec. 7491(a)(1); see also Charlotte’s Office Boutique, Inc. v.

Commissioner, 121 T.C. 89, 102 (2003), aff’d, 425 F.3d 1203 (9th Cir. 2005);

Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. 121, 123 n.2

(2002), aff’d, 93 Fed. Appx. 473 (3d Cir. 2004). Therefore, petitioner bears the
                                       - 19 -

[*19] burden of proving that Mr. Schwartz was not its employee during the taxable

periods at issue.

      B.     Mr. Schwartz as Petitioner’s Employee

      Petitioner contends that the payments made to Mr. Schwartz were pursuant

to a trust that Rabbi Schwartz created for Mr. Schwartz’s benefit, rather than wage

payments to an employee or an independent contractor. We have determined that

this case can be decided on whether Mr. Schwartz can be classified as an

employee of petitioner. Therefore, we will not address the issue of whether a trust

was created.3

      Employers and employees are subject to “employment taxes”, including

FICA. FICA provides a Social Security tax payable by both employers and

employees. See secs. 3101, 3111. Employers are required to withhold FICA tax

and Federal income tax on wage payments (i.e., ITW) that they make to their

employees. See secs. 3102, 3402. These employment taxes do not apply to

payments made to independent contractors.

      Petitioner contends that Mr. Schwartz was not its employee and that Mr.

Schwartz’s actions were consistent with those of a homeowner rather than

      3
       Even though we will not discuss the issue of whether a trust was created,
we found it disconcerting that the testimony petitioner’s witnesses presented did
not support a requisite intent to create a trust, among other things.
                                       - 20 -

[*20] petitioner’s worker. Respondent contends that Mr. Schwartz was

petitioner’s property manager and that many of Mr. Schwartz actions with respect

to the Kings Point residence were performed on petitioner’s behalf using

petitioner’s funds. Respondent further contends that petitioner benefited from Mr.

Schwartz’s actions, which respondent claims were done in connection with

petitioner’s business of owning and maintaining a parsonage for Rabbi Schwartz

during his retirement.

      The facts in this case and those of typical worker classification

controversies are strikingly dissimilar. See, e.g., Kurek v. Commissioner, T.C.

Memo. 2013-64 (holding that the taxpayer, the sole proprietor of a construction

company, failed to properly classify as employees the workers he hired to help him

complete construction projects); Specks v. Commissioner, T.C. Memo. 2012-343

(holding that the taxpayer husband, who provided security services to several

companies as a second job and was paid weekly by the companies, properly

classified himself as an independent contractor); Blodgett v. Commissioner, T.C.

Memo. 2012-298 (holding that the taxpayer husband, who served on the board of

trustees of a local bank for nearly 30 years and was issued a Form 1099-MISC for

the wage payments he received from the bank, was properly classified as an

independent contractor); Atl. Coast Masonry, Inc. v. Commissioner, T.C. Memo.
                                       - 21 -

[*21] 2012-233 (holding that the taxpayer failed to properly classify its corporate

officers, masons, and laborers as employees); Twin Rivers Farm, Inc. v.

Commissioner, T.C. Memo. 2012-184 (holding that the taxpayer, who hired two

men to work on its farm, failed to properly classify the workers as employees; the

taxpayer purchased workers’ compensation and employer’s liability insurance,

paid the workers weekly, and provided living quarters to the workers rent free).

Among other things, unlike in a typical worker classification controversy,

petitioner did not make payments to Mr. Schwartz while he was maintaining the

Kings Point residence;4 rather, petitioner made large payments to Mr. Schwartz

over the course of four years following the sale of the Kings Point residence.5




      4
       The record implies that Mr. Schwartz may have maintained the Kings Point
residence in exchange for living at the Kings Point residence rent free before
2003, when Mr. Schwartz moved to a new home. Taxable periods before 2004,
however, are beyond the scope of this case.
      5
       Pursuant to secs. 31.3121(a)-1(i) and 31.3401(a)-1(a)(5), Employment Tax
Regs., remuneration for employment may constitute wages even if the employer-
employee relationship no longer existed at the time of the remuneration between
the person in whose employ the services were performed and the individual who
performed them. Although the regulations themselves do not offer a limitation on
the amount of time that may pass between the end of the employment relationship
and the payment before the payment made is no longer remuneration, the
regulations provide an example of a gap of two weeks between employment and
payment. Secs. 31.3121(a)-1(i), Example, 31.3401(a)-(1)(a)(5), Example,
Employment Tax Regs.
                                         - 22 -

[*22] Whether an individual performing services for a principal is an employee

(rather than an independent contractor) is a factual question to which common law

principles apply. Weber v. Commissioner, 103 T.C. 378, 386 (1994), aff’d per

curiam, 60 F.3d 1104 (4th Cir. 1995); see secs. 3121(d)(2), 3306(i). In

determining whether a worker is an employee, the Court considers (1) the degree

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

invests in the facilities used by the worker; (3) the opportunity of the worker for

profit or loss; (4) whether the principal can 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.

Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 270; Weber v. Commissioner,

103 T.C. at 387. We consider all facts and circumstances; no one factor dictates

the outcome. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 270. Although

the determination of employee status is to be made by common law concepts, a

realistic interpretation of the term “employee” should be adopted, and doubtful

questions should be resolved in favor of employment in order to accomplish the

remedial purposes of the legislation involved. Id. at 269 (citing Breaux & Daigle,

Inc. v. United States, 900 F.2d 49, 52 (5th Cir. 1990)); see also Twin Rivers Farm,

Inc. v. Commissioner, slip op. at 6-7.
                                         - 23 -

[*23]         1.     Degree of Control

        The right of the principal to exercise control over the agent, whether or not

the principal in fact does so, is the “crucial test” for the existence of an employer-

employee relationship. Weber v. Commissioner, 103 T.C. at 387; see also Atl.

Coast Masonry, Inc. v. Commissioner, at *15. Under common law, an employer-

employee relationship exists when the principal has the right to control and direct

the worker regarding the result and how the result is accomplished. Secs.

31.3121(d)-1(c)(2), 31.3401(c)-1(b), Employment Tax Regs. The principal need

not actually direct or control the manner in which the services are performed; the

principal need only have the right to do so. See Weber v. Commissioner, 103 T.C.

at 388; Twin Rivers Farm, Inc. v. Commissioner, slip op. at 7. Similarly, the

principal need not set the worker’s hours or supervise every detail of the work

environment to control the worker. Ewens & Miller, Inc. v. Commissioner, 117

T.C. at 270 (citing Gen. Inv. Corp. v. United States, 823 F.2d 337, 342 (9th Cir.

1987)). Workers who set their own hours are not necessarily independent

contractors. Id.

        There is no indication in the record that petitioner maintained any control

over Mr. Schwartz or could have directed or controlled Mr. Schwartz. Indeed,

there is no indication that Mr. Schwartz reported to petitioner or that petitioner
                                        - 24 -

[*24] maintained any oversight over Mr. Schwartz’s efforts or evaluated his work.

This factor weighs against classifying Mr. Schwartz as petitioner’s employee.

             2.     Investment in Facilities

       Unlike in a typical worker classification case, Mr. Schwartz was the tenant

of the Kings Point residence, where respondent alleges most of Mr. Schwartz’s

services took place. However, the Kings Point residence was sold on June 3,

2004. Therefore, there were no facilities or equipment in which petitioner

invested for most of the taxable periods at issue. This factor is neutral.

             3.     Opportunity for Profit and Risk of Loss

      The opportunity for profit or loss indicates nonemployee status. See

Simpson v. Commissioner, 64 T.C. 974, 988 (1975); see also Twin Rivers Farm,

Inc. v. Commissioner, slip op. at 9. The fact that a worker is insulated from

suffering a loss or prevented from realizing profit generally indicates that the

worker is an employee. See Kurek v. Commissioner, at *12; Atl. Coast Masonry,

Inc. v. Commissioner, at *16. As the sole owner of the Kings Point residence,

petitioner generally had the opportunity for profit and bore the risk of loss from

the sale of the Kings Point residence. However, the Kings Point residence was

sold in June 2004. We note, though, that petitioner was not engaged in any
                                         - 25 -

[*25] apparent trade or business during most of the taxable periods at issue. This

factor weighs against classifying Mr. Schwartz as petitioner’s employee.

              4.    Right To Discharge the Workers

       Employers typically have the right to terminate employees at will. Ellison

v. Commissioner, 55 T.C. 142, 155 (1970); Kurek v. Commissioner, at *12.

Unlike a normal employer-employee situation, petitioner would not have been able

to terminate Mr. Schwartz. As the tenant of the Kings Point residence, Mr.

Schwartz would have had the right to continue to maintain the property. Had

petitioner wished to prevent Mr. Schwartz from maintaining the property,

petitioner likely would have had to evict Mr. Schwartz. Furthermore, we note that

for most of the taxable periods at issue, petitioner no longer owned the Kings

Point residence. This factor weighs against classifying Mr. Schwartz as

petitioner’s employee.

              5.    Integral Part of the Business

      Employees are typically an essential part of a taxpayer’s normal operation.

Kurek v. Commissioner, at *12; see Atl. Coast Masonry, Inc. v. Commissioner, at

*18. Petitioner’s sole asset was the Kings Point residence until the sale, after

which its sole asset was the proceeds. Although petitioner claimed in its certificate

of incorporation that it was organized to maintain a house of worship, with a
                                        - 26 -

[*26] principal place of worship in Brooklyn, New York, the record reflects that

petitioner never operated the Kings Point residence (or any other building) as a

house of worship and that petitioner has never had a congregation. Instead, the

record reflects that petitioner owned and maintained the Kings Point residence as a

parsonage for Rabbi Schwartz and his family.

      Petitioner did not maintain a business for the purposes of this factor test.

This factor is neutral.

             6.     Permanency of the Relationship

      The permanency of a work relationship indicates employee status. See

Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 273 (noting that a transitory

work relationship may point toward independent contractor status); see also Twin

Rivers Farm, Inc. v. Commissioner, slip op. at 11. Mr. Schwartz’s relationship

with petitioner began when he was a member of petitioner’s original board. This

relationship ended when Mr. Schwartz resigned from his position in 1998, several

years before the taxable periods at issue. This factor weighs against classifying Mr.

Schwartz as petitioner’s employee.
                                         - 27 -

[*27]         7.     The Relationship the Parties Believed They Created

        Petitioner contends that the relationship created by the parties was not

intended to be that of an employer-employee. Petitioner contends that they created

a relationship in which petitioner supported Mr. Schwartz.

        At trial Mr. Gross testified that he believed that Rabbi Klein promised Rabbi

Schwartz that he, Rabbi Klein, would take care of Mr. Schwartz with petitioner’s

funds. Specifically, Mr. Gross testified that “[Rabbi] Bernard Schwartz had an

only child, Myron, and the funds were considerable and he didn’t find a way that

this son is going to be able to support himself.6 And it was my understanding that

Rabbi Klein promised [Rabbi] Bernard Schwartz that he would take care of his son

from these funds.” Mr. Gross was not present when Rabbi Schwartz and Rabbi

Klein made this claimed agreement. When asked whether he discussed the claimed

agreement with Rabbi Klein, Mr. Gross stated: “I don’t know that we discussed it.

We had that common understanding. We worked together, you know. * * * We

discussed the Schwartzes, we discussed the house that was sold. We discussed that

Myron is, you know, knocking on our door wanting to know--how do we support

the guy? So this is what we did.”

        6
       Petitioner alleges that Mr. Schwartz’s weight left him unfit for
employment; however, petitioner acknowledges that Mr. Schwartz worked
periodically as a limo driver.
                                         - 28 -

[*28] Despite the contradictions in Mr. Gross’ testimony, the consistent thread is

that petitioner believed its duty was to support Mr. Schwartz. Although the

existence of this duty was highly questionable given petitioner’s exempt status, we

find that petitioner did not believe it had an employer-employee relationship with

Mr. Schwartz. This factor weighs against classifying Mr. Schwartz as petitioner’s

employee.

               8.    Conclusion

         After weighing the above factors, we conclude that Mr. Schwartz was not

petitioner’s employee during the taxable periods at issue. It appears that

respondent was trying to fit a square peg into a round hole by arguing Mr.

Schwartz was an employee.

II.      Additions to Tax and Penalties Under Sections 6651(a)(1) and 6656

         Petitioner was not required to file any Federal employment tax returns or

make any required deposits for the taxable periods at issue with respect to Mr.

Schwartz because Mr. Schwartz was not petitioner’s employee during that time.

Accordingly, we hold that petitioner is not liable for additions to tax pursuant to

section 6651(a)(1) or for penalties under section 6656 for the taxable periods at

issue.
                                         - 29 -

[*29] III.   Conclusion

      We hold that Mr. Schwartz was not petitioner’s employee for the taxable

periods at issue and that petitioner is not liable for Federal employment taxes with

respect to Mr. Schwartz as determined by respondent. Because Mr. Schwartz was

not petitioner’s employee, section 530 relief is not applicable. We further hold that

petitioner is not liable for additions to tax pursuant to section 6651(a)(1) or

penalties pursuant to section 6656 for the taxable periods at issue with respect to

Mr. Schwartz. Contentions we have not addressed are irrelevant, moot, or

meritless.

      To reflect the foregoing and respondent’s concessions,


                                                        An appropriate decision

                                                  will be entered.
