                  T.C. Memo. 2010-239



                UNITED STATES TAX COURT



   CHERYL A. MAYFIELD THERAPY CENTER, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

         ARDMORE DAY SPA, INC., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 9156-07, 9157-07.   Filed October 28, 2010.



     Massage therapists, cosmetologists, and nail
technicians (service providers) operated on the
premises of Ps’ spa. Ps generally charged each service
provider weekly “booth rent” equal to the greater of
approximately $80 base rent or 25 percent of the
service provider’s gross revenues. Ps contend that
they had a landlord/tenant relationship with the
service providers. R determined that the service
providers were Ps’ employees. Held: The service
providers were independent contractors.



Edith F. Moates, for petitioners.

Denise G. Dengler, for respondent.
                                 - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Petitioners have brought these actions for

redetermination of employment status pursuant to section 7436.1

In a notice of determination of worker classification dated

February 15, 2007, respondent determined that for 2002 petitioner

Cheryl A. Mayfield Therapy Center (the therapy center) owed

employment taxes of $20,473 and additions to tax under sections

6651 and 6656 of $4,607 and $1,211, respectively.   In a separate

notice of determination of worker classification dated

February 21, 2007, respondent determined that for 2003 and 2004

petitioner Ardmore Day Spa, Inc. (the corporation), owed

employment taxes, additions to tax, and penalties as follows:

                                           2003        2004

     Employment taxes                    $34,509    $29,895
     Sec. 6651 addition to tax             4,627      4,079
     Sec. 6656 addition to tax             2,181      1,921
     Sec. 6662 penalty                     2,789      2,353


     The issue is whether respondent properly classified certain

massage therapists and cosmetologists as petitioners’ employees.

                         FINDINGS OF FACT

     The parties have stipulated some facts, which we incorporate

herein by this reference.   When they filed their petitions,


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years at issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
All figures are rounded to the nearest dollar.
                                - 3 -

Cheryl A. Mayfield (Ms. Mayfield), who is the sole proprietor of

the therapy center, resided in Oklahoma, and the corporation had

its principal place of business in Oklahoma.

     Ms. Mayfield is a licensed massage therapist.   During 2002

she operated the therapy center and a massage school at separate

locations in Ardmore, Oklahoma.   At the beginning of 2003 she

combined these business activities in the corporation, of which

she was the sole shareholder.   (Hereinafter we sometimes refer to

the therapy center’s and the corporation’s operations

collectively as the spa.)

     Ms. Mayfield originally operated the spa out of a three-

bedroom house, which she partitioned to create four massage

rooms, one of which had two massage tables.    In August 2003 the

spa moved to a larger building with about 12 massage rooms.    The

facilities at each location included a reception area in the

front and workstations for cosmetologists and nail technicians.

(Hereinafter we refer to the cosmetologists and nail technicians

collectively as cosmetologists and sometimes refer to the

cosmetologists, nail technicians, and massage therapists

collectively as service providers.)

     The aggregate number of service providers (not counting Ms.

Mayfield) operating part or full time on the spa’s premises

during each year at issue were:
                                  - 4 -

                           2002             2003           2004

     Massage therapists     10               16               15
     Cosmetologists          3                8                4

During any given week, however, there were generally fewer

service providers operating at the spa than indicated by these

numbers, which reflect turnover during the year.     During 2002,

for instance, and until the spa moved to its larger quarters in

August 2003, there were no more than five massage therapists (not

counting Ms. Mayfield) operating at the spa during any given week

and no more than two cosmetologists.      During each year at issue

the spa employed one or more receptionists; during 2003 and 2004

the spa also employed a massage instructor.

     Although some of the service providers operated at the spa

for several years, others had only a short-term relationship with

the spa.

     The service providers received no set salary or wages and no

fringe benefits.    As a general rule, the spa charged each service

provider weekly “booth rent” equal to the greater of

approximately $80 “base rent” or 25 percent of the gross revenues

the service provider generated that week.     But the spa’s

practices varied.   Sometimes the spa did not charge the full

amount of booth rent, especially for a new or part-time service

provider.   If a service provider was absent from the spa for the

entire week, the spa might forgo booth rent, although on occasion
                                 - 5 -

it charged the absent service provider “base rent” and withheld

it from the next weekly check.

     The service providers set their own hours.    Some of them

worked full time; others were part-time workers who were students

or had jobs elsewhere.   At least one part-time worker was present

at the spa only when he had scheduled appointments.    Other

service providers spent time at the spa even when they did not

have appointments.

     Petitioners had written agreements with some service

providers, at least for some years at issue, but not with others.

Although the agreements are not in evidence, the testimony of one

of the service providers indicated that the agreements

essentially indicated the service provider’s schedule for the

coming year.   Similarly, service providers without written

agreements generally gave the spa advance notice of the days and

hours they planned to be at the spa.     But the service providers

often altered their schedules as they chose and were free to

leave the spa during the hours they had scheduled for themselves.

Ms. Mayfield would work at the spa when no other service

providers were there.    During 2002 the spa was open 6 days a week

and later posted operating hours 7 days a week.    The hours during

which the spa was actually open, however, depended upon whether

any service provider or Ms. Mayfield was available to work.    Most

of the service providers had keys to the spa and could come into
                               - 6 -

the spa for appointments outside of the spa’s normal business

hours.

     Clients made appointments for spa services at the

receptionist’s desk.   A receptionist or Ms. Mayfield generally

answered the telephone, or if they were unavailable, one of the

service providers would answer it.     If the client requested a

particular service provider, the request was honored.     If the

client requested no particular service provider, the receptionist

would rotate scheduling among available service providers.     A

service provider could decline servicing any particular customer.

When coming to the spa for the first time, a new client would

sign a waiver of liability and fill out an information sheet

listing his or her name and address and any health issues.     The

spa kept these forms at the receptionist’s desk and made them

available to the service providers to review.

     The spa posted prices for various spa services on brochures

and on its Internet site.   But the service providers were not

required to charge these posted prices; they often charged less

and occasionally provided free services for repeat customers,

family, and friends.

     The spa offered discounted prices for clients who prepaid

for packages of services, e.g., for eight massages.     Any massage

therapist who honored these specials could give massages to the

clients who prepaid for the discounted services.     The service
                                - 7 -

providers sometimes got together and designed “specials”, which

were then offered by the spa.    Ms. Mayfield started the practice

of offering her clients a card that gave them a free massage

after 10 paid massages for a certain rate.    Some of the other

massage therapists also offered this card, but others decided not

to offer it.    The spa also sold gift certificates and offered

“spa parties”, sometimes offsite, at which spa services were

provided to a group of customers for a single price, invoiced by

the spa and divided among the participating service providers.    A

service provider’s participation in “spa parties” was voluntary.

     Clients paid for services at a central point as they left

the spa.   The spa accepted payment by cash, check, gift

certificate, or credit card.    Cash payments were kept in a wicker

basket beneath the receptionist’s desk.    When low on funds, a

service provider would sometimes take money from the basket and

leave a handwritten note; the borrowed cash would then be

deducted from the service provider’s weekly check.

     Each cosmetologist generally provided her own supplies, such

as shampoo, conditioner, hair dye, combs, brushes, curling irons,

and scissors.    Each massage therapist also generally provided his

or her own supplies, such as massage oils, creams, salt scrubs,

hot stones, towels, and sheets.    Some types of supplies, such as

massage oils, the massage therapists generally purchased from the
                                 - 8 -

spa, which bought them in bulk.    They sometimes bought other

supplies from outside sources.

     Each massage therapist generally had an assigned room.2     In

at least some instances, the massage therapists decorated and

fitted out their assigned rooms with massage tables, lamps,

shelves, stereos, and other items procured at their own expense.3

When the spa was at its original location, there were sometimes

more massage therapists than massage rooms available.    In those

circumstances, massage therapists who had their own rooms would

sometimes permit other massage therapists to use their rooms if

the rooms happened to be free.4

     Service providers initially wore scrubs to work at the spa.

During 2002 they collectively decided to wear shirts with the spa

logo and either khaki, black, or white slacks or shorts.     This

practice continued during 2003 and 2004.    Each service provider

purchased his or her own work clothing.




     2
      The record is vague as to whether cosmetologists had
assigned working areas.
     3
      For instance, one massage therapist testified that when she
took a room at the spa, she purchased a massage table, hot
stones, cabinets, and a mural for the room and brought in her own
stereo, lamps, greenery, water fountain, and decorations. When
she later moved to a larger room at the spa, she had her husband
build a full wall unit of shelves for the new room.
     4
      One massage therapist testified that she never allowed
anyone else to use her massage room.
                               - 9 -

     Massage therapists are required to have a license from the

City of Ardmore.   Cosmetologists are required to have a State

license.   The service providers paid for their own training

school, licenses, and continuing professional education.   Many of

the massage therapists initially received their training from the

massage school Ms. Mayfield operated.   These students paid the

regular fees charged by the massage school, and there was no

guarantee or obligation that massage school students would work

at the spa after graduation.   Sometimes a new service provider

would be paired with a more experienced service provider for

observation and training as to particular types of services.

     Each week the spa would prepare payout sheets for the

service providers.   These payout sheets listed each service

provider’s clients and the total amount that each client paid for

services rendered.   From these amounts the spa would deduct booth

rent, expenses for products the service providers might have

purchased from the spa, and any amount that the service provider

might have taken from the basket money.   Each week, the spa would

write the service providers checks for the net amounts due them.

     Petitioners did not file Forms W-2, Wage and Tax Statement,

with respect to any individuals listed in the notices of

determination.   Petitioners also did not report any compensation

payments to employees during the years at issue on Forms 941,
                                - 10 -

Employer’s Quarterly Federal Tax Return, or Forms 940, Employer’s

Annual Federal Unemployment (FUTA) Tax Return.5

     In the notices of determination respondent classified as

employees the receptionists, massage therapists, and

cosmetologists who worked at the spa during 2002 through 2004 and

an instructor who worked at the massage school during 2003 and

2004.

                                OPINION

     Petitioners concede that the receptionists and the massage

instructor listed in the notices of determination are employees.6

Petitioners contend, however, that respondent improperly

classified the service providers (i.e., the massage therapists

and cosmetologists) as employees.     Petitioners acknowledge that

they have the burden of proof.     See Rule 142(a); Ewens & Miller,

Inc. v. Commissioner, 117 T.C. 263, 268 (2001).

        For purposes of employment taxes, the term “employee”

includes “any individual who, under the usual common law rules

applicable in determining the employer-employee relationship, has


        5
      For some periods petitioners did not file such forms, and
for other periods petitioners filed such forms reporting zero
payments to employees.
        6
      Petitioners do not contend that, with respect to these
employees, they are entitled to “safe harbor” relief under the
Revenue Act of 1978, Pub. L. 95-600, sec. 530, 92 Stat. 2885, as
amended, nor do they dispute, with respect to these employees,
the application of penalties and additions to tax as determined
in the notices of final determination. We deem petitioners to
have waived any such arguments.
                              - 11 -

the status of an employee”.   Sec. 3121(d)(2).   Under common law

rules, the most important consideration in determining an

employer-employee relationship is generally whether the person

for whom the services are performed has the right to direct and

control the method and manner in which the work is to be done.

See Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992);

Marvel v. United States, 719 F.2d 1507, 1514 (10th Cir. 1983);

Leavell v. Commissioner, 104 T.C. 140, 149-150 (1995).

     The Internal Revenue Service has identified these 20 factors

for determining the existence of an employment relationship in

various tax law contexts:   (1) The putative employer’s right to

require compliance with instructions; (2) training by the

putative employer; (3) integration of the worker’s services into

business operations; (4) a requirement that the worker’s services

be rendered personally; (5) the putative employer’s hiring,

supervising, and paying assistants; (6) a continuing

relationship; (7) set hours of work; (8) a requirement that the

worker devote substantially full time for the putative employer

rather than being free to work when and for whom he or she

chooses; (9) doing work on the putative employer’s premises; (10)

requiring the worker to perform services in the order or sequence

set by the putative employer; (11) requiring the worker to submit

oral or written reports; (12) paying by the hour, week, or month,

rather than by the job or on a straight commission; (13) paying
                               - 12 -

business and travel expenses; (14) furnishing tools and

materials; (15) a lack of significant investment by the worker;

(16) an absence of ability by the worker to realize a profit or

suffer a loss; (17) working for no more than one firm at a time;

(18) the worker’s not making his or her services available to the

general public on a regular and consistent basis; (19) a right to

discharge the worker; and (20) a right by the worker to terminate

the relationship without incurring liability.    Rev. Rul. 87-41,

1987-1 C.B. 296, 298-299.    The Court of Appeals for the Tenth

Circuit, to which any appeal of this case would lie, has endorsed

applying these 20 factors.    E. Inv. Corp. v. United States, 49

F.3d 651, 653-654 (10th Cir. 1995).     As the Court of Appeals has

observed, however, not every factor applies in every situation,

and no one factor in isolation is dispositive; rather “‘it is the

total situation that controls.’”    Id. at 653 (quoting Bartels v.

Birmingham, 332 U.S. 126, 130 (1947)).

     Petitioners contend that their relationship to the service

providers was not that of an employer to employees but that of a

landlord to tenants.   They point to the fact that each week, as a

general rule, the spa retained as booth rent the greater of $80

or 25 percent of the service provider’s gross revenues.    Although

the spa wrote each service provider a weekly check for the

balance of the customer fees that it collected, petitioners seem
                              - 13 -

to suggest that they did so merely as financial intermediaries

for the service providers.

     We find these contentions unpersuasive.    Clients paid the

spa, not the service providers.   These funds were within the

control and disposition of the spa until it paid the service

providers by writing them checks.7   See sec. 1.6041-1(h), Income

Tax Regs. (a “payment” is made for purposes of section 6041

information returns when an amount is made available to a person

“so that it may be drawn at any time, and its receipt brought

within his own control and disposition.”).    Consequently, we

conclude that the spa’s weekly checks to the service providers in

fact represented payments to them.     But this does not answer the

question whether the payments were made to the service providers

in their capacities as employees or as independent contractors.

     Some revenue rulings, concluding that certain beauticians

and barbers are self-employed, take into account as part of the

analysis the existence of a fixed-fee lease agreement.    See Rev.

Rul. 73-592, 1973-2 C.B. 338 (beauticians); Rev. Rul. 57-110,

1957-1 C.B. 329 (barbers).   Conversely, other revenue rulings,

concluding that certain beauticians and similar professionals are



     7
      Our conclusion in this regard is not altered by the fact
that the service providers would sometimes take cash from the
cash basket and leave notes. This practice seems to indicate
less that the cash was in the service providers’ dominion and
control than that the spa had a very lenient (and trusting)
policy for making cash advances.
                              - 14 -

employees, take into account that the working space is leased for

a percentage of gross receipts.   See Rev. Rul. 73-591, 1973-2

C.B. 337 (beautician); Rev. Rul. 73-574, 1973-2 C.B. 335

(manicurist in barbershop); Rev. Rul. 70-488, 1970-2 C.B. 219

(barbers).   Similarly, some judicial precedents involving worker

classification of beauticians and similar professionals take into

account, with mixed results, the nature of leasing arrangements

as part of the multifactor common law employment analysis.   See,

e.g., Wolfe v. United States, 570 F.2d 278, 282 (8th Cir. 1978)

(holding that beauticians were employees, taking into account,

among other factors, a percentage-basis leasing arrangement);

Ren-Lyn Corp. v. United States, 968 F. Supp. 363 (N.D. Ohio 1997)

(holding that cosmetologists were not employees, taking into

account, among other factors, a percentage-basis leasing

arrangement); Henry v. United States, 452 F. Supp. 253, 255 (E.D.

Tenn. 1978) (holding that beauticians were not employees, taking

into account, among other factors, that they leased working space

in the beauty parlor for rent of 40 percent of their proceeds,

with minimum rent of $50 per week).

     Respondent acknowledges that the spa’s payout arrangement is

“something of a hybrid” since it includes both a percentage split

of gross revenues and a “minimum rent component”.   But respondent

contends that this “minimum rent component” demonstrates “more

control over the workers rather than less.”   If, however, as the
                               - 15 -

Commissioner’s revenue rulings suggest, a fixed rent arrangement

evidences self-employment status (since employees do not normally

pay their employers rent for their workspace), we have difficulty

understanding how a fixed rent component in a percentage payout

formula weakens, rather than strengthens, the case for self-

employment status.    Although the spa was not wholly consistent in

its policies, it appears that the spa generally did charge, and

the service providers did generally pay, weekly rent of at least

$80.    We take this circumstance into account as one factor

weighing against an employer-employee relationship.

       The weekly payment arrangement also reflected, in addition

to the spa’s retention of rent, compensation of the service

providers on a straight commission basis, with no minimum

guaranteed level of payment.    This circumstance also counts in

favor of independent contractor status, see Rev. Rul. 87-41,

1987-1 C.B. at 299, as does the fact that the spa provided the

service providers no employee benefits, such as vacation or sick

leave, see Weber v. Commissioner, 103 T.C. 378, 393-394 (1994),

affd. 60 F.3d 1104 (4th Cir. 1995).

       Respondent concedes that the spa did not pay service

providers’ business or travel expenses and that this circumstance

supports independent contractor status.    In addition, it appears

that many of the massage therapists made significant investments
                               - 16 -

in outfitting and decorating their massage rooms.8   These various

circumstances, coupled with the spa’s right to collect minimum

fixed rent each week, also lead us to conclude that service

providers bore the risk of suffering net losses, and in some

weeks did suffer net losses, from their operations at the spa.

Conversely, the service providers had opportunities to profit by

working longer hours, at times coming into the spa for

appointments outside the spa’s normal business hours.    Finally,

on the basis of the testimony of several service providers, it

appears that they believed that they had a nonemployee

relationship with the spa.9   All these considerations support a

finding of independent contractor status.   See Ewens & Miller,

Inc. v. Commissioner, 117 T.C. at 270.

     Other factors also point to independent contractor status.

Respondent concedes that the spa did not tell the service

providers how to provide their services to the clients.   In fact,

it appears that the spa required the service providers to comply

with only a relatively small number of instructions relating to

the spa’s operation.   The service providers were all licensed


     8
      Although the record does not similarly establish that the
cosmetologists made significant investments, we assign this
consideration little weight in our analysis since it would not
appear that a cosmetologist would ordinarily require large
expenditures to conduct that profession.
     9
      For instance, one of the massage therapists testified that
in 2004, while operating at the spa, she incorporated her massage
therapy business.
                                   - 17 -

professionals, possessing skills as required by their licensing.10

They set their own hours.        Although they provided the spa with

their schedules in advance, they changed those schedules as they

pleased.        And although the spa posted operating hours and

attempted to have coverage for all those hours, the service

providers were not required to work those hours, and the spa

sometimes closed early if no service provider was available to

work.        Moreover, the service providers might work in the spa

outside the posted hours, gaining access to the spa with their

own keys.        Although the spa posted prices for various services,

the service providers were free to charge less and sometimes

provided services for free.        Similarly, although the spa promoted

various “specials”, the service providers were free to decide

whether they wished to participate.         And although the spa

assigned walk-in clients on a rotating basis, the service

providers retained the right to refuse any client.

     Arrayed against these considerations supporting independent

contractor status are a number of factors supporting employee

status for the service providers.        In particular, their services

were integrated into the spa’s operations; they provided their

services mostly, if not entirely, on the spa’s premises; the spa



        10
      Although many of the massage therapists initially trained
at Ms. Mayfield’s massage school, they paid regular tuition for
these classes and had no guarantee of subsequently securing a
spot at the spa.
                              - 18 -

provided at least some informal training to new service

providers; there is no showing that the service providers made

their services available to the general public (other than by

working at the spa) regularly and consistently; they were

assisted in booking appointments and in receiving payments by

receptionists that the spa employed and supervised; clients paid

the spa rather than the service providers; and the spa retained

the payments until it distributed the service providers’ weekly

checks.

     Other factors we consider neutral or of limited usefulness

to our analysis.   For instance, although there was no requirement

that the service providers work full time for the spa, and

although some of them in fact worked part time and had jobs

elsewhere, these circumstances appear consistent with either

independent contractor or part-time employee status.   Likewise we

regard as neutral the fact that the service providers rendered

their services personally--a circumstance probably dictated by

the nature of the services and the licensing requirements.

     Respondent asserts as a factor evidencing an

employer/employee relationship that petitioners had the right to

terminate the services of any service provider at any time and

that any service provider could terminate his or her relationship

with the spa at any time.   But we are not persuaded that this

consideration adds much to our analysis, particularly given the
                              - 19 -

informal nature of the relationship between the spa and its

service providers.   It may, however, help explain what appears to

have been a significant level of turnover among the service

providers, many of whom operated at the spa for only a short

time.   That consideration, in turn, leads us to think that

although some other service providers operated at the spa for

several years, the work relationship was not necessarily

permanent or indefinite, as indicative of employment status.    See

Ewens & Miller, Inc. v. Commissioner, supra at 273.

Consequently, we also regard this factor as neutral.

     Although this is a close case, weighing all the evidence we

conclude that factors indicating the service providers’ autonomy

predominate over factors indicating petitioners’ control over

them.   Accordingly, we conclude and hold that the service

providers were independent contractors rather than petitioners’

employees during the years at issue.

     To reflect the foregoing and petitioners’ concessions,


                                         Decisions will be entered

                                    under Rule 155.
