                        T.C. Memo. 2003-48



                      UNITED STATES TAX COURT



      VETERINARY SURGICAL CONSULTANTS, P.C., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10401-01.           Filed February 26, 2003.



     Joseph H. O’Donnell, Jr., for petitioner.

     Pamela J. Arthur-Gerlach, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


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

response to a Notice of Determination Concerning Worker

Classification Under Section 7436 (notice of determination)

regarding petitioner’s liabilities pursuant to the Federal

Insurance Contributions Act (FICA) and the Federal Unemployment

Tax Act (FUTA) for 1997 and 1998.   The issues for decision are:
                                - 2 -

(1) Whether Kenneth K. Sadanaga (Sadanaga) was an employee of

petitioner for Federal employment tax purposes during 1997

through 1998 and, if so, (2) whether petitioner is entitled to

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

600, 92 Stat. 2885, as amended (Section 530).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.   For convenience, FICA and FUTA taxes are collectively

referred to as employment taxes.

                          FINDINGS OF FACT

     Some of the facts were deemed stipulated pursuant to Rule

91(f); certain additional facts have been stipulated by the

parties.   The stipulated facts are incorporated in our findings

by this reference.

Petitioner’s Organization and Operations

     Sadanaga has been a licensed veterinarian since 1985.     He

subsequently decided to incorporate his business on account of

the protections afforded by limited liability, in that a

corporation’s debts are generally not assessed against individual

shareholders.    Petitioner was incorporated in Pennsylvania on

May 22, 1991, and has at all relevant times operated as an S

corporation.    Petitioner’s principal place of business was

located in Pennsylvania, at the address of Sadanaga’s personal
                                - 3 -

residence, during the years in issue and when the petition was

filed in this case.

     Since its organization, petitioner has provided consulting

and surgical services to veterinarians.    This activity was and is

petitioner’s only business and only source of income.    Sadanaga

has been the sole shareholder of petitioner from the time of its

incorporation and throughout 1997 and 1998.

     Sadanaga has at all times served as petitioner’s president

and only officer.    Minutes from petitioner’s annual meetings of

directors and shareholders reflect that, for each of the years in

issue, Sadanaga was elected president, vice president, secretary,

and treasurer.    Sadanaga was also petitioner’s sole director.

During 1997 and 1998, Sadanaga performed the following services

for petitioner:    (1) Solicited business on behalf of petitioner;

(2) ordered and purchased supplies on behalf of petitioner;

(3) entered into verbal and/or written agreements on behalf of

petitioner; (4) oversaw the finances of petitioner; (5) collected

moneys owed petitioner; (6) managed petitioner; (7) obtained

clients for petitioner; (8) maintained customer satisfaction;

(9) performed all bookkeeping services for petitioner; and

(10) performed all surgical and consulting services to clients on

behalf of petitioner.    No other person provided any services to

petitioner.
                                - 4 -

     During the period in issue, petitioner rendered services to

Veterinary Orthopedic Services, Ltd. (Veterinary Orthopedic).

Sadanaga performed such services on behalf of petitioner pursuant

to a service contract between petitioner and Veterinary

Orthopedic dated January 1, 1992.    Sadanaga provided consulting

and surgical services on petitioner’s behalf to other

veterinarians at the Veterinary Orthopedic business office, at

the offices of the individual veterinarians, and at petitioner’s

office (as maintained in Sadanaga’s home).    During 1997 and 1998,

Sadanaga also worked approximately 25 to 30 hours per week as an

employee of Bristol-Meyer Squibb Co., which relationship had

begun in 1990.

     In 1997 and 1998, petitioner did not maintain any type of

business bank account.    Rather, all moneys earned on behalf of

petitioner were deposited into the joint account of Sadanaga and

his wife, Amy Sadanaga.    Sadanaga used funds maintained in this

account to pay both business expenses of petitioner and his

personal expenses as the need arose.    Petitioner did not make

regular payments at fixed times to Sadanaga for his services.

Petitioner’s Tax Reporting

     Petitioner timely filed Forms 1120S, U.S. Income Tax Return

for an S Corporation, and related schedules, for each of the

years 1997 and 1998.   Petitioner reported ordinary income from

its trade or business of $214,896.40 and $316,484.05 for 1997 and
                               - 5 -

1998, respectively.   Petitioner claimed deductions for

compensation of officers of $26,000 in 1997 and $40,000 in 1998;

petitioner did not claim any deductions for salaries and wages.

Schedules K-1, Shareholder’s Share of Income, Credits,

Deductions, etc., attached to the returns show $214,896.40 for

1997 and $316,484.05 for 1998 as the pro rata share of, and as a

property distribution other than a dividend to, Sadanaga.

Petitioner’s Forms 1120S were signed by Sadanaga as president and

by Joseph M. Grey (Grey) as preparer.

     During 1997 and 1998, petitioner did not issue any Forms W-

2, Wage and Tax Statement, to Sadanaga.   Petitioner issued Forms

1099-MISC, Miscellaneous Income, to Sadanaga for 1997 and 1998

reporting respective payments of $26,000 and $46,000.

     Petitioner did not file a Form 941, Employer’s Quarterly

Federal Tax Return, for any quarter in 1997 or 1998 or a Form

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

for 1997 or 1998.   Since petitioner’s incorporation in 1991 to

the present, petitioner has not filed any Federal or employer tax

returns reporting any payments to Sadanaga as salary or wages for

services provided by or on behalf of petitioner.

The Sadanagas’ Tax Reporting

     For each of the years 1997 and 1998, Sadanaga and his spouse

filed a joint Form 1040, U.S. Individual Income Tax Return.   On

these returns, the Sadanagas reported as ordinary income from
                               - 6 -

“Rental real estate, royalties, partnerships, S corporations,

trusts, etc.” $214,896.40 and $322,484.05 for 1997 and 1998,

respectively.   For 1997, the foregoing amount is characterized on

the attached Schedule E, Supplemental Income and Loss, as

nonpassive income from Schedule K-1, and $26,000 is shown on

Schedule C, Profit or Loss From Business, as gross receipts.    For

1998, $316,484.05 is shown on Schedule E as nonpassive income

from Schedule K-1; $6,000 is shown on Schedule E and on Form

4831, Rental Income, as rent; and $40,000 is shown on Schedule C

as gross receipts.

The Notice of Determination

     Respondent neither audited nor challenged petitioner’s 1991,

1992, or 1993 Federal tax return regarding petitioner’s treatment

of Sadanaga as other than an employee.   Prior to the audit

underlying the instant case covering 1997 and 1998, respondent

did audit petitioner for employment tax purposes for 1994, 1995,

and 1996.   That audit resulted in litigation of issues similar to

those presented here.   This Court issued an opinion thereon, in

favor of respondent, in Veterinary Surgical Consultants, P.C. v.

Commissioner, 117 T.C. 141 (2001), and the Court of Appeals for

the Third Circuit affirmed sub nom. Yeagle Drywall Co. v.

Commissioner, 54 Fed. Appx. 100 (3d Cir. 2002).

      During pendency of the prior matter, on June 8, 2001,

respondent sent to petitioner the notice of determination at
                                - 7 -

issue in this proceeding.    The notice was based on a

determination that Sadanaga was to be legally classified as an

employee for purposes of Federal employment taxes and that

petitioner was not entitled to relief from such classification

pursuant to Section 530.    Enclosed with the notice was a schedule

setting forth petitioner’s liabilities for FICA and FUTA taxes.

      It is stipulated that, if the Court decides that Sadanaga is

to be classified as an employee for Federal employment tax

purposes for all periods in 1997 and 1998, the amounts of taxes

due and owing are as set forth in the notice of determination.

Conversely, if the Court decides that Sadanaga should not be

classified as an employee for any of the periods in issue, the

parties agree that petitioner owes no employment taxes.

                      ULTIMATE FINDINGS OF FACT

      Sadanaga, as president of petitioner, performed more than

minor services and received remuneration therefor.

      Petitioner did not have a reasonable basis for failing to

treat Sadanaga as an employee during the years in issue.

                               OPINION

I.   Statutory and Regulatory Provisions

      A.   Subtitle C of the Internal Revenue Code

      Subtitle C of the Internal Revenue Code governs payment of

employment taxes.    In particular, sections 3111 and 3301 impose

taxes on employers under FICA (pertaining to Social Security) and
                                - 8 -

FUTA (pertaining to unemployment), respectively, based on wages

paid to employees.    The term “wages” as used in these statutes

generally encompasses “all remuneration for employment”.    Secs.

3121(a), 3306(b).    “Employee” is defined for purposes of FICA

taxes in section 3121(d), and, with modifications not germane

here, section 3306(i) makes this definition applicable for

purposes of FUTA taxes as well.    Section 3121(d) provides:

          SEC. 3121(d). Employee.--For purposes of this
     chapter, the term “employee” means--

               (1) any officer of a corporation; or

               (2) any individual who, under the usual
          common law rules applicable in determining the
          employer-employee relationship, has the status of
          an employee; or

               (3) any individual (other than an individual
          who is an employee under paragraph (1) or (2)) who
          performs services for remuneration for any
          person--

                    (A) as an agent-driver or commission-
               driver * * *;

                      (B) as a full-time insurance salesman;

                      (C) as a home worker * * *; or

                    (D) as a traveling or city salesman
               * * *;

          * * * [under specified conditions]; or

               (4) any individual who performs services that
          are included under an agreement entered into
          pursuant to section 218 of the Social Security
          Act.
                                - 9 -

     Regulations promulgated under section 3121(d) clarify the

scope of the inclusion in paragraph (1) for corporate officers,

as follows:

     Generally, an officer of a corporation is an employee
     of the corporation. However, an officer of a
     corporation who as such does not perform any services
     or performs only minor services and who neither
     receives nor is entitled to receive, directly or
     indirectly, any remuneration is considered not to be an
     employee of the corporation. * * * [Sec. 31.3121(d)-
     1(b), Employment Tax Regs.]

Identical language is also included in regulations promulgated

under section 3306.    Sec. 31.3306(i)-1(e), Employment Tax Regs.

     B.   Section 530 of the Revenue Act of 1978

     Section 530 operates in enumerated circumstances to afford

relief from employment tax liability, notwithstanding the actual

relationship between the taxpayer and the individual performing

services.    The statute provides, in part:

     SEC. 530. CONTROVERSIES INVOLVING WHETHER INDIVIDUALS
     ARE EMPLOYEES FOR PURPOSES OF THE EMPLOYMENT TAXES.

          (a) Termination of Certain Employment Tax
     Liability.--

            (1) In general.--If--

          (A) for purposes of employment taxes, the taxpayer
     did not treat an individual as an employee for any
     period, and

          (B) in the case of periods after December 31,
     1978, all Federal tax returns (including information
     returns) required to be filed by the taxpayer with
     respect to such individual for such period are filed on
     a basis consistent with the taxpayer’s treatment of
     such individual as not being an employee,
                              - 10 -

     then, for purposes of applying such taxes for such
     period with respect to the taxpayer, the individual
     shall be deemed not to be an employee unless the
     taxpayer had no reasonable basis for not treating such
     individual as an employee.

          (2) Statutory standards providing one method of
     satisfying the requirements of paragraph (1).-- For
     purposes of paragraph (1), a taxpayer shall in any case
     be treated as having a reasonable basis for not
     treating an individual as an employee for a period if
     the taxpayer’s treatment of such individual for such
     period was in reasonable reliance on any of the
     following:

          (A) judicial precedent, published rulings,
     technical advice with respect to the taxpayer, or a
     letter ruling to the taxpayer;

          (B) a past Internal Revenue Service audit of the
     taxpayer in which there was no assessment attributable
     to the treatment (for employment tax purposes) of the
     individuals holding positions substantially similar to
     the position held by this individual; or

          (C) long-standing recognized practice of a
     significant segment of the industry in which such
     individual was engaged.

     In specified circumstances, Section 530(e)(4) places the

burden of proof on the Commissioner with respect to certain

issues under Section 530, but this provision does not affect our

analysis here.   Section 530(e)(4) applies to periods after

December 31, 1996.   Small Business Job Protection Act of 1996,

Pub. L. 104-188, sec. 1122(b)(3), 110 Stat. 1767.   A taxpayer

desiring to take advantage of Section 530(e)(4) first must

establish a prima facie case that it was reasonable not to treat

an individual as an employee and must have fully cooperated with

the Secretary.   Because, as explained in detail below, petitioner
                                - 11 -

did not establish a prima facie case that its treatment of

Sadanaga was reasonable, the burden of proof remains on

petitioner.

II.   Classification of Sadanaga for Employment Tax Purposes

      A.   Status Under FICA and FUTA Provisions

      In contending that Sadanaga should not be classified as an

employee under the FICA and FUTA provisions of the Internal

Revenue Code, petitioner focuses on Sadanaga’s status as an

S corporation shareholder and alleged lack of status as a common

law employee.    We briefly address these contentions seriatim.

            1.   Contentions Regarding S Corporation Shareholders

      Petitioner cites sections 1366, 1372, and 6037(c) and

Durando v. United States, 70 F.3d 548 (9th Cir. 1995), presumably

in support of an argument that S corporation shareholders should

not be deemed employees.    Sections 1366 and 6037(c) generally

require that income items of S corporations be passed through to

shareholders on a pro rata basis and reported by such

shareholders in a manner consistent with treatment on the

corporate return.    These rules, however, pertain to calculation

of income tax liability under subtitle A and have no bearing on

computation of Federal employment taxes.     Veterinary Surgical

Consultants, P.C. v. Commissioner, 117 T.C. at 145.     Furthermore,

an employer cannot by the expedient of characterizing moneys paid

in remuneration for services as distributions of net income,
                                - 12 -

rather than as wages, avoid FICA and FUTA liabilities.     Id. at

145-146.   Thus, as in Veterinary Surgical Consultants, P.C. v.

Commissioner, supra at 145-146, and Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, 119 T.C. 121, 128 (2002), we

reject any suggestion that petitioner’s passing through of its

net income to Sadanaga precludes the finding of an employer-

employee relationship between petitioner and Sadanaga.    We

likewise reject as not germane to the question before us

petitioner’s reliance on section 1372, addressing fringe benefits

under subtitle A, and the reference to that statute in Durando v.

United States, supra at 551.    See Veterinary Surgical

Consultants, P.C. v. Commissioner, supra at 147-148, 150.

           2.   Contentions Regarding Common Law Employment

     Petitioner contends that “employee” as used throughout

section 3121(d) must be construed in a manner consistent with its

use in section 3121(d)(2), such that the usual common law rules

for determining existence of an employer-employee relationship

are to be taken into account.    In support of this position,

petitioner quotes the following passage from Tex. Carbonate Co.

v. Phinney, 307 F.2d 289, 291-292 (5th Cir. 1962):

          The statutory definition of “employees” as
     including officers of a corporation will not be so
     construed as to mean that an officer is an employee
     per se. Only such officers as work for it in fact are
     to be so included and, in determining whether an
     officer is an employee within the meaning of the
     statutes the usual employer-employee tests are to be
     applied. * * *
                               - 13 -

Petitioner further emphasizes that common law focuses on whether

the alleged employer held the right to control the details of the

work performed by the individual and argues that petitioner had

neither the authority nor the ability to exert control over

Sadanaga.   There exist, however, at least two fatal defects in

petitioner’s arguments in this regard.

     First, from the standpoint of statutory construction, the

premise underlying petitioner’s position finds no support either

in the structure of the text or in the Tex. Carbonate Co. v.

Phinney, supra, decision.    Section 3121(d) is written in the

disjunctive, with each of the four paragraphs expressly separated

from the next by “or”.   Accordingly, each paragraph affords a

separate and independent basis for deeming one engaged to perform

services an employee.    Individuals described in paragraphs (1),

(3), and (4) of section 3121(d) are therefore frequently referred

to as “statutory” employees, subject to FICA and FUTA regardless

of their status under common law.   See Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 126.

     Moreover, Tex. Carbonate Co. v. Phinney, supra, is not

authority to the contrary.   Significant regulatory and statutory

developments have occurred since the years in issue in that case.

Given that sections 31.3121(d)-1(b) and 31.3306(i)-1(e),

Employment Tax Regs., were promulgated after those years and that

the FUTA definition of “employee” then in effect appears to have
                               - 14 -

contemplated a corporate officer who could be an independent

contractor under common law, see, e.g., sec. 1607(i), I.R.C.

1939, the Court of Appeals’ statements concerning common law

rules “may no longer be relevant.”      Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 128 n.4.      The opinion

in Tex. Carbonate Co. v. Phinney, supra at 291, recognized that,

regardless of the test purportedly being applied, “such officers

as work for * * * [a corporation] in fact” are included as

employees.   The court also addressed the impact of an alleged

absence of control in that case, as follows:

     Even though an absence of control is shown, and this as
     we have noted has not been done, the force of the
     factor is diminished to near de minimis by the fact
     that * * * [the service provider] himself was a member
     of the Board of Directors, a Vice President, and the
     executive of the Company in charge of its sales and the
     development of its markets. * * * [Id. at 292.]

Hence, critical components of the analysis in Tex. Carbonate Co.

v. Phinney, supra, are consistent with the current regulatory

approach to officers and contrary to petitioner’s position.

     Second, from a factual standpoint, even if the common law

control factor were pertinent to our evaluation, petitioner has

failed to establish a lack of control over Sadanaga in the

performance of his services.   As in Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 128-129, to accept

petitioner’s contentions in this regard would be the equivalent

of disregarding the corporate form in which Sadanaga chose to
                               - 15 -

conduct his business.   Caselaw does not permit a taxpayer to use

his or her dual role as a shareholder of and service provider to

a corporation as grounds for ignoring the legal ramifications of

the business construct so selected.     Moline Props., Inc. v.

Commissioner, 319 U.S. 436, 438-439 (1943); Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 129.

          3.    Application of Section 3121(d)(1)

     On the basis of the foregoing analysis, the application of

section 3121(d)(1) is not precluded or limited here by

considerations pertaining to Sadanaga’s status as an

S corporation shareholder or under the common law.    Section

3121(d)(1) and sections 31.3121(d)-1(b) and 31.3306(i)-1(e),

Employment Tax Regs., specify that corporate officers are to be

classified as employees if they perform more than minor services

and receive or are entitled to receive remuneration.    The

overwhelming weight of the evidence here shows that Sadanaga’s

activities vis-a-vis petitioner met these criteria.

(Accordingly, considerations with respect to burden of proof do

not affect our analysis on this point.)    Sadanaga at all relevant

times served as petitioner’s president and worked in all aspects

of petitioner’s consulting, surgical, and day-to-day business

operations.    Sadanaga also obtained remuneration from petitioner

as his needs arose.
                              - 16 -

     Furthermore, although section 3121(d)(1) may be inapplicable

to the extent that an officer performs services in some other

capacity, i.e., as an independent contractor, petitioner has

offered no convincing evidence that Sadanaga worked for or was

engaged by petitioner in a capacity other than as an officer.

See Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119

T.C. at 129-130; Rev. Rul. 82-83, 1982-1 C.B. 151, 152.    The only

items referenced in the record that could suggest an independent

contractor relationship are the Forms 1099-MISC reporting

nonemployee compensation.   These documents are uncorroborated by

other evidence, such as a service agreement, and are entitled to

little weight.   See Joseph M. Grey Pub. Accountant, P.C. v.

Commissioner, supra at 130.   Hence, we conclude that Sadanaga was

an employee of petitioner for employment tax purposes, in

accordance with section 3121(d)(1).    (We also reject without

further discussion petitioner’s argument that Sadanaga falls

within an exception applicable only to paragraph (3) of section

3121(d).)

     B.   Availability of Section 530 Relief

     Section 530 affords relief from employment tax liability,

notwithstanding an adverse classification, where the following

three requirements are satisfied:   (1) The taxpayer has not

treated the individual, or any individual holding a substantially

similar position, as an employee for any period; (2) the taxpayer
                              - 17 -

has consistently treated the individual as not being an employee

on all tax returns for periods after December 31, 1978; and

(3) the taxpayer has a reasonable basis for not treating the

individual as an employee.   Sec. 530(a)(1), (3).    With respect to

the case at bar, respondent has conceded that petitioner meets

the first and second of the above requirements.     Rather, the

parties dispute whether petitioner had a reasonable basis for not

treating Sadanaga as an employee.

     Concerning the existence of a reasonable basis for purposes

of Section 530(a)(1), Section 530(a)(2) sets forth three

statutory safe havens.   Reliance upon any of the circumstances

enumerated in subparagraph (A), (B), or (C) of Section 530(a)(2)

is deemed sufficient to establish the requisite reasonable basis.

     Subparagraph (A) lists judicial precedent, published

rulings, technical advice with respect to the taxpayer, or a

letter ruling to the taxpayer.   The amended petition alleges:

          The Petitioner did not treat its sole shareholder,
     Kenneth K. Sadanaga, as an employee during any part of
     1997 and 1998, and reasonable basis exists for not
     treating Kenneth K. Sadanaga as an employee for the
     said periods based on a judicial precedent contained in
     the opinion of Texas Carbonate Company v. R.L. Phinney,
     307 F.2d 289 (5th Cir.), cert denied, 371 U.S. 940
     (1962) and based on the rules concerning the employer
     and employee relationship as outlined by the common
     law, as mentioned in Section 530 of the Revenue Act of
     1978 and I.R.C. Section 3121(d)(2).

On brief, petitioner reiterates reliance on Tex. Carbonate Co. v.

Phinney, 307 F.2d 289 (5th Cir. 1962), and cites as well to
                                - 18 -

Automated Typesetting, Inc. v. United States, 527 F. Supp. 515

(E.D. Wis. 1981), in support of the premise that petitioner

reasonably looked to common law control concepts in classifying

Sadanaga.

     For the reasons previously discussed, Tex. Carbonate Co. v.

Phinney, supra, does not afford a reasonable basis for disregard

of the explicit rules of section 3121(d)(1) and sections

31.3121(d)-1(b) and 31.3306(i)-1(e), Employment Tax Regs.    In

affirming our opinion in petitioner’s prior case, the Court of

Appeals ruled:

     Texas Carbonate is not authoritative and it does not
     support the taxpayers’ argument * * *. Thus, any
     reliance upon Texas Carbonate * * * was unreasonable,
     particularly in light of the subsequent decisions in
     Radtke * * * [Joseph Radtke, S.C. v. United States, 895
     F.2d 1196, 1197-1198 (7th Cir. 1990)], and Spicer
     Accounting * * * [Spicer Accounting, Inc. v. United
     States, 918 F.2d 90, 94-95 (9th Cir. 1990)]. Indeed,
     Spicer Accounting rejected the taxpayer’s argument that
     it had a reasonable basis for not treating its officer
     as an employee under Section 530 and should not be held
     liable. The court reasoned that Mr. Spicer was “for
     all practical purposes, the central worker for the
     taxpayer” and it declared that a “corporation’s sole
     full-time worker must be treated as an employee.” 918
     F.2d at 95. [Yeagle Drywall Co. v. Commissioner, 54
     Fed. Appx. at 104.]

     Equally unavailing in this regard is Automated Typesetting,

Inc. v. United States, supra.    The District Court in that case

simply evaluated the employment relationship of the involved

individuals both through a common law analysis and through

application of the provisions relating to corporate officers.
                              - 19 -

Id. at 519-522.   In deciding that the individuals qualified as

employees under either rubric, the court did not repudiate the

statutory treatment of corporate executives.    Id. at 520, 522;

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

supra at 129 n.5.

     Moreover, even if we were to assume arguendo that the cited

cases could offer a reasonable basis for treating an officer as a

nonemployee, petitioner has failed to establish reliance on the

claimed precedent as a factual matter.   To fall within the safe

harbors of Section 530(a)(2), the taxpayer must have relied on

the alleged authority during the periods in issue, at the time

the employment decisions were being made.   The statute does not

countenance ex post facto justification.    See 303 W. 42nd St.

Enters., Inc. v. IRS, 181 F.3d 272, 277, 279 (2d Cir. 1999)

(reversing and remanding because it was “unclear from the record

whether * * * [the taxpayer] in fact relied on any specific

industry practice in reaching its decision to treat its * * *

[workers] as non-employee tenants, let alone whether such

reliance was reasonable”); Select Rehab, Inc. v. United States,

205 F. Supp. 2d 376, 380 (M.D. Pa. 2002) (“The taxpayer must show

that it relied upon those grounds [alleged as a reasonable

basis], and that the reliance was reasonable.”); W. Va. Pers.

Servs., Inc. v. United States, 78 AFTR 2d 96-6600, at 96-6608,

96-2 USTC par. 50,554, at 85,919 (S.D. W. Va. 1996) (“The plain
                             - 20 -

meaning of section 530(a)(2) is that only evidence known to and

relied upon by the taxpayer is relevant.   Facts that are learned

after the incorrect treatment of the employees * * * are not

facts that a taxpayer relied upon in making its original decision

regarding how to treat its employees.”).

     Until a few months before trial, petitioner did not purport

to rely on Section 530 or the bases described therein and

expressly disclaimed any dependence on the statute.    Petitioner’s

present claim of reliance is not credible.   The following

colloquy transpired at trial between Sadanaga and counsel for

respondent:

     Q [Counsel for respondent]     Are you aware of the
     case of Texas Carbonate versus Phinney?

     A [Sadanaga]     No.

     Q    Have you ever discussed that case with anyone?

     A    Yes.

     Q    Who did you discuss the case with?

     A    It was just mentioned to me by my accountant.

     Q    Could you clarify “just mentioned to you”?

     A    He had mentioned it as incorporating it as
     evidence within this.

     Q    And that was today that you discussed it?

     A    No.

     Q    When did you discuss the case?

     A    Two or three months ago.
                                - 21 -

     Petitioner also called Grey, the accountant who advised

petitioner and prepared petitioner’s tax returns.    Grey was

permitted to testify in this case, despite petitioner’s failure

to list him as a witness in its trial memorandum, in the interest

of a complete record and because respondent had been given

sufficient warning and time to prepare.

     Grey explained that he had based his determination that

Sadanaga was not an employee on common law concepts pertaining to

the employment relationship, particularly the element of control.

As regards Section 530 and judicial precedent, Grey testified

that he was unaware of the Tex. Carbonate Co. v. Phinney, supra,

case until posttrial briefing, during the fall of 2001, in Joseph

M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. 121

(2002).    Hence, given the testimony that neither petitioner’s

sole shareholder and officer nor the accountant was familiar with

the alleged judicial authority at the time petitioner decided to

treat Sadanaga as a nonemployee for 1997 and 1998, petitioner has

failed to establish that it relied on judicial precedent or, for

that matter, on any of the other sources specified in Section

530(a)(2)(A).    Accordingly, we conclude that subparagraph (A)

does not aid petitioner here.

     The same result obtains with respect to subparagraphs (B)

and (C).    The parties have stipulated that respondent did not

audit petitioner for employment tax purposes prior to the
                              - 22 -

examination underlying Veterinary Surgical Consultants, P.C. v.

Commissioner, 117 T.C. 141 (2001), which, as here, challenged

petitioner’s treatment of Sadanaga as a nonemployee.   Petitioner

therefore cannot show reliance on a past audit under Section

530(a)(2)(B).   Likewise, petitioner has adduced no evidence of

conventions in the consulting and surgical industry to establish

longstanding industry practice under Section 530(a)(2)(C).   The

safe havens of Section 530(a)(2) are therefore inapplicable on

the record before us.

     In seeking to establish a reasonable basis for Sadanaga’s

treatment apart from the safe havens, petitioner quotes from the

following definition of “employment status” in Section 530(c)(2):

“The term ‘employment status’ means the status of an individual,

under the usual common law rules applicable in determining the

employer-employee relationship, as an employee or as an

independent contractor (or other individual who is not an

employee).”   Petitioner apparently believes that the purported

lack of common law control makes its treatment of Sadanaga

reasonable within the meaning of Section 530 and that the above

definition supports this view.

     Again, however, petitioner’s approach is contrary to

controlling statutes and to the facts of this case.    As a matter

of construction, Section 530(c)(2) defines employment status for

purposes of certain provisions of Section 530 not germane here.
                               - 23 -

It does not purport to override or interpret the definition of

“employee” in section 3121(d) and related regulations.    Hence,

Section 530(c)(2) does not render it rational for petitioner to

have ignored the statutory mandate regarding corporate officers

and to have taken a position that was not otherwise supported by

authority.    Petitioner also does not claim in actuality to have

relied on Section 530(c)(2) in deciding not to treat Sadanaga as

an employee in 1997 or 1998.    We conclude and have found as a

fact that petitioner did not have a reasonable basis for failing

to characterize Sadanaga as an employee.    Consequently, relief

from employment tax liability is not available to petitioner

under Section 530.

     Lastly, in connection with Section 530, petitioner raises a

due process argument.   This issue has never been properly pled by

petitioner.   Rather, petitioner mentioned due process in its

motion for leave to file an amended petition, did not allege a

due process violation in the amended petition itself, and argued

the matter only on brief.    Generally, issues not properly raised

prior to briefing will not be considered when to do so would

prevent the opposing party from presenting evidence that might

have been offered if the issue had been timely raised.    DiLeo v.

Commissioner, 96 T.C. 858, 891 (1991), affd. 959 F.2d 16 (2d Cir.

1992); Shelby U.S. Distribs., Inc. v. Commissioner, 71 T.C. 874,

885 (1979).    Here, however, even if we were to treat the due
                              - 24 -

process issue as appropriately before us, petitioner’s position

is without merit.

     Section 530(e)(1) provides that the Internal Revenue Service

“shall, before or at the commencement of any audit inquiry

relating to the employment status of one or more individuals who

perform services for the taxpayer, provide the taxpayer with a

written notice of the provisions of this section.”    Small

Business Job Protection Act of 1996 sec. 1122(a), 110 Stat. 1766.

On brief, petitioner alleges that it learned of the existence of

Section 530 only through the June 8, 2001, notice of

determination, which postdated by a substantial margin the

commencement in early 1999 of the underlying employment tax

audit.   Petitioner then states:

     The inaction of Respondent in not providing Petitioner
     with the required Section 530(e)(1) notice constitutes
     a serious Constitutional violation of due process
     rights guaranteed to Petitioner, and Petitioner moves
     this Court to allow it to recover its legal fees, since
     the conduct against Petitioner by Respondent is so
     egregious, and the basis of Respondent’s
     reclassification of Dr. Sadanaga as an employee of
     Petitioner is totally unreasonable and without merit.

     To the extent that petitioner’s due process contentions take

the form of a claim for litigation or administrative costs and

fees under section 7430, such claim is premature.    Rule

231(a)(2), as pertinent here, specifies that the appropriate time

to seek recovery of legal costs follows service of a written
                                - 25 -

opinion.   See McWilliams v. Commissioner, 104 T.C. 320, 327

(1995); Groetzinger v. Commissioner, 87 T.C. 533, 548 (1986).

     Furthermore, even if petitioner’s allegations might be read

as a plea encompassing other remedies, petitioner has failed to

show that its situation satisfies the prerequisites for relief

under the Due Process Clause.    As this Court has noted, even in a

criminal context defendants are generally required to establish

actual prejudice in order to obtain due process relief.     Riland

v. Commissioner, 79 T.C. 185, 197-198 (1982) (involving a claimed

denial of due process on account of delay in issuance of the

subject deficiency notice).   The record in the instant case is

devoid of evidence of such prejudice.     Although petitioner was

made aware of Section 530 at least prior to filing its petition

with the Court, petitioner failed therein to raise the statute.

Nonetheless, petitioner was subsequently granted leave to file an

amended petition specifically to place at issue its right to

relief under Section 530.   The matter (of substantive relief

under Section 530(a), not, as previously noted, of a due process

violation based on Section 530(e)(1) notice procedures) therefore

was properly before the Court at trial, and petitioner was

afforded an opportunity to be heard.     Accordingly, no actual

prejudice was sustained.

     The above analysis is consistent with our recent

jurisprudence on the notice provision contained in section
                               - 26 -

3463(a) of the Internal Revenue Service Restructuring and Reform

Act of 1998, Pub. L. 105-206, 112 Stat. 767.   In Smith v.

Commissioner, 114 T.C. 489 (2000), affd. 275 F.3d 912 (10th Cir.

2001), we considered this requirement that the Commissioner

include on each notice of deficiency the last date for filing a

petition with the Tax Court.   We held that, where the

Commissioner failed to place such date on the notice, but the

taxpayers nonetheless received the notice and filed a petition in

a timely manner, the notice was valid.   Id. at 492.     In so

holding, we noted the absence of any delay prejudicial to the

taxpayers’ ability to petition the Court.   Id. at 491-492.

     Thus, failure to comply with certain procedural notice

requirements does not rise to the level of a denial of due

process where, as here, the taxpayer’s opportunity to present its

position is not prejudiced.

     C.   Conclusion

     We hold that Sadanaga is an employee of petitioner pursuant

to section 3121(d)(1) and that petitioner is not entitled to

relief under Section 530.   Accordingly, petitioner is liable for

FICA and FUTA taxes for the periods in issue as set forth in

respondent’s notice of determination and relevant stipulations.

Furthermore, given this result compelled by the facts before us,

it is unnecessary to reach respondent’s additional contention

that petitioner should in any event be precluded from challenging
                             - 27 -

the employment taxes at issue under the doctrine of collateral

estoppel.

     To reflect the foregoing,


                                      Decision will be entered for

                                 respondent and in accordance with

                                 stipulations as to amounts.
