                        T.C. Memo. 2001-284



                      UNITED STATES TAX COURT



          YEAGLE DRYWALL COMPANY, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3908-00.                     Filed October 15, 2001.


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

     Linda P. Azmon, for respondent.



                        MEMORANDUM OPINION


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

for redetermination of a Notice of Determination Concerning Worker

Classification Under Section 7436 (Notice of Determination).     It

was submitted to the Court fully stipulated under Rule 122.     The
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sole issue to be decided is whether John G. Yeagle (Mr. Yeagle) is

an employee of petitioner for the period at issue (each of the four

quarters   of   1995,   1996,    and    1997)    for    purposes    of   Federal

employment taxes.1

     Rule references are to the Tax Court Rules of Practice and

Procedure, and except as otherwise noted, section references are to

the Internal Revenue Code in effect for the years at issue.

                                 Background

     The   stipulation   of     facts   and     the    attached    exhibits   are

incorporated herein.       The stipulated facts are hereby found.

     Petitioner is an S corporation that was incorporated in

Pennsylvania on October 2, 1989.           At the time the petition was

filed, petitioner’s principal place of business was in Quakertown,

Pennsylvania.   Petitioner operates a drywall construction business

that is the sole source of petitioner’s income.             Mr. Yeagle owns 99

percent of petitioner’s stock.          Mr. Yeagle’s wife, Terree Yeagle

(Mrs. Yeagle), owns the remaining 1 percent.               Since petitioner’s

incorporation, Mr. Yeagle has been its president, and Mrs. Yeagle

has been its vice president and secretary.

     Mr. Yeagle performs many services for petitioner, including

soliciting business, ordering supplies, entering into oral and


     1
          For convenience, we use the term "Federal employment
tax" to refer to taxes under secs. 3101-3125 (enacted as Federal
Insurance Contributions Act (FICA), ch. 9, 53 Stat. 175 (1939))
and secs. 3301-3311 (enacted as Federal Unemployment Tax Act
(FUTA), ch. 9, 53 Stat. 183 (1939)).
                                   - 3 -

written agreements, overseeing finances, collecting money owed to

petitioner, hiring and firing independent contractors, obtaining

clients, maintaining client relationships, and generally managing

petitioner’s business affairs.

      During the period at issue, all payments made to petitioner

were deposited into petitioner’s checking account.            Mr. Yeagle is

the only person with signature authority on petitioner’s bank

account.   Petitioner did not make regular payments to Mr. Yeagle;

Mr. Yeagle withdrew money from petitioner’s bank account at his

discretion.       Mr.   Yeagle   also     paid   personal    expenses   from

petitioner’s bank account at his discretion.           Mr. Yeagle did not

receive any wages, salary, or tips from any other business entity,

or income from any other S corporation during 1995, 1996, and 1997.

      During the period at issue, petitioner did not treat any

individual, including Mr. Yeagle, as an employee, and it did not

file a Form 941, Employer’s Quarterly Federal Tax Return, or a Form

940, Employer’s Annual Federal Unemployment Tax Return, for any

quarter during the period at issue. Petitioner treated individuals

who   performed   services   for    it,    other   than     Mr.   Yeagle,   as

independent contractors and issued Forms 1099-MISC, Miscellaneous

Income, to those individuals.           Petitioner did not issue a Form

1099-MISC or a Form W-2, Wage and Tax Statement, to Mr. Yeagle for

1995, 1996, or 1997.
                                    - 4 -

     On Forms 1120S, U.S. Income Tax Return for an S Corporation,

petitioner reported net income from its trade or business for 1995,

1996,    and   1997,   in   the   respective   amounts   of   $26,711.08,

$32,973.39, and $34,508.90.       Petitioner paid these amounts to Mr.

Yeagle and reported these amounts as the Yeagles’ share of its

income on Schedules K-1, Shareholders’ Shares of Income, Credits,

Deductions, etc., of the Forms 1120S.2

     During 1995, 1996, and 1997, petitioner distributed all of its

net income to the Yeagles.        Petitioner reported on Schedules M-2,

Analysis of Accumulated Adjustments Account, Other Adjustments

Account, and Shareholders’ Undistributed Taxable Income Previously

Taxed, of the Forms 1120S that the amounts it paid to the Yeagles

were distributions other than dividend distributions paid from

accumulated earnings and profits.

     The Yeagles timely filed        Forms 1040, U.S. Individual Income

Tax Returns for 1995, 1996, and 1997.       On Schedules E, Supplemental

Income and Loss, of the Yeagles’ Forms 1040, they reported their

share of petitioner’s income (as indicated on Schedules K-1) as

nonpassive income from an S corporation.

     On February 23, 2000, respondent issued to petitioner a Notice

of Determination, in which respondent determined that (1) Mr.

Yeagle was petitioner’s employee for purposes of Federal employment



     2
          Petitioner did not allocate the income between Mr. and
Mrs. Yeagle.
                                       - 5 -

taxes, and (2) petitioner was not entitled to “safe harbor” relief

from these taxes as provided by section 530 of the Revenue Act of

1978, Pub. L. 95-600, 92 Stat. 2885 (Section 530).              Attached to the

Notice of Determination was a schedule detailing the amount of the

proposed Federal employment taxes.              Thereafter, petitioner filed

with the Court a timely petition seeking our review of respondent’s

Notice of Determination.

                                    Discussion

      Petitioner contends that Mr. Yeagle was not its employee and

that it properly distributed its net income to the Yeagles, as its

only shareholders, pursuant to section 1366.                On the other hand,

respondent contends that Mr. Yeagle was an employee of petitioner

because he was an officer of petitioner and performed substantial

services on petitioner’s behalf.

      Sections 3111 and 3301 impose FICA (social security) and FUTA

(unemployment)      taxes      on   employers    for   wages    paid    to   their

employees.      An officer of a corporation, "who performs substantial

services for a corporation and who receives remuneration in any

form for those services is considered an employee, whose wages are

subject    to    Federal    employment     taxes."         Veterinary   Surgical

Consultants, P.C. v. Commissioner, 117 T.C. ___, ___ (2001) (slip

op.   at   7);    see   also    sec.    3121(d);    sec.    31.3121(d)-(1)(b),

Employment Tax Regs.
                                     - 6 -

     With respect to the case at hand, Mr. Yeagle is an officer of

petitioner   who   performed    substantial      services       for    petitioner,

including soliciting business, ordering supplies, entering into

oral and written agreements, overseeing finances, collecting money

owed to petitioner, hiring and firing independent contractors,

obtaining clients, maintaining client relationships, and generally

managing petitioner’s business affairs. Petitioner distributed all

of its net income to the Yeagles.                Those distributions were

compensation for the services provided to petitioner by Mr. Yeagle.

     Petitioner contends that the amounts paid to Mr. Yeagle were

distributions of its corporate net income, rather than wages, and

that Mr. Yeagle properly reported the net income as nonpassive

income from an S corporation on his Forms 1040.                       Mr. Yeagle’s

reporting    the   distributions     as    nonpassive      income      from   an   S

corporation has no bearing on the Federal employment tax treatment

of   those   wages.     Veterinary        Surgical    Consultants,        P.C.     v.

Commissioner, supra at ___ (slip op. at 8).                 We hold that Mr.

Yeagle is an employee of petitioner for the period at issue and, as

such, the payments to him from petitioner constitute wages subject

to Federal employment taxes.

     Despite our determination that Mr. Yeagle is an employee of

petitioner and that the payments to him from petitioner are wages

subject to Federal employment taxes, Section 530 allows petitioner

relief   from   employment     tax   liability       if   two   conditions       are
                                      - 7 -

satisfied.       Section 530(a)(1) provides in relevant part:

     (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,

     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.

     Here,       the    first   of   the   two    conditions      is     satisfied.

Petitioner did not treat Mr. Yeagle as an employee during the

period in issue. Since its incorporation, petitioner filed its tax

returns reflecting all withdrawals by Mr. Yeagle as distributions

of petitioner’s net income, not wages.

     However, the second condition of Section 530(a)(1) is not

satisfied because petitioner had no reasonable basis for not

treating Mr. Yeagle as an employee.                 For purposes of Section

530(a)(1), a taxpayer is treated as having a reasonable basis for

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

treatment of the individual was in reasonable reliance of judicial

precedent, published rulings, technical advice with respect to the

taxpayer,    a    letter    ruling    to   the    taxpayer,      or    longstanding
                                    - 8 -

recognized practice of a significant segment of the industry in

which the individual was engaged.           Section 530(a)(2); see also

Veterinary Surgical Consultants, P.C. v. Commissioner, supra at___

(slip op. at 10-11); Rev. Proc. 85-18, 1985-1 C.B. 518.

      Petitioner cites to the identical cases and ruling addressed

in   Veterinary Surgical Consultants, P.C. v. Commissioner, supra,

and makes the same arguments as those made by the taxpayer in that

case.     For the reasons set forth in that opinion, we find that

petitioner did not have a reasonable basis for not treating Mr.

Yeagle as an employee.

      In this case, respondent’s position is supported by the plain

language of the statute, the applicable Treasury regulations,

published revenue rulings, and cases interpreting the applicable

statutes. Petitioner’s position is inconsistent with the weight of

authority.

      We have considered all of petitioner’s arguments, and, to the

extent not specifically addressed, we find them unpersuasive or

irrelevant.

                             _______________

      After the petition was filed in this case, Congress amended

section    7436(a)   to   provide   this    Court   with   jurisdiction   to

determine the correct amounts of Federal employment taxes that

relate    to   the   Secretary’s     determination     concerning   worker

classification.      See Community Renewal Tax Relief Act of 2000
                                       - 9 -

(CRTRA), Pub. L. 106-554, sec. 314(f), 114 Stat. 2763A-643.                   That

amendment was made retroactive to the effective date of section

7436(a).    CRTRA sec. 314(g), 114 Stat. 2763A-643.

      The parties filed a Stipulation of Settled Issues setting

forth the      proper   amount    of   Federal     employment     taxes   owed   by

petitioner in the event we find that Mr. Yeagle is petitioner’s

employee for purposes of Federal employment taxes (which we do).

The   amount    so   stipulated    will   be     reflected   in    our    decision

document.

      To reflect the foregoing,



                                                    Decision will be entered

                                               for respondent and in accordance

                                               with the parties’ stipulations

                                               as to amounts.
