                        T.C. Memo. 2003-51



                      UNITED STATES TAX COURT



  SPECIALTY TRANSPORT & DELIVERY SERVICES, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10261-01.          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 1996, 1997, and 1998.     The issues for decision
                                - 2 -

are:    (1) Whether John F. Ludlow (Ludlow) was an employee of

petitioner for Federal employment tax purposes during 1996

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

       Ludlow has been in the business of providing hauling

services since 1973.    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, since the trucking

business involves a high degree of potential liability in the

event of an accident.    Petitioner was incorporated in

Pennsylvania on March 9, 1989, and has at all relevant times
                                - 3 -

operated as an S corporation.    Petitioner’s principal place of

business has been located in Levittown, Pennsylvania, at the

address of Ludlow’s personal residence, from the time of its

incorporation to the present.

     Since its organization, petitioner has provided pickup and

delivery services to distributors, wholesalers, and manufacturers

of steel, steel coil, and steel-related products.    This activity

was and is petitioner’s only business and only source of income.

Ludlow has been the sole shareholder of petitioner from the time

of its incorporation and throughout 1996, 1997, and 1998.

     Ludlow 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, Ludlow was elected president, vice president, secretary,

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

During 1996, 1997, and 1998, Ludlow performed the following

services for petitioner:    (1) Ordered and purchased supplies on

behalf of petitioner; (2) entered into verbal and/or written

agreements on behalf of petitioner; (3) oversaw the finances of

petitioner; (4) collected moneys owed petitioner; (5) managed

petitioner; (6) maintained customer satisfaction; (7) performed

all bookkeeping services for petitioner, with assistance from his

spouse, Sharon Ludlow, from time to time; and (8) performed all
                               - 4 -

pickup and delivery services for clients on behalf of petitioner.

No other person provided any services to petitioner.

     During the period in issue, petitioner received client

referrals from Pyle Transport Services, Inc. (Pyle Transport), of

West Chester, Pennsylvania.   Ludlow performed services on behalf

of petitioner pursuant to an “Independent Contractor Service

Agreement” between petitioner and Pyle Transport, dated March 25,

1993, and identifying Ludlow as the driver for petitioner.

     During 1996, 1997, and 1998, petitioner maintained a

business/commercial checking account.   Ludlow shared signature

authority on petitioner’s account with his spouse.   Petitioner

did not make regular payments at fixed times to Ludlow for his

services.   Rather, Ludlow, or his wife, obtained funds from

petitioner’s bank account to pay Ludlow as his needs arose.

Petitioner neither classified any payment as a dividend nor

distributed any dividends to shareholders from 1996 through 1998.

Petitioner’s Tax Reporting

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

for an S Corporation, and related schedules, for 1989 through

1995.   On these returns, petitioner did not report treating

Ludlow, or any other individual, as an employee of petitioner.

     Petitioner filed a Form 1120S for each of the years 1996,

1997, and 1998.   Petitioner reported ordinary income from its

trade or business of $15,605.36, $27,362.14, and $38,486.89 for
                              - 5 -

1996, 1997, and 1998, respectively.   Petitioner claimed no

deduction either for compensation of officers or for salaries and

wages in 1996 or 1997; for 1998, petitioner’s return reflects a

deduction of $15,000 for compensation of officers.   Schedules K-

1, Shareholder’s Share of Income, Credits, Deductions, etc.,

attached to the returns show $15,605.36 for 1996, $27,362.14 for

1997, and $38,486.89 for 1998 as the pro rata share of, and as a

property distribution other than a dividend to, Ludlow.

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

by Joseph M. Grey (Grey) as preparer.

     During the period from 1996 to 1998, petitioner did not

issue any Forms W-2, Wage and Tax Statement, to Ludlow.

Petitioner also did not issue any Forms 1099-MISC, Miscellaneous

Income, to Ludlow in 1996 or 1997.    In 1998, petitioner issued a

Form 1099-MISC to Ludlow for $15,000 “non-employee compensation”

and $7,200 “rents” for the use of Ludlow’s residence as a

business office for petitioner.    Since petitioner’s incorporation

in 1989, petitioner has not reported paying Ludlow a salary or

wages for work he performed on behalf of petitioner.

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

Federal Tax Return, for any quarter in 1996, 1997, or 1998 or a

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

Return, for 1996, 1997, or 1998.
                                - 6 -

The Ludlows’ Tax Reporting

     For each of the years 1996, 1997, and 1998, Ludlow and his

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

Return.   On these returns, the Ludlows reported as ordinary

income from “Rental real estate, royalties, partnerships,

S corporations, trusts, etc.” $15,605.36, $27,362.14, and

$45,686.89 for 1996, 1997, and 1998, respectively.    For 1996 and

1997, attached Schedules E, Supplemental Income and Loss,

characterize the foregoing amounts as nonpassive income from

Schedules K-1.   For 1998, $38,486.89 is shown on Schedule E as

nonpassive income from Schedules K-1; $7,200 is shown on

Schedule E and on Form 4831, Rental Income, as rent; and $15,000

is shown on Schedule C, Profit or Loss From Business, as gross

receipts.   (Although a deemed stipulation states that $45,686.89

was reported on the 1998 Schedule E as nonpassive income from

Schedules K-1, a subsequent stipulation and documentary evidence

reveal the allocation above.)

The Notice of Determination

     Prior to the audit underlying the instant case covering

1996, 1997, and 1998, respondent neither audited petitioner for

employment tax purposes nor challenged petitioner’s treatment of

Ludlow as other than an employee.    Thereafter, on June 8, 2001,

respondent sent to petitioner the notice of determination at

issue in this proceeding.    The notice was based on a
                                - 7 -

determination that Ludlow 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 Ludlow is

to be classified as an employee for Federal employment tax

purposes for all periods in 1996, 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 Ludlow

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

      Ludlow, as president of petitioner, performed more than

minor services and received remuneration therefor.

      Petitioner did not have a reasonable basis for failing to

treat Ludlow 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 only to periods after

December 31, 1996, so has no bearing on petitioner’s liabilities

for 1996.   Small Business Job Protection Act of 1996, Pub. L.

104-188, sec. 1122(b)(3), 110 Stat. 1767.   For subsequent

periods, 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
                                - 11 -

have fully cooperated with the Secretary.    Because, as explained

in detail below, petitioner did not establish a prima facie case

that its treatment of Ludlow was reasonable, the burden of proof

remains on petitioner with respect to 1997 and 1998 as well.

II.   Classification of Ludlow for Employment Tax Purposes

      A.   Status Under FICA and FUTA Provisions

      In contending that Ludlow should not be classified as an

employee under the FICA and FUTA provisions of the Internal

Revenue Code, petitioner focuses on Ludlow’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. 141, 145 (2001),

affd. sub nom. Yeagle Drywall Co. v. Commissioner, 54 Fed. Appx.
                                - 12 -

100 (3d Cir. 2002).   Furthermore, an employer cannot by the

expedient of characterizing moneys paid in remuneration for

services as distributions of net income, 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 Ludlow

precludes the finding of an employer-employee relationship

between petitioner and Ludlow.    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
                               - 13 -

     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. * * *

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

Ludlow.   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.
                               - 14 -

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

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 Ludlow in the

performance of his services.   As in Joseph M. Grey Pub.
                               - 15 -

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 Ludlow chose to

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, application of

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

considerations pertaining to Ludlow’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 Ludlow’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.)   Ludlow at all relevant times served as petitioner’s

president and worked in all aspects of petitioner’s delivery
                              - 16 -

operations.   Ludlow also obtained remuneration from petitioner’s

bank account as his needs arose.

     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 Ludlow 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

item referenced in the record that could suggest an independent

contractor relationship is the Form 1099-MISC reporting

nonemployee compensation for 1998.     This document is

uncorroborated by other evidence, such as a service agreement,

and is entitled to little weight.    See Joseph M. Grey Pub.

Accountant, P.C. v. Commissioner, supra at 130.     Hence, we

conclude that Ludlow was an employee of petitioner for employment

tax purposes, in accordance with section 3121(d)(1).

     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

has consistently treated the individual as not being an employee
                              - 17 -

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 of the above requirements.   As regards the second,

respondent contends that petitioner did not meet this reporting

requirement for 1996 and 1997, but, because of the Form 1099-

MISC, respondent does not argue that a similar failure exists for

1998.   The third requirement is in dispute for each 1996 through

1998, and, since lack of a reasonable basis for not treating

Ludlow as an employee will render Section 530 relief unavailable

for all years, without regard to the other criteria, we begin

with this element.

     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 relies on judicial precedent as its
     reasonable basis for not treating John F. Ludlow, its
     sole shareholder and president, as an employee during
     any part of 1996, 1997 and 1998; said judicial
     precedent is Texas Carbonate Company v. R.L. Phinney,
                              - 18 -

     307 F.2d 289 (5th Cir.), cert denied, 371 U.S. 940
     (1962).

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

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

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

Ludlow.

     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.

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.   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
                             - 19 -

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

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
                                - 20 -

colloquy transpired at trial between Ludlow and counsel for

respondent:

     Q [Counsel for respondent]     Are you familiar with
     the case, Texas Carbonate versus Phinney?

     A [Ludlow]       No.

     Q     Have you ever discussed that case with anyone?

     A     No.

     Petitioner proposed to call Grey, the accountant who advised

petitioner and prepared petitioner’s tax returns.     Grey was not

allowed to testify in this case because he had not been listed as

a witness in petitioner’s trial memorandum, in violation of this

Court’s Standing Pre-Trial Order.     See Rule 131(b).   His

testimony, in any event, would not have made a difference.     See

Veterinary Surgical Consultants, P.C. v. Commissioner, T.C. Memo.

2003-48 (where 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)).     Petitioner 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
                              - 21 -

examination underlying the present case.   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 hauling 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 Ludlow’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 Ludlow

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.

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
                               - 22 -

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 Ludlow as an

employee in 1996, 1997, or 1998.    We conclude and have found as a

fact that petitioner did not have a reasonable basis for failing

to characterize Ludlow 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

process issue as appropriately before us, petitioner’s position

is without merit.
                              - 23 -

     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 on July 2, 1999, of the underlying employment tax

audit.   Petitioner then states:

     The inaction of Respondent in not providing Petitioner
     with the required Sect. 530(e)(1) notice constitutes a
     serious Constitutional violation of Petitioner’s right
     to due process, and Petitioner moves this Court to
     allow it to recover its legal fees, since the conduct
     of Respondent is so egregious against the Petitioner.

     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

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
                                - 24 -

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

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
                                - 25 -

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 Ludlow 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.

     To reflect the foregoing,


                                      Decision will be entered for

                                 respondent and in accordance with

                                 stipulations as to amounts.
