                         T.C. Memo. 1997-427



                       UNITED STATES TAX COURT



            HARISH K. AND MAGGY M. PARIANI, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12477-95.               Filed September 22, 1997.



     Abhijit Modak, for petitioners.

     Christina D. Moss and David W. Johnson, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:    Respondent determined the following

deficiencies in petitioners' Federal income taxes and the

following accuracy-related penalties:

                                          Accuracy-Related Penalty
     Year                Deficiency              Sec. 6662(a)
     1989                  $3,107                     $621
     1992                  15,017                    3,003
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Unless otherwise noted, 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.

     After a concession by petitioners, we must decide the

following issues:

     (1) Whether, during the years in issue, petitioner Harish K.

Pariani was an employee or an independent contractor of his

wholly owned professional association for Federal income tax

purposes.    We hold that he was an employee.

     (2) Whether petitioners are liable for the accuracy-related

penalties as determined by respondent.    We hold that they are so

liable.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.    We

incorporate by this reference the stipulation of facts, first

supplemental stipulation of facts, and attached exhibits.    At the

time of filing the petition, petitioners resided in Humble,

Texas.

The Professional Association

     Petitioner Harish K. Pariani (Dr. Pariani) is a doctor of

medicine.    In 1982, Dr. Pariani organized, under the laws of the

State of Texas, a professional association called Harish K.
                                - 3 -


Pariani, M.D., P.A. (the Association).   During the years in issue

and during all times relevant to this case, Dr. Pariani was the

sole shareholder and president of the Association, performed

medical services for the Association, and had no supervisors.

Further, Dr. Pariani exercised supervision over the Association's

day-to-day affairs, and he was the only individual who

supervised, controlled, and directed the business of the

Association, including the making of management decisions.    Also,

Dr. Pariani had authority to sign corporate checks on behalf of

the Association.   Other doctors occasionally performed medical

services for the Association.

     Asit Modak served as bookkeeper for Dr. Pariani starting in

1978, and also for the Association from its inception in 1982,

through the years in issue.   He also prepared the tax returns of

the Association and of petitioners personally.

Tax Returns

     On their 1989 tax returns, the Association and petitioners

were not consistent with respect to the way in which they

reported the compensation paid to Dr. Pariani.   The Association

paid $51,418 to Dr. Pariani and deducted this amount as

compensation of officers.   However, petitioners reported $51,418

as income from a sole proprietorship (i.e., self-employment

income).   On its 1992 return, the Association reported that it

paid $8,000 to Dr. Pariani and deducted this amount as
                                 - 4 -


compensation of officers.    In addition, the Association paid

$178,857 to Dr. Pariani for medical professional services

performed by him and deducted this amount under the heading

"other deductions".     Petitioners reported wages of $19,631, which

included the $8,000 paid by the Association and $11,631 of Mrs.

Pariani's wages.   Petitioners reported $178,857 as income from a

sole proprietorship.1    The Association paid $40,090 to persons

other than Dr. Pariani for medical professional services and

deducted this amount under the heading "other deductions".

Information Returns

     For the 1989 tax year, no Forms W-2 or Forms 1099 were

issued to Dr. Pariani by the Association or by any other person.

For the 1992 tax year, the Association issued a Form W-2 to Dr.

Pariani showing $8,000 paid as compensation of officers.    No

other Forms W-2, and no Forms 1099, were issued to Dr. Pariani by

the Association or by any other person for 1992.    However, the

Association issued Forms 1099 to 13 other individuals, at least

one of whom was a doctor, for 1992.

                                OPINION

Evidentiary Matters

     Petitioners did not appear or testify at the trial of this

case and called only one witness, Asit Modak, who was the

     1
       The Association did not include the payment of $178,857 in
its reportable wages on any Form 941, Employer's Quarterly
Federal Tax Return, filed for 1992.
                                 - 5 -


bookkeeper for petitioners and the Association for the years in

issue and several years prior.    At trial, respondent made various

objections to portions of Mr. Modak's testimony, based on lack of

personal knowledge,2 relevance, and hearsay, on which we deferred

ruling.   We hereby overrule those objections and admit the

challenged testimony.

Employee or Independent Contractor

     The first issue is whether Dr. Pariani provided services to

the Association as an employee or as an independent contractor.

If Dr. Pariani was an employee of the Association, several

consequences follow.    First, petitioners may not deduct

contributions to a Keogh plan.    See secs. 401(c)(1),

404(a)(8)(C), 1402(a), (c); Jacobs v. Commissioner, T.C. Memo.

1993-570.   Second, petitioners are liable for the 10-percent

excise tax on the nondeductible contributions.    Sec. 4972(a); see

Frick v. Commissioner, T.C. Memo. 1989-86, affd. without

published opinion 916 F.2d 715 (7th Cir. 1990).    Finally,

petitioners are not liable for the tax on self-employment income,

and in 1992 would not be entitled to the deduction for one-half

of self-employment tax.    Secs. 1401(a), 1402(b), 164(f).    This

Court has described the question of whether a taxpayer is an


     2
       We conclude that Mr. Modak's longstanding relationship
with Dr. Pariani and the Association as bookkeeper and tax return
preparer for both gave him sufficient personal knowledge to
testify with respect to the matters challenged by respondent.
                                - 6 -


employee or an independent contractor as a question of fact.

Weber v. Commissioner, 103 T.C. 378, 386 (1994), affd. per curiam

60 F.3d 1104 (4th Cir. 1995).    However, the Court of Appeals for

the Fifth Circuit, to which an appeal in this case would lie, has

held that the determination of employment status is a question of

law.    Breaux & Daigle, Inc. v. United States, 900 F.2d 49, 51

(5th Cir. 1990).    In any event, petitioners have the burden of

proof.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).

       The definition of "employee" found in section 3121(d) that

applies for purposes of the Federal Insurance Contributions Act

also applies to the issues involved in this case; namely the tax

on self-employment income and the deductibility of contributions

to a Keogh plan.    Secs. 1402(d), 401(c), 404(a)(8)(A).   Section

3121(d) provides:

       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; * * *

Respondent argues that Dr. Pariani was an employee both under

section 3121(d)(1), because he was an officer of the Association,

and under the common law test incorporated in section 3121(d)(2).

Although petitioners appear to concede that Dr. Pariani was an

employee of the Association with respect to his duties as
                               - 7 -


president,3 they argue that he was an independent contractor with

respect to the medical services he provided to the Association.

     Dr. Pariani was an officer of the Association and therefore

an employee under the general rule of section 3121(d)(1).

Although the regulations under section 3121(d) provide an

exception to this general rule, for corporate officers who as

such do not perform more than minor services or receive any

compensation, sec. 31.3121(d)-1(b), Employment Tax Regs., Dr.

Pariani does not qualify for this exception because he performed

substantial services for and received compensation from the

Association.

     With respect to the medical services Dr. Pariani provided to

the Association, we look to the common law test incorporated in

section 3121(d)(2).   Under the common law test, we examine

numerous factors to decide whether an individual is an

independent contractor or common law employee, among which are

the following:   (1) The degree of control exercised by the

principal over the details of the work; (2) which party invests

in the facilities used in the work; (3) the opportunity of the

individual for profit or loss; (4) whether the principal has the

right to discharge the individual; (5) whether the work is part

of the principal's regular business; (6) the permanency of the


     3
       On brief petitioners characterize the amounts received by
Dr. Pariani with respect to his managerial duties as "wages".
                               - 8 -


relationship; (7) the relationship the parties believe they are

creating; and (8) whether fringe benefits are provided.     Weber v.

Commissioner, supra at 387; Lozon v. Commissioner, T.C. Memo.

1997-250.   Other relevant factors are (9) the degree of skill

required on the part of the worker, and (10) whether the worker

makes his services available to more than one company and to the

general public.   Breaux & Daigle, Inc. v. United States, supra at

51; Jacobs v. Commissioner, supra.

     In this case, the degree of control exercised by the

principal is of little or no relevance since the worker, Dr.

Pariani, is president and sole shareholder and therefore controls

the principal, the Association.   Jacobs v. Commissioner, supra.

On the basis of the remaining factors, we conclude that Dr.

Pariani was an employee rather than an independent contractor.

Dr. Pariani had a permanent relationship with the Association.

The Association's line of business was the provision of medical

services, and the work Dr. Pariani performed was not just part of

this line of business but coterminous with it.    Dr. Pariani was

integral to the Association's business; in 1992, his compensation

for medical services was over four times as great as the

compensation paid to all other providers of medical services.

His services were essential to the Association.   See Weber v.

Commissioner, supra at 391; Jacobs v. Commissioner, supra.

Although he was not the sole provider of medical services, he was
                                - 9 -


the key worker.    See Spicer Accounting, Inc. v. United States,

918 F.2d 90, 94 (9th Cir. 1990).   There is no evidence that Dr.

Pariani made his services available to another company or to the

general public.4   The only factor that weighs in favor of finding

that Dr. Pariani was an independent contractor is the fact that

the type of work that he provided, medical services, requires a

high degree of skill.   Considering all the facts and

circumstances, we conclude that Dr. Pariani was an employee of

the Association under the common law rules.

     Petitioners offered no evidence or argument that Dr. Pariani

qualifies as an independent contractor under the common law

standard.   Rather, petitioners rely on section 530 of the Revenue

Act of 1978 (Section 530)5 for their position that Dr. Pariani

was an independent contractor rather than an employee.


     4
       Asit Modak testified that Dr. Pariani performed services
in the emergency room at York Plaza Hospital (the Hospital) "up
to 1989". Whether this includes 1989 or not, there is no
evidence that Dr. Pariani was paid by the Hospital, or that he
had a contract to work for the Hospital. He did not receive a
Form W-2 or a Form 1099 from the Hospital. Moreover, if there
was an arrangement with the Hospital, it could have been with the
Association rather than with Dr. Pariani, in which case any
services that Dr. Pariani performed at the Hospital might have
been services performed for the Association.
     5
       All references to sec. 530 of the Revenue Act of 1978,
Pub. L. 95-600, 92 Stat. 2763, 2885, are to that section as
amended and in effect for the years in issue. Sec. 530 of the
Revenue Act of 1978 was originally an interim relief provision
that was eventually extended indefinitely by sec. 269(c) of the
Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248,
96 Stat. 324, 552.
                              - 10 -


Respondent makes two arguments in response:   First, respondent

argues that petitioners may not invoke Section 530 because its

relief is available only to employers with respect to their

liability for subtitle C employment taxes, and Dr. Pariani was

not an employer so liable.   Second, respondent argues that, even

if petitioners could invoke Section 530, the threshold

requirements of that section have not been satisfied.    We agree

with respondent.

     Section 530 by its clear terms has limited application.      The

section designates certain circumstances where an "individual"

who has not been treated as an employee by the "taxpayer" shall

be deemed not to be an employee "for purposes of applying * * *

[employment] taxes * * * with respect to the taxpayer".    Sec.

530(a)(1), flush language.   "Taxpayer" as used in the context of

Section 530 refers to an employer, and "employment tax" for

purposes of the section is defined as "any tax imposed by

subtitle C" of the Internal Revenue Code.   Sec. 530(c)(1).    Thus,

Section 530 by its terms is confined to the applicability of

subtitle C taxes to an employer-taxpayer and operates to

"terminate"6 such taxes if certain conditions are met.    As

subtitle C taxes are not at issue in this case, Section 530 is of

no help to petitioners.   Moreover, even if petitioners could


     6
       The heading of Sec. 530(a) states:   "Termination of
Certain Employment Tax Liability".
                              - 11 -


invoke Section 530, they could not meet its terms.   One of the

threshold requirements for obtaining Section 530 relief is that

the taxpayer-employer must have filed all required Federal tax

returns (including information returns) on a basis consistent

with the treatment of the worker as not being an employee.   Sec.

530(a)(1)(B).   For both 1989 and 1992, the Association failed to

file returns consistent with the treatment of Dr. Pariani as an

independent contractor; the Association did not issue a Form 1099

with respect to any payments made to Dr. Pariani for either year.

Accuracy-Related Penalties

     Petitioners bear the burden of proving that the

determinations pursuant to section 6662(a) are erroneous.    Rule

142(a).   Petitioners introduced no evidence relating to these

determinations.   Therefore, they are liable for the accuracy-

related penalties under section 6662(a).

     To reflect the foregoing,


                                       Decision will be entered

                                 under Rule 155.
