                        T.C. Memo. 2007-66



                      UNITED STATES TAX COURT



           PENO TRUCKING, INCORPORATED, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21070-03.                Filed March 21, 2007.



     Brent L. English, for petitioner.

     Linda C. Grobe, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


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

response to a Notice of Determination Concerning Worker

Classification Under Section 7436 regarding petitioner’s

liabilities pursuant to the Federal Insurance Contributions Act

(FICA) and the Federal Unemployment Tax Act (FUTA) for 1997,
                                - 2 -

1998, and 1999 and each of the quarters therein (periods at

issue).1

     The issues for decision are:    (1) Whether certain drivers

who operated petitioner’s trucks were employees of petitioner for

Federal employment tax purposes during the periods at issue 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 (act section 530).2

                           FINDINGS OF FACT

     The parties’ stipulation of facts and the attached exhibits

are incorporated herein by this reference, and the facts

stipulated are so found.    At the time the petition was filed,

petitioner’s principal place of business was in Warren, Ohio.




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and Rule references are to
the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
     2
       This Court ordered the parties to file posttrial briefs.
Respondent did so; petitioner did not. Under these
circumstances, the Court may hold petitioner in default on all
issues for which it bears the burden of proof. See Stringer v.
Commissioner, 84 T.C. 693, 704-708 (1985), affd. without
published opinion 789 F.2d 917 (4th Cir. 1986); Furniss v.
Commissioner, T.C. Memo. 2001-137; McGee v. Commissioner, T.C.
Memo. 2000-308. However, we will decide this case on the record
as it stands. We base our understanding of petitioner’s position
on its petition, the stipulation of facts, and trial testimony.
                                 - 3 -

Petitioner was an S corporation incorporated in the State of Ohio

on December 23, 1993.3

A.   Petitioner’s Business Operation

     Petitioner was engaged in the business of operating a

trucking company to transport steel and other freight.    Robert

Peno, Sr., and Joann Peno, husband and wife, were petitioner’s

sole shareholders and sole officers.     Joann Peno was president,

and Robert Peno, Sr., was vice president.

     During the periods at issue, petitioner owned approximately

15 tractor-trailers (trucks), which it leased to the Ohio

Transport Corp.4 (Ohio Transport) pursuant to written lease

agreements (leases).     The leases required petitioner to transport

freight and perform related services for Ohio Transport within a

reasonable time in a safe, competent, lawful, and workmanlike

manner, inform Ohio Transport daily as to the vehicles’ locations

and the shipments being transported, and pay all costs of

operating the leased trucks and related equipment.

     Under the leases, petitioner was required to provide drivers

to operate its trucks and be responsible for all work performed

by the drivers and to confirm their work was performed in


     3
       Although petitioner went out of business in 2003, it was
still an Ohio corporation in good standing when this petition was
filed.
     4
        Ohio Transport is an interstate motor carrier
headquartered in Ohio.
                                - 4 -

accordance with the leases.    Consequently, petitioner was

required to direct, supervise, pay, discipline, and discharge its

drivers.5    Petitioner was also responsible for determining the

days and hours per day the drivers worked, the routes traveled,6

and the order of picking up and delivery of shipments and

ensuring that the drivers had the appropriate commercial drivers’

licenses.7

     The leases also required petitioner to submit completed

drivers’ logs to Ohio Transport and to “cooperate in the

preparation, carrying and preservation of manifestos, bills of

lading, way bills, freight bills, and other papers and records

respecting the lading and the use of equipment, all in accordance

with applicable laws and regulations”.




     5
       The leases required petitioner, not Ohio Transport, to
withhold and pay employment taxes for its drivers and pay the
premiums for workers’ compensation or employers’ liability
insurance to cover the drivers.
     6
       However, the parties stipulated that the drivers
determined the routes to travel, not petitioner.
     7
       Petitioner was required to confirm that the drivers
complied with all applicable laws, government rules, regulations,
and orders. Ohio Transport and its insurer also determined
whether the drivers had the appropriate credentials and driving
records to operate the leased equipment.
                                - 5 -

     As compensation, petitioner received 75 percent of the total

amount paid to Ohio Transport by its customers for each load

hauled by a leased truck.8

     The leases required Ohio Transport to provide liability

insurance for petitioner’s trucks while they were “under

dispatch”.9   Otherwise petitioner provided the insurance.   If a

driver intentionally damaged a truck or its cargo, he or she was

responsible for the damage, to the extent it was not insured.

B.   Relationship Between Petitioner and Drivers

     Petitioner entered into an agreement (agreement) with each

of its drivers during the periods at issue which expressly

provided that the drivers were independent contractors and not

employees.    The agreement, in pertinent part, stated:



     8
       During the periods at issue, petitioner and Ohio Trucking
also had an oral agency agreement by which petitioner was paid a
9-percent agency fee on all loads it solicited from customers on
behalf of Ohio Transport. The 9-percent fee was over and above
the 75 percent Ohio Transport paid petitioner for each load
hauled under the leases. The drivers were paid no portion of the
separate 9-percent agency fee.

     These loads were hauled by petitioner’s trucks or by
individuals who owned their own trucks (owner-operators). A
number of owner-operators hauled steel for Ohio Transport and
were dispatched by petitioner. The owner-operators’ employment
relationship with petitioner is not at issue in this case.
     9
       The term “under dispatch” means Ohio Transport had
contacted petitioner to haul a particular load, petitioner agreed
to haul the load, and the truck used to haul the load was: (1)
En route to pick up the load; (2) was picking up the load; (3)
was transporting the load; or (4) was returning to the location
where the truck was garaged having delivered the load.
                              - 6 -

     Peno Trucking Inc. and Operator agree and understand
     that Operator is not an employee or agent of Peno
     Trucking Inc. Operator is an independent contractor and
     Peno Trucking Inc. shall not direct in any manner the
     means or method by which Operator shall perform his
     occupation. Operator understands that Peno Trucking
     Inc. from time to time contracts with other persons or
     corporations, to transport goods via Peno Trucking Inc.
     trucks and equipment. While not an employee of such
     other persons or corporations, Operator shall, at all
     times applicable hereto, work at the direction and
     control of such persons or corporations.

     Peno Trucking Inc. agrees to pay Operator at the
     percentage of * * * per total gross pay per load.
     Additionally, Peno Trucking Inc. shall be responsible
     for all maintenance of Peno Trucking Inc. equipment,
     all fuel, oil, tolls, permits, and road fuel taxes
     incurred by Operator on such dispatched trips in Peno
     Trucking Inc. equipment.

     Operator agrees and understands that he is solely
     responsible for payment of all income and withholding
     taxes, Social Security and unemployment compensation.
     In accordance with the terms of this agreement, Peno
     Trucking Inc. will supply Operator with an IRS Form
     1099 at the end of each calendar year.

     Operator understands and agrees that he cannot
     obligate, contract or incur any indebtedness on behalf
     of Peno Trucking Inc.

     Petitioner’s drivers were not obligated to accept

petitioner’s request to transport a load, to work on any

particular day, or work any particular schedule.    If a driver

chose not to haul a load or work for a period of time, he or she

was not disciplined or sanctioned.    Petitioner and the drivers

were entitled to terminate their relationship at any time.

     Petitioner provided all necessary equipment required to

secure the cargo hauled on its trucks.    However, petitioner’s
                                    - 7 -

drivers were free to supply any additional equipment at their own

cost.        Drivers paid for their own gloves, hand tools, and meals.

If a driver’s relationship with petitioner was severed, the

driver was free to take any equipment or accessories he or she

had provided.

        Petitioner paid for all fuel, oil, highway use taxes, and

normal maintenance and repairs required to operate its trucks.

Petitioner was solely responsible for determining the nature and

timing of any repairs and/or maintenance of its trucks, and its

mechanics performed all the maintenance and repairs.10       The

drivers were not required to make any repairs or perform any

maintenance to the trucks, but they were obligated to comply with

the Federal motor carrier safety regulations, including those

provisions which required pretrip inspections.

     Drivers were paid, on a weekly basis, between 23 percent and

27 percent of the 75 percent petitioner received for each hauled

load.        The more loads a driver hauled each week, the more money

he or she earned.11




        10
       However, if a truck broke down in an area where it was
not feasible for petitioner to send one of its mechanics to make
repairs, or if the repairs needed were extensive, petitioner
hired a third party to make the repairs.
        11
       However, drivers were limited by the Federal motor
carrier safety regulations as to the amount of time they could
drive each day.
                                - 8 -

     During the periods at issue, petitioner filed Forms 1099-

MISC, Miscellaneous Income, for each of its drivers who worked

under the agreement.

     In 1997, 1998, and 1999, respondent reclassified as

employees a total of 29, 24, and 21 drivers, respectively.    Of

the drivers who were reclassified, 13 had contracted with

petitioner for more than 2 years and 4 had contracted with

petitioner for more than 3 years.

C.   Day-to-Day Operations

     When Ohio Transport had freight which needed to be

transported, ordinarily in the Midwest and frequently to States

adjoining Ohio, it or a mill12 working with Ohio Transport would

contact petitioner and instruct it as to the specifications of

the particular job.    If petitioner had a truck available to haul

the load, it would offer the job to one of its drivers.     If a

driver was unavailable or unwilling to accept the load, then the

load was offered to another driver.13

     If a driver accepted the job, petitioner advised the driver,

in accordance with Ohio Transport’s or the mill’s directives, of

the time to pick up the load, the delivery location, and the



     12
       A mill was the facility where petitioner’s drivers would
travel to pick up a load of steel or other materials.
     13
       Petitioner also had the option of offering the load to
one, or more, of the owner-operators who had leased their trucks
to Ohio Transport.
                               - 9 -

expected delivery time.14   The drivers carried beepers so that

petitioner could remain in contact while they were on the road.

Petitioner did not direct the routes drivers were to use in

either picking up or delivering loads.15   If a driver chose to

drive on a toll road, the driver was responsible for paying the

tolls.16   After a load was delivered, the driver could

immediately return to petitioner’s place of business with or

without a return load.17

D.   Ohio Determination of Independent Contractor Status

     On May 18, 1995, Richard Chatfield (Chatfield), one of

petitioner’s drivers, filed a claim with the Ohio Industrial

Commission (OIC) for workers’ compensation because of an injury

he suffered on May 2, 1995.   By order dated October 25, 1995, the

Ohio Industrial Commission (OIC) disallowed Chatfield’s claim,

finding he was not an employee of petitioner on the date of

injury but an independent contractor who had failed to secure


     14
       The same information was provided to any owner-operator
who was offered, and accepted, an assignment to pick up and
transport a load.
     15
       However, the driver’s route was specified when Ohio
Transport obtained a special hauling permit to carry a load that
exceeded weight and/or width limitations.
     16
       Although the agreement stated petitioner would cover the
cost of toll roads, the parties stipulated that the drivers were
actually required to cover the costs of paying tolls.
     17
        Ordinarily, it was in petitioner’s and the driver’s best
interests for the driver to request petitioner to find a return
load.
                              - 10 -

workers’ compensation for himself.     The OIC order did not state

the basis for its determination.

     On December 21, 1995, Chatfield filed an appeal in the Court

of Common Pleas, Trumball County, Ohio (court of common pleas).

By order dated August 21, 1996, pursuant to the journal entry of

the court of common pleas filed on June 18, 1996, the Bureau of

Workers’ Compensation (BWC) dismissed Chatfield’s appeal without

prejudice.

     On June 26, 1997, another driver for petitioner, Kenneth G.

Jamison (Jamison), filed a claim for workers’ compensation

because of an injury he suffered on June 18, 1997.    Basing its

decision upon a signed agreement between petitioner and Jamison

dated March 3, 1997, the BWC denied Jamison’s claim on August 25,

1997.   Jamison appealed the denial of his claim to the OIC on

September 4, 1997.   The OIC vacated the previous BWC order and

found without stating the grounds for its decision that Jamison

was an independent contractor who had not secured workers’

compensation for himself.

     On December 16, 1997, Jamison filed an appeal in the court

of common pleas.   On June 8, 1998, the court of common pleas

entered an order of voluntary dismissal without prejudice.
                              - 11 -

                              OPINION

I.   Employees v. Independent Contractors

     Petitioner contends that for employment tax purposes during

the periods at issue the drivers of its trucks were independent

contractors, not employees.

     The taxpayer has the burden of proving the existence of an

independent contractor relationship.18   See Rule 142(a); Ellison

v. Commissioner, 55 T.C. 142, 152 (1970).   For the purposes of

employment taxes, the term “employee” includes “any individual

who, under the usual common law rules applicable in determining

the employer-employee relationship, has the status of an

employee”.   Sec. 3121(d)(2); secs. 31.3121(d)-1(c), 31.3306(i)-1,

Employment Tax Regs.

     Whether an individual is a common law employee is a question

of fact, Ellison v. Commissioner, 55 T.C. 142, 152 (1970); sec.

31.3121(d)-1(c)(3), Employment Tax Regs., to be determined

applying the following factors:   (1) The degree of control

exercised by the principal; (2) which party invests in work

facilities used by the individual; (3) the opportunity of the

individual to realize profit or loss; (4) whether the principal

can discharge the individual; (5) whether the work is part of the


     18
       Petitioner did not contend that the burden of proof was
placed upon respondent pursuant to act sec. 530(e)(4) as added by
the Small Business Job Protection Act of 1996, Pub. L. 104-188,
sec. 1122(b)(3), 110 Stat. 1767.
                               - 12 -

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

relationship; and (7) the relationship the parties believed they

were creating, Ewens & Miller, Inc. v. Commissioner, 117 T.C.

263, 270 (2001); Weber v. Commissioner, 103 T.C. 378, 387 (1994),

affd. 60 F.3d 1104 (4th Cir. 1995); Potter v. Commissioner, T.C.

Memo. 1994-356.   No single factor is dispositive.    Ewens &

Miller, Inc. v. Commissioner, supra at 270.   If an

employer-employee relationship exists, characterization by the

parties as some other relationship is immaterial.     Sec.

31.3121(d)-1(a)(3), Employment Tax Regs.

     A.    Degree of Control

     The “degree of control” test requires the Court to examine

not only the control exercised by an alleged employer, but also

the degree to which the alleged employer may intervene to impose

control.   Weber v. Commissioner, supra at 387-388.

     The agreement stated that “Peno Trucking Inc. shall not

direct in any manner the means or method by which Operator shall

perform his occupation” and “Operators shall, at all times

applicable hereto, work at the direction and control of” persons

or corporations petitioner contracts with to transport goods.

The stipulated facts and testimony clearly show otherwise.

     Pursuant to the leases with Ohio Transport, petitioner was

responsible for hiring drivers, overseeing all work performed by

the drivers, confirming their work was performed in accordance
                             - 13 -

with the leases, and directing, supervising, paying,

disciplining, and discharging the drivers.

     Petitioner determined the days drivers could work and

controlled which loads the drivers would haul.   Petitioner

required the drivers to have appropriate commercial drivers’

licenses, deliver the freight to certain places at certain times,

maintain driving logs and other documents, and carry beepers.19

Petitioner, not the drivers, determined whether truck repairs

were performed on the road or by its own mechanics and was

responsible for all truck maintenance costs incurred in

maintaining the trucks.

     The fact that the drivers could choose the routes to take to

the specified destination, were liable to pay tolls, and could

stop and rest when desired does not mean petitioner did not

maintain the requisite control.   For an employer-employee

relationship to exist, petitioner is not required to direct or

control the manner in which the services are performed, so long

as it has that right to do so if necessary.   Sec.

31.3121(d)-1(c)(2), Employment Tax Regs.

     It was unnecessary for petitioner to control the manner in

which the drivers completed their work because their work


     19
       At trial, Mr. Peno testified that petitioner did not
require its drivers to carry electronic communication devices.
However, a stipulated exhibit indicated petitioner required its
drivers to carry beepers, presumably so that it could maintain
contact while the drivers were on the road.
                               - 14 -

required little supervision.    See Day v. Commissioner, T.C. Memo.

2000-375.    This factor indicates petitioner exercised control

over the drivers’ activities consistent with an employer-employee

relationship.    See id.

     B.     Investment in Facilities

     The fact that a worker provides his or her own tools

generally indicates a nonemployee status.    Ewens & Miller, Inc.

v. Commissioner, supra at 271.

     The drivers incurred some cost for tools and maintaining

their licenses.20   However, these costs were insignificant when

compared to petitioner’s substantial investment to acquire and

maintain the fleet of approximately 15 trucks.    The drivers did

not pay any of the costs of operating the trucks or transporting

the freight.    The agreement stated petitioner alone was

responsible for all maintenance of its equipment, all fuel, oil,

tolls,21 permits, and road fuel taxes incurred by the drivers on

dispatched trips while in petitioner’s trucks.

     The relatively minor investment by the drivers and the

substantial investment by petitioner support an employer-employee

relationship.


     20
       The drivers provided their own hand tools and, at their
option, could provide ratchet binders to use rather than the snap
binders that were provided with the trucks.
     21
       Although the agreement stated petitioner would cover
those costs, the parties stipulated that the drivers were
actually required to cover the costs of paying tolls.
                                - 15 -

     C.    Opportunity for Profit or Loss

     A worker’s opportunity to earn a profit and assume risk of

loss may indicate a nonemployee status.       Simpson v. Commissioner,

64 T.C. 974, 988 (1975).   On the other hand, earning an hourly

wage or salary indicates an employer-employee relationship

exists.   Del Monico v. Commissioner, T.C. Memo. 2004-92; Kumpel

v. Commissioner, T.C. Memo. 2003-265.

     The drivers were not paid an hourly wage or salary.       They

were paid 23 to 27 percent of the 75 percent petitioner received

per load hauled, and the amounts earned depended entirely upon

the number of trips they made.    The drivers did not assume any

risk of loss.   As stated in the agreement, a driver could not

incur any indebtedness on behalf of petitioner.       This factor

indicates an employer-employee relationship.

     D.    Right To Discharge

     Generally, an employers’ right to discharge an employee

indicates an employer-employee relationship.       Sec. 31.3121(d)-

1(c)(2), Employment Tax Regs.    The parties stipulated that

petitioner retained the right to discharge its drivers and the

drivers had a right to terminate their relationship with

petitioner.   However, at trial Mr. Peno testified that he

personally would not terminate a driver; instead Ohio Transport

or the mills would ban the driver.       Mr. Peno’s testimony as to
                                - 16 -

this factor was self-serving and unreliable.     This factor

indicates an employee-employer relationship.

     E.   Integral Part of Business

     The drivers performed a service essential to petitioner’s

operation.     The success of petitioner’s business depended, in

large part, upon the service performed by the drivers.     Thus, the

drivers were an integral part of petitioner’s business.     This

factor supports an employer-employee relationship.     See Day v.

Commissioner, supra.

     F.   Permanency of the Relationship

     A transitory work relationship may point toward a

nonemployee status.     Ewens & Miller, Inc. v. Commissioner, 117

T.C. at 273.    If, however, a person works in the course of the

employers’ trade or business, the fact that he does not work

regularly may be insignificant.     Id.

     The drivers worked in the course of petitioner’s business

rather than having a transitory relationship with petitioner.

This factor supports an employer-employee relationship.     See id.

     G.   Relationship the Parties Thought They Created

     Petitioner and its drivers entered into written agreements

which expressly provided that the drivers were independent

contractors.    However, our findings with respect to the degree of

control exercised by petitioner, petitioner’s investment in the

trucks, the drivers’ lack of assumption of risk, the ability to
                               - 17 -

discharge, the integration of the drivers into the business, and

the permanency of the relationship override any contrary

characterization contained in the agreement.    See sec.

31.3121(d)-1(a)(3), Employment Tax Regs.    Accordingly the Court

finds petitioner’s drivers were common law employees during the

periods at issue and, consequently, the payments to them during

these periods constituted wages subject to Federal employment

tax.

II.    Whether Petitioner Is Eligible for Act Section 530 Relief

       Petitioner contends it is entitled to relief pursuant to act

section 530.    Congress enacted act section 530 to alleviate what

it perceived as the “‘overly zealous pursuit and assessment of

taxes and penalties against employers who had, in good faith,

misclassified their employees as independent contractors.’”

Ewens & Miller, Inc. v. Commissioner, supra at 276-277 (quoting

Boles Trucking, Inc. v. United States, 77 F.3d 236, 239 (8th Cir.

1996)).    Act section 530(a)(1) shields a taxpayer who has

mistakenly not classified his workers as employees from

employment tax liability if the taxpayer had a reasonable basis

for not treating the workers as employees and has filed all

required Federal employment tax returns on a basis consistent

with this treatment.    Petitioner never treated the drivers as

employees and consistently issued them Forms 1099-MISC.    The
                             - 18 -

question which remains is whether petitioner had a reasonable

basis for treating the drivers as nonemployees.

     A taxpayer is treated as having a reasonable basis for not

treating an individual as an employee if the taxpayer reasonably

relied 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.

Sec. 530(a)(2).22

     Petitioner’s sole contention is that it relied upon judicial

precedent in determining its drivers were independent

contractors, basing its decision on the court of common pleas’

rulings and the administrative and appeals decisions finding that

two of petitioner’s drivers were independent contractors.




     22
       A taxpayer who fails to come within any of the safe
harbors is still entitled to relief if the taxpayer can
demonstrate, in some other manner, a reasonable basis for not
treating the individual as an employee. Veterinary Surgical
Consultants, P.C. v. Commissioner, 117 T.C. 141, 147 (2001),
affd. sub nom. Yeagle Drywall Co. v. Commissioner, 54 Fed. Appx.
100 (3d Cir. 2002).
                               - 19 -

     For a taxpayer to have a reasonable basis for not treating

an individual as an employee under the judicial precedent safe

harbor, the judicial precedent relied upon must have evaluated

the employment relationship through a Federal common law

analysis.   See sec. 3121(d); Nu-Look Design, Inc. v.

Commissioner, T.C. Memo. 2003-52, affd. 356 F.3d 290 (3d Cir.

2004); secs. 31.3121(d)-1(c), 31.3306(i)-1, Employment Tax Regs.

To come within the safe harbor, “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.”    Nu-Look Design, Inc.

v. Commissioner, supra.

     The record does not indicate that the BWC, the OIC, or the

court of common pleas evaluated the employment relationships of

petitioner’s former drivers, Chatfield and Jamison, through a

common law analysis.    Only the BWC’s vacated order in the Jamison

case indicated the grounds for its decision:   “The signed

agreement by and between Peno Trucking Inc. and the Injured

Worker dated 3/3/97.”   Moreover, nothing in the record indicates

the rulings concerning Jamison and Chatfield were relied upon at

the time petitioner’s employment decisions were made.   Petitioner

failed to establish that it relied upon judicial precedent or

otherwise provided a reasonable basis to disregard section

3121(d)(2) and sections 31.3121(d)-1(c) and 31.3306(i)-1,
                              - 20 -

Employment Tax Regs.   Therefore this Court finds petitioner is

not entitled to act section 530 relief for its drivers.

     The Court, in reaching its holding, has considered all

arguments made and concludes that any arguments not mentioned

above are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.
