Ewens & Miller, Inc. v. Comm'r of Internal Revenue

• Decision Date: 11 December 2001
• Docket Number: No. 13069–99.,13069–99.
• Citation: 117 T.C. 263,117 T.C. No. 22
• Parties: EWENS AND MILLER, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

117 T.C. 263

117 T.C. No. 22

EWENS AND MILLER, INC., Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 13069–99.

United States Tax Court.

Dec. 11, 2001.

Corporate taxpayer petitioned for redetermination of IRS' classification of its workers as employees. The Tax Court, Vasquez, J., held that: (1) in matter of first impression, Tax Court had jurisdiction over additions to tax and penalties related to employment taxes; (2) bakery workers and cash payroll workers were common law employees; (3) route distributors were statutory employees.

Decision for IRS. P manufactured bakery products. P had workers who produced its product (CPWs and BWs), delivered its product (RDs), and marketed its product (OSWs).In 1992, P “converted” all its employees to independent contractors. R issued P a Notice of Determination Concerning Worker Classification Under Section 7436 determining that the CPWs, BWs, RDs, and OSWs were employees for purposes of Federal employment tax, that P was not entitled to relief pursuant to sec. 530 of the Revenue Act of 1978, Pub.L. 95–600, 92 Stat. 2763, 2885, and that P was liable for penalties pursuant to sec. 6656, I.R.C.On Sept. 28, 1999, R filed a motion to dismiss for lack of jurisdiction as to the amounts of employment taxes and related penalties. On Oct. 26, 1999, following this Court's decision in Henry Randolph Consulting v. Commissioner, 112 T.C. 1, 1999 WL 10017 (1999), we granted R's motion.Subsequent to the trial in this case, Congress amended sec. 7436(a), I.R.C., to provide this Court with jurisdiction to decide the correct amounts of employment taxes that relate to the Secretary's determination concerning worker classification. Community Renewal Tax Relief Act of 2000 (CRTRA), Pub.L. 106–554, sec. 314(f), 114 Stat. 2763. The amendment to sec. 7436, I.R.C., was made retroactive to the effective date of sec. 7436(a), I.R.C. CRTRA sec. 314(g).Held: pursuant to sec. 7436(a), I.R.C., this Court has jurisdiction over additions to tax and penalties found in subtitle F, chapter 68, including deciding the proper amounts of such additions to tax and penalties, related to taxes imposed by subtitle C with respect to worker classification or sec. 530 treatment determinations.Held, further, The CPWs, BWs, and OSWs are employees of P pursuant to sec. 3121(d)(2), I.R.C., because they were common law employees.Held, further, the RDs are employees of P pursuant to sec. 3121(d)(3)(A), I.R.C., because they were statutory employees.Held, further, P is not entitled to relief pursuant to sec. 530 of the Revenue Act of 1978, Pub.L. 95–600, 92 Stat. 2763, 2885.

Roger Miller (an officer), for petitioner.

Denise G. Dengler, for respondent.

VASQUEZ, J.

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). Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

The issues for decision are: (1) Whether the workers ¹ performing services for petitioner were employees during 1992; (2) whether petitioner is entitled to “safe harbor” relief as provided by section 530 of the Revenue Act of 1978, Pub.L. 95–600, 92 Stat. 2763, 2885 (section 530); and (3) whether our jurisdiction to decide the proper amount of employment taxes ² provides the Court with jurisdiction to decide the proper amount of additions to tax and penalties related to employment tax arising from worker classification or section 530 treatment determinations.

FINDINGS OF FACT

Petitioner was a Virginia corporation that had its principal place of business in Lorton, Virginia. At the time it filed its petition, petitioner had terminated its corporate status. Prior to and during 1992, petitioner manufactured bakery products such as cookies, brownies, and cinnamon buns.

Peter Ewens (Ewens) was the president, and Roger Miller (Miller) was the vice president of petitioner. Ewens ran petitioner on a day-to-day basis and controlled petitioner's operations. Miller was a financial adviser to petitioner. During its operation, Miller was at petitioner's plant approximately once a month.

Miller was a C.P.A. who had his own company that prepared tax returns. ³ Miller prepared petitioner's Federal corporate income tax returns for 1991 and 1992. He also signed petitioner's Federal employment tax returns for 1992.

Petitioner had several categories of workers including bakery personnel and production workers (bakery workers), cash payroll workers, route distributors/sales people (route distributors), and outside sales workers.

The bakery workers worked at petitioner's plant. Using equipment and supplies provided by petitioner, they mixed dough, and baked and packaged petitioner's products. Although petitioner did not set the bakery workers' hours, each day a certain amount of production had to be completed, and the bakery workers could not leave until the production quota was met. Petitioner paid the bakery workers a fixed amount based on the amount of product they produced.

Prior to 1992, petitioner treated the bakery workers as employees. In 1991, petitioner issued the bakery workers Forms W–2, Wage and Tax Statement. In 1992, 30 out of petitioner's 37 bakery workers received Forms 1099. Of the seven who did not receive a Form 1099, only two earned less than $600.⁴

The cash payroll workers were a family of six or seven individuals known as “the Rusli group”. The Rusli group was not a corporation. The Rusli group worked for petitioner for a number of years prior to 1992. The Rusli group performed the same work as the bakery workers. Since 1987, pursuant to a written agreement between the Rusli group and petitioner, the Rusli group also supervised the bakery workers. In 1992, petitioner did not issue Forms 1099 to any of the cash payroll workers.

The route distributors transported petitioner's product from its plant to individuals or businesses who purchased the product. Some route distributors bought the product and resold it for a higher price; others worked on a commission basis. The route distributors drove their own vehicles. Petitioner did not set the hours the route distributors worked.

In 1991, petitioner issued at least one route distributor, Frank Barranco, a Form W–2. In 1992, petitioner did not issue Forms 1099 to any of petitioner's 21 route distributors.⁵

The outside sales workers were individuals who marketed petitioner's product. They had their own vehicles, and petitioner did not set their hours. When an outside sales worker sold a product, he was paid a commission. Petitioner had the right to hire and fire the outside sales people.

In 1991, petitioner issued at least two outside sales workers, Terre Cone and Terry McKnight, a Form W–2. In 1992, two of petitioner's five outside sales workers received Forms 1099. Of the three who did not receive a Form 1099, two earned less than $600.

On November 4, 1991, petitioner issued a memorandum from Ewens to the staff. The memorandum stated: (1) The company had treated certain workers as employees and others as independent contractors; (2) beginning January 1, 1992, petitioner would discontinue its production function and would subcontract its entire operations to outside groups or individuals; (3) individuals who wanted to continue their association with petitioner would be required to sign a statement in which they accepted responsibility for all of their own payroll taxes; (4) individuals would be issued Forms 1099 instead of Forms W–2; and (5) employees not wishing to become independent contractors would be discharged prior to January 1, 1992.

After January 1, 1992, there was no change in the activities petitioner's workers performed (i.e., in 1992, the workers did much of the same work). The reason petitioner wanted to convert its employees to independent contractors was to protect petitioner from lawsuits ⁶ and to have better control over the activities of its workers. Petitioner was advised by an attorney to convert the employees to independent contractors to limit petitioner's liability. Petitioner continued directly paying its workers.

Several of petitioner's checks issued to its workers, and signed by Miller, in 1992 bear the notation “payroll”. Additionally, there was a debit slip dated July 3, 1992, for petitioner's bank account that noted that cash was withdrawn for payroll.

For 1991, petitioner reported salaries and wages of $196,433 on its Federal corporate income tax return, and it issued 51 Forms W–2 to its employees reporting total wages of $196,432.60. Petitioner also reported $81,143 of subcontractual labor, and it issued 10 Forms 1099–MISC reporting total payments of $37,930.74.

For 1992, petitioner reported no salaries and wages on its Federal corporate income tax return. Petitioner reported $115,287 of subcontractual labor, and it issued 36 Forms 1099–MISC reporting total payments of $115,287.05.

Petitioner filed Forms 941, Employer's Quarterly Federal Tax Return, for the four quarters of 1992 and reported no wages subject to withholding, no withheld income tax, no Social Security tax, and no Medicare tax. Petitioner's Form 941 for the last quarter of 1992 reported that the date final wages were paid was December 31, 1991, that it had no employees, and that it was out of business. Petitioner's Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, for 1992 also reported no wages, that petitioner had no employees, and that it was out of business.

Respondent determined that the bakery workers, cash payroll workers, route distributors, and outside sales workers were employees for employment tax purposes for 1992. Respondent further determined that petitioner was not entitled to section 530 relief for any of these workers. Respondent also determined penalties pursuant to section 6656.

OPINION

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