The opinion
T.C. Memo. 2003-162
UNITED STATES TAX COURT
WESTERN MANAGEMENT, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12686-99. Filed June 3, 2003.
Robert E. Kovacevich and Richard W. Kochansky, for
petitioner.
Milton B. Blouke and Roger P. Law, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: The petition in this case was filed in
response to a Notice of Determination Concerning Worker
Classification Under Section 74361 (notice of determination)
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
(continued...)
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relating to petitioner’s liabilities, pursuant to the Federal
Insurance Contributions Act (FICA) and the Federal Unemployment
Tax Act (FUTA), for 1994 and the first quarter of 1995 (period in
issue). The issues for decision are whether: (1) Robert E.
Kovacevich (Kovacevich) was petitioner’s employee for Federal
employment tax purposes, (2) 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), (3) petitioner owes
employment taxes pursuant to sections 3111 and 3301, and (4)
petitioner is liable for section 6656 and 6662(a) penalties.
FINDINGS OF FACT
On October 1, 1981, Kovacevich incorporated petitioner as
Robert E. Kovacevich, P.S., a Washington C corporation, whose
name was subsequently changed to Western Management, Inc. From
its incorporation and through the period in issue, petitioner’s
only source of income was from the provision of legal services,
and Kovacevich was petitioner’s sole shareholder, president, and
secretary-treasurer. In 1981, petitioner’s board of directors
voted to pay Kovacevich $28,000 in 1982 and $60,000, annually,
thereafter. Kovacevich designated the Seattle First National
Bank, Spokane and Eastern Branch (Seafirst), as the depository
for all of petitioner’s funds. All moneys that were paid on
1
(...continued)
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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petitioner’s accounts receivable were deposited in the Seafirst
account.
Kovacevich worked 160 to 180 hours per month for petitioner
and performed all services necessary to generate gross receipts
on behalf of petitioner, including: Paying creditors, hiring
employees, signing checks, determining employee compensation,
renewing petitioner’s malpractice insurance, and signing
petitioner’s Federal tax returns. No other person performed
legal services on behalf of petitioner.
Kovacevich received funds from petitioner as his needs arose
and was not compensated for his services at predetermined
intervals. In 1994 and the first quarter of 1995, respectively,
petitioner paid Kovacevich $132,000 and $33,250. Petitioner
issued checks to Kovacevich, his wife, and their creditors (e.g.,
Nordstrom, Teneff Jewelry, Fit and Hollywood, and National Golf),
and Kovacevich informed petitioner’s accountant and tax return
preparer, Bob Moe & Associates (Moe), that the payments were
draws. Petitioner classified the payments as “loans” on its
corporate ledgers and did not file Forms 1099-MISC, Miscellaneous
Income, relating to the payments. Petitioner also paid
Kovacevich’s law license renewal fees, office expenses, bar dues,
and health insurance premiums and deducted most of these expenses
on its corporate income tax returns.
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Kovacevich and his wife (Kovacevichs) maintained, at Farmers
and Merchant’s Bank, a personal line of credit. On the corporate
ledgers, Moe listed the checks written to Farmers and Merchants
Bank and MBNA in the “Receivable from Officer” account. These
checks had an “LN” memo description, indicating that the payment
related to a loan or the “Receivable from Officer” account.
From 1982 through 1992, petitioner sponsored a defined
benefit plan for Kovacevich, its only participant. In 1982 and
1984, petitioner contributed $46,473 and $81,822, respectively,
to the plan.
Petitioner’s fiscal year ends on March 31. On its corporate
income returns for 1994 and 1995, petitioner deducted officers’
compensation expenses in the amounts of $132,000 and $133,000,
respectively. Kovacevich, in his capacity as president, amended
petitioner’s 1991 Form 941, Employer's Quarterly Federal Tax
Return, with the following statement:
The amount of earnings of Employee Robert E. Kovacevich
was not clear, hence was left off. The Employee paid
all Income Tax due, hence the withholding is
unnecessary. However the Social Security Tax is due.
A completed W-2(c) term is included.
On April 28, 1999, respondent sent petitioner a notice of
determination, in which respondent determined that Kovacevich was
an employee for Federal employment tax purposes and that
petitioner was not entitled, pursuant to section 530, to relief
from such classification. Enclosed with the notice of
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determination was a schedule setting forth petitioner’s
liabilities as follows:
Addition to Tax Penalty
Year Deficiency Sec. 6656 Sec. 6662
1994 $48,968 $611 $9,794
1995 14,397 254 3,133
On September 21, 1999, the Court filed respondent’s Motion
To Dismiss In Part For Lack Of Jurisdiction And To Strike As To
The Amounts Of Employment Taxes And Additions To Tax Proposed For
Assessment By The Respondent (partial motion to dismiss). On
October 12, 1999, the Court filed petitioner’s response to the
motion and granted the motion on October 14, 1999. On October
17, 2000, the Court filed petitioner’s Motion To Dismiss For Lack
Of Jurisdiction And Judgment On The Pleadings (motion to
dismiss). On October 17 and 18, 2000, the Court held proceedings
to determine whether petitioner properly classified Kovacevich as
an independent contractor and whether petitioner is entitled to
section 530 relief. On December 21, 2000, Congress amended
section 7436(a) to provide this Court with jurisdiction to
determine the correct amounts of Federal employment taxes in
worker classification cases. See Community Renewal Tax Relief
Act of 2000 (CRTRA), Pub. L. 106-554, sec. 314(f), 114 Stat.
2763A-643. That amendment was retroactive to August 5, 1997.
CRTRA sec. 314(g), 114 Stat. 2763A-643. On February 8, 2001, the
Court vacated its October 14, 1999, order of dismissal and denied
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respondent’s motion. On January 29, 2002, the Court held
proceedings to determine the correct amount of employment taxes.
At the time the petition was filed, petitioner’s principal
place of business was Spokane, Washington.
OPINION
I. Jurisdiction
Petitioner contends that this Court lacks jurisdiction to
determine the correct amount of employment taxes because:
section 7436 was amended after this Court granted respondent’s
partial motion to dismiss, the notice of determination is
invalid, and no employment tax is due.
A. Our Decision To Vacate the October 14, 1999, Order Was
Proper
Petitioner contends that the Court improperly vacated its
October 14, 1999, order, which granted respondent’s partial
motion to dismiss. Petitioner, relying on Plaut v. Spendthrift
Farm, 514 U.S. 211 (1995), contends that the Constitution’s
separation of powers principles and the Due Process Clause of the
Fifth Amendment prohibit the reopening of final judgments
relating to section 7436 cases. Petitioner’s reliance on Plaut
is misplaced. In Plaut, the action was dismissed, and the
judgment of dismissal became final prior to the enactment of the
applicable statute. Specifically, the judgment of the District
Court dismissing that case with prejudice was entered on August
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13, 1991, was not appealed, and became final 30 days later.
Legislation purporting to authorize the reopening of that final
judgment and the reinstatement of the complaint was signed into
law by the President on December 19, 1991. The Supreme Court
held that the retroactive legislation was unconstitutional to the
extent it required Federal courts to reopen judgments that became
final before its enactment. Plaut v. Spendthrift Farm, supra.
Plaut is distinguishable because the amendment to section
7436 does not require the reopening of judgments which had become
final prior to the amendment’s enactment. Cf. Plaut v.
Spendthrift Farm, supra at 214-217. Vacating the order was
within our authority and consistent with the amendment and its
effective date. See sec. 7436(a). Moreover, our judgment in
this case is not yet final. See sec. 7481(a); Rule 190(a).
Consequently, Plaut is inapplicable. Accordingly, this Court’s
decision to vacate its October 14, 1999, order was proper.
Neely v. Commissioner, 116 T.C. 79, 84 n.6 (2001).
B. Notice of Determination
Petitioner contends that the notice of determination is
invalid because “the unexplained arrows and rounding of * * *
[the amounts used to determine the deficiencies] indicate
vagueness.” Challenges regarding the validity of a notice of
determination are analogous to such challenges to a notice of
deficiency. Henry Randolph Consulting v. Commissioner, 113 T.C.
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250 (1999) (holding that a notice of determination was not
invalid for failure to specify the names of the individuals whose
status had been determined pursuant to section 7436). A notice
of deficiency is not “invalid for failure to explain the
adjustments, failure to cite statutory provisions on which
respondent relied, or inconsistencies in the notice [of
deficiency].” Id. at 253; Campbell v. Commissioner, 90 T.C. 110
(1988); Mayerson v. Commissioner, 47 T.C. 340, 348-349 (1966).
There is no dispute that the name of the taxpayer, the affected
tax periods, and the amounts of the deficiencies are set forth in
the notice of determination. Generally, the Court will not
examine respondent’s motives or procedure leading to his
determination relating to a notice of deficiency. See Riland v.
Commissioner, 79 T.C. 185, 201 (1982); Greenberg's Express, Inc.
v. Commissioner, 62 T.C. 324, 327 (1974). Similarly, petitioner
has not identified any reason to examine respondent’s motives or
procedure leading to his determination pursuant to section 7436.
C. Kovacevichs’ 1994 FICA Tax Payment
On October 17, 2000, the Court filed petitioner’s motion to
dismiss on the ground that the Court lacks jurisdiction because
the Kovacevichs allegedly paid all of their 1994 FICA taxes. Our
jurisdiction, pursuant to section 7436, is based upon whether
petitioner properly classified Kovacevich as an independent
contractor and whether petitioner is entitled to section 530
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relief. Henry Randolph Consulting v. Commissioner, supra. In
addition, we have jurisdiction to determine petitioner’s
employment tax liability relating to amounts petitioner paid
Kovacevich in 1994 and 1995. Sec. 7436(a). Therefore,
petitioner’s motion to dismiss will be denied.
II. Employment Status
Sections 3111 and 3301 impose taxes on employers under FICA
and FUTA, respectively, based on wages paid to employees.
“Employee” is defined for purposes of the FICA tax in section
3121(d). With certain modifications not germane here, this
definition applies for purposes of the FUTA tax as well. Sec.
3306(i). Pursuant to section 3121(d)(2), the term “employee”
includes any individual who has the status of an employee under
the common law. Paragraphs (1), (3), and (4) of section 3121(d)
delineate “statutory employees”. These individuals are
considered employees regardless of their status under the common
law rules. See Joseph M. Grey Pub. Accountant, P.C. v.
Commissioner, 119 T.C. 121, 126 (2002). Any officer of a
corporation is a statutory employee, if such officer performs
substantial services for a corporation and receives remuneration
for those services. See Veterinary Surgical Consultants, P.C. v.
Commissioner, 117 T.C. 141 (2001), affd. sub nom. Yeagle Drywall
Co. v. Commissioner, 54 Fed. Appx. 100 (3d Cir. 2002); sec.
3121(d)(1); sec. 31.3121(d)-1(b), Employment Tax Regs.
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Kovacevich was a statutory employee because at all relevant times
he served as petitioner’s president and secretary-treasurer,
worked in all significant aspects of petitioner’s business,
performed substantial services for petitioner in his capacity as
an officer, and obtained remuneration for such services from
petitioner as his needs arose.2
III. Section 530 of the Revenue Act of 1978
Section 530 provides relief from employment tax liability,
notwithstanding the actual relationship between the taxpayer and
the individual performing services. Sec. 530(a). The taxpayer,
however, must establish: It did not treat the worker as an
employee, filed all returns for periods after December 31, 1978,
“on a basis consistent with the taxpayer’s treatment of such * *
* [worker] as not being an employee”, and had a reasonable basis
for not treating the worker as an employee. Sec. 530(a)(1) and
(2); Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, supra
at 123.
2
Petitioner contends that the Court’s determination of
whether Kovacevich is an employee or independent contractor is
controlled by Clackamas Gastroenterology Associates, P.C. v.
Wells, 536 U.S. __, 123 S. Ct. 1673 (Apr. 22, 2003). We
disagree. In Clackamas, the Court simply held that in
determining whether four director-shareholder physicians were
employees or employers for purposes of the Americans with
Disabilities Act of 1990, “the common-law element of control is
the principal guidepost”. The Court did not consider whether
these individuals were employees or independent contractors for
FICA and FUTA purposes. For employment tax purposes, Kovacevich
is a statutory employee pursuant to sec. 3121(d)(1), and we need
not resort to the common-law principles considered in Clackamas.
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Petitioner treated Kovacevich as an employee. Sec.
530(a)(1)(A). Petitioner’s board of directors voted to pay
Kovacevich a $60,000 salary and issued a Form W-2, Wage and Tax
Statement, relating to 1991. In addition, Kovacevich, in his
capacity as petitioner’s president, filed an amended Form 941 for
1991, with the following statement:
The amount of earnings of Employee Robert E. Kovacevich
was not clear, hence was left off. The Employee paid
all Income Tax due, hence the withholding is
unnecessary. However the Social Security Tax is due.
A completed W-2(c) term is included. [Emphasis added.]
Furthermore, petitioner did not file Forms 1099 relating to
payments made to Kovacevich. Sec. 530(a)(1)(B). Thus,
petitioner fails the first two requirements and, accordingly, is
not entitled to relief.
IV. Liability for Employment Tax
Petitioner paid Kovacevich $132,000 and $33,250 in wages
during 1994 and the first quarter of 1995, respectively. Because
we have determined that Kovacevich is an employee under sections
3121(d)(2) and 3306(i), petitioner is liable for FICA and FUTA
taxes as determined by respondent. See secs. 3306(a)(1) and (b),
3111(a) and (b).
V. Penalties Under Sections 6656 and 6662(a)
Section 6656 imposes a penalty equal to 10 percent of the
portion of an underpayment in tax that is required to be
deposited if the failure to deposit is more than 15 days beyond
the prescribed deadline. See sec. 6656(a); secs. 31.3402(b)-1,
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31.3402(c)-1, Employment Tax Regs. Petitioner has not
established reasonable cause for failing to make the required
deposits of tax. Therefore, we sustain respondent’s
determination. See Van Camp & Bennion v. United States, 251 F.3d
862 (9th Cir. 2001).
Section 6662(a) imposes an accuracy-related penalty equal to
20 percent of the portion of an underpayment that is attributable
to negligence. Petitioner’s contention that amounts paid to
Kovacevich were not wages is meritless. See Van Camp & Bennion
v. United States, supra at 869 (stating that the reasonable basis
standard is not satisfied by “a return position that is merely
arguable or that is merely a colorable claim”); Spicer Accounting
Inc. v. United States, 918 F.2d 90 (9th Cir. 1990). Petitioner
did not exercise due care in the filing of its return and thus is
liable for the section 6662(a) penalty. Therefore, we sustain
respondent’s determination.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
An order denying
petitioner’s motion to dismiss
will be issued, and decision will
be entered under Rule 155.