UNITED STATES TAX COURT

T.C. Memo. 2012-184

UNITED STATES TAX COURT

TWIN RIVERS FARM, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14074-10.

Filed July 2, 2012.

Richard Militana, for petitioner.

Linda E. Mosakowski, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: The petition in this case was filed in response tb

respondent's notice of determination of worker classification (notice) dated March

24, 2010. Petitioner seeks a redetermination of employment status pursuant to

-2section 7436.i Respondent determined in the notice that petitioner, Twin Rivers

Farm, Inc. (Twin Rivers), owed employment taxes of $6,951.75, $9,430.20, and

$9,430.20 for the taxable years 2006, 2007, and 2008, respectively (years at issue).

Respondent also determined additions to tax under section 6651(a)(1) of

$1,564.14, $2,121.80, and $2,121.80 and penalties under section 6656 of $131.96,

$179.01, and $179.01 for the taxable years 2006, 2007, and 2008, respectively.

After concessions,2 the issues for decision are: (1) whether petitioner's two

farm workers were employees for purposes of Federal employment taxes during

the years at issue, and (2) whether petitioner is liable for additions to tax and

penalties under sections 6651(a)(1) and 6656, respectively, for the years at issue.

FINDINGS OF FACT

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

facts and the attached exhibits are incorporated herein by this reference. At the

'Unless otherwise indicated, all section references are to the Internal

Revenue Code as amended and in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

2Respondent concedes that petitioner is not liable for the addition to tax

under sec. 6651(a)(2) for the years at issue. In addition, in its pretrial

memorandum petitioner indicated that it would seek relief from Federal

employment taxes under the Revenue Act of 1978, Pub. L. No. 95-600, sec. 530,

92 Stat. at 2885. Petitioner did not address that issue on brief and indicated at trial

that it did not intend to pursue that avenue for relief.

-3time the petition was filed, petitioner was an S corporation with its principal place

of business in Franklin, Tennessee.

Petitioner was formed on October 11, 2005. From January 1, 2006, to

December 31, 2008 (years at issue), petitioner's primary activity was the

raising, inventorying, training, marketing, and showing of horses for anticipated

sales, and/or anticipated prospective use for lessons and/or leasing of horses.

Petitioner's sole owner and sole corporate officer was Diana Militana. Diana

Militana has been involved in the equestrian business at other locations and with

other entities. Diana Militana is married to Richard Militana.

During the years at issue at least six horses were, for at least some time, kept

on property which petitioner had the right to occupy. The property on which

petitioner operates consists of approximately 114 acres and includes woods, a

meadow, a barn with a tack room, a metal corral, a house (in which the Militanas

lived), a trailer, cross fencing, and a fence surrounding the property. The house on

the property includes a stable office (which the Militanas used to work on

equestrian-related business) and is surrounded by grounds on which horses can be

displayed and observed from either the office or the front porch.

During 2006 and continuing through 2007 and 2008 petitioner engaged two

farm workers, Adam Lopez Morales and Nallhelyo Ruiz (workers), to work on the

-4property. The workers lived in the trailer on the property and do not appear to

ever have paid rent. For the years at issue petitioner purchased workers'

compensation and employer's liability insurance from American National Property

and Casualty.

During the years at issue the workers' job duties included: cleaning stalls,

the barn area, the barn offices, the rest room, and the tack room; grooming horses;

watering the horses; and moving the horses between pastures. The harnesses,

brushes and combs, shovels, pitchforks, wheelbarrow, manure spreader, and

brooms used to care for the horses and barn were all owned by petitioner.

During the years at issue Mr. Morales was also primarily responsible for

cutting grass in the pastures and otherwise performing grounds-keeping-related

activities. Mr. Morales used weed whackers, a Bush Hog mower, a tractor, and

other equipment provided to him by petitioner to cut the grass in the pasture.

On occasion the workers also repaired fences on the property. The materials

to maintain the fences were provided by either petitioner directly, or Mr. Morales

would pick them up at the store, sign for the materials, and have the bill sent to

petitioner.

Petitioner paid to each worker weekly compensation by check signed by

Diana Militana in her capacity as president. Mr. Morales was paid $300 per week,

-5and Mr. Ruiz was paid $150 per week. The workers were sometimes given

advances on their weekly compensation. When a worker received an advance on

his weekly compensation, his next several compensation checks were reduced to

repay petitioner for the advanced amount.

With respect to the years at issue petitioner did not file with respondent any

Forms 943, Employer's Annual Federal Tax Return for Agricultural Employees, or

Forms 941, Employer's Quarterly Federal Tax Return. For the years at issue

petitioner did not make deposits of employment tax with respondent and has not

paid any of the employment tax liability that was determined in the notice. For the

years at issue petitioner did not file Forms 1099 with respect to the workers.

OPINION

I. Employee Classification

Respondent's determinations are presumptively correct, and petitioner bears

the burden of proving that those determinations are erroneous. See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). This principle applies to the

Commissioner's determinations that a taxpayer's workers are employees. Boles

Trucking, Inc. v. United States, 77 F.3d 236, 239-240 (8th Cir. 1996); Ewens &

Miller, Inc. v. Commissioner, 117 T.C. 263, 268 (2001).

-6For 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);

see also sec. 3306(i); Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 269.

Whether an individual is an employee must be determined on the basis of the

specific facts and circumstances involved. Prof'l & Exec. Leasing, Inc. v.

Commissioner, 89 T.C. 225, 232 (1987), aff'd, 862 F.2d 751 (9th Cir. 1988);

Simpson v. Commissioner, 64 T.C. 974, 984 (1975). Relevant factors include: (1)

the degree of control exercised by the principal; (2) which party invests in the

work facilities used by the worker; (3) the opportunity of the individual for profit

or loss; (4) whether the principal can discharge the individual; (5) whether the

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

relationship; and (7) the relationship the parties believed they were creating. See

Avis Rent A Car Sys., Inc. v. United States, 503 F.2d 423, 429 (2d Cir. 1974);

Ewens & Miller, Inc, v. Commissioner, 117 T.C. at 270; Weber v. Commissioner,

103 T.C. 378, 387 (1994), aff'd per curiam, 60 F.3d 1104 (4th Cir. 1995). We

consider all of the facts and circumstances of each case, and no single factor is

determinative. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 270; Weber v.

Commissioner, 103 T.C. at 387. Although the determination of employee status is

-7-

to be made by common law concepts, a realistic interpretation of the term

"employee" should be adopted, and doubtful questions should be resolved in favor

of employment in order to accomplish the remedial purposes of the legislation

involved. Breaux & Daigle, Inc. v. United States, 900 F.2d 49, 52 (5th Cir. 1990);

see Schramm v. Commissioner, T.C. Memo. 2011-212; Donald G. Cave A Prof'l

Law Corp. v. Commissioner, T.C. Memo. 2011-48, aff'd, __ Fed. Appx. _ (5th

Cir. Mar. 22, 2012).

1. Degree of Control

The degree of control that the principal exercises over the worker has been

referred to as the crucial test in making the determination. See Clackamas

Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440, 448 (2003); Rosato v.

Commissioner, T.C. Memo. 2010-39. The degree of control necessary to find

employment status varies with the nature of the services provided by the worker.

Weber v. Commissioner, 103 T.C. at 388; Potter v. Commissioner, T.C. Memo.

1994-356. To retain the requisite degree of control, the principal need not actually

direct or control the manner in which the services are performed; it is sufficient if

the principal has the right to do so. Weber v. Commissioner, 103 T.C. at 388;

Potter v. Commissioner, T.C. Memo. 1994-356; sec. 31.3401(c)-1(b), Employment

Tax Regs. A business can retain the requisite control over the details of a

-8worker's service without having to stand over the worker and direct every move

made by that worker. Prof'l & Exec. Leasing, Inc. v. Commissioner, 89 T.C. at

234.

Diana Militana maintains that she did not exercise control over the workers.

However, the nature of the employment arrangement indicates that it is likely that

she had the right to exercise control, even if that right was not often exercised.

The workers were allowed to use petitioner's farm equipment (including a tractor)

and supplies to maintain the appearance of the property. It is difficult to imagine

that the workers' use of petitioner's valuable equipment could not have been

controlled by petitioner in the event of misuse by the workers. Throughout the

years at issue Diana Militana was at the farm "most of the time" and, therefore,

had the opportunity to supervise the work being done on the farm. It is unlikely

that if the workers were careless in their use of the equipment petitioner would not

have exercised control over their activities. In addition, the workers were

responsible for performing services that could affect petitioner's primary assets, its

horses. That petitioner would turn the responsibility of caring for the horses over

to the workers without retaining the right to control their work is implausible. As

a result, we find that this factor is supportive of the existence of an employeremployee relationship between petitioner and the workers for the years at issue.

2. Investment in Facilities

The fact that a worker provides his or her own tools or owns a vehicle that

is used for work is indicative of independent contractor status. Ewens & Miller.

Inc. v. Commissioner, 117 T.C. at 271. Petitioner owned all of the equipment that

the workers used to perform their services including, but not limited to: the

equipment and supplies used to care for the horses and the pastures and to clean

the stalls and other rooms in the barn; the tractor used to maintain the grounds; and

the trailer where the workers lived. As a result, the workers had no financial

investment in the rendering of services to petitioner. Because petitioner made all

of the investments in the equipment supplied to the workers and provided them

with everything needed to perform their services, this factor is supportive of the

existence of an employer-employee relationship.

3. Opportunity for Profit or Loss

The opportunity for profit or loss indicates nonemployee status. Simpson v.

Commissioner, 64 T.C. 974, 988 (1975); Rosato v. Commissioner, T.C. Memo.

2010-39. During the years at issue, Mr. Morales was paid $300 per week and Mr.

Ruiz was paid $150 per week, regardless of the hours worked or their productivity.

Because petitioner provided the workers with all of the necessary equipment and

supplies for the job, the workers had no opportunity to make a profit with respect

- 10 to the materials used on the job. Given the salarylike nature of the workers' pay

and their lack of entrepreneurial risk or opportunity, this factor also indicates there

was an employer-employee relationship.

4. Right To Discharge

There is no evidence in the record of the existence of any formal or informal

agreement or contract that would preclude petitioner's discharging the workers.

Employers typically have the right to terminate employees at will. Ellison v.

Commissioner, 55 T.C. 142, 155 (1970); Colvin v. Commissioner, T.C. Memo.

2007-157, aff'd, 285 Fed. Appx. 157 (5th Cir. 2008). Without evidence of any

limitation of that right, we conclude that this factor supports a finding of an

employer-employee relationship.

5. Work Is Part of Principal's Regular Business

Work that is part of the principal's regular business is indicative of

employee status. Simpson v. Commissioner, 64 T.C. at 989; Rosato v.

Commissioner, T.C. Memo. 2010-39. During the years at issue petitioner's

primary activity was the raising, inventorying, training, marketing, and showing of

horses for anticipated sales, and/or anticipated prospective use for lessons and/or

leasing of horses. The work performed by the workers was at least an ancillary

part of petitioner's business during the years at issue. The record indicates that the

- 11 -

workers were not responsible for the marketing and sale of horses, nor were they

responsible for the training of horses. However, their services kept the farm

presentable to potential buyers, kept the grounds safe for the horses, and aided in

the care of petitioner's primary assets. Given that the workers provided services

which were supportive of petitioner's business, we find that this factor is also

indicative of an employer-employee relationship.

6. Permanency of Relationship

Permanency of a working relationship is indicative of an employeremployee relationship. Rosemann v. Commissioner, T.C. Memo. 2009-185. In

contrast, a transitory work relationship may weigh in favor of independent

contractor status. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 273.

Here, the workers were employed by petitioner throughout the years at

issue. Furthermore, the workers actually maintained their primary residence on

petitioner's property in a trailer provided to them by petitioner. Although there is

no evidence of a contractual arrangement between petitioner and the workers

creating an explicit permanent employment relationship, the relationship in

practice was certainly ongoing. Because the workers were long-term employees

who actually resided on the farm, it cannot be said that the relationship was

- 12 transitory or temporary. Therefore, we find that this factor is also supportive of an

employer-employee relationship.

7. Relationship the Parties Thought They Created

Petitioner contends that the relationship created by the parties was intended

to be that of a business and independent contractors. However, the relationship

between petitioner and the workers does not support such a characterization. The

record indicates that petitioner purchased workers' compensation and employer's

liability insurance for the years at issue. In addition, petitioner covered all of the

job-related expenses necessary for the workers to perform their duties. Petitioner

even provided a residence on the property for the workers and allowed the workers

to receive advances on their compensation. These actions are far more indicative

of an intention to create an employment relationship than they are of an intention

to create an independent-contractor relationship. Therefore, this factor also

supports the existence of an employer-employee relationship.

On the basis of a careful consideration of the foregoing factors, in the light

of the facts and circumstances particular to this case, we hold that the workers

were petitioner's employees for purposes of Federal employment taxes during the

years at issue.

- 13 II. Additions to Tax Under Section 6651(a)(1)

Respondent determined that for each year at issue petitioner is liable for an

addition to tax under section 6651(a) (1) for failure to timely file required tax

returns. Section 6651(a) (1) provides for an addition to tax for failure to timely

file a return. The addition to tax is equal to 5% of the tax required to be shown on

the return for each month or fraction thereof for which there is a failure to file, not

to exceed 25%. A taxpayer is not liable for an addition under section 6651(a)(1) if

the failure to timely file was due to reasonable cause and not due to willful

neglect. Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241, 245-246 (1985).

To show reasonable cause, the taxpayer must show that it could not file the return

on time even though it exercised ordinary business care and prudence. See

Crocker v. Commissioner, 92 T.C. 899, 913 (1989); sec. 301.6651-1(c)(1), Proced.

& Admin. Regs. "Willful neglect" means a "conscious, intentional failure or

reckless indifference." Boyle, 469 U.S. at 245.

Employers of agricultural workers must report employment taxes on Form

943. Sec. 31.6011(a)-1(a) (2)(ii), Employment Tax Regs. Petitioner has not filed

Forms 943 for any of the years at issue. Petitioner has submitted no credible

evidence that it exercised ordinary business care and prudence in its failure to file

- 14 Forms 943 or that it could not file the returns when due.3 Accordingly, we find

that petitioner is liable for the addition to tax under section 6651(a)(1) for each of

the years at issue.

III. Penalties Under Section 6656

Respondent determined that for each year at issue petitioner is liable for a

penalty under section 6656 for failure to make deposits of employment taxes. If a

taxpayer is more than 15 days late in depositing employment tax, section 6656

imposes a 10% penalty. Sec. 6656; see also Ewens & Miller, Inc. v.

Commissioner, 117 T.C. at 268. The taxpayer is not liable for the section 6656

penalty if the late deposit was due to reasonable cause and not due to willful

neglect. Sec. 6656(a).

3Petitioner contends that Diana Militana was involved in two previous tax

audits involving herself and businesses similar to petitioner's operation and that

those businesses had workers performing the same services, under the same

conditions and payment schedules, as the workers hired by petitioner during the

years in issue. Petitioner contends that in both of the previous instances, the

workers were designated by Internal Revenue Service auditors as independent

contractors and not employees. Petitioner's support for this contention is limited

to Mrs. Militana's testimony. The record before us is insufficient to indicate with

any specificity the details of any previous audit determinations, the conclusions

reached by the auditors, or that the businesses involved were substantially similar

to petitioner's. We also note that petitioner's failure to file Forms 1099 is

inconsistent with its contentions regarding the prior audits.

- 15 Petitioner failed to make employment tax deposits. Petitioner submitted no

credible evidence that it exercised ordinary business care and prudence in its

failure to deposit employment taxes or that it could not make the deposits when

due. Accordingly, for each of the years at issue, we find that petitioner is liable

for the section 6656 penalty.

In reaching our holdings herein, we have considered all arguments made,

and to the extent not mentioned above, we find them to be moot, irrelevant, or

without merit.

To reflect the foregoing, including respondent's concession,

Decision will be entered for

respondent as to the deficiencies,

additions to tax under section

section 6651(a)(1), and penalties

under section 6656 and for

petitioner as to the section

6651(a)(2) additions to tax.