UNITED STATES TAX COURT

ALS

144 T.C. No. 7

UNITED STATES TAX COURT

TFT GALVESTON PORTFOLIO, LTD., AS SUCCESSOR IN INTEREST FOR

TFT #2, LTD., ET AL.,¹ Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 29995-11, 30001-11,

682-12, 1082-12,

1175-12, 1180-12,

1533-12.

Filed February 26, 2015.

P received a Notice of Determination Concerning Worker

Classification and corresponding employment tax liabilities on its

own behalf and other such notices as successor in interest to various

'Cases of the following petitioners are consolidated herewith: TFT

Galveston Portfolio, Ltd., As Successor in Interest to TFT #2, Ltd., docket No.

29995-11; TFT Galveston Portfolio, Ltd., As Successor in Interest to TFT #1, Ltd.,

docket No. 30001-11; TFT Galveston Portfolio, Ltd., Successor in Interest to TFT

#4, Ltd., docket No. 682-12; TFT Galveston Portfolio, Ltd., docket No. 1082-12;

TFT Galveston Portfolio, Ltd., As Successor in Interest to TFT Chateau LafitteWJT, Ltd., docket No. 1175-12; TFT Galveston Portfolio, Ltd., As Successor in

Interest to TFT Somerset-WJT, Ltd., docket No. 1180-12; and TFT Galveston

Portfolio, Ltd., As Successor in Interest to TFT #3, Ltd., docket No. 1533-12.

SERVED Feb 26 2015

-2partnerships. The parties dispute whether P was a successor in

interest under Texas law, and R asserts this Court should establish a

Federal standard of successor in interest as Federal common law. In

addition, the status of P's workers for the period involving P is itself

at issue.

Held: On the facts before us, P was not a successor in interest

under Texas law.

Held, further, we do not adopt a Federal common law standard

of successor in interest.

Held, further, P's workers were employees.

Gary I. Currier, for petitioners.

Jeremy H. Fetter and Jason D. Laseter, for respondent.

GOEKE, Judge: These consolidated cases2 are before us on petitions for

redetermination of employment status filed pursuant to section 7436.3 In separate

2We refer to TFT Galveston Portfolio, Ltd., as petitioner or TFT Galveston

Portfolio when referencing docket No. 1082-12 alone regarding worker

classification for the fourth quarter of 2004 and successor in interest. We refer to

the partnerships named in the other consolidated cases as petitioners when

referencing docket Nos. 29995-11, 30001-11, 682-12, 1175-12, 1180-1.2, and

1533-12 regarding worker classification.

3Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the period at issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

-3Notices of Determination Concerning Worker Classification (notices) respondent

determined that for purposes of Federal employment taxes, the individuals listed in

Table 1 attached to the notices should be legally classified as petitioners'

employees and thus determined deficiencies in, additions to, and penalties with .

respect to petitioner's Federal employment taxes as follows:4

TFT Galveston Portfolio, Ltd., docket No. 1082-12

Additions to tax

Period

ended

Type of tax

12/31/2004

FICA, ITW

12/31/2004

FUTA

Amount

Sec.

6651(a)(1)

Sec.

6651(a)(2)

Penalty

sec. 6656

$36,362

$8,182

$9,091

$690

5,414

1,218

1,354

541

TFT Galveston Portfolio, Ltd., As Successor in Interest to TFT #1, Ltd., docket No. 30001-11

Additions to tax

Period

ended

Type of tax

Amount

Sec.

6651(a)(1)

Sec.

6651(a)(2)

Penalty

sec. 6656

3/31/2000

FICA, ITW

$8,817

$1,984

$2,204

$156

6/30/2000

FICA, ITW

7,300

1,642

1,825

129

9/30/2000

FICA, ITW

7,988

1,797

1,997

141

12/31/2000

FICA, ITW

7,926

1,783

1,981

140

.

4In this case, the Court uses the term "employment taxes" as it is defined by

sec. 7436(e) to refer to taxes imposed pursuant to subtitle C of the Internal

Revenue Code, including taxes imposed under secs. 3402 (Federal income tax

withholding), 3102 and 3111 (FICA tax), and 3301 (FUTA tax). We round all

amounts to the nearest dollar.

_4_

12/31/2000

FUTA

2,759

621

690

276

3/31/2001

FICA, ITW

7,730

1,739

1,932

137

6/30/2001

FICA, ITW

8,287

1,865

2,072

146

9/30/2001

FICA, ITW

8,465

1,905

2,116

151

12/31/2001

FICA, ITW

7,977

1,795

1,994

143

12/31/2001

FUTA

2,349

528

587

235

3/31/2002

FICA, ITW

7,524

1,693

1,881

136

6/30/2002

FICA, ITW

7,340

1,652

1,835 .

133

9/30/2002

FICA, ITW

7,437

1,673

1,859

135

12/31/2002

FICA, ITW

7,615

1,713

1,904

138

12/31/2002

FUTA

2,568

578

642

257

3/31/2003

FICA, ITW

6,882

1,548

1,721

131

6/30/2003

FICA, ITW

7,121

1,602

1,780

135

9/30/2003

FICA, ITW

7,554

1,700

1,888

143

12/31/2003

FICA, ITW

7,511

1,690

1,878

143

12/31/2003

FUTA

1,865

420

466

187

3/31/2004

FICA, ITW

7,598

1,710

1,899

144

6/30/2004

FICA, ITW

7,838

1,763

1,959

149

9/30/2004

FICA, ITW

8,837

1,988

2,209

168

12/31/2004

FICA, ITW

2,837

638

709

54

12/31/2004

FUTA

1,810

407

452

181

TFT Galveston Portfolio, Ltd., As Sticcessor in Interest to TFT #2, Ltd., docket No. 29995-11

Additions to Tax

Period

ended

Type of tax

3/31/2000

FICA, ITW

Amount

Sec.

6651(a)(1)

Sec.

6651(a)(2)

Penalty

sec. 6656

$17,667

$3,975

$4,417

$312

-56/30/2000

FICA, ITW

19,286

4,339

4,822

.

341

9/30/2000

FICA, ITW

18,009

4,052

4,502

318

12/31/2000

FICA, ITW

17,014

3,828

4,254

301

12/31/2000

FUTA

4,298

967

1,075

430

3/31/2001

FICA, ITW

17,372

3,909

4,343

307

6/30/2001

FICA, ITW

17,478

3,933

4,370

309

9/30/2001

FICA, ITW

17,459

3,928

4,365

312

12/31/2001

FICA, ITW

19,564

4,402

4,891

350

12/31/2001

FUTA

3,726

838

931

373

3/31/2002

FICA, ITW

18,301

4,118

4,575

331

6/30/2002

FICA, ITW

16,858

3,793

4,215

305

9/30/2002

FICA,'ITW

20,032

4,507

5,008

362

12/31/2002

FICA, ITW

15,588

3,507

3,897

282

12/31/2002

FUTA

4,492

1,011

1,123

449

3/31/2003

FICA, ITW

9,346

2,103

2,337

177

12/31/2003

FUTA

1,438

324

359

144

TFT Galveston Portfolio, Ltd., As Successor in Interest to TFT # 3, Ltd., docket No. 1533-12

Additions to tax

Period

ended

Amount

Sec.

6651(a)(1)

Sec.

6651(a)(2)

Penalty

sec. 6656

Type of tax

3/31/2000

FICA, ITW

$20,126

$4,528

$5,032

$356

6/30/2000

FICA, ITW

22,320

5,022

5,580

394

9/30/2000

FICA, ITW

27,588

6,207

6,897

487

12/31/2000

FICA, ITW

26,026

5,856

6,507

460

12/31/2000

FUTA

8,045

1,810

2,011

805

3/31/2001

FICA, ITW

21,074

4,742

5,268

372

-66/30/2001

FICA, ITW

22,729

5,114

5,682

402

9/30/2001

FICA, ITW

21,677

4,877

5,419

387

12/31/2001

FICA, ITW

20,618

4,639

5,155

369

12/31/2001

FUTA

6,706

1,509

1,676

671

3/31/2002

FICA, ITW

17,384

3,911

4,346

314

6/30/2002

FICA, ITW

18,792

4,228

4,698

340

9/30/2002

FICA, ITW

19,124

4,303

4,781

346

12/31/2002

FICA, ITW

18,367

4,133

4,592

332

12/31/2002

FUTA

5,484

1,234

1,371

548

3/31/2003

FICA, ITW

14,287

3,215

3,572

271

6/30/2003

FICA, ITW

14,715

3,311

3,677

279

9/30/2003

FICA, ITW

14,957

3,365

3,739

284

12/31/2003

FICA, ITW

14,603

3,286

3,651

277

12/31/2003

FUTA

4,968

1,118

1,242

497

3/31/2004

FICA, ITW

11,271

2,536

2,818

214

6/30/2004

FICA, ITW

11,713

2,635

2,928

222

9/30/2004

FICA, ITW

20,189

4,543

5,047

383

12/31/2004

FICA, ITW

6,874

1,547

1,718

130

12/31/2004

FUTA

5,230

1,177

1,308

523

TFT Galveston Portfolio, Ltd., Successor in Interest to TFT # 4, Ltd., docket No. 682-12

Additions to tax

Period

ended

Amount

Sec.

6651(a)(1)

Sec.

6651(a)(2)

Penalty

sec. 6656

Type of tax

3/31/2000

FICA, ITW

$14,136

$3,181

$3,534

$250

6/30/2000

FICA, ITW

19,532

4,395

4,883

345

9/30/2000

FICA, ITW

14,889

3,350

3,722

263

-712/31/2000

FICA, ITW

14,755

3,320

3,689

261

12/31/2000

FUTA

4,400

990

1,100

440

3/31/2001

FICA, ITW

11,724

2,368

2,931

207

6/30/2001

FICA, ITW

13,868

3,120

3,467

245

9/30/2001

FICA, ITW

11,202

2,520

2,800

.200

12/31/2001

FICA, ITW

10,913

2,455

2,728

195

12/31/2001

FUTA

3,752

844

938

375

3/31/2002

FICA, ITW

10,185

2,292

2,546

184

6/30/2002

FICA, ITW

10,675

2,402

2,669

193

9/30/2002

FICA, ITW

8,655

1,947

2,164

157

12/31/2002

FICA, ITW

9,981

2,246

2,495

181

12/31/2002

FUTA

3,395

764

849

340

3/31/2003

FICA, ITW

5,437

1,223

1,359

103

12/31/2003

FUTA

837

188

209

84

TFT Galveston Portfolio, Ltd., As Successor in Interest to TFT Chateau Lafitte-WJT., Ltd.,

docket No. 1175-12

Additions to tax

Period

ended

Type of tax

Amount

Sec.

6651(a)(1)

Sec.

6651(a)(2)

Penalty

sec. 6656

3/31/2003

FICA, ITW

$4,662

$1,049

$1,165

$88

6/30/2003

FICA, ITW

15,803

3,556

3,951

300

9/30/2003

FICA, ITW

16,266

3,660

4,067

309

12/31/2003

FICA, ITW

14,196

3,194

3,549

269

12/31/2003

FUTA

3,727

839

932

373

3/31/2004

FICA, ITW

12,906

2,904

3,227

245

6/30/2004

FICA, ITW

14,503

3,263

3,626

275

.

-89/30/2004

FICA, ITW

13,267

2,985

3,317

252

12/31/2004

FICA, ITW

4,402

991

1,101

84

12/31/2004

FUTA

2,754

620

. 689

275

TFT Galveston Portfolio, Ltd., As Successor in Interest to TFT Somerset-WJT., Ltd., docket

No. 1180-12

Additions to tax

Period

ended

Amount

Sec.

6651(aX1)

Sec.

6651(a)(2)

Penalty

sec. 6656

Type of tax

3/31/2003

FICA, ITW

$2,475

$557

$619

$47

6/30/2003

FICA, ITW

8,721

1,962

2,180

166

9/30/2003

FICA, ITW

8,997

2,024

2,249

171

12/31/2003

FICA, ITW

8,007

1,802

2,002

152

12/31/2003

FUTA

3,034

683

758

303

3/31/2004

FICA, ITW

8,124

1,828

2,031

154

6/30/2004

FICA, ITW

8,149

1,833

2,037

155

9/30/2004

FICA, ITW

9,047

2,036

2,262

172

12/31/2004

FICA, ITW

3,303

743

826

63

12/31/2004

FUTA

3,077

692

769

308

_9_

After concessions,5 the issues for decision are: (1) whether the workers

listed in the notice of determination for TFT Galveston Portfolio, Ltd.'s ("TFT

Galveston Portfolio") fourth quarter of the taxable year 2004 were properly

classified as employees for purposes of Federal employment taxes. We hold that

the identified individuals were TFT Galveston Portfolio's employees and TFT

Galveston Portfolio is liable for the employment taxes determined with respect to

those individuals; (2) whether, in addition to being liable for employment taxes for

the fourth quarter of taxable year 2004, TFT Galveston Portfolio is liable for the

Federal employment taxes, additions to tax, and penalties, as a successor in

interest to TFT #1, Ltd., TFT #2, Ltd., TFT #3, Ltd., TFT #4, Ltd., TFT Chateau

Lafitte-WJT, Ltd., and TFT Somerset-WJT, Ltd. We hold it is not; and (3) whether

TFT Galveston Portfolio is liable for additions to tax pursuant to section

6651(a)(1) and (2) and penalties pursuant to section 6656. We hold that it is so

liable.

5TFT Galveston Portfolio concedes that it is not entitled to treatment under

the Revenue Act of 1978, Pub. L. No. 95-600, sec. 530, 92 Stat. at 2885, as

amended, with respect to the workers listed in any of the notices for the period at

issue. Respondent concedes that the workers who performed janitorial and maid

services as well as those who performed pool and fountain maintenance for the

apartment complexes, along with a number of other listed workers, were not

employees of petitioners during the period at issue. Consequently, our decision in

docket No. 1082-12 will be entered under Rule 155.

- 10 FlNDINGS OF FACT

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

stipulations of facts are incorporated herein by this reference.

Petitioner's Organizational Structure

Petitioner, TFT Galveston Portfolio, and its alleged predecessors, TFT #1,

Ltd. (TFT #1); TFT #2, Ltd. (TFT #2); TFT #3, Ltd. (TFT #3); TFT #4, Ltd. (TFT

#4); TFT Chateau Lafitte-WJT (TFT Chateau Lafitte-WJT); and TFT SomersetWJT (TFT Somerset-WJT), are all organized as Texas limited partnerships. At all

relevant times TFT Galveston Portfolio's principal office and mailing address was

in Tomball, Texas.

During the period at issue TFT #1 comprised one general partner, TFT

Holdings, L.L.C. (TFT Holdings), and one limited partner, Walter J, Teachworth.

From January 1, 2000, through October 26, 2004, its principal business activity

was the operation of The Ebbtide apartment complex. TFT #1's final Form 1065,

U.S. Return of Partnership Income, reported that it was for the period January 1

through October 31, 2004. No additional Forms 1065 were filed for TFT #1 after

that return. On November 1, 2006, the State of Texas canceled the certificate of

limited partnership for TFT #1.

- 11 TFT #2 comprised two general partners, TFT Holdings and Hunters R. Hill,

Inc., and two limited partners, Mr. Teachworth and Henry Hamman. From

January 1, 2000, through February 26, 2003, its principal business activity was the

operation of the Chateau Lafitte apartment complex. TFT #2's final Form 1065

reported that it was for the period January 1 through February 28, 2003. No

additional Forms 1065 were filed for TFT #2 after that return. On November 1,

2006, the State of Texas canceled the certificate of limited partnership for TFT #2.

On or about February 26, 2003, Mr. Hamman sold his partnership interest in

TFT #2 to Mr. Teachworth, who created TFT Chateau Lafitte-WJT to operate the

Chateau Lafitte apartment complex. TFT Chateau Lafitte-WJT comprised one

general partner, TFT Holdings, and one limited partner, Mr. Teachworth. From

February 26, 2003, through October 26, 2004, its principal business activity was

the operation of the Chateau Lafitte apartment complex. TFT Chateau LafitteWJT's final Form 1065 reported that it was for the period January 1 through

October 31, 2004. No additional Forms 1065 were filed for TFT Chateau LafitteWJT after that return. On August 16, 2006, the State of Texas canceled the

certificate of limited partnership for TFT Chateau Lafitte-WJT.

TFT #3 comprised one general partner, TFT Holdings, and one limited

partner, Mr. Teachworth. From January 1, 2000, through October 26, 2004, its

- 12 principal business activity was the operation of The Seasons Resort apartment

complex. TFT #3's final Form 1065 reported that it was for the period January 1

through October 31, 2004. No additional Forms 1065 were filed for TFT #3 after

that return. On November 1, 2006, the State of Texas canceled the certificate of

limited partnership for TFT #3.

TFT #4 comprised two general partners, TFT Holdings and Hunters R. Hill,

Inc., and two limited partners, Mr. Teachworth and Mr. Hamman. From January

1, 2000, through February 26, 2003, its principal business activity was the

operation of the Somerset Retirement Village apartment complex. TFT #4's final

Form 1065 reported that it was for the period January 1 through February 28,

2003. No additional Forms 1065 were filed for TFT #4 after that return. On

October 27, 2004, the State of Texas canceled the certificate of limited partnership

for TFT #4.

On or about February 26, 2003, Mr. Hamman sold his partnership interest in

TFT #4 to Mr. Teachworth, who created TFT Somerset-WJT to operate the

Somerset Retirement Village apartment complex. TFT Somerset-WJT comprised

one general partner, TFT Holdings, and one limited partner, Mr. Teachworth.

From February 26, 2003, through October 26, 2004, its principal business activity

was the operation of the Somerset Retirement Village apartment complex. TFT

- 13 Somerset-WJT's final Form 1065 reported that it was for the period January 1

through October 31, 2004. No additional Forms 1065 were filed for TFT Chateau

Lafitte-WJT after that return. On August 16, 2006, the State of Texas canceled the

certificate of limited partnership for TFT Somerset-WJT.

TFT Galveston Portfolio comprised one general partner, TFT Portfolio

Investments, L.L.C., and one limited partner, Mr. Wentworth. On October 26,

2004, the four apartment complexes were conveyed from TFT #1, TFT Chateau

Lafitte-WJT, TFT #3, and TFT Somerset-WJT, respectively, to TFT Galveston

Portfolio. TFT Galveston Portfolio did not expressly assume the liabilities of the

other partnerships. From October 26 through December 31, 2004, its principal

business activity was the operation of The Ebbtide, Chateau Lafitte, The Seasons

Resort, and Somerset Retirement Village apartment complexes (collectively,

apartment properties).

During the period at issue, Mr. Teachworth was the only owner of the

partnerships who was actively involved in operating the business. He signed

numerous documents on behalf of TFT Holdings, the listed general partner of TFT

#1, TFT #2, TFT #3, TFT #4, TFT Chateau Lafitte-WJT, and TFT Somerset-WJT,

as its "manager", "authorized manager", and "sole manager", and he was the sole

manager of TFT Galveston Portfolio during the period at issue.

- 14 Petitioners' Financial Information

During the period at issue, petitioners employed Galen Mansee, a certified

public accountant, to perform accounting services, including gathering of data

from apartment managers, payment of all bills approved by Mr. Teachworth, bank

reconciliations, and preparation of tax returns for the partnerships and Mr. and

Mrs. Teachworth.

Petitioners maintained and used a commercial checking account funded

entirely by Mr. Teachworth. All expenses for the apartment properties and all

payments to petitioners' workers were approved by Mr. Teachworth and were

made from that account. Mr. Teachworth provided all the information and coding

for the general ledger entries prepared by Mr. Mansee. Following the transfer of

the Chateau Lafitte and Somerset Retirement Village complexes to TFT Chateau

Lafitte-WJT and TFT Somerset-WJT, respectively, Mr. Mansee continued

maintaining the same general ledgers he had previously used for TFT #2 and TFT

#4.

Petitioners' Workers

The workers for petitioners during the period at issue fall within four

groups: (1) apartment managers and leasing agents, (2) security personnel, (3) a

maintenance supervisor, and (4) general maintenance workers. The general

- 15 maintenance workers performed a variety of tasks including appliance and air

conditioning maintenance, cleanup, landscape maintenance, drywall repairs,

painting, roof maintenance, carpentry, and general miscellaneous maintenance.

The Apartment Managers

During the period at issue Mr. Teachworth hired all the apartment managers.

They were not required to submit bids or fill out any applications before securing

their positions. Nor did the managers sign written agreements for the work they

performed.

Mr. Teachworth established the management office's hours of operation for

each of the apartment properties, and he set the hours that the managers were

supposed to work. He also established the monthly salaries that were paid to the

apartment managers, along with nominal performance-based bonuses. Further, the

apartment managers were provided onsite housing and had their utilities expenses

paid as part of their compensation.

Mr. Teachworth established all the managers' duties, leaving them with

little to no discretion in how services were to be performed. They had to consult

with Mr. Teachworth when determining how to handle vacancies at the apartment

properties and had to seek approval to return security deposits to departing

- 16 tenants. He established the community rules and regulations, and the rent for the

properties. The managers could not change policies without his approval.

Mr. Teachworth provided the apartment managers with the office supplies

and equipment required to perform their duties. He reimbursed them for expenses

they incurred while performing their duties. He established a petty cash fund,

which he monitored, to purchase office supplies and postage and for general office

use. Finally, he would directly pay any replacement manager for the time worked

in place of the normal manager.

Mr. Teachworth supervised all aspects of the apartment managers' work.

He had to approve the managers' time off requests, and he could fire them at any

time. During the period at issue none of the managers worked at any properties

that were not owned by Mr. Teachworth.

The Maintenance Supervisor

During the period at issue petitioners employed Mr. Adams as the

maintenance supervisor for the apartment properties. In that capacity he

performed general repairs and any required maintenance project. He also

supervised all the other maintenance workers. He was not required to submit a bid

or fill out an application before securing his position. Mr. Adams did not enter

- 17 into a written agreement for the work he performed. He was paid a monthly

salary.

Mr. Teachworth was Mr. Adams' supervisor with regard to the services he

performed for petitioners. Mr. Teachworth had to approve any maintenance work

and expenditures that were not routine. During the period at issue Mr. Adams

provided full-time services to petitioners. He averaged around 50 hours per week

on the job. Additionally, he was on call 24 hours a day, 7 days a week.

Mr. Adams was never personally at risk of losing money by working for

petitioners because Mr. Teachworth maintained accounts with Home Depot,

Maintenance Warehouse, and Chalmers Hardware that were used to purchase

materials and supplies required to perform his job. Additionally, he was

reimbursed for any expenses he incurred performing his duties as maintenance

supervisor. However, Mr. Adams supplied some of his own hand tools and

equipment including saws, a sewer machine, spray rigs, a welder, and scaffolding.

Mr. Teachworth directly paid any replacement maintenance supervisor for the time

worked in place of Mr. Adams.

In addition to the standard duties Mr. Adams performed for petitioners, he

established a business called Circle A through which he performed occasional

maintenance services for Exact Realty, a property management company, and for

- 18 petitioners during the period at issue. However, the services provided to

petitioners through Circle A were separate and distinct from the typical services he

performed for petitioners.

The Maintenance Workers

During the period at issue petitioners employed numerous maintenance

workers for general maintenance of the apartment properties. Those workers were

not required to submit bids or fill out applications before securing their positions.

Nor did they have written agreements for the work they performed. The workers

were hired by either the maintenance supervisor or the apartment managers, but

Mr. Teachworth had the final approval over all hiring decisions. Their hours were

set by Mr. Adams, and they could be fired at any time. For their work, the

maintenance workers were paid an hourly rate, with Mr. Teachworth having final

approval on that rate.

The maintenance workers were never personally at risk of losing money by

working for petitioners, because the materials used in performing their services for

petitioners were provided by Mr. Teachworth. All the maintenance workers were

supervised by Mr. Adams. They mostly worked at the same apartment complex

each day unless one of the complexes had a project requiring more workers.

- 19 The Security Workers

During the tax years 2000 and 2001 The Seasons Resort apartment complex

had security workers. The Somerset Retirement Village had security workers for

all of 2000 and the first two months of 2001. Mr. Teachworth hired the security

workers, and they reported to him and the apartment managers where they worked.

Their hours were set by Mr. Adams and Mr. Teachworth, but the amount they

were paid was determined solely by Mr. Teachworth. None of the security

workers were off-duty police officers during the period at issue, and their presence

was included in the advertisements and was a selling point for the apartment

complexes.

Federal Tax Filings

TFT #1, TFT #2, TFT #3, TFT #4, TFT Chateau Lafitte-WJT, and TFT

Somerset-WJT all filed Forms 1065 for period at issue. TFT Galveston Portfolio

did not. However, none of the six partnerships filed any Forms 941, Employer's

Quarterly Federal Tax Return, or Forms 940, Employer's Annual Federal

Unemployment (FUTA) Tax Return, for the period at issue. Nor did they file or

furnish any Forms 1099-MISC, Miscellaneous Income, to any of the workers in

question. Petitioners did not deposit employment taxes for the relevant periods.

Respondent previously audited the Forms 1065 of petitioners for the period at

- 20 issue, at which time respondent learned of petitioners' treating the workers in

question as independent contractors and deducting their compensation accordingly

on Forms 1065. Because the IRS had not received any Forms 940 and 941 from

petitioners, IRS employees prepared substitutes for returns (SFRs) in accordance

with the authority provided by section 6020(b).

Notices

On October 11, 2011, respondent issued a notice of determination to TFT

Galveston Portfolio in which he determined that (1) workers listed in Table 1

attached to the notice were to be treated as petitioner's employees, (2) petitioner

was not entitled to relief under the Revenue Act of 1978 (RA '78), Pub. L. No. 95600, sec. 503(a), 92 Stat. at 2885, as amended, and (3) petitioner was liable for

income tax withholding, FICA and FUTA taxes, the section 6651(a)(1) and (2)

additions to tax, and the section 6656 penalty for failure to make deposit of taxes

for the period at issue.

Between September 29 and October 13, 2011, respondent issued an

additional six separate notices of determination to TFT Galveston Portfolio as

successor in interest to TFT #1, TFT #2, TFT #3, TFT #4, TFT Chateau LafitteWJT, and TFT Somerset-WJT, in which he determined that (1) workers listed in

Table 1 attached to each notice were to be treated as petitioner's employees, (2)

- 21 petitioner was not entitled to relief under RA '78 sec. 530(a), and (3) petitioner

was liable for income tax withholding, FICA and FUTA taxes, the section

6651(a)(1) and (2) additions to tax, and the section 6656 penalty for failure to

make deposit of taxes for the period at issue.

Petitioner filed timely petitions challenging the determinations.

OPINION

I.

Jurisdiction

Under section 7436(a) this Court has jurisdiction to determine (1) whether

an individual providing services to a "person" is that person's employee, (2)

whether the person, if in fact an employer, is entitled to relief under RA' 78 sec.

530, and (3) the correct amount of employment taxes which relate to the

Commissioner's determination concerning worker classification. Charlotte's

Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 102-103 (2003), aff'd, 425

F.3d 1203 (9th Cir. 2005). Section 7701(a)(1) provides that "[t]he term 'person'

shall be construed to mean and include an individual, a trust, estate, partnership,

association, company or corporation." Respondent issued notices of determination

to TFT Galveston Portfolio determining that the individuals in question were TFT

Galveston Portfolio's employees and that TFT Galveston Portfolio owes

employment taxes, additions to tax, and penalties with respect thereto; and TFT

- 22 Galveston Portfolio filed a timely petition in response. Therefore, we have

jurisdiction to hear the challenge to respondent's determinations.

II.

Successor in Interest

The structure of petitioner and the other six partnerships is, for the most

part, uncontested, as demonstrated by the extensive stipulations of those facts.

The issue before the Court is whether successor liability should be imposed on

TFT Galveston Portfolio as the successor in interest to TFT #1, TFT #2, TFT #3,

TFT #4, TFT Chateau Lafitte-WJT, and TFT Somerset-WJT. TFT Galveston

Portfolio's liability for the employment tax, additions to tax, and penalties

determined with respect to TFT Galveston Portfolio as successor in interest to the

other six partnerships will turn on this decision.6

A successor in interest is "[o]ne who follows another in ownership or

control of property. A successor in interest retains the same rights as the original

owner, with no change in substance." Black's Law Dictionary 1570 (9th ed.

2009). Successor liability relies on two policy goals: "compensating plaintiffs as

if the damage-causing business had not terminated; and preventing the rule of

successor liability from otherwise reducing the free transferability of firms or their

6Respondent is arguing liability only under the theory of successor in

interest and not under sec. 6901, providing for transferee liability, as respondent

did not issue notices of transferee liability to TFT Galveston Portfolio.

- 23 assets." Mark J. Roe, "Mergers, Acquisitions, and Tort: A Comment on the

Problem of Successor Corporation Liability", 70 Va. L. Rev. 1559, 1561-1562

(1984). The Government may rely on the successor liability doctrine to hold a

successor corporation liable for the tax debts of its predecessor. See Atlas Tool

Co. v. Commissioner, 614 F.2d 860, 871 (3d Cir. 1980), aff'g 70 T.C. 86 (1978).

Further, if permitted by State law, successor liability may be asserted when a

partnership transfers its assets to another entity. See Graham v. James, 144 F.3d

229, 240 (2d Cir. 1998) ("'The traditional rule of corporate successor liability and

the exceptions to the rule are generally applied.regardless of whether the

predecessor or successor organization was a corporation or some other form of

business organization.'" (quoting 63 Am. Jur. 2d, Products Liability, sec. 117

(1984)).7

A.

Application of Federal Common Law

Respondent argues that because the uniform imposition and collection of

employment taxes is a significant Federal interest, we should disregard State law

and adopt the broader parameters of Federal common law in determining

successor liability in employment tax cases.

7See also IRS CCA 200840001 (Oct. 3, 2008) (discussing the IRS' ability to

collect employment tax from a multimember LLC taxed like a partnership).

- 24 The application of Federal common law in a novel context requires "'a

significant conflict between some federal policy or interest and the use of state

law'". Atherton v. FDIC, 519 U.S. 213, 218 (1997) (quoting Wallis v. Pan Am.

Petroleum Corp., 384 U.S. 63, 68 (1966)). The Supreme Court cautioned against

the creation of Federal common law, noting that "'cases in which judicial creation

of a special federal rule would be justified * * * are * * * "few and restricted".'"

Id. at 218 (quoting Wheeldin v. Wheeler, 373 U.S. 647, 651 (1963)). The Court

further directed that "'[w]hether latent federal power should be exercised to

displace state law is primarily a decision for Congress,'" not the Federal courts.

Id. (quoting Wallis, 384 U.S. at 68). .

We have not found a significant conflict between a Federal policy or interest

and the use of State law that would justify the adoption of Federal common law in

this context. Respondent contends that "[t]he uniform imposition and collection

of employment taxes is a significant federal interest justifying the application of a

uniform federal approach." However, the Supreme Court has specifically rejected

uniformity as a sufficient reason for adopting Federal common law. See, e.g.,

Atherton, 519 U.S. at 219-220; O'Melveny & Myers v. FDIC, 512 U.S. 79, 87

(1994); United States v. Kimbell Foods, Inc., 440 U.S. 715, 728 (1979). Further,

courts have rejected the application of Federal common law in tax cases in similar

- 25 contexts. See, e.g., Commissioner v. Stern, 357 U.S. 39 (1958); Whelco Indus.

Ltd. v. United States, 526 F. Supp. 2d 819 (N.D. Ohio 2007); Stramaglia v. United

States, 2007 WL 4404185 (E.D. Mich. 2007), aff'd, 377 Fed. Appx. 472 (6th Cir.

2010).

As support for his theory, respondent has offered a number of cases where

courts have adopted Federal common law in determining successor liability.

However, these decisions seem to be grounded in either environmental liability

(i.e., CERCLA) or labor law (i.e., ERISA) and appear to have little or no

application outside of those contexts. The only case to which respondent invites

our attention involving the application of Federal common law successor liability

in an employment tax context is Today's Child Learning Ctr. Inc. v. United States,

40 F. Supp. 2d 268 (E.D. Pa. 1998). In that case, the court held that Today's Child

was the "mere continuation and/or successor in interest" of the original taxpayer,

Wee Care. However, because the court's analysis of the "Continuation/De Facto

Merger/Successor in Interest" theories was essentially one inquiry and its use of

the term "successor in interest" was not necessary to its decision, we are not

persuaded by its holding. Cf., e.g., Storage & Office Sys., LLC v. United States,

490 F. Supp. 2d 955, 963-964 (S.D. Ind. 2007) (also distinguishing Today's Child

for purposes of similar Federal common law argument).

- 26 Finally, respondent contends that "[i]f federal common law is not applied, it

could encourage taxpayers subject to Texas law to use a similar structure to easily

avoid the payment of employment taxes * * * [thereby] thwarting the Service's

crucial function of enforcement and collection of federal employment taxes."

Respondent further contends that "other states could be persuaded to modify their

laws to reject the de facto merger or mere continuation exceptions and further

frustrate the collection of federal taxes."

Respondent's fear of the potential for manipulation is unfounded. None of

these concerns are present here, and no evidence was put forth tending to show

that the concerns will be present. There is no evidence that petitioner's business

structure was anything other than a valid reorganization.

More importantly, successor in interest liability is only one procedure by

which the Commissioner may collect taxes from a successor who received assets

from a taxpayer who owed the taxes. On brief respondent concedes that he could

have potentially applied transferee liability against petitioner under section 6901

by issuing Notices of Determination Concerning Worker Classification to the

other six partnerships, assessing the resulting liabilities, and then issuing a Notice

of Transferee Liability to TFT Galveston Portfolio. Additionally, respondent

could have potentially attempted to collect directly from Mr. Teachworth as a

- 27 "responsible person" under section 6672. Thus, our decision against applying

Federal common law successor rules and holding that TFT Galveston Portfolio is

not a successor in interest to the six partnerships listed on the notices does not by

itself thwart respondent's crucial function of collecting Federal employment

taxes. Accordingly, we do not accept respondent's suggestion that we adopt a

Federal common law to override Texas law.

B.

Application of State Law

Successor liability is generally determined by State law. LiButti v. United

States, 178 F.3d 114, 124 (2d Cir. 1999). As we have discussed above, we do not

accept respondent's suggestion of applying Federal common law in this case;

therefore we will apply the applicable State law.8 Because TFT Galveston

Portfolio and its alleged predecessors were all organized in Texas, we look to

Texas law to determine whether TFT Galveston Portfolio is a successor in interest

to the other partnerships.

Under Texas law "a person acquiring property * * * may not be held

responsible or liable for a liability or obligation of the transferring domestic entity

8This Court generally follows State law to determine the legal interests and

rights of the taxpayer. See, e.g., United States v. Mitchell, 403 U.S. 190 (1971);

Commissioner v. Stern, 357 U.S. 39 (1958); Morgan v. Commissioner, 309 U.S.

78 (1940).

- 28 that is not expressly assumed by the person." Tex. Bus. Orgs. Code Ann. sec.

10.254(b) (West 2012).9 In a majority of States that have a similar rule, four wellrecognized exceptions impose liability on an acquiring company. The first is

similar to that codified above in the Texas Business Organizations Code. The

three other exceptions are as follows: (1) when the transaction amounts to a de

facto merger; (2) when the successor is a mere continuation of the seller company;

and (3) when the transaction is entered into fraudulently to escape liability. Sg

e_.g, Lyon v. S. Gas Co. (In re Wright Enters.), 77 Fed. Appx. 356, 366-367 (6th

Cir. 2003); Cyr v. B. Offen & Co., 501 F.2d 1145, 1152 (1st Cir. 1974); Pulis v.

U.S. Elec. Tool Co., 561 P.2d 68, 69 (Okla. 1977). In Texas, however, de facto

mergers are considered to be against public policy. See, e.g., McKee v. Am.

Transfer & Storage, 946 F. Supp. 485, 486-487 (N.D. Tex. 1996); Mudgett v.

Paxson Mach. Co., 709 S.W.2d 755, 756-759 (Tex. App. 13th 1986, writ ref'd

n.r.e.). Texas courts have also refused to apply the doctrine of mere continuation.

9The Texas Business Organizations Code was adopted in 2003. See H.B.

No. 1156, 2003 Tex. Sess. Law Serv. ch. 182 (H.B.1156) (Vernon). Its

predecessor contained substantially similar language. See Tex. Bus. Corp. Act,

art. 5.10 (expired Jan. 1, 2010); Ford, Bacon & Davis, LLC v. Travelers Ins. Co.,

635 F.3d 734, 737 (5th Cir. 2011). Because there is no substantive difference

between the statutes, the Court refers to the currently enacted version of the law

for the sake of convenience, and it does not decide which version of the statute

would apply.

- 29 See, e.g., Medic. Designs, Inc. v. Shannon, Gracey, Ratliff & Miller, L.L.P., 922

S.W.2d 626 (Tex. Ct. App. 2d 1996); Mudgett, 709 S.W.2d at 758 ("Certainly if

the de facto merger doctrine is contrary to the public policy of our state, so must

be the mere continuation doctrine."). Lastly, there is some dispute in Texas courts

as to whether Texas recognizes a fraudulent transfer exception to the general rule

of successor nonliability. See In re 1701 Commerce, LLC, 511 B.R. 812, 823-825

(Bankr. N.D. Tex. 2014). But see Ford, Bacon & Davis, LLC v. Travelers Ins.

Co., 2010 WL 1417900, at *6 (S.D. Tex. 2010), aff'd, 635 F.3d 734 (5th Cir.

2011).¹° Thus, in Texas, an acquiring entity is not a successor in interest unless it

expressly agrees to assume the liabilities of the other party in the transaction.

TFT Galveston Portfolio did not expressly assume the liabilities of the other

six partnerships. Accordingly, under Texas law, TFT Galveston Portfolio is not a

successor in interest to the six partnerships listed on the notices.

III.

Classification of Workers

Sections 3111 and 3301 impose taxes on employers under the Federal

Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act

(FUTA). Section 3101 imposes on employees under FICA a tax based on their

¹°We find that even if Texas does accept the fraud exception, there is no

evidence to support its application here.

- 30 wages paid, which the employer is required to collect under section 3102. Under

sections 3402 and 3403, employers are liable for withholding from their

employees' wages the employees' shares of Federal income tax.

In addition to the successor in interest liabilities, respondent determined that

TFT Galveston Portfolio's workers were employees for purposes of employment

taxes and thus that TFT Galveston Portfolio is liable for withholding the proper

amounts of tax under sections 3101, 3111, 3301, and 3402. TFT Galveston

Portfolio challenges respondent's classification of the individuals listed in the

notice of determination as employees." TFT Galveston Portfolio maintains that

"Because we hold that petitioner is not a successor in interest to the other

six partnerships, the following analysis pertains only to the workers listed on the

notice sent to petitioner on October 11, 2011, for the fourth quarter of tax year

2004. These include Jerry Adams (maintenance supervisor); Johnny Puentes,

Robert Thorpe, Francisco Cedillo, Jaime Rosales, Roller Delgado, Hector

Martinez, Joel Romero, John Russo, Ron Baltrusk, Francisco Flores, Joshua

Wagner, Allen Jacobs, Oscar Loir (collectively, maintenance workers); Lestie

Adams, Kelli Grant, Cheryl Mohr, Jason Wolfe, Kelli Grant, Christina Gerrior,

Kimberly Wilkins, Linda Bradley, Randi Jensen (collectively, apartment

managers).

With respect to the other names listed on the notice, such as Elizabeth

Bonds, Delores Guamelo, Eric Puentes, Carla Carcano, Maria Martinez, Karla

Carcano, Melinda Ruiz, Anita Jones, and Bobby Harris, respondent concedes that

they were not petitioner's employees during the period at issue and payments

made to them did not subject TFT Galveston Portfolio to employment tax

liabilities.

- 31 these individuals were independent contractors and thus it was not responsible for

withholding employment taxes.

A.

Burden of Proof

We presume that a worker classification determination made by the

Commissioner is correct, but a taxpayer may rebut that presumption by

demonstrating by a preponderance of the evidence that the determination was

erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Boles

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

this standard to a worker classification determination); Ewens & Miller, Inc. v.

Commissioner, 117 T.C. 263, 268 (2001).

B.

Common Law Test

Whether an employer-employee relationship exists in a particular situation

is a question of fact. Weber v. Commissioner, 103 T.C. 378, 386 (1994), aff'd per

curiam, 60 F.3d 1104 (4th Cir. 1995). 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); accord sec. 3306(i); Ewens & Miller, Inc. v.

Commissioner, 117 T.C. at 269.

- 32 Section 31.3121(d)-1(c)(2), Employment Tax Regs., defines the common

law employer-employee relationship as follows:

Generally such relationship exists when the person for whom services

are performed has the right to control and direct the individual who

performs the services, not only as to the result to be accomplished by

the work but also as to the details and means by which that result is

accomplished. That is, an employee is subject to the will and control

of the employer not only as to what shall be done but how it shall be

done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it

is sufficient if he has the right to do so. The right to discharge is also

an important factor indicating that the person possessing that right is

an employer. Other factors characteristic of an employer, but not

necessarily present in every case, are the furnishing of tools and the

furnishing of a place to work, to the individual who performs the

services. In general, if an individual is subject to the control or

direction of another merely as to the result to be accomplished by the

work and not as to the means and methods for accomplishing the

result, he is an independent contractor. * * *

In deciding whether a worker is a common law employee or an independent

contractor, this Court considers: (1) the degree of control exercised by the

principal; (2) which party invests in the work facilities used by the individual; (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 that the

parties believed that they were creating. Weber v. Commissioner, 103 T.C. at 387.

- 33 All of the facts and circumstances of each case are considered, and no single factor

is dispositive. Id.

While no single factor is dispositive, the degree of control exercised by the

principal over the details of the individual's work is one of the most important

factors in determining whether a common law employment relationship exists.

See, e.g., Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440, 448

(2003); Leavell v. Commissioner, 104 T.C. 140, 149 (1995). All that is necessary

however, is that the principal have the right to control the details of the

individual's work. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 270.

C.

Analysis

1. Degree of Control

The principal's degree of control over the details of the agent's work is one

of the most important factors in determining whether an employment relationship

exists. See Clackamas Gastroenterology Assocs., P.C, 538 U.S. at 448; Weber v.

Commissioner, 103 T.C. at 387. The degree of control necessary to find employee

status varies according to the nature of the services provided. Weber v.

Commissioner, 103 T.C. at 388. When the nature of the work is more

independent, a lesser degree of control by the principal may still result in a finding

- 34 of an employer-employee relationship. Robinson v. Commissioner, T.C. Memo.

2011-99, aff'd, 487 Fed. Appx. 751 (3d Cir. 2012).

TFT Galveston Portfolio, through Mr. Teachworth, controlled nearly every

aspect of the work performed by the apartment managers. He unilaterally

established the compensation paid to the managers, and he set their working hours

and duties. In determining how to handle vacancies at the complexes the

managers had to consult with Mr. Teachworth, and they had to gain his approval

to return security deposits to departing tenants. He set the community rules and

regulations and determined the rent at the properties, and the managers had no

authority to alter the rents without his approval.

TFT Galveston Portfolio, through Mr. Teachworth, controlled the work

performed by Mr. Adams. Because Mr. Adams was the maintenance supervisor,

his duties included supervising the various maintenance workers, performing

general repairs and maintenance, and executing large maintenance projects as

needed. Mr. Adams had a small degree of latitude in his work. However, at trial

he testified that he had to seek approval from Mr. Teachworth before performing

any maintenance job that was not routine or small. Thus, the discretion allowed to

Mr. Adams in performing his work was severely limited.

- 35 The maintenance workers, including those who performed more specialized

or skilled work and those who provided temporary services, were all supervised by

Mr. Adams. Mr. Adams, along with the apartment managers, had the authority,

delegated by Mr. Teachworth, to give instructions to any maintenance worker

regarding what to do and how to do it. Mr. Adams, however, was ultimately

responsible for making sure the maintenance jobs were completed. Additionally,

Mr. Adams set the maintenance workers' hours and, if needed, could call workers

from the various complexes to come help on a certain project. Ultimately though,

all maintenance projects were subject to the final approval of Mr. Teachworth.

To retain the requisite degree of control over an employee, the employer

need not direct the employee's every move; it is sufficient if he has the right to do

so. Weber v. Commissioner, 103 T.C. at 387-388; see sec. 31.3401(c)-1(b),

Employment Tax Regs. Although some of the workers had some latitude in how

they performed their duties, ultimately Mr. Teachworth was the boss and had final

authority on all the work performed at the properties. Accordingly, this factor

weighs heavily towards a finding that TFT Galveston Portfolio's workers were in

fact employees and not independent contractors.

- 36 2. Investment in Facilities and Opportunity for Profit or Loss

The fact that a worker has no investment in the facilities used in the work is

indicative of an employer-employee relationship. Ewens & Miller, Inc. v.

Commissioner, 117 T.C. at 271. Conversely, the fact that a worker provides his or

her own tools generally indicates the worker is an independent contractor. Id.

When workers have no opportunities for profit or loss, they are more like

employees than independent contractors. See D & R Fin. Servs., Inc. v.

Commissioner, T.C. Memo. 2011-252, slip op. at 10.

The workers had little, if any, financial investment in TFT Galveston

Portfolio's business, and they were never at risk of suffering a personal financial

loss. The work was all performed on site at the apartment properties. TFT

Galveston Portfolio provided most of the office equipment and supplies used by

the apartment managers and set up a petty cash fund to cover any incidental

expenses incurred. The managers all received fixed salaries, with the exception of

a small performance-based bonus available to some of them. As part of their

compensation, or as a condition of employment, the managers were provided with

on-site housing and had their utilities expenses paid.

Mr. Adams, the maintenance supervisor, supplied some of his own tools and

equipment; they were not purchased or used specifically or exclusively for TFT

- 37 Galveston Portfolio's business. However, this factor alone is not determinative.

In contrast, TFT Galveston Portfolio provided and paid for all the required

maintenance materials through charge accounts Mr. Teachworth maintained at

local hardware stores. Additionally, any incidental expenses the workers incurred

were reimbursed by Mr. Teachworth.

Finally, the workers never had an opportunity for financial profit aside from

their salaries. Although the maintenance workers could increase their earnings

through working additional hours, they could not increase their hourly rate of pay,

which was unilaterally set by Mr. Teachworth. Thus, the workers were never at

risk of personal financial loss due to the services they provided. Accordingly, this

factor weighs towards a finding that TFT Galveston Portfolio's workers were in

fact employees and not independent contractors.

3. Right To Discharge

TFT Galveston Portfolio, through Mr. Teachworth, had the right to

terminate the service of any of the workers at any time without financial penalties.

The workers could also quit at any time. At no point did any of the workers enter

into a contract or agreement that would bind TFT Galveston Portfolio or the

workers. Accordingly, this factor weighs towards a finding that the workers were

in fact employees and not independent contractors.

- 38 4. Workers Part of Petitioner's Regular Business

TFT Galveston Portfolio's sole business activity was the operation of the

apartment properties. The workers all played a crucial role in its operation and

financial success. The apartment managers' primary responsibility was to fill the

vacancies, and the financial success of the properties depended on their

maximizing the occupancy of the properties. The maintenance supervisor and the

workers were tasked with responding to tenants' maintenance problems and work

orders. Thus, the workers all played an integral role in the business by keeping

vacancies to a minimum, maintaining the physical integrity of the properties, and

providing security, thereby preserving tenant satisfaction. See Breaux & Daigle,

Inc. v. United States, 900 F.2d 49, 53 (5th Cir. 1990). Accordingly, this factor

weighs towards a fmding that the workers were in fact employees and not

independent contractors.

5. Permanency of Working Relationship

A transitory work relationship may weigh in favor of independent contractor

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

tends to show a continuing relationship between the workers and TFT Galveston

Portfolio. Accordingly, this factor weighs towards a finding that the workers were

in fact employees and not independent contractors.

- 39 6. The Parties' Perception of the Relationship

None of the workers had independent contractor agreements or written

contracts. The workers did not submit bids for services. There is no evidence that

any of the workers advertized their services to the public, nor did they work for

any other companies during the period at issue. Although Mr. Adams occasionally

performed maintenance and repair work outside of his job with TFT Galveston

Portfolio, that work was done in his spare time and was not part of his full-time

job, where he worked an average of 50 hours per week and was on call 24 hours a

day, 7 days a week. That other work is not at issue.

Even if it was Mr. Teachworth's intention to create a legitimate independent

contractor relationship with the workers, such an intention does not carry much

weight when the common law factors compel a finding that an employer-employee

relationship exists. See Kumpel v. Commissioner, T.C. Memo. 2003-265, slip op.

at 14. Accordingly, this factor weighs towards a finding that TFT Galveston

Portfolio's workers were in fact employees and not independent contractors.

7. Conclusion

After considering the record and weighing all of the factors, we conclude

that the workers were employees during the period at issue. None of the relevant

factors suggest that the workers were independent contractors, and many of the

- 40 factors evidence an employer-employee relationship. For instance, the workers

were all ultimately subject to the direction and control of Mr. Teachworth. He

hired them and set their hours and wages. They had no financial investment in the

work they performed. They bore no risk of financial loss, and they did not

participate in TFT Galveston Portfolio's profits in any way. Finally, the fact that

TFT Galveston Portfolio and Mr. Teachworth did not think they were creating an

employment relationship with the workers is not persuasive when the common law

factors weigh towards an employment relationship.

We think these factors sufficiently establish that the workers were properly

classified as employees of TFT Galveston Portfolio. Therefore, we hold TFT

Galveston Portfolio liable for the employment taxes determined for the fourth

quarter of 2004 regarding the employees.

IV.

Additions to Tax and Penalties

A.

Burden of Proof

The Commissioner bears the burden of production with respect to an

individual's liability for additions to tax and penalties. See sec. 7491(c). To meet

that burden, the Commissioner must produce sufficient evidence itidicating that it

is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438,

446-447 (2001). However, section 7491(c) does not shift the burden of proof,

- 41 which remains on the individual. See Higbee v. Commissioner, 116 T.C. at 446-

447.

Section 7491(c) is not entirely instructive as to whether the section imposes

the initial burden on the Commissioner when the taxpayer is an entity that has

petitioned this Court under section 7436. By its terms, section 7491(c) applies

only to the liability of "any individual" for penalties.¹² See Palmer Ranch

Holdings Ltd. v. Commissioner, T.C. Memo. 2014-79; Palm Canyon X Inys., LLC

v. Commissioner, T.C. Memo. 2009-288; Santa Monica Pictures, LLC v.

Commissioner, T.C. Memo. 2005-104.

We need not resolve any potential uncertainty; even if we assume that

respondent has the initial burden of production, we are satisfied that he has carried

it. Therefore, the burden remains with petitioner to prove the penalty

determinations are incorrect. See Highbee v. Commissioner, 116 T.C. at 446-447.

B.

Additions to Tax

Respondent determined that TFT Galveston Portfolío is liable for additions

to tax under section 6651(a)(1) for its failure to file Forms 940 and 941, for

employment taxes, for the period at issue and under section 6651(a)(2) for failure

¹²In contrast, sec. 7491(a), which provides the general rule for shifting the

burden of proof to the Commissioner in certain circumstances, applies in

ascertaining the liability of a "taxpayer."

- 42 to pay the amount of tax shown on the SFRs. Section 6651(a)(1) imposes an

addition to tax for failure to timely file a return unless the taxpayer shows that

such failure was due to reasonable cause and not willful neglect.¹³ Section

6651(a)(2) imposes an addition to tax for failure to pay the amount of tax shown

on the return on or before the date prescribed unless the taxpayer can establish that

the failure is due to reasonable cause and not due to willful neglect.

TFT Galveston Portfolio filed no employment tax return for the period at

issue. Accordingly, we conclude that respondent produced sufficient evidence to

show that the section 6651(a)(1) addition to tax is appropriate. Although the

issues in this case are somewhat technical, TFT Galveston Portfolio has not

produced any evidence demonstrating a good-faith effort to comply with the law

and determine the correct treatment of the workers. Therefore, we find that the

failure to file was not due to reasonable cause and hold TFT Galveston Portfolio

liable for the section 6651(a)(1) addition to tax.

¹³The addition to tax is equal to 5% of the amount of the tax required to be

shown on the return if the failure to file is not for more than one month. An

additional 5% is imposed for each month or fraction thereof in which the failure to

file continues, to a maximum of 25% of the tax. The addition to tax is imposed on

the net amount due. Sec. 6651(a)(1), (b); Cabirac v. Commissioner, 120 T.C. 163,

168 n.9 (2003).

- 43 As stated, TFT Galveston Portfolio did not file an employment tax return;

however, respondent prepared a valid SFR under section 6020(b). Pursuant to

section 6651(g)(2), an SFR is treated as the taxpayer's return for purposes of

determining the section 6651(a)(2) addition to tax. Respondent presented

evidence showing that TFT Galveston Portfolio did not make any tax payments

during the period at issue. Accordingly, we conclude that respondent has

produced sufficient evidence to show that the section 6651(a)(2) addition to tax is

appropriate. TFT Galveston Portfolio has not produced sufficient evidence

demonstrating that the failure to pay the appropriate amount was due to reasonable

cause. Therefore, we hold TFT Galveston Portfolio liable for the section

6651(a)(2) addition to tax.

C.

Penalty Under Section 6656

If a taxpayer is more than 15 days late in depositing employment taxes,

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). TFT Galveston Portfolio is liable for a penalty under

section 6656. Respondent showed that TFT Galveston Portfolio did not deposit

employment taxes. See Ramirez v. Commissioner, T.C. Memo. 2007-346 (finding

- 44 that the IRS met its burden where section 7491(c) undisputedly applied by

showing that the employer made no deposits). TFT Galveston Portfolio did not

show that it had reasonable cause for failing to deposit employment taxes.

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

parties made, and to the extent we did not mention them above, we conclude they

are moot, irrelevant, or without merit.

To reflect the foregoing and the settled issues,

Decisions will be entered for

petitioners in docket Nos. 29995-11,

30001-11, 682-12, 1175-12, 1180-12,

and 1533-12.

Decision will be entered under

Rule 155 in docket No. 1082-12.