UNITED STATES TAX COURT

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121 T.C. No. 6

UNITED STATES TAX COURT

CHARLOTTE’S OFFICE BOUTIQUE, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5077-01.

Filed August 4, 2003.

P is a C corporation owned equally by O and her

husband. P petitioned the Court under sec. 7436(a),

I.R.C., to redetermine R’s determination that P was

liable for unreported 1995 through 1998 employment

taxes and additions to tax under secs. 6651(a)(1) and

6656, I.R.C. That determination resulted from R’s

determination that O received “wages” in the form of

payments which P made to O primarily as “royalties”

and, for 1995 and 1996, that P also had “Other Workers”

who received “wages”. R concedes his determination as

to the other workers and moves the Court to dismiss

this case for lack of jurisdiction as to 1996 through

1998. The parties agree that, during those years, O

was P’s employee as to other payments which O received

from P as wages. Held: The Court has jurisdiction over

all of the petitioned years in that R has determined

contrary to P’s audit and litigating position that:

(1) O received the disputed amounts as wages and

(2) P is liable for the payment of employment taxes

under subtitle C as to those disputed amounts. As to

-21996, the Court also has jurisdiction by virtue of P’s

dispute as to R’s determination that the other workers

were P’s employees during that year. Held, further,

the disputed amounts are wages. Held, further, P is

not entitled to relief under section 530 of the Revenue

Act of 1978 Pub. L. 95-600, 92 Stat. 2763, 2885. Held,

further, P is liable for the additions to tax

determined by R under secs. 6651(a) and 6656, I.R.C.,

to the extent stated herein.

Robert E. Kovacevich, for petitioner.

Milton B. Blouke, for respondent.

LARO, Judge:

Petitioner petitioned the Court under section

7436(a)1 to redetermine the following employment tax liabilities

and additions thereto determined by respondent:

Tax Period

Ended

Employment Tax

3/1995

6/1995

9/1995

12/1995

3/1996

6/1996

9/1996

12/1996

3/1997

6/1997

9/1997

12/1997

3/1998

6/1998

9/1998

12/1998

$2,356.20

2,004.30

1,774.80

2,627.85

1,300.50

2,080.80

841.50

2,191.11

1,942.48

1,942.28

1.942.48

1,785.89

2,004.30

Additions to Tax

Sec. 6651(a)(1) Sec. 6656

$589.05

501.08

443.70

656.96

325.13

520.20

210.38

212.91

485.62

-0-0357.18

-0-0-0-

$117.81

100.22

88.74

80.68

65.03

104.04

42.08

70.27

97.12

89.29

Unless otherwise noted, section references are to the

applicable versions of the Internal Revenue Code, and Rule

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

-3These amounts result from respondent’s determination that

Charlotte Odell (Ms. Odell) received “wages” in the form of

payments (disputed payments) which petitioner made to her

primarily as “royalties” and, for 1995 and 1996, that petitioner

also had “Other Workers” who received “wages”.

Respondent

determined that petitioner is liable for the additions to tax

because it failed to file timely the requisite returns

(Forms 941, Employer’s Quarterly Federal Tax Returns) reporting

the “wages” and/or failed to deposit timely the related taxes.

Approximately 2 weeks before the trial of this case,

respondent conceded his determination as to the “Other Workers”.

Shortly thereafter, respondent moved the Court to dismiss 1996,

1997, and 1998 for lack of jurisdiction.

Respondent asserts that

the notice of determination is invalid as to those 3 years

because, respondent maintains, neither party has disputed that

Ms. Odell was petitioner’s employee during 1996, 1997, and 1998

by virtue of other amounts during those years which petitioner

paid to her as wages.

Respondent argued that the Court’s

jurisdiction under section 7436(a) extends only to those cases

where a taxpayer asserts that an individual performing services

for the taxpayer is a nonemployee and respondent has determined

that the individual is an employee.

Respondent’s motion does not

include 1995 in that petitioner disputes that Ms. Odell was

petitioner’s employee during that year.

-4We decide first certain arguments made by petitioner as to

claimed improprieties in the conduct of the trial of this case.

We reject each argument.

We decide second whether we have

jurisdiction over 1996 through 1998.

We hold we do.

We decide

third whether the disputed amounts paid to Ms. Odell were wages.

We hold they were.

We decide fourth whether petitioner is

entitled to relief under section 530 of the Revenue Act of 1978,

Pub. L. 95-600, 92 Stat. 2763, 2885.

We hold it is not.

decide fifth whether petitioner is liable for the additions to

tax determined by respondent under sections 6651(a) and 6656.

hold it is to the extent stated herein.

FINDINGS OF FACT2

Some facts were stipulated.

The stipulated facts and the

exhibits submitted therewith are incorporated herein by this

reference.

We find the stipulated facts accordingly.

Petitioner

is a C corporation, and its mailing address was in Spirit Lake,

Idaho, when its petition was filed.

Its stock is owned equally

by Ms. Odell and her husband, Theodore K. Odell (Mr. Odell)

(collectively, the Odells).3

Ms. Odell is petitioner’s president

Petitioner in its brief proposes that the Court find as

facts certain recitals of trial testimony. We decline to do so.

See Rule 151(e)(3).

Mr. Odell’s ownership interest arises entirely from

community property law.

-5and one of its two directors.

Mr. Odell is petitioner’s other

director and its secretary.

Petitioner’s business is the former sales business of a sole

proprietorship that Ms. Odell started in 1989.

That former

business sold to the Federal Government (primarily United States

Postal Service) office supplies and equipment (collectively,

office supplies).

Petitioner is the corporation that was formed

on January 3, 1995, when Ms. Odell incorporated that former

business.

In connection with the incorporation, Ms. Odell’s sole

proprietorship conveyed to petitioner an ownership interest in

certain assets (mainly bank accounts and inventory).

Ms. Odell

purportedly did not convey to petitioner an ownership interest in

a customer list used in the former business.

The customer list

contains the names and addresses of more than 6,000 Federal

agencies in the United States.

Ms. Odell also purportedly did

not convey to petitioner an ownership interest in contracts under

which the former business’s customers had agreed with Ms. Odell,

in her capacity as the former business’s sole proprietor, to

purchase certain merchandise from the sole proprietorship.

Ms.

Odell ostensibly allowed petitioner to use the customer list and

to assume the income and liabilities under the contracts in

exchange for petitioner’s payment to her of royalties ascertained

on the basis of petitioner’s sales.

-6Petitioner’s business primarily sells to the Federal

Government office supplies consisting of staplers, staple

removers, and letter openers.

As to its sales, petitioner

usually causes the subject merchandise to be delivered to the

customer directly from its suppliers, mainly Panasonic.

Sometimes, usually in the case of small orders, petitioner ships

the merchandise directly to the customer from petitioner’s

inventory.

Petitioner does not sell at retail.

Petitioner’s business requires minimal labor.

Ms. Odell

primarily handles the business’s day-to-day administration; e.g.,

dealing with and paying suppliers, talking with customers by

telephone, processing customer orders, and bookkeeping.

But for

a limited amount of outside laborers, who during the relevant

years received minimal pay, the only other individual who works

for petitioner is Mr. Odell.

Mr. Odell works for petitioner’s

business approximately the same amount of time as Ms. Odell,

doing, among other things, all of the shipping and computer work

and helping facilitate sales.

Unlike Ms. Odell, who is paid for

her time, Mr. Odell receives no pay from petitioner.

Mr. Odell’s

primarily source of income is his employment as a locomotive

engineer with Union Pacific Railroad.

There he works 4

consecutive days and then has the next 4 days off.

During petitioner’s typical business day, petitioner

(through Mr. or Ms. Odell) checks the fax machine for incoming

-7orders and processes the orders as they come in.

An order is

processed by inputting its data into a computer and, except when

the customer pays by direct deposit, running the customer’s

credit card through a machine in order for petitioner to receive

credit for the sale.

Petitioner transmits its inputted orders to

its suppliers to be filled.

Typically, petitioner receives 3 to

4 orders a day and takes approximately 10 minutes to process each

order.

Petitioner (through Ms. Odell approximately 70 percent of

the time and Mr. Odell the rest) also returns phone calls left on

the answering machine.

At the most, Ms. Odell usually works an

average of 2 hours during each day that the Government is open.

In August 1996, petitioner and Ms. Odell entered into three

agreements effective January 1, 1995.

These agreements were an

employment agreement, a rental agreement, and a licensing and

sale agreement.

Pursuant to the employment agreement, petitioner

agreed to pay $400 per month to Ms. Odell in return for her

services,4 and Ms. Odell agreed that she would receive no

employment compensation from January 1, 1995, through July 31,

1996.

Pursuant to the rental agreement, petitioner agreed to pay

to Ms. Odell $600 per month to rent certain of her property.

Pursuant to the licensing and sale agreement, petitioner agreed

to pay to Ms. Odell a monthly royalty fee of the larger of $200

Petitioner’s accountant advised it that it should

initially set the wages at $400 per month.

-8or 5 percent of the gross receipts for all office supplies sold

under the agreement.

Petitioner had resolved on February 15,

1996, to pay Ms. Odell for 1995 a royalty payment equal to 5

percent of gross receipts for the use of her existing Government

contracts and her experience in obtaining Government contracts.

Petitioner also had resolved to pay Ms. Odell a salary of $400

per month.

The employment agreement provided in relevant part:

EMPLOYMENT AGREEMENT

Charlotte’s Office Boutique, Inc. is engaged in

the fulfillment of office supply orders; and

Charlotte Odell is experienced in office

procedures,

In consideration of the promises and mutual

covenants herein set forth, the parties agree as

follows:

Job Duties and Responsibilities

A. Charlotte Odell agrees to perform general

office duties for Charlotte’s Office Boutique. Such

duties include, but are not limited to, answering the

telephone, ordering supplies, receiving orders,

fulfilling orders, preparing bid documents, and

recordkeeping.

Payments

A. As this is a start-up company with limited

cash flow, Charlotte Odell will not receive

compensation for her job performance for the period

January 1, 1995 through July 31, 1996.

B. Commencing on August 1, 1996, Charlotte’s

Office Boutique, Inc. agrees to pay Charlotte Odell

-9$400 per month as payment for the performance of the

general office duties. Such payment shall be payable

at the end of every month for that month’s performance.

The licensing and sale agreement provided in relevant part:

LICENSING AND SALE AGREEMENT

Charlotte’s Office Boutique, Inc. is engaged in

the fulfillment of office supply orders; and

Charlotte Odell has developed a system to obtain

governmental contracts and qualifies as a woman

business owner,

In consideration of the promises and mutual

covenants herein set forth, the parties agree as

follows:

Definitions

A. The term “know-how” as used herein shall mean

select process, sources of supply, marketing data,

sales techniques relating to office supplies, quality

control, inventory control, bid process, and government

contract process.

B. The term “existing contracts” shall mean

contracts executed by Charlotte Odell prior to January

1, 1995, to fulfill supplies and equipment orders. The

term shall also include contracts executed after

January 1, 1995, but based upon bids submitted prior to

January 1, 1995.

C. The term “gross receipts” shall mean the

actual price at which Charlotte’s Office Boutique

invoices its customers for products and as reported on

the corporation’s financial statements. Gross receipts

shall not be reduced by bad debts or any other

uncollected amounts.

2. Transfer of Know-How, Existing Contracts and “Woman-Owned”

Status

A. Charlotte Odell transfers to Charlotte’s

Office Boutique, Inc. the right to assume both the

-10income and liability of contracts entered into by

Charlotte Odell prior to January 1, 1995 to fulfill

office supply orders. Charlotte Odell agrees to

transfer to the Charlotte’s Office Boutique her

experience in obtaining governmental contracts.

Charlotte Odell agrees to allow Charlotte’s Office

Boutique, Inc. to use her status as a woman and

majority stock holder to be classified as a “womanowned business.”

Payments

A. As payment for the transfer of exclusive

rights to receive Charlotte Odell’s know-how and

existing contracts and the right to Charlotte Odell’s

status as woman business owner, Charlotte’s Office

Boutique, Inc. agrees to pay to Charlotte Odell a

royalty fee of the larger of five per cent (5%) of the

gross receipts for all office supplies sold under this

Agreement or Two Hundred Dollars ($200.00) monthly.

B. Estimated Royalties are due and payable

monthly to Charlotte Odell, with a final accounting due

after final financial statements have been prepared for

the calendar year. Any overage or shortage between

estimated royalties paid and actual royalties will be

netted first against the dividends distributed to

Charlotte Odell during the calendar year and second as

a payable or receivable of Charlotte’s Office Boutique,

Inc. owed to or due from Charlotte Odell.

Petitioner made to Ms. Odell the payments referenced in the

employment agreement (but not always at the time referenced in

the agreement) and issued to her a 1996, 1997, and 1998 Form W-2,

Wage and Tax Statement, reporting that it had paid to her during

the respective years wages of $2,000, $4,800, and $4,800.

Petitioner also during the relevant years paid to Ms. Odell

royalties and rent as follows:

-11Year

Royalties

Rent

Total

1995

1996

1997

1998

$42,048

34,200

51,611

46,690

$7,200

2,500

7,200

$49,248

36,700

58,811

53,890

Petitioner paid the amounts to Ms. Odell in 1995 and 1996

primarily by transferring the following amounts from its business

bank account to Ms. Odell’s personal bank account:

Date

Amount

1995

Date

Amount

1996

Jan.

Feb.

Mar.

$1,600

500

1,700

500

2,500

8,000

600

15,400

Feb.

$2,000

5,000

500

1,000

8,500

4,000

1,500

2,000

900

500

2,500

1,500

700

13,600

Jul. 12

Sept. 5

1,500

1,100

500

900

1,500

5,500

Oct.

Nov.

Dec.

1,200

1,400

3,500

500

6,600

Mar.

Apr.

May

Apr.

1,500

200

1,500

200

2,000

1,500

2,000

200

3,500

500

13,100

Aug.

Sept. 6

1,500

500

1,000

1,500

1,000

2,000

1,500

500

600

11,600

May

Jun.

Jul.

Jun.

-12Oct.

Nov.

Dec.

1,000

700

550

1,400

625

1,550

1,100

6,925

As to the amounts that petitioner reportedly paid to Ms.

Odell as wages, petitioner timely filed with the Commissioner

Forms 941 for the calendar quarters ended December 31, 1996,

September 30, 1997, December 31, 1997, June 30, 1998,

September 30, 1998, and December 31, 1998, and filed untimely on

August 2, 1998, a Form 941 for the calendar quarter ended

March 31, 1998.

Petitioner did not file a Form 941 for any of

the other calendar quarters during the subject years.

chronological order, the Forms 941 filed with the Commissioner

reported that petitioner paid the following amount of wages to

one employee during the corresponding quarter:

$2,000, 0,

$4,800, $1,200, $1,200, $1,200, and $1,200.

On January 26, 2001, respondent issued to petitioner a

Notice of Determination Concerning Worker Classification Under

Section 7436 (notice of determination) for 1995, 1996, 1997, and

1998.

The notice of determination stated in relevant part:

As a result of an employment tax audit, we are

sending you this NOTICE OF DETERMINATION CONCERNING

WORKER CLASSIFICATION UNDER SECTION 7436. We have

determined that the individual(s) listed or described

on the attached schedule are to be legally classified

as employees for purposes of federal employment taxes

under subtitle C of the Internal Revenue Code and that

-13you are not entitled to relief from this classification

pursuant to section 530 of the Revenue Act of 1978 with

respect to such individual(s). This determination

could result in employment taxes being assessed against

you.

The schedule attached to the notice of determination listed the

referenced individuals as “Odell, Charlotte” and “Other Workers”

and listed their determined unreported wages as follows:

Taxable Period

Ended

Ms. Odell

Other Workers

3/1995

6/1995

9/1995

12/1995

$15,400

13,100

11,600

6,925

47,025

------$3,622

3,622

3/1996

6/1996

9/1996

12/1996

6,500

13,600

5,500

6,600

32,200

------2,585

2,585

3/1997

6/1997

9/1997

12/1997

12,696

50,784

---------0-

3/1998

6/1998

9/1998

12/1998

11,672.50

46,690

------—--0-

The Commissioner commenced his audit of most of the taxable

years underlying the notice of determination in December 1997 and

later expanded his audit to all of the subject years.5

During

The Commissioner began auditing the Odell’s individual

(continued...)

-14the audit and in the proceeding herein, petitioner did not

dispute respondent’s determination that Ms. Odell was

petitioner’s employee in any of the taxable quarters after 1995.

Petitioner did dispute respondent’s determination that Ms. Odell

was petitioner’s employee in 1995 and that petitioner employed

“Other Workers” in 1995 and 1996.

Respondent conceded in this

proceeding his determination as to the “Other Workers”.

The Odells reported on their joint 1995 through 1998 Federal

individual income tax returns the following amounts of total

income, rent income, and royalties:

1995

1996

1997

1998

Total income

Rent income

Royalties

$107,804

91,912

109,920

98,329

$7,200

2,500

7,200

$42,048

34,200

50,784

46,690

Whereas the 1997 Form 1099-MISC, Miscellaneous

Income, that petitioner issued to Ms. Odell reported

that it had paid to her royalties of $51,611, the

record does not explain why the Odells reported this

lower amount.

They recognized (1) the royalties in full and (2) the full amount

of rent less $1,018 of depreciation in 1995, $860 of mortgage

interest in 1996, $794 of depreciation in 1997, and $1,086 of

depreciation in 1998.

For 1995 through 1997, petitioner deducted

(...continued)

income tax returns in October 1997 and began auditing

petitioner’s corporate income tax returns in December 1997.

-15rent and royalties in the gross amounts reported by the Odells

(but for 1997 where petitioner deducted royalties of $51,611).6

Petitioner reported on its 1995 through 1997 Federal

corporate income tax returns (signed by Ms. Odell, in her

capacity as petitioner’s president) the following amounts of

gross profit, taxable income, and Federal taxes paid:

1995

1996

1997

Gross profit

Taxable income

Federal

taxes paid

$123,976

154,071

170,041

$9,982

14,535

15,394

$1,497

2,180

2,309

Petitioner’s assets and liabilities as of the end of its 1995

through 1997 taxable years were as follows:

1995

1996

1997

15,386

12,204

----12,570

40,160

44,168

18,698

-----–62,866

35,725

12,528

25,115

15,510

--88,878

-------0-

-–14,489

--14,489

----38,014

38,014

Assets

Cash

Inventory

A/R

Corp clearing a/c

Loans to stockholders

Liabilities

Loans from stockholders

A/P

Petitioner’s 1998 corporate tax return is not in evidence.

-16OPINION

Conduct of the Trial

Petitioner argues that the trial was conducted improperly.

First, petitioner argues, the Court violated its constitutional

rights by improperly questioning its witnesses and by directing

its witness, Ms. Odell, not to discuss her testimony with anyone

during a recess.

Petitioner also claims a violation of its

constitutional rights by virtue of the fact that the Court

declined to consider before proceeding to trial petitioner’s

motion in limine to place the burden of proof on respondent.

The

Court informed the parties at trial that we were taking

petitioner’s motion under advisement and directed petitioner to

proceed with its case-in-chief as if it had the burden of proof.

Petitioner asserts that respondent bears the burden of proof and

should have been required by the Court to present his case-inchief before petitioner presented its case-in-chief.

According

to petitioner, respondent was required to go first in that:

(1) The notice of determination is arbitrary and invalid in that

it neither explains nor references the facts underlying

respondent’s determination and (2) section 7491 by its terms

places the burden of proof upon respondent.

Constitutional Claims

It is deeply ingrained in judicial jurisprudence that the

presiding judge is “the governor of the trial for the purpose of

-17assuring its proper conduct”, Logue v. Dore, 103 F.3d 1040, 1045

(1st Cir. 1997); see also Geders v. United States, 425 U.S. 80,

86-87 (1976); United States v. Scholl, 166 F.3d 964, 977 (9th

Cir. 1999), and may both question witnesses and comment upon the

evidence, Quercia v. United States, 289 U.S. 466, 469 (1933);

United States v. Paiva, 892 F.2d 148, 159 (1st Cir. 1989); United

States v. Laurins, 857 F.2d 529, 537 (9th Cir. 1988).

generally Fed. R. Evid. 614(b).

See

Of course, a judge’s

participation must be tailored so as not to advocate or otherwise

to advantage or disadvantage a party unfairly.

See Quercia v.

United States, supra at 470; United States v. Paiva, supra at

159; see also Notes of the Advisory Committee on Fed. R. Evid.

614(b), 28 U.S.C. App. 891 (2000).

It is permissible for a judge

to instruct a witness not to discuss his or her testimony with

third parties until the end of the testimony.

Perry v. Leeke,

488 U.S. 272, 281, 282 (1989) (“when a defendant becomes a

witness, he has no constitutional right to consult with his

lawyer while he is testifying”).

Following our careful review of the record, we reject

petitioner’s claim that the Court’s conduct of the trial violated

its constitutional rights.

The Court’s questioning of witnesses

was narrowly tailored to clarify their vague and confusing

answers so as to further our decisionmaking process.

The Court

properly instructed Ms. Odell not to discuss her testimony with

-18anyone during a short recess.

The Constitution does not mandate

that a Judge presiding over a proceeding in this Court require

that the party with the burden of proof go first at trial.

Burden of Proof

We need not and do not decide which party bears the burden

of proof in this case as to the nonpenalty issues.

The record is

sufficient for us to decide this case on its merits based on a

preponderance of the evidence.

We note, however, that we have

recently held that a notice of determination concerning worker

classification under section 7436 was valid even though it did

not name the individuals whom the Commissioner determined to be

employees.

Henry Randolph Consulting v. Commissioner, 113 T.C.

250 (1999).

We also note that section 7491(a), which in certain

cases shifts the burden of proof to the Commissioner, does not

apply to employment tax determinations.

Sec. 7491(a)(1); Joseph

M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. 121, 123

n.2 (2002).

Jurisdiction

The parties agree that we lack jurisdiction over 1996

through 1998 because petitioner did not dispute that Ms. Odell

was its employee during those years.

According to the parties,

Ms. Odell’s classification as petitioner’s employee was not in

dispute for those years because petitioner during those years

paid to her wages as evidenced by the Forms W-2.

Respondent

-19asserts that the Court’s jurisdiction under section 7436(a) is

narrowly drawn to reach only those cases where a taxpayer asserts

that an individual performing services for the taxpayer is a

nonemployee and respondent has determined that the individual is

an employee.

We disagree with the parties that we lack jurisdiction over

1996 through 1998.

It is well settled that a Court may proceed

in a case only if it has jurisdiction and that the question of

jurisdiction may be raised at any time, even after the case has

been tried and briefed.

(2000).

Neely v. Commissioner, 115 T.C. 287, 290

It is also well settled that jurisdiction cannot be

conferred upon a Court by the agreement of the parties.

v. Commissioner, 85 T.C. 527, 530 (1985).

Naftel

Where, as here, the

parties agree that we lack jurisdiction, that agreement is not

dispositive as well.

Generally, in the setting of employment taxes, we have

jurisdiction under section 7436(a) to determine:

(1) Whether an

individual providing services to a person is that person’s

employee for purposes of Subtitle C; (2) whether the person, if

in fact an employer, is entitled to relief under section 530 of

the Revenue Act of 1978; and (3) the correct amounts of

employment taxes which relate to the Commissioner’s determination

-20concerning worker classification.7

See Evans Publg. Inc. v.

Commissioner, 119 T.C. 242, 244 (2002); Henry Randolph Consulting

v. Commissioner, 112 T.C. 1 (1999).

It is the Commissioner’s

determination of worker classification that provides the

predicate for our jurisdiction under section 7436(a), and the

ultimate merits of that determination do not affect our

jurisdiction.

Neely v. Commissioner, supra at 290 n.8.

Given

that the Commissioner in this case has determined that Ms. Odell

is petitioner’s employee as to the disputed payments, and that

petitioner owes employment taxes and additions to tax with

respect thereto, we conclude that we have jurisdiction over all

the years included in the notice of determination.

As to 1996,

Sec. 7436(a) provides:

SEC. 7436(a). Creation of Remedy.—If, in

connection with an audit of any person, there is an

actual controversy involving a determination by the

Secretary as part of an examination that—

(1) one or more individuals performing

services for such person are employees of

such person for purposes of subtitle C, or

(2) such person is not entitled to the

treatment under subsection (a) of section 530

of the Revenue Act of 1978 with respect to

such an individual,

upon the filing of an appropriate pleading, the Tax

Court may determine whether such a determination by the

Secretary is correct and the proper amount of

employment tax under such determination. Any such

redetermination by the Tax Court shall have the force

and effect of a decision of the Tax Court and shall be

reviewable as such.

-21we also note that we have jurisdiction by virtue of the fact that

respondent determined that “Other Workers” had during that year

received $2,585 of wages from petitioner.

Although respondent

now concedes that determination, respondent’s concession has no

bearing upon our jurisdiction.

Cf. LTV Corp. v. Commissioner,

64 T.C. 589 (1975) (respondent’s concession of no deficiency in a

year did not deprive the Court of jurisdiction over the subject

matter of that year).

Our conclusion is further supported by an analogy to the

applicable law underlying the issuance of a notice of

deficiency.8

The Court may acquire jurisdiction in such a

setting only when the Commissioner has determined that there is a

deficiency.

Secs. 6212(a), 6213(a); see also Richards v.

Commissioner, T.C. Memo. 1997-149, affd. without published

opinion 165 F.3d 917 (9th Cir. 1998).

It is the determination of

a deficiency, rather than the existence of a deficiency, that is

dispositive as to our jurisdiction.

52 T.C. 787, 791 (1969).

Hannan v. Commissioner,

Thus, even when a taxpayer has made a

showing that casts doubt on the validity of a determination in a

notice of deficiency, the notice is generally not rendered void,

Under sec. 7436(d), the principles of secs. 6213(a), (b),

(c), (d), and (f), 6214(a), 6215, 6503(a), 6512, and 7481 apply

to cases that arise under sec. 7436, as if the Secretary’s notice

of determination were a notice of deficiency.

-22but remains sufficient to vest the Court with jurisdiction.

Suarez v. Commissioner, 58 T.C. 792, 814 (1972).

Respondent also argues that there was no actual controversy

as to the status of Ms. Odell as an employee of petitioner and

that such a controversy is a prerequisite to our jurisdiction.

While there is no actual controversy as to whether Ms. Odell was

an employee of petitioner with respect to the amounts of $400 per

month which she received as wages, there is a dispute as to

whether she received the disputed amounts as additional wages in

her capacity as petitioner’s employee.

We hold that we have jurisdiction as to each of the

petitioned years.

Employment Taxes

Sections 3111 and 3301 impose FICA (Social Security) and

FUTA (unemployment) taxes on employers for wages paid to their

employees.

In this context, the term “wages” generally includes

“all remuneration for employment, including the cash value of all

remuneration (including benefits) paid in any medium other than

cash”.

Secs. 3121(a), 3306(b).

immaterial.

The form of payment is

Notwithstanding the manner in which an employer

characterizes payments made to an employee, the critical fact is

whether a payment is actually received as compensation for

employment.

Secs. 31.3121(a)-1(b), 31.3306(b)-1(b), Employment

Tax Regs.; see also Spicer Accounting, Inc. v. United States,

-23918 F.2d 90, 93 (9th Cir. 1990).

An officer who performs

substantial services for a corporation and who receives

remuneration in any form for those services is considered an

employee, and his or her wages are subject to the employer’s

payment of Federal employment taxes.

Veterinary Surgical

Consultants, P.C. v. Commissioner, 117 T.C. 141, 145 (2001),

affd. sub nom. Yeagle Drywall Co. v. Commissioner, 54 Fed. Appx.

100 (3d Cir. 2002).

Respondent determined that the disputed amounts were wages.

Respondent contends that Ms. Odell was petitioner’s officer and

that she performed substantial services for petitioner in that

capacity.

We agree.

We are persuaded by the record that Ms.

Odell performed vital and substantial services for petitioner as

its president, that she and her labor were petitioner’s principal

generator of income, and that the disputed payments were indeed

remuneration that petitioner paid to her for services which she

performed in its business.

In fact, with the exception of a

small number of outside laborers, who expended minimal labor in

petitioner’s business, Ms. Odell and her husband were the only

individuals who actually worked for petitioner.

Whereas Mr.

Odell opted not to be compensated directly by petitioner for his

vital and substantial services, this choice obviously was made

with the knowledge that any benefit from his services would flow

directly to only him and his wife.

The services of the Odells,

-24while arguably not long in hours, were indispensable to

petitioner’s business.

Whereas the employment agreement provides that petitioner

was a “start-up company with limited cash flow”, we do not agree.

First, we scrutinize that agreement strictly given that it was a

contract simply entered into by Ms. Odell, on one side in her

capacity as an individual and on the other side in her capacity

as petitioner’s officer, and that it was made effective

approximately 20 months beforehand.

Second, although the

corporation (i.e., petitioner) may have been relatively young,

petitioner’s business was old in that Ms. Odell had been

operating it for some time.

Third, as to the claim of “limited

cash flow”, petitioner reported taxable income in both 1995 and

1996 and had enough available funds during those years to pay to

Ms. Odell “rent” and “royalties” totaling $49,248 and $36,700,

respectively.

We also give little weight to the fact that Ms. Odell’s

employment agreement with petitioner provided as to the relevant

years that she would be paid only for the last 5 months of 1996

and that, for those months, she would receive only $400 per

month.

An employer such as petitioner may not evade Federal

employment taxes simply by characterizing payments to its

principal worker as something other than wages.

Spicer

Accounting, Inc. v. United States, supra; see also Boles

-25Trucking, Inc. v. United States, 77 F.3d 236 (8th Cir. 1996);

Joseph Radtke, S.C. v. United States, 895 F.2d 1196 (7th Cir.

1990).

We recognize that the record contains a licensing and sale

agreement between petitioner and Ms. Odell which provides for

petitioner’s payment of royalties to Ms. Odell for its use of

certain intangible property rights.

We also understand that a

royalty may be paid for the use of valuable intangible property

rights.

Or. State Univ. Alumni Association v. Commissioner,

193 F.3d 1098 (9th Cir. 1999), affg. T.C. Memo. 1996-34 and

Alumni Association of Univ. of Or. Inc., v. Commissioner, T.C.

Memo. 1996-63.

We do not believe, however, that petitioner’s

payments of any of the disputed amounts to Ms. Odell were

royalties under the facts herein.

Whereas Ms. Odell had used the

referenced intangible property in her sole proprietorship to earn

self-employment income subject to self-employment tax, we do not

believe that she can avoid the payment of Federal employment

taxes simply by declaring that she will be paying royalties to

herself through a controlled corporation for its use of that

property.

We sustain respondent’s determination that petitioner paid

all of the disputed amounts to Ms. Odell as wages.

Section 530 Relief

Petitioner argues that it is entitled to relief under

section 530 of the Revenue Act of 1978.

When applicable, section

-26530 affords a taxpayer such as petitioner relief from employment

taxes notwithstanding that the relationship between the taxpayer

and the individual performing services would otherwise require

the payment of those taxes.

SEC. 530.

Section 530 provides in part:

CONTROVERSIES INVOLVING WHETHER INDIVIDUALS

ARE EMPLOYEES FOR PURPOSES OF THE EMPLOYMENT

TAXES.

(a) Termination of Certain Employment Tax

Liability * * *–(1) In general.--If-(A) for purposes of employment taxes, the taxpayer

did not treat an individual as an employee for any

period * * *, and

(B) in the case of periods after December 31,

1978, all Federal tax returns (including information

returns) required to be filed by the taxpayer with

respect to such individual for such period are filed on

a basis consistent with the taxpayer’s treatment of

such individual as not being an employee,

then, for purposes of applying such taxes for such

period with respect to the taxpayer, the individual

shall be deemed not to be an employee unless the

taxpayer had no reasonable basis for not treating such

individual as an employee.

(2) Statutory standards providing one method of

satisfying the requirements of paragraph (1).--For

purposes of paragraph (1), a taxpayer shall in any case

be treated as having a reasonable basis for not

treating an individual as an employee for a period if

the taxpayer’s treatment of such individual for such

period was in reasonable reliance on any of the

following:

(A) judicial precedent, published rulings,

technical advice with respect to the taxpayer, or a

letter ruling to the taxpayer;

(B) a past Internal Revenue Service audit of the

taxpayer in which there was no assessment attributable

-27to the treatment (for employment tax purposes) of the

individuals holding positions substantially similar to

the position held by this individual; or

significant segment of the industry in which such

individual was engaged.

We disagree with petitioner that it is entitled to relief

under section 530 of the Revenue Act of 1978.

Under a literal

reading of that text, three requirements must be met in order for

petitioner to receive the relief described therein.

First, as to

the disputed payments, petitioner must not have treated Ms. Odell

as an employee for any period.

Second, petitioner must have

consistently treated Ms. Odell as not being an employee as to

those payments on all tax returns for periods after December 31,

1978.

Third, petitioner must have had a reasonable basis for not

treating Ms. Odell as an employee as to those payments.

All

three requirements must be met in order for petitioner to qualify

for relief under section 530 of the Revenue Act of 1978.

We start our analysis with the third requirement; i.e.,

whether petitioner had a reasonable basis for not treating Ms.

Odell as an employee with respect to the disputed payments.

Section 530(a)(2) of the Revenue Act of 1978 provides a safe

harbor for satisfying this requirement.

Under the safe harbor,

petitioner will have had a reasonable basis for not treating Ms.

Odell as an employee as to the disputed payments if the record

establishes that, in so treating her, petitioner reasonably

relied on the existence of any of the circumstances listed in

-28subparagraph (A), (B), or (C) of section 530(a)(2) of the Revenue

Act of 1978.

Although not expressed by petitioner clearly, we understand

it to argue in its opening brief that Howard E. Clendenen, Inc.

v. Commissioner, 207 F.3d 1071 (8th Cir. 2000), affg. T.C. Memo.

1998-318, Springfield v. United States, 88 F.3d 750 (9th Cir.

1996), and Rev. Rul. 87-41, 1987-1 C.B. 296, support a finding

that it reasonably believed that Ms. Odell received the disputed

payments in other than her capacity as petitioner’s employee.

understand petitioner in its amended opening brief to expand that

list of cases and revenue ruling to include Idaho Ambucare Ctr.

Inc. v. United States, 57 F.3d 752 (9th Cir. 1995), United States

v. Bernstein, 179 F.2d 105 (4th Cir. 1949), United States v.

Aberdeen Aerie No. 24, 148 F.2d 655 (9th Cir. 1945), Ridge

Country Club v. United States, 135 F.2d 718 (7th Cir. 1943), and

Rev. Rul. 58-505, 1958-2 C.B. 728.

The principle that petitioner

educes from these six cases and two revenue rulings is that an

individual such as Ms. Odell may perform services for a taxpayer

both as an employee and as an independent contractor.

Petitioner

concludes from this principle that petitioner is entitled to pay

to Ms. Odell both wages and other amounts such as rent and

royalties.

-29Although we have no qualm with the principle educed by

petitioner or its conclusion as to that principle, we do not

believe that the cited cases or revenue rulings support a finding

that petitioner reasonably believed that it paid the disputed

amounts to Ms. Odell in other than her capacity as an employee.

In fact, Spicer Accounting, Inc. v. United States, 918 F.2d 90

(9th Cir. 1990), and Joseph Radtke, S.C. v. United States,

895 F.2d 1196 (7th Cir. 1990), two highly relevant cases that

petitioner did not mention as to this issue,9 lead to the

conclusion that petitioner in fact paid the disputed amounts to

Ms. Odell as wages.

Cf. W. Mgmt. Inc. v. United States, 45 Fed.

Cl. 543, 554 n.11 (2000) (court noted that on the basis of Spicer

and Van Camp & Bennion, P.S. v. United States, 78 AFTR 2d 5843,

96-2 USTC par. 50,438 (E.D. Wash. 1996), a second case in which

Mr. Kovacevich was counsel of record, it was “unlikely” that the

plaintiff corporation, a professional service corporation of

which he was president, met the reasonable basis requirement of

section 530 of the Revenue Act of 1978).

We hold that petitioner

lacked a reasonable basis not to treat Ms. Odell as an employee

Robert E. Kovacevich (Mr. Kovacevich), petitioner’s

counsel herein, was counsel of record in Spicer Accounting, Inc.

v. United States, 918 F.2d 90 (9th Cir. 1990).

-30with respect to the disputed payments and is not entitled to

relief under section 530 of the Revenue Act of 1978.10

Additions to Tax

Respondent determined that petitioner is liable for

additions to tax under sections 6651(a) and 6656 by virtue of its

failure to file Forms 941 for certain quarters and to deposit the

requisite amount of taxes for those and other quarters.

Section

6651(a)(1) imposes an addition to tax for failing to file a

return on or before the specified filing date unless it is shown

that such failure is due to reasonable cause and not due to

willful neglect.

The addition to tax equals 5 percent of the

amount of the tax required to be shown on the return if the

failure to file is not for more than 1 month.

An additional 5

percent is imposed for each month or fraction thereof in which

the failure to file continues, to a maximum of 25 percent of the

tax.

The addition to tax is imposed on the net amount due.

6651(a)(1) and (b).

Sec.

If a taxpayer exercised ordinary business

care and prudence and was nonetheless unable to file the return

within the date prescribed by law, then reasonable cause exists.

We note as alternative reasoning leading to this holding

that Ms. Odell was petitioner’s statutory employee under sec.

3121(d)(1) (i.e., a corporate officer who performed more than

minor services for the corporation, see sec. 31.3121(d)-1(b),

Employment Tax Regs.) and that we recently indicated in Joseph M.

Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. 121 (2002),

that relief under the Revenue Act of 1978, Pub L. 95-600,

92 Stat. 2763, 2885, is limited to worker classification issues

arising under common law.

-31Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

Willful neglect

means a “conscious, intentional failure or reckless

indifference.”

United States v. Boyle, 469 U.S. 241, 245 (1985).

Section 6656 imposes an addition to tax 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.

As is

true with respect to an addition to tax under section 6651(a), a

taxpayer may avoid an addition to tax under section 6656 if the

taxpayer’s failure to deposit a tax was due to reasonable cause

and not willful neglect.

Van Camp & Bennion v. United States,

251 F.3d 862 (9th Cir. 2001); Ellwest Stereo Theatres, Inc. v.

Commissioner, T.C. Memo. 1995-610.

Respondent conceded at trial that section 7491(c) applies to

place on him the burden of production as to the additions to

tax.11

In order to meet this burden, respondent must present

sufficient evidence to persuade the Court that it is appropriate

to impose the additions to tax.

438, 446 (2001).

Higbee v. Commissioner, 116 T.C.

If respondent does so, petitioner, in order to

prevail, must present sufficient evidence to persuade the Court

In that we have found that the examination of most of the

years commenced before the effective date of sec. 7491(c), we

have difficulty understanding respondent’s blanket concession.

All the same, we decide the issue as to penalties giving full

regard to this concession.

-32that the Commissioner’s determination is incorrect.12

447.

Id. at

Respondent need not present evidence as to reasonable cause

in order to meet his burden.

Id. at 446-447.

Petitioner bears

the burden of proving that any failure on its part is due to

reasonable cause and not due to willful neglect.

Rule 142(a)(1);

United States v. Boyle, supra at 245.

Except as to the taxable quarter ended December 31, 1996,

for which the record establishes that petitioner filed a timely

Form 941, respondent has met his burden of production as to all

of the determined additions to tax.

those additions to tax that:

The record establishes as to

(1) Petitioner was required to file

Forms 941 and was required to deposit the referenced taxes, and

(2) petitioner failed to file those returns and failed to deposit

those taxes.

As to petitioner’s burden, we understand petitioner to argue

primarily that it is not liable for the additions to tax by

virtue of the reasonable cause exception.13

More specifically,

Sec. 7491(c) does not operate to shift the burden of

proof on the Commissioner. It only refers to the burden of

production. The burden of proof is still with petitioner. Sec.

7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

Relying on Kochansky v. Commissioner, 92 F.3d 957, 959

(9th Cir. 1996), affg. in part and revg. in part T.C. Memo.

1994-160, petitioner also argues that it is not liable for the

additions to tax in that the Court of Appeals for the Ninth

Circuit has not decided the substantive issue at hand. We do not

read the opinion of the Court of Appeals in Kochansky to stand

for the broad proposition stated by petitioner, and we find

(continued...)

-33we understand petitioner to argue that it relied upon the advice

of competent professionals that the disputed amounts were not

wages.

We disagree.

In order for petitioner to rely reasonably upon professional

advice so as possibly to negate any or all of the additions to

tax at issue, petitioner must prove by a preponderance of

evidence each prong of the following 3-prong test:

(1) The

adviser was a competent professional who had sufficient expertise

to justify reliance, (2) petitioner provided necessary and

accurate information to the adviser, and (3) petitioner actually

relied in good faith on the adviser’s judgment.

Neonatology

Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd.

299 F.3d 221 (3d Cir. 2002).

these prongs.

Petitioner has not proven any of

We sustain respondent’s determination as to the

applicability of the additions to tax.

In their computation (or

computations) under Rule 155, the parties shall determine these

additions to tax taking into account (1) respondent’s concession

as to the other workers and (2) that the Form 941 for the taxable

quarter ended December 31, 1996, was timely filed.

_____________________________________

(...continued)

petitioner’s reliance on that opinion to be misplaced. We note

that Spicer Accounting, Inc. v. United States, 918 F.2d 90, 93

(9th Cir. 1990), one of the principal cases upon which we rely to

decide the substantive issue, was decided by the Court of Appeals

for the Ninth Circuit.

-34We have considered all arguments made by the parties and

have found those arguments not discussed herein to be irrelevant

and/or without merit.

Accordingly,

An order denying

respondent’s motion to dismiss

for lack of jurisdiction will

be issued, and decision will

be entered under Rule 155.

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