UNITED STATES TAX COURT

T.C. Memo. 2021-86

UNITED STATES TAX COURT

BLOSSOM DAY CARE CENTERS, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 3868-12, 3869-12.1

Filed July 13, 2021.

Steven P. Flowers and Nathalie M. Cornett, for petitioner.

William F. Castor and Vassiliki Economides Farrior, for respondent.

1

These cases were consolidated for trial, briefing, and opinion. The subject

of this opinion will pertain to those issues arising out of docket No. 3869-12.

Those issues arising out of docket No. 3868-12 are addressed in Blossom Day

Care Ctrs., Inc. v. Commissioner, T.C. Memo. 2021-87, filed today.

Served 07/13/21

-2MEMORANDUM FINDINGS OF FACT AND OPINION

[*2]

PARIS, Judge: This case is before the Court on a petition for

redetermination of employment status filed pursuant to section 7436.2 In a notice

of determination of worker classification dated November 14, 2011, respondent

determined that Blossom Day Care Centers, Inc. (petitioner or Blossom), had not

classified its corporate officers as employees for all taxable periods of calendar

years 2005 through 2008. Respondent determined that Barry A. Hacker and

Celeste Hacker (Hackers) were to be legally classified as petitioner’s “employees”

for all taxable periods of calendar years 2005 through 2008 and that petitioner is

not entitled to relief under the Revenue Act of 1978, Pub. L. No. 95-600, sec. 530,

92 Stat. at 2885. Respondent also determined that petitioner is liable for

employment taxes, penalties under section 6656 for failure to deposit tax, and

accuracy-related penalties under section 6662(a) for negligence. Attached to the

notice are schedules setting forth petitioner’s liabilities for (1) Federal Insurance

Contribution Act (FICA) pursuant to sections 3101 and 3111, (2) Federal

Unemployment Tax Act (FUTA) taxes pursuant to section 3301, (3) penalties for

2

Unless otherwise noted, all section references are to the Internal Revenue

Code in effect at all relevant times. All Rule references are to the Tax Court Rules

of Practice and Procedure.

-3[*3] failure to deposit tax pursuant to section 6656, and (4) accuracy-related

penalties under section 6662(a) for negligence, summarized as follows:

Penalties

Tax periods

Type of tax

Amount

Sec. 6656

Sec. 6662(a)

3/31 to

12/31/2005

941

$80,686.80

$1,419.36

$16,137.36

2005

940

868.00

86.80

173.60

3/31 to

12/31/2006

941

84,800.20

1,487.38

16,960.03

2006

940

868.00

86.80

173.60

3/31 to

12/31/2007

941

88,852.20

1,545.12

17,770.44

2007

940

868.00

86.80

173.60

3/31 to

12/31/2008

941

93,372.00

1,618.60

18,674.40

2008

940

868.00

86.80

173.60

After concessions,3 the issues for decision are whether: (1) the Hackers

should be legally classified as employees of petitioner such that petitioner is liable

for employment tax (FICA) and unemployment tax (FUTA) relating to wages paid

to the Hackers for all tax periods in 2005, 2006, 2007, and 2008; (2) petitioner is

3

Petitioner does not assert it is entitled to relief under the Revenue Act of

1978, Pub. L. No. 95-600, sec. 530, 92 Stat. at 2885, given the Hackers’ corporate

officer status.

-4[*4] liable for FICA and FUTA taxes on the basis of respondent’s determination

that the Hackers had additional wage income from petitioner in 2005, 2006, 2007,

and 2008 of $209,200, $220,210, $231,800, and $244,000, respectively;

(3) petitioner is liable for a failure to deposit penalty under section 6656 with

respect to the FICA and FUTA tax liabilities respondent determined for the

taxable periods from 2005 through 2008; and (4) petitioner is liable for accuracyrelated penalties under section 6662(a) with respect to the FICA and FUTA tax

liabilities determined by respondent for the taxable periods from 2005 through

2008.

FINDINGS OF FACT

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

first stipulation of facts and six supplemental stipulations of facts with

accompanying exhibits that are incorporated herein by this reference.

Background

Petitioner was an Oklahoma corporation, originally incorporated in 1986,

with its principal place of business in Tulsa, Oklahoma, at the time the petition

was filed in this case. Petitioner was a valid corporation in the State of Oklahoma

during all periods at issue.

-5[*5] Petitioner did business as Blossom Day Care Centers and operated five

child care centers in the Tulsa metropolitan area from 2004 through May 2005 and

six child care centers from May 2005 through December 2008.

At all relevant times and since 1986, the Hackers were petitioner’s only

corporate officers. Mr. Hacker has always served as petitioner’s vice president,

secretary, and treasurer. Mrs. Hacker has always served as petitioner’s president.

There were no other corporate officers. In addition, the Hackers were petitioner’s

sole shareholders, Mrs. Hacker owning 51% and Mr. Hacker owning 49% of

petitioner’s stock.

In October 2002 the Hackers, as sole shareholders, incorporated Hacker

Corp. and had it elect to be taxed as a small business corporation (S corporation)

pursuant to section 1362. Petitioner was not a shareholder in Hacker Corp. In

May 2005 petitioner conveyed to Hacker Corp. by quitclaim deed certain real

estate locations of Blossom Day Care Centers. The Hackers have asserted that the

purpose of Hacker Corp. was to provide property and services management to

petitioner, the only client of the S corporation. On its returns petitioner claimed

deductions of management fees paid to Hacker Corp. in the following amounts in

the years at issue: $342,650 in 2005, $378,484 in 2006, $0 in 2007, and $204,514

in 2008.

-6[*6] There is no written agreement as to the purpose of the management fees, but

Hacker Corp. did pay total salary to the Hackers from 2005 through 2008 of

$73,848, $40,000, $53,847, and $58,462, respectively, for services provided to

Hacker Corp., which were arguably for management of petitioner. Petitioner

asserts that whatever services the Hackers performed for Blossom Day Care

Centers were actually provided under a purported oral management agreement

between petitioner and Hacker Corp. for the benefit of Blossom Day Care Center,

and it was not petitioner’s responsibility to provide reasonable compensation to its

corporate officers, the Hackers, for services provided to petitioner.

Involvement of the Hackers

Before petitioner was incorporated, Mrs. Hacker, having received an

associate’s degree in child development, opened her own day care center which in

turn became the basis for the incorporation of Blossom Day Care Centers. From

1986 and through the years at issue, Mrs. Hacker served not only as petitioner’s

president but also as the director of curriculum and education for the 90

employees, students, and six locations for Blossom Day Care Centers. She served

as Blossom’s top manager, personally overseeing and supervising employees,

including hiring and firing and managing Blossom’s six day care directors, with

all of petitioner’s employees ultimately reporting to her.

-7[*7] Mr. Hacker, also since 1986 and through all the years at issue, served not

only as petitioner’s corporate vice president but also as its secretary and treasurer.

During the years at issue Mr. Hacker also served as the director of the Blossom

Day Care Centers and as director of accountability and finance for petitioner. Mr.

Hacker had authority over all of petitioner’s bank accounts, and his daily

responsibilities included, but were not limited to, depositing parents’ payments for

child care into petitioner’s bank accounts and personally writing all of the payroll

checks to petitioner’s 90 employees.

Both Mr. and Mrs. Hacker were members of the Oklahoma Child Care

Association, and Mr. Hacker was a member of its board from 2004 through 2008.

This State organization focused on child care issues, working with the Oklahoma

Department of Human Services (ODHS) regarding comments on regulations,

training, and education. Petitioner’s daycare locations were licensed by ODHS,

and the Hackers were responsible for ensuring the programs and employees met

ODHS standards.

During the tax periods at issue, 2005 through 2008, the Hackers controlled

all of petitioner’s child care policies and education, and coordinated all physical

location and program maintenance decisions. Both actively participated in

petitioner’s daily operation, frequently working 50 to 60 hours per week at all

-8[*8] levels, including those duties described above, as well as paperwork and front

office duties, classroom teaching and supervision of teachers, purchasing and

delivering food for petitioner’s child care programs, and even maintenance and

custodial duties, if needed.

Wages, Salary, or Other Compensation of Mr. and Mrs. Hacker

Petitioner did not report paying a salary or wages to either Mr. or Mrs.

Hacker on its Forms 1120, U.S. Corporation Income Tax Return, for tax years

2005 through 2008. It did report paying compensation to officers of $100,000 in

2006, but not for the other years at issue.4 In addition, petitioner maintained

vehicles titled in the Hackers’ names including loan payments and maintenance for

a 2000 Lexus and a 2003 Hummer. Petitioner claimed depreciation for those autos

on its corporate tax returns for 2005 through 2008. In addition, petitioner

maintained vehicles it did not own, for the benefit of the Hackers’ children and a

parent and a sibling. Petitioner provided multiple credit cards in the names of Mr.

Hacker and Mrs. Hacker and for their children. Petitioner paid personal

expenditures for their benefit that were not petitioner’s business expenses.

4

The parties agree that petitioner made no actual cash payments to its

corporate officers as compensation during 2006.

-9[*9] Petitioner did pay salaries and wages to its other employees and did file

timely Forms 941, Employer’s Quarterly Federal Tax Return, for all calendar

quarters from 2005 through 2008. Petitioner also filed timely Forms 940,

Employer’s Annual Federal Unemployment (FUTA) Tax Return, for tax years

2005 through 2008. Petitioner, consistent with its assertion that the Hackers

provided services pursuant to an oral management agreement with Hacker Corp.,

did not issue to Mr. Hacker or Mrs. Hacker or file with the Internal Revenue

Service (IRS) Forms W-2, Wage and Tax Statement, nor did it issue to them or file

with the IRS Forms 1099-MISC, Miscellaneous Income.

In addition, petitioner did not include either Mr. Hacker or Mrs. Hacker on

the Forms 941 or 940, nor make on their behalf any deposit of employment taxes

into any Federal depository for any calendar quarter or annual return for tax years

2005 through 2008.

OPINION

I.

Burden of Proof

The determinations set forth in the Commissioner’s notice of determination

of worker classification are presumed correct, and the taxpayer bears the burden of

proving those determinations are in error. See Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933); Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263,

- 10 [*10] 268 (2001). Petitioner bears the burden of proving that its officers, the

Hackers, were not its employees as determined in the notice of determination for

the tax periods in issue. Petitioner, a corporation, also bears the burden of proving

that it is not liable for the penalties under section 6656 for failure to deposit tax

and accuracy-related penalties under section 6662(a) for negligence. See NT, Inc.

v. Commissioner, 126 T.C. 191, 194-195 (2006).

II.

Worker Classification

For the purposes of respondent’s determination, “employee” is defined for

FICA and FUTA purposes to include “any officer of a corporation”. See secs.

3121(d)(1) and (2), 3306(i). For purposes of income tax withholding under

section 3402, the term “employee” also includes “an officer of a corporation”. See

sec. 3401(c). FICA and FUTA impose “employment taxes” that employers must

pay and are obligated to withhold in addition to income tax withholding under

section 3402. Employers are required to make periodic deposits of amounts

withheld from employees’ wages and amounts corresponding to the employer’s

share of FICA and FUTA tax. Secs. 6302, 6157; secs. 31.6302-1, 31.6302(c)-3,

Employment Tax Regs.

- 11 [*11] III.

Petitioner’s Corporate Officers

An officer of a corporation who performs more than minor services and

receives remuneration for such services is a “statutory” employee for employment

tax purposes. See Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119

T.C. 121, 126 (2002), aff’d, 93 F. App’x 473 (3d Cir. 2004); Central Motorplex,

Inc. v. Commissioner, T.C. Memo. 2014-207; Glass Blocks Unlimited v.

Commissioner, T.C. Memo. 2013-180; Nu-Look Design, Inc. v. Commissioner,

T.C. Memo. 2003-52, 85 T.C.M. (CCH) 927, 931 (2003), aff’d, 356 F.3d 290 (3d

Cir. 2004); secs. 31.3121(d)-1(b), 31.3306(i)-1(c), 31.3401(c)-1(f), Employment

Tax Regs. An officer can escape statutory employee status only if he performs no

services (or only minor services) for that corporation and neither receives nor is

entitled to receive any remuneration, directly or indirectly, for services performed.

See Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C. 141, 144145 (2001), aff’d sub nom. Yeagle Drywall Co. v. Commissioner, 54 F. App’x 100

(3d Cir. 2002); secs. 31.3121(d)-1(b), 31.3306(i)-1(e), 31.3401(c)-1(f),

Employment Tax Regs.

Petitioner has stipulated that the Hackers were corporate officers during all

of the calendar quarters and years 2005 through 2008. Both provided substantial

services far beyond minor services, and both directly and indirectly received

- 12 [*12] remuneration for their services. Mrs. Hacker was petitioner’s 51%

shareholder and acted as president of the corporation and director of curriculum

and education for all six child care locations and supervised over 90 employees

and students of those centers. See Nu-Look Design, Inc. v. Commissioner, 85

T.C.M. (CCH) at 931-932 (characterizing as statutory employee S corporation

shareholder who served as corporation’s president). Mr. Hacker was 49%

shareholder and acted as vice president, secretary, and treasurer; as director of

Blossom Day Care Centers; and as director of accounting and finance for

petitioner. Both Mr. and Mrs. Hacker had check-signing authority over

petitioner’s bank accounts and credit card authorization in their corporate capacity.

In addition, Mr. Hacker’s daily responsibilities included but were not

limited to depositing parents’ payments for child care and personally writing all of

the payroll checks to petitioner’s 90 employees. Both Mr. and Mrs. Hacker

provided numerous services to petitioner, any one of which could be considered

substantial. Both received direct and indirect remuneration in the form of cars for

themselves, a Lexus and a Hummer; cars for their children and relatives; credit

cards; and access to all cash distributions.

Petitioner has asserted that it operates under an oral management contract

and pays management fees to a related S corporation, Hacker Corp., to provide

- 13 [*13] services, and that the Hackers, as employees of Hacker Corp., provide

services to petitioner and its day care centers. Whether a corporate officer is

performing services in his capacity as an officer is a question of fact. Joseph M.

Grey Public Accounting, P.C. v. Commissioner, 119 T.C. at 129-130; Rev. Rul.

82-83, 1982-1 C.B. 151, 152. The conclusion that a corporate officer is a statutory

employee may not apply to the extent that he or she performs services in some

other capacity. Nu-Look Design, Inc. v. Commissioner, 85 T.C.M. (CCH) at 931932.

Petitioner did pay Hacker Corp. money classified as management fees on its

general ledger for the years at issue in the following amounts: $382,650 in 2005,

$378,484 in 2006, $0 in 2007, and $204,514 in 2008. From these management

fees, Hacker Corp. paid Form W-2 wages to the Hackers for 2005 through 2008 of

$73,848, $40,000, $53,847, and $58,462, supposedly for the services the Hackers

were to render to petitioner under an oral management contract. Petitioner has

submitted no evidence of a management agreement, either written or oral, with

Hacker Corp. Likewise, petitioner has submitted no evidence, written or

otherwise, as to a service agreement directing the Hackers to perform substantial

services on behalf of Hacker Corp. to benefit petitioner, or even a service or

employment agreement between the Hackers and Hacker Corp. Therefore, there is

- 14 [*14] no evidence in the record that Mr. Hacker or Mrs. Hacker performed

services in a capacity other than as a corporate officer.

The Court finds that the Hackers were both “statutory” employees of

petitioner for employment tax purposes for all calendar quarters and years of 2005

through 2008. Having made that determination, the Court is not required to

consider whether they would also be classified as “employees” under the common

law test. See Nu-Look Design, Inc. v. Commissioner, 356 F.3d at 293.

IV.

Reasonableness of Compensation

Petitioner also contends that, even if the Court determines that its corporate

officers are statutory employees, the determination of additional wages paid to the

Hackers should be no more than the difference between what was paid to the

Hackers as Form W-2 employees of Hacker Corp. and the reasonable wage

determinations of respondent. Petitioner’s arguments are misguided in that wages

paid by Hacker Corp. do not offset reasonable compensation requirements for the

services provided by petitioner’s corporate officers to petitioner. Whatever wages

paid for whatever purposes by Hacker Corp. to the Hackers as employees of the S

corporation will be better addressed in relation to respondent’s notice of

deficiency for the Hackers’ individual income tax, in consideration that Hacker

Corp. is a wholly owned S corporation.

- 15 [*15] Additionally, petitioner contends that the notice of determination is flawed

in that the determined compensation reflects requirements of higher educational

qualifications than either Mr. Hacker or Mrs. Hacker has achieved, since Mr.

Hacker did not graduate from college and Mrs. Hacker has only an associate’s

degree in child development. While petitioner has not further developed this

contention in its briefs and there was limited trial testimony on the topic, whatever

higher educational qualifications might be required have been far eclipsed by the

Hackers’ practical experience, professional qualifications, success in running day

care centers, and ownership prerogatives.

Reasonableness of compensation is a question determined by all the facts

and circumstances of the case. E.g., Glass Blocks Unlimited v. Commissioner,

at *13; Joly v. Commissioner, T.C. Memo. 1998-361, 1998 WL 712528, at *4,

aff’d without published opinion, 211 F.3d 1269 (6th Cir. 2000). Factors affecting

the reasonableness of compensation include the employee’s role in the company,

comparisons of the employee’s salary to those paid by similar companies for

similar services, and the character and condition of the company. Elliotts, Inc. v.

Commissioner, 716 F.2d 1241, 1245-1246 (9th Cir. 1983), rev’g T.C. Memo.

1980-282; see also Pepsi-Cola Bottling Co. of Salina, Inc. v. Commissioner, 528

F.2d 176, 179 (10th Cir. 1975), aff’g 61 T.C. 564 (1974). The Court does not find

- 16 [*16] persuasive petitioner’s evidence that the services provided by the Hackers

were worth something less than respondent’s determination. Once again, although

the issue was passingly addressed in evidence at trial, petitioner’s briefs have

failed to show why respondent’s determination is unreasonable and, accordingly,

petitioner has not carried its burden to show that the amounts respondent

determined are unreasonable compensation.

V.

Penalties

Respondent determined that petitioner is liable for penalties for failure to

deposit tax pursuant to section 6656 and accuracy-related penalties pursuant to

section 6662(a) for all periods in issue. Section 6656(a) and (b) imposes a penalty

equal to 10% of the portion of an underpayment in tax that is required to be

deposited if the failure to deposit is more than 15 days beyond the prescribed

deadline, unless it is shown that such failure is due to reasonable cause and not to

willful neglect. Section 6662(a) and (b)(1) imposes an accuracy-related penalty

equal to 20% of the portion of an underpayment that is attributable to negligence.

Petitioner contends that respondent has not met his burden of production

with respect to the penalties because he has not introduced evidence that the initial

determination was approved in writing by the immediate supervisor of the

individual making the determination, as required by section 6751(b)(1).

- 17 [*17] Petitioner’s argument is misplaced. Section 7491(c), which shifts the

burden of production to the Secretary in any court proceeding with respect to

liability for any penalty, addition to tax, or additional amount, applies only to

individuals. See Povolny Grp., Inc. v. Commissioner, T.C. Memo. 2018-37,

at *27. Respondent thus has no burden of production in this case. That burden

remains with petitioner.

Nevertheless, a nonindividual taxpayer may raise the lack of supervisory

approval as an affirmative defense to penalties. See, e.g., Palmolive Bldg. Inv’rs,

LLC v. Commissioner, 152 T.C. 75, 83 (2019); Endeavor Partners Fund v.

Commissioner, T.C. Memo. 2018-96, at *63-*64, aff’d, 943 F.3d 464 (D.C. Cir.

2019). Petitioner raised the question of supervisory approval for the first time on

brief. It did not raise the affirmative defense in its pleadings, as required under

Rule 40, nor has it sought leave to amend its pleadings pursuant to Rule 41.

Moreover, respondent has introduced into evidence a Civil Penalty

Approval Form signed on March 31, 2010, by the immediate supervisor of the

revenue agent who conducted the examination of petitioner’s employment tax

liabilities for the periods in issue.5 The Form reflects that the revenue agent’s

5

On October 6, 2017, respondent filed a motion to reopen the record to

submit additional evidence. Attached to the motion was, among other documents,

(continued...)

- 18 [*18] immediate supervisor approved assertion of the failure to deposit penalties

under section 6656 and the accuracy-related penalties under section 6662(a) for

negligence. There is no evidence in the record to suggest, and petitioner does not

contend, that respondent communicated his initial penalty determination to

petitioner before the date the examining agent’s supervisor signed the penalty

approval form. See Clay v. Commissioner, 152 T.C. 223, 249 (2019), aff’d, 990

F.3d 1296 (11th Cir. 2021).

Petitioner does not contest the substance of the penalties, except insofar as it

disagrees with respondent’s classification of the Hackers as employees and his

determination of employment tax liabilities. The Court has sustained respondent’s

determinations. Petitioner does not claim reasonable cause for the failure to

deposit or for the underpayments, and the Court finds that petitioner had none.

Accordingly, the Court holds that petitioner is liable for the section 6656

penalty for failure to deposit tax and section 6662 penalty for negligence for all

periods in issue.

5

(...continued)

the declaration of Joe W. Cooper, the immediate supervisor of the revenue agent

who conducted the examination of petitioner’s worker classification and

employment tax liabilities for the periods in issue. Also attached to the motion

was a Civil Penalty Approval Form, signed by Mr. Cooper and approving the

assertion of the penalties at issue in this case. The Court has granted respondent’s

motion contemporaneously with the filing of this opinion.

- 19 [*19] VI.

Conclusion

The Court sustains respondent’s determination of worker classification,

Federal employment tax deficiencies, and penalties and additions to tax.

To reflect the foregoing,

Decision will be entered for

respondent in docket No. 3869-12.