*

The HONORABLE JOHN B. JONES, Senior District Judge, United

States District Court for the District of South Dakota, sitting by

designation.

___________

No. 95-1826

 

No. 95-2088

___________

BOLES TRUCKING, INC., *

*

Appellee/Cross-Appellant, *

* Appeal from the United

vs. * States District Court for

* the District of Nebraska

UNITED STATES OF AMERICA, *

*

Appellant/Cross-Appellee, *

 

___________

 Submitted: January 11, 1996

 Filed: February 22, 1996 ___________

Before BEAM and MORRIS SHEPPARD ARNOLD, Circuit Judges, and JONES,*

Senior District Judge.

___________

JONES, Senior District Judge

This appeal involves the attempt by the United States to

collect employment taxes from plaintiff Boles Trucking, Inc.

The appeal by the United States presents two issues: first,

what is the taxpayer's burden of proof when it asserts it had a

"reasonable basis" for improperly classifying employees as

independent contractors under Section 530 of the Revenue Act of

1978, 26 U.S.C. § 3401 note (Section 530) and secondly, whether the

evidence was sufficient to support the jury's finding of a
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"reasonable basis". We find that the district court improperly

instructed the jury on taxpayer's burden of proof, and reverse and

remand on the appeal by the United States. In doing so, we do not

reach the sufficiency of the evidence claim made by the United

States.

Taxpayer's cross-appeal presents the issue of whether the

district court properly assessed penalties against it because of

its failure to pay employment taxes on behalf of David B. Boles

(Boles), taxpayer's owner and president. We affirm on the issue

raised in the cross-appeal.

I.

Taxpayer is a Nebraska corporation engaged in the business of

leasing truck tractors, or "power units," to interstate trucking

carriers. At all times relevant to this case, Boles was the sole

stockholder, director, and president of taxpayer. In the relevant

period from January 1984 through December 1987, taxpayer leased its

tractors to Bee Line Motor Express, Inc. or to its successor,

Cornhusker Motor Lines, Inc. Under the terms of the lease

agreements taxpayer was to supply drivers with each leased tractor.

Although the lease agreements provided that the drivers were

to be "employees" of taxpayer, during the years in question

taxpayer treated its drivers as independent contractors. For tax

purposes this means the taxpayer did not withhold any federal

income (withholding tax or "WT") or Federal Insurance Contributions

Act (FICA) taxes from the amount it paid to its drivers, nor did it

make any payments of Federal Unemployment Tax Act (FUTA) taxes to

the Internal Revenue Service. Rather than W-2's, taxpayer issued

Forms 1099 to its drivers each year. 

Boles was compensated by way of interest-free "loans against

future profits" instead being paid a salary or wages. Under this
 2

The parties agreed prior to trial that the district court

would make the determination of whether the loans and other

benefits received by David Boles from taxpayer were, in fact,

taxable income. The parties further agreed that once the jury made

its determinations regarding the classification and section 530

issues, the district court would determine the amount of money, if

any, owed by the respective parties. 

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arrangement the taxpayer was not withholding income taxes or FICA

or FUTA taxes relative to Boles. There was also evidence that

taxpayer paid many of Boles' personal living expenses and purchased

a Lincoln Continental automobile for Boles' exclusive use. 

 

Taxpayer underwent an employment tax examination in 1987 which

resulted in the Commissioner of the I.R.S. reclassifying the truck

drivers who worked for taxpayer as employees rather than

independent contractors. The I.R.S. subsequently made assessments

against the taxpayer for unpaid WT, FICA, and FUTA taxes, along

with interest and penalties for years 1984 through 1987. The

assessments also reflected the I.R.S.'s determination that Boles

himself was an employee of taxpayer and that loans and other

payments he received were actually wages.

In October 1991, taxpayer paid a small portion of the taxes,

interest and penalties allegedly owed and thereafter filed

administrative claims for a refund of the same. After the

administrative claims were denied, taxpayer filed the present

action against the United States seeking a refund of the taxes,

interest, and penalties paid, along with a determination that it

was not liable for the remaining taxes, interest, and penalties

assessed against it. The United States filed a counterclaim for

the outstanding balance of the unpaid taxes, interest, and

penalties. The issues tried to the jury were: (1) whether

taxpayer's drivers were employees or independent contractors; and

(2) if taxpayer's treatment of its drivers as independent

contractors was erroneous, whether it had a reasonable basis for

such treatment pursuant to Section 530.2 
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 The jury found that taxpayer's drivers were employees. The

jury went on to find that taxpayer had a reasonable basis for not

treating the drivers as employees. When asked to state the basis

for its finding on the latter issue, the jury made check marks by

two of the four options; the long-standing practice of a

significant segment of the industry and the advice of a CPA or tax

return preparer. 

II.

Under the Internal Revenue Code, an employer is required to

pay one-half of the total FICA taxes assessed against its

employees, and withhold from paychecks those FICA taxes owed by the

employees themselves. 26 U.S.C. §§ 3101, 3102(a), 3402(a). Also,

the employer is obligated to pay FUTA taxes for its employees. 26

U.S.C. § 3101. However, these obligations are incumbent upon an

employer only if its workers are determined to be "employees" under

the Tax Code. 

Section 530 was created by Congress in 1978 to alleviate what

was perceived as overly zealous pursuit and assessment of taxes and

penalties against employers who had, in good faith, misclassified

their employees as independent contractors. In Re Rasbury, 130

B.R. 990 (Bankr. N.D. Ala. 1991). The statute is a relief

provision and provides an alternative method by which to avoid

employment tax liability where a taxpayer cannot establish his

workers are or were independent contractors. Section 530(a)(1)

provides in pertinent part that although a taxpayer mistakenly

classified its workers as other than employees, "the individual

[worker] shall be deemed not to be an employee unless the taxpayer

had no reasonable basis for not treating such individual as an

employee."

The statute goes on to explain methods by which a taxpayer may

show it had a "reasonable basis" for the improper classification of

its workers. Section 530(a)(2) provides that reasonable reliance
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on any of three "safe harbors" or "safe havens" shall be treated as

a reasonable basis for not treating an individual as an employee.

The provision states:

For the 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 to

the treatment (for employment tax purposes) of the

individuals holding positions substantially similar to

the position held by this individual; or

(C) long standing recognized practice of a

significant segment of the industry in which such

individual was engaged.

In addition to the three specific safe haven rules, a taxpayer

may take advantage of Section 530 by demonstrating that it had some

other reasonable basis for treating its workers as independent

contractors. H.R. Rep. Not. 95-1748, 95th Cong., 2d Sess. 5

(1978), reprinted in 1978-3 C.B. (vol. 1) 629, 633 (hereinafter

House Report). As stated in Rev.Proc. 85-18, 1 C.C. 518, Sec.

3.01(c), "A taxpayer who fails to meet any of the three 'safe

havens' may nevertheless be entitled to relief if the taxpayer can

demonstrate, in some other manner, a reasonable basis for not

treating the individual as an employee." 

III.

Despite the relative breadth and complexity of the employment

tax statutes discussed above, we are faced in the government's

appeal with the narrow question of what is the taxpayer's burden in

proving it had a reasonable basis for not treating its workers as

employees under Section 530. 

The district court instructed the jury that should it reach
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the reasonable basis issue, the taxpayer was not required to prove

this issue by a preponderance of the evidence. The instruction

concluded, " To prove reasonable basis, [taxpayer] need only show

that the existence of a reasonable basis is just as likely true

than not true. In other words, even if the evidence weighs out

evenly, you must find that [taxpayer] had a reasonable basis for

not treating the drivers as its employees."

The government contends these instructions erroneously shifted

the burden of proof on the issue to the government. While we are

not convinced the court's instruction actually shifted the burden

to the government, we nevertheless conclude the instruction

erroneously stated the taxpayer's burden.

We start with the well-established principle that the

Commissioner's determination of tax liability is entitled to a

presumption of correctness and that the burden is on the taxpayer

to prove that the determination is erroneous. Helvering v. Taylor,

293 U.S. 507, 55 S. Ct. 287, 79 L. Ed. 212 (1935); Day v.

Commissioner, 975 F.2d 534, 537 (8th Cir. 1992). It is further

well established that the quantum of proof required is that of a

preponderance of the evidence. Mattingly v. U.S., 924 F.2d 785,

787 (8th Cir. 1991). These general principles apply as well to the

Commissioner's classification of a taxpayer's workers as employees,

i.e., once such a determination is made, it is the taxpayer's

burden to prove, by a preponderance of the evidence, that its

workers are or were independent contractors. Beatty v. Halpin, 267

F.2d 561, 563 (8th Cir. 1959); Kiesel v. U.S., 545 F.2d 1144, 1146

(8th Cir. 1976). The district court's instructions in this regard

were correct and the jury found the taxpayer had not satisfied its

burden. 

The taxpayer sought relief via Section 530 urging that when

Section 530 is involved, a lesser standard of proof is permitted

for the taxpayer to prevail. It should first be noted that nothing
-7-

in the text of Section 530 itself suggests that the taxpayer's

traditional burden is to be altered when applying this statute. As

previously indicted, Section 530 permits a taxpayer/employer who

had wrongly failed to treat its workers as employees for tax

purposes to avoid employment tax liability. This is done by the

taxpayer showing it had a "reasonable basis" for doing so. Under

the clear text of the statute, "reasonable basis" is what must be

proved by the taxpayer - it is not an expression regarding the

level of proof or quantum of evidence. Congress's silence as to an

altered burden must be taken as meaning the traditional burdens

apply, i.e., a taxpayer's reasonable basis must be proved by a

preponderance of evidence. See, Grogan v. Garner, 498 U.S. 279,

286, 111 S. Ct. 654, 659, (1991) (interpreting section 523 of the

Bankruptcy Code to require a defrauded creditor to prove his claim

by a preponderance of the evidence based on lack of Congressional

directives to the contrary). 

Nor does the legislative history of Section 530 lend support

to the notion that the traditional burden of proof is to be

altered. There can be no doubt that Section 530 is provision

favorable to taxpayers and may serve to relive significant tax

burdens. Section 530 was intended "[g]enerally, [to] grant[]

relief if a taxpayer had any reasonable basis for treating its

workers as other than employees. The committee intends that this

reasonable basis requirement be construed liberally in favor of the

taxpayers." House Report at 631-32. Taxpayer argues that the

statutory language and legislative history "demonstrates that

Congress fully intended that section 530 be interpreted and

enforced quite differently than the norm in other tax cases where

the Government is presumptively correct." We do not agree.

 Liberal construction of Section 530 is not inconsistent with

maintaining the taxpayer's traditional burden. Liberal

construction may be effected in a variety of ways that have nothing

to do with the taxpayer's burden of proof, including: 1)
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consideration of a wide range of conduct serving to establish

reasonable basis; 2) broadly interpreting the scope of the safe

havens specifically enumerated in the statute; and 3) leniently

construing the term "reasonable." 

The taxpayer relies in part on Critical Care Register Nursing,

Inc. v. U.S., 776 F.Supp. 1025 (E.D.Pa. 1991). In Critical Care,

the United States moved for judgment notwithstanding the verdict

after a jury found that the taxpayer in that case had a reasonable

basis for treating its workers as independent contractors instead

of employees. Id. at 1028. While the court engaged in an extended

discussion of the statute and its relatively taxpayer-friendly

legislative history, there is no indication the court interpreted

Section 530 to alter the burden of proof or shift the burden to the

government. To the contrary, it is apparent the evidence was

analyzed with the traditional preponderance standard being placed

on the taxpayer. For example, the court submitted the issue to the

jury via a special interrogatory which stated, "Has the plaintiff,

Critical Care, proved by a preponderance of the evidence that in

1982 and 1983 it had a reasonable basis for not treating the nurses

in question as employees...?" Critical Care, 776 F.Supp. at 1029

(emphasis added). Further, the court's holding based on the record

was that "there was more than sufficient evidence presented at

trial from which the jury could conclude that Critical Care

satisfied, by a preponderance of the evidence, the dictates of

Section 530(a)(1) as to a reasonable basis for not treating its

nurses as employees." Id. (emphasis added). The district court's

opinion in Critical Care does not support the jury instruction

given in the present case. 

REAG, Inc. v. U.S., 801 F.Supp. 494 (W.D. Okl. 1992), is also

cited by taxpayer as supporting its argument on this issue. In

that case the court noted that "REAG has carried its burden of

proof by a preponderance of the evidence on each of the three

independent grounds for demonstrating a reasonable basis for its
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treatment of the Workers as independent contractors. However, REAG

is only required to carry its burden of proof by a lesser

standard." Id. at 500 (citing Critical Care, supra). By the REAG

court's reading, Section 530 and its legislative history required

the court to "... lower[] the hurdle of the taxpayer's burden of

proof." Id. The court articulated this "lesser standard" by

stating that "a taxpayer need only show a substantial rational

basis for its decision to treat the Workers as independent

contractors in order to prevail." Id. Language in the currentlychallenged instruction was likely derived from commentary found in

a footnote of the REAG case, which states in part: 

The Court is aware of the seemingly amorphous nature of

a standard of review that is quantitatively less that a

preponderance of the evidence. However, logically, the

burden on the taxpayer must be some quantum more than the

IRS' prima facia showing of correctness, but less than a

preponderance. Certainly if the evidence weighted out

evenly, then under such a standard the taxpayer would

still prevail.

REAG, 801 F.Supp. at 500 note. 

We believe the REAG court misinterpreted Section 530 and its

legislative history and decided this issue wrongly. As previously

indicated, there is nothing in the statute or its legislative

history which supports the idea that the burden of proof under

Section 530 is different than other tax cases. "Rational basis"

for not treating workers as employees is what must be shown by the

taxpayer; "[Substantial] rational basis" is not the level of proof

required. Under the present facts it was taxpayer's burden to

prove that its workers were properly classified as independent

contractors by a preponderance of the evidence. Failing that, it

became the taxpayer's burden to prove by a preponderance of the

evidence that it had a rational basis for improperly classifying

the workers. The district court's burden of proof instruction was

reversible error.
 3

Regarding our standard of review on this issue, the Supreme

Court has stated that "Whether the elements that constitute

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 This court has stated that "It has long been generally

recognized that it is reversible error to place the burden of proof

on the wrong party or to place an unwarranted burden of proof on

one party. Voight v. Chicago & Northwestern Railroad Co., 380 F.2d

1000, 1004 (8th Cir. 1967). 

 

IV.

The taxpayer's cross-appeal alleges the district court

committed reversible error by imposing penalties on the taxpayer

for its failure to file tax returns attributable to "loans" or

other fringe benefits recharacterized as salary to David Boles.

The district court determined that David Boles was an employee of

the taxpayer and should have been treated as such for employment

tax purposes. Taxpayer does not challenge this determination. The

district court went on to impose additions to the taxes due for

taxpayer's failure to file returns or pay the taxes at the time

they were due. Taxpayer contends the imposition of penalties in

addition to the taxes was in error. We disagree.

Where an employer fails to file timely employment or

unemployment tax returns or fails to make deposits of taxes, the

Code provides for additions to the tax in the way of penalties. 26

U.S.C. § 6651(a)(1), 26 U.S.C. § 6656(a). The addition to taxes

under § 6651 has been described as mandatory unless it is shown

that the taxpayer's actions were due to reasonable cause and not

due to willful neglect. Id.; Rubber Research, Inc. v.

Commissioner, 433 F.2d 1402, 1407 (8th Cir. 1970). To escape the

penalties, "the taxpayer bears the heavy burden of proving both (1)

that the failure did not result from 'willful neglect,' and (2)

that the failure was 'due to reasonable cause.'" U.S. v. Boyle,

468 U.S. 241, 245, 105 S. Ct. 687, 689-90, 83 L. Ed. 2d 622 (1985);

Rubber Research, 433 F.2d at 1407.3
'reasonable cause' are present in a given situation is a question

of fact, but what elements must be present to constitute

'reasonable cause' is a question of law." U.S. v. Boyle, 469 U.S.

241, 249, 105 S.Ct. 687, 692 n.8, 83 L. Ed. 2d 622 (1985) (emphasis

in the original). We construe the district court's decision as

analyzing whether the taxpayer presented evidence to establish the

presence of reasonable cause, and thus review the decision under

the clearly erroneous standard. It should be noted however that

our conclusion on this issue would be the same even if we reviewed

the issue de novo.

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In this case the evidence showed that Boles was the sole owner

of the taxpayer, as well as serving as its president, secretary and

treasurer. In short, the evidence presented indicated that Boles

alone ran taxpayer in all respects, both day to day and long term.

During the time in question Boles did not draw a salary, but

instead caused taxpayer to make him interest-free loans by writing

checks payable to himself or to "cash" on taxpayer's checking

account. Taxpayer also paid some of Boles' personal living

expenses and paid for an automobile for Boles' exclusive use.

Boles had no other employment other than with taxpayer, and his

sole source of income was the money he received from taxpayer.

Given its treatment of its drivers as independent contractors, the

taxpayer was operating as a corporation without any employees for

tax purposes.

In an effort to establish reasonable cause and the lack of

willful neglect, the taxpayer argued below that he relied on the

advice of his tax preparers in not paying taxes attributable to

Boles' wages. The district court heard all of the evidence and

rejected this contention. 

Reasonable cause requires the taxpayer to demonstrate that he

exercised "ordinary business care and prudence" but nevertheless

was "unable to file the return within the prescribed time." 26

C.F.R. § 301.-6651(c)(1) (1984); U.S. v. Boyle, 105 S. Ct. at 690.

Additionally it was the taxpayer's burden to show that its actions

were not due to willful neglect, which has been interpreted as
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meaning a "conscious, intentional failure or reckless

indifference." U.S. v. Boyle, 105 S. Ct. at 690. While a taxpayer

may establish reasonable cause (and/or lack of willful neglect) by

showing that it reasonably relied on the advice of an accountant or

tax preparer, Chared Corp. v. U.S., 69-2 USTC ¶ 9535 (N.D. Tex.,

1969), aff'd. 446 F.2d 745 (5th Cir. 1971), ordinary business care

and prudence on the part of the taxpayer are still required.

Obviously, reliance on the advice of others must be reasonable to

make out a showing of reasonable cause. Boles received no income

other than that received from the taxpayer. For the years in

question, Boles was running a corporation with no employees for

federal tax purposes. Under the facts of this case, we agree with

the district court that taxpayer failed to meet its burden of

showing reasonable cause. The district court's determination is

affirmed on this issue. 

V.

In conclusion, we affirm the judgment of the trial court

assessing penalties on taxpayer's failure to pay employment taxes

on the money and fringe benefits given to David Boles. We reverse

the judgment entered on the jury's verdict finding that taxpayer

had a reasonable basis for treating its drivers as independent

contractors, and we remand for a new trial on this issue.

A true copy.

Attest:

 CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.