T.C. M em o . 2 0 2 1 -8 6

UNITED STATES TAX COURT

BLOSSOM DAY CARE CENTERS, INC., Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 3 8 6 8 -1 2 , 3 8 6 9-1 2
. 1 Fi l edJ u l y 1 3, 2 0 21
.

St ev enP. Fl o wers an d Nat h al i e M . Co rn et t , fo r p et it i o n er. W i l l i am F. Cas t o r an dVas s i l i k i Eco n o m i d es Farri o r, fo r res p o nd en t .

1 Th es e cas es were co n s o l i d at edfo r t ri al , b ri efi n g , an do p in i o n . Th e s ub ject o f t h i s o p i n i o nwi l l p ert ai nt o th o s e i s s u es ari s i n g o u t o f d o ck etNo
. 3 86 9 -1 2
. Th o se i s su es ari si n g o u t o f d o ck etNo . 3 8 6 8 -1 2 are ad dres sedi nBl o s s o m Day Care Ct rs ., In c. v . Co m

m i s si o ner, T.C. M em o . 2 02 1 -8 7 , fi l edt o d ay .

Served 07/13/21- 2
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[* 2 ] M EM ORANDUM FINDINGS OF FACT AND OPINION PARIS, J u d g e: Th i s cas e i s b efo re t h e Co u rt o na p et i t i o nfo r red et erm i n at i o no f em

p l o ym en ts t atu s fi ledp u rs uan tt o s ect i o n7 4 3 6
. 2 In a n o t i ce
o f d et erm i nat i o no f wo rk er cl as s i fi cat i o n d at edNo v em b er 1 4 , 2 01 1 , res p o n d en t d et erm i n edth atBl o s so m Day Care Cen t ers , In c. (p et it i on er o r Bl o s s o m ), h adn o t cl as s ifi edi t s co rp o rat e o ffi cers as em p l o y ees fo r al l t ax ab l e p eri o d s o f cal en d ar y ears 2 0 0 5 th ro u g h 2 0 0 8 . Res p o n d en td et erm i n edth atBarryA. Hack er an d Cel es t e Hack er (Hack ers ) were t o b e l eg al ly cl as s ifi edas p et i t i o n er’ s “ em pl o y ees ” fo r al l t ax ab l e p eri od s o f cal en dar y ears 2 0 0 5 t h ro u g h 2 0 0 8 an dth at p et i t io n er i s
n o ten ti t l edt o rel i ef u n d er t h e Rev en u e Acto f 1 97 8 , Pub . L. No . 9 5 -6 0 0 , s ec. 5 3 0 , 9 2 St at . at2 8 8 5 . Res p o nd en tal s o d et erm i n edthatp et i t i o n er i s l i ab l e fo r
em pl o y m en tt ax es , p en al t i es u n d er s ect io n6 65 6 fo r fai l u re t o d ep os i tt ax , an d
accu racy -rel at edp en al ti es u n d er s ect i o n6 6 6 2(a) fo r n eg l i g en ce. At t ach ed t o th e
n o t i ce are s ch edu l es s et ti n g fo rt h p et i t i o ner’ s l i ab i l i t i es fo r (1 ) Fed eral In s u ran ce Co n tri b u t i o n Act(FICA) p u rs u an tt o s ect io n s 3 1 0 1 an d 3 1 1 1 , (2 ) Fed eral Un em p l o ym en tTax Act(FUTA) t ax es p urs u an t t o s ect i on 3 3 0 1, (3 ) p en al ti es fo r

2 Un l es s o th erwi s e n o t ed , al l s ect i on referen ces are t o t h e In t ern al Rev en u e Co d e i neffect atal l rel ev an t t i m es . Al l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.- 3
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[* 3 ] fai l u re t o d ep o s itt ax p u rs uan tt o s ect i o n6 6 5 6 , an d(4 ) accu racy -rel at ed p en al t i es u n d er s ect i o n6 6 6 2 (a) fo r n eg li gen ce, s u m m ari zedas fo l l o ws : Pen al t i es Tax p eri od s Ty

p e o f t ax Am o u nt Sec. 6 6 5 6 Sec. 6 6 6 2 (a) 3/ 3 1 t o 1 2 / 3 1 / 2 0 0 5 9 4 1 $ 8 0 , 6 8 6 .8 0 $ 1,4 1 9 .3 6 $1 6 , 1 3 7 .3 6 20 0 5 9 4 0 8 6 8.0 0 8 6
. 8 0 1 7 3 .6 0 3 / 3 1 t o 1 2 / 31 / 2 0 0 6 9 4 1 8 4 ,8 0 0 .2 0 1 ,4 8 7
. 3 8 1 6,9 6 0 .0 3 20 0 6 9 4 0 8 6 8 .0 0 8 6 .8 0 1 73 .6 0 3 / 3 1 t o 1 2 / 31 / 2 0 0 7 9 4 1 8 8 ,8 5 2 .2 0 1 ,5 4 5
. 1 2 1 7,7 7 0 .4 4 20 0 7 9 4 0 8 6 8 .0 0 8 6 .8 0 1 73 .6 0 3 / 3 1 t o 1 2 / 31 / 2 0 0 8 9 4 1 9 3 ,3 7 2 .0 0 1 ,6 1 8
. 6 0 1 8,6 7 4 .4 0 20 0 8 9 4 0 8 6 8 .0 0 8 6 .8 0 1 73 .6 0 Aft er co n ces si o ns , 3 th e i s s u es fo r d eci si o nare wh et h er: (1 ) th e Hack ers
s h o u ldb e l eg al l y

cl as si fi edas em

p l o y ees o f p et i t i on er s u ch th atp et i t io n er i s l i ab l e fo r em p lo ym en t t ax (FICA) an du n em p l o ym en tt ax (FUTA) rel at i ng t o wag es p ai d t o the Hack ers fo r al l t ax p eri o d s i n2 0 0 5, 2 0 06 , 2 0 0 7 , an d2 0 08 ; (2 ) p et i t i o n er i s

3 Pet i t i on er d o es n otas s erti ti s en t it l edt o rel i ef u n d er th e Rev en u e Acto f 1 9 7 8 , Pub . L. No
. 9 5 -6 0 0, s ec. 5 3 0 , 9 2 St at . at2 8 8 5 , g iv en th e Hack ers ’ co rp o rat e o ffi cer s t atu s.- 4
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[* 4 ] l i ab l e fo r FICA an dFUTA t ax es o n t h e b as i s o f res p on d en t ’ s d et erm i nat i o n th atth e Hack ers h adad di ti o n al wag e i n co m e fro m p et i t i o n er i n2 0 0 5 , 2 0 0 6 , 2 0 0 7 , an d 2 0 0 8 o f $ 2 0 9 ,2 00 , $ 2 2 0 , 2 1 0 , $ 2 3 1,8 0 0 , an d$ 2 4 4,0 0 0 , res pect i vel y ; (3 ) p et i t i o n er i s l i ab l e fo r a fai l u re t o d ep o si tp en al ty u n d er s ect i o n6 65 6 wi th
res p ectt o t h e FICA an d FUTA t ax l i ab i l i t i es res p o n den td et erm i n edfo r t h e t ax ab l e p eri o d s fro m 2 0 0 5 t h ro u g h 2 0 0 8 ; an d (4 ) p et i t i o n er i s l i ab l e fo r accu racy rel at ed p en al t i es u n der s ect i o n 6 6 6 2 (a) wi th res p ectt o th e FICA an d FUTA t ax l i ab i l i t i es d et erm i nedb y

res p o n d en tfo r t h e t ax ab l e p eri o d s fro m 2 00 5 thro u g h 2 0 0 8
. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e p art i es fi l eda fi rs ts t ip u l at i o n o f fact s an ds i x s up pl em en t al s t i p ul at i o n s o f fact s wi th
acco m pan y i n g ex h i b i t s t h atare i n co rp orat edh erei nb y thi s referen ce. Back g ro u n d Pet i t i o ner was an Ok l ah o m a co rp orat i o n , o ri g i n al l y i n co rp o rat edi n1 9 8 6 , wi th i t s p ri n ci p al p l ace o f b us i nes s i n Tu l s a, Ok l ah o m a, at th e t i m e t h e p et i t i o n
was fi l edi nth is cas e. Pet i t i on er was a v al idco rp o rat i o ni nth e St at e o f Ok l ah o m a du ri n g al l p eri o d s ati s su e.- 5
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[* 5 ] Pet i t i o ner d i db u s i n es s as Bl o ss o m Day Care Cen t ers an d o perat edfi v e ch i l dcare cen ters i n t h e Tu l s a m et ro p o l i tan area fro m 2 0 0 4 th ro u g h M ay 2 0 0 5 an d
s i x ch i l dcare cen ters fro m M ay 2 0 0 5 th ro u g h Decem

ber 2 00 8
. Atal l rel ev an tt im es an ds i n ce 1 9 8 6 , th e Hack ers were p et i t i o n er’ s o n l y
co rp o rat e o ffi cers . M r. Hack er h as al way s s erv edas p et i t i o ner’ s v i ce p res i d en t , s ecret ary , an dtreas urer. M rs . Hack er h as al way s s erv edas p et i t i o n er’ s p res i d en t . Th ere were n o o th er co rp o rat e o ffi cers . In ad d i t i o n , th e Hack ers were p et i t i o n er’ s
s o l e s h areh o l d ers , M rs . Hack er o wn i n g 5 1 % an dM r. Hack er o wn in g 4 9 % o f p et i t i o n er’ s s t o ck
. In Oct o b er 2 0 02 th e Hack ers , as s o l e s hareh o l d ers , i n co rp o rat edHack er Co rp . an dh adi tel ectt o b e t ax edas a s m al l b u s i n es s co rp o rat io n(S co rp o rat i o n ) p u rs u an t t o s ect io n1 36 2 . Pet i t i o n er was n o ta s h areh o l d er i nHack er Co rp . In M ay 2 0 0 5 p et i t i o ner co n v ey edt o Hack er Co rp . b y qu i t cl ai m

d eedcert ai nreal
es t at e l o cat i on s o f Bl os s o m Day Care Cen ters . Th e Hack ers h av e as s ert edth atth e p u rp os e o f Hack er Co rp . was t o p ro v i d e p ro p ert y an ds erv i ces m an ag em en tt o p et i t i o n er, t h e o n l y

cl i en t o f t h e S co rp o rat i on . On i t s retu rn s p et i ti o n er cl ai m ed d educt i o n s o f m an ag em en tfees p ai dt o Hack er Co rp . i n t h e fo l l o wi n g am o u n t s i n th e y ears ati s s u e: $ 3 4 2 ,6 5 0 i n2 0 0 5 , $ 3 7 8,4 8 4 i n 2 0 0 6 , $ 0 i n2 00 7 , an d$ 2 0 4 ,5 1 4 i n2 0 0 8.- 6
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[* 6 ] Th ere i s n o wri t ten ag reem en tas t o th e p u rp o s e o f th e m an ag em en tfees , b u t Hack er Co rp . d i dp ay

t o t al s al ary

t o th e Hack ers fro m

2 0 05 th ro u g h 2 0 0 8 o f $ 7 3 ,8 4 8 , $ 4 0,0 0 0, $ 5 3 ,8 4 7 , an d$ 5 8 ,4 6 2 , res p ect i v el y , fo r s erv i ces p ro v i d edt o Hack er Co rp ., wh i ch were arg u ab l y fo r m an ag em en t o f p et i t io n er. Pet i t i o n er
as s ert s th atwh at ev er s erv i ces th e Hack ers p erfo rm edfo r Bl o s s o m Day Care Cen ters were act u al l y pro vi d edu n d er a p u rp o rt edo ral m an ag em en tag reem en t b et ween p et i t i o n er an dHack er Co rp . fo r t h e b en efi to f Bl o s s o m Day Care Cen t er,
an d i twas n o tp et i t i o n er’ s res p o n s i bi l it y t o p ro v i d e reas o nab l e co m p en s at i o nt o i t s
co rp o rat e o ffi cers , th e Hack ers , fo r s erv ices p ro v i d edt o p et i t i o n er. In v o lv em en to f t h e Hack ers Befo re p et i t i o n er was i n co rp o rat ed , M rs . Hack er, h av i n g recei v edan
as s o ci at e’ s d eg ree i nch i l dd ev el o pm en t, o pen edh er o wnd ay care cen t er wh i ch i n tu rn b ecam e t h e b as i s fo r th e i nco rp o rat i o no f Bl o s so m Day Care Cen t ers . Fro m 1 9 8 6 an dth ro u g h th e y ears ati s s u e, M rs . Hack er s erv edn o to n ly as p et i t i o n er’ s p res i den tb u tal s o as th e d i rect or o f cu rri cu l u m an dedu cat i o nfo r t h e 9 0
em pl o y ees , s tu d en ts , an ds i x l o cat i o n s fo r Bl o s so m Day Care Cen t ers . Sh e s erv ed
as Bl o ss o m ’ s t op m an ag er, p ers o n al l y o vers eei n g an ds up erv i si n g em p l o y ees , i n cl u d i n g h i ri n g an dfi ri n g an dm an ag i n g Bl o s s om ’ s s i x d ay care d i rect o rs , wi th al l o f p et i t io n er’ s em

p lo y ees u lt i m at el y

rep o rt i n g t o h er.- 7
-

[* 7 ] M r. Hack er, al s o s i n ce 1 9 8 6 an dth ro ug h al l th e y ears at i s s ue, s erv edn o t
o n l y as p et i t i o n er’ s co rp o rat e v i ce p res i d en tb u tal s o as i t s s ecret ary an dtreas u rer. Du ri n g the y ears ati ss u e M r. Hack er al s o s erv edas th e d i rect or o f t h e Bl os s o m Day Care Cen t ers an d as d i rect o r o f acco u n tab i li ty an d fi n an ce fo r p et i t io n er. M r. Hack er h adau th o ri ty o v er al l o f p et i t i o n er’ s b an k acco u n t s , an dh i s d ai l y
res p o n s i b i l i t ies in cl u d ed , b u twere n o tl i m it edt o, d ep os i t i n g p aren t s ’ p aym en t s fo r ch i l dcare i n t o p et i t i o n er’ s b an kacco u n t s an dp ers o n al l y wri t i n g al l o f t h e p ayro l l ch eck s t o p et i t i o n er’ s 9 0 em p l o y ees . Bo th M r. an dM rs . Hack er were m em b ers o f t he Ok l ah o m a Ch i l d Care As s oci at i o n , an dM r. Hack er was a m em b er o f i ts b o ardfro m

2 0 0 4 th ro u g h 2 0 0 8
. Th i s St at e o rg an i zat io n fo cu s edo nch i ldcare i s s u es , wo rk i n g wi th th e Ok lah o m a Dep art m en to f Hu m an Serv i ces (ODHS) reg ard i n g co m m en t s o n reg u l at i o n s , trai n in g , an dedu cat i on . Pet i t i o n er’ s d ay care l o cat i o ns were l i cen s edb y ODHS,
an d th e Hack ers were res p o n s i b l e fo r en s u ri n g th e p ro gram s an dem p l o y ees m et ODHS s t an d ard s . Du ri n g th e t ax p eri o d s ati s s u e, 2 0 0 5 th ro u g h 2 0 0 8, the Hack ers co n tro l l ed al l o f p et i t io n er’ s ch i ldcare p o l i ci es an dedu cat i o n , an dco o rd i n at edal l p h y s i cal l o cat io nan dp ro gram

m ai n t en an ce d eci s i o n s . Bo th act i v el y p art i ci p at edi n p et i t i o n er’ s d ai l y

o p erat i o n , freq u en t l y

wo rk i ng 5 0 t o 6 0 h o u rs p er weekatal l- 8
-

[* 8 ] l ev el s , i n cl u d i n g th o se du t i es d es cri b edab o v e, as wel l as p ap erwo rk an dfro n t
o ffi ce du t i es , cl as sro o m

t each i ng an ds up erv is io no f t each ers , p u rch as i ng an d d el i v eri n g fo o d fo r p et i t io n er’ s ch i l dcare p ro gram s, an dev en m ai n ten an ce an d
cu s t o d i al du t i es , i f n eed ed
. W ag es , Sal ary , o r Other Co m p en s at i o no f M r. an dM rs . Hack er Pet i t i o ner d i dn o trep o rt p ay i n g a s al ary o r wag es t o ei th er M r. o r M rs . Hack er o ni t s Fo rm s 1 1 2 0 , U.S. Co rp o rat i o nIn co m e Tax Retu rn , fo r t ax y ears 2 0 0 5 thro u g h 2 0 0 8 . Itd i d rep o rtp ay i n g co m p en sat i o nt o o ffi cers o f $ 1 0 0 ,0 0 0 i n 2 0 0 6 , b u tn o tfo r t h e o th er y ears ati s s u e. 4 Inad d i ti o n , p et i t i o n er m ai n t ai n ed
v eh icl es t i t l edi nth e Hack ers ’ n am es i n cl u d in g l o an p aym en t s an d m ai n t en an ce fo r a 2 0 0 0 Lex u s an da 2 0 0 3 Hu m m er. Pet i t i on er cl ai m edd ep reci at i o nfo r t h o s e au t o s
o ni t s co rp o rat e t ax return s fo r 2 0 0 5 thro u g h 2 0 0 8 . In ad di t i o n , p et it i on er
m ai n t ai n edv eh i cl es i td idn o t o wn , fo r t h e b en efi t o f t h e Hack ers ’ ch i l dren an da p aren tan da s i b l i ng . Pet i t i o n er p ro v i d ed m u l t i p l e cred i tcard s i nth e n am es o f M r. Hack er an dM rs . Hack er an dfo r t h ei r ch i l dren . Pet i t i o n er p ai dp ers o n al
ex p en d i tu res fo r t h ei r b en efi tth atwere n o tp et i t i o n er’ s b us i n es s ex p en s es .

4 Th e p art i es ag ree t h atp et i t i o n er m ad e n o actu al cas h p aym en ts t o i t s co rp o rat e o ffi cers as co m p en sat i o ndu ri n g 2 0 0 6
.- 9
-

[* 9 ] Pet i t i o ner d i dp ay

s al ari es an dwag es t o i t s o th er em p l o y ees an dd i dfi l e t i m el y Fo rm s 9 4 1 , Em

p lo y er’ s Qu art erl y

Fed eral Tax Return , fo r al l cal en d ar qu art ers fro m

2 0 0 5 t h ro u gh 2 0 0 8 . Pet i ti o ner al s o fi l edt im el y Fo rm s 9 4 0 , Em p l o y er’ s An nu al Fed eral Un em p l o ym en t(FUTA) Tax Retu rn , fo r t ax y ears 2 0 0 5 thro u g h 2 0 0 8 . Pet i t i o n er, co n s i s t en twi th i t s as s ert i o nth at the Hack ers p ro v id eds erv i ces p urs u an tt o an o ral m an ag em en t ag reem en twi th Hack er Co rp ., d i dn o t i s s u e t o M r. Hack er o r M rs . Hack er o r fi l e wi th t h e In t ern al Rev enu e Serv i ce (IRS) Fo rm s W -2 , W ag e an dTax St at em en t , n o r d i d i t i s su e t o th em o r fi l e wi th th e IRS Fo rm s 1 0 9 9-M ISC, M i s cel l an eo us In co m e. In ad d i t i o n , p et i t i o n er d i dn oti n cl u d e ei th er M r. Hack er o r M rs . Hack er o n th e Fo rm s 9 41 o r 9 4 0 , n o r m ak e o nth ei r b eh al f an y d ep os i to f em

p l o ym en t t ax es i n t o an y Fed eral d ep o s i t o ry

fo r an y cal en d ar q u art er o r an nu al retu rn fo r t ax y ears 2 0 0 5 thro u g h 2 0 0 8
. OPINION I. Bu rd en o f Pro o f Th e d et erm i n at i o n s s etfo rt h i nth e Co m m i s s i o n er’ s n ot i ce o f d et erm i n at i o n
o f wo rk er cl as si fi cat io n are p res u m edco rrect , an dth e t ax p ay er b ears th e b u rd en o f p ro v in g th o s e d et erm i n at i on s are i n erro r. See Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ); Ewen s & M i l l er, In c. v . Co m m i s si o n er, 1 1 7 T.C. 2 6 3 ,- 1 0 -

[* 1 0 ] 2 6 8 (2 0 0 1 ). Pet i t io n er b ears th e b u rd en o f p ro v i n g th ati t s o ffi cers , th e Hack ers , were n o ti t s em

p l oy ees as d et erm i nedi nth e n o t i ce o f d et erm in at i o nfo r th e t ax p eri o d s i n i s s u e. Pet i t i o n er, a co rp o rat i o n , al s o b ears the b u rd en o f p ro v i n g th ati ti s n o tl i ab l e fo r th e p en al t i es u n d er s ect i on 6 6 5 6 fo r fai l u re t o d ep o s i tt ax
an d accu racy -rel at edp en al ti es u n der s ect i o n6 6 62 (a) fo r n eg l i g en ce. See NT, In c.
v . Co m m i s s i o n er, 1 2 6 T.C. 1 91 , 1 9 4 -1 9 5 (2 00 6 ). II. W o rk er Cl as s i fi cat i o n Fo r t h e p u rp o ses o f res p o n d en t ’ s d et erm i n at i o n, “ em p l o y ee” i s d efi nedfo r FICA an dFUTA p u rp o ses t o i n cl u d e “ an y o ffi cer o f a co rp o rat i o n”. See s ecs . 3 1 2 1 (d )(1 ) an d(2 ), 3 3 06 (i ). Fo r p urp o s es o f i nco m e t ax wi th ho l d i n g u n d er
s ect i on 3 4 0 2 , the t erm

“ em p l o y ee” al s o i n cl u d es “ an o ffi cer o f a co rp o rat i o n ”. See
s ec. 3 4 01 (c). FICA an d FUTA i m p o s e “ em p lo ym en tt ax es ” t h at em

p l oy ers m u s t p ay an d are o b l i g at edt o wi th h o l di nad d i t i o n t o i n co m e t ax wi th h ol d i n g u n d er
s ect i on 3 4 0 2 . Em

p l o y ers are req u i redt o m ak e p eri o d i c d ep o s i t s o f am o u n t s wi th h el dfro m

em p lo y ees ’ wag es an d am o u n t s co rres p on d i n g t o th e em p l o y er’ s
s h are o f FICA an dFUTA t ax . Secs . 6 3 02 , 6 15 7 ; s ecs . 3 1 .6 3 0 2 -1 , 3 1.6 3 0 2 (c)-3 , Em p l o ym en t Tax Reg s .- 1 1 -

[* 1 1 ] III. Pet i t i o ner’ s Co rp o rat e Offi cers Ano ffi cer o f a co rp o rat io nwh o p erfo rm s m o re t h an m i n o r s erv i ces an d recei v es rem

u n erat i o n fo r s u ch s erv i ces i s a “ s t atu t o ry ” em p lo y ee fo r em

p lo ym en t t ax p u rp o s es . See J o s ep h M . Grey Pub . Acco u n tan t , P.C. v
. Co m m i s s io n er, 1 1 9 T.C. 1 2 1 , 1 2 6 (2 0 0 2 ), aff’ d , 9 3 F. Ap p ’ x 4 7 3 (3 dCi r. 2 0 0 4 ); Cen tral M o t o rp l ex , In c. v . Co m

m is s io n er, T.C. M em o . 2 0 1 4 -2 0 7 ; Gl as s Bl o ck s Un l i m i t edv . Co m m i s s i o n er, T.C. M em o . 2 0 1 3 -1 8 0 ; Nu -Lo o kDes i g n , In c. v . Co m m i s s i o n er, T.C. M em o . 2 00 3 -5 2 , 8 5 T.C.M . (CCH) 9 2 7, 9 3 1 (2 0 0 3 ), aff’ d, 3 5 6 F.3 d 2 9 0 (3 d Ci r. 2 0 04 ); s ecs . 3 1 .3 1 2 1 (d )-1 (b ), 3 1
. 3 3 06 (i )-1 (c), 3 1 .3 4 0 1(c)-1 (f), Em p l o y m en t Tax Reg s . An o ffi cer can es cap e s t atu t o ry em p l o y ee s t atu s o n l y

i f h e p erfo rm s n o
s erv i ces (o r o n l y

m i n o r s erv ices ) fo r t h atco rp o rat io n an dn ei th er recei v es n o r i s
en t i t l edt o recei ve an y

rem u n erat io n , d i rect l y

o r i n d i rect l y , fo r s erv i ces p erfo rm ed
. See Vet eri n ary

Su rg i cal Co n su l t an t s , P.C. v . Co m m i s si o n er, 1 1 7 T.C. 1 4 1 , 1 4 4
- 1 4 5 (2 00 1 ), aff’ d s ub n o m . Yeag l e Drywal l Co . v . Co m m i s s i o n er, 5 4 F. Ap p ’ x 1 0 0 (3 dCi r. 2 0 0 2); s ecs . 3 1.3 1 2 1 (d )-1 (b ), 3 1 .3 3 0 6 (i )-1 (e), 3 1 .3 4 0 1 (c)-1 (f), Em p l o ym en t Tax Reg s . Pet i t i o ner h as s t i p u lat edth atth e Hack ers were co rp o rat e o ffi cers du ri n g al l
o f t h e cal en d ar q u art ers an dy ears 2 0 0 5 th ro ug h 2 0 08 . Bo th p ro v id eds ubs t an t ial
s erv i ces far b ey o n dm i n o r s erv i ces , an db o th d i rect ly an di nd i rect l y

recei v ed- 1 2 -

[* 1 2 ] rem u n erat io nfo r t h ei r s erv i ces . M rs . Hack er was p et i t i o n er’ s 5 1%
s h areh o ld er an dact edas p res i d en t o f t he co rp o rat i o nan dd i rect o r o f cu rri cu l u m
an d edu cat i o n fo r al l s i x ch i l d care l o cat i o n s an d s up erv i s edo v er 9 0 em p l o y ees
an d s tu d en t s o f t h o s e cen t ers . See Nu -Lo o k Des ig n , In c. v . Co m m is s i o n er, 8 5 T.C.M . (CCH) at 9 31 -9 3 2 (ch aract eri zi ng as s t atu t o ry em p lo y ee S co rp o rat i o n
s h areh o ld er wh o s erv edas co rp o rat i o n’ s p res i d en t). M r. Hack er was 4 9 %
s h areh o ld er an dact edas v ice p res i d en t, s ecret ary , an dtreas u rer; as d i rect o r o f Bl o ss o m Day Care Cen t ers ; an das d i rect o r o f acco u n t i ng an dfi n an ce fo r p et i t i o n er. Bo th M r. an d M rs . Hack er h adch eck -s i gn i n g au th ori ty o v er p et i t i o n er’ s b an kacco u n t s an dcred i tcardau th o ri zat i o n i nth ei r co rp orat e cap aci ty . In ad d i t i o n , M r. Hack er’ s d ai l y res p o n s i bi l i t i es i n cl u dedb u twere n o t l i m i ted t o d ep os i ti n g p aren ts ’ p aym en t s fo r ch il dcare an dp ers o n al l y wri ti ng al l o f th e p ayro l l ch eck s t o p et i t i o n er’ s 9 0 em p l o y ees . Bo th M r. an d M rs . Hack er p ro v id ednu m ero u s s erv i ces t o p et i t i o n er, an y o n e o f wh i ch co u l db e co n si d ered
s ub s t an t i al . Bo th recei v edd i rect an di nd i rect rem u n erat i o ni nth e fo rm

o f cars fo r th em s el v es , a Lex u s an da Hu m m er; cars fo r t h ei r ch i l dren an drel at i v es ; cred i t card s ; an dacces s t o al l cas h di s tri b u t i o ns . Pet i t i o ner h as as s ert edthati to p erat es u n d er an o ral m an ag em en tco n tract
an d p ay s m an ag em en tfees t o a rel at edS co rp orat i on , Hack er Co rp ., t o p ro v i d e- 1 3 -

[* 1 3 ] s erv i ces , an dth atth e Hack ers , as em p lo y ees o f Hack er Co rp ., p ro v id e
s erv i ces t o p et i t io n er an d i t s d ay care cen t ers . Wh et h er a co rp orat e o ffi cer i s p erfo rm i n g s erv i ces i nh i s cap aci ty as an o ffi cer i s a ques t i o no f fact . J o s ep h M
. Grey Pub l i c Acco u n t i n g , P.C. v . Co m m i s s i o n er, 1 1 9 T.C. at1 2 9 -1 3 0 ; Rev . Ru l
. 8 2 -8 3, 1 9 8 2 -1 C.B. 1 5 1 , 1 5 2
. Th e co n cl us i o nth ata co rp o rat e o ffi cer i s a s t atu t ory
em pl o y ee m ay

n o tap p l y

t o the ex t en tth at h e o r s h e p erfo rm s s erv i ces i ns o m e
o th er cap aci ty . Nu -Lo o k Des i g n , In c. v . Co m m is si o n er, 8 5 T.C.M . (CCH) at 9 3 1
- 9 3 2
. Pet i t i o ner d i dp ay

Hack er Co rp . m o n ey

cl as s i fi edas m an ag em en tfees o n i t s g en eral l ed g er fo r t h e y ears ati s s u e i nth e fo l lo wi n g am ou n t s : $ 3 8 2 ,6 5 0 i n2 0 0 5 , $ 3 7 8 ,4 8 4 i n2 0 0 6 , $ 0 i n2 0 0 7 , an d $ 2 0 4 ,5 1 4 i n2 0 0 8. Fro m th es e m an ag em en t fees , Hack er Co rp . p ai d Fo rm W -2 wag es t o th e Hack ers fo r 2 0 0 5 th ro ug h 2 0 0 8 o f $ 7 3 ,8 4 8 , $ 4 0,0 0 0, $ 5 3 ,8 4 7 , an d$ 5 8 ,4 6 2 , s upp o s ed ly fo r t h e s erv i ces th e Hack ers were t o ren d er t o p et it i o n er u n der an o ral m an ag em en tco n tract . Pet i ti o n er h as
s ub m i t t edn o ev i d en ce o f a m an ag em en tag reem en t , ei th er wri tt en o r o ral , wi th Hack er Co rp . Li k ewi s e, p et i t i o n er h as s ub m i tt edn o ev i den ce, wri t t en o r
o th erwi s e, as t o a s erv i ce ag reem en t d i rect i n g th e Hack ers t o p erfo rm s ub s t an t i al
s erv i ces o nb eh al f o f Hack er Co rp . t o b en efi tp et i t i o n er, o r ev en a s erv i ce o r
em pl o y m en tag reem en t b et w een the Hack ers an d Hack er Co rp . Th erefo re, t h ere i s- 1 4 -

[* 1 4 ] n o ev i d en ce i nthe reco rdth atM r. Hack er o r M rs . Hack er p erfo rm ed
s erv i ces i na cap aci ty

o ther t h an as a co rp o rat e o ffi cer. Th e Co u rtfi n d s th atth e Hack ers were b ot h “ s t atu t o ry ” em pl o y ees o f p et i t i o n er fo r em

p l o ym en t t ax p u rp o s es fo r al l cal en d ar q uart ers an d y ears o f 2 0 0 5 th ro u g h 2 0 0 8 . Hav i n g m ad e t h atd et erm in at i o n , th e Co u rti s n o treq u i redt o
co n si d er wh eth er th ey

wo ul dal s o b e cl as s i fi edas “ em p l oy ees ” u n d er th e co m

m on l aw t es t . See Nu -Lo okDes i g n , In c. v . Co m m i s s i o ner, 3 5 6 F.3 dat2 9 3. IV. Reas o n ab l en es s o f Co m p en s at i o n Pet i t i o ner al s o co n t en d s th at , ev en i f t h e Co u rtd et erm i n es th at i t s co rp o rat e
o ffi cers are s t atu t o ry em

p l o y ees , th e d et erm in at i o no f ad d i t i o nal wag es p ai dt o th e Hack ers s h o ul d b e n o m ore t h an th e d i fferen ce b et ween wh atwas p ai d t o th e Hack ers as Fo rm

W -2 em p lo y ees o f Hack er Co rp . an d th e reas o nab l e wag e d et erm i n at i o n s o f res p o nd en t . Pet i t i o n er’ s arg u m en t s are m i s g u i d edi nth atwag es p ai db y Hack er Co rp . d o n o to ffs etreas o n ab l e co m p en s at i o nreq u i rem en t s fo r t h e
s erv i ces p ro vi dedb y

p et i t i o n er’ s co rp o rat e o ffi cers t o p et it i on er. Wh at ev er wag es p ai dfo r wh at ev er p u rp o s es b y Hack er Co rp . t o t h e Hack ers as em p l o y ees o f t h e S
co rp o rat i o n wi l l b e b et t er ad dres s edi n rel at i o nt o res p o n d en t ’ s n o t i ce o f d efi ci en cy

fo r th e Hack ers ’ i n d i v i du al i n co m e t ax , i nco n s i d erat i o nth atHack er Co rp . i s a wh o l l y o wn edS co rp o rat i o n.- 1 5 -

[* 1 5 ] Ad d it i on al l y , p et i t i o n er co n t en d s t hatth e n o ti ce o f d et erm i n at i o ni s fl awed i nthat th e d et erm i n ed co m p en sat i o nrefl ect s req u i rem en t s o f h i g h er edu cat i o n al qu al i fi cat i o n s th an ei th er M r. Hack er o r M rs . Hack er h as ach i ev ed , s in ce M r. Hack er d i dn o tg radu at e fro m co l l eg e an d M rs . Hack er h as o n l y an as s oci at e’ s d eg ree i nch i l d d ev el op m en t . Wh i l e p et it i on er h as n o tfu rt her d ev el o p edth i s
co n ten t i o ni ni t s b ri efs an dth ere was l im i t ed tri al t es t im o n y o n t h e t o p i c, wh at ev er h i g h er edu cat i o n al qu al i fi cat i o n s m i g htb e req u i redh av e b een far ecl i p s edb y th e Hack ers ’ p ract i cal ex p eri en ce, p ro fes s i o n al qual i fi cat i o n s , s u cces s i n ru n n i n g d ay
care cen t ers , an do wn ers h i p p rero g at i v es . Reas o n ab l en es s o f co m

p en s at i o n i s a ques t i o nd et erm i n edb y al l the fact s
an d ci rcu m s t an ces o f t h e cas e. E.g ., Gl as s Bl o ck s Un l i m i t edv . Co m m i s s i o n er, at* 1 3 ; J o l y

v . Co m m i s s i o n er, T.C. M em o . 1 9 9 8 -3 6 1 , 1 9 9 8 W L 7 1 2 52 8 , at* 4 , aff’ dwi th o u tp ub l i s h edo p i n i o n , 2 1 1 F.3 d1 2 6 9 (6 th Ci r. 2 0 0 0 ). Fact ors affect i n g th e reas o n ab l en es s o f co m p en s at i o ni n cl u de t h e em pl o y ee’ s ro l e i nth e co m

p an y , co m p ari s o n s o f t h e em

p l o y ee’ s s al ary

t o t h o se p ai db y

s i m i l ar co m

p an i es fo r
s i m i l ar s erv i ces , an dth e ch aract er an dco n d i t io no f th e co m p an y . El l i o tt s, In c. v . Co m m i s s i o n er, 7 1 6 F.2 d1 2 4 1 , 1 2 4 5 -1 2 4 6 (9 th Ci r. 1 9 83 ), rev ’ g T.C. M em o . 1 9 8 0 -2 8 2 ; s ee al s o Pep s i -Co l a Bo t t l in g Co . o f Sal i na, In c. v . Co m m i s s i o ner, 5 2 8 F.2 d1 7 6 , 1 7 9 (1 0 th Ci r. 1 9 7 5 ), aff’ g 6 1 T.C. 5 6 4 (1 9 7 4 ). Th e Co u rtd o es n o tfi n d- 1 6 -

[* 1 6 ] p ers u as i v e p et i t i on er’ s ev i d en ce t h atth e s erv i ces p ro v i d edb y th e Hack ers
were wo rt h s o m eth i n g l es s t h an res p o n den t ’ s d et erm i n at i o n . On ce ag ai n , al th o ug h th e i s s ue was p as s i n g l y

ad dres s edi nev i den ce attri al , p et i t i o n er’ s b ri efs h av e fai l edt o s h o w wh y

res p o n d en t ’ s d et erm i n at io ni s u nreas o n ab le an d, acco rd i n g ly , p et i t i o n er h as n o tcarri edi t s b urd en t o s h o w thatth e am ou n t s res po n d en t d et erm i n edare u n reas o n ab le co m p en s at i o n . V. Pen al t i es Res p o n d en td et erm i n edth at p et i t i o n er i s l i ab l e fo r p en al t i es fo r fai l u re t o d ep os i tt ax p u rs uan tt o s ect i on 6 6 56 an daccu racy -rel at edp en al t i es p u rs uan tt o
s ect i on 6 6 6 2 (a) fo r al l p eri o d s i ni s s ue. Sect i o n6 6 5 6 (a) an d (b ) i m po s es a p en al ty equ al t o 1 0 % o f t he p o rt i o n o f an u n d erp aym en t i n t ax th ati s req u i redt o b e d ep os i t edi f t he fai l u re t o d ep o s i ti s m o re t h an 1 5 d ay s b ey o n d t h e p res cri b ed d ead li n e, u n l es s i t i s s h o wnthats u ch fai l ure i s du e t o reas o n ab l e cau se an dn o tt o wi l l fu l n eg l ect . Sect i o n6 6 6 2 (a) an d(b )(1 ) i m p o ses an accu racy -rel at edp en al ty equ al t o 2 0 % o f t he p o rt i o n o f an u n d erp aym en t thati s at tri b u t ab l e t o n eg li g en ce. Pet i t i o ner co n ten d s th atres p o n d en th as n o tm eth i s b u rd en o f p ro du ct i o n wi th res p ect t o th e p en al t ies b ecau s e h e h as n o ti n tro du ced ev id en ce t h atth e i n i ti al d et erm i n at i o n was ap p ro v edi nwri t i n g b y the i m m ed i at e s up erv is or o f t h e i n d i v i du al m ak i n g th e d et erm i n at i o n , as req u i redb y s ect i o n 6 7 5 1 (b )(1 ).- 1 7 -

[* 1 7 ] Pet i t i o ner’ s arg u m en ti s m i s pl aced . Sect io n7 49 1 (c), wh i ch s hi ft s the b u rd eno f p ro du ct i o nt o the Secret ary i nan y co u rtp ro ceed i ng wi th res p ectt o l i ab i l i ty fo r an y

p en al ty , ad d i t i o n t o t ax , o r ad d i t i o nal am o u n t , ap p l i es o n ly t o i n d i v i du al s . See Po v o l n y Grp ., In c. v . Co m m is si o n er, T.C. M em o . 2 0 1 8-3 7 , at* 2 7
. Res p o n d en t th u s h as n o b u rd en o f p ro du ct i o ni nth i s cas e. Th atb u rd en
rem ai n s wi th p et i ti o n er. Nev ert h el es s , a n o n i n di vi du al t ax p ay er m ay rai se t h e l acko f s up erv is o ry ap p ro v al as an affi rm at i v e d efen s e t o p en al t ies . See, e.g ., Pal m o l i v e Bl d g . In v ’ rs , LLC v . Co m

m i s s i o n er, 1 52 T.C. 7 5 , 8 3 (2 0 1 9 ); En d eav o r Part n ers Fu ndv . Co m m i s s i o n er, T.C. M em o . 2 0 1 8 -9 6 , at* 6 3 -* 6 4 , aff’ d , 9 4 3 F.3 d4 6 4 (D.C. Ci r. 2 0 1 9 ). Pet i t io n er rai s edth e qu es t i o no f s uperv i s o ry ap p ro v al fo r t he fi rs tt i m e o n b ri ef. Itd i d n o trai se t h e affi rm at i v e d efen s e i ni t s p l ead i n g s , as req ui redu n d er Ru l e 4 0 , n o r h as i t so u gh tl eav e t o am en di t s p l ead i ng s p u rs u an tt o Ru l e 4 1
. M o reo v er, res p o n d en th as i n tro du cedi n t o ev i den ce a Ci v i l Pen al ty Ap p ro v al Fo rm

s i gn edo nM arch 3 1 , 2 0 10 , b y th e i m m ed i at e s up erv i s o r o f t h e
rev en u e ag en twh o co ndu ct edth e ex am i n at io no f p et i t i o n er’ s em p l o ym en t t ax l i ab i l i t i es fo r t h e p eri o d s i n i s s u e. 5 Th e Fo rm refl ect s th atth e rev en u e ag en t ’ s

5 OnOct ob er 6 , 2 01 7, res p o nd en tfi l eda m o t io nt o reo p en th e reco rdt o s ub m i tad d i t io nal ev i d en ce. At t ach edt o th e m o t i o nwas , am o n g o th er d o cu m en t s , (co n ti n u ed ...)- 1 8 -

[* 1 8 ] i m m ed i at e s up erv is o r ap p ro v edas s ert i o no f t h e fai lu re t o d ep o s i t p en al t i es
u n d er s ect i o n6 6 5 6 an dth e accu racy -rel at edp en al ti es u n d er s ect i o n 6 6 6 2 (a) fo r
n eg li g en ce. Th ere i s n o ev i d en ce i n th e reco rdt o s u g g es t , an d p et i t io n er d o es n o t
co n ten d , th at res p on d en t co m m u n i cat edh i s i n i t i al p en al ty d et erm i n at i o n t o p et i t i o n er b efo re th e d at e t h e ex am i n i n g ag en t ’ s s uperv i s o r s i g nedth e p en al ty ap p ro v al fo rm . See Cl ay v . Co m m i s s i o n er, 1 5 2 T.C. 2 2 3 , 2 4 9 (2 01 9 ), aff’ d , 9 9 0 F.3 d1 2 9 6 (1 1 th Ci r. 2 02 1 ). Pet i t i o ner d o es n o tco n t es tth e s ubs t an ce o f t h e p en al t i es , ex cep ti ns o far as i t d i s ag rees wi th res p on d en t’ s cl as s i fi cat io no f t h e Hack ers as em p l o y ees an dh i s d et erm i n at i o n o f em

p l o ym en t tax l i ab i li t i es . Th e Co urth as s u s tai n edres po n d en t ’ s d et erm i n at i o n s. Pet i t i on er d o es n o tcl ai m reas o n ab l e cau s e fo r t he fai l u re t o d ep os i to r fo r t h e u n d erp aym en t s , an dth e Co u rtfi n d s th atp et it i on er h adn o n e. Acco rd i ng l y , th e Co u rth o l d s th atp et i t i o n er i s l i ab l e fo r t h e s ect i o n6 6 5 6 p en al ty fo r fai lu re t o d ep o s i tt ax an ds ect i on 6 6 6 2 p en al ty fo r n eg li g en ce fo r al l p eri o d s i ni s s u e.

5 (...co n t in u ed ) th e d ecl arat i on o f J o e W . Co o p er, t h e i m m ed i at e s up erv is o r o f t h e rev en u e ag en t wh o co n du ct ed th e ex am i n at io no f p et i ti o ner’ s wo rk er cl as s i fi cat i o n an d em pl o y m en tt ax l i ab i l it i es fo r th e p eri o d s i ni s s ue. Al s o at t ach edt o th e m o t i o n was a Ci v i l Pen al ty Ap p ro v al Fo rm , s i g n edb y M r. Co o p er an d ap p ro v i n g th e as s ert i o no f t he p en al t i es ati s s u e i n th i s cas e. Th e Co u rt h as g ran t edres p o n d en t ’ s m o ti o n co n t em

p o ran eo u s ly

wi th th e fi l i n g o f t h i s o p i n i o n .- 1 9 -

[* 1 9 ] VI. Co n cl u si o n Th e Co u rts u s tai n s res p on d en t ’ s d et erm i n at i o no f wo rk er cl as si fi cat i o n , Fed eral em

p l o ym en tt ax d efi ci en ci es , an d p en al t i es an dad d i t i o n s t o t ax . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r
res p o nd en t i nd o ck et No . 3 8 6 9 -1 2
.