TAX COURT OPINION

Case: Ronald E. Byers
Docket Number: 22629-07
Judge: Colvin
Opinion Type: bench
Filed: 07/20/2010
Pages: 16

UNITED STATES TAX COUR T WASHINGTON, DC 2021 7 RONALD E . BYERS, Petitioner , V . COMMISSIONER OF INTERNAL REVENUE , Respondent . Docket No . 22629-07 . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and .Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to Petitioners and to respondent a .copy,of the pages of the transcript of the trial in the above case befor e Judge Holmes at St . Paul, Minnesota on June 8, 2010 , .containing his oral findings of fact and opinion rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, a decision will be entered for respondent . (Signed ) Mark V. Holmes Judge Dated : Washington, D .C . . July 20, 2010 SERVED JUL 29 2010 4 1 Bench Opinion by Judge Mark V . Holmes June 11, 201 0 2 Ronald E . Byers v . Commissioner Docket No . 22629-07 3 The Court has decided to render ora l 4 findings of fact and opinion in this case, and th e 5 following represents the Court's oral findings of fact 6 and opinion . 7 This bench opinion is made pursuant to the 8 authority granted by section 7459(b) of the Internal 9 Revenue Code of 1986, as amended, and Rule 152 of the 10 Tax Court's Rules of Practice and Procedure . 11 Mr . Byers resided in Minnesota when he filed 12 his petition . The parties had a stipulation of facts 13 that together with the evidence submitted during trial 14 constitutes the record of this case . 15 This is a return trip to Tax Court for Mr . 16 Byers . In Byers I , Tax Court Memorandum 2007-331, the 17 primary issue was exactly the same as the one in this 18 case, which was whether Petitioner was an independent 19 contractor or an employee of a company called Edin a 20 Couriers, Incorporated. And, indeed, the background 21 facts are almost identical with this case . A 22 familiarity is assumed with Byers I , as I will refer 23 to T .C . Memo . 2007-331 . The chief difference is that 24 this case arises from Mr . Byers' '03 and '04 years, in 25 which the Government determined a deficiency as wel l Heritage Reporting Corporation (202) 628-4888 5 1 as additions to tax for failure to timely file, 2 failure to timely pay, and failure to make the 3 required estimated tax payments . 4 There are four issues in the case . Th e 5 first is whether I have jurisdiction over the 2003 tax 6 year . Here, as I had explained earlier at th e 7 beginning of trial, I will dismiss the 2003 year for 8 lack of jurisdiction . There was no notice o f 9 deficiency attached to the petition, the IRS did not 10 produce one, and also there's no indication o r 11 evidence that one was'mailed to Mr . Byers' last known 12 address . This is sufficient to dismiss for lack of 13 jurisdiction on Mr . Byers' motion . Of course, if the 14 IRS is correct that he failed to file a tax return for 15 2003, there would be no prohibition on their tryin g 16 again . 17 The second issue is the main one in the 18 case, the classification of Mr . Byers as a n 19 independent contractor . rather than an employee during 20 the 2004 tax year . This is the same issue as in Byers 21 I . That issue, the classification of Mr . Byers as an 22 independent contractor or an employee, was essential 23 to the decision for the 1999 to 2000 tax years . I t 24 was actually litigated, necessarily decided, th e 25 subject of a final judgment, and, of course, betwee n Heritage Reporting Corporation (202) 628-4888 6 1 the same parties, the Commissioner and Mr . Byers . 2 On that basis, the Commissioner in this case 3 moved for summary judgment, and Mr . Byers swore : 4 "In 2004, Edina Couriers imposed numerou s 5 material changes in the way that I performed my truck 6 driving services for it . Thomas Bartsh told me i n 7 2004 that in order to increase Edina Couriers ' 8 drivers' productivity, Edina Couriers was compelled to 9 expressly exercise its right to control the way I did 10 my job . Mr . Bartsh further told me in 2004 that I was 11 required at all times to take Edina Couriers ' 12 instructions as to the ways and means of how I should 13 perform my job . This, he said, was because Edin a 14 Couriers' goal was to service its customers more 15 quickly in 2004 than it had served its customers in 16 previous years . 17 "In 2004, Edina Couriers compelled me to 18 work many more hours than I had worked for them in 19 other years . That year, Thomas Bartsh specifically 20 told me that I was required to be personally availabl e 21 to work for Edina Couriers for at least 10 certain 22 hours a day for each of the five business days in a 23 week and also to be on call throughout whicheve r 24 weekends and on whichever holidays he thought Edina 25 Couriers needed me . Heritage Reporting Corporation (202) 628-4888 7 1 "Throughout 2004, Edina Couriers personally 2 instructed me as to where, when, and how to perform my 3 truck driving services . These Edina Couriers ' 4 instructions in 2004 included directing me as to the 5 specific travel route .I was required to take to it s 6 customers, the precise order in which I was to pick up 7 and deliver freight to its customers, and even th e 8 exact manner in which I was to load and unload my 9 truck . " 10 In response to this sworn declaration ; I had 11 to deny the motion for summary judgment because there 12 was a genuine issue as to a disputed material fact . 13 And yet during trial when I asked Mr . Byers what had 14 changed between 2002 and 2004, he replied that he had 15 been required to obtain a certificate to hi s 16 commercial driver's license certifying him as eligible 17 to drive hazardous materials . This is not consistent 18 with his sworn declaration and with the other evidence 19 presented at trial as to the means and methods o f 20 accomplishing his ordinary trucking and delivery 21 services, which I specifically find did not change 22 between 2002 and 2004 . 23 My conclusion, therefore, is that collateral 24 estoppel does apply and requires a decision for th e 25 Commissioner on this issue in this case . However , Heritage Reporting Corporation (202) 628-4888 8 1 even if collateral estoppel did not apply -- and here 2 I'm making an alternative holding -- in the Eight h 3 Circuit, where appellate venue would lie in this case, 4 the circuit court has for over 40 years stated tha t 5 "The authorities seem to be in general agreement that 6 an employer's right to control the manner in which the 7 work is performed is as important if not the maste r 8 test" -- I'm sorry -- "is an important if not the 9 master test to be considered in determining th e 10 existence of an employer-employee relationship, the 11 right to control and direct the individual wh o 12 performs the services, not only as to the results to 13 be accomplished by the work but also as to the details 14 and means by which that result is accomplished . " 15 That's Azad v . U .S . , 388 F .2d 74, 76 (8th Circuit 16 1968) . 17 And, of course, in Byers I , Judge Swif t 18 discussed the same matter at greater detail, and I'm 19 incorporating his conclusions of law on this point as 20 my own . He said, in Byers I : 21 "In deciding whether a taxpayer is to be 22 treated as an independent contractor or as a n 23 employee, we apply seven factors : control over the 24 manner of accomplishing work, investment in wor k 25 facilities and tools, opportunity for profit or loss , Heritage Reporting Corporation (202) 628-4888 9 1 termination of the work relationship, participation in 2 service integral to regular business, length o f 3 relationship, and intent of the parties as to the type 4 of relationship formed . 5 "The United States Court of Appeals for the 6 Eighth Circuit uses two additional factors, see Day v . 7 Commissioner , T .C . Memo . 2000-375, as follows : those 8 --two-factors are substantial cost incurred and special 9 skills required . 10 "We apply the factors as appropriate under 11 the circumstances, and no single factor i s 12 dispositive . " 13 Each of these factors is unchanged since 14 2002, and even if viewed as an original matter i n 15 2004, these are the holdings and findings that I would 16 make . 17 First factor : control over the manner o f 18 accomplishing work . Petitioner controlled the manner 19 in which he scheduled and made pickups and delivery 20 without substantial control at least from ECI . This 21 factor indicates an independent contracto r 22 relationship . 23 Investment in work facilities and tools . 24 Petitioner was required either to own or to lease his 25 own truck, tools, and other equipment and made a Heritage Reporting Corporation '(202) 628-4888 1 0 1 significant investment in his truck driving activity 2 through his rental contract with the associate d 3 company, Conrad Corporation . This factor to o 4 indicates an independent contractor relationship . 5 Third factor : opportunity for profit o r 6 loss . Because Mr . Byers was paid not a fixed wage but 7 a percentage of gross billings to customers an d 8 because the number of deliveries that he made depended 9 significantly on his efficiency and willingness t o 10 show up early in the morning, Mr . Byers had 11 effectively an opportunity to participate in ECI's 12 profits . Because he provided and paid for his own 13 truck and insurance through his lease with Conra d 14 Corporation, he also risked a net loss if his profits 15 did not exceed his expenses . As the credibl e 16 testimony of Mr . Bartsh indicated during trial, this 17 did happen with some drivers, albeit not with Mr . 18 Byers . This factor too indicates an independent 19 contractor relationship . 20 Fourth factor : termination of the wor k 21 relationship . Under Mr . Byers' operating agreement, 22 which in 2004 was identical to the one he had in 1999 23 through 2002, Edina Couriers or Mr . Byers were to give 24 30 days' notice before termination of Petitioner . But 25 Edina Couriers had a practice of allowing truc k Heritage Reporting Corporation (202) 628-4888 11 1 drivers to terminate without notice in 2004, I' m 2 finding, as well as in 2002 and previous years . This 3 factor is neutral as a result . 4 Next factor is the participation in services 5 integral to the regular business . Here again I agree 6 with Judge Swift that because truck drivers are a n 7 integral part of Edina Couriers' regular service, Mr . 8 Byers' participation as a truck driver in thei r 9 regular business for the year at issue does indicate 10 an employment relationship . 11 Similarly, the length of Mr . Byers ' 12 relationship to Edina Couriers, which was 6 years, as 13 Judge Swift found and as I'm finding now, indicates 14 that he did have a long-term relationship with ECI . 15 And that too, as it did in Byers I , indicates a n 16 employment relationship . 17 Next factor is the parties' intent as to the 18 type of relationship formed . Mr . Byers was working in 19 2004 under the same operating agreement he was i n 20 Byers I , and that operating agreement clearly states .21 that he was to be treated as an independen t 22 contractor . Because he worked for years under that . 23 operating agreement and never objected to the Forms 24 1099 that ECI sent him, the operating agreement does 25 not in any way support his claim that an employmen t Heritage Reporting Corporation (202) 628-4888 1 2 1 relationship with Edina Couriers was what the parties 2 intended . Moreover, he was treated in 2004, as in the 3 previous years, as an independent contractor . He got 4 no accrued paid leave, no health or pensio n 5 contributions, no retirement, and no wage withholding . 6 This factor strongly indicates an independen t 7 contractor relationship . 8 Mr . Byers also incurred substantial costs, 9 which is the next factor in this multifactor test, to 10 lease his truck which allowed him to make deliveries 11 .to and from ECI's customers . This too indicates an 12 independent contractor relationship . 13 Finally, there are the special skill s 14 required . And here again, this factor would indicate 15 an employment relationship, as it did in Byers I , 16 because ECI did not require that Petitioner have 17 special skills other than his commercial driver's 18 license . 19 So, again, as in Byers I , of the nine 20 factors, five indicate an independent contracto r 21 relationship, three indicate an employee relationship, 22 and one factor is neutral . I conclude from this, as 23 did Judge Swift in Byers I , that Mr . Byers is to be 24 treated as an independent contractor for the tax year 25 2004 and that he is therefore liable for self- Heritage Reporting Corporation (202) 628-4888 13 1 employment taxes as well . 2 I found it particularly telling from the 3 credible testimony of Mr . Bartsh that most Edin a 4 Courier drivers supplied their own vehicle . Many were 5 actually owners and therefore not subject to the lease 6 payment withholding that Mr . Byers was . In that way, 7 Mr . Byers was just like them : he supplied the tools of 8 his job ; he just did it through renting a truck from a 9 related corporation . 10 The third issue in this case is Mr . Byers' 11 challenge to the characterization of the withholding 12 from the gross settlements that he was owed by Edina 13 Couriers . He claims again, as he did in Byers I , that 14 these payments were somehow withholding taxes tha t 15 should be credited to his tax liability to the Federal 16 Government . However, as again in Byers I . there were 17 no Federal income or self-employment taxes withheld 18 from his earnings, and Mr . Byers did not cite an y 19 authority that would authorize me now t o 20 recharacterize his truck lease payments to Conrad 21 Corporation as Federal income and self-employment 22 taxes withheld from his earnings . 23 The fourth and final issue here are th e 24 penalties, which, as Ms . Timmons stated, include both 25 additions to tax for failure to timely file an d Heritage Reporting Corporation (202) 628-4888 14 1 failure to timely pay, as well as underwithholding, 2 the failure to make estimated tax payments . 3 The Commissioner bears the burden o f 4 production in connection with these additions to tax 5 under both section 6651 and section 6654 . Unde r 6 section 6651(a)(1), a taxpayer who fails to file a 7 Federal income tax return by the date due may b e 8 liable for an addition to tax unless the taxpaye r 9 demonstrates reasonable cause and not willful neglect . 10 Similarly, under section 6652 -- I'm sorry -- 11 6651(a)(2), a taxpayer who fails to timely pay with 12 his return Federal income tax by the date due may be 13 liable for an addition to tax unless he demonstrates 14 reasonable cause and not willful neglect in making 15 payment . And, of course, a taxpayer who is required 16 to pay but who significantly underpays estimate d 17 income taxes is also .liable for an addition to tax 18 under section 6654(a) . 19 I find that Mr . Byers had no reasonable 2.0 cause for his failure to file Federal income tax . 21 returns for the year in issue, failure to pay and, of 22 course, make estimated tax payments, so I therefore 23 sustain the Commissioner's determination unde r 24 sections 6651(a)(1), (a)(2), and 6654 for additions to 25 tax against Mr . Byers for the 2004 tax year . Heritage Reporting Corporation (202) 628-4888 1 5 1 Mr . Byers is a frequent litigant, not jus t 2 producing Byers I and this case but also Minnesota Tax 3 Court cases, and indeed he's generated at least three 4 opinions in the Minnesota tax system that are ver y 5 similar to the Byers cases in the Federal system , 6 including Byers v . Commissioner , 2006 Westlaw 2380586 7 (Minnesota Tax Regular Division), amended o n 8 rehearing, 2006 Westlaw 3155401, and affirmed, 735 9 N .W .2d 671 (Minnesota 2007) . 10 The root cause of this litigiousness seems 11 to be a deep misunderstanding on Mr . Byers' part o f 12 the definition of an independent contractor and of the 13 organization of business corporations in Americ a 14 today . To be an independent contractor is not to be a 15 business entity of one's own or to be in competition 16 for clients with the company with whom one is doing 17 business as an independent contractor . It doesn' t 18 require a stable of clients, billing, recordkeeping 19 that would be required if Mr . Byers was a courie r 20 service unto himself . Mr . Byers also doesn't seem t o 21 understand the concept of close corporations o r 22 related corporations . For somebody like Mr . Olsen, 23 the owner of Conrad Corporation, the truck leasing 24 company, and a substantial owner of Edina Couriers, 25 be in the same general business and to hav e Heritage Reporting Corporation (202) 628-4888 1 6 1 contractual relations with each other but not offe r 2 them to the general public isn't indication of a 3 conspiracy or a scam or anything like that . It' s 4 simply a way of organizing economic activity that's 5 become increasingly common in America today . And a 6 way of in fact increasing the ability of a compan y 7 like Edina Couriers to have a larger pool of operators 8 beyond those who can pay for their or own their ow n 9 tools, Mr . Olsen has through Conrad Corporatio n 10 acquired the ability to make money by renting those 11 tools and equipment and thereby increasing the supply 12 of drivers available for Edina Couriers to contract 13 with . 14 Moreover, throughout the trial, I observed 15 that Mr . Byers has an unusual understanding of the 16 incidence of taxation at the state level, referring 17 several times to the rental tax for renting trucks in 18 Minnesota or the sales tax on leased vehicles i n 19 Minnesota, so I did some legal research on those 20 issues as well . 21 And the fact of the matter is that as a 22 matter of law in Minnesota there is no rental tax owed 23 for the rental of the sort of trucks that Mr . Byer s 24 was driving or for rentals generally of motor vehicles 25 where the rental period is longer than 28 days . An d Heritage Reporting Corporation (202) 628-4888 1 7 1 the exhibits in this case show that the minimum period 2 of rental from Conrad Corporation was, not 3 coincidentally, 30 days . That's section 297A .64 .1 of 4 the Minnesota Revised Statutes . 5 Similarly, there is no sales tax on leased 6 vehicles, including trucks, if the original lesso r 7 collects it . And as we saw in the evidence that was 8 presented, most of the vehicles, and certainly th e 9 ones that were at issue in this case that Conrad 10 Corporation re-leases to truck drivers, are in fact 11 leased vehicles themselves from a company called Koch 12 Corporation -- that's K-O-C-H Corporation -- o r 13 another large trucking company . And as we saw from 14 that evidence, the sales tax on leased vehicles i s 15 paid by the original lessee by the original lessor and . .16 the second level of lease is not subject to that tax . 17 That again is Minnesota Revised Statutes section 18 297A .815 . 19 The Government has not moved and I certainly 20 won't impose a penalty at this time under section 6673 21 or the other tools available for me for people wh o 22 won't accept their losses in one tax case . I 23 therefore conclude that I find for the Commissioner as 24 to the following deficiencies and additions to tax for 25 the tax year 2004 : a deficiency of $29,826, a n Heritage Reporting Corporation (202) 628-4888 1 8 1 addition to tax under 6651(a)(1) of $6,710 .85, a n 2 addition to tax under section 6651(a)(2) of $3,579 .12, 3 and an addition to tax under section 6654 of $854 .68 . 4 This concludes the Court's oral findings of 5 fact and opinion in this case . 6 (Whereupon, at 9 :23 a .m ., the bench opinion 7 in the above-entitled matter was concluded . ) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4 25 Heritage Reporting Corporation (202) 628-4888