t c memo united_states tax_court guy schoenecker inc business incentives inc and carousel by guy inc petitioners v commissioner of internal revenue respondent docket nos filed date james e o'brien and wayne a hergott for petitioners in docket nos and steven z kaplan for petitioners in docket no genelle f forsberg for respondent memorandum findings_of_fact and opinion scott judge respondent determined deficiencies in the consolidated income_tax of guy schoenecker inc and its two subsidiaries for the years and in the amounts as follows fiscal_year ended deficiency date date date date dollar_figure big_number big_number big_number all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated some of the issues raised by the pleadings have been disposed of by agreement of the parties leaving for our decision whether the deduction claimed by guy schoenecker inc and subsidiaries petitioner for compensation to guy schoenecker mr schoenecker exceeds reasonable_compensation for services rendered by mr schoenecker and if so the proper deduction for compensation to mr schoenecker in each of the years in issue some of the facts have been stipulated and are found findings_of_fact accordingly guy schoenecker inc hereinafter gsi is a corporation formed on date with its principal_place_of_business in minneapolis minnesota during the years here in issue percent of the stock of gsi was owned by mr schoenecker and certain family trusts and percent was owned by his son larry schoenecker larry gsi owns and has owned since its inception percent of the stock of business incentives inc bi gsi also owns and has owned since its inception percent of the stock of carousel by guy inc formerly animal fair inc and hereinafter referred to as animal fair gsi and its subsidiaries kept their books and reported their income on an accrual basis for the fiscal years ending june for the years here in issue in the fiscal yearend was changed from march to june gsi bi and animal fair filed a consolidated federal_income_tax return for each of the fiscal years ended date and mr schoenecker was born on date in mr schoenecker and mr robert macdonald mr macdonald incorporated bi from the time of its incorporation until mr schoenecker and mr macdonald each owned percent of the stock of bi in mr macdonald had a driving accident and became a paraplegic he returned to work for bi on a part-time basis in and in he retired as an officer and director of bi because of his health but remained as a consultant of bi until on date mr macdonald sold his 50-percent of the common_stock in bi to gsi for dollar_figure the terms and conditions of the stock purchase by gsi from mr macdonald were incorporated in an agreement the purchase of the shares originally owned by mr macdonald included shares which mr macdonald had given to a charity which shares were purchased by gsi at the same time and at the same price per share as the shares which at that time were owned by mr macdonald under the provisions of the stock purchase agreement gsi paid dollar_figure in cash to mr macdonald and executed a promissory note to him in the aggregate principal_amount of dollar_figure installment payments of dollar_figure principal plus accrued interest were to be made on april june september and december of each year plus dollar_figure principal was due on date and date the promissory note was due and payable in full by date after the incorporation of gsi and its purchase of mr macdonald's stock the following dividends were declared by bi and paid in cash to gsi by bi fiscal_year dividends declared amount_paid dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number short_period due to change in fiscal_year in addition in bi transferred improved real_estate having a value of approximately dollar_figure to gsi as a dividend dividend payments in and prior years were used by gsi to pay mr macdonald the real_estate dividend was paid as a result of advice received by mr schoenecker that restructuring of bi to transfer the real_estate it owned to mr schoenecker was advisable from the time of its incorporation in no dividends were declared by gsi until its fiscal_year on date gsi transferred and paid dividends in cash to larry of dollar_figure and to mr schoenecker of dollar_figure and transferred real_estate located pincite bush lake road valued at dollar_figure to mr schoenecker and real_estate located pincite bush lake road valued at dollar_figure to mr schoenecker the real_estate transferred by gsi to mr schoenecker was the property in which the business offices of gsi and bi were located the cash dividend from gsi to mr schoenecker was paid out of cash dividends from bi to gsi and enabled mr schoenecker to have readily available funds with which to pay the taxes resulting from the dividend paid to him in real_estate bi is engaged and has been since its incorporation in the business of business incentive awards which awards are primarily merchandise and travel given by the clients of bi to their customers in return for stamps or certificates and as promotions by bi's clients approximately percent of the revenues of bi in came from its incentive awards activities however bi is also engaged in communication media direct mail print theater and video work and approximately percent of its revenues in were derived from these activities it also is engaged in training of employees of bi's clients and from this activity derived approximately percent of its revenues in bi was also engaged in measurement of the efforts by the client firms to satisfy their customers and approximately percent of its revenues in came from this activity bi was not engaged in the business of advertising or placing for clients advertisements in newspapers in magazines on television or on radio advertising agencies were not primary competitors of bi in connection with its incentives award and travel program bi arranges for the certificates or the stamps for the clients arranges the availability of the merchandise or the travel and generally handles the work in connection with the program bi attempts to have a 50-percent markup on merchandise used to redeem certificates but this target is not often received on large volume bi also attempts to make a profit by obtaining a discount on the travel provided for certificates in addition it very often receives the normal travel commission for transportation and hotel sales mr schoenecker grew up in a small town in rural minnesota he attended the university of st thomas in st paul minnesota where he received a degree in political science in he then attended the university of minnesota law school for a time while still in college mr schoenecker became interested and involved in the business of selling diamonds as engagement gifts to other college students following his formal schooling mr schoenecker decided to join forces with mr macdonald and as a result of their agreement bi's predecessor was incorporated in in the early days of its operation bi sold various items such as diamonds dishes and sporting goods but it soon developed and began the incentives promotion business initially bi's clients were merchants service stations banks and other businesses which were mostly local and relatively small variations of these programs were the primary aspect of bi's business until approximately when it began to expand into the other areas discussed above bi's business steadily grew during the first years of its existence sales grew from approximately dollar_figure in to dollar_figure in the aspects of bi's business other than incentive awards developed by mr schoenecker in were geared toward selling incentive programs to large businesses in bi had sales offices throughout the country it had sales employees of whom were account executives and managers the account executives reported to field sales managers who reported to one of three area regional vice presidents who reported to the senior vice president of sales and marketing of bi mr william shaw mr shaw the sales other income which was principally interest_income total revenues and net_income before taxes of bi for book purposes for its fiscal years through were as follows sales other income revenues before taxes net_income dollar_figure dollar_figure -- dollar_figure big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number on date bi and mr schoenecker entered into a written employment agreement whereby bi employed mr schoenecker as its president and chief_executive_officer ceo mr macdonald signed the agreement on behalf of bi at the time the employment agreement was entered into mr macdonald was the vice president and a director of bi as well as a 50-percent stockholder the employment agreement provided that mr schoenecker would act as bi's president and ceo and that he would devote his attention and best skills and energies toward the profit benefit and advantage of bi the employment agreement provided for bi to pay mr schoenecker a base salary of dollar_figure a month dollar_figure per year and an annual bonus of percent of the net profits of bi and its subsidiaries before taxes mr schoenecker wa sec_46 years old when the employment agreement was entered into the employment agreement contained no provision for long-term incentives or retirement benefits the following table shows the book income before taxes for gsi and its subsidiaries taken from gsi's financial statements also included is the net_income before taxes for gsi which is income before taxes adjusted for losses or income from discontinued operations net_income before income before taxes fy ended taxes of gsi subsidiaries gsi subsidiaries date dollar_figure dollar_figure date big_number big_number date big_number big_number date big_number big_number bi's transition from providing services only to local merchants service stations and banks to serving some large companies was gradual during the years here involved and for some years prior to those here involved bi would design and sell integrated performance improvement programs involving numerous types of services and products designed to meet the specific needs of its clients bi's clients for these services have included such companies as at t cadillac gte quaker oats and ibm not all of these clients after engaging the services of bi have remained with it since bi is in competition with other companies engaged in a similar_business mr schoenecker has personally directed efforts toward the securing of large companies as clients of bi and through his efforts and personal discussions with the officers of some of these companies many of bi's clients have been obtained the employment agreement between bi and mr schoenecker was ratified by unanimous action of the directors of bi dated date at that time the directors were mr schoenecker mr macdonald and mr james e o'brien an attorney up through its fiscal_year ended date mr schoenecker's base salary remained at dollar_figure a year but starting in its fiscal_year ended date after the purchase by gsi of mr macdonald's stock his base salary began to increase mr schoenecker's base salary was dollar_figure for bi's fiscal_year ended date and dollar_figure for each of bi's fiscal years ended date and there are no corporate minutes or similar documents relating to the salary of mr schoenecker and his bonus for bi's fiscal years and the bonus for bi's fiscal_year was computed pincite percent of net book income of bi before taxes and for its fiscal_year it was computed pincite percent of the net book income of bi before taxes by action of the sole director of bi dated date mr schoenecker's annual base salary of dollar_figure and a bonus equal to percent of corporate net_income before taxes of gsi and subsidiaries was ratified for the prior year the fiscal_year corporate net_income was defined as net_income of gsi and subsidiaries before income taxes and before mr schoenecker's bonus by action of the sole director of bi dated date mr schoenecker's annual base salary of dollar_figure and a bonus equal to percent of corporate net_income before taxes of gsi and subsidiaries was ratified for its fiscal_year corporate net_income was defined in the same way as it was defined for bi's fiscal_year for bi's fiscal years here in issue through mr schoenecker's bonus was computed as a percentage of the book income before taxes of bi and not the book income of gsi and subsidiaries which for each of these years was less than the book income of bi in some years prior to those here in issue animal fair had profits and in those years book income of gsi and subsidiaries would for that reason have been greater than book income of bi alone mr schoenecker participated in all employee fringe_benefits of bi in the same manner as all employees of the corporation during the years here in issue bi had a sec_401 plan a group health insurance plan and a group_life_insurance plan in which mr schoenecker participated bi paid a portion of mr schoenecker's health insurance premiums and the full premium for mr schoenecker's life_insurance the sec_401 plan of bi was adopted date and provided for salary reduction contributions by persons covered by the plan of a minimum of l percent to a maximum of percent of certified earnings animal fair was acquired by bi in the corporate and business names were changed to carousel by guy inc in in its fiscal_year a large portion of the assets of animal fair including its name was sold the corporate name was then changed back to animal fair inc originally animal fair manufactured and sold stuffed animals animal fair after its acquisition by bi expanded to three divisions a toy division a gift division and a premium division in its fiscal_year the toy division of animal fair was liquidated and in its fiscal_year the gift division was sold animal fair paid compensation to mr schoenecker for each of its fiscal years and of dollar_figure for its fiscal_year compensation of dollar_figure was awarded to mr schoenecker but was not paid until after date mr james kelly was paid dollar_figure by animal fair for its fiscal_year dollar_figure for its fiscal_year dollar_figure for its fiscal_year and dollar_figure for its fiscal_year for its fiscal_year animal fair paid mr richard duff dollar_figure and mr dean fitch dollar_figure for service for three-quarters of the year and mr william jeurgens dollar_figure for its fiscal_year animal fair paid mr richard duff dollar_figure and for its fiscal_year paid him dollar_figure mr duff was paid dollar_figure for a part of animal fair's fiscal_year mr schoenecker's son larry was paid dollar_figure by animal fair for its fiscal_year and dollar_figure for its fiscal_year other senior executives of bi were paid on a basis of a base salary plus a bonus which was generally computed on a percentage of either sales or income or both above specified amounts for it sec_4 fiscal years involved in this case the total salary and bonus of the five highest paid employees of bi other than mr schoenecker were as follows fy-88 position salary bonus total william shaw v p sales marketing dollar_figure dollar_figure dollar_figure jim dinwoodie st acct exec big_number dallas big_number big_number jim discher detroit sr acct exec big_number big_number big_number william shumate v p travel big_number big_number big_number earl nelson v p travel big_number big_number big_number fy-89 william shaw v p sales marketing big_number big_number big_number jim discher sr acct exec big_number big_number big_number roger ackley sales v p -east big_number big_number big_number edward thompson regional v p big_number big_number big_number terry winzeler sales v p -west big_number big_number big_number fy-90 terry winzeler sales v p -west big_number big_number big_number james mcgivern reg sales mgr big_number big_number big_number david terry sales v p -central big_number big_number big_number william shaw marketing v p sales big_number big_number big_number jim morrissey sales manager chicago big_number big_number big_number fy-91 james mcgivern reg sales manager big_number big_number big_number wayne heus william shaw sales manager indianapolis v p sales marketing big_number big_number big_number big_number big_number big_number robert van buskirk sr account exec dallas big_number big_number big_number larry v p merchandise big_number big_number big_number mr shaw's employment agreement with bi provided for a bonus composed of five elements including sales contributions to profits and performance based on both sales and contributions to profits for bi's fiscal years and mr shaw's stated sales plan the amount required before a bonus applied was increased over the prior year and the fixed bonus for achieving the stated sales plan was decreased from the prior year for and the stated contributions to the profits plan amount before application of a bonus were increased over the prior years and the fixed bonus for achieving the stated contributions to profits plan was decreased in amount the performance bonus was also changed to include levels in bi's fiscal_year and levels in bi's fiscal_year as opposed to levels in and had a cap placed on it for bi's fiscal years and less than the cap in each of the other five top paid officers had bonuses computed on amounts above a certain level somewhat comparable but not identical or equal in amount to the bonus arrangement with mr shaw there were employees other than the five highest paid employees for the years here in issue who were compensated by bi with a fixed salary plus a bonus related to sales or profits or both during the years here in issue bi had an excellent management team which was experienced capable and had long service with bi as of the various vice presidents of bi had been employed by bi for periods of time ranging from to years the average length of employment was more than years however mr schoenecker was the key man of the organization as its ceo as ceo mr schoenecker's duties included building the purpose and mission of bi integration of quality strategies with the business strategies signing contracts of over year's duration involvement in changes in the organizational structure working with the handbook and meeting and greeting customers which involved considerable travel as ceo mr schoenecker had the overall responsibility for the operations and policies of bi mr schoenecker uses a hands-on type of management he interviews all account executives hired by bi he has client contact particularly with the high-ranking executives of bi's clients he customarily works to hours per week bi's two major competitors are maritz inc maritz headquartered in st louis missouri and carlson marketing also known as e f macdonald hereinafter referred to as macdonald headquartered in minneapolis minnesota in addition to its two major competitors bi has a number of other competitors maritz was organized in and is sometimes referred to as the grandfather of the incentive industry according to a dunn bradstreet corp report the business of maritz consists of providing employee-motivation programs through merchandise and travel incentives percent of its revenue arranging and providing travel tour services on a corporate and business group level percent of its revenue providing data communication services and audio-visual production for business meetings percent of its revenue and providing marketing research and analysis services percent of its revenue maritz in its fiscal_year ended date according to the dunn bradstreet report generated revenue in excess of dollar_figure billion and net_income of dollar_figure million according to dunn bradstreet maritz employs approximately big_number individuals in various capacities has offices in states and has international offices in england mexico city acapulco cancun mexico and montego bay jamaica macdonald was incorporated in as premium corp of america and grand union corp in the company was acquired by carlson companies and operated as a subsidiary of that organization according to dunn bradstreet macdonald had assets of dollar_figure million with stockholder's equity of dollar_figure million as of date management of bi estimated that in the late 1980's macdonald generated yearly revenues of approximately dollar_figure million the following is a summary of a survey by the executive compensation service ecs of top executive compensation of ceo's by industry categories as of date showing results for the year classified under all industries and categories of industries for companies that had sales of approximately dollar_figure million title year sales average sd sds ceo dollar_figure6 dollar_figure dollar_figure dollar_figure all industries ceo dollar_figure dollar_figure dollar_figure all manufacturing ceo dollar_figure dollar_figure dollar_figure durable goods manufacturing ceo dollar_figure dollar_figure dollar_figure non-durable goods manufacturing ceo dollar_figure dollar_figure dollar_figure all non-manufacturing ceo dollar_figure dollar_figure dollar_figure wholesale trade ceo dollar_figure dollar_figure dollar_figure services ceo dollar_figure dollar_figure dollar_figure business services sales are in millions sd is one standard deviation over the average and sds is two standard deviations over the average the sd and sds are adjustments to the average compensation by ecs for superior performance the ecs survey of top executives' compensation in the business services and wholesale trade industries for companies with sales in the range of dollar_figure to dollar_figure million showed the top compensation of any ceo to be dollar_figure for dollar_figure for dollar_figure for and dollar_figure for the compensation shown in the ecs survey was total cash compensation including salary bonuses and cash fringe_benefits the following schedule shows information taken from proxies of the advertising agencies indicated with respect to revenues and net_income before taxes for the years and proxy analysis - advertising agency profiles data in thousands revenue net_income before taxes company dimark dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure inc foote big_number big_number big_number big_number big_number big_number big_number big_number cone belding comm grey big_number big_number big_number big_number big_number big_number big_number big_number advertising inc greenstone big_number big_number big_number big_number roberts adv inter- big_number big_number big_number big_number big_number big_number big_number big_number public_group of cos laser n a n a big_number big_number n a n a vision centers inc omnicom big_number big_number big_number big_number big_number big_number big_number big_number group the following table shows the cash compensation paid to the ceo of each of the companies listed above for the years indicated proxy analysis - ceo pay cash compensation - top paid individual company dimark n a n a n a dollar_figure inc foote cone dollar_figure dollar_figure dollar_figure big_number belding grey adv big_number big_number big_number big_number inc greenstone big_number big_number big_number big_number roberts adv interpublic big_number big_number big_number big_number group of cos laser n a n a n a big_number vision centers inc omnicom group big_number big_number big_number big_number 75th tile big_number big_number big_number regression est employment contract calls for base of dollar_figure plu sec_15 of pretax earnings greater than dollar_figure employment agreement calls for employment through with annual base of dollar_figure million agreement amended to increase base pay to dollar_figure million and dollar_figure million employment agreement calls for base salary of dollar_figure and bonus equal to of ebit through employment contract which in calls for employment through and base of dollar_figure the 75th percentile regression estimate is a variation of average the size of a company the amount of its sales and the volume of its sales have a definite effect on the compensation paid to the top executives the following schedule shows the base salary bonus estimated and paid in the applicable_year and the earned bonus paid in the following year by bi to mr schoenecker and the amounts deducted on the corporate_income_tax return by bi as compensation to mr schoenecker fy-88 fy-89 fy-90 fy-91 base salary dollar_figure dollar_figure dollar_figure dollar_figure bonus estimated and paid in the applicable_year big_number big_number big_number big_number earned and paid in the following year -- big_number big_number big_number amount_paid and deducted on corporate_income_tax return big_number big_number big_number big_number in addition as heretofore stated mr schoenecker received dollar_figure from animal fair in each of its fiscal years and respondent in her notice_of_deficiency determined that the proper allowable deductions for compensation to mr schoenecker by petitioner were dollar_figure for its fiscal_year dollar_figure for its fiscal_year dollar_figure for its fiscal_year and dollar_figure for its fiscal_year accordingly respondent disallowed the balance of the compensation claimed to be deductible by gsi and subsidiaries for mr schoenecker in each of these years opinion sec_162 allows as a deduction a reasonable allowance for salaries or other compensation paid for personal services rendered in order to be deductible the amount must be paid for services rendered and not a substitute for dividends and must be reasonable for the services rendered 500_f2d_148 8th cir affg tcmemo_1973_130 the schneider case citing 178_f2d_115 6th cir lists the following factors that are often considered in determining the reasonableness of compensation the employee's qualifications the nature extent and scope of the employee's work the size and complexities of the business a comparison of salaries paid with the employer's gross_income and net_income the prevailing general economic conditions a comparison of salaries with distributions to stockholders the prevailing rates of compensation_for comparable positions in comparable concerns the salary policy of the taxpayer as to all employees and in the case of small corporations with a limited number of officers the amount of compensation paid to the particular employee in previous years the schneider case also quotes the provision of sec_1_162-7 income_tax regs that while a fixed method of compensation is not decisive as to its deductibility generally speaking if contingent_compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid petitioner in this case argues that mr schoenecker had superior qualifications which would justify a high level of compensation petitioner contends that mr schoenecker's education which included a college degree and some study of law his experience motivation leadership managerial skills business judgment specialized training personal contacts and personal selling attributes justify a high salary we have concluded that mr schoenecker was a very competent ceo and have given weight to this fact in our conclusion as to reasonable_compensation for his services however limits to reasonable_compensation exist even for very valuable employees 819_f2d_1315 5th cir affg tcmemo_1985_267 petitioner next refers to the nature extent and scope of mr schoenecker's work at bi petitioner states that it is no small task to be the person responsible for keeping over employees including such diverse groups as salespeople creative personnel and accounting personnel moving in the same direction however this is the normal expected job of a ceo and though a lack of ability in that area might warrant less compensation competence in that area is expected nevertheless we consider mr schoenecker to have been shown by this record to be a ceo who kept close tabs on the work of his organization in a very competent manner petitioner states that mr schoenecker's duties included those of ceo as well as chief operating officer and chief quality officer however the record shows that there were a number of other competent employees in bi and mr schoenecker's work was primarily that of the ceo certainly as the ceo he had general supervision and control_over operations and quality of the work but he did have other competent officers to perform the daily aspects of that work mr schoenecker as ceo had final responsibility of all aspects of bi's business mr schoenecker's devotion to the business is certainly unquestioned on this record he had been with the company since its inception and was the sole owner of the company during the years here in issue the record shows he worked to 70-hour weeks but this again is not uncommon for a ceo nor is it necessarily one of the prime criteria on which to judge the competency and value to the company of a ceo it is the accomplishments of the executive and not necessarily the hours worked although the working of long hours is to be considered again petitioner cites the responsibility for bi's success and irreplaceability of mr schoenecker while mr schoenecker would certainly be a great loss to the company were he not there it is fairly clear from this record that there are other competent officers of bi such as mr shaw and during the latter years here in issue mr schoenecker's son larry was taking more responsibility for the business however the fact that there are other competent officers employed by bi does not detract from the fact that mr schoenecker is a very competent ceo petitioner points out that the growth profitability and financial condition of the business are important in determining whether compensation paid to an employee is reasonable 73_tc_1142 the record here shows that bi has grown substantially since its incorporation in certainly that growth is to an appreciable extent due to the work of mr schoenecker however unlike the situation in home interiors gifts inc v commissioner supra the growth of bi was in line with that of bi's competitors petitioner contends that an unrelated investor would be satisfied with the return on his investment in bi from the income of bi after the payment of mr schoenecker's salary respondent contests this assertion and particularly the comparison petitioner's expert made to mutual_fund returns it is difficult to determine what an independent investor would expect from the risk of his funds in a business such as bi's however it is reasonable to assume that an independent investor would be unwilling for an officer to realize compensation out of line with compensation paid_by similar businesses thus unnecessarily reducing the income produced by the business in which he had invested petitioner discusses the general economic conditions and the growth of the incentives industry in general and contends that bi's growth was outstanding even compared to the general economic conditions and the economic conditions in the incentives industry unfortunately the record has very little information with respect to other members of the incentives industry which are petitioner's prime competitors the record has some indications that petitioner's growth did not exceed that of the incentives industry in general petitioner's expert witness mr locke indicated that information as to the salaries paid to the ceo by maritz and macdonald might be available to his firm but he did not produce the information even when it was suggested to him that it might be quite helpful the information that is in the record indicates that petitioner did not grow faster than its competitors and may have grown less fast than its prime competitor maritz finally petitioner argues that mr schoenecker's compensation was paid under a formula agreed to in in an arm's-length_transaction if this were the fact it might have a bearing on the reasonableness of mr schoenecker's compensation although it would not be conclusive as to its reasonableness if the conditions in the company had changed see 168_f2d_28 6th cir affg a memorandum opinion of this court dated date however here it is not at all clear that the agreement entered into in when petitioner was a 50-percent owner of bi and because of an injury the other 50-percent owner-officer could work only part-time was at arm's length however even if we assume that the agreement made in was an arm's-length agreement mr schoenecker's compensation_for the years here in issue was not computed under this agreement the agreement provided for dollar_figure yearly base compensation and a bonus of percent of net_income of bi and subsidiaries before taxes by the base compensation of mr schoenecker had been upped to dollar_figure and in and it was dollar_figure and the bonus percentage had become percent in and percent in and the information to determine exactly the amount mr schoenecker would have received in each of the years here in issue under the agreement is in this voluminous record and shows that applying the formula under the agreement mr schoenecker's salaries and bonuses would have been dollar_figure for bi's fiscal_year dollar_figure for bi's fiscal_year dollar_figure for bi's fiscal_year and dollar_figure for bi's fiscal_year this computation is as follows income before 8-percent of 8-percent of taxes of gsi income before income before fy ended subsidiaries taxes taxes dollar_figure date dollar_figure dollar_figure dollar_figure date big_number dollar_figure dollar_figure date big_number dollar_figure dollar_figure date big_number dollar_figure dollar_figure total big_number dollar_figure dollar_figure for the years and mr schoenecker's bonuses were to be computed on the income of gsi and its subsidiaries but were in fact computed on bi's income and apparently with some small error even in that computation since bi's income in the years here in issue was in excess of that of gsi and its subsidiaries the bonuses were overstated under the compensation formula set forth in the corporate minutes for bi's and years the agreement as to base compensation was honored through while mr macdonald was still a 50-percent stockholder of bi once gsi acquired all of bi's stock and mr schoenecker as the sole stockholder of gsi was the owner of bi the dollar_figure began to increase and by the years here in issue it was greatly increased this is an indication that mr schoenecker as sole owner fixed his own salary without real reference to the value of his services to bi this is further demonstrated by the difference in the formula for bonuses for other officers and for mr schoenecker and the fact that when the formula for mr shaw's bonuses resulted in a bonus which apparently mr schoenecker considered too high in an uncommonly good year for bi the formula was changed to reduce the bonus base since a reasonable salary is one that would be agreed to in arm's-length negotiations the amount_paid for comparable work by comparable companies is a very important factor in determining reasonable_compensation in a competitive market for a ceo the going salary paid_by a comparable business to a ceo would set a pattern for negotiations experts for each party testified in the case and used various statistics to support the opinions given one of petitioner's experts mr locke relied on materials from the advertising industry which even he admitted were not representative of petitioner's business we have set forth the statistics mr locke used since the figures themselves show that some of the companies were ten times the size of bi also the record shows the businesses were different from and more complex than bi's business the record is clear that the advertising companies are not a good comparison to bi however even the 75-percentile regression estimate of these advertising companies which was used in effect as an average was except for year less than dollar_figure million for the ceo and in the year just slightly over dollar_figure million in order to attempt to justify mr schoenecker's salary petitioner's expert made adjustments to the salaries paid to advertising executives for retirement and other fringe_benefits in our view the testimony of mr locke based on the statistics from the advertising field is of little value if any consideration were warranted of the salaries paid_by advertising agencies the payments by grey advertising inc interpublic group of companies and the omnicom group one of which had revenues of about three times that of bi another of which had revenues of almost times bi's and the third about six times bi's revenues would have to be eliminated the salaries paid to ceo's by the other advertising firms as shown in the proxies ranged from dollar_figure to dollar_figure none approached the salary including bonuses paid to mr schoenecker by bi for any year here in issue the clear indication from the testimony of mr locke is that he was aware of salaries paid_by bi's direct competitors maritz and macdonald but would not disclose them respondent's expert mr brennan used the ecs statistics along with other information in his reports mr brennan's report was received in evidence as his opinion and petitioners' counsel did not cross-examine him on the report petitioner argues that the business services and wholesale trade from the ecs statistics primarily relied on by mr brennan are not comparable to bi because the area of business services and wholesale trade are not comparable to petitioner's business and because the officers in these companies may have received pensions and other_benefits that mr schoenecker did not get it is reasonably clear that the compensation in the ecs reports included all cash compensation paid to the ceo's if some fringe_benefits or contributions to a retirement_plan were cash payments this amount was included mr schoenecker had some fringe_benefits bi had a sec_401 plan in which mr schoenecker was entitled to participate and mr schoenecker had his life_insurance premiums_paid for him by bi and a portion of his medical insurance premiums just as other bi employees however we do agree with petitioner that while the categories of business services and wholesale trade might include the type of business engaged in by petitioner they are far too broad to be representative of petitioner's business while mr brennan did not know the exact amount of the salary of the ceo of petitioner's main competitor maritz he did have information from the company that it was less than the maximum range of companies its size in the ecs survey maritz was a much larger company than bi as petitioner points out there is no way of knowing from the record the reason the ceo of maritz had the salary he had without knowing more facts about how the salary was determined than this record shows however that is true of any determination based on statistics the burden here is on petitioner to show error in respondent's determination petitioner has produced little evidence to show what a reasonable salary would be for mr schoenecker in the years here in issue the record here shows no payments of dividends by bi except to gsi to buy out mr macdonald until a rearrangement of financial affairs was made for bi gsi and mr schoenecker in when it was determined to be advantageous to get real_estate out of the ownership of bi or gsi the real_estate was declared as a dividend by bi to gsi and by gsi to mr schoenecker and a cash dividend was declared for mr schoenecker to use to pay the taxes on the real_estate dividend the main business offices of bi were located on the real_estate declared as a dividend to mr schoenecker neither bi nor gsi had a regular dividend policy in evaluating mr schoenecker's ability as a ceo it should be noted that he was also the ceo of animal fair which was not very successful in its operations from the record here we conclude that mr schoenecker set his salary in the years here involved on a basis to take out of the company as salary amounts he wished to withdraw from the company and not on the basis of a reasonable salary which would have been paid in an arm's-length_transaction this record is clearly inadequate to establish the amount of a reasonable salary for mr schoenecker however there are indications that a reasonable salary for mr schoenecker would be in excess of the amounts allowed by respondent in each of the years in issue in fact respondent in her brief requests as an ultimate finding of fact that reasonable_compensation for guy mr schoenecker as ceo was in the range of dollar_figure to dollar_figure for fy-88 dollar_figure to dollar_figure for fy-89 dollar_figure to dollar_figure for fy-90 and dollar_figure to dollar_figure for fy-91 the minimum of this range was in excess of the amount determined by respondent in the notice_of_deficiency to be reasonable_compensation respondent of course based this requested finding on her interpretation of the evidence as a whole however a review of the report of respondent's expert witness mr brennan indicates that the ranges probably came to an appreciable extent from his report the ecs figures included in that report by mr brennan contained as we have stated amounts of maximum amounts paid to ceo's of companies in business services and wholesale trade which receive revenues comparable to those received by gsi and subsidiaries in the years through mr brennan's report stated that to justify a salary of this amount mr schoenecker would have to be the outstanding executive in the entire country which in mr brennan's opinion the record did not support it is not absolutely clear how the maximum amounts of compensation were computed in the ecs statistics it does appear that this amount is basically the top salary paid to an executive of a company in the business services and wholesale trades industry the revenues of which were comparable to those of bi although we recognize that the business services and wholesale trade industries are not good comparisons on an average basis to petitioner's more limited type of business it appears to us that a reasonable salary for mr schoenecker would not be greater than the top salaries paid if in fact petitioner had been among the companies included in the ecs report the salary paid to mr schoenecker would have been the top salary since it exceeded the top salary shown in the ecs report however bi and gsi were not public companies the financial operations of which were available to ecs from published sources it appears that neither bi nor gsi information was reported to ecs another difficulty with the ecs statistics is the difference in the number of companies included in different years however we have compared the figures of the top salaries in the business services and wholesale trade classification for the years through with the salaries paid_by advertising firms that were close in size to bi overall the top salaries in the business services and wholesale trade classification are in excess of the salaries paid_by advertising firms of the approximate size of bi according to petitioner's witness the salaries in the business services and wholesale trade industries did not include certain fringe_benefits such as retirement pay however there is nothing to show that in addition to the reported salaries such fringe_benefits were paid_by the companies the ecs figures of top pay in the business service and wholesale industry are also in total in excess of the amount of salary that would have been paid to mr schoenecker under the agreement for the years here in issue we are aware of course that under an arm's-length arrangement the base salary of mr schoenecker would probably have been increased to some extent through the years however there is nothing to show that the percentage of income before taxes which mr schoenecker was to receive would have been increased and in fact if an unusually good year occurred the percentage might have been decreased as was the situation with mr shaw after an unusually good year for bi the top amounts paid or maximum amounts shown in the ecs survey exceed substantially the amounts determined under the formula for the fiscal years and in our computation of the amount that mr schoenecker would have received under the agreement for the fiscal years and the amounts computed under the formula are somewhat in excess of the amounts shown as the maximum amounts paid in the ecs survey however it was the results of the very high amount received by mr shaw under his bonus plan in bi's fiscal_year that caused the method of computing the bonus to be changed so that the amounts received by mr shaw in fiscal years and were approximately back to the level of the amount he received in fiscal_year it would therefore seem logical that had mr schoenecker been negotiating compensation at arm's length the amount resulting from the high income in the fiscal_year would have caused some form of decrease in the percentage of income amount he would receive as a bonus in subsequent years on an overall basis it is more favorable to petitioner to use the amounts of the top pay as shown by the ecs reports of ceo's of business services and wholesale companies receiving comparable revenues to those received by bi than to use the amount computed under petitioner's salary agreement with bi it is certainly more favorable than using the salary payments from advertising companies in the same general revenue receipt area as bi unless they are to be substantially increased for items which it is not clear were not already included or were benefits which were not part of the compensation of the officer involved it is not unusual that higher cash compensation be paid to an officer who does not receive noncash benefits therefore considering this record as a whole and being unwilling to sustain respondent's determination on the basis of failure of proof by petitioner we conclude that the evidence most indicative of a proper amount to be paid to mr schoenecker in each of the years here in issue from this record is the maximum amounts paid ceo's of companies in business services and wholesale trade that received revenues comparable to those received by gsi as shown by the ecs survey for the years through these amounts are dollar_figure in bi's fiscal_year dollar_figure in bi's fiscal_year dollar_figure in bi's fiscal_year and dollar_figure in bi's fiscal_year therefore based on this record as a whole and considering the outstanding contribution mr schoenecker made as ceo of bi we hold that the above-set forth amounts constitute reasonable_compensation to mr schoenecker for serving as ceo of bi in the fiscal years here involved and therefore hold that these amounts are the appropriate amounts of deductible compensation by petitioner for mr schoenecker rather than the amounts determined by respondent in the notice_of_deficiency decisions will be entered under rule


number release date internal_revenue_service index numbers - -------------------------------------- --------------------------------- ------------------------- ------------------------- --------------------- department of the treasury washington dc person to contact ----------------------------------------------------- -------- telephone number -------------------- refer reply to cc psi - plr-100374-06 date date legend x --------------------------------- --------- ---------------- ---------------- ------------------ d1 country dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity under the laws of country was acquired by a single owner with limited_liability on d1 x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x did not timely file a form_8832 entity classification election according to the information submitted all of the interest in x an entity formed sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301 b unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 provides that an election under sec_301_7701-3 member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 except as specifically set forth above no opinion is expressed or implied as to based on the facts submitted and representations made we conclude that the the federal tax consequences of the transaction described above under any other provision of the code sec_6110 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer on whose behalf it was requested in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries


t c memo united_states tax_court peno trucking incorporated petitioner v commissioner of internal revenue respondent docket no filed date brent l english for petitioner linda c grobe for respondent memorandum findings_of_fact and opinion haines judge the petition in this case was filed in response to a notice_of_determination concerning worker classification under sec_7436 regarding petitioner’s liabilities pursuant to the federal_insurance_contributions_act fica and the federal_unemployment_tax_act futa for and and each of the quarters therein periods at issue the issues for decision are whether certain drivers who operated petitioner’s trucks were employees of petitioner for federal employment_tax purposes during the periods at issue and if so whether petitioner is entitled to relief under sec_530 of the revenue act of publaw_95_600 92_stat_2885 as amended act sec_530 findings_of_fact the parties’ stipulation of facts and the attached exhibits are incorporated herein by this reference and the facts stipulated are so found at the time the petition was filed petitioner’s principal_place_of_business was in warren ohio unless otherwise indicated all section references are to the internal_revenue_code as amended and rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar this court ordered the parties to file posttrial briefs respondent did so petitioner did not under these circumstances the court may hold petitioner in default on all issues for which it bears the burden_of_proof see 84_tc_693 affd without published opinion 789_f2d_917 4th cir furniss v commissioner tcmemo_2001_137 mcgee v commissioner tcmemo_2000_308 however we will decide this case on the record as it stands we base our understanding of petitioner’s position on its petition the stipulation of facts and trial testimony petitioner was an s_corporation incorporated in the state of ohio on date a petitioner’s business operation petitioner was engaged in the business of operating a trucking company to transport steel and other freight robert peno sr and joann peno husband and wife were petitioner’s sole shareholders and sole officers joann peno was president and robert peno sr was vice president during the periods at issue petitioner owned approximately tractor-trailers trucks which it leased to the ohio transport corp ohio transport pursuant to written lease agreements leases the leases required petitioner to transport freight and perform related_services for ohio transport within a reasonable_time in a safe competent lawful and workmanlike manner inform ohio transport daily as to the vehicles’ locations and the shipments being transported and pay all costs of operating the leased trucks and related equipment under the leases petitioner was required to provide drivers to operate its trucks and be responsible for all work performed by the drivers and to confirm their work was performed in although petitioner went out of business in it was still an ohio corporation in good standing when this petition was filed ohio transport is an interstate motor carrier headquartered in ohio accordance with the leases consequently petitioner was required to direct supervise pay discipline and discharge its drivers petitioner was also responsible for determining the days and hours per day the drivers worked the routes traveled and the order of picking up and delivery of shipments and ensuring that the drivers had the appropriate commercial drivers’ licenses the leases also required petitioner to submit completed drivers’ logs to ohio transport and to cooperate in the preparation carrying and preservation of manifestos bills of lading way bills freight bills and other papers and records respecting the lading and the use of equipment all in accordance with applicable laws and regulations the leases required petitioner not ohio transport to withhold and pay employment_taxes for its drivers and pay the premiums for workers’ compensation or employers’ liability insurance to cover the drivers however the parties stipulated that the drivers determined the routes to travel not petitioner petitioner was required to confirm that the drivers complied with all applicable laws government rules regulations and orders ohio transport and its insurer also determined whether the drivers had the appropriate credentials and driving records to operate the leased equipment as compensation petitioner received percent of the total amount_paid to ohio transport by its customers for each load hauled by a leased truck the leases required ohio transport to provide liability insurance for petitioner’s trucks while they were under dispatch otherwise petitioner provided the insurance if a driver intentionally damaged a truck or its cargo he or she was responsible for the damage to the extent it was not insured b relationship between petitioner and drivers petitioner entered into an agreement agreement with each of its drivers during the periods at issue which expressly provided that the drivers were independent contractors and not employees the agreement in pertinent part stated during the periods at issue petitioner and ohio trucking also had an oral agency agreement by which petitioner was paid a 9-percent agency fee on all loads it solicited from customers on behalf of ohio transport the 9-percent fee was over and above the percent ohio transport paid petitioner for each load hauled under the leases the drivers were paid no portion of the separate 9-percent agency fee these loads were hauled by petitioner’s trucks or by individuals who owned their own trucks owner-operators a number of owner-operators hauled steel for ohio transport and were dispatched by petitioner the owner-operators’ employment relationship with petitioner is not at issue in this case the term under dispatch means ohio transport had contacted petitioner to haul a particular load petitioner agreed to haul the load and the truck used to haul the load was en route to pick up the load was picking up the load was transporting the load or was returning to the location where the truck was garaged having delivered the load peno trucking inc and operator agree and understand that operator is not an employee or agent of peno trucking inc operator is an independent_contractor and peno trucking inc shall not direct in any manner the means or method by which operator shall perform his occupation operator understands that peno trucking inc from time to time contracts with other persons or corporations to transport goods via peno trucking inc trucks and equipment while not an employee of such other persons or corporations operator shall at all times applicable hereto work at the direction and control of such persons or corporations peno trucking inc agrees to pay operator at the percentage of per total gross pay per load additionally peno trucking inc shall be responsible for all maintenance of peno trucking inc equipment all fuel oil tolls permits and road fuel taxes incurred by operator on such dispatched trips in peno trucking inc equipment operator agrees and understands that he is solely responsible for payment of all income and withholding taxes social_security and unemployment_compensation in accordance with the terms of this agreement peno trucking inc will supply operator with an irs form_1099 at the end of each calendar_year operator understands and agrees that he cannot obligate contract or incur any indebtedness on behalf of peno trucking inc petitioner’s drivers were not obligated to accept petitioner’s request to transport a load to work on any particular day or work any particular schedule if a driver chose not to haul a load or work for a period of time he or she was not disciplined or sanctioned petitioner and the drivers were entitled to terminate their relationship at any time petitioner provided all necessary equipment required to secure the cargo hauled on its trucks however petitioner’s drivers were free to supply any additional equipment at their own cost drivers paid for their own gloves hand tools and meals if a driver’s relationship with petitioner was severed the driver was free to take any equipment or accessories he or she had provided petitioner paid for all fuel oil highway use taxes and normal maintenance and repairs required to operate its trucks petitioner was solely responsible for determining the nature and timing of any repairs and or maintenance of its trucks and its mechanics performed all the maintenance and repairsdollar_figure the drivers were not required to make any repairs or perform any maintenance to the trucks but they were obligated to comply with the federal motor carrier safety regulations including those provisions which required pretrip inspections drivers were paid on a weekly basis between percent and percent of the percent petitioner received for each hauled load the more loads a driver hauled each week the more money he or she earneddollar_figure however if a truck broke down in an area where it was not feasible for petitioner to send one of its mechanics to make repairs or if the repairs needed were extensive petitioner hired a third party to make the repairs however drivers were limited by the federal motor carrier safety regulations as to the amount of time they could drive each day during the periods at issue petitioner filed forms misc miscellaneous income for each of its drivers who worked under the agreement in and respondent reclassified as employees a total of and drivers respectively of the drivers who were reclassified had contracted with petitioner for more than years and had contracted with petitioner for more than years c day-to-day operations when ohio transport had freight which needed to be transported ordinarily in the midwest and frequently to states adjoining ohio it or a mill12 working with ohio transport would contact petitioner and instruct it as to the specifications of the particular job if petitioner had a truck available to haul the load it would offer the job to one of its drivers if a driver was unavailable or unwilling to accept the load then the load was offered to another driverdollar_figure if a driver accepted the job petitioner advised the driver in accordance with ohio transport’s or the mill’s directives of the time to pick up the load the delivery location and the a mill was the facility where petitioner’s drivers would travel to pick up a load of steel or other materials petitioner also had the option of offering the load to one or more of the owner-operators who had leased their trucks to ohio transport expected delivery timedollar_figure the drivers carried beepers so that petitioner could remain in contact while they were on the road petitioner did not direct the routes drivers were to use in either picking up or delivering loadsdollar_figure if a driver chose to drive on a toll road the driver was responsible for paying the tollsdollar_figure after a load was delivered the driver could immediately return to petitioner’s place of business with or without a return loaddollar_figure d ohio determination of independent_contractor status on date richard chatfield chatfield one of petitioner’s drivers filed a claim with the ohio industrial commission oic for workers’ compensation because of an injury he suffered on date by order dated date the ohio industrial commission oic disallowed chatfield’s claim finding he was not an employee of petitioner on the date of injury but an independent_contractor who had failed to secure the same information was provided to any owner-operator who was offered and accepted an assignment to pick up and transport a load however the driver’s route was specified when ohio transport obtained a special hauling permit to carry a load that exceeded weight and or width limitations although the agreement stated petitioner would cover the cost of toll roads the parties stipulated that the drivers were actually required to cover the costs of paying tolls ordinarily it was in petitioner’s and the driver’s best interests for the driver to request petitioner to find a return load workers’ compensation_for himself the oic order did not state the basis for its determination on date chatfield filed an appeal in the court of common pleas trumball county ohio court of common pleas by order dated date pursuant to the journal entry of the court of common pleas filed on date the bureau of workers’ compensation bwc dismissed chatfield’s appeal without prejudice on date another driver for petitioner kenneth g jamison jamison filed a claim for workers’ compensation because of an injury he suffered on date basing its decision upon a signed agreement between petitioner and jamison dated date the bwc denied jamison’s claim on date jamison appealed the denial of his claim to the oic on date the oic vacated the previous bwc order and found without stating the grounds for its decision that jamison was an independent_contractor who had not secured workers’ compensation_for himself on date jamison filed an appeal in the court of common pleas on date the court of common pleas entered an order of voluntary dismissal without prejudice opinion i employees v independent contractors petitioner contends that for employment_tax purposes during the periods at issue the drivers of its trucks were independent contractors not employees the taxpayer has the burden of proving the existence of an independent_contractor relationshipdollar_figure see rule a 55_tc_142 for the purposes of employment_taxes the term employee includes any individual who under the usual common_law rules applicable in determining the employer-employee relationship has the status of an employee sec_3121 sec_31_3121_d_-1 sec_31_3306_i_-1 employment_tax regs whether an individual is a common_law_employee is a question of fact 55_tc_142 sec_31_3121_d_-1 employment_tax regs to be determined applying the following factors the degree of control exercised by the principal which party invests in work facilities used by the individual the opportunity of the individual to realize profit or loss whether the principal can discharge the individual whether the work is part of the petitioner did not contend that the burden_of_proof was placed upon respondent pursuant to act sec_530 as added by the small_business job protection act of publaw_104_188 sec b 110_stat_1767 principal’s regular business the permanency of the relationship and the relationship the parties believed they were creating 117_tc_263 weber v commissioner 103_tc_378 affd 60_f3d_1104 4th cir potter v commissioner tcmemo_1994_356 no single factor is dispositive ewens miller inc v commissioner supra pincite if an employer-employee relationship exists characterization by the parties as some other relationship is immaterial sec_31_3121_d_-1 employment_tax regs a degree of control the degree of control test requires the court to examine not only the control exercised by an alleged employer but also the degree to which the alleged employer may intervene to impose control weber v commissioner supra pincite the agreement stated that peno trucking inc shall not direct in any manner the means or method by which operator shall perform his occupation and operators shall at all times applicable hereto work at the direction and control of persons or corporations petitioner contracts with to transport goods the stipulated facts and testimony clearly show otherwise pursuant to the leases with ohio transport petitioner was responsible for hiring drivers overseeing all work performed by the drivers confirming their work was performed in accordance with the leases and directing supervising paying disciplining and discharging the drivers petitioner determined the days drivers could work and controlled which loads the drivers would haul petitioner required the drivers to have appropriate commercial drivers’ licenses deliver the freight to certain places at certain times maintain driving logs and other documents and carry beepersdollar_figure petitioner not the drivers determined whether truck repairs were performed on the road or by its own mechanics and was responsible for all truck maintenance_costs incurred in maintaining the trucks the fact that the drivers could choose the routes to take to the specified destination were liable to pay tolls and could stop and rest when desired does not mean petitioner did not maintain the requisite control for an employer-employee relationship to exist petitioner is not required to direct or control the manner in which the services are performed so long as it has that right to do so if necessary sec_31_3121_d_-1 employment_tax regs it was unnecessary for petitioner to control the manner in which the drivers completed their work because their work at trial mr peno testified that petitioner did not require its drivers to carry electronic communication devices however a stipulated exhibit indicated petitioner required its drivers to carry beepers presumably so that it could maintain contact while the drivers were on the road required little supervision see day v commissioner tcmemo_2000_375 this factor indicates petitioner exercised control_over the drivers’ activities consistent with an employer-employee relationship see id b investment in facilities the fact that a worker provides his or her own tools generally indicates a nonemployee status ewens miller inc v commissioner supra pincite the drivers incurred some cost for tools and maintaining their licensesdollar_figure however these costs were insignificant when compared to petitioner’s substantial investment to acquire and maintain the fleet of approximately trucks the drivers did not pay any of the costs of operating the trucks or transporting the freight the agreement stated petitioner alone was responsible for all maintenance of its equipment all fuel oil tolls permits and road fuel taxes incurred by the drivers on dispatched trips while in petitioner’s trucks the relatively minor investment by the drivers and the substantial investment by petitioner support an employer-employee relationship the drivers provided their own hand tools and at their option could provide ratchet binders to use rather than the snap binders that were provided with the trucks although the agreement stated petitioner would cover those costs the parties stipulated that the drivers were actually required to cover the costs of paying tolls c opportunity for profit or loss a worker’s opportunity to earn a profit and assume risk of loss may indicate a nonemployee status 64_tc_974 on the other hand earning an hourly wage or salary indicates an employer-employee relationship exists del monico v commissioner tcmemo_2004_92 kumpel v commissioner tcmemo_2003_265 the drivers were not paid an hourly wage or salary they were paid to percent of the percent petitioner received per load hauled and the amounts earned depended entirely upon the number of trips they made the drivers did not assume any risk of loss as stated in the agreement a driver could not incur any indebtedness on behalf of petitioner this factor indicates an employer-employee relationship d right to discharge generally an employers’ right to discharge an employee indicates an employer-employee relationship sec_31 d - c employment_tax regs the parties stipulated that petitioner retained the right to discharge its drivers and the drivers had a right to terminate their relationship with petitioner however at trial mr peno testified that he personally would not terminate a driver instead ohio transport or the mills would ban the driver mr peno’s testimony as to this factor was self-serving and unreliable this factor indicates an employee-employer relationship e integral part of business the drivers performed a service essential to petitioner’s operation the success of petitioner’s business depended in large part upon the service performed by the drivers thus the drivers were an integral part of petitioner’s business this factor supports an employer-employee relationship see day v commissioner supra f permanency of the relationship a transitory work relationship may point toward a nonemployee status ewens miller inc v commissioner t c pincite if however a person works in the course of the employers’ trade_or_business the fact that he does not work regularly may be insignificant id the drivers worked in the course of petitioner’s business rather than having a transitory relationship with petitioner this factor supports an employer-employee relationship see id g relationship the parties thought they created petitioner and its drivers entered into written agreements which expressly provided that the drivers were independent contractors however our findings with respect to the degree of control exercised by petitioner petitioner’s investment in the trucks the drivers’ lack of assumption of risk the ability to discharge the integration of the drivers into the business and the permanency of the relationship override any contrary characterization contained in the agreement see sec_31_3121_d_-1 employment_tax regs accordingly the court finds petitioner’s drivers were common_law employees during the periods at issue and consequently the payments to them during these periods constituted wages subject_to federal employment_tax ii whether petitioner is eligible for act sec_530 relief petitioner contends it is entitled to relief pursuant to act sec_530 congress enacted act sec_530 to alleviate what it perceived as the ‘overly zealous pursuit and assessment of taxes and penalties against employers who had in good_faith misclassified their employees as independent contractors ’ ewens miller inc v commissioner supra pincite quoting 77_f3d_236 8th cir act sec_530 shields a taxpayer who has mistakenly not classified his workers as employees from employment_tax liability if the taxpayer had a reasonable basis for not treating the workers as employees and has filed all required federal employment_tax returns on a basis consistent with this treatment petitioner never treated the drivers as employees and consistently issued them forms 1099-misc the question which remains is whether petitioner had a reasonable basis for treating the drivers as nonemployees a taxpayer is treated as having a reasonable basis for not treating an individual as an employee if the taxpayer reasonably relied 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 sec_530dollar_figure petitioner’s sole contention is that it relied upon judicial precedent in determining its drivers were independent contractors basing its decision on the court of common pleas’ rulings and the administrative and appeals decisions finding that two of petitioner’s drivers were independent contractors a taxpayer who fails to come within any of the safe harbors is still entitled to relief if the taxpayer can demonstrate in some other manner a reasonable basis for not treating the individual as an employee 117_tc_141 affd sub nom 54_fedappx_100 3d cir for a taxpayer to have a reasonable basis for not treating an individual as an employee under the judicial precedent safe_harbor the judicial precedent relied upon must have evaluated the employment relationship through a federal common_law analysis see sec_3121 nu-look design inc v commissioner tcmemo_2003_52 affd 356_f3d_290 3d cir sec_31_3121_d_-1 sec_31_3306_i_-1 employment_tax regs to come within the safe_harbor the taxpayer must have relied on the alleged authority during the periods in issue at the time the employment decisions were being made the statute does not countenance ex post facto justification nu-look design inc v commissioner supra the record does not indicate that the bwc the oic or the court of common pleas evaluated the employment relationships of petitioner’s former drivers chatfield and jamison through a common_law analysis only the bwc’s vacated order in the jamison case indicated the grounds for its decision the signed agreement by and between peno trucking inc and the injured worker dated moreover nothing in the record indicates the rulings concerning jamison and chatfield were relied upon at the time petitioner’s employment decisions were made petitioner failed to establish that it relied upon judicial precedent or otherwise provided a reasonable basis to disregard sec_3121 and sec_31_3121_d_-1 and sec_31_3306_i_-1 employment_tax regs therefore this court finds petitioner is not entitled to act sec_530 relief for its drivers the court in reaching its holding has considered all arguments made and concludes that any arguments not mentioned above are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number - --------------------------------------------------- -------------------------------------- --------------------------------------------------- ---------------------------------- -------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb presp-142471-06 date date dear ------------- pursuant to sec_54 of the internal_revenue_code the code and notice_2005_98 2005_52_irb_1211 and after review of your application submitted on date including supplements thereto we have determined that the project described in appendix a attached hereto is qualified for purposes of sec_54 and will be owned by one or more qualified borrowers we allocate authority to ----------------------------------- ------------------------------------------------------- the issuer a qualified issuer under sec_54 to issue up to dollar_figure----------- of clean renewable energy bonds crebs bonds issued pursuant to this allocation must be designated by the issuer as bonds for purposes of sec_54 for the project described in appendix a up to the amount allocated for each project described in appendix a bonds so designated must be issued on or before date please be aware that in order for bonds to be crebs the applicable_requirements of the code including without limitation sec_54 notice_2005_98 and notice_2006_7 2006_10_irb_559 must be met please note that creb proceeds may be used to reimburse capital expenditures paid_by qualified borrowers for qualified projects only if the provisions of sec_54 are met if you have any questions with respect to this allocation please contact --------------------- ------------------------------------------------------------------------------------------------------------------- - -------- or -----------------------------of the office of division counsel associate chief_counsel tax-exempt and government entities on --------------------- not a toll-free call except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter presp-142471-06 for purposes of the renewable_electricity_production_credit under sec_45 of the code no inference may be drawn from this allocation that any project listed in appendix a is a qualified_facility or that electricity to be produced at such project s is electricity from a qualified_energy resource at a qualified_facility within the meaning of sec_45 this determination is directed only to the applicant named above sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any form 8038-g information_return for tax- exempt governmental obligations filed for bonds issued pursuant to this allocation the allocation contained in this letter is based upon information and representations submitted by the applicant for the creb allocation and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the application_for an allocation it is subject_to verification on examination sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-142471-06 borrower name appendix a project type project location ----------------------------------- ----------------------------------- ------------------------------- solar_energy_facility -------------------------------- ---------------------- amount allocated dollar_figure-----------