Court Opinion

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Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

1-26-2004

Nu Look Design Inc v. Commissioner IRS
Precedential or Non-Precedential: Precedential

Docket No. 03-2754

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Recommended Citation
"Nu Look Design Inc v. Commissioner IRS" (2004). 2004 Decisions. Paper 1039.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/1039

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                                  PRECEDENTIAL

                                          Filed January 26, 2004

            UNITED STATES COURT OF APPEALS
                 FOR THE THIRD CIRCUIT

                           No. 03-2754

                    NU-LOOK DESIGN, INC.,
                                            Appellant
                                  v.
         COMMISSIONER OF INTERNAL REVENUE

        On Appeal from the United States Tax Court
                      (No. 01-10368)
        Tax Judge: The Honorable Mary Ann Cohen

         Submitted Under Third Circuit LAR 34.1(a)
                     January 9, 2004
         Before: BARRY and SMITH, Circuit Judges,
                and POLLAK, District Judge*

                   (Filed: January 26, 2004)
                         Joseph O’Donnell
                         116 East Allen Street
                         Philadelphia, PA 19125
                           Counsel for Appellant

* The Honorable Louis H. Pollak, Senior District Judge for the Eastern
District of Pennsylvania, sitting by designation.
                             2

                      Regina S. Moriarty
                      Richard Farber
                      United States Department of Justice
                      Tax Division
                      P.O. Box 502
                      Washington, D.C. 20044
                        Counsel for Appellee

                OPINION OF THE COURT

SMITH, Circuit Judge.
  This appeal challenges the determination by the United
States Tax Court that the Internal Revenue Service (“IRS”)
appropriately classified Ronald A. Stark, who was an officer
and the sole shareholder of Nu-Look Design, Inc. (“Nu-
Look”), as an employee of Nu-Look. That determination
resulted in Nu-Look’s liability for certain employment taxes
under the Federal Insurance Contributions Act (“FICA”) 26
U.S.C. § 3101-3128, and the Federal Unemployment Tax
Act (“FUTA”), 26 U.S.C. § 3301-3311. We affirm.

                             I.
  On June 8, 2001, the IRS issued to Nu-Look a Notice of
Determination Concerning Worker Classification Under
Section 7436. The Notice advised that the IRS had
classified an individual at Nu-Look as an employee for
purposes of federal employment taxes and that such taxes
“could” be assessed for calendar years 1996, 1997 and
1998. The Notice further advised that the IRS had
determined that Nu-Look was “not entitled to relief from
this classification pursuant to Section 530 of the Revenue
Act of 1978.” Although the Notice did not identify the
“employee” by name, it was clear that the alleged employee
was its sole shareholder and president, Ronald A. Stark.
  Nu-Look challenged this determination by filing a petition
for redetermination in the United States Tax Court which
asserted that Nu-Look had “properly and correctly
distributed its net income to Mr. Stark in each of the said
years (1996, 1997 and 1998) at issue . . . .” On February
                             3

26, 2002, Nu-Look filed a motion seeking leave to file an
amended petition for redetermination. The motion asserted
that the IRS had not complied with Section 530 of the
Revenue Act of 1978 because it had failed to furnish Nu-
Look with written notice of Section 530’s provisions. This
omission, according to Nu-Look, “seriously violated [Nu-
Look’s] Constitutionally guaranteed due process . . . .” The
motion to amend was granted. In an amended petition for
redetermination, Nu-Look not only disputed the propriety of
the determination that Stark was an employee, but also
sought relief from that determination under Section 530 of
the Revenue Act of 1978.
  The parties filed a stipulation of facts in the Tax Court.
The stipulation established that Nu-Look, a subchapter “S”
corporation since 1987, “operated as a residential home
improvement company, providing carpentry, siding
installation and general residential home improvement and
construction services to the public.” During calendar years
1996, 1997 and 1998, Stark was not only Nu-Look’s sole
shareholder and president, but he also managed the
company. He solicited business, performed necessary
bookkeeping, otherwise handled finances, hired and
supervised workers. Rather than pay Stark a salary or
wages, Nu-Look distributed its net income during 1996,
1997 and 1998 to him “as Mr. Stark’s needs arose . . . .”
Nu-Look reported on its Form 1120S tax returns in 1996,
1997 and 1998, a net income of $10,866.14, $14,216.37,
and $7,103.60, respectively. Stark, in turn, reported the
very same amounts as non-passive income on Schedule E
of his 1996, 1997 and 1998 Form 1040 tax returns.
  In a decision dated February 26, 2003, the Tax Court
found that Stark performed more than minor services for
Nu-Look and that he had received remuneration for those
services. As a result, the court held that Stark was an
employee of Nu-Look and that Nu-Look was not entitled to
relief under Section 530. Nu-look filed this timely appeal.

                            II.
  Section 7482(a)(1) of the Internal Revenue Code provides
this court with “exclusive jurisdiction to review the
                              4

decisions of the Tax Court . . . in the same manner and to
the same extent as decisions of the district courts in civil
actions tried without a jury . . . .” 26 U.S.C. § 7482(a)(1).
Accordingly, “we have plenary review of the Tax Court’s
findings of law, including its construction and application
of the Internal Revenue Code.” PNC Bancorp, Inc. v. Comm’r
of Internal Revenue, 212 F.3d 822, 827 (3d Cir. 2000).

                             III.
  Nu-Look contends that the Tax Court erred in
determining that Stark was an employee under the FICA
and the FUTA. We begin by looking to the statutory
language. “Where the statutory language is plain and
unambiguous, further inquiry is not required . . . .”
Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197,
202 (3d Cir. 1998); see also United States v. Gollapudi, 130
F.3d 66, 70 (3d Cir. 1997).
  Both the FICA and the FUTA impose taxes on employers
based on the wages paid to individuals in their employ. 26
U.S.C. §§ 3111, 3301. “Wages,” as defined by both Acts,
includes, with certain exceptions not applicable here, “all
remuneration for employment . . . .” 26 U.S.C. §§ 3121(a),
3306(b). Employment is “any service of whatever nature,
performed . . . by an employee for the person employing
him . . . .” 26 U.S.C. §§ 3121(b), 3306(c). Employee is
defined by the FICA as:
    (1) any officer of a corporation; or
    (2) any individual who, under the usual common law
    rules applicable in determining the employer-employee
    relationship, has the status of an employee[.]
26 U.S.C. § 3121(d). Under the FUTA, the term employee,
with certain exceptions not relevant here, has the same
meaning as § 3121(d) of the FICA. 26 U.S.C. § 3306(i). The
general rule that an officer of a corporation is an employee
of that corporation is restated in Treasury Regulation
§ 31.3121(d)-1(b). That regulation further specifies that
there is an exception for an “officer of a corporation who as
such does not perform any services or performs only minor
services and who neither receives nor is entitled to receive,
                             5

directly or indirectly, any remuneration[.]” Treas. Reg.
§ 31.3121(d)-1(b). The regulations promulgated pursuant to
the FUTA are identical. Treas. Reg. § 31.3306(i)-1(e).
  Mindful of these statutory provisions and Stark’s status
as a corporate officer, the Tax Court appropriately focused
on the nature of the services Stark rendered and whether
the distributions Nu-Look paid were remuneration for those
services. It found that Stark performed more than minor
services and that the distributions Stark received were, in
fact, remuneration for his services. Those findings led the
Tax Court to conclude that Stark was an employee for
purposes of the FICA and the FUTA.
   We agree. The record establishes that Stark was a
corporate officer and that he single-handedly managed Nu-
Look’s entire operation. The services that Stark rendered for
Nu-Look were, therefore, substantial and the Tax Court
appropriately concluded that Stark was an employee under
§ 3121(d)(1). See Spicer Accounting, Inc. v. United States,
918 F.2d 90, 93 (9th Cir. 1990) (services provided by
corporation’s officer, who was the only certified public
accountant performing services for the business, were
substantial and dividends paid to him constituted
remuneration); Joseph Radtke, S.C. v. United States, 895
F.2d 1196, 1197 (7th Cir. 1990) (concluding that dividends
which were paid to lawyer, who was sole shareholder of
subchapter S corporation and its only provider of legal
services, were remuneration for services rendered and
subject to the FICA and the FUTA).
  Nu-Look argues, however, that Stark was not an
employee under the usual common law rules applicable in
determining employer-employee relationships and therefore
was not an employee under § 3121(d)(2). Nu-Look contends
that, under § 3121(d)(2), it must exercise specific control
over Stark for him to be classified as an employee and that
such control was not demonstrated because Stark himself
managed Nu-Look’s business affairs. This argument is
without merit because it completely ignores the plain
language of § 3121(d) and would render subparagraph (1)
superfluous. Section 3121(d) defines employee by using the
disjunctive “or” between subparagraphs (1) and (2). Thus,
an individual may qualify as an employee under either set
                              6

of circumstances. Here, because Stark was a corporate
officer, he came within § 3121(d)(1) and the Tax Court was
not required to consider whether he was an employee under
the common law rules made applicable under § 3121(d)(2).
   As support for its position that the common law rules for
determining the existence of an employer-employee
relationship govern the determination of whether Stark is
an employee for federal employment tax purposes, Nu-Look
relies on Texas Carbonate Co. v. Phinney, 307 F.2d 289,
291-92 (5th Cir. 1962). There, the Fifth Circuit considered
whether Luther Miller, a corporate director, officer and
shareholder of Texas Carbonate, was an employee for
purposes of the FICA and the FUTA. The Court recognized
that FICA’s statutory definition of “employee” included
corporate officers, but declared that the provision applied to
“[o]nly such officers as work for it in fact” and that “in
determining whether an officer is an employee within the
meaning of the statutes the usual employer-employee tests
are to be applied.” 307 F.2d at 291-92. The Court’s analysis
focused on whether Miller’s services, in the absence of any
control by the corporation, were substantial. It pointed out
that Miller did not perform services for any other entity,
was in charge of sales and marketing, and managed some
of the company’s affairs. These services, the Fifth Circuit
concluded, were sufficient to establish that Miller was in
fact an employee, thereby warranting the determination
that the corporation was liable for federal employment
taxes. Id. at 292-93.
   Nu-Look’s reliance on Texas Carbonate is puzzling. The
analysis employed by the Fifth Circuit was substantively
the same as the rule set forth in Treasury Regulations
§ 31.3121(d)-1(b) and § 31.3306(i)-1(e). Regardless, then, of
whether the Tax Court applied the plain language of the
statutory provisions or the Texas Carbonate test, Stark was
an employee because of his status as a corporate officer
who performed more than minor services. The Tax Court
did not err in concluding that Stark was Nu-look’s
employee under § 3121(d)(1).

                             IV.
  Section 530 of the Revenue Act of 1978 provides a safe
harbor for certain taxpayers who owe FICA and FUTA taxes
                              7

as a result of wrongfully failing to classify certain
individuals as employees. 303 West 42nd St. Enter., Inc. v.
I.R.S., 181 F.3d 272, 276 (2d Cir. 1999); Revenue Act of
1978, Pub. L. No. 95-600, 92 Stat. 2763 (as amended by
Act of Dec. 29, 1979, Pub. L. No. 96-167, 93 Stat. 1275;
Act of Dec. 17, 1980, Pub. L. No. 96-541, 94 Stat. 3204;
Tax Equity and Fiscal Responsibility Act of 1982, Pub. L.
No. 97-248, 96 Stat. 324; Tax Reform Act of 1986, Pub. L.
No. 99-514, 100 Stat. 2085; Small Business Job Protection
Act of 1996, Pub. L. No. 104-188, 110 Stat. 1755
(hereinafter cited as “Section 530”); see also Springfield v.
United States, 88 F.3d 750, 751 n.2 (9th Cir. 1996)
(discussing Section 530’s legislative history). This
uncodified section allows the taxpayer to avoid liability for
certain federal employment taxes if the taxpayer had a
“reasonable basis for not treating such individual as an
employee.” Section 530(a)(2); 303 West 42nd St. Enter., Inc.,
181 F.3d at 274. A “reasonable basis” under this section of
the Act may be established if the “taxpayer’s treatment of
such individual . . . was in reasonable reliance” upon
    (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 holdings 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.
Section 530(a)(2).
  Here, Nu-Look asserts that the Tax Court erred in
determining that it was not entitled to relief under this safe
harbor provision. Citing Texas Carbonate as judicial
precedent, 307 F.2d at 291-93, Nu-Look contends that it
had a reasonable basis for not treating Stark as an
employee.
                                    8

  This contention lacks merit. A reasonable reading of
Texas Carbonate would not have provided Nu-look with a
basis to treat Stark as anything other than an employee.
We find the Ninth Circuit’s decision in Spicer Accounting
instructive. 918 F.2d at 94-95. That Court rejected a
taxpayer’s argument that it was entitled to Section 530’s
safe harbor, explaining that Spicer, who was the
corporation’s sole shareholder and only certified public
accountant providing services, was the “central worker for
the taxpayer.” It declared that a “corporation’s sole full-time
worker must be treated as an employee.” 918 F.2d at 95.

                                   V.
  Nu-Look also argues that the IRS had committed a due
process violation by failing to provide notice of Section
530’s provisions.1 The Tax Court rejected this argument,
explaining that relief under the due process clause required
some showing of prejudice. Such prejudice was absent, the
Tax Court concluded, inasmuch as Nu-Look had been
granted leave to amend its petition for redetermination so
that it could seek relief under Section 530.
   It is well settled that an “elementary and fundamental
requirement of due process in any proceeding which is to
be accorded finality is notice reasonably calculated, under
all the circumstances, to apprise interested parties of the
pendency of the action and afford them an opportunity to
present their objections.” Mullane v. Central Hanover Bank
& Trust Co., 339 U.S. 306, 314 (1950); see also Cleveland
Bd. of Educ. v. Loudermill, 470 U.S. 532, 542 (1985). Both
of these requirements were met. The Notice of
Determination specifically apprised Nu-Look that Stark had
been classified as an employee and that relief under the
safe harbor provision of Section 530 was not warranted. In
addition, the Notice advised Nu-Look of the means by which

1. Section 530(e)(1) provides that the Internal Revenue Service “shall,
before or at the commencement of any audit inquiry relating to the
employment status of one or more individuals who perform services for
the taxpayer, provide the taxpayer with a written notice of the provisions
of this section.” Small Business Job Protection Act of 1996, Pub. L. No.
104-188, sec. 1122(a), 110 Stat. 1755, 1766 (1996).
                              9

it could challenge that determination. Accordingly, Nu-Look
is not entitled to relief under the due process clause.

                             VI.
  In sum, we conclude that Stark was properly classified by
the IRS as an employee of Nu-Look and that Nu-Look
lacked a reasonable basis for failing to treat Stark as an
employee. We will affirm the decision of the Tax Court that
Nu-Look is liable for certain employment taxes under the
FICA and the FUTA for calendar years 1996, 1997 and
1998.

A True Copy:
        Teste:

                  Clerk of the United States Court of Appeals
                              for the Third Circuit