Court Opinion

ID: 4337551
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:26:07.187881+00
Date Added: 2024-06-11T09:38:19.104221
License: Public Domain

132 T.C. No. 13

                UNITED STATES TAX COURT

          HI-Q PERSONNEL, INC., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22101-04.                Filed May 4, 2009.

     P corporation provided skilled and unskilled
laborers for casual employment (temporary laborers) to
more than 250 client companies. P gave temporary
laborers the option of being paid by check or in cash.
For those paid in cash, P failed to withhold Federal
income taxes and pay either the employer or employee
portions of FICA taxes (together, employment taxes) for
all taxable quarters in 1995, 1996, 1997, and 1998. In
2002, P’s president and sole shareholder, N, pleaded
guilty to failing to withhold and pay the employment
taxes and to conspiracy to defraud the United States.
R determined P was liable for the employment taxes
under secs. 3402, 3102, and 3111, I.R.C., and imposed
fraud penalties under sec. 6663(a), I.R.C. R argues
that N’s guilty plea collaterally estops P from denying
its responsibility for paying the employment taxes and
from denying fraud. In the alternative, R argues that
P is the employer of the temporary laborers and for
that reason is liable for the employment taxes and
fraud penalties. P argues that R’s determinations were
                               - 2 -

     not timely because R did not make them within the 3-
     year period of limitations in sec. 6501(a), I.R.C.
          1. Held: P is collaterally estopped from denying
     its responsibility for paying the employment taxes.
          2. Held, further, P is the statutory employer of
     temporary laborers under sec. 3401(d)(1), I.R.C., and
     therefore is liable for paying the employment taxes.
          3. Held, further, P is liable for fraud penalties
     under sec. 6663(a), I.R.C.
          4. Held, further, R’s determinations were timely
     under sec. 6501(c)(1), I.R.C., because P filed false or
     fraudulent returns.

     Mark E. Cedrone, for petitioner.

     Linda P. Azmon, for respondent.

     HALPERN, Judge:   The petition in this case was filed in

response to a Notice of Determination of Worker Classification

(the notice) regarding petitioner’s liabilities pursuant to the

Federal Insurance Contributions Act (FICA) and for Federal income

tax withholding (together, employment taxes) for all taxable

quarters in 1995, 1996, 1997, and 1998.   After concessions,1 the

following questions remain.

     (1)   Is petitioner collaterally estopped from denying that

it was responsible for paying the employment taxes?

     (2)   Has respondent properly determined that the workers

identified in the notice as “Temporary Laborers” should be

     1
       Principally, petitioner concedes that it is not entitled
to relief under sec. 530 of the Revenue Act of 1978, Pub. L. 95-
600, 92 Stat. 2885, as amended.
                                - 3 -

legally classified as petitioner’s employees for each taxable

quarter in 1995, 1996, 1997, and 1998?

     (3)    Is petitioner liable for the employment taxes?

     (4)    Is petitioner liable for fraud penalties?

     (5)    Have the periods of limitations for assessing and

collecting the employment taxes expired?

     A table setting forth the employment taxes and fraud

penalties respondent determined is attached to this report as an

appendix.

     Unless otherwise stated, all section references are to the

Internal Revenue Code (the Code) in effect for the taxable

quarters in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

                          FINDINGS OF FACT

     Some facts are stipulated and are so found.    The stipulation

of facts, with accompanying exhibits, is incorporated herein by

this reference.    At the time the petition was filed, petitioner’s

principal place of business was in Philadelphia, Pennsylvania.

Background

     Beginning in 1995 and extending through 1998, petitioner

operated an employment service that provided skilled and

unskilled laborers for casual employment (temporary laborers) to

more than 250 client companies (clients) for a fee.     Clients paid

petitioner by check for the services of temporary laborers, and
                                - 4 -

petitioner offered temporary laborers the choice of being paid by

check or of being paid in cash (temporary laborers paid by check

and temporary laborers paid in cash, respectively).    Petitioner

included temporary laborers paid by check on its regular payroll

and treated them as its employees for employment tax purposes.

Petitioner disregarded temporary laborers paid in cash for

employment tax purposes.    To remain competitive in recruiting

temporary laborers, petitioner honored temporary laborers’

choices as to how to be paid.    In placing temporary laborers with

clients, petitioner did not distinguish between temporary

laborers paid by check and temporary laborers paid in cash.

During the taxable quarters here in issue, petitioner paid

$14,845,019 to temporary laborers paid in cash.

     During those periods, Luan Nguyen (Mr. Nguyen) was president

of petitioner and its sole shareholder.    As more fully explained

infra, Mr. Nguyen was indicted on, and pleaded guilty to, Federal

criminal charges in connection with the failure to pay employment

taxes with respect to the $14,845,019 paid to temporary laborers

paid in cash.

Petitioner’s Client Contracts

     Petitioner’s relationship with its clients was established

by contract.    A typical client contract (client contract)

included the following provisions:
                         - 5 -

     1. Hi-Q will provide to CLIENT the following
classifications of temporary employees at the rates set
forth.

       SERVICE                                 RATE
    GENERAL LABOR                        $9.00 per/hr

          *      *   *   *       *   *     *

     2. The hourly rate of payment for services listed
above shall be paid by CLIENT to Hi-Q, per hour, per
employee. * * *

     3. Payment shall be made in full, to Hi-Q by
check within 7 days from the date of the invoice
rendered by Hi-Q. * * *

          *      *   *   *       *   *     *

     5. CLIENT agrees not to advance any money, goods
or services to Hi-Q employees without Hi-Q’s prior
written consent. CLIENT agrees not to leave CLIENT’S
premises with any cash, negotiable instrument, or other
valuable items thereon * * * unattended in the presence
of any Hi-Q employees or [to] entrust the same to the
care, custody and control of any Hi-Q employees without
Hi-Q’s prior written consent.

     6. CLIENT will not authorize Hi-Q employees to
operate any vehicle without Hi-Q’s prior written
consent. * * *

     7. In the unlikely event that the services of a
Hi-Q employee prove unsatisfactory, Hi-Q shall
immediately provide a replacement. * * *

     8. Hi-Q shall promptly pay all employees, and
shall make all federal, state and local payroll tax
deductions, deposits and payments as required by law.

          *      *   *   *       *   *     *

     10. Hi-Q shall provide worker’s compensation
insurance coverage for all employees and provide
evidence of same to CLIENT.
                                 - 6 -

          11. Upon notification to Hi-Q by CLIENT and
     written consent of Hi-Q, CLIENT shall have the right to
     hire any Hi-Q employee who has worked for CLIENT for a
     period in excess of 520 consecutive hours or 13
     consecutive weeks, at no fee or commission paid to Hi-
     Q. However, upon employing any Hi-Q employee prior to
     completion of 520 consecutive hours, CLIENT agrees to
     pay to Hi-Q a fee of ten (10%) percent of employee’s
     annual salary, i.e. 2080 hours [at] employee’s starting
     hourly rate paid by CLIENT to employee.

          12. If without Hi-Q’s prior written consent, any
     employee referred to CLIENT by Hi-Q is employed by
     CLIENT, or by another division, subsidiary or affiliate
     of CLIENT, within six (6) months from the last date
     said employee was on Hi-Q’s payroll and working for
     CLIENT, CLIENT agrees to pay to Hi-Q a fee of ten (10%)
     percent of employee’s annual salary, i.e. 2080 hours at
     employee’s starting hourly rate paid by CLIENT to
     employee.

Petitioner’s Business

     Petitioner employed job counselors responsible for all

aspects of recruiting temporary laborers.    Job counselors

recruited temporary laborers through newspaper advertisements and

referrals.   Job counselors interviewed each temporary laborer and

performed background checks by calling the laborer’s prior

employer or listed reference.    After recruiting a temporary

laborer, job counselors matched the laborer with an appropriate

position according to the laborer’s qualifications and the job

descriptions clients provided.    Before placing a temporary

laborer with a client, petitioner required the laborer to

complete a job application.   Approximately 80 to 90 percent of

the temporary laborers petitioner recruited chose to be temporary

laborers paid in cash.
                                - 7 -

     In its promotional material, petitioner made many promises

to clients.    It stated that, by hiring temporary laborers through

petitioner, clients could avoid paying “Employee Tax” and “Social

Security”.    It pledged to make “all federal, state and local

payroll tax deductions, deposits and payments as required by

law.”   It represented that it was responsible for providing

workers’ compensation insurance for all temporary laborers.      It

claimed that it “[offered] training to our employees on

computers, on job-specific work, languages, and specialized

industrial machinery”, and stated that, “if your location has no

access to public transit, we will provide HI-Q employees with

[free] transportation to your site.”    Petitioner also promised

that clients could “easily” hire any temporary laborer, ensuring

that clients hired only “the best of the best” to their

“permanent staff.”

     As stated, petitioner treated temporary laborers paid by

check as its employees for employment tax purposes.    On its Forms

941, Employer’s Quarterly Federal Tax Return, it reported as

wages the amounts it paid those temporary laborers.    For those

temporary laborers, it withheld Federal income taxes under

section 3402.    It also withheld those temporary laborers’ shares

of FICA taxes under section 3102 and paid its own corresponding

share of FICA taxes under section 3111.    In contrast, petitioner

did not require temporary laborers paid in cash to produce proper
                                - 8 -

identification for Federal income tax purposes or to prepare the

documents necessary for payroll tax deductions.   It did not issue

to temporary laborers paid in cash either Forms 1099-MISC,

Miscellaneous Income, or Forms W-2, Wage and Tax Statement.

     To generate funds to pay temporary laborers paid in cash,

petitioner cashed some client checks at check-cashing agencies.

It did not record on its books the proceeds of those client

checks as business income or the payments to temporary laborers

paid in cash as payroll expenses.   For the years in issue,

petitioner failed to report $14,845,019 as cash wages paid.

     Clients could refuse the services of any temporary laborer,

and petitioner was contractually bound to provide a replacement

laborer on request.   Nonetheless, petitioner retained the right

at any time to reassign any temporary laborer from one client to

another.   Petitioner required temporary laborers unable to report

to a client’s premises for work to notify petitioner; petitioner,

in turn, notified the client.

     Clients completed timesheets for petitioner showing the

hours temporary laborers worked.    Petitioner billed clients for

temporary laborers’ services by means of invoices based on those

timesheets.   Often, however, petitioner paid temporary laborers

before receiving payment from clients.
                               - 9 -

Criminal Proceedings

     Mr. Nguyen was a defendant in the criminal case of United

States v. Nguyen, docket No. 2:02CR745 (E.D. Pa., Nov. 6, 2002)

(the criminal case).   On November 6, 2002, Mr. Nguyen was

indicted on 10 counts.   Count 1 of the indictment charges a

violation of 18 U.S.C. sec. 371, Conspiracy to commit offense or

to defraud United States; counts 2 through 10 of the indictment

charge violations of section 7202, Willful Failure To Collect or

Pay Over Tax, and 18 U.S.C. sec. 2, Principals (viz., one who

aids and abets the commission of an offense against the United

States is punishable as a principal).2

     In pertinent part, the indictment states:

                            COUNT ONE
            (CONSPIRACY TO DEFRAUD THE UNITED STATES)

                           INTRODUCTION

     THE GRAND JURY CHARGES THAT:

          1. At all times relevant to this Indictment, Hi-Q
     Personnel, Inc. (“Hi-Q Personnel”) was a corporation
     doing business * * * as a temporary employment service
     that supplied casual laborers to clients for a fee.

     2
       The taxable quarters in issue with respect to count 1 (the
16 quarters in 1995 through 1998) differ from the taxable
quarters in issue with respect to counts 2 through 10 (the 8
quarters in 1997 through 1998). The reason is that the period of
limitations for violations of sec. 7202 is 6 years. See sec.
6531(4). Thus Mr. Nguyen, indicted Nov. 6, 2002, could not be
charged with violations of sec. 7202 for returns filed before
November 1996.
                        - 10 -

     2. At all times relevant to this Indictment, LUAN
NGUYEN * * * was the president and sole shareholder of
Hi-Q Personnel.

     3. At all times relevant to this Indictment,
PHUONG NGUYEN * * * was employed by Hi-Q Personnel and
responsible for the day-to-day operation of the
business, including, but not limited to, the
supervision of the preparation of the payroll[,]
including the cash payroll; the supervision of the
hiring of temporary laborers who were given the option
of being paid in cash; and the cashing of checks used
to pay the cash payroll.

     4. At all times relevant to this Indictment, the
casual laborers supplied * * * to client businesses
were employees of Hi-Q Personnel. As part of its
business of providing laborers to its clients, Hi-Q
Personnel acknowledged and agreed in its contracts with
its clients that Hi-Q Personnel, and not the client,
was responsible for collecting, accounting for and
paying over to the United States all employment taxes.

     5. [F]rom 1995 through 1998, Hi-Q Personnel
supplied temporary laborers to approximately 259 client
companies.

     6. At all times relevant to this Indictment, LUAN
NGUYEN, * * * as the President and sole shareholder of
Hi-Q Personnel, was required by Title 26 of the United
States Code, to collect, truthfully account for, and
pay over to the United States, taxes imposed by Title
26, United States Code, namely Hi-Q Personnel’s
employees’ federal income tax withholdings * * * [and
FICA taxes,] ( * * * collectively referred to as
“employment taxes” * * *). In this regard, LUAN NGUYEN
* * * and Hi-Q Personnel were required truthfully to
account for and pay over the employment taxes each
quarter by filing * * * [Form 941] by reporting therein
the total wages paid to Hi-Q Personnel employees and
the amount of employment taxes due and owing to the
United States on those wages, and by paying employment
taxes due on those wages at the time the Form 941 was
filed * * *.
                        - 11 -

                  THE TAX CONSPIRACY

     7. [From January 1, 1995, through January 31,
1999, the defendants LUAN NGUYEN and PHUONG NGUYEN]
conspired and agreed together * * * to defraud the
United States concerning its governmental functions and
rights, by impeding, impairing, obstructing and
defeating the lawful governmental functions of the
Internal Revenue Service [IRS] * * * in the
ascertainment, computation, assessment and collection
of revenue, that is, the employment taxes due and owing
to the United States * * * from Hi-Q Personnel.

             THE OBJECT OF THE CONSPIRACY

     8. The object of the conspiracy was to prevent
the IRS from discovering the actual wages paid to the
employees of Hi-Q Personnel and from assessing and
collecting employment taxes due thereon.

                   MANNER AND MEANS

     9. It was a part of the conspiracy that Hi-Q
Personnel contracted with various businesses in the
greater Philadelphia, Pennsylvania area to supply the
businesses with casual laborers * * *.

     10. It was further a part of the conspiracy that
Hi-Q Personnel acknowledged and agreed in its contracts
with its clients that Hi-Q Personnel, and not the
client, was responsible for collecting, accounting for
and paying over to the United States all employment
taxes due on wages earned by the laborers.

     11. It was further a part of the conspiracy that
defendants LUAN NGUYEN * * * and PHUONG NGUYEN * * *
caused Hi-Q Personnel * * * to give the laborers * * *
a choice to be paid either in cash, which they
understood to mean that there would be no employment
taxes withheld from their wages, or by check in which
case all appropriate payroll taxes would be collected,
accounted for, and paid over to the United States.

          (a) When laborers * * * opted to be paid in
cash, they were not required to produce proper
identification for income tax purposes or prepare the
necessary documents for payroll tax deductions, and did
not receive * * * [a Form W-2] from Hi-Q Personnel.
                          - 12 -

     12. It was further a part of the conspiracy that
defendants LUAN NGUYEN * * * and PHUONG NGUYEN * * *
paid a substantial number of their employee laborers in
cash to conceal the true number and identities of the
employees, the amounts of cash wages paid to Hi-Q
Personnel’s employee laborers, and the fact that they
did not collect or account for the employment taxes due
on the cash wages paid.

     13. It was further a part of the conspiracy that
to generate the cash needed to meet and facilitate the
concealment of its cash payroll, the defendants LUAN
NGUYEN * * * and PHUONG NGUYEN * * * used check cashing
agencies to cash checks obtained from their clients to
pay for the labor provided by Hi-Q Personnel.

          *    *    *     *    *     *   *

     14. It was further a part of the conspiracy that
to conceal the amount of employment tax due to the
United States, the defendants LUAN NGUYEN * * * and
PHUONG NGUYEN * * * substantially understated and
misrepresented the wages paid to the employees of Hi-Q
Personnel on the * * * [Forms 941] filed on behalf of
Hi-Q Personnel each quarter with the IRS during the
conspiracy.

     15. It was further a part of the conspiracy that *
* * [from January 1, 1995, through January 31, 1999,]
the defendants LUAN NGUYEN * * * and PHUONG NGUYEN * *
* failed to account for, collect and pay over to the
IRS employment taxes in the approximate amount of
$3,326,054.48 on total unreported wages of
approximately $14,845,019.24.

                        OVERT ACTS

     16. In furtherance of the conspiracy and to
accomplish its object, the defendants committed the
following overt acts * * *:

          (a) [Between January 1, 1995, and December
31, 1998,] on different occasions, the defendants LUAN
NGUYEN * * * and PHUONG NGUYEN, * * * together and
separately, cashed corporate checks received from
client companies at check cashing agencies located in
Philadelphia, Pennsylvania.
                            - 13 -

              (b) [Between January 1,    1995, and December
    31, 1998,] on different occasions,   the defendants LUAN
    NGUYEN * * * and PHUONG NGUYEN * *   * caused Hi-Q
    Personnel to pay employees of Hi-Q   Personnel in cash at
    the offices of Hi-Q Personnel.

              (c) [T]he defendants LUAN NGUYEN * * * and
    PHUONG NGUYEN * * * filed with the IRS in Philadelphia,
    Pennsylvania a false Form 941 for * * * [each quarter,
    sixteen in total, in taxable years 1995 through 1998,]
    which substantially misrepresented the wages paid to
    Hi-Q Personnel employees, each filing constituting a
    separate overt act * * *[.]

              *    *    *    *    *      *    *

         All in violation of Title 18, United States Code,
    Section 371.

              *    *    *    *    *      *    *

                    [COUNTS TWO THROUGH TEN]
(FAILURE TO COLLECT, ACCOUNT FOR AND PAY OVER EMPLOYMENT TAXES)

    THE GRAND JURY FURTHER CHARGES THAT:

         1. Paragraphs 1 through 6 of Count One are
    incorporated herein as if fully set forth.

         2. [For the taxable quarters beginning December
    31, 1996, and through the taxable quarter ending
    December 31, 1998, defendant LUAN NGUYEN,] being a
    person required under Title 26, United States Code, to
    collect, account for and pay over taxes imposed by
    Title 26, United States Code, did willfully fail to
    collect and cause to be collected, truthfully account
    for and cause to truthfully be accounted for, and pay
    over and cause to be paid over to the United States,
    federal income tax withholdings and * * * [FICA] taxes,
    of approximately * * * [$2,224,384.73] due and owing to
    the United States on taxable wages paid by Hi-Q
    Personnel * * * to its employee laborers of
    approximately * * * [$9,640,197.62].

         All in violation of Title 26, United States Code,
    Section 7202 and Title 18, United States Code, Section
    2.
                              - 14 -

     On March 10, 2003, at the change of plea hearing, Mr. Nguyen

accepted the guilty plea agreement (the plea agreement), thereby

pleading guilty to all 10 counts in the indictment.   On July 24,

2003, the U.S. District Court for the Eastern District of

Pennsylvania sentenced Mr. Nguyen to 150 months in prison and

$1,000 in special assessments, and, on October 10, 2003, the

court entered a judgment of conviction against him in the

criminal case.

The Notice

      The notice states the amounts of employment taxes respondent

determined for the taxable quarters in issue along with the fraud

penalties he determined.   See appendix.   Respondent determined a

fraud penalty for each taxable quarter in issue.

      The notice omits a list of the temporary laborers that

respondent determined to be petitioner’s employees during those

taxable quarters.   That omission is explained as follows:

      Please Note:
      No individuals were listed * * * due to inadequate
      records. While the books and records provided by the
      Taxpayer did not identify each individual worker to be
      reclassified [as an employee], the administrative file
      contains sufficient evidence to support a class of
      workers identified as “Temporary Laborers”.

                              OPINION

I.   Introduction

      Petitioner operated an employment service providing

temporary laborers to clients for a fee.   Petitioner offered
                                - 15 -

temporary laborers the option of being paid by check or in cash.

Petitioner included temporary laborers paid by check on its

regular payroll and treated them as its employees for employment

tax purposes.    Petitioner disregarded temporary laborers paid in

cash for employment tax purposes.

      Mr. Nguyen, petitioner’s president and sole shareholder, was

indicted on, and pleaded guilty to, various counts involving

conspiracy to defraud the United States and failure to pay

employment taxes with respect to the cash payments to temporary

laborers paid in cash.

      The present action involves respondent’s attempts to collect

the unpaid employment taxes (and fraud penalties) from

petitioner.

      We shall address the issues remaining for decision in the

order stated.    Our authority to determine the employment

classification question here in issue and the proper amount of

employment tax is found in section 7436.

II.   Issue Preclusion

      A.   Introduction

      Relying on the doctrine of issue preclusion, respondent

argues that, as a result of the plea agreement, petitioner may

not contest its responsibility to pay the employment taxes here

in issue.     Petitioner objects.   We agree with respondent.
                               - 16 -

     B.   The Doctrine of Issue Preclusion

     In Monahan v. Commissioner, 109 T.C. 235, 240 (1997), we

stated:

          The doctrine of issue preclusion, or collateral
     estoppel, provides that, once an issue of fact or law
     is “actually and necessarily determined by a court of
     competent jurisdiction, that determination is
     conclusive in subsequent suits based on a different
     cause of action involving a party to the prior
     litigation.” Montana v. United States, 440 U.S. 147,
     153 (1979) (citing Parklane Hosiery Co. v. Shore, 439
     U.S. 322, 326 n.5 (1979)). * * *

     Under the doctrine of issue preclusion, or collateral

estoppel, (1) the issue to be decided in the second case must be

identical in all respects to the issue decided in the first case,

(2) a court of competent jurisdiction must have rendered a final

judgment in the first case, (3) a party may invoke the doctrine

only against parties to the first case or those in privity with

them, (4) the parties must have actually litigated the issue and

the resolution of the issue must have been essential to the prior

decision, and (5) the controlling facts and legal principles must

remain unchanged.   See Jean Alexander Cosmetics, Inc. v. L’Oreal

USA, Inc., 458 F.3d 244, 249 (3d Cir. 2006); Monahan v.

Commissioner, supra at 240.

     C.   Discussion

           1.   Petitioner’s Argument

     Petitioner does not dispute the second or fifth conditions.

Petitioner, however, contends the other three conditions are not
                               - 17 -

satisfied, arguing that:   (1) The fourth condition is not

satisfied because Mr. Nguyen pleaded guilty, and so did not

actually litigate any issue; (2) the first condition is not

satisfied because the issue before us is not identical to any

issue decided in the criminal case; and (3) the third condition

is not satisfied because petitioner is not in privity with Mr.

Nguyen.   We disagree with all three arguments.

           2.   Issue Actually Litigated

     A conviction based on a guilty plea is “nevertheless a

judgment on the merits sufficient for purposes of collateral

estoppel to preclude relitigation of issues determination of

which was essential to the conclusion reached.”     Arctic Ice Cream

Co. v. Commissioner, 43 T.C. 68, 76 (1964); see De Cavalcante v.

Commissioner, 620 F.2d 23, 26-27 n.9 (3d Cir. 1980) (noting that

a guilty plea has collateral estoppel effect), affg. Barrasso v.

Commissioner, T.C. Memo. 1978-432.3     On October 10, 2003, the

U.S. District Court for the Eastern District of Pennsylvania

     3
       Petitioner relies on Bower v. O’Hara, 759 F.2d 1117, 1124-
1126 (3d Cir. 1985), for the proposition that a guilty plea is
insufficient for issue preclusion. The rule in Bower depends on
the underlying law (e.g., State law). See Anela v. City of
Wildwood, 790 F.2d 1063, 1068-1069 (3d Cir. 1986). The
controlling law in Bower was the organic statute of the U.S.
Virgin Islands. The controlling law here, however, is Federal
common law. For that reason we follow De Cavalcante v.
Commissioner, 620 F.2d 23, 26-27 n.9 (3d Cir. 1980), affg.
Barrasso v. Commissioner, T.C. Memo. 1978-432, in which the Court
of Appeals for the Third Circuit affirmed this Court’s decision
to give collateral estoppel effect to a taxpayer’s guilty plea in
Federal court. Bower is inapposite.
                                  - 18 -

convicted Mr. Nguyen after accepting his guilty plea.     His

conviction is a judgment on the merits sufficient to preclude

relitigation of the issues involved in the criminal case.

            3.   Issue Identity

     Mr. Nguyen pleaded guilty to the charge of willfully failing

to collect, truthfully account for, and pay employment taxes on

taxable wages petitioner paid temporary laborers paid in cash.

Specifically, Mr. Nguyen pleaded guilty to violating section 7202

and 18 U.S.C. sec. 2.4   5
                             Section 7202 refers to the willful

failure of any “person” required under the Code to collect,

account for, and pay over any tax imposed by the Code.     The

requirement here was to collect and pay the employment taxes due

on wages petitioner paid the temporary laborers paid in cash.     It

is the duty of the employer to collect, account for, and pay over

     4
       Sec. 7202, Willful Failure To Collect or Pay Over Tax,
provides:

          Any person required under this title to collect,
     account for, and pay over any tax imposed by this title
     who willfully fails to collect or truthfully account
     for and pay over such tax shall, in addition to other
     penalties provided by law, be guilty of a felony * * *.
     5
         Tit. 18 U.S.C. sec. 2, Principals, provides:

          (a) Whoever commits an offense against the United
     States or aids, abets, counsels, commands, induces or
     procures its commission, is punishable as a principal.

          (b) Whoever willfully causes an act to be done
     which if directly performed by him or another would be
     an offense against the United States, is punishable as
     a principal.
                               - 19 -

both the employees’ and the employer’s FICA taxes and to withhold

income taxes.    See secs. 3102(a) and (b) (employees’ FICA taxes),

3111 (employer’s FICA taxes), 3402 and 3403 (Federal income tax

withholding).

     The reason Mr. Nguyen--and not petitioner--was charged with

the violation of section 7202 is that section 7343 defines

“person”, as used in section 7202, to include an officer or

employee of a corporation who, as such, is under a duty to

perform the act in respect of which the violation occurs.    See

United States v. Thayer, 201 F.3d 214, 219-220 (3d Cir. 1999)

(“[T]he president and majority owner of * * * [employers] was

properly charged and convicted as a ‘person’ under § 7202.”).

Mr. Nguyen was an officer of petitioner (its president), and

petitioner does not claim Mr. Nguyen was an officer or employee

of any client.    In other words, Mr. Nguyen was convicted of

failing in his duty to collect, account for, and pay the

employment taxes imposed by law on petitioner as the employer of

temporary laborers.

     Petitioner argues, however, that Mr. Nguyen’s guilty plea is

consistent with the theory that the clients were the temporary

laborers’ employers.    Petitioner relies on 18 U.S.C. sec. 2,

which “‘[abolished] the distinction between principals and

accessories in offenses defined in the laws of the United

States’”.   United States v. Standefer, 610 F.2d 1076, 1082 (3d
                               - 20 -

Cir. 1979) (quoting Rooney v. United States, 203 F. 928, 932 (9th

Cir. 1913)), affd. 447 U.S. 10 (1980).   Under 18 U.S.C. sec. 2,

both those who commit crimes and those who aid and abet their

commission are principals.    Id. at 1083.   Petitioner argues that

Mr. Nguyen, although charged as a principal, in fact merely aided

and abetted the clients’ officers (the “true” principals under

sections 7202 and 7343) in their efforts to defraud the Internal

Revenue Service.   We reject petitioner’s theory.

     Petitioner’s argument is founded on the precept that a

guilty plea admits only the minimum facts necessary to sustain

the indictment’s charges.    See, e.g., De Cavalcante v.

Commissioner, supra at 26-27 n.9.    Petitioner, however, cites no

authority requiring us to ignore the indictment’s plain language.

In the criminal case, the ultimate issue was whether petitioner

filed false or fraudulent Forms 941 for the 16 taxable quarters

in 1995 through 1998 by failing to pay employment taxes on the

wages petitioner paid temporary laborers paid in cash.     The

indictment not only lists the 16 dates petitioner filed the

“false” Forms 941 that “substantially misrepresented the wages

paid to Hi-Q Personnel employees”, but also describes

petitioner’s failure to provide temporary laborers with Forms W-

2.   In that way, the indictment implicitly names petitioner as

the employer of the temporary laborers, because only their

employer must record their wages on its Forms 941 and issue them
                               - 21 -

Forms W-2.    Moreover, in several places, the indictment

explicitly refers to the temporary laborers as petitioner’s

employees.    The indictment in no way suggests that any person or

entity other than petitioner was the employer of the temporary

laborers.    The indictment itself is unequivocal:   Petitioner was

the employer of the temporary laborers.     Because that issue is

now before us, the issue in the criminal case and the issue in

this case are identical.

            4.   Privity

     “A sole or controlling stockholder can be in privity with

his * * * closely held corporation.”      Levitt v. Commissioner,

T.C. Memo. 1995-464, affd. without published opinion 101 F.3d 691

(3d Cir. 1996).    Petitioner argues that Mr. Nguyen and petitioner

are not in privity and relies on a flawed analogy between this

case and Am. Range Lines, Inc. v. Commissioner, 17 T.C. 764

(1951), affd. on privity issue 200 F.2d 844 (2d Cir. 1952).     In

Am. Range Lines v. Commissioner, supra at 771, after recognizing

that the “official acts” of a corporation could bind the

“individual stockholders in their capacity as such”, we declined

to allow the actions of “stockholders in their individual

capacity” to bind the corporation.      That case is distinguishable

because of the capacity in which Mr. Nguyen was acting.

     It is uncontroverted that Mr. Nguyen was petitioner’s

president and sole shareholder.    Mr. Nguyen committed tax fraud
                              - 22 -

on behalf of petitioner (not, as petitioner contends, in his

“individual capacity”), and his duty to file accurate Forms 941

arose directly from his position as president of petitioner.

Indeed, “a corporation can act only through its officers and * *

* it does not escape responsibility for the acts of its officers

performed in that capacity.   Corporate fraud necessarily depends

upon the fraudulent intent of the corporate officer.”     Federbush

v. Commissioner, 34 T.C. 740, 749 (1960), affd. 325 F.2d 1 (2d

Cir. 1963).   Moreover, Mr. Nguyen did not benefit directly from

his crimes; rather, he acted to attract temporary laborers to

petitioner and thereby to make petitioner competitive.    That is,

petitioner, and so Mr. Nguyen, “benefited by being able to stay

in business”.   We reject petitioner’s analogy between this case

and Am. Range Lines, Inc. v. Commissioner, supra, and find that

petitioner and Mr. Nguyen are in privity.

     D.   Conclusion

     The conditions for issue preclusion apply.   In the criminal

case, Mr. Nguyen was convicted of failing in his duty to collect,

account for, and pay the employment taxes imposed by law on

petitioner as the employer of temporary laborers.   Petitioner is

therefore precluded from denying that temporary laborers paid in

cash were its employees.   As a corollary, petitioner is also

precluded from denying its liability for the payment of
                                  - 23 -

employment taxes with respect to those temporary laborers, as set

forth in the notice.

III.       Statutory and Common Law Employers

       A.     Introduction

       While we have held that petitioner is precluded from denying

its liability for the payment of employment taxes with respect to

temporary laborers paid in cash, the parties, particularly

respondent, devoted considerable argument to whether the evidence

(apart from that supporting issue preclusion) shows that

petitioner was the common law employer of the temporary laborers.

Even if we agreed with petitioner that it was not the common law

employer of the temporary laborers (which we do not6), petitioner

is nevertheless their statutory employer under section

3401(d)(1).       See, e.g., Educ. Fund of the Elec. Indus. v. United

States, 426 F.2d 1053, 1057-1058 (2d Cir. 1970) (holding that

even though taxpayer was not common law employer, taxpayer was

statutory employer liable for withholding income taxes).

       6
       Were it pertinent to our decision, we would find that,
applying the factors courts generally use to determine whether an
individual is the common law employee of the person for whom he
performs services, e.g., degree of control, right to discharge,
permanency of the relationship, and the relationship the parties
intended to create, see Ewens & Miller, Inc. v. Commissioner, 117
T.C. 263, 270 (2001), the temporary laborers paid in cash were
petitioner’s, and not its clients’, common law employees.
                                - 24 -

     B.    The Requirement To Pay Employment Taxes

     Sections 3102, 3111, and 3402 require employers to withhold

FICA taxes and income taxes from wages they pay to employees, and

to pay their own share of FICA taxes.     Section 3401(d) defines

“employer”, and provides in pertinent part:

          SEC. 3401(d). Employer.--For purposes of this
     chapter, the term “employer” means the person for whom
     an individual performs or performed any service, of
     whatever nature, as the employee of such person, except
     that--

                  (1) if the person for whom the
             individual performs or performed the services
             does not have control of the payment of the
             wages for such services, the term “employer”
             * * * means the person having control of the
             payment of such wages * * *

Although that definition is, by its terms, limited to chapter 24

of the Code, Collection of Income Tax at Source on Wages, the

Supreme Court has applied it also to chapter 21 of the Code,

FICA.     See Otte v. United States, 419 U.S. 43, 51 (1974) (“The

fact that the FICA withholding provisions of the Code do not

define ‘employer’ is of no significance, for that term is not to

be given a narrower construction for FICA withholding than for

income tax withholding.”).     The Supreme Court in Otte v. United

States, supra at 50, concluded that section 3401(d)(1) “obviously

was intended to place responsibility for withholding at the point

of control.”
                               - 25 -

     C.   Control of the Payment for Services

     Petitioner contends that the clients “determined how much

they would ultimately pay for any particular * * * [temporary

laborer].”   If petitioner means that the clients determined how

much they paid petitioner for temporary laborers’ services, that

is uncontested and irrelevant.    If petitioner means that the

clients determined how much petitioner in fact paid temporary

laborers, that is unsupported by any evidence in the record.7

Clients did nothing more than pay petitioner, according to rates

set in the client contracts, for the services temporary laborers

performed.   Those rates included not only the gross wages of the

temporary laborers (that is, before employment taxes), but also a

fee for petitioner.    Petitioner did not offer convincing evidence

that all clients knew what salaries temporary laborers received

or what fee petitioner earned.8   We find that petitioner set the

salaries of the temporary laborers and paid their wages.    For

that reason, we find that petitioner controlled the payment of

wages for the services temporary laborers rendered for clients

and is, therefore, liable for all employment taxes associated

with those payments.   See, e.g., Winstead v. United States, 109

     7
       Indeed, petitioner often paid temporary laborers before
receiving payment from clients.
     8
       Although some client contracts included an additional
markup as a fee (generally a percentage of the hourly rate),
petitioner failed to offer convincing evidence that it paid
temporary laborers in accordance with the contract terms.
                              - 26 -

F.3d 989, 991-992 (4th Cir. 1997) (holding that taxpayer who paid

day laborers directly from his personal checking account, even

though not their common law employer, was liable for Federal

Unemployment Tax Act (FUTA) taxes and for both the employer and

employee portions of FICA); Evans v. IRS (In re Sw. Rest. Sys.,

Inc.), 607 F.2d 1237 (9th Cir. 1979) (holding that control of

payment of wages made debtor--and not common law employers--

liable for Federal income tax withholding, FUTA taxes, and both

the employer and employee portions of FICA).

      D.   Conclusion

      For the reasons stated, petitioner is the statutory employer

of the temporary laborers.   Petitioner is thus liable for the

employment taxes as set forth in the notice.   See Evans v. IRS

(In re Sw. Rest. Sys., Inc.), supra at 1240 (“[T]here is nothing

inequitable in the placing of such a burden upon a corporation

which voluntarily places itself in the position of handling the

wages and reporting the amounts due under the taxing statutes but

which then fails to deduct and remit the amounts required by

law.”).

IV.   Amounts of Employment Taxes

      In the petition, petitioner argues that the amount of

employment taxes due and owing on the $14,845,019 of unreported

cash wages should be offset by the earned income credits to which

temporary laborers paid in cash would have been entitled under
                              - 27 -

section 32 had they claimed those credits.   Petitioner does not

renew that argument on brief, and, therefore, we shall consider

petitioner to have abandoned it.   See Mendes v. Commissioner, 121

T.C. 308, 312-313 (2003) (“If an argument is not pursued on

brief, we may conclude that it has been abandoned.”).

     Petitioner does, however, argue that respondent’s

determinations of employment taxes should be disregarded because

they are “arbitrary, capricious or without reasonable

foundation.”9   Petitioner so argues because respondent, claiming

in the notice that he lacked information about individual

laborers paid in cash, did not list those individuals but,

instead, referred to a group of “Temporary Laborers”.    The

parties have stipulated the amount of unreported wages for each

taxable quarter and disagree only as to the withholding rate to

be applied to those wages.   Respondent argues, and petitioner

does not disagree, that, for each taxable quarter, respondent

used the “actual” rate petitioner used in filing the Forms 941

for the corresponding quarter to report the wages of temporary

laborers paid by check.   Since he used the same income tax

withholding rate petitioner used in filing its Forms 941,

respondent argues that his methodology was not arbitrary,

     9
       Respondent argues that petitioner is precluded from making
that argument because it was not raised in the petition. We deem
the petition amended and allow petitioner to make the argument.
See Rule 41(b).
                                - 28 -

capricious, or without reasonable foundation.     We agree with

respondent.     We remind petitioner that it, not respondent, paid

some temporary laborers in cash, failed to require them to

produce proper identification for income tax withholding

purposes, and failed to have them prepare the necessary documents

for payroll tax deduction purposes.      Given petitioner’s failure

to secure Forms W-4, Employee’s Withholding Allowance

Certificate, from the temporary laborers paid in cash, respondent

argues that he could have proposed an income tax withholding rate

of 28 percent.10    Instead, for each taxable quarter in issue,

respondent used the more favorable “actual” rate petitioner

itself used for income tax withholding purposes on its Forms 941.

See appendix.

     We shall sustain the employment taxes respondent determined.

     10
       Although respondent did not cite the source of his
authority to propose an income tax withholding rate of 28
percent, we assume he relies on the Internal Revenue Manual
(IRM). 2 Audit, IRM (CCH) pts. 4.23.8.4, at 10,779-773-30 (Feb.
1, 2003) (Relief for Employer When Employees Have Paid Income Tax
on Wages), and 4.23.8.8, at 10,779-773-39 (Feb. 1, 2003)
(Computing Income Tax Withholding), direct respondent to compute
withholding either under existing law and regulations or using
sec. 31.3402(g)-1(a)(7)(iii), Employment Tax Regs., which
provides the appropriate flat withholding rates. See, e.g.,
Varjabedian v. United States, 339 F. Supp. 2d 140, 163-165 (D.
Mass. 2004). Petitioner’s failure to provide the necessary
information made a calculation under the former impossible.
Using the latter, the proper rate is 28 percent.
                                - 29 -

V.   Penalties for Fraud

      A.   Introduction

      We next address whether, for each taxable quarter in issue,

petitioner is liable for the fraud penalty respondent determined.

Section 6663(a) provides:     “If any part of any underpayment of

tax required to be shown on a return is due to fraud, there shall

be added to the tax an amount equal to 75 percent of the portion

of the underpayment which is attributable to fraud.”

      “Fraud is defined as an intentional wrongdoing designed to

evade tax believed to be owing.”     Neely v. Commissioner, 116 T.C.

79, 86 (2001).    The Commissioner bears the burden of proving

fraud and must establish it by clear and convincing evidence.

See sec. 7454(a); Rule 142(b).     To satisfy the burden of proof,

the Commissioner must show that (1) an underpayment in tax

exists, and (2) the taxpayer intended to conceal, mislead, or

otherwise prevent the collection of taxes.     Neely v.

Commissioner, supra at 86.     If the Commissioner establishes that

any portion of an underpayment is attributable to fraud, the

entire underpayment is treated as attributable to fraud, except

with respect to any portion of the underpayment that the taxpayer

establishes (by a preponderance of the evidence) is not

attributable to fraud.     See sec. 6663(b).

      In section IV. of this report we sustained the employment

taxes respondent determined, and we here find that the entire
                               - 30 -

underpayment is attributable to fraud.    Given Mr. Nguyen’s

conviction for conspiracy to defraud the United States, we agree

with respondent that petitioner is precluded from denying fraud.

Notwithstanding issue preclusion, we also find fraud by clear and

convincing evidence on the facts before us.

     B.   Fraudulent Intent

           1.   Issue Preclusion

     Mr. Nguyen pleaded guilty to one count of defrauding the

United States in connection with his willful failure as an

officer of petitioner to collect, truthfully account for, and pay

the employment taxes here in issue.     Thus, fraudulent intent to

evade the employment taxes was an element of the crimes of which

Mr. Nguyen was charged, pleaded guilty, and was convicted.

     Mr. Nguyen’s fraudulent intent with respect to petitioner’s

employment tax obligations is imputed to petitioner.    See Benes

v. Commissioner, 42 T.C. 358, 382 (1964) (“Where fraud is alleged

against a corporate taxpayer, the requisite proof of fraudulent

intent is to be found in the acts of its officers, inasmuch as

the corporation, being an artificial person created by law, can

have no separate intent of its own apart from those who direct

its affairs.”), affd. 355 F.2d 929 (6th Cir. 1966), overruled on

another issue by Truesdell v. Commissioner, 89 T.C. 1280 (1987).

A corporation can act only through its officers and cannot escape
                                 - 31 -

responsibility for actions its officers perform in their official

capacity.    Federbush v. Commissioner, 34 T.C. at 749.    “Corporate

fraud necessarily depends upon the fraudulent intent of the

corporate officer.”     Id.   Moreover, Mr. Nguyen did not enrich

himself directly; rather, his dishonesty served petitioner’s

competitive purposes.    Petitioner was able to offer temporary

laborers paid in cash, at the expense of the United States, a

wage undiminished by employment taxes, and to avoid paying its

own share of FICA taxes.      Because Mr. Nguyen was acting as an

agent of petitioner, his principal, we may infer petitioner’s

fraudulent intent.    See Benes v. Commissioner, supra at 382.

     Petitioner’s president and sole shareholder was convicted of

conspiracy to defraud the United States by willfully failing to

comply with petitioner’s statutory obligation to collect, account

for, and pay employment taxes.      That conviction precludes

petitioner from here denying its fraudulent intent.

            2.   Fraud on the Facts

     Even if petitioner is not precluded from denying its

fraudulent intent, the facts independently support a finding of

fraud.   Petitioner, acting through its agents, offered temporary

laborers cash wages not reduced by employment taxes.      Petitioner

understood its employment tax obligations, as demonstrated by its

proper payment of employment taxes for temporary laborers paid by

check.   To conceal its disparate employment tax treatment of
                                - 32 -

temporary laborers according to their method of payment,

petitioner ignored temporary laborers paid in cash for all

business purposes.    Petitioner conceded that it recorded on its

books neither the proceeds of client checks cashed at check-

cashing agencies as business income, nor the payments to

temporary laborers paid in cash as payroll expenses.    In that

way, petitioner effectively hid 80 to 90 percent of its

workforce.    Those actions strongly suggest that petitioner

intended to evade its legal obligation to treat temporary

laborers paid in cash as its employees for employment tax

purposes.11

     To remain competitive, petitioner offered temporary laborers

the opportunity to receive cash wages.    Petitioner needed to

supplement their net earnings either at its own expense or at the

expense of the U.S. Treasury.    Petitioner chose the latter

course.   As a bonus, petitioner evaded its own FICA obligations.

Petitioner argues that it simply honored the wishes of its

temporary laborers and lacked any fraudulent intent:    “Each

worker determined whether he or she would be paid in cash.

     11
       We assume that, as a result of understating its business
income, petitioner evaded 80 to 90 percent of its corporate
income tax. We believe that any corporate income tax fraud was
part and parcel of an overall intent to defraud the Government.
Petitioner had to avoid both the income taxes and the employment
taxes due respondent to evade its responsibility to pay either.
The reporting of one would almost certainly have led respondent
to challenge the omission of the other.
                                - 33 -

Petitioner did not determine who was to be paid in cash under any

scenario.”     That may be true, but it is irrelevant; petitioner

knowingly ignored its obligation to withhold and to pay

employment taxes with respect to temporary laborers paid in cash.

We find that petitioner intended to evade its employment tax

obligations.

       C.   Conclusion

       Because petitioner is liable for the underpayment of

employment taxes and intended to prevent the collection of those

taxes, petitioner is liable for the section 6663(a) fraud

penalties in their entirety.

VI.    Period of Limitations

       Because petitioner filed false or fraudulent returns, i.e.,

the false and fraudulent Forms 941, the usual 3-year period of

limitations of section 6501(a) does not apply.     See sec.

6501(c)(1); Neely v. Commissioner, 116 T.C. at 85.      Respondent’s

determinations were thus timely.

VII.    Conclusion

       We sustain respondent’s determinations of deficiencies in

and penalties with respect to petitioner’s employment taxes for

all taxable quarters in issue.

                                           Decision will be entered

                                      for respondent.
                                                               - 34 -

                                                             APPENDIX
                                         Federal                Federal
  Taxable         Unreported           withholding          withholding tax               FICA tax             Sec. 6663(a)
  quarter            wages              tax rate1              liability                 liability2           fraud penalties
 1995     Q1     $550,300.17               0.0565               $31,091.96              $84,195.93                $86,465.91
          Q2       578,706.40              0.0494                28,588.10               88,542.08                 87,847.63
          Q3       855,895.25              0.0510                43,650.66              130,951.97                130,951.97
          Q4       734,370.85              0.0599                43,988.81              112,358.74                117,260.66
 1996     Q1       669,742.84              0.0616                41,256.16              102,470.65                107,795.10
          Q2       784,396.38              0.0643                50,436.69              120,012.65                127,837.00
          Q3    1,031,409.80               0.0643                66,319.65              157,805.70                168,094.01
          Q4       914,585.63              0.0746                68,228.09              139,931.60                156,119.77
 1997     Q1       925,198.32              0.0818                75,681.22              141,555.34                162,927.42
          Q2       982,099.62              0.0722                70,907.59              150,261.24                165,876.62
          Q3    1,083,568.56               0.0732                79,317.21              165,785.99                183,827.40
          Q4    1,003,822.37               0.0756                75,888.97              153,584.82                172,105.34
 1998     Q1    1,202,354.30               0.0857               103,041.76              183,960.21                215,251.48
          Q2    1,098,759.00               0.0791                86,911.84              168,110.13                191,266.48
          Q3    1,202,302.80               0.0758                91,134.55              183,952.33                206,315.16
          Q4    1,227,506.95               0.0801                98,323.30              187,808.56                214,598.90
        1
          To calculate for each taxable quarter the Federal withholding tax liability on the unreported wages petitioner paid to
temporary laborers paid in cash, respondent used the “actual” withholding rate petitioner calculated in its corresponding Forms 941,
which reported the wages and withholdings of temporary laborers paid by check.
        2
          Secs. 3101 and 3111 each required petitioner to pay 7.65 percent of total wages. Therefore the FICA taxes in the notice
represented 15.30 percent of the unreported wages.