The Tax Court in Brief – April 11th- April 15th, 2022
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Tax Litigation: The Week of April 11th, 2022, through April 15th, 2022
The REDI Foundation, Inc. v. Comm’r, T.C. Memo. 2022-34 |April 11, 2022 |Nega, J. | Dkt. No. 23715-18
Short Summary: Richard Abraham formed The REDI Foundation, Inc. (“REDI”) to serve as a vehicle to offer Abraham’s seminars on real estate development. Abraham served as a member of REDI’s board and as a corporate officer during the tax periods in issue. REDI’s sole source of income was from the tuition charged for enrollment in online courses presented by Abraham, and those courses represented REDI’s only activities. REDI reported that it paid Abraham—as an independent contractor—$91,918 in 2014 and did not file a Form 941, Employer’s Quarterly federal Tax Return, for any of the periods in issue. The IRS selected REDI’s Form 990 return for employment tax examination and determined that Abraham was to be legally classified as an employee for purposes of federal employment taxes. The IRS also made additions to tax under section 6651(a)(1) and (2) and penalties under section 6656. REDI challenged those determinations.
Primary Holdings:
- Abraham was properly classified as an employee for federal employment tax purposes. He provided—and received remuneration for—more than “minor services” for REDI and those services constituted REDI’s entire source of income. REDI presented insufficient evidence to show that Abraham worked for or was engaged by REDI in a capacity other than as an officer. REDI failed to carry its burden of establishing that Abraham was engaged by REDI in a capacity other than as an officer or in dual roles as an employee and an independent contractor. All additions to tax liability were upheld.
Key Points of Law:
- Burdens of Proof. Generally, the IRS’s determinations are presumed correct, and the taxpayer bears the burden of proving the IRS’s determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). This principle applies to the IRS’s determinations that a taxpayer’s workers are employees. See Ewens & Miller, Inc. v. Comm’r, 117 T.C. 263, 268 (2001). Also, a corporation bears the burden of proving that it is not liable for additions to tax under section 6651(a)(1) and (2). See NT, Inc. v. Comm’r, 126 T.C. 191, 194–95 (2006).
- FICA. Section 3111 imposes taxes on employers under the Federal Insurance Contributions Act, commonly known as FICA (pertaining to Social Security), based on wages paid to employees. “Wages” encompasses “all remuneration for employment.” 26 U.S.C. §§ 3121(a), 3401(a). Employers must report employment taxes on Forms 941. Treas. Reg. § 31.6011(a)-1(a)(1).
- Corporate Officers. “Employee” is defined for purposes of employment taxes to include “any officer of a corporation.” at § 3121(d)(1). “However, 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, directly or indirectly, any remuneration is considered not to be an employee of the corporation.” Treas. Reg. §§ 31.3121(d)-1(b), 31.3401(c)-1(f); see United States v. Bernstein, 179 F.2d 105, 109 (4th Cir. 1949).
- Dual Roles. A corporate officer can operate in dual capacities as both a statutory employee and an independent contractor—if the roles are not interrelated and intermingled such that there is a clear distinction between the dual roles. See Idaho Ambucare Ctr., Inc. v. United States, 57 F.3d 752, 757 (9th Cir. 1995); Mgmt., Inc. v. United States, 45 Fed. Cl. 543, 552 (2000). However, when services performed by a corporate officer are responsible for the entirety of a corporate taxpayer’s income and that corporate officer receives remuneration for those services, such an officer is properly considered a statutory employee. See Joseph M. Grey Pub. Acct., P.C. v. Comm’r, 119 T.C. 121, 130 (2002), aff’d, 93 F. App’x 473 (3d Cir. 2004).
- Common Law Employee Versus Statutory Employee. The right to control is a common law classification factor, and a taxpayer cannot rely on that factor as determinative of statutory employee status. See, e.g., Yeagle Drywall Co. v. Comm’r, 54 F. App’x 100, 103 (3d Cir. 2002). The safe harbor relief afforded by section 530 of the Internal Revenue Code is limited to common law worker classification determinations, not to statutory employees.
- Additions to Tax, Section 6651(a)(1). Section 6651(a)(1) provides for an addition to tax for failure to timely file a return equal to 5% of the tax required to be shown on the return for each month or fraction thereof for which there is a failure to file, not to exceed 25%. A taxpayer is not liable for an addition to tax under section 6651(a)(1) if the failure to timely file was due to reasonable cause and not due to willful neglect. United States v. Boyle, 469 U.S. 241, 245–46 (1985). To show reasonable cause, the taxpayer must show that it could not file the return on time even though it exercised ordinary business care and prudence. See Crocker v. Comm’r, 92 T.C. 899, 913 (1989); Treas. Reg. § 301.6651-1(c)(1). Reliance on a tax professional can constitute reasonable cause if that professional advises the taxpayer on a substantive tax issue, such as whether a liability exists or a return must be filed. Boyle, 469 U.S. at 250–51. Willful neglect means a “conscious, intentional failure or reckless indifference” by the taxpayer. Id. at 245.
- Additions to Tax, Section 6651(a)(2). Section 6651(a)(2) imposes an addition to tax for failure timely to pay the amount shown as tax on a return. Where a taxpayer fails to file a required return, the IRS may introduced evidence of a substitute for return showing the additional tax under section 6651(a)(2). See 26 U.S.C. § 6651(g)(2).
Insights: The statutory employee is a commonly overlooked issue for corporate employers. For federal employment tax purposes, the term “employee” includes any officer of a corporation. Thus, any remuneration paid to such officer may be subject to taxation under FICA and reporting through use of Form 941, unless the taxpayer can show there is no interrelation or intermingling of the dual roles performed by the individual as both an officer and an independent contractor. But, as seen in the case of The REDI Foundation, Inc., where a corporation’s business activities are solely or substantially performed by an officer who is paid for performing more than “minor services” to the corporation, the officer will likely be treated as an employee for federal employment tax purposes.
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