These consolidated cases
TFT Galveston Portfolio, Ltd., docket No. 1082-12 Additions to tax Period Sec. Sec. Penalty ended Type of tax Amount 6651(a)(1) 6651(a)(2) sec. 6656 12/31/2004 FICA, ITW $36,362 $8,182 $9,091 $690 12/31/2004 FUTA 5,414 1,218 1,354 541
TFT Galveston Portfolio, Ltd., Successor in Interest to TFT #1, Ltd., docket No. 30001-11
Additions to tax Period Sec. Sec. Penalty ended Type of tax Amount 6651(a)(1) 6651(a)(2) sec. 6656 3/31/2000 FICA, ITW $8,817 $1,984 $2,204 $156 6/30/2000 FICA, ITW 7,300 1,642 1,825 129 9/30/2000 FICA, ITW 7,988 1,797 1,997 141 12/31/2000 FICA, ITW 7,926 1,783 1,981 140 12/31/2000 FUTA 2,759 621 690 276 3/31/2001 FICA, ITW 7,730 1,739 1,932 137 6/30/2001 FICA, ITW 8,287 1,865 2,072 146 9/30/2001 FICA, ITW 8,465 1,905 2,116 151 12/31/2001 FICA, ITW 7,977 1,795 1,994 143 12/31/2001 FUTA 2,349 528 587 235 3/31/2002 FICA, ITW 7,524 1,693 1,881 136 6/30/2002 FICA, ITW 7,340 1,652 1,835 133 9/30/2002 FICA, ITW 7,437 1,673 1,859 135 12/31/2002 FICA, ITW 7,615 1,713 1,904 138 12/31/2002 FUTA 2,568 578 642 257 3/31/2003 FICA, ITW 6,882 1,548 1,721 131 6/30/2003 FICA, ITW 7,121 1,602 1,780 135 9/30/2003 FICA, ITW 7,554 1,700 1,888 143 12/31/2003 FICA, ITW 7,511 1,690 1,878 143 12/31/2003 FUTA 1,865 420 466 187 3/31/2004 FICA, ITW 7,598 1,710 1,899 144 6/30/2004 FICA, ITW 7,838 1,763 1,959 149 9/30/2004 FICA, ITW 8,837 1,988 2,209 168 12/31/2004 FICA, ITW 2,837 638 709 54 12/31/2004 FUTA 1,810 407 452 181
TFT Galveston Portfolio, Ltd., as Successor in Interest for TFT #2, Ltd., docket No. 29995-11
Additions to tax Period Sec. Sec. Penalty ended Type of tax Amount 6651(a)(1) 6651(a)(2) sec. 6656 3/31/2000 FICA, ITW $17,667 $3,975 $4,417 $312 6/30/2000 FICA, ITW 19,286 4,339 4,822 341 9/30/2000 FICA, ITW 18,009 4,052 4,502 318 12/31/2000 FICA, ITW 17,014 3,828 4,254 301 12/31/2000 FUTA 4,298 967 1,075 430 3/31/2001 FICA, ITW 17,372 3,909 4,343 307 6/30/2001 FICA, ITW 17,478 3,933 4,370 309 9/30/2001 FICA, ITW 17,459 3,928 4,365 312 12/31/2001 FICA, ITW 19,564 4,402 4,891 350
12/31/2001 FUTA 3,726 838 931 373 3/31/2002 FICA, ITW 18,301 4,118 4,575 331 6/30/2002 FICA, ITW 16,858 3,793 4,215 305 9/30/2002 FICA, ITW 20,032 4,507 5,008 362 12/31/2002 FICA, ITW 15,588 3,507 3,897 282 12/31/2002 FUTA 4,492 1,011 1,123 449 3/31/2003 FICA, ITW 9,346 2,103 2,337 177 12/31/2003 FUTA 1,438 324 359 144
TFT Galveston Portfolio, Ltd., as Successor in Interest to TFT # 3, Ltd., docket No. 1533-12
Additions to tax Period Sec. Sec. Penalty ended Type of tax Amount 6651(a)(1) 6651(a)(2) sec. 6656 3/31/2000 FICA, ITW $20,126 $4,528 $5,032 $356 6/30/2000 FICA, ITW 22,320 5,022 5,580 394 9/30/2000 FICA, ITW 27,588 6,207 6,897 487 12/31/2000 FICA, ITW 26,026 5,856 6,507 460 12/31/2000 FUTA 8,045 1,810 2,011 805 3/31/2001 FICA, ITW 21,074 4,742 5,268 372 6/30/2001 FICA, ITW 22,729 5,114 5,682 402 9/30/2001 FICA, ITW 21,677 4,877 5,419 387 12/31/2001 FICA, ITW 20,618 4,639 5,155 369 12/31/2001 FUTA 6,706 1,509 1,676 671 3/31/2002 FICA, ITW 17,384 3,911 4,346 314 6/30/2002 FICA, ITW 18,792 4,228 4,698 340 9/30/2002 FICA, ITW 19,124 4,303 4,781 346 12/31/2002 FICA, ITW 18,367 4,133 4,592 332 12/31/2002 FUTA 5,484 1,234 1,371 548 3/31/2003 FICA, ITW 14,287 3,215 3,572 271 6/30/2003 FICA, ITW 14,715 3,311 3,677 279 9/30/2003 FICA, ITW 14,957 3,365 3,739 284 12/31/2003 FICA, ITW 14,603 3,286 3,651 277 12/31/2003 FUTA 4,968 1,118 1,242 497 3/31/2004 FICA, ITW 11,271 2,536 2,818 214 6/30/2004 FICA, ITW 11,713 2,635 2,928 222 9/30/2004 FICA, ITW 20,189 4,543 5,047 383 12/31/2004 FICA, ITW 6,874 1,547 1,718 130 12/31/2004 FUTA 5,230 1,177 1,308 523
TFT Galveston Portfolio, Ltd., Successor in Interest to TFT # 4, Ltd., docket No. 682-12
Additions to tax Period Sec. Sec. Penalty ended Type of tax Amount 6651(a)(1) 6651(a)(2) sec. 6656 3/31/2000 FICA, ITW $14,136 $3,181 $3,534 $250 6/30/2000 FICA, ITW 19,532 4,395 4,883 345
9/30/2000 FICA, ITW 14,889 3,350 3,722 263 12/31/2000 FICA, ITW 14,755 3,320 3,689 261 12/31/2000 FUTA 4,400 990 1,100 440 3/31/2001 FICA, ITW 11,724 2,368 2,931 207 6/30/2001 FICA, ITW 13,868 3,120 3,467 245 9/30/2001 FICA, ITW 11,202 2,520 2,800 200 12/31/2001 FICA, ITW 10,913 2,455 2,728 195 12/31/2001 FUTA 3,752 844 938 375 3/31/2002 FICA, ITW 10,185 2,292 2,546 184 6/30/2002 FICA, ITW 10,675 2,402 2,669 193 9/30/2002 FICA, ITW 8,655 1,947 2,164 157 12/31/2002 FICA, ITW 9,981 2,246 2,495 181 12/31/2002 FUTA 3,395 764 849 340 3/31/2003 FICA, ITW 5,437 1,223 1,359 103 12/31/2003 FUTA 837 188 209 84
TFT Galveston Portfolio, Ltd., as Successor in Interest to TFT Chateau Lafitte-WJT., Ltd., docket No. 1175-12
Additions to tax Period Sec. Sec. Penalty ended Type of tax Amount 6651(a)(1) 6651(a)(2) sec. 6656 3/31/2003 FICA, ITW $4,662 $1,049 $1,165 $88 6/30/2003 FICA, ITW 15,803 3,556 3,951 300 9/30/2003 FICA, ITW 16,266 3,660 4,067 309 12/31/2003 FICA, ITW 14,196 3,194 3,549 269 12/31/2003 FUTA 3,727 839 932 373 3/31/2004 FICA, ITW 12,906 2,904 3,227 245 6/30/2004 FICA, ITW 14,503 3,263 3,626 275 9/30/2004 FICA, ITW 13,267 2,985 3,317 252 12/31/2004 FICA, ITW 4,402 991 1,101 84 12/31/2004 FUTA 2,754 620 689 275
TFT Galveston Portfolio, Ltd., as Successor in Interest to TFT Somerset-WJT., Ltd., docket No. 1180-12
Additions to tax Period Sec. Sec. Penalty ended Type of tax Amount 6651(a)(1) 6651(a)(2) sec. 6656 3/31/2003 FICA, ITW $2,475 $557 $619 $47 6/30/2003 FICA, ITW 8,721 1,962 2,180 166 9/30/2003 FICA, ITW 8,997 2,024 2,249 171 12/31/2003 FICA, ITW 8,007 1,802 2,002 152 12/31/2003 FUTA 3,034 683 758 303 3/31/2004 FICA, ITW 8,124 1,828 2,031 154 6/30/2004 FICA, ITW 8,149 1,833 2,037 155 9/30/2004 FICA, ITW 9,047 2,036 2,262 172 12/31/2004 FICA, ITW 3,303 743 826 63 12/31/2004 FUTA 3,077 692 769 308
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The parties' stipulations of facts are incorporated herein by this reference.
Petitioner's Organizational Structure
Petitioner, TFT Galveston Portfolio, and its alleged predecessors, TFT #1, Ltd. (TFT #1); TFT #2, Ltd. (TFT #2); TFT #3, Ltd. (TFT #3); TFT #4, Ltd. (TFT #4); TFT Chateau Lafitte-WJT (TFT Chateau Lafitte-WJT); and TFT Somerset-WJT (TFT Somerset-WJT), are all organized as Texas limited partnerships. At all relevant times TFT Galveston Portfolio's principal office and mailing address was in Tomball, Texas.
TFT #2 comprised two general partners, TFT Holdings and Hunters R. Hill, Inc., and two limited partners, Mr. Teachworth and Henry Hamman. From January 1, 2000, through February 26, 2003, its principal business activity was the operation of the Chateau Lafitte apartment complex. TFT #2's final Form 1065 reported that it was for the period January 1 through February 28, 2003. No additional Forms 1065 were filed for TFT #2 after that return. On November 1, 2006, the State of Texas canceled the certificate of limited partnership for TFT #2.
On or about February 26, 2003, Mr. Hamman sold his partnership interest in TFT #2 to Mr. Teachworth, who created TFT Chateau Lafitte-WJT to operate the Chateau Lafitte apartment complex. TFT Chateau Lafitte-WJT comprised one general partner, TFT Holdings, and one limited partner, Mr. Teachworth. From February 26, 2003, through October 26, 2004, its principal business activity was the operation of the Chateau Lafitte apartment complex. TFT Chateau Lafitte-WJT's final Form 1065 reported that it was for the period January 1 through October 31, 2004. No additional Forms 1065 were filed for TFT Chateau Lafitte-WJT after that return. On August 16, 2006, the State of Texas canceled the certificate of limited partnership for TFT Chateau Lafitte-WJT.
TFT #3 comprised one general partner, TFT Holdings, and one limited partner, Mr. Teachworth. From January 1, 2000, through October 26, 2004, its principal business activity was the operation of The Seasons Resort apartment complex. TFT #3's final Form 1065 reported that it was for the period January 1 through October 31, 2004. No additional Forms 1065 were filed for TFT #3 after that return. On November
TFT #4 comprised two general partners, TFT Holdings and Hunters R. Hill, Inc., and two limited partners, Mr. Teachworth and Mr. Hamman. From January 1, 2000, through February 26, 2003, its principal business activity was the operation of the Somerset Retirement Village apartment complex. TFT #4's final Form 1065 reported that it was for the period January 1 through February 28, 2003. No additional Forms 1065 were filed for TFT #4 after that return. On October 27, 2004, the State of Texas canceled the certificate of limited partnership for TFT #4.
On or about February 26, 2003, Mr. Hamman sold his partnership interest in TFT #4 to Mr. Teachworth, who created TFT Somerset-WJT to operate the Somerset Retirement Village apartment complex. TFT Somerset-WJT comprised one general partner, TFT Holdings, and one limited partner, Mr. Teachworth. From February 26, 2003, through October 26, 2004, its principal business activity was the operation of the Somerset Retirement Village apartment complex. TFT Somerset-WJT's final Form 1065 reported that it was for the period January 1 through October 31, 2004. No additional Forms 1065 were filed for TFT Chateau Lafitte-WJT after that return. On August 16, 2006, the State of Texas canceled the certificate of limited partnership for TFT Somerset-WJT.
TFT Galveston Portfolio comprised one general partner, TFT Portfolio Investments, L.L.C., and one limited partner, Mr. Teachworth. On October 26, 2004, the four apartment complexes were conveyed from TFT #1, TFT Chateau Lafitte-WJT, TFT #3, and TFT Somerset-WJT, respectively, to TFT Galveston Portfolio. TFT Galveston Portfolio did not expressly assume the liabilities of the other partnerships. From October 26 through December 31, 2004, its principal business activity was the operation of The Ebbtide, Chateau Lafitte, The Seasons Resort, and Somerset Retirement Village apartment complexes (collectively, apartment properties).
During the period at issue, Mr. Teachworth was the only owner of the partnerships who was actively involved in operating the business. He signed numerous documents on behalf of TFT Holdings, the listed general partner of TFT #1, TFT #2, TFT #3, TFT #4, TFT Chateau Lafitte-WJT, and TFT
Petitioners' Financial Information
During the period at issue, petitioners employed Galen Mansee, a certified public accountant, to perform accounting services, including gathering of data from apartment managers, payment of all bills approved by Mr. Teachworth, bank reconciliations, and preparation of tax returns for the partnerships and Mr. and Mrs. Teachworth.
Petitioners maintained and used a commercial checking account funded entirely by Mr. Teachworth. All expenses for the apartment properties and all payments to petitioners' workers were approved by Mr. Teachworth and were made from that account. Mr. Teachworth provided all the information and coding for the general ledger entries prepared by Mr. Mansee. Following the transfer of the Chateau Lafitte and Somerset Retirement Village complexes to TFT Chateau Lafitte-WJT and TFT Somerset-WJT, respectively, Mr. Mansee continued maintaining the same general ledgers he had previously used for TFT #2 and TFT #4.
The workers for petitioners during the period at issue fall within four groups: (1) apartment managers and leasing agents, (2) security personnel, (3) a maintenance supervisor, and (4) general maintenance workers. The general maintenance workers performed a variety of tasks including appliance and air conditioning maintenance, cleanup, landscape maintenance, drywall repairs, painting, roof maintenance, carpentry, and general miscellaneous maintenance.
The Apartment Managers
During the period at issue Mr. Teachworth hired all the apartment managers. They were not required to submit bids or fill out any applications before securing their positions. Nor did the managers sign written agreements for the work they performed.
Mr. Teachworth established the management office's hours of operation for each of the apartment properties, and he set
Mr. Teachworth established all the managers' duties, leaving them with little to no discretion in how services were to be performed. They had to consult with Mr. Teachworth when determining how to handle vacancies at the apartment properties and had to seek approval to return security deposits to departing tenants. He established the community rules and regulations, and the rent for the properties. The managers could not change policies without his approval.
Mr. Teachworth provided the apartment managers with the office supplies and equipment required to perform their duties. He reimbursed them for expenses they incurred while performing their duties. He established a petty cash fund, which he monitored, to purchase office supplies and postage and for general office use. Finally, he would directly pay any replacement manager for the time worked in place of the normal manager.
Mr. Teachworth supervised all aspects of the apartment managers' work. He had to approve the managers' time off requests, and he could fire them at any time. During the period at issue none of the managers worked at any properties that were not owned by Mr. Teachworth.
The Maintenance Supervisor
During the period at issue petitioners employed Jerrell Adams as the maintenance supervisor for the apartment properties. In that capacity he performed general repairs and any required maintenance project. He also supervised all the other maintenance workers. He was not required to submit a bid or fill out an application before securing his position. Mr. Adams did not enter into a written agreement for the work he performed. He was paid a monthly salary.
Mr. Teachworth was Mr. Adams' supervisor with regard to the services he performed for petitioners. Mr. Teachworth had to approve any maintenance work and expenditures that were not routine. During the period at issue Mr. Adams provided full-time services to petitioners. He averaged around 50
Mr. Adams was never personally at risk of losing money by working for petitioners because Mr. Teachworth maintained accounts with Home Depot, Maintenance Warehouse, and Chalmers Hardware that were used to purchase materials and supplies required to perform his job. Additionally, he was reimbursed for any expenses he incurred performing his duties as maintenance supervisor. However, Mr. Adams supplied some of his own hand tools and equipment including saws, a sewer machine, spray rigs, a welder, and scaffolding. Mr. Teachworth directly paid any replacement maintenance supervisor for the time worked in place of Mr. Adams.
In addition to the standard duties Mr. Adams performed for petitioners, he established a business called Circle A through which he performed occasional maintenance services for Exact Realty, a property management company, and for petitioners during the period at issue. However, the services provided to petitioners through Circle A were separate and distinct from the typical services he performed for petitioners.
The Maintenance Workers
During the period at issue petitioners employed numerous maintenance workers for general maintenance of the apartment properties. Those workers were not required to submit bids or fill out applications before securing their positions. Nor did they have written agreements for the work they performed. The workers were hired by either the maintenance supervisor or the apartment managers, but Mr. Teachworth had the final approval over all hiring decisions. Their hours were set by Mr. Adams, and they could be fired at any time. For their work, the maintenance workers were paid an hourly rate, with Mr. Teachworth having final approval on that rate.
The maintenance workers were never personally at risk of losing money by working for petitioners, because the materials used in performing their services for petitioners were provided by Mr. Teachworth. All the maintenance workers were supervised by Mr. Adams. They mostly worked at the same apartment complex each day unless one of the complexes had a project requiring more workers.
The Security Workers
During the tax years 2000 and 2001 The Seasons Resort apartment complex had security workers. The Somerset Retirement Village had security workers for all of 2000 and the first two months of 2001. Mr. Teachworth hired the security workers, and they reported to him and the apartment managers where they worked. Their hours were set by Mr. Adams and Mr. Teachworth, but the amount they were paid was determined solely by Mr. Teachworth. None of the security workers were off-duty police officers during the period at issue, and their presence was included in the advertisements and was a selling point for the apartment complexes.
Federal Tax Filings
TFT #1, TFT #2, TFT #3, TFT #4, TFT Chateau Lafitte-WJT, and TFT Somerset-WJT all filed Forms 1065 for the period at issue. TFT Galveston Portfolio did not. However, none of the six partnerships filed any Forms 941, Employer's Quarterly Federal Tax Return, or Forms 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, for the period at issue. Nor did they file or furnish any Forms 1099-MISC, Miscellaneous Income, to any of the workers in question. Petitioners did not deposit employment taxes for the relevant periods. Respondent previously audited the Forms 1065 of petitioners for the period at issue, at which time respondent learned of petitioners' treating the workers in question as independent contractors and deducting their compensation accordingly on Forms 1065. Because the IRS had not received any Forms 940 and 941 from petitioners, IRS employees prepared substitutes for returns (SFRs) in accordance with the authority provided by section 6020(b).
On October 11, 2011, respondent issued a notice of determination to TFT Galveston Portfolio in which he determined that (1) workers listed in Table 1 attached to the notice were to be treated as petitioner's employees, (2) petitioner was not entitled to relief under the Revenue Act of 1978 (RA '78), Pub. L. No. 95-600, sec. 503(a), 92 Stat. at 2885, as amended, and (3) petitioner was liable for income tax withholding, FICA and FUTA taxes, the section 6651(a)(1) and (2)
Between September 29 and October 13, 2011, respondent issued an additional six separate notices of determination to TFT Galveston Portfolio as successor in interest to TFT #1, TFT #2, TFT #3, TFT #4, TFT Chateau Lafitte-WJT, and TFT Somerset-WJT, in which he determined that (1) workers listed in Table 1 attached to each notice were to be treated as petitioner's employees, (2) petitioner was not entitled to relief under RA '78 sec. 530(a), and (3) petitioner was liable for income tax withholding, FICA and FUTA taxes, the section 6651(a)(1) and (2) additions to tax, and the section 6656 penalty for failure to make deposit of taxes for the period at issue.
Petitioner filed timely petitions challenging the determinations.
Under section 7436(a) this Court has jurisdiction to determine (1) whether an individual providing services to a "person" is that person's employee, (2) whether the person, if in fact an employer, is entitled to relief under RA '78 sec. 530, and (3) the correct amount of employment taxes which relate to the Commissioner's determination concerning worker classification. Charlotte's Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 102-103 (2003), aff'd, 425 F.3d 1203 (9th Cir. 2005). Section 7701(a)(1) provides that "[t]he term `person' shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation." Respondent issued notices of determination to TFT Galveston Portfolio determining that the individuals in question were TFT Galveston Portfolio's employees and that TFT Galveston Portfolio owes employment taxes, additions to tax, and penalties with respect thereto; and TFT Galveston Portfolio filed a timely petition in response. Therefore, we have jurisdiction to hear the challenge to respondent's determinations.
II. Successor in Interest
The structure of petitioner and the other six partnerships is, for the most part, uncontested, as demonstrated by the extensive stipulations of those facts. The issue before the Court is whether successor liability should be imposed on TFT Galveston Portfolio as the successor in interest to TFT #1, TFT #2, TFT #3, TFT #4, TFT Chateau Lafitte-WJT, and TFT Somerset-WJT. TFT Galveston Portfolio's liability for the employment tax, additions to tax, and penalties determined with respect to TFT Galveston Portfolio as successor in interest to the other six partnerships will turn on this decision.
A successor in interest is "[o]ne who follows another in ownership or control of property. A successor in interest retains the same rights as the original owner, with no change in substance." Black's Law Dictionary 1570 (9th ed. 2009). Successor liability relies on two policy goals: "compensating plaintiffs as if the damage-causing business had not terminated; and preventing the rule of successor liability from otherwise reducing the free transferability of firms or their assets." Mark J. Roe, "Mergers, Acquisitions, and Tort: A Comment on the Problem of Successor Corporation Liability", 70 Va. L. Rev. 1559, 1561-1562 (1984). The Government may rely on the successor liability doctrine to hold a successor corporation liable for the tax debts of its predecessor. See Atlas Tool Co. v. Commissioner, 614 F.2d 860, 871 (3d Cir. 1980), aff'g 70 T.C. 86 (1978). Further, if permitted by State law, successor liability may be asserted when a partnership transfers its assets to another entity. See Graham v. James, 144 F.3d 229, 240 (2d Cir. 1998) ("`The traditional rule of corporate successor liability and the exceptions to the rule are generally applied regardless of whether the predecessor or successor organization was a corporation or some other form of business organization.'" (quoting 63 Am. Jur. 2d, Products Liability, sec. 117 (1984)).
A. Application of Federal Common Law
Respondent argues that because the uniform imposition and collection of employment taxes is a significant Federal interest, we should disregard State law and adopt the broader parameters of Federal common law in determining successor liability in employment tax cases.
The application of Federal common law in a novel context requires "`a significant conflict between some federal policy or interest and the use of state law'". Atherton v. FDIC, 519 U.S. 213, 218 (1997) (quoting Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68 (1966)). The Supreme Court cautioned against the creation of Federal common law, noting that "`cases in which judicial creation of a special federal rule would be justified * * * are * * * "few and restricted".'" Id. at 218 (quoting Wheeldin v. Wheeler, 373 U.S. 647, 651 (1963)). The Court further directed that "`[w]hether latent federal power should be exercised to displace state law is primarily a decision for Congress,'" not the Federal courts. Id. (quoting Wallis, 384 U.S. at 68).
We have not found a significant conflict between a Federal policy or interest and the use of State law that would justify the adoption of Federal common law in this context. Respondent contends that "[t]he uniform imposition and collection of employment taxes is a significant federal interest justifying the application of a uniform federal approach." However, the Supreme Court has specifically rejected uniformity as a sufficient reason for adopting Federal common law. See, e.g., Atherton, 519 U.S. at 219-220; O'Melveny & Myers v. FDIC, 512 U.S. 79, 87 (1994); United States v. Kimbell Foods, Inc., 440 U.S. 715, 728 (1979). Further, courts have rejected the application of Federal common law in tax cases in similar contexts. See, e.g., Commissioner v. Stern, 357 U.S. 39 (1958); Whelco Indus. Ltd. v. United States, 526 F.Supp.2d 819 (N.D. Ohio 2007); Stramaglia v. United States, 2007 WL 4404185 (E.D. Mich. 2007), aff'd, 377 Fed. Appx. 472 (6th Cir. 2010).
As support for his theory, respondent has offered a number of cases where courts have adopted Federal common law in determining successor liability. However, these decisions
Finally, respondent contends that "[i]f federal common law is not applied, it could encourage taxpayers subject to Texas law to use a similar structure to easily avoid the payment of employment taxes * * * [thereby] thwarting the Service's crucial function of enforcement and collection of federal employment taxes." Respondent further contends that "other states could be persuaded to modify their laws to reject the de facto merger or mere continuation exceptions and further frustrate the collection of federal taxes."
Respondent's fear of the potential for manipulation is unfounded. None of these concerns are present here, and no evidence was put forth tending to show that the concerns will be present. There is no evidence that petitioner's business structure was anything other than a valid reorganization.
More importantly, successor in interest liability is only one procedure by which the Commissioner may collect taxes from a successor who received assets from a taxpayer who owed the taxes. On brief respondent concedes that he could have potentially applied transferee liability against petitioner under section 6901 by issuing Notices of Determination Concerning Worker Classification to the other six partnerships, assessing the resulting liabilities, and then issuing a Notice of Transferee Liability to TFT Galveston Portfolio. Additionally, respondent could have potentially attempted to collect directly from Mr. Teachworth as a "responsible person"
B. Application of State Law
Successor liability is generally determined by State law. LiButti v. United States, 178 F.3d 114, 124 (2d Cir. 1999). As we have discussed above, we do not accept respondent's suggestion of applying Federal common law in this case; therefore we will apply the applicable State law.
Under Texas law "a person acquiring property * * * may not be held responsible or liable for a liability or obligation of the transferring domestic entity that is not expressly assumed by the person." Tex. Bus. Orgs. Code Ann. sec. 10.254(b) (West 2012).
TFT Galveston Portfolio did not expressly assume the liabilities of the other six partnerships. Accordingly, under Texas law, TFT Galveston Portfolio is not a successor in interest to the six partnerships listed on the notices.
III. Classification of Workers
Sections 3111 and 3301 impose taxes on employers under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). Section 3101 imposes on employees under FICA a tax based on their wages paid, which the employer is required to collect under section 3102. Under sections 3402 and 3403, employers are liable for withholding from their employees' wages the employees' shares of Federal income tax.
In addition to the successor in interest liabilities, respondent determined that TFT Galveston Portfolio's
A. Burden of Proof
We presume that a worker classification determination made by the Commissioner is correct, but a taxpayer may rebut that presumption by demonstrating by a preponderance of the evidence that the determination was erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Boles Trucking, Inc. v. United States, 77 F.3d 236, 239-240 (8th Cir. 1996) (applying this standard to a worker classification determination); Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 268 (2001).
B. Common Law Test
Whether an employer-employee relationship exists in a particular situation is a question of fact. Weber v. Commissioner, 103 T.C. 378, 386 (1994), aff'd per curiam, 60 F.3d 1104 (4th Cir. 1995). For the purposes of employment taxes, the term "employee" includes "any individual who, under the
Section 31.3121(d)-1(c)(2), Employment Tax Regs., defines the common law employer-employee relationship as follows:
In deciding whether a worker is a common law employee or an independent contractor, this Court considers: (1) the degree of control exercised by the principal; (2) which party invests in the work facilities used by the individual; (3) the opportunity of the individual for profit or loss; (4) whether the principal can discharge the individual; (5) whether the work is part of the principal's regular business; (6) the permanency of the relationship; and (7) the relationship that the parties believed that they were creating. Weber v. Commissioner, 103 T.C. at 387. All of the facts and circumstances of each case are considered, and no single factor is dispositive. Id.
While no single factor is dispositive, the degree of control exercised by the principal over the details of the individual's work is one of the most important factors in determining whether a common law employment relationship exists. See, e.g., Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440, 448 (2003); Leavell v. Commissioner, 104 T.C. 140, 149 (1995). All that is necessary however, is that the principal
1. Degree of Control
The principal's degree of control over the details of the agent's work is one of the most important factors in determining whether an employment relationship exists. See Clackamas Gastroenterology Assocs., P.C., 538 U.S. at 448; Weber v. Commissioner, 103 T.C. at 387. The degree of control necessary to find employee status varies according to the nature of the services provided. Weber v. Commissioner, 103 T.C. at 388. When the nature of the work is more independent, a lesser degree of control by the principal may still result in a finding of an employer-employee relationship. Robinson v. Commissioner, T.C. Memo. 2011-99, aff'd, 487 Fed. Appx. 751 (3d Cir. 2012).
TFT Galveston Portfolio, through Mr. Teachworth, controlled nearly every aspect of the work performed by the apartment managers. He unilaterally established the compensation paid to the managers, and he set their working hours and duties. In determining how to handle vacancies at the complexes the managers had to consult with Mr. Teachworth, and they had to gain his approval to return security deposits to departing tenants. He set the community rules and regulations and determined the rent at the properties, and the managers had no authority to alter the rents without his approval.
TFT Galveston Portfolio, through Mr. Teachworth, controlled the work performed by Mr. Adams. Because Mr. Adams was the maintenance supervisor, his duties included supervising the various maintenance workers, performing general repairs and maintenance, and executing large maintenance projects as needed. Mr. Adams had a small degree of latitude in his work. However, at trial he testified that he had to seek approval from Mr. Teachworth before performing any maintenance job that was not routine or small. Thus, the discretion allowed to Mr. Adams in performing his work was severely limited.
The maintenance workers, including those who performed more specialized or skilled work and those who provided temporary
To retain the requisite degree of control over an employee, the employer need not direct the employee's every move; it is sufficient if he has the right to do so. Weber v. Commissioner, 103 T.C. at 387-388; see sec. 31.3401(c)-1(b), Employment Tax Regs. Although some of the workers had some latitude in how they performed their duties, ultimately Mr. Teachworth was the boss and had final authority on all the work performed at the properties. Accordingly, this factor weighs heavily towards a finding that TFT Galveston Portfolio's workers were in fact employees and not independent contractors.
2. Investment in Facilities and Opportunity for Profit or Loss
The fact that a worker has no investment in the facilities used in the work is indicative of an employer-employee relationship. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 271. Conversely, the fact that a worker provides his or her own tools generally indicates the worker is an independent contractor. Id. When workers have no opportunities for profit or loss, they are more like employees than independent contractors. See D & R Fin. Servs., Inc. v. Commissioner, T.C. Memo. 2011-252, slip op. at 10.
The workers had little, if any, financial investment in TFT Galveston Portfolio's business, and they were never at risk of suffering a personal financial loss. The work was all performed on site at the apartment properties. TFT Galveston Portfolio provided most of the office equipment and supplies used by the apartment managers and set up a petty cash fund to cover any incidental expenses incurred. The managers all received fixed salaries, with the exception of a small
Mr. Adams, the maintenance supervisor, supplied some of his own tools and equipment; they were not purchased or used specifically or exclusively for TFT Galveston Portfolio's business. However, this factor alone is not determinative. In contrast, TFT Galveston Portfolio provided and paid for all the required maintenance materials through charge accounts Mr. Teachworth maintained at local hardware stores. Additionally, any incidental expenses the workers incurred were reimbursed by Mr. Teachworth.
Finally, the workers never had an opportunity for financial profit aside from their salaries. Although the maintenance workers could increase their earnings through working additional hours, they could not increase their hourly rate of pay, which was unilaterally set by Mr. Teachworth. Thus, the workers were never at risk of personal financial loss due to the services they provided. Accordingly, this factor weighs towards a finding that TFT Galveston Portfolio's workers were in fact employees and not independent contractors.
3. Right To Discharge
TFT Galveston Portfolio, through Mr. Teachworth, had the right to terminate the service of any of the workers at any time without financial penalties. The workers could also quit at any time. At no point did any of the workers enter into a contract or agreement that would bind TFT Galveston Portfolio or the workers. Accordingly, this factor weighs towards a finding that the workers were in fact employees and not independent contractors.
4. Workers Part of Petitioner's Regular Business
TFT Galveston Portfolio's sole business activity was the operation of the apartment properties. The workers all played a crucial role in its operation and financial success. The apartment managers' primary responsibility was to fill the vacancies, and the financial success of the properties depended on their maximizing the occupancy of the properties. The maintenance supervisor and the workers were tasked with responding to tenants' maintenance problems
5. Permanency of Working Relationship
A transitory work relationship may weigh in favor of independent contractor status. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 273. The evidence tends to show a continuing relationship between the workers and TFT Galveston Portfolio. Accordingly, this factor weighs towards a finding that the workers were in fact employees and not independent contractors.
6. The Parties' Perception of the Relationship
None of the workers had independent contractor agreements or written contracts. The workers did not submit bids for services. There is no evidence that any of the workers advertized their services to the public, nor did they work for any other companies during the period at issue. Although Mr. Adams occasionally performed maintenance and repair work outside of his job with TFT Galveston Portfolio, that work was done in his spare time and was not part of his full-time job, where he worked an average of 50 hours per week and was on call 24 hours a day, 7 days a week. That other work is not at issue.
Even if it was Mr. Teachworth's intention to create a legitimate independent contractor relationship with the workers, such an intention does not carry much weight when the common law factors compel a finding that an employer-employee relationship exists. See Kumpel v. Commissioner, T.C. Memo. 2003-265, slip op. at 14. Accordingly, this factor weighs towards a finding that TFT Galveston Portfolio's workers were in fact employees and not independent contractors.
After considering the record and weighing all of the factors, we conclude that the workers were employees during the period at issue. None of the relevant factors suggest that the workers were independent contractors, and many of the factors evidence an employer-employee relationship. For instance, the workers were all ultimately subject to the direction and control of Mr. Teachworth. He hired them and set their hours and wages. They had no financial investment in the work they performed. They bore no risk of financial loss, and they did not participate in TFT Galveston Portfolio's profits in any way. Finally, the fact that TFT Galveston Portfolio and Mr. Teachworth did not think they were creating an employment relationship with the workers is not persuasive when the common law factors weigh towards an employment relationship.
We think these factors sufficiently establish that the workers were properly classified as employees of TFT Galveston Portfolio. Therefore, we hold TFT Galveston Portfolio liable for the employment taxes determined for the fourth quarter of 2004 regarding the employees.
IV. Additions to Tax and Penalties
A. Burden of Proof
The Commissioner bears the burden of production with respect to an individual's liability for additions to tax and penalties. See sec. 7491(c). To meet that burden, the Commissioner must produce sufficient evidence indicating that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). However, section 7491(c) does not shift the burden of proof, which remains on the individual. See Higbee v. Commissioner, 116 T.C. at 446-447.
Section 7491(c) is not entirely instructive as to whether the section imposes the initial burden on the Commissioner when the taxpayer is an entity that has petitioned this Court under section 7436. By its terms, section 7491(c) applies only to the liability of "any individual" for penalties.
We need not resolve any potential uncertainty; even if we assume that respondent has the initial burden of production, we are satisfied that he has carried it. Therefore, the burden remains with petitioner to prove the penalty determinations are incorrect. See Higbee v. Commissioner, 116 T.C. at 446-447.
B. Additions to Tax
Respondent determined that TFT Galveston Portfolio is liable for additions to tax under section 6651(a)(1) for its failure to file Forms 940 and 941, for employment taxes, for the period at issue and under section 6651(a)(2) for failure to pay the amount of tax shown on the SFRs. Section 6651(a)(1) imposes an addition to tax for failure to timely file a return unless the taxpayer shows that such failure was due to reasonable cause and not willful neglect.
TFT Galveston Portfolio filed no employment tax return for the period at issue. Accordingly, we conclude that respondent produced sufficient evidence to show that the section 6651(a)(1) addition to tax is appropriate. Although the issues in this case are somewhat technical, TFT Galveston Portfolio has not produced any evidence demonstrating a good-faith effort to comply with the law and determine the correct treatment of the workers. Therefore, we find that the failure to file was not due to reasonable cause and hold TFT Galveston Portfolio liable for the section 6651(a)(1) addition to tax.
C. Penalty Under Section 6656
If a taxpayer is more than 15 days late in depositing employment taxes, section 6656 imposes a 10% penalty. Sec. 6656; see also Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 268. The taxpayer is not liable for the section 6656 penalty if the late deposit was due to reasonable cause and not due to willful neglect. Sec. 6656(a). TFT Galveston Portfolio is liable for a penalty under section 6656. Respondent showed that TFT Galveston Portfolio did not deposit employment taxes. See Ramirez v. Commissioner, T.C. Memo. 2007-346 (finding that the IRS met its burden where section 7491(c) undisputedly applied by showing that the employer made no deposits). TFT Galveston Portfolio did not show that it had reasonable cause for failing to deposit employment taxes.
In reaching our holdings herein, we have considered all arguments the parties made, and to the extent we did not mention them above, we conclude they are moot, irrelevant, or without merit.
Decisions will be entered for petitioners in docket Nos. 29995-11, 30001-11, 682-12, 1175-12, 1180-12, and 1533-12.
Decision will be entered under Rule 155 in docket No. 1082-12.
With respect to the other names listed on the notice, such as Elizabeth Bonds, Delores Guamelo, Eric Puentes, Carla Carcano, Maria Martinez, Karla Carcano, Melinda Ruiz, Anita Jones, and Bobby Harris, respondent concedes that they were not petitioner's employees during the period at issue and payments made to them did not subject TFT Galveston Portfolio to employment tax liabilities.