NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 08a0597n.06
Filed: October 3, 2008
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
PENO TRUCKING, INC., )
v. ) ON APPEAL FROM THE UNITED
) STATES TAX COURT
COMMISSIONER OF INTERNAL )
Before: NORRIS, BATCHELDER, and GIBBONS, Circuit Judges.
JULIA SMITH GIBBONS, Circuit Judge. Petitioner-appellant Peno Trucking, Inc.
(“Peno Trucking”) appeals both the Tax Court’s classification of its truckers as employees and the
Tax Court’s determination that Peno Trucking was not entitled to relief from tax liability under § 530
of the Revenue Act of 1978. For the following reasons, we reverse the decision of the Tax Court.
Peno Trucking was incorporated in the State of Ohio on December 23, 1993. Its principal
place of business was in Warren, Ohio. Throughout the period in question, Peno Trucking was
incorporated as a Subchapter S Corporation under Internal Revenue Code §§ 1361 et seq. From
1997 through 1999, Robert Peno, Sr. and his wife, Joann Peno, together owned 100% of the stock
of Peno Trucking; Robert and Joann Peno were also the officers of the corporation, with Joann Peno
as the President and Robert Peno, Sr. as the Vice President.
In its Memorandum Findings of Fact and Opinion, the Tax Court summarized the stipulated
facts regarding Peno Trucking’s business operations as follows:
During the periods at issue, petitioner owned approximately 15 tractor-trailers
(trucks), which it leased to the Ohio Transport Corp. (Ohio Transport) pursuant to
written lease agreements (leases). The leases required petitioner to transport freight
and perform related services for Ohio Transport within a reasonable time in a safe,
competent, lawful, and workmanlike manner, inform Ohio Transport daily as to the
vehicles’ locations and the shipments being transported, and pay all costs of
operating the leased trucks and related equipment.
Under the leases, petitioner was required to provide drivers to operate its trucks and
be responsible for all work performed by the drivers and to confirm their work was
performed in accordance with the leases. Consequently, petitioner was required to
direct, supervise, pay, discipline, and discharge its drivers. Petitioner was also
responsible for determining the days and hours per day the drivers worked, the routes
traveled, and the order of picking up and delivery of shipments and ensuring that the
drivers had the appropriate commercial drivers’ licenses.
The leases also required petitioner to submit completed drivers’ logs to Ohio
Transport and to “cooperate in the preparation, carrying and preservation of
manifestos, bills of lading, way bills, freight bills, and other papers and records
respecting the lading and the use of equipment, all in accordance with applicable
laws and regulations”.
As compensation, petitioner received 75 percent of the total amount paid to Ohio
Transport by its customers for each load hauled by a leased truck.
These loads were hauled by petitioner’s trucks or by individuals who owned their
own trucks (owner-operators). A number of owner-operators hauled steel for Ohio
Transport and were dispatched by petitioner. The owner-operators’ employment
relationship with petitioner is not at issue in this case.
The leases required Ohio Transport to provide liability insurance for petitioner’s
trucks while they were “under dispatch”. Otherwise petitioner provided the
insurance. If a driver intentionally damaged a truck or its cargo, he or she was
responsible for the damage, to the extent it was not insured.
Peno Trucking entered into an agreement with each of its drivers during the dates in question
which explicitly provided that the drivers were independent contractors and not employees. The
agreement stated, in part, as follows:
Peno Trucking Inc. and Operator agree and understand that Operator is not an
employee or agent of Peno Trucking Inc. Operator is an independent contractor and
Peno Trucking Inc. shall not direct in any manner the means or method by which
Operator shall perform his occupation. Operator understands that Peno Trucking Inc.
from time to time contracts with other persons or corporations, to transport goods via
Peno Trucking Inc. trucks and equipment. While not an employee of such other
persons or corporations, Operator shall, at all times applicable hereto, work at the
direction and control of such persons or corporations.
Peno Trucking Inc. agrees to pay Operator at the percentage of ___ per total gross
pay per load. Additionally, Peno Trucking Inc. shall be responsible for all
maintenance of Peno Trucking Inc. equipment, all fuel, oil, tolls, permits, and road
fuel taxes incurred by Operator on such dispatched trips in Peno Trucking Inc.
Operator agrees and understands that he is solely responsible for payment of all
income and withholding taxes, Social Security and unemployment compensation. In
accordance with the terms of this agreement, Peno Trucking Inc. will supply Operator
with an IRS Form 1099 at the end of each calendar year.
Operator understands and agrees that he cannot obligate, contract or incur any
indebtedness on behalf of Peno Trucking Inc.
The Tax Court further explained the details of the relationship between Peno Trucking and the
drivers as follows:
Petitioner’s drivers were not obligated to accept petitioner’s request to transport a
load, to work on any particular day, or work any particular schedule. If a driver chose
not to haul a load or work for a period of time, he or she was not disciplined or
sanctioned. Petitioner and the drivers were entitled to terminate their relationship at
Petitioner provided all necessary equipment required to secure the cargo hauled on
its trucks. However, petitioner’s drivers were free to supply any additional equipment
at their own cost. Drivers paid for their own gloves, hand tools, and meals. If a
driver’s relationship with petitioner was severed, the driver was free to take any
equipment or accessories he or she had provided.
Petitioner paid for all fuel, oil, highway use taxes, and normal maintenance and
repairs required to operate its trucks. Petitioner was solely responsible for
determining the nature and timing of any repairs and/or maintenance of its trucks, and
its mechanics performed all the maintenance and repairs. The drivers were not
required to make any repairs or perform any maintenance to the trucks, but they were
obligated to comply with the Federal motor carrier safety regulations, including those
provisions which required pretrip inspections.
Drivers were paid, on a weekly basis, between 23 percent and 27 percent of the 75
percent petitioner received for each hauled load. The more loads a driver hauled each
week, the more money he or she earned.
During the periods at issue, petitioner filed Forms 1099MISC, Miscellaneous
Income, for each of its drivers who worked under the agreement.
In 1997, 1998, and 1999, respondent reclassified as employees a total of 29, 24, and
21 drivers, respectively. Of the drivers who were reclassified, 13 had contracted with
petitioner for more than 2 years and 4 had contracted with petitioner for more than
(footnotes omitted). The Tax Court also described Peno Trucking’s day to day operations as follows:
When Ohio Transport had freight which needed to be transported, ordinarily in the
Midwest and frequently to States adjoining Ohio, it or a mill working with Ohio
Transport would contact petitioner and instruct it as to the specifications of the
particular job. If petitioner had a truck available to haul the load, it would offer the
job to one of its drivers. If a driver was unavailable or unwilling to accept the load,
then the load was offered to another driver.
If a driver accepted the job, petitioner advised the driver, in accordance with Ohio
Transport’s or the mill’s directives, of the time to pick up the load, the delivery
location, and the expected delivery time. The drivers carried beepers so that
petitioner could remain in contact while they were on the road. Petitioner did not
direct the routes drivers were to use in either picking up or delivering loads. If a
driver chose to drive on a toll road, the driver was responsible for paying the tolls.
After a load was delivered, the driver could immediately return to petitioner’s place
of business with or without a return load.
During its years of operation, two of Peno Trucking’s drivers filed claims for workers’
compensation because they suffered injuries during the course of their trucking activities. On May
18, 1995, Richard Chatfield filed his claim for workers’ compensation. The Ohio Industrial
Commission (“OIC”), in an order dated October 25, 1995, disallowed Chatfield’s claim, finding that
he “was not an employee of [Peno Trucking] on the date of injury herein. [Chatfield] was an
independent contractor who had not secured Workers’ Compensation for himself.” The order did
not provide the basis for its determination. Chatfield’s appeal of the order was dismissed without
Similarly, on June 26, 1997, Kenneth Jamison filed a claim for workers’ compensation
because of an injury he suffered during the course of his trucking activities. In an order dated August
25, 1997, the Bureau of Workers’ Compensation (“BWC”) denied Jamison’s claim, finding that
“[t]here is no proof of an employee/employer relationship between the injured worker and the listed
employer.” The BWC further explained that this decision was based on the signed agreement
between Jamison and Peno Trucking. Pursuant to Jamison’s appeal of the BWC order, the OIC
vacated the BWC order and found that “[Jamison] was an independent contractor who had not
secured Workers’ Compensation for himself.” The OIC did not explain the grounds of its decision
and simply stated that “All evidence in the file was considered.”
On September 12, 2003, the Commissioner of Internal Revenue (the “Commissioner”) issued
Peno Trucking a Notice of Determination of Worker Classification. In that determination, the
Commissioner stated that certain identified drivers were in fact employees of Peno Trucking and not
independent contractors. In addition, the Commissioner concluded that Peno Trucking was not
entitled to relief from employment taxes under § 530(a) of the Revenue Act of 1978. The
Commissioner then went on to calculate the additional taxes owed by Peno Trucking. Peno
Trucking appealed the Commissioner’s determination pursuant to 26 U.S.C. § 7436. In that appeal,
Peno Trucking argued that the truck drivers in question were independent contractors and not
employees. In addition, Peno Trucking claimed that it had not treated the truckers in question as
employees, had filed all federal tax returns consistent with this treatment, and had a reasonable basis
for doing so – the order of the OIC concluding that both Chatfield and Jamison were not employees,
but independent contractors. Thus, Peno Trucking claimed its tax liability should have been
terminated under § 530 of the Revenue Act of 1978’s safe harbor provisions.
The Tax Court found in favor of the Commissioner, concluding that the relevant factors
indicated the truckers in question were employees and not independent contractors. Furthermore,
the Tax Court found that Peno Trucking could not have reasonably relied upon the determination of
either the BWC or the OIC in treating the truckers as independent contractors because (1) “[t]he
record d[id] not indicate that the BWC, the OIC, or the court of common pleas evaluated the
employment relationships of petitioner’s former drivers, Chatfield and Jamison, through a common
law analysis” and (2) “nothing in the record indicates the rulings concerning Jamison and Chatfield
were relied upon at the time petitioner’s employment decisions were made.” Peno Trucking appeals
the Tax Court’s decision.
As a general rule “[w]e review the tax court’s legal conclusions de novo and its factual
findings under the ‘clearly erroneous’ standard.” Zack v. Comm’r, 291 F.3d 407
, 412 (6th Cir.
2002); Indmar Prods. Co. v. Comm’r, 444 F.3d 771
, 777 (6th Cir. 2006) (“We review the Tax
Court’s factual findings for ‘clear error’ and its application of law de novo.”); MTS Int’l Inc. v.
Comm’r, 169 F.3d 1018
, 1021 (6th Cir. 1999) (“This court reviews the tax court’s legal conclusions
de novo and its findings of fact under the ‘clearly erroneous’ standard.”). In turn, “[f]actual findings
are clearly erroneous if, based upon the entire record, the reviewing court is ‘left with the definite
and firm conviction that a mistake has been committed.’” Zack, 291 F.3d at 412 (quoting Sanford
v. Harvard Indus., Inc., 262 F.3d 590
, 595 (6th Cir. 2001)). This tracks the language of 26 U.S.C.
§ 7482(a) which states “[t]he United States Courts of Appeals . . . shall have exclusive jurisdiction
to review the decisions of the Tax Court . . . in the same manner and to the same extent as decisions
of the district courts in civil actions tried without a jury . . . .” Cf. Freytag v. Comm’r, 501 U.S. 868
891 (1991) (noting that the standard under 26 U.S.C. § 7482(a) “contrasts with the standard applied
to agency rulemaking”).
Although this court has in the past applied the clearly erroneous standard to the employee-
independent contractor question, it has done so only when the dispute hinged primarily on factual
determinations. Lanigan Storage & Van Co. v. United States, 389 F.2d 337
, 341 (6th Cir. 1968).
Indeed, in Lanigan Storage, this court cited precedent from the Ninth Circuit, which indicated that,
when courts below make findings on such issues “as a fact,” we review the conclusion for clear
error. Id. (emphasis in original) (citing McGuire v. United States, 349 F.2d 644
(9th Cir. 1965)).
And, only applying the clear-error standard to the factual determinations underlying the employee-
independent contractor distinction comports with both Lanigan Storage’s analysis of the tax court’s
role as factfinder and this court’s analysis of the distinction in other contexts. See, e.g., Trs. of the
Resilient Floor Decorators Ins. Fund v. A & M Installations, Inc., 395 F.3d 244
, 249 (6th Cir. 2005)
(stating in the ERISA context that “[t]his court applies de novo review to the question of whether
an individual is an employee or an independent contractor”). We therefore review the facts
underlying the Tax Court’s determination that the truckers in question were employees for clear
error, while reviewing its legal conclusions de novo. But see Spicer Accounting v. United States, 918
, 92 (9th Cir. 1990) (“The determination of whether an employer-employee relationship
exists involves a mixed question of law and fact. However, since the determination is predominantly
one of fact, it is subject to a clearly erroneous standard of review.” (internal citation omitted)).
Employers are required to pay one half of the Federal Insurance Contributions Act, 26 U.S.C.
§§ 3101 et seq., (“FICA”) taxes assessed against their employees and withhold from “wages” the
amount of FICA taxes owed by the employees themselves. See Boles Trucking v. United States, 77
, 238 (8th Cir. 1996) (citing 26 U.S.C. §§ 3101, 3102(a), 3402(a)). In addition, employers
must pay Federal Unemployment Tax Act, 26 U.S.C. §§ 3301 et seq., (“FUTA”) taxes on the
“wages” paid to their employees. 26 U.S.C. § 3301; see also Boles Trucking, 77 F.3d at 238. For
the purposes of both FICA and FUTA taxes, “wages” is defined as “all remuneration for
employment.” 26 U.S.C. § 3121 (FICA); 26 § U.S.C. 3306 (FUTA). However, employers are not
required to pay and withhold FICA and FUTA taxes in connection with payments to independent
contractors. 26 C.F.R. 31.3121(d)-1 (FICA); 26 C.F.R. 31.3306(i)-1 (FUTA); see also, e.g., Hosp.
Res. Pers. v. United States, 68 F.3d 421
, 424 (11th Cir. 1995); Breaux & Daigle, Inc. v. United
States, 900 F.2d 49
, 52 (5th Cir. 1990); see generally United State v. Silk, 331 U.S. 704
As a general rule, “the Commissioner’s determination of tax liability is entitled to a
presumption of correctness and . . . the burden is on the taxpayer to prove that the determination is
erroneous.” Boles Trucking, 77 F.3d at 239 (citing Helvering v. Taylor, 293 U.S. 507
principle applies “to the Commissioner’s classification of a taxpayer’s workers as employees, i.e.,
once such a determination is made, it is the taxpayer’s burden to prove, by a preponderance of the
evidence, that its workers are or were independent contractors.” Id. Thus, in reviewing the Tax
Court’s conclusions, this court must determine whether the Tax Court clearly erred in concluding
that Peno Trucking had not demonstrated by a preponderance of the evidence that the truckers in
question were not employees, but instead independent contractors. See Van Camp & Bennion, 251
F.3d at 865.
For the purposes of FICA, the term “employee” includes “any individual who, under the
usual common law rules applicable in determining the employer-employee relationship, has the
status of an employee.” 26 U.S.C. § 3121(d)(2). The regulations promulgated pursuant to FICA and
FUTA provide some additional guidance as to the definition of an employer-employee relationship:
Generally such relationship exists when the person for whom services are performed
has the right to control and direct the individual who performs the services, not only
as to the result to be accomplished by the work but also as to the details and means
by which that result is accomplished. That is, an employee is subject to the will and
control of the employer not only as to what shall be done but how it shall be done.
In this connection, it is not necessary that the employer actually direct or control the
manner in which the services are performed; it is sufficient if he has the right to do
so. The right to discharge is also an important factor indicating that the person
possessing that right is an employer. Other factors characteristic of an employer, but
not necessarily present in every case, are the furnishing of tools and the furnishing
of a place to work, to the individual who performs the services. In general, if an
individual is subject to the control or direction of another merely as to the result to
be accomplished by the work and not as to the means and methods for accomplishing
the result, he is an independent contractor. An individual performing services as an
independent contractor is not as to such services an employee under the usual
common law rules. Individuals such as physicians, lawyers, dentists, veterinarians,
construction contractors, public stenographers, and auctioneers, engaged in the
pursuit of an independent trade, business, or profession, in which they offer their
services to the public, are independent contractors and not employees.
26 C.F.R. 31.3121(d)-1 (FICA); 26 C.F.R. 31.3306(i)-1 (FUTA).
“The determination of an individual’s status as an employee or an independent contractor has
been the subject of numerous decisions. It is settled that each case must stand on its own facts, in
light of all the existing circumstances, and that no one facet of the relationship is generally
determinative.” Azad v. United States, 388 F.2d 74
, 76 (8th Cir. 1968); see also Silk, 331 U.S. at
716. Despite this fact, “authorities seem to be in general agreement that an employer’s right to
control the manner in which the work is performed is an important if not the master test to be
considered in determining the existence of an employer-employee relationship.” Azad, 338 F.3d at
76. Nonetheless, courts typically consider the following factors in determining whether an employer-
employee relationship exists: “(1) The degree of control exercised by the principal over the details
of the work; (2) which party invests in the facilities used in the work; (3) the opportunity of the
individual for profit or loss; (4) whether or not the principal has the right to 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 the parties believe they are creating.” Weber v. Comm’r, 60
, 1110 (4th Cir. 1995); Professional & Executive Leasing v. Comm’r, 89 T.C. 225
(T.C. 1987) (listing the same seven factors); Avis Rent A Car System, Inc. v. United States, 503 F.2d
, 428 (2d Cir. 1974) (listing the same seven factors); Pack v. United States, 434 F. Supp. 232
234 (E.D. Tenn. 1977) (listing the same seven factors); see also Silk, 331 U.S. at 716. But see Doty
v. Elias, 733 F.2d 720
, 723 (10th Cir. 1984) (“In applying this test, the courts generally focus on five
factors: (1) the degree of control exerted by the alleged employer over the worker; (2) the worker's
opportunity for profit or loss; (3) the worker’s investment in the business; (4) the permanence of the
working relationship; and (5) the degree of skill required to perform the work.”); Rev. Rul. 87-41,
1987-1 Cum. Bull. 296, 298-299 (compiling a list of twenty non-exhaustive factors when
determining whether an individual was an employee or independent contractor). Indeed, these were
the same seven factors considered by the Tax Court below. Thus, in order to review the Tax Court’s
opinion, we consider each of these seven factors in turn as they apply to the instant case.
(1) The degree of control exercised by the principal over the details of the work
As noted above, an employer-employee relationship is generally assumed to exist where
“such relationship exists when the person for whom services are performed has the right to control
and direct the individual who performs the services, not only as to the result to be accomplished by
the work but also as to the details and means by which that result is accomplished.” 26 C.F.R.
31.3121(d)-1 (FICA); 26 C.F.R. 31.3306(i)-1 (FUTA). In other words, “it is not necessary that the
employer actually direct or control the manner in which the services are performed; it is sufficient
if he has the right to do so.” Id. “Thus, no actual control need be exercised, as long as the employer
has the right to control.” Professional & Executive Leasing v. Comm’r, 862 F.2d 751
, 753 (9th Cir.
1988) (using a five-factor test); see also McGuire v. United States, 349 F.2d 644
, 646 (9th Cir. 1965)
(“The absence of need to control should not be confused with the absence of right to control. The
right to control contemplated by the Regulations relevant here and the common law as an incident
of employment requires only such supervision as the nature of the work requires.”); Air Terminal
Cab, Inc. v. United States, 478 F.2d 575
, 580 (8th Cir. 1973) (stating that “it is the right to control
which is determinative”).
Moreover, “[w]here the nature of a person’s work requires little supervision, there is no need
for actual control.” Id; see also McGuire, 349 F.2d at 646 (noting that the work in question required
little supervision, but nonetheless the individuals in question were employees as the appellant
maintained the right to control their work). Furthermore, “The mere fact that the workers set their
own hours and determined when to take breaks did not make them independent contractors.”
General Inv. Corp. v. United States, 823 F.2d 337
, 342 (9th Cir. 1987).
In detailing the facts that supported its conclusion that Peno Trucking exercised control over
the truckers consistent with an employer-employee relationship, the Tax Court stated:
Pursuant to the leases with Ohio Transport, petitioner was responsible for hiring
drivers, overseeing all work performed by the drivers, confirming their work was
performed in accordance with the leases, and directing, supervising, paying,
disciplining, and discharging the drivers.
Petitioner determined the days drivers could work and controlled which loads the
drivers would haul. Petitioner required the drivers to have appropriate commercial
drivers’ licenses, deliver the freight to certain places at certain times, maintain
driving logs and other documents, and carry beepers. Petitioner, not the drivers,
determined whether truck repairs were performed on the road or by its own
mechanics and was responsible for all truck maintenance costs incurred in
maintaining the trucks.
(footnote omitted.) Peno Trucking contends that some of these factual conclusions are clearly
First, Robert Peno, Sr., stated at trial that the truckers were not required to carry beepers to
stay in touch with him. However, two of the subcontract statements – both stipulated exhibits –
include charges for lost pagers or beepers. Given this evidence, the Tax Court concluded that Peno
Trucking “required its drivers to carry beepers, presumably so that it could maintain contact while
the drivers were on the road.” And, because of this evidence in the record, this conclusion is not
clearly erroneous. See Conti v. Comm’r, 39 F.3d 658
, 664 (6th Cir. 1994) (noting that “the Tax
Court, like any other court, may disregard uncontradicted testimony by a taxpayer where it finds that
testimony lacking in credibility, or finds the testimony to be improbable, unreasonable or
questionable.” (internal quotation marks and citation omitted)).
Second, Peno Trucking focuses on the fact that it did not control the rates for the freight
hauled by the truckers; in turn, because the truckers’ income was a percentage of the income from
the freight hauled, Peno Trucking argues that it did not control the amount of income earned by its
truckers. However, this conclusion overlooks the fact that the different truckers received different
percentages of income from the hauled freight. It would appear that the truckers negotiated the rate
with Peno Trucking; in this way, Peno Trucking does appear to have controlled, to some degree, the
income of the truckers.
Third, Peno Trucking emphasizes that the truckers could choose whether or not to accept a
particular load to haul. Thus, Peno Trucking argues that the truckers controlled their own work.
While this may be true, it also appears to be the case that once a trucker did agree to haul a particular
load, Peno Trucking controlled many of the conditions under which that hauling was done. Indeed,
in its lease with Ohio transport, Peno Trucking stated that it would be “solely responsible for
directing, supervising, paying, discharging, disciplining and otherwise controlling and such drivers,
helpers or other persons.” This representation by Peno Trucking to Ohio Transport gives strong
indication that Peno Trucking did in fact control the truckers in question.
We therefore conclude that the Tax Court did not clearly err in determining that Peno
Trucking did exercise sufficient control over the truckers in question to indicate the existence of an
(2) Which party invests in the facilities used in the work
“The fact that a worker provides his or her own tools generally indicates independent
contractor status.” Ewens & Miller, Inc. v. Comm’r, 117 T.C. 263
, 271 (T.C. 2001) (citing Breaux
& Daigle, Inc. v. United States, 900 F.2d 49
, 52 (5th Cir. 1990)).
The Tax Court, in considering this factor, found the following facts:
The drivers incurred some cost for tools and maintaining their licenses. However,
these costs were insignificant when compared to petitioner’s substantial investment
to acquire and maintain the fleet of approximately 15 trucks. The drivers did not pay
any of the costs of operating the trucks or transporting the freight. The agreement
stated petitioner alone was responsible for all maintenance of its equipment, all fuel,
oil, tolls, 21 permits, and road fuel taxes incurred by the drivers on dispatched trips
while in petitioner’s trucks.
(footnotes omitted.) In response, Peno Trucking emphasizes that the truckers could in fact provide
their own tools and would be entitled to take those tools with them if they chose to no longer drive
a Peno truck. In addition, the parties stipulated that the drivers were responsible for paying tolls
incurred en route to picking up a load for hauling. The Tax Court noted these facts, but nonetheless
concluded “[t]he relatively minor investment by the drivers and the substantial investment by
petitioner support an employer-employee relationship.” The Tax Court did not err in this evaluation.
As a result, this factor also supports the existence of an employer-employee relationship.
(3) The opportunity of the individual for profit or loss
In evaluating this factor, the Tax Court stated the following:
The drivers were not paid an hourly wage or salary. They were paid 23 to 27 percent
of the 75 percent petitioner received per load hauled, and the amounts earned
depended entirely upon the number of trips they made. The drivers did not assume
any risk of loss. As stated in the agreement, a driver could not incur any indebtedness
on behalf of petitioner. This factor indicates an employer-employee relationship.
Based on these facts, the Tax Court concluded that “[t]his factor indicates an employer-employee
relationship.” In doing so, the Tax Court clearly emphasized the fact that the truckers were not
exposed to risk of loss, while minimizing the import of the truckers’ ability to profit by pursuing
more hauling assignments. Emphasizing the risk of loss while minimizing the opportunity for profit
comports with analysis of this factor in Revenue Ruling 87-41 (1987):
Realization of Profit or Loss. A worker who can realize a profit or suffer a loss as a
result of the worker’s services (in addition to the profit or loss ordinarily realized by
employees) is generally an independent contractor, but the worker who cannot is an
employee. For example, if the worker is subject to a real risk of economic loss due
to significant investments or a bona fide liability for expenses, such as salary
payments to unrelated employees, that factor indicates that the worker is an
independent contractor. . . .
Id. (emphasis added). Indeed, the Tax Court has similarly emphasized the exposure to losses in
weighing this factor. See, e.g., Jones v. Comm’r, 94 T.C.M. 230
, 2007 Tax Ct. Memo
LEXIS 251, at *9 (2007); Hathaway v. Comm’r, 72 T.C.M. 460
, P53 (1996); Feivor v.
Comm’r, 69 T.C.M. 2078
, 1995 Tax Ct. Memo LEXIS 108, at *38-39 (1995). And, such an
analysis ensures that the mere fact that an employer links salary to performance does not militate
against finding that his workers are in fact employees. We therefore conclude that the Tax Court did
not clearly err in determining that this factor also indicates the existence of an employer-employee
(4) Whether or not the principal has the right to discharge the individual
As noted above, the right to discharge indicates the existence of an employer-employee
relationship. See, e.g., Air Terminal Cab, Inc., 478 F.2d at 581. In evaluating this factor, the Tax
Court made the following findings:
The parties stipulated that petitioner retained the right to discharge its drivers and the
drivers had a right to terminate their relationship with petitioner. However, at trial
Mr. Peno testified that he personally would not terminate a driver; instead Ohio
Transport or the mills would ban the driver. Mr. Peno’s testimony as to this factor
was self-serving and unreliable. This factor indicates an employee-employer
As this court has previously explained, “we give deference to the Tax Court’s credibility findings
because of the court’s opportunity to observe the witnesses and their demeanor when they testify.”
Conti v. Comm’r, 39 F.3d at 664. Thus, “ [o]nce the Tax Court finds that the taxpayer’s testimony
lacks credibility, if the taxpayer has offered no other evidence in support of his position, the Tax
Court has no choice but to rule for the Commissioner, since the taxpayer has failed to carry his
requisite burden of proof.” Id. (internal quotation and citation omitted). This is most notably the
case here where the transcript of Robert Peno’s testimony seems inconsistent on its face. Because
of the Tax Court’s credibility determination, this factor also supports a finding that an employer-
employee relationship existed.
(5) Whether the work is part of the principal’s regular business
In its brief, Peno Trucking concedes that this factor supports a finding of an employer-
(6) The permanency of the relationship
According to the Tax Court, “[t]he drivers worked in the course of petitioner’s business
rather than having a transitory relationship with petitioner. This factor supports an
employer-employee relationship.” However, as Peno Trucking correctly notes, the truckers were not
required to work any particular hours or days. These facts make it somewhat difficult to determine
whether there was, in fact, a “permanent” relationship. That being said, such a determination is a
factual determination, which we review for clear error. Moreover, the absence of this factor has
limited import in effecting the employee-independent contractor analysis. See Avis Rent A Car
System, Inc. v. United States, 503 F.2d 423
, 430 (2d Cir. 1974) (finding the individuals in question
to be employees despite their being transient and noting that the individuals in Silk were also
transient and still deemed by the Supreme Court to be employees). We therefore conclude that the
Tax Court did not clearly err in finding that this factor indicated the existence of an employer-
(7) The relationship the parties believe they are creating
The record does provide evidence that Peno Trucking and its truckers believed they were
creating an independent contractor relationship. Most notably, the contracts between Peno Trucking
and its truckers specifically stated that the truckers were to be considered independent contractors.
However, as noted by the Tax Court, “[i]f the relationship of employer and employee exists, the
designation or description of the relationship by the parties as anything other than that of employer
and employee is immaterial. Thus, if such relationship exists, it is of no consequence that the
employee is designated as a partner, coadventurer, agent, independent contractor, or the like.” 26
In sum, the factors detailed above weigh heavily in favor of finding an employer-employee
relationship, combined with the fact that it is Peno Trucking’s burden to prove by a preponderance
of the evidence that the Commissioner erred in his assessment, see Boles Trucking, 77 F.3d at 239,
the beliefs of the parties simply cannot undermine the Tax Court’s conclusion. Therefore, based on
the factual and credibility determinations of the Tax Court, we conclude that the truckers in question
were employees of Peno Trucking.
Despite the foregoing conclusions, Peno Trucking can still avoid liability under the safe
harbor provisions of § 530 of the Revenue Act of 1978.
Section 530 of the Revenue Act of 1978 (“§ 530”) provides for the termination of tax liability
if “for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any
period”; “all Federal tax returns (including information returns) required to be filed by the taxpayer
with respect to such individual for such period are filed on a basis consistent with the taxpayer’s
treatment of such individual as not being an employee”; and the employer had a “reasonable basis
for not treating such individual as an employee.” Pub. L. No. 95-600, 92 Stat. 2763, 2885-86
(reproduced at 26 U.S.C. § 3401 note § 530 (a)(2)).1 Among the grounds giving rise to a such a
reasonable basis, § 530(a)(2) includes “judicial precedent, published rulings, technical advice with
respect to the taxpayer, or a letter ruling to the taxpayer . . . .” Id. at 2885. Whether Peno Trucking
can satisfy the “reasonable basis” requirement of § 530 is a question of law that we review de novo.
See Spicer Accounting v. United States, 918 F.2d 90
, 94 (9th Cir. 1990) (applying de novo review
to whether the appellant had a “reasonable basis” for not treating the individuals in question as
employees); cf. United States v. Talley, 275 F.3d 560
, 563 (6th Cir. 2001) (noting, in the Fourth
Amendment context, that “[t]he question of whether a belief is reasonable is one we review de novo,
since the reasonableness test is objective, not subjective”).
Section 530 also provides a specific burden-shifting scheme: “If (i) a taxpayer establishes a
prima facie case that it was reasonable not to treat an individual as an employee for purposes of this
section, and (ii) the taxpayer has fully cooperated with reasonable requests from the Secretary of the
Treasury or his delegate, then the burden of proof with respect to such treatment shall be on the
Secretary.” Pub. L. No. 104-188, 110 Stat. 1755, 1767 (reproduced at 26 U.S.C. § 3401 note
§ 530(e)(4)(A)). It is the petitioner’s initial burden to establish his prima facie case by a
preponderance of the evidence. See Dains v. United States, Internal Revenue Service, 82 A.F.T.R.2d
(RIA) 5044, 1998 U.S. App. LEXIS 14924
, at *21 (6th Cir. 1998) (applying a preponderance of the
Section 530 of the Revenue Act of 1978 was initially intended to provide interim tax relief.
However, although never codified, it was extended indefinitely by § 269 of the Tax Equity and Fiscal
Responsibility Act of 1982 (“TEFRA”), Pub. L. No. 97-248, 96 Stat. 324, 552. It is reproduced in
the notes following 26 U.S.C. § 3401. See also Springfield v. United States, 88 F.3d 750
, 751 n.2
(9th Cir. 1996) (summarizing legislative history).
evidence standard to the reasonable basis showing under § 530); see also Springfield, 88 F.3d at 752-
53 (applying a preponderance of the evidence standard despite Congress’s “liberally construed”
In the instant case, Peno Trucking argues that it has satisfied the requirements of § 530’s safe
harbor provision. As evidence of this claim, Peno Trucking notes that the Tax Court concluded that
“[Peno Trucking] never treated the drivers as employees and consistently issued them Forms 1099-
MISC.” This comports with the tax returns Peno Trucking provided the Commissioner for the years
in question, 1997-1999. Peno Trucking argues that the decisions of the OIC and the BWC issued
in response to the workers’ compensation claims of Chatfield and Jamison provided reasonable bases
for treating the truckers in question as independent contractors.
We believe that Peno Trucking has clearly established a prima facie case that it was
reasonable not to treat the truckers in question as employees, thus shifting the burden of proof to the
Commissioner for the purposes of our § 530 analysis. Peno Trucking’s tax returns for the years in
question and representative contracts for the truckers in question constitute sufficient evidence to
make out a prima facie showing that it had always treated the truckers in question as independent
contractors and that it has always filed its tax returns in a manner consistent with this treatment.
Although the reasonable basis requirement presents a somewhat more complex issue, the
legislative history for § 530 counsels finding that reliance on the decisions from the OIC and the
BWC satisfy this inquiry. Section 530 was originally passed “to provide interim relief for taxpayers
who are involved in employment tax status controversies with the Internal Revenue Service, and who
potentially face large assessments, as a result of the Service’s proposed reclassifications of workers
. . . .” H.R. Rep. No. 1748, 95th Cong., 2d Sess. 5, reprinted in 1978-3 C.B. 629, 632 [“House
Report”]. To that end, § 530 was intended to “grant relief if a taxpayer had any reasonable basis
for treating workers as other than employees.” Id. at 632-33. Most notably, Congress intended “that
this reasonable basis requirement be construed liberally in favor of taxpayers.” Id. at 633. As the
Ninth Circuit has stated, “[w]ithout question, Congress intended to protect employers who exercised
good faith in determining whether their workers were employees or independent contractors.”
General Inv. Corp. v. United States, 823 F.2d 337
, 340 (9th Cir. 1987); see also McClellan v. United
States, 900 F. Supp. 101
, 104-06 (E.D. Mich. 1995).
Given this purpose, it is not surprising that other courts have construed this “reasonable
basis” standard as requiring reliance in-fact. See, e.g., 303 West 42nd St. Enters. v. IRS, 181 F.3d
, 277 (2d Cir. 1999) (focusing its inquiry on whether there the appellant “in fact relied on” the
grounds alleged); Nu-Look Design, Inc. v. Comm’r, 85 T.C.M. 927
, 2003 Tax Ct. Memo
LEXIS 48, at *21 (2003) (“The statute does not countenance ex post facto justification.”).
Importantly, this requirement functions as a double-edged sword. While on the one hand, courts
must liberally construe potential grounds for reasonable reliance, courts must be extremely vigilant
in only applying the tax relief afforded by § 530 when “the taxpayer . . . relied on the alleged
authority . . . at the time the employment decisions were being made.” Veterinary Surgical
Consultants, P.C. v. Comm’r, 85 T.C.M. 901
, 2003 Tax Ct. Memo LEXIS 52, at *24-25
(2003); see also 303 West 42nd St. Enters., 181 F.3d at 277.
In applying the reasonable basis requirement, the Tax Court concluded that reliance on the
decisions of the BWC and the OIC could not be considered reasonable. In reaching this conclusion,
the Tax Court cited Nu-Look Design, for the proposition that “[f]or a taxpayer to have a reasonable
basis for not treating an individual as an employee under the judicial precedent safe harbor, the
judicial precedent relied upon must have evaluated the employment relationship through a Federal
common law analysis.” And, according to the Tax Court, “[t]he record does not indicate that the
BWC [or] the OIC . . . evaluated the employment relationships of petitioner’s former drivers,
Chatfield and Jamison, through a common law analysis.”2 We disagree with the Tax Court’s
In doing so, we begin by noting that, although not part of the record before us, the Ohio
Board of Worker’s Compensation appears to employ a twenty-factor common-law test virtually
identical to the twenty-factor test outlined by Internal Revenue Service for determining whether
individuals are employees or independent contractors. Compare
http://www.ohiobwc.com/infostation/content/1/1.2/18.104.22.168.2.2.1.htm (stating that the Ohio BWC
uses the twenty-factor test outlined at O.R.C. § 4123.01(A)(1)(c)), and O.R.C. § 4123.01(A)(1)(c),
with Rev. Rul. 87-41; 1987-1 C.B. 296 (outlining the Internal Revenue Service’s twenty-factor
common law test). Indeed, at oral argument the Commissioner could not point to another
jurisdiction in the United States that uses a test for differentiating between employees and
independent contractors at odds with typical common-law tests. Thus, much of the Commissioner’s
argument stands on shaky ground.
But more importantly, Nu-Look Design is clearly distinguishable from our own case. In Nu-
Look Design, the petitioners relied upon the language in previously decided cases, applying the logic
of those cases to their own. Nu-Look Design, 2003 Tax Ct. Memo LEXIS 48, at *21. In our own
The Tax Court also stated that it had no evidence that the Ohio Court of Common Pleas used
federal common law analysis. The record does not indicate that there ever was an adjudication of
any claims in the Court of Common Pleas, only that Chatfield filed an appeal of his independent
contractor designation and then withdrew that appeal on June 18, 1996.
case, Peno Trucking received official determinations – the determinations of the OIC and the BWC
– as to the status of its truckers. Peno Trucking did not engage in the type of specious application
of prior case law that pervaded the arguments of the petitioner in Nu-Look Design. Indeed, Peno
Trucking’s reliance on the official determinations of the OIC and the BWC would seem to satisfy
the reasonable basis requirement.
This is especially the case in circumstances like ours, where the individuals in question, while
ultimately determined to be employees, resemble independent contractors on many counts. It is in
such cases where courts can be confident that § 530 functions to advance its legislative purpose: “to
protect employers who exercised good faith in determining whether their workers were employees
or independent contractors.” General Inv. Corp., 823 F.2d at 340 (9th Cir. 1987).
With the burden shifted, the Commissioner has not demonstrated that Peno Trucking does
not qualify for tax relief under § 530. See McClellan, 900 F. Supp. at 107 (“ Once the taxpayer has
made this prima facie showing, the burden then shifts to the IRS to verify or refute the taxpayer’s
explanation.”). The Commissioner has not presented any evidence of Peno Trucking’s treatment of
the truckers in question in a manner inconsistent with that of an independent contractor and the
Commissioner has not presented any tax returns, filed by Peno Trucking, that would be inconsistent
with its truckers’ independent contractor status. In addition, the Commissioner has not alleged that
Peno Trucking has failed to cooperate in any way with the reasonable requests made in the
The Commissioner does argue, however, that Peno Trucking could not have in fact relied
upon the decisions of the OIC and the BWC because those determinations came after the decision
to treat the truckers in question as independent contractors. This argument overlooks the factual
record here. Although the decisions of the BWC and the OIC in response to Jamison’s workers
compensation claim were rendered in late 1997, too late to have actually served as the basis for Peno
Trucking’s employment decision, the OIC’s decision to treat Chatfield as an independent contractor
was rendered on October 25, 1995. Thus, Peno Trucking could have in fact relied upon the decision
of the OIC in making its employment decision for the years in question – 1997 though 1999 – to treat
its truckers as independent contractors.3 Indeed, Robert Peno, Sr., testified at trial that this was in
fact what he had done. The Commissioner has not provided any evidence to the contrary. Therefore,
pursuant to § 530, we conclude that Peno Trucking is eligible for relief from the tax liabilities
imposed upon it by the Commissioner.
For the foregoing reasons, we reverse the decision of the Tax Court.
The Commissioner, in his brief, seems to argue that the OIC’s decision in Chatfield’s case
could not have been relied upon because Chatfield could still have pursued an appeal of the OIC’s
decision in the Court of Common Pleas until June 18, 1997. While this may in fact have been the
case, the Commissioner fails to explain why the mere fact that Chatfield could have appealed the
decision of the OIC until June 18, 1997 should preclude Peno Trucking from relying on the decision
of the OIC prior to that point.