Anthony Contracting, Inc. and Lucimar A. Inacio v. Commissioner of Revenue (September 26, 2016)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



ANTHONY CONTRACTING, INC.	v.	   COMMISSIONER OF REVENUE
and LUCIMAR A. INACIO 				   						
					
Docket No. C321996			 	   Promulgated:
							   September 26, 2016

This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39, from the refusal of the Commissioner of Revenue ("appellee" or "Commissioner"), to abate withholding tax, along with related interest and penalties, assessed against the appellant, Anthony Contracting, Inc. ("appellant"), for the 60 monthly withholding periods from the period ending March 31, 2007 through and including the period ending March 31, 2012 ("tax periods at issue").
Commissioner Scharaffa heard this appeal and was joined by Chairman Hammond and Commissioners Rose, Chmielinski and Good in the decision for the appellee.  
	These findings of fact and report are made pursuant to requests by both the appellant and appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
Roger S. Davis, Esq. for the appellant.

	Andrew M. Zaikis, Esq. for the appellee. 


FINDINGS OF FACT AND REPORT
	On the basis of all of the evidence, the Appellate Tax Board ("Board") made the following findings of fact.
	The appellant is a Massachusetts corporation which at all times relevant to this appeal was engaged in the business of providing professional painting services.  On January 30, 2013, having determined that the appellant failed to file withholding tax returns or remit withholding tax, the Commissioner made an assessment of tax, interest and penalties in the total amount of $76,670.63.  In response, on March 27, 2013, the appellant filed withholding tax returns for the tax periods at issue claiming $0 withholding for all periods.  On that same date, the appellant also filed an abatement application seeking the abatement of the tax, interest and penalties assessed by the Commissioner for the tax periods at issue.  The Commissioner denied the abatement application on November 6, 2013.  On December 11, 2013, the appellant seasonably filed its Petition Under Formal Procedure with the Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction over the instant appeal. 
The contested issue in this appeal is whether workers who provided painting services for the appellant were independent contractors or whether they were the appellant's employees for whom the appellant was required to withhold and remit income taxes.  At the hearing, the appellant presented two witnesses: Mr. Inacio and one of the appellant's alleged independent contractors, Sebastio Queiroz.  The appellant also submitted into evidence a copy of a contract entered into by the appellant as the subcontractor for a project involving the School Street residences in Athol ("School Street Contract") as a representative sample of the contracts entered into by the appellant with general contractors for painting jobs during the tax periods at issue.
Relevant to the issue in this appeal were the following provisions from the School Street Contract prescribing the appellant's obligations, as the subcontractor, for performing the work pursuant to the contract:
Exhibit J - Miscellaneous Provisions

3.	All subcontractors shall abide by all relevant state and federal laws and regulations with regard to their work on the jobsite including, but not limited to, those laws and regulations relating to:
. . .
	c.	Classification of and payment to all employees on the jobsite as employees instead of Independent Contractors.

4.	All subcontractors shall:

. . .

	e.	Deduct from employee paychecks those withholdings required by state and federal law.

. . . 

3.2.5	The Subcontractor agrees that all Work shall be done subject to the final approval of the Owner and Architect. 

. . .

3.3.2	The Subcontractor shall comply with federal, state and local tax laws, social security acts, unemployment compensation acts, worker's or workmen's compensation acts, Davis-Bacon or State prevailing wage requirements, or local ordinances insofar as applicable to the performance of this Subcontract.

. . . 
5.1	The Subcontractor shall perform all the Work required by the Contract Documents . . . .  The Subcontractor agrees to furnish all labor, materials and taxes, supervision, equipment and tools, applicable permits, staging, transportation, layout, coordination, off loading, hoisting and anything else required to complete the Work without reservation.

Mr. Inacio testified concerning the business practices of the appellant.  At all relevant times, Mr. Inacio owned and operated the appellant, a commercial painting corporation.  The painting was performed by workers that Mr. Inacio hired.  He testified that his normal business practice was to recruit workers from within his local Brazilian community, with the exception of projects that were located outside of Massachusetts.  Mr. Inacio claimed that he did not request employment applications or resumes from his workers but instead would decide which workers to hire, and at what rate to pay them -- typically between $14 and $20 per hour -- based on the particular project and on Mr. Inacio's own estimation of the worker's skill and experience.  Mr. Inacio further testified that he did not have any written contracts between the appellant and the workers specifying the wage rate or obligations for the project.  He testified that he hired the workers only for a specific project and that their service ended when the specific project ended.  Mr. Inacio further claimed that the workers likewise had no loyalty towards the appellant, and if they found a higher hourly wage working elsewhere, that they would leave the appellant's project without notice.  
Mr. Inacio testified that the appellant obtained work by submitting detailed written bids for commercial painting projects to general contractors.  Mr. Inacio explained that he would calculate his estimate of the appellant's costs to perform the painting work and then propose a bid based on his estimate.  When the appellant had a successful bid for the painting work, the appellant, as the project subcontractor, would then enter into a written contract with the general contractor for the project work to be performed.
Mr. Inacio testified that the customer typically would set the hours during which the work would be performed, particularly when the customer was a commercial store and would want work to be performed during the evening or during times of reduced customer traffic.  
Mr. Inacio admitted that the appellant had employed its own supervisor, Donald Alves, whose job was to visit the various job sites and to supervise the work being performed.  Mr. Alves was employed by the appellant in this position until he passed away in 2010.
Despite his concession that Mr. Alves worked as a supervisor for the appellant, Mr. Inacio testified that he had only one employee, an office manager, during the tax periods at issue.  Upon questioning, Mr. Inacio testified that he believed that he had paid withholding taxes on this employee's salary while he was working for the appellant; however, Mr. Inacio later testified that he was unsure whether the appellant had ever filed withholding tax returns for this employee.  
Mr. Inacio testified that during the tax periods at issue, he had retained the services of a local accountant, Gibson Viera, who conducted business as U.S. Fiscal Tax and Financial in Cambridge, Massachusetts.  Mr. Inacio testified that he had retained Mr. Viera to prepare corporate tax returns, including Forms 1099 for the appellant's payments to its workers, as well as personal income tax returns for Mr. Inacio.  Mr. Inacio testified that he relied upon Mr. Viera to prepare and file all necessary returns and documents.  Mr. Inacio testified that he did not have copies of Forms 1099 corresponding to all of the appellant's painters during the tax periods at issue, which the appellant should have issued if it claimed that the painters were independent contractors.  Mr. Inacio was able to produce copies of only a handful of Forms 1099 for the years 2008 and 2009, and he admitted that he had never received copies of Forms 1099 from his accountant for any of the other tax years.  Mr. Inacio further testified that Mr. Viera had evidently failed to perform the duties for which he had been engaged, including the filing of Forms 1099, and had failed to return the appellant's records to Mr. Inacio.  Mr. Inacio testified that Mr. Viera left the country to return to Brazil without notice, and that he did not discover Mr. Viera's failures until sometime in 2012, the same year when Mr. Viera left the country.
The appellant's second witness was Mr. Queiroz, who testified that he had worked for the appellant during 2008 and 2009.  Mr. Queiroz testified that he worked on various jobs during the tax periods at issue, and that he had provided his own transportation, clothing, drop cloths, roller frames, poles, hard hats, boots, and cleaning equipment.  The appellant provided the paint and mechanical equipment, like scaffolding.  He further testified that he was paid on an hourly basis for his work for each job.  Mr. Queiroz then testified that he also performed other painting jobs, both for other contractors and his own independent work, during the same tax periods at issue when he was not performing work for the appellant.  Mr. Queiroz identified a copy of one of the Forms 1099 from 2009, entered into evidence at the hearing, as being issued to him, and he claimed that he had reported all of the income shown on the Form 1099 on his own personal income tax return.
The Commissioner then presented his case-in-chief.  The Commissioner's evidence was limited to the tax filing history of the appellant and Mr. Inacio, including the appellant's failure to file any corporate tax returns during any of the tax periods at issue.  
On the basis of the above evidence, the Board found and ruled that the appellant failed to establish that its painters were independent contractors.  
First, the evidence indicated that the workers were operating under the direction and control of the appellant.  The appellant admitted that, during most of the tax periods at issue, it employed a supervisor, Mr. Alves, whose job was to manage and direct the work being performed by the appellant's painters.  The Board found that this evidence established that the workers were under the direction and control of the appellant in the performance of their duties during the tax periods when Mr. Alves was employed by the appellant.  
As to the remaining tax periods, the appellant produced insufficient evidence to establish that the workers were free from the control of the appellant.  The appellant produced no records or documentation, including but not limited to contracts between the appellant and the workers to document the level of independence the workers may have had from the appellant.  Evidence concerning loyalty to the appellant, including Mr. Inacio's and Mr. Queiroz's testimonies that the painters were free to perform other painting jobs for other contractors or for their own enterprises when not working for the appellant, did not address whether the workers were independent from the control of the appellant when working on the appellant's projects.  The appellant thus failed to produce sufficient evidence to show that the workers were independent contractors while they were performing the jobs under the appellant's contracts. 
Second, the Board found that, because the appellant was in the business of providing painting services, the workers were performing the principal service offered by the appellant, not a specialized or unusual service that was not normally performed by the appellant.  As will be explained in the Opinion, this is another factor that determines whether a worker is an employee, not an independent contractor.
Additional factors further indicated that the workers were employees, not independent contractors.  For example, the workers were paid on a straightforward hourly basis, at a rate set by the appellant, with no opportunity for the workers to increase their profits based on their skill or efforts.  These factors further established that the workers were employees. 
Therefore, on the basis of all of its findings, the Board found and ruled that the workers hired by the appellant during the tax periods at issue were its employees, not independent contractors.  Accordingly, the Board issued a decision upholding the Commissioner's assessment of withholding tax, interest and penalties for the tax periods at issue.

OPINION
The issue in the instant appeal is whether the workers employed by the appellant during the tax periods at issue were "employees" or "independent contractors."  The difference is crucial: G.L. c. 62B, § 2, requires an employer to withhold income taxes from the wages of an employee, but it does not apply to the wages of an independent contractor.  
General Laws c. 62B, § 1 adopts the definition of "employee" found in § 3401(c) of the Internal Revenue Code ("Code").  Treas. Reg. § 31.3401(c)-1(b), which interprets Code § 3401, provides general guidelines for distinguishing between an employee and an independent contractor.  Generally, a worker is properly characterized as an employee when the employer has the right to control and direct the worker, "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," or in other words, "not only as to what shall be done but how it shall be done."  Treas. Reg. § 31.3401(c)-1(b).  According to the Commissioner's interpretation of this Treasury Regulation, as stated in Letter Ruling 80-30 ("LR 80-30"), it is the right to discharge authority that is key, not whether the authority is actually discharged:  "[t]he employer does not have to actually direct the manner in which the services are performed so long as he has a right to do so." LR 80-30.
Similarly, G.L. c. 149, § 148B ("§ 148B") provides a consistent rule for determining the status of a worker as an employee for labor and minimum wage purposes: 
(a) For the purpose of this chapter and chapter 151, an individual performing any service, except as authorized under this chapter, shall be considered to be an employee under those chapters unless:--     
(1) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
     (2) the service is performed outside the usual course of the business of the employer; and,
(3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
The failure to satisfy any prong of these "three indicia of an independent contractor relationship" will result in an individual's classification as an employee.  Sebago v. Boston Cab Dispatch, Inc., 471 Mass. 321, 327 (2015). 
In this appeal, the Board found evidence that the appellant exerted significant control over the workers.  The appellant admitted that, for most of the tax periods at issue, it had engaged a supervisor, Mr. Alves, whose job was to manage and direct the work being performed by the appellant's painters.  The Board found that this evidence established that the workers were under the direction and control of the appellant during most of the tax periods at issue.  As to the remaining tax periods, the appellant produced insufficient evidence to establish that the workers were not under the control of the appellant.  The appellant produced no contracts between it and its workers to outline the arrangement agreed upon by them, and the appellant produced merely a few Forms 1099 supporting tax treatment of the workers.  The appellant's insufficient evidence prevented it from meeting its burden to prove that the Commissioner's classification was incorrect.  See Staples v. Commissioner of Corps. and Tax'n, 305 Mass. 20, 26 (1940) ("the burden of establishing [its] right to an abatement was on the taxpayer").
The Board also found that the appellant's evidence as to whether the workers had an obligation to the appellant beyond any hours that they actually worked, whether they could simply walk away from their jobs, or whether they could hold multiple jobs with multiple employers during the same time they were employed by the appellant, did not establish the appellant's level of control over the workers.  Loyalty to the employer is not one of the factors cited in Treas. Reg. § 31.3401(c)-1(b) or in LR 80-30, and the appellant offered no legal authority for this proposition. 
Whether "the service is performed outside the usual course of the business of the employer" is the second prong under § 148B, and likewise a key a factor considered by Federal courts in tax cases:  "The fact that the work [the worker] performs is integral to the principal's regular business likewise suggests 'employee' status."  Central Motorplex, Inc. v. Commissioner, T.C. Memo 2014-207 (citing Donald G. Cave, a Professional Law Corp., T.C. Memo 2011-48, aff'd 476 Fed. Appx. 424 (5th Cir. 2012)).  See also Breaux & Daigle, Inc, v. United States, 900 F.2d 49, 52-53 (5th Cir. 1990) (citations omitted) (finding employee status particularly when the worker is a laborer "who perform[s] the essential everyday chores" of the taxpayer's business operation).  Here, the evidence establishes that the workers were performing painting services, which were squarely within the usual course of business of the appellant.  The appellant offered no evidence to the contrary.  Therefore, the appellant failed to meet this prong of § 148B.
The appellant offered minimal evidence on the third prong of § 148B, whether the workers were engaged in independently established painting trades or businesses.  The fact that workers could perform multiple painting jobs other than those for the appellant did not address whether the painters had their own established enterprises.  In any event, even if the workers had their own painting trade or business, their work for the appellant was in furtherance of the appellant's painting business and not their own businesses.  Therefore, the appellant failed to meet any of the three prongs of § 148B.   
Other facts of this appeal provide further support for the Commissioner's determination.  For example, the Board found that the appellant's payment of the workers on a fixed hourly basis, at a rate determined and fixed by Mr. Inacio and for a length of time established by him, was typical of an employee arrangement, not an independent contractor arrangement, which typically provides an opportunity for the worker to increase his profits based on skills or efforts.  See, e.g., Simpson v. Commissioner, 64 T.C. 974, 988 (1975) (finding that an opportunity to make a profit or loss based solely on the worker's efforts and skills, as opposed to a fixed time-based wage, is consistent with status as an independent contractor).  
On the basis of the facts of the instant appeal, the Board found that the appellant offered insufficient evidence to challenge the Commissioner's classification of its workers as employees rather than as independent contractors.  
Accordingly, the Board issued a decision for the appellee in this appeal.

    THE APPELLATE TAX BOARD




  By: _________________________________       
    Thomas W. Hammond, Jr., Chairman 





A true copy,


Attest: ____________________________
	      Clerk of the Board

	

 This appeal was brought in the names of Anthony Contracting, Inc. and its sole shareholder, Lucimar A. Inacio.  Although there was evidence of a deemed assessment against Mr. Inacio under G.L. c. 62, § 5 and G.L. c. 62C, § 31A as an individual personally and individually liable for the unpaid withholding tax due from Anthony Contracting, Inc., no evidence was offered that Mr. Inacio filed an abatement application in his own name.  Accordingly, this appeal is limited to the issue of whether the assessment against Anthony Contracting, Inc. should be abated.

ATB 2016-396