Specialty Transport & Delivery Services, Inc. v. COMMISSIONER OF INTERNAL REVENUE On Appeal from the Decision of the United States…

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 03-2732
SPECIALTY TRANSPORT & DELIVERY SERVICES, INC.
Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE
On Appeal from the Decision of the United States Tax Court
( No. 01-10261)
United States Tax Court Judge: Honorable Mary Ann Cohen
Submitted Under Third Circuit LAR 34.1(a)
January 15, 2004
Before: SLOVITER, RENDELL and ALDISERT, Circuit Judges.
(Filed: March 12, 2004)
OPINION OF THE COURT
ALDISERT, Circuit Judge.
This appeal from a decision of the United States Tax Court that decided that John
Ludlow, an officer and sole shareholder of the taxpayer, Specialty Transport & Delivery

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Services, Inc. (“Specialty Transport”), was an employee and that the taxpayer was
therefore liable for taxes under the Federal Insurance Contributions Act (“FICA”), 26
U.S.C. §§ 3101-3128, and the Federal Unemployment Tax Act (“FUTA”), 26 U.S.C. §§
3301-3311. We affirm for the rationale and holding set forth in Nu-Look Design, Inc. v.
Comm’r of Internal Revenue, 356 F.3d 290 (3d Cir. 2004).
I.
Because counsel for the Appellant represented also the Appellants in Nu-Look as
well the appeals resulting in non-precedential opinions in Yeagle Drywall Co., Inc. v.
Commissioner of Internal Revenue, 54 Fed. Appx. 100 (3d Cir. 2002), and Veterinary
Surgical Consultants v. Commissioner of Internal Revenue, No. 03-2733 (3d Cir. 2004),
and because we write only for the parties, our discussion will be truncated. We have to
decide whether John F. Ludlow was an employee of the petitioner for federal employment
tax purposes during 1996 through 1998 and, if so, whether petitioner is entitled to relief
under Section 530 of the Revenue Act of 1978, as amended.
Ludlow had been in the business of providing hauling services since 1973. He
subsequently decided to incorporate his business as Specialty Transport and Delivery
Services, Inc. on March 9, 1989, and since that time it has been operated as an S
corporation.
Since its organization, Specialty Transport has provided pick up and delivery
services to distributers, wholesalers and manufacturers of steel, steel coil and steel related

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products. This activity was and is the taxpayer’s only business. It is also the only source
of income to Ludlow. Ludlow was elected President, Vice President, Secretary and
Treasurer of taxpayer. He is also its sole director. During 1996 to 1998, Ludlow ordered
and purchased supplies, entered into verbal and/or written agreements, oversaw the
finances, collected monies owed, managed the company, maintained customer
satisfaction, performed all bookkeeping services – with assistance from his spouse,
Sharon Ludlow from time to time – and performed all pick up and delivery services for
customers on behalf of taxpayer. No other person provided any services whatsoever to
the taxpayer.
During the period in issue, taxpayer received customer referrals from Pyle
Transport Services, Inc.
II.
The taxpayer received a notice from the Internal Revenue Service – “Notice of
Determination concerning worker classification under § 7436” – advising that the IRS
had determined that Ludlow was to be classified as an employee for purposes of
employment taxes for the relevant years. It also advised that taxpayer was not “entitled to
relief from this classification pursuant to Section 530 of the Revenue Act of 1978.”
Taxpayer filed a timely petition for re-determination with the United States Tax
Court.
The taxpayer did not make regular payments to Ludlow for his services. It claimed

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no deductions either for compensation of officers or for salaries or wages in 1996 or
1997. For 1998, its return reflects a deduction of $15,000.00 for compensation of an
officer. Schedule K-1, Shareholder’s Share of Income, Credits, Deductions, etc., attached
to returns shows $15,605.36 for 1996, $27,362.14 for 1997 and $38,486.89 for l998 as a
pro rata share of, and as a property distribution other than a dividend to, Ludlow. During
this period taxpayer did not issue any Forms W-2, Wage and Tax Statement to Ludlow. It
did not issue any Forms 1099 to Ludlow in 1996 or 1997; it did in 1998 for “non-
employee compensation” and for“rents” of $7,200.00 for use of Ludlow’s residence as a
business office for taxpayer. Ludlow and his wife filed a joint form 1040 reporting as
ordinary income from “rental real estate, royalties, partnerships, S corporations, trusts,
etc.” in the amounts of $15,605.36, $27,362.14 and $45,686.89 for 1996, 1997 and 1998,
respectively.
Based on these facts the Tax Court determined that the IRS had not erred in
classifying Ludlow as an employee under the FICA and FUTA. It found that the
payments received by him were enumeration for substantial services performed on behalf
of the taxpayer. The court also concluded that the taxpayer could not obtain relief from
the taxes due under the safe harbor established by Section 530 of the Revenue Act of
1978.
III.
We have “exclusive jurisdiction,” 26 U.S.C. § 7482(a), “to review the decisions of

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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[.]” 26 USC § 7482(a)(1). Our review is
plenary over findings determinations of law including a construction and application of
the Internal Revenue Code. PNC Bankcorp, Inc. v. Comm’r of Internal Revenue, 212
F.3d 822, 827 (3d Cir. 2000).
IV.
FICA and FUTA impose taxes on employers based on the wages paid to
individuals in their employ. 26 U.S.C. §§ 3111, 3301. “Wages” is defined broadly by
both Acts, with certain exceptions not applicable here, as “all remuneration for
employment[.]” Id. §§ 3121(a), 3306(b). Employment is defined as “any service of
whatever nature, performed . . . by an employee for the person employing him[.]” Id. §§
3121(b) and 3306(c). FICA also defines “employee” in pertinent part as “1) any officer
of a corporation; or 2) any individual who, under the usual common law rules applicable
in determining the employer-employee relationship, has the status of an employee[.]” Id.
§ 3121(d). Treasury Regulation §§ 31.2-1(d)-1(b) restates the general rule that an officer
of a corporation is an employee of the corporation and specifies that there is an exception
for an “officer of a corporation who as such does not perform any services or performs
only minor services and who neither receives nor is entitled to receive, directly or
indirectly, any remuneration[.]” 26 C.F.R. §§ 31.3121(d)-1(b).
The Tax Court determined that Ludlow performed substantial services for the

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taxpayer and that the distributions of income received were remuneration for the services
rendered. Accordingly, it held that the taxpayer was liable for future federal employment
taxes under the FICA and FUTA.
V.
We are in complete agreement with the Tax Court. Ludlow’s services were not minor.
He performed all tasks for the taxpayer. These services were substantial because he was the
only employee. Accordingly, the Tax Court did not err in concluding that the distribution of
income paid by the taxpayer were remunerations for services rendered, thereby constituting
wages under both FICA and the FUTA. See Nu-look Design, Inc., 356 F.3d at 294.
Taxpayer relies on the teachings of Texas Carbonate Co. v. Phinney, 307 F.2d 289
(5th Cir. 1962). Suffice it to say, in Nu-Look Design, Inc., we addressed the identical
argument and rejected it, concluding “Nu-Look’s reliance on Texas Carbonate is puzzling.”
356 F.3d at 294.
IV.
Section 530 of the Revenue Act of 1978 is a safe harbor for taxpayers who owe
FICA and FUTA taxes as the result of wrongfully failing to classify certain individuals as
employees. This uncodified section relieves the taxpayer of certain federal employment
tax liabilities arising from a failure to treat an individual as an employee if the taxpayer
had a “reasonable basis for not treating such an individual as an employee.” Section
530(a)(2). Appellant argues that it I entitled to relief under this section. In Nu-Look

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Design, Inc., we rejected this argument as well. 356 F.3d at 294.
Taxpayer’s main contention is that it reasonably relied on the usual common law
rules for determining an employer-employee relationship and not classifying Ludlow as
an employee. We were not persuaded by this argument also in Nu-Look Design, Inc., 356
F.3d at 293-294.
VI.
Taxpayer alleges a due process violation because the IRS failed to give written
notice of Section 530 at the commencement of the audit inquiry. The Tax Court rejected
this argument, explaining that relief under the due process clause required some showing
of prejudice. We repeat what we said in Nu-Look Design, Inc., that because the record is
devoid of evidence of any actual prejudice, it may not prevail. 356 F.3d at 295.
We will affirm the decision of the Tax Court.

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