6427(i)(1) from obtaining a credit for fuel tax under section 34(a)(3). An appropriate order will be issued denying respondent's motion for partial summary judgment. U.R. NEELY, PETITIONER v. COMMISSIONER OF Docket No. 14936-98. Filed February 13, 2001. P contends that R is barred from assessing additional Kirk A. McCarville, for petitioner. VASQUEZ, Judge: Respondent issued to petitioner a notice of determination concerning worker classification. Petitioner contends that respondent is barred from assessing additional employment taxes for the taxable periods in issue on the grounds that the notice of determination was issued after the expiration of the general 3-year period of limitations under section 6501(a).1 Respondent argues that the period of limitations on assessment remains open pursuant to section 6501(c) by reason of petitioner's fraudulent conduct. In a previous opinion, we addressed whether this Court possesses jurisdiction to address issues pertaining to the period of limitations on assessment in the context of a case brought under section 7436. We resolved that inquiry in the 1 All section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. affirmative. See Neely v. Commissioner, 115 T.C. 287 (2000). Accordingly, we now address whether the period of limitations on assessment expired prior to the issuance of respondent's notice of determination. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in Phoenix, Arizona, at the time he filed his petition in this case. Petitioner's Background Petitioner graduated from high school in 1972 and immediately thereafter began working in the air-conditioning business by installing ductwork for his father. In 1976, after attending one semester of college, petitioner went to work for Geottle's Metal Products (Geottle). Petitioner's initial responsibilities at Geottle included installing sheet metal and airconditioning units. He later worked his way up into the estimating department, where he bid jobs on behalf of his employer. In 1985, petitioner left Geottle and formed his own business called the A/C Co. (the company).2 The company specialized in the installation of air-conditioning equipment and associated ductwork, and the company's principal place of business was located in Mesa, Arizona. The activities of the company during 1992 constitute the focus of respondent's determination. Activities of the Company During 1992 The company experienced a busy year in 1992. Petitioner had approximately 100 jobs, with each job lasting anywhere from 6 weeks to 6 months. While petitioner typically maintained a workforce of approximately 20 to 25 people, during 1992 that figure increased to 40. Most of the employees served in the field as installers. Petitioner, a superintendent, an estimator, and an office manager operated out of the business office. 2 The company was initially operated as a partnership between petitioner and an associate, whom petitioner later bought out. At all times during the 1992 tax year, the company was operated by petitioner as a sole proprietorship. At some point in 1992, Robert Cook approached petitioner about working at one of his job sites. Mr. Cook, however, conditioned his services upon being paid in cash. Due to his need for labor, petitioner agreed, but only after informing Mr. Cook that he would be issued a Form 1099 with respect to the cash payments made to him. William Baker and Dennis Page were hired by petitioner under similar circumstances. Petitioner did not meet with these individuals; rather, he hired them on the recommendation of his job foremen. Mr. Baker and Mr. Page each insisted on being paid in cash for their services, a condition to which petitioner again agreed on the understanding that Forms 1099 would be issued with regard to the payments. Petitioner's arrangements with Messrs. Cook, Baker, and Page (collectively, the workers) constitute the only instance in which petitioner paid a worker in cash for services rendered. During less busy times, petitioner rejected requests from individuals to be paid in cash. Petitioner's Internal Accountant Ann Gerber (formerly Ann Melcher) served as the company's office manager from 1986 until the company was sold in 1994. Ms. Gerber was responsible for all monetary aspects of the business. In addition to collecting receivables and paying expenses, Ms. Gerber maintained the company's books and processed the payroll. As part of her payroll obligations, Ms. Gerber calculated the proper amount of employment taxes3 to be withheld from each employee's paycheck. Each time petitioner notified Ms. Gerber that a worker was to be paid in cash, he instructed her that the worker was to be issued a Form 1099 to reflect the payment. Petitioner believed that the issuance of a Form 1099 was sufficient to keep him in compliance with relevant tax laws. The workers submitted weekly timecards to Ms. Gerber, and she would distribute the appropriate cash payments to them. In order to generate the cash necessary to pay the workers, Ms. Gerber would write a check from the company's account to petitioner. The amount of the check included 3 For convenience, we use the term "employment taxes" to refer to taxes under the Federal Insurance Contributions Act (FICA), secs. 3101-3128, the Federal Unemployment Tax Act (FUTA), secs. 3301-3311, and income tax withholding, secs. 3401-3406. See Henry Randolph Consulting v. Commissioner, 112 T.C. 1, 1 n.1 (1999). petitioner's weekly $500 draw, plus whatever amounts were owed to the workers. After depositing petitioner's $500 draw to his individual account, Ms. Gerber received the remainder of the check proceeds in cash. She in turn distributed the cash to the workers in the amounts they were owed. As a result of this practice, the amounts paid to the workers were reflected on the company's books as distributions to petitioner. Petitioner was not aware that the cash payments to the workers were being accounted for in this manner. Ms. Gerber withheld no employment taxes from the amounts paid to the workers. In addition, Ms. Gerber did not issue Forms 1099 to the workers, as such was the responsibility of petitioner's outside accountant. Petitioner did not instruct nor suggest to Ms. Gerber that the cash payments were not to be reported to the Internal Revenue Service. Petitioner's External Accountant Kenneth Messmer, a certified public accountant, served as petitioner's outside accountant starting in 1986. Mr. Messmer was responsible for preparing petitioner's Form 1040, U.S. Individual Income Tax Return (which included the activities of the company on Schedule C, Profit or Loss From Business), and all of the company's required employment tax returns. Additionally, Mr. Messmer prepared the necessary Forms W-2, Wage and Tax Statement, and Forms 1099 pertaining to the company. Mr. Messmer's contact with Mr. Neely was limited; he instead dealt primarily with Ms. Gerber. Ms. Gerber coded the checks written on behalf of the company to various expense accounts, and Mr. Messmer prepared the relevant tax returns based on such information. Petitioner's Employment Tax Returns Petitioner filed various employment tax returns relating to the operations of the company during 1992. Below is a summary of the Forms 941, Employer's Quarterly Federal Tax Return, filed on behalf of the company: 1 Income tax withholding, secs. 3401-3406. 2 Federal Insurance Contributions Act, secs. 3101-3128. With respect to the company's 1992 tax liability under the Federal Unemployment Tax Act, sections 3301-3311, petitioner filed a Form 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return, on March 1, 1993. The form reflected total payments to employees of $353,172, total taxable wages of $176,286, and a FUTA tax liability of $1,410. Petitioner was current in payment of his employment tax obligations listed on the above-described returns. Over the course of 1992, petitioner's company made cash payments of $19,985 to Mr. Cook, $21,694 to Mr. Baker, and $15,414 to Mr. Page. The payments were not included in the appropriate employment tax returns. Petitioner, however, was not aware in signing the returns that the payments to the workers had been omitted. Petitioner's Individual Income Tax Return During the review of his 1992 individual income tax return with Mr. Messmer, petitioner informed Mr. Messmer that he had not received all of the amounts which were reflected on the company accounts as his personal draw. After further investigation, Mr. Messmer became aware that the payments coded as petitioner's personal draw included the cash payments made to the workers. Mr. Messmer therefore made an adjusting entry to petitioner's draw account by subtracting the cash payments to the workers and adding those payments to the labor expense account under cost of goods sold. Petitioner's 1992 individual income tax return was selected for examination in 1995. In the course of the examination, the revenue agent noticed that the cost of goods sold reported by petitioner varied from the figure carried on the company's books by $57,000. Petitioner initially did not know the reason for the discrepancy, but he later informed the revenue agent that the discrepancy was attributable to the cash payments made to the workers. |