## Facts

- A Louisiana professional law corporation operated by Donald G. Cave engaged three associate attorneys and a law clerk during 2003–2004.
- The firm treated the associates and clerk as independent contractors: it issued Forms 1099, did not withhold or deposit employment taxes, and did not execute formal employment agreements.
- The working relationship was continuous rather than project-by-project; there was no showing the associates worked for other law firms while associated with the firm.
- Donald Cave hired the workers, referred and allocated cases to the associates, reviewed at least some work product, made suggestions on handling issues, and expected assistance on his own cases.
- Associates were compensated as a percentage of fees: typically one-third of fees from cases referred by Cave and one-half of fees from cases they originated.
- The firm provided major infrastructure and support, including office space, administrative staff, business cards/letterhead, computers and equipment, and reimbursement of certain professional expenses (including bar dues).
- The IRS issued a worker-classification determination asserting the associates and clerk were employees for 2003–2004 and asserting employment tax liabilities and § 6656 failure-to-deposit penalties; the firm sought redetermination and § 530 relief.

## Issues

1. Whether the associate attorneys and the law clerk were employees or independent contractors for federal employment tax purposes for 2003–2004.
2. Whether the firm qualified for § 530 of the Revenue Act of 1978 safe-harbor relief from employment tax liability.
3. Whether § 6656 penalties for failure to deposit employment taxes applied.

## Decision

- The Tax Court held the three associate attorneys and the law clerk were common-law employees of the corporation for FICA and FUTA purposes for 2003–2004.
- The Tax Court denied § 530 safe-harbor relief.
- The Tax Court sustained the assessed employment tax liabilities and upheld § 6656 failure-to-deposit penalties.
- The court also held Donald G. Cave, as a corporate officer performing substantial services, was a statutory employee; any appellate challenge to that determination was treated as waived.
- On appeal, the Fifth Circuit affirmed.

## Legal Principles

- Common-law employee status for FICA/FUTA turns on whether the service recipient has the right to control not only the result, but also the details and means of the work; no single factor is controlling.
- Relevant factors include the degree of control, the worker’s investment in facilities, opportunity for profit or loss, permanency of the relationship, and whether skill is exercised as part of an independent business or as part of the firm’s integrated operations.
- A corporate officer who performs substantial services is treated as a statutory employee for employment tax purposes.
- Section 530 relief requires consistent non-employee treatment, consistent information reporting, and a reasonable basis (such as reliance on authority, past audit, or recognized industry practice); failure on these requirements defeats the safe harbor.
- Section 6656 penalties apply for failure to timely deposit employment taxes absent reasonable cause.

## Conclusion

The Tax Court classified a law firm’s associates and law clerk as employees where the firm supplied the infrastructure, integrated their services into its practice, and retained supervisory authority, and it imposed employment taxes and failure-to-deposit penalties after finding no § 530 safe-harbor protection.


Donald G. Cave, A Prof'l Law Corp. v. Commissioner, T.C. Memo. 2011-48 (2011)