EVANS PUBLISHING, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8278-00.
UNITED STATES TAX COURT
Filed November 7, 2002.
119 T.C. No. 14
Held: Pursuant to
Held, further, pursuant to
Brian C. Bernhardt, Paul L. B. McKenney, and Eric M. Nemeth, for petitioner.
Linda C. Grobe, for respondent.
OPINION
VASQUEZ, Judge: This case is before the Court on petitioner’s Motion to Strike Paragraphs 9 and 10 of the Answer to Second Amended Petition. The parties have presented both written and oral arguments on the motion.
Background
Respondent issued to petitioner a Notice of Determination Concerning Worker Classification Under Section 7436 (notice of determination).1 Respondent determined that petitioner’s sales personnel and graphics personnel should have been treated as employees rather than independent contractors for 1993, 1994, and 1995, and made adjustments to the amounts of employment taxes2
On July 27, 2000, petitioner petitioned this Court. Petitioner disputed that its sales personnel and graphics personnel should have been treated as employees rather than independent contractors; i.e., petitioner sought a redetermination of the classification determined by respondent. Petitioner also disputed the amounts of the employment taxes, additions to tax, and penalties that were set forth on the schedule accompanying the notice of determination.
On September 26, 2000, respondent filed a Motion to Dismiss for Lack of Jurisdiction and to Strike as to the Amounts of Employment Taxes Proposed for Assessment by the Respondent (motion to dismiss). Respondent sought to dismiss issues regarding the amounts of the employment taxes, the additions to tax, and the penalties and to strike from the petition references to the amounts of petitioner’s employment tax. Respondent relied on our decision in Henry Randolph Consulting v. Commissioner, 112 T.C. 1 (1999) (holding that we did not have jurisdiction to decide the amount of employment tax liabilities).
On October 17, 2000, petitioner filed a response to
On December 18, 2000, respondent filed an answer to the amended petition (first answer). In the first answer, respondent affirmatively alleged that Will L. Evans and Sherry L. Evans (Mr. and Mrs. Evans), shareholders of petitioner, were employees of petitioner during 1993, 1994, and 1995, and that petitioner is not entitled to “safe harbor” relief as provided by
On April 18, 2001, petitioner filed a Motion for Leave to File Second Amended Petition (motion for leave). In the motion for leave, petitioner relied on Congress’s amendment of
We granted petitioner’s motion for leave and filed the second amended petition. In the second amended petition, as in the original petition, petitioner sought a redetermination of the classification determined by respondent and disputed the amounts of the employment taxes, additions to tax, and penalties that were set forth on the schedule accompanying the notice of determination.
On June 15, 2001, respondent filed an answer to the second amended petition (second answer). In the second answer, respondent again affirmatively alleged that Mr. and Mrs. Evans were employees of petitioner during 1993, 1994, and 1995, and that petitioner is not entitled to “safe harbor” relief as provided by
On July 16, 2001, petitioner filed a Motion to Strike Paragraphs 9 and 10 of the Answer to Second Amended Petition (motion to strike).3 On July 31, 2001, respondent filed an Objection to Petitioner’s Motion to Strike. On August 20, 2001, petitioner filed a reply.
On October 31, 2001, the Court held a hearing on the motion to strike. At the hearing, respondent conceded that he has the burden of proof regarding the classification of Mr. and Mrs. Evans as employees and the compensation of Mr. and Mrs. Evans through the payment of commissions and other wages disguised as shareholder loans.
At the hearing, the issue arose regarding whether, pursuant to
Discussion
I. Jurisdiction
It is well settled that the Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418 (1943); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The question of the Court’s jurisdiction is fundamental and must be addressed when raised by a party or on the Court’s own motion. Naftel v. Commissioner, supra at 530. If we find that we do not properly have jurisdiction to consider an issue, then we may not decide the issue despite the choice of the Tax Court as a forum to settle the dispute. Id.
A. Additional Individuals and Additional Amounts
SEC. 7436(a). Creation of Remedy.--If, in connection with an audit of any person, there is an actual controversy involving a determination by the Secretary as part of an examination that--
(1) one or more individuals performing services for such person are employees of such person for purposes of subtitle C, or
(2) such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual, upon the filing of an appropriate pleading, the Tax Court may determine whether such a determination by the Secretary is correct and the proper amount of employment tax under such determination. Any such redetermination by the Tax Court shall have the force and effect of a decision of the Tax Court and shall be reviewable as such.
SEC. 7436(d). Special Rules.--
(1) Restrictions on Assessment and Collection Pending Action, Etc.--The principles of subsections (a), (b), (c), (d), and (f) of section 6213, section 6214(a), section 6215, section 6503(a), section 6512, and section 7481 shall apply to proceedings brought under this section in the same manner as if the Secretary’s determination described in subsection (a) were a notice of deficiency.
SEC. 6214(a). Jurisdiction as to Increase of Deficiency, Additional Amounts, or Additions to the Tax.--Except as provided by section 7463 [regarding disputes involving $50,000 or less], the Tax Court shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any additional amount, or any addition to the tax should be assessed, if claim therefor is asserted by the Secretary at or before the hearing or a rehearing.
In Henry Randolph Consulting v. Commissioner, 112 T.C. 1 (1999), while rejecting the taxpayer’s claim that
It is well established that the Court has jurisdiction to review an increased deficiency asserted by the Commissioner at or before the hearing or rehearing.
We conclude that, pursuant to
B. Moneys Disguised as Loans
Although petitioner and respondent agree with our conclusion that the Court has jurisdiction over the additional individuals and the additional amounts of employment taxes,5 petitioner argues that we do not have jurisdiction to rule on respondent’s affirmative allegations that petitioner compensated its shareholders through the payment of moneys disguised as loans.6
Congress has specifically given the Court jurisdiction to determine the proper amount of employment tax under the Commissioner’s determination of whether an individual is an employee.
Therefore, it follows that the Court’s jurisdiction includes determining the amount of wages paid to individuals that the Commissioner determined, or alleged in the answer, to be employees of the taxpayer.
Additionally,
We conclude that, in order to determine the proper amount of employment taxes, pursuant to
II. Motion To Strike
Rule 290(a) provides:
(a) Applicability: The Rules of this Title XXVIII set forth the provisions which apply to actions for redetermination of employment status under Code Section 7436. Except as otherwise provided in this Title, the other Rules of Practice and Procedure of the Court, to the extent pertinent, are applicable to such actions for redetermination.
Title XXVIII does not set forth specific rules regarding motions to strike. See Rules 290-295. Accordingly, we apply Rule 52 and the case law thereunder in determining whether to grant or deny the motion to strike. See Liberty Ministries Intl. v. Commissioner, T.C. Memo. 1984-260 (applying Rule 52, via Rule 210, in the context of an action for declaratory judgment).
Rule 52 provides that this Court, upon a timely motion of the parties or on its own initiative, may strike from any pleading any insufficient claim or defense or any redundant, immaterial, impertinent, frivolous, or scandalous matter. Rule 52 was derived from rule 12(f), Federal Rules of Civil Procedure. Estate of Jephson v. Commissioner, 81 T.C. 999, 1000 (1983); Allen v. Commissioner, 71 T.C. 577, 579 (1979). Accordingly, the principles enunciated by the Federal courts in the interpretation and application of that provision are applicable here. Estate of Jephson v. Commissioner, supra at 1000-1001; Allen v. Commissioner, supra.
In general, motions to strike pleadings have not been favored by the Federal courts. Estate of Jephson v. Commissioner, supra at 1001; Allen v. Commissioner, supra. A matter will not be stricken from a pleading unless it is clear that it can have no possible bearing upon the subject matter of the litigation. Estate of Jephson v. Commissioner, supra; Allen v. Commissioner, supra.
A motion to strike should be granted only when the allegations have no possible relation to the controversy. When the court is in doubt whether under any contingency the matter may raise an issue, the motion should be denied. If the matter that is the subject of the motion involves disputed and substantial questions of law, the motion should be denied and the allegations should be determined on the merits. In addition, a motion to strike will usually not be granted unless there is a showing of prejudice to the moving party.
Estate of Jephson v. Commissioner, supra at 1001 (citations omitted).
Furthermore, in a case in which the taxpayer sought to strike the portion of the answer alleging an increased deficiency pursuant to
A. Second Exam
Petitioner alleges that respondent’s affirmative allegations that Mr. and Mrs. Evans should be classified as employees and that petitioner compensated Mr. and Mrs. Evans through the payment of commissions and other wages disguised as shareholder loans, amounts to a second examination of petitioner which is not permitted pursuant to
The statutory language and legislative history of
B. Additional Cost to Petitioner
Petitioner further alleges that respondent’s affirmative allegations will require that respondent review petitioner’s
After weighing petitioner’s claim of prejudice against respondent’s claim that the affirmative allegations should be tried, we conclude that the fact that petitioner will have to be prepared at trial to counter respondent’s assertion that petitioner compensated Mr. and Mrs. Evans through the payment of commissions, personal expenses, and other wages disguised as shareholder loans is not prejudicial to petitioner and is not a sufficient basis for granting the motion to strike in this case. Estate of Jephson v. Commissioner, supra at 1003 (alleged prejudice of having to adduce evidence at trial to counter the Commissioner’s assertion is insufficient to grant motion to
C. Conclusion
We are not deciding at this time that additional individuals were employees of petitioner or that petitioner is liable for additional employment taxes. We conclude, however, that respondent should have the opportunity to present these allegations to the Court as the questions raised by the allegations are better left for a determination on the merits. Estate of Jephson v. Commissioner, supra at 1003.
Paragraphs 9 and 10 of the Answer to the Second Amended Petition are not redundant, immaterial, impertinent, frivolous, or scandalous. Accordingly, petitioner’s motion to strike is denied.
In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
An appropriate order will be issued.