Reflectxion Resources, Inc. v. Commissioner

T.C. Memo. 2020-114UNITED STATES TAX COURT
REFLECTXION RESOURCES, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12017-16. Filed August 3, 2020.
P, a medical staffing agency, hired therapists to work for client
medical facilities. P entered into a professional services agreement
with G for 11 calendar quarters, during which G paid the therapists
and filed employment tax returns reporting itself, not P, as their
employer, pursuant to I.R.C. sec. 3401(d). For the next 5 calendar
quarters, P paid the therapists itself and filed the employment tax
returns. In all 16 quarters the therapists were paid reimbursements for
travel expenses that were not reported as wages subject to
employment taxes.
R examined P’s employment tax liabilities for all 16 quarters
and determined that the travel expense reimbursements were subject
to employment taxes. For all 16 quarters P contended that the travel
expense reimbursements are not taxable. For the 11 calendar quarters
reported by G, P contended that the therapists were employees not of
P but of G and that, if they were G’s employees, G was entitled to
“section 530 relief” from employment taxes under the Revenue Act of
1978, Pub. L. No. 95-600, sec. 530, 92 Stat. at 2885. R issued a
-2-
[*2] “Notice of Determination of Worker Classification” in which he
determined--ostensibly for all 16 quarters--that the workers are
properly classified as P’s employees and that P is not entitled to
section 530 relief.
Held: We have jurisdiction under I.R.C. sec. 7436(a)(2) as to
the 11 calendar quarters reported by G, because after an audit R
issued a determination concerning section 530 relief, as to which
there was an “actual controversy”.
Held, further, we do not have jurisdiction as to the 5 calendar
quarters reported by P, because, despite R’s purported
“determinations” concerning the workers’ status as employees and
concerning section 530 relief, P had reported the workers as
employees and had never claimed section 530 relief for those reported
quarters, and there was no “actual controversy” on those issues, as
required by I.R.C. sec. 7436(a).
Saul Mezei, Mary H. Hevener, Steven P. Johnson, and John F. Craig III,
for petitioner.
Linda P. Azmon, for respondent.
MEMORANDUM OPINION
GUSTAFSON, Judge: The petition in this case, brought by Reflectxion
Resources, Inc., pursuant to section 7436,1 seeks--
1
Unless otherwise indicated, all section references are to the Internal
(continued...)
-3-
[*3] a redetermination of the determinations and deficiencies in Federal
income tax withholding and Federal Insurance Contributions Act
(“FICA”) taxes for the sixteen calendar quarters in the years 2008
through 2011, set forth by the Commissioner of Internal Revenue
(“Respondent”) in a Notice of Determination of Worker
Classification (“NDWC”) dated February 26, 2016.
The principal merits issue that must eventually be decided in this case is whether
certain travel reimbursement expenses are subject to employment taxes as wages.
In this opinion we do not address that issue.
Rather, the case is now before us on “Petitioner’s Motion to Determine
Jurisdiction”, and we address the jurisdictional questions that petitioner has raised.
The parties agree that we have jurisdiction over the first 11 of the 16 quarters at
issue, and we so hold. Respondent contends that we also have jurisdiction over
the remaining 5 quarters, but we hold that we do not.
1
(...continued)
Revenue Code of 1986 as in effect at all relevant times (codified in 26 U.S.C.).
However, references to “section 530” are to the Revenue Act of 1978, Pub. L. No.
95-600, sec. 530, 92 Stat. at 2885.
-4-
[*4] Background2
Petitioner’s business
Petitioner was organized in 2001 as a corporation under the laws of the
State of Delaware. Its principal place of business when it filed its petition was in
Florida.3 The tax periods at issue are the 16 calendar quarters in the years 2008
through 2011. Throughout those periods, petitioner operated as a medical staffing
agency. It employed various therapists to fulfill contracts with clients throughout
the United States (hospitals, schools, physical therapy clinics, and other healthcare
facilities) who sought therapists for temporary staffing and for direct hire
purposes.
2
The facts underlying the jurisdictional issues are not in dispute. We
therefore need not address any issues as to burden of proof or burden of
production, nor any questions about the scope and standard of our review. In this
statement of the background of the case, we largely follow respondent’s
recounting of the facts. Respondent’s version is in turn based largely on the
petition.
3
Under the general rule of section 7482(b)(1), our decision in this case may,
absent stipulation of the parties under section 7482(b)(2), be “reviewed by the
United States court of appeals for the circuit in which is located * * * (B) in the
case of a corporation seeking redetermination of tax liability, the principal place of
business or principal office or agency of the corporation”. Because petitioner
seeks a redetermination of its liabilities and its principal place of business is
Florida, appeal in this case would be to the U.S. Court of Appeals for the Eleventh
Circuit.
-5-
[*5] Reimbursement of therapists’ travel expenses
During the periods at issue, petitioner hired therapists who were local to
petitioner’s clients. Petitioner also hired “travel therapists” who, in order to accept
employment assignments for clients to whom they were not local, had to travel
from their locations to the clients’ geographical areas to perform services for the
clients.
During the periods at issue, petitioner reimbursed the travel expenses of
travel therapists--i.e., per diem payments for meals and lodging and other travel
expenses.4 Petitioner treated reimbursement payments for some travel therapists
(not at issue here) as wages subject to employment taxes--i.e., Federal Insurance
Compensation Act (“FICA”) tax and income tax withholding (“ITW”). However,
for other travel therapists, petitioner reimbursed travel expenses but did not treat
those payments as wages subject to FICA or ITW. The travel expenses that
petitioner did not treat as subject to employment taxes are the subject of the merits
issue in this case. (We do not resolve that dispute in this opinion.)
4
For some travel therapists, petitioner provided housing rather than
reimbursing them for housing expenses. Both parties appear to assume that, for
employment tax purposes, provision of housing is equivalent to reimbursement for
housing expenses; and for purposes of this opinion, we assume the same. For
simplicity’s sake we refer only to reimbursement in the following discussion.
-6-
[*6] Gevity’s reporting in the first 11 quarters
For the 11 quarters ending March 31, 2008, through September 30, 2010
(“the Gevity-reported quarters”), petitioner was party to a professional services
agreement (“PSA”) with Gevity HR, Inc. (“Gevity”). Under the PSA, Gevity
(rather than petitioner) reported the wages and withholding of petitioners’
employees on Forms 941, “Employer’s Quarterly Federal Tax Return”, and Forms
W-2, “Wage and Tax Statement”. Gevity did this reporting under its own
employer identification number (“EIN”). On those forms the payments for travel
reimbursement were not reported as wages subject to employment taxes.
Petitioner did not deposit any FICA taxes or ITW with the Internal Revenue
Service (“IRS”) under its own EIN for the Gevity-reported quarters.
The PSA was terminated at the end of September 2010.
Petitioner’s reporting in the subsequent 5 quarters
Thereafter, for the 5 calendar quarters ending December 31, 2010, through
December 31, 2011 (“the self-reported quarters”)--i.e., the quarters after the
Gevity-reported quarters--petitioner under its own EIN timely filed Forms 941 and
issued Forms W-2 to the travel therapists. On those forms petitioner reported the
wages it paid to the travel therapists, but petitioner (like Gevity in the previous
-7-
[*7] quarters) did not report or pay taxes on the travel reimbursement payments at
issue.
Employment tax examination
The IRS examined petitioner’s employment tax liabilities for the periods at
issue, and its examiners determined that petitioner’s travel reimbursement plan
violated the accountable plan rules provided in section 62 and its accompanying
regulations. Specifically, respondent found that petitioner paid per diem
payments, mileage, and other travel expenses to travel therapists who petitioner
failed to properly determine were performing services while traveling “away from
home” within the meaning of section 162(a)(2)--an issue we do not resolve in this
opinion. The IRS examiners further determined that petitioner’s travel
reimbursement practice constituted “wage recharacterization” in violation of
section 1.62-2(d) of the Income Tax Regulations.
During the audit petitioner maintained that, for employment tax purposes,
the therapists were Gevity’s employees for the Gevity-reported quarters because
Gevity was their section 3401(d)(1) statutory employer during that time.
Petitioner also maintained that, with respect to the Gevity-reported quarters, it
qualified for relief from any employment tax liabilities under section 530 of the
Revenue Act of 1978, Pub. L. No. 95-600, 92 Stat. at 2885, to which we refer as
-8-
[*8] “section 530”. We quote and discuss section 530 in part II below. During the
audit petitioner did not raise any contention (under section 530 or otherwise) in
connection with the self-reported quarters.
The IRS examiners proposed the employment tax liabilities at issue.
Petitioner’s appeal
Petitioner filed a protest with the IRS, and the case was forwarded for
consideration by the IRS’s Office of Appeals (“Appeals”). During the course of
Appeals’ consideration, petitioner sent to Appeals a two-page letter dated June 18,
2015, with two attachments--(1) an eight-page “List of Authorities for Review in
Connection with Reflectxion’s Protest” and (2) a red-lined copy of “Treas. Reg. §
1.62-2”, showing revisions made to the proposed regulation to yield the final
regulation.
In its June 2015 submission, petitioner referred to section 530. For reasons
we explain below, petitioner’s references in this submission to section 530 are
significant to the jurisdiction issue we resolve here, so we quote the relevant
portions of that submission at length.
Petitioner’s letter explained that it was “submitting additional authorities for
your review”, and it included four “bullet points”. The fourth stated:
-9-
[*9] The contract between Reflectxion and Gevity, in place through the
third quarter of 2010, ensured under Florida law that Gevity was the
section 3401(d)(1) employer, and thus that Reflectxion was not
required to file any payroll tax returns treating its employees as
subject to wage withholding. For this reason, Reflectxion should be
subject to Section 530 relief from withholding for these periods.
[Emphasis added.]
Thus, petitioner’s letter invoked section 530 for the Gevity-reported quarters but
not for the self-reported quarters.
Petitioner’s eight-page “List of Authorities” consisted of seven numbered
sections, the seventh of which (at pp. 6-8) stated in full as follows (emphasis
added):
7. Disputes over the Application of Section 530 of the Revenue
Act of 1978 Can Be Resolved in Tax Court.
The final important authorities that should be examined in
consideration of this Appeal are the several recent cases determining
both that (a) the Tax Court has jurisdiction, provided by Code section
7436, over any cases in which there is a “dispute” about the
application of Section 530 of the Revenue Act of 1978, Pub. L. No.
95-600, sec. 530, 92 Stat. at 2885 (the text of which we faxed to you
in advance of our Appeals Conference on June 8, and is quoted again
below); and (b) that Section 530 is not limited solely to cases
involving the classification of workers as employees versus
independent contractors, but instead, by its terms prohibits the IRS
from assessing payroll taxes on any employees in instances where the
employees’ common law employer has reasonably believed that the
employees’ wages are exempt from payroll taxes. Section 530 of the
Revenue Act of 1978 provides in relevant part:
“(a) Termination of Certain Employment Tax Liability. -
- 10 -
[*10] (1) In general. - If -
(A) for purposes of employment taxes, the taxpayer did not
treat an individual as an employee for any period, and
(B) in the case of periods after December 31, 1978, all Federal
tax returns (including information returns) required to be filed
by the taxpayer with respect to such individual for such period
are filed on a basis consistent with the taxpayer’s treatment of
such individual as not being an employee, then, for purposes of
applying such taxes for such period with respect to the
taxpayer, the individual shall be deemed not to be an employee
unless the taxpayer had no reasonable basis for not treating
such individual as an employee.”
During the period that Reflectxion had contracted with Gevity to act
as the “co-employer” under Florida law (and, effectively as the
“statutory employer” under Code section 3401(d)(1)), Reflectxion
knew that all the payments to its employees (including the per diem
payments) were being made by Gevity, and it knew that all the
employment tax and information returns, which were filed by Gevity
and accepted by the IRS, were filed consistently under the legal
assumption that Gevity (not Reflectxion) was the employer of the
workers. This position, supported by the Florida co-employment law
and by Code section 3401(d)(1)(as applied and interpreted by Florida
courts) unquestionably had a “reasonable basis.” Accordingly,
Reflectxion should be protected by Section 530 for all the period for
which Gevity’s contract was in effect (irrespective of whether it is
separately protected due to closure of the statute of limitations for the
years 2007-2008).5
Further, should the IRS take the position that Section 530 relief does
not apply, such a conclusion automatically creates jurisdiction for the
Tax Court under Code section 7436. Even if the IRS were to fail to
issue a 90-day letter upon the conclusion of this audit, the taxpayer
would still be entitled to resolve this dispute in Tax Court, because “It
- 11 -
[*11] is the determination [that Section 530 does not apply], not the piece
of paper, that provides a basis for our jurisdiction.”6
The Tax Court, in interpreting Section 530, has concluded that the
statute does not require the existence of any dispute as to whether the
workers were employees versus independent contractors.7 Instead, it
would apply the statute as written, to determine whether the employer
had any reasonable basis for not filing Forms 941 reporting wages
paid and withholdings collected from its employees.[5] Reflectxion’s
reasonable belief is based upon its contract with Gevity, and Florida
law respecting such contracts, and treating companies like Gevity as
the statutory employer, which is the sole entity required to withhold
and pay employment file and file employment tax returns.
Should IRS Appeals not agree with the many arguments outlined here
and in our Protest supporting abatement of the proposed taxes, and
not accept Reflection’s settlement offer with respect to the few
(approximately 20) identified employees for whom factual disputes
exist about their travel status, [it] is Reflectxion’s intent to file a
Petition in Tax Court, even if the IRS fails to send Reflectxion a
Letter 3523, Notice of Determination of Worker Classification
(NDWC), with respect to the tax periods in issue,[6] or to send a
5
See infra part III.B.3.c. Respondent contends in his response brief that, in
the sentence quoted in text above (beginning “Instead”), petitioner “asserts * * *
that section 530 is not limited solely to cases involving the classification of
employees versus independent contractors, but also instances where the
employees’ common law employer has reasonably believed that the employees’
wages are exempt from payroll taxes”. We see in this excerpt no suggestion by
petitioner that its section 530 argument applies to the self-reported quarters. The
“also instances” that petitioner posits pertain to the Gevity quarters, for which it
refers to itself as the “common law employer” because (it contends) Gevity is
treated as “employer” under section 3401(d)(1).
6
See infra part III.B.3.c. Respondent contends in his response brief that “the
statement that petitioner intends to file a petition with the Tax Court with ‘respect
(continued...)
- 12 -
[*12] 90-day letter (but instead sends Reflectxion an assessment). In its
petition, Reflectxion would follow the path established in SECC v.
Commissioner, explaining that a dispute exists as to the application of
Section 530 (which procedurally establishes jurisdictional grounds to
file in Tax Court, with appeal available to the Eleventh Circuit8), and
further explaining its reasonable belief both that section 530 applies
to the period covered by the Gevity contract, and, for all the years, its
reasonable expectation that travel expenses would be incurred, and its
reasonable belief that these payments met the requirements of both
the Code section 62(c) regulations and Treas. Reg. § 1.132-5(a)(1)(v)
and (vi), and were excludable from wages under Code section 132.[7]
We hope that in consideration of these hazards of litigation, you will
work with us to reach a settlement in this Appeal.
__________
5
The contract with Gevity was in effect through the third quarter of
2009 [sic]. There was no statute of limitations extension filed by
Reflectxion for 2007 or 2008. As was explained in Reflectxion’s
6
(...continued)
to the tax periods at [sic] issue’”, combined with other statements we have
addressed in footnotes here, “in and of itself creates an actual controversy under
section 7436(a)(2) with respect to the non-Gevity periods.” As we read the “List
of Authorities”, it is not so. Petitioner indeed indicated it would file a petition as
to all periods, but the contentions it stated for the self-reported (“non-Gevity”)
periods did not invoke section 530.
7
See infra part III.B.3.c. Respondent contends in his response brief that, in
the second half of the sentence quoted above, petitioner asserts that “section 530
applies to the period covered by the Gevity contract, and for all the years, its
reasonable expectation that the travel expenses would be incurred, and its
reasonable belief that these payments * * * were excludable from wages under
Code section 132.” We see in this excerpt no suggestion by petitioner that its
section 530 argument applies to the self-reported quarters. On the contrary, it
explicitly states that “section 530 applies to the period covered by the Gevity
contract”. (Emphasis added.)
- 13 -
[*13] Protest, its subsequent submissions on January 6, 2014 and May 20,
2015, and during our conference on June 3, Reflectxion maintains
that the statute of limitations expired for 2007-2008, because the
returns filed by Gevity were filed on Reflectxion’s behalf, there was
no Schedule F filing requirement for those years, and the IRS did not
request a statute extension from either Gevity (the section 3401(d(l)
employer, under Eleventh Circuit law) or Reflectxion.
6
See footnote 8 in American Airlines v. Commissioner, 144 T.C. No.
2, Jan 13, 2015), citing SECC Corp. v. Commissioner, 142 T.C. No
12 (slip. op, at 11) (Apr. 3, 2014).
7
See Charlotte’s Office Boutique v. Commissioner, 425 F.3d 1203,
1211 (9th Cir. 2005) (concluding that Section 530 applied, even
though the worker in question, whose wages had been exempted from
withholding and reporting, had been treated as an employee for the
relevant taxable periods). See also Marlar v. Commissioner, 151 F.3d
962 (9th Cir. 1998) (in which, the court concluded that a company
that had never filed any information returns whatsoever with respect
to certain persons who had been treated as “lessees” instead of
employees was nevertheless entitled to Section 530 protection).
Marlar was cited in the pleadings submitted in American Airlines,
supra, in which the Tax Court concluded that “Respondent has
provided no convincing authority that there must be an actual
controversy about the employment status of a taxpayer’s workers.”
8
Applying the so-called “Golsen Doctrine,” the Tax Court follows
precedent in the circuit to which any case under consideration by the
Tax Court would be appealed. See Lardas v. Commissioner, 99 T.C.
490, 495 (1992), explaining Golsen v. Commissioner, 54 T.C. 742(1970), aff’d, 445 F.2d 985 (10th Cir. 1971). Thus the above-cited
Eleventh Circuit cases (Trucks, Inc., on the wage recharacterization
issue) and Thostesen v. U.S., 331 F. 3d 1295 (11th Cir 2003) on the
section 3401(d)(1) issues) would be followed and applied by the Tax
Court.
- 14 -
[*14] Thus, petitioner’s list of authorities cited section 530 in connection with the
Gevity-reported quarters but not the self-reported quarters.
The above-quoted portions of petitioner’s June 2015 submission are the
only contentions regarding section 530 that petitioner made before Appeals.
Petitioner did not invoke section 530 in connection with the self-reported quarters.
NDWC
On February 26, 2016, respondent issued to petitioner a “Notice of
Determination of Worker Classification” (“NDWC”), the first page of which
stated as follows:
Dear Taxpayer:
This letter is your Notice of Determination of Worker Classification
(“Notice”), as required by law, to notify you (before assessment) that
we have determined that you owe additional employment tax,
additions to tax, and/or penalties for the tax periods identified below.
We have made three determinations:
• We have determined that for purposes of federal
employment taxes, the individual(s) described or listed in
Table 1 below are to be legally classified as employees
for the tax periods indicated;
• We have determined that with respect to such
individual(s) you are not entitled to relief from
employment tax under the treatment described in
section 530(a) of the Revenue Act of 1978; and
- 15 -
[*15] • We have determined that for the tax periods indicated,
you owe additional employment tax, additions to tax,
and/or penalties in the amounts set forth in Table 2
following the list of reclassified individuals. Please be
aware that the figures on Table 2 do not include the
interest that is required by law to be imposed on
underpayment of tax. [Emphasis added.]
The “Table 1 below” that is referred to in the NDWC lists employees in all
16 quarters at issue (i.e., both the Gevity-reported quarters and the self-reported
quarters). Thus, by its general terms, the NDWC seems to have purported to
determine employee status and entitlement to section 530 treatment for both the 11
Gevity-reported quarters and the 5 self-reported quarters.
The reference to section 530 in the second bullet point above is the only
such reference in the NDWC. The NWDC concluded with an “Explanation of
Adjustments”, which stated:
You provide physical therapists, physical therapist assistants,
certified occupational therapy assistants, occupational therapists, and
speech language pathologists (“health care employees”) to facilities
requiring health care workers for temporary assignments. During
2008, 2009, 2010, and 2011, you made payments to or for the benefit
of some of your health care employees for lodging, per diem, mileage,
and other travel expenses, which payments you did not include as
wages for purposes of employment tax under Internal Revenue Code
§§ 3101, 3111, and 3402.
Under Treas. Reg. §31.3401(a)-4(b), if a reimbursement or other
expense allowance arrangement does not satisfy the requirements of
section 62(c) and §1.62-2, all amounts paid under the arrangement are
- 16 -
[*16] treated as paid under a non-accountable plan, are included in wages,
and are subject to withholding and payment of employment taxes
when paid. Your plan serves to re-characterize amounts paid as
taxable wages as a non-taxable reimbursement allowance to
employees when they are traveling away from home. Thus, your plan
does not meet the business connection requirement of §1.62-2(d)(3)
because health care employees are receiving the same amount of
wages, regardless of whether they incur any travel expenses.
Accordingly, the payments you made during 2008 through 2011 are
wages subject to employment taxes under sections 3101, 3111, and
3401.
In addition, you have not established that your health care employees
have incurred traveling expenses “while away from home” within the
meaning of section 162(a)(2). Because the workers have no tax home
within the meaning of section 162, payments to them do not meet the
business connection requirement of § 1.62-2(d)(2) and such
reimbursements of those expenses are wages for purposes of
employment tax.
This “Explanation” in the NDWC did not refer to section 530.
Petition
On May 18, 2016, petitioner timely filed its petition with the Tax Court.
The petition includes the following allegations that refer to section 530 (emphasis
added):
4.b. Respondent incorrectly determined that Petitioner is not
entitled to relief under Section 530(a) with respect to
Petitioner’s therapists for the Gevity Quarters.
* * * * * * *
- 17 -
[*17] 5.b. Petitioner qualifies for Section 530 relief for the Gevity
Quarters.
* * * * * * *
WHEREFORE, Petitioner prays that this Court hear this
proceeding and determine:
* * * * * * *
3. That Petitioner is entitled to Section 530 relief during the
Gevity Quarters * * *. [Emphasis added.]
That is, the petition seeks section 530 relief for the Gevity-reported quarters but
not for the self-reported quarters.
Motion to determine jurisdiction
Petitioner filed a “Motion to Determine Jurisdiction”, which asks the Court
to determine the extent to which it has jurisdiction in this case. Petitioner states:
“[I]t appears that the Court possesses jurisdiction over the first eleven quarters in
issue (the ‘Gevity Quarters’) but might not possess jurisdiction over the last five
quarters in issue” (i.e., the self-reported quarters). Respondent filed a response to
the motion, in which he contends that the Court has jurisdiction over all
16 quarters.
- 18 -
[*18] Discussion
I. Section 7436
A. Overview
Section 7436 was enacted as part of the Taxpayer Relief Act of 1997, Pub.
L. No. 105-34, sec. 1454(a), 111 Stat. at 1055, and it grants the Tax Court
jurisdiction over cases involving employment taxes imposed under subtitle C. We
explained in Am. Airlines, Inc. v. Commissioner, 144 T.C. 24, 32 (2015):
As the Court has noted previously: “[I]n response to the
expressed intent of Congress to provide a convenient, prepayment
hearing, this Court and the Courts of Appeals have given the
jurisdictional provisions a broad, practical construction rather than a
narrow, technical meaning.” Lewy v. Commissioner, 68 T.C. 779,
781 (1977) (fn. refs. omitted). Therefore, where a statute is capable
of various interpretations, the Court is inclined to “adopt a
construction which will permit the Court to retain jurisdiction without
doing violence to the statutory language.” Smith v. Commissioner,
140 T.C. 48, 51 (2013).
However, we still properly characterized the grant under section 7436 as one of
“limited jurisdiction”. Id. at 31.
B. The text of the statute
Section 7436(a), as amended and in effect during the periods at issue,
provides as follows:
- 19 -
[*19] 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.
[Emphasis added.]
Pertinent to the current controversy, this statute sets up three jurisdictional
requirements:
First, there must be a certain kind of “determination” by the IRS--i.e., either
a determination that someone is an “employee” of the person whose return is being
audited (whom we will call “the taxpayer”) or a determination that the taxpayer is
not entitled to section 530 treatment. If the IRS has made one or both of such
determinations, there may be jurisdiction. If it has not, then there can be no
jurisdiction in the Tax Court. (One such determination can suffice to confer
jurisdiction. There need not be a determination as to both employee status and
- 20 -
[*20] entitlement to section 530 treatment. See Am. Airlines, Inc. v.
Commissioner, 144 T.C. at 33.)
Second, that determination must have been made “in connection with an
audit” of the taxpayer’s returns and “as part of an examination”. If the
determination was so made, then there may be jurisdiction. If instead the IRS had
made its determination in some other context (such as in ongoing litigation), then
there can be no jurisdiction in the Tax Court.
Third, there must be an “actual controversy” regarding that audit
determination. In the absence of an “actual controversy”, there can be no
jurisdiction in the Tax Court.
C. “Actual controversy”
The main jurisdictional issue in this case turns on the “actual controversy”
requirement. The phrase “actual controversy” is a term of art in the declaratory
judgment context, Malowney v. Fed. Collection Deposit Grp., 193 F.3d 1342,
1347 (11th Cir. 1999) (“a declaratory judgment may be issued only in the case of
an ‘actual controversy’”); and its use in section 7436 corresponds to the fact that
section 7436 resembles a declaratory judgment provision. See SECC Corp. v.
Commissioner, 142 T.C. 225, 237 (2014); Henry Randolph Consulting v.
Commissioner, 112 T.C. 1, 11-12 (1999). As the Supreme Court explained:
- 21 -
[*21] A “controversy” in this sense must be one that is appropriate for
judicial determination. * * * A justiciable controversy is thus
distinguished from a difference or dispute of a hypothetical or
abstract character; from one that is academic or moot. * * * The
controversy must be definite and concrete, touching the legal
relations of parties having adverse legal interests. * * * It must be a
real and substantial controversy admitting of specific relief through a
decree of a conclusive character, as distinguished from an opinion
advising what the law would be upon a hypothetical state of facts.
***
Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, 240-241 (1937);
cf. id. at 240 (“The word ‘actual’ is one of emphasis rather than of definition”).
If during an audit the IRS purports to make a determination that a given
individual is the employee of the taxpayer, but the taxpayer had admitted that the
individual was an employee and had treated him as an employee, then there is no
“actual controversy” about employee status and no jurisdiction in the Tax Court.
Or if the IRS makes a purported determination that the taxpayer is not entitled to
section 530 treatment, but the taxpayer had not claimed section 530 treatment,
then there is no “actual controversy” about section 530 and no jurisdiction in the
Tax Court.
II. Section 530
For a worker correctly characterized as an independent contractor, an
employer does not owe employment taxes; but for a worker correctly characterized
- 22 -
[*22] as an employee, the employer may owe employment taxes. The line
between an employee and an independent contractor is not always easy to draw. If
an employer has incorrectly characterized an employee as an independent
contractor, then correcting the error may require after-the-fact payment of the
employment taxes, possibly with penalties, additions to tax, and interest.
Of course, underpayments of employment taxes can also result from errors
other than mischaracterization of an employee as an independent contractor. For
example, an employer might simply fail to report the wages that it paid as such to
employees. Or it might fail to report payments that are wages but that the
employer did not treat as wages. Or it might make computational errors in
reporting wages.
For underpayments that do result from employers’ mistakes in line-drawing
between employees and independent contractors, Congress gave partial relief by
enacting section 530. Where it applies, section 530 gives the employer relief from
employment taxes even though the actual employment relation would have
required the payment of those taxes. Section 530 provides in part as follows
(emphasis added):
- 23 -
[*23] SEC. 530. CONTROVERSIES INVOLVING WHETHER
INDIVIDUALS ARE EMPLOYEES FOR PURPOSES OF
THE EMPLOYMENT TAXES.
(a) Termination of Certain Employment Tax Liability * * *--
(1) In general.--If--
(A) for purposes of employment taxes, the
taxpayer did not treat an individual as an employee
for any period * * *, and
(B) in the case of periods after December 31,
1978, all Federal tax returns (including
information returns) required to be filed by the
taxpayer with respect to such individual for such
period are filed on a basis consistent with the
taxpayer’s treatment of such individual as not
being an employee,
then, for purposes of applying such taxes for such period with
respect to the taxpayer, the individual shall be deemed not to be
an employee unless the taxpayer had no reasonable basis for
not treating such individual as an employee.
Under that statute, three requirements must be met in order for the employer to
receive relief: First, it must be true that the employer “did not treat an individual
as an employee”. Second, the employer must have filed tax returns “on a basis
consistent with the taxpayer’s treatment of such individual as not being an
employee”. Third, the employer must have had a “reasonable basis for not
- 24 -
[*24] treating such individual as an employee”. All three requirements must be
met in order for the employer to qualify for relief under section 530.
All three of those requirements for relief under section 530 involve the
employer’s having not treated the worker as an employee. Thus, section 530 has
no application where the employer did treat the worker as an employee. For
employment taxes that result not from the mischaracterization of the worker but
from some other error in reporting and paying employment tax, section 530 has no
application.
III. Analysis
A. Jurisdiction over the Gevity-reported quarters
With respect to the 11 Gevity-reported quarters, there is at least one “actual
controversy” under section 7436(a)--i.e., whether petitioner is “entitled to the
treatment under subsection (a) of section 530”, for purposes of
section 7436(a)(2).8 For those periods petitioner’s June 2015 submission to
8
A second possible “actual controversy” in connection with the Gevity-
reported quarters is whether the relevant individuals were petitioner’s
“employees”, for purposes of section 7436(a)(1). Petitioner admits that it was
their common law employer but contends that Gevity was “the person having
control of the payment of such wages” and was therefore the “employer”, under
section 3401(d)(1). Arguably, a controversy about who is the employer of the
individuals for employment tax purposes inherently involves an “actual
controversy” about whether the individuals are one’s employees, for purposes of
(continued...)
- 25 -
[*25] Appeals explicitly requested treatment under section 530, and respondent’s
NDWC expressly denied petitioner’s request. Thus, in the words of
section 7436(a), for those periods there was an “actual controversy”; and the IRS
made a “determination”--“in connection with an audit” and “as part of an
examination”--that petitioner “is not entitled to the treatment under subsection (a)
of section 530”.
Following that determination, petitioner filed in this Court a petition
seeking, in paragraph 3 of its prayer for relief, section 530 treatment for those
quarters; and respondent’s answer asked the Court to deny that relief and sustain
the IRS’s adverse determinations. We hold, as the parties agree, that there is an
“actual controversy”, under section 7436(a), for the 11 Gevity-reported quarters.
We have jurisdiction to resolve that dispute for the Gevity-reported quarters.
B. Jurisdiction over the self-reported quarters
1. Jurisdiction must be determined separately for each period.
It does not follow that we therefore automatically have jurisdiction over the
five self-reported quarters. The Court cannot conclude that it has jurisdiction over
all periods in a case simply because it has jurisdiction over some periods. Rather,
8
(...continued)
section 7436(a)(1), and arguably such a controversy could support jurisdiction in
the Tax Court. However, it is not necessary that we resolve that issue in this case.
- 26 -
[*26] the Court must determine whether it has jurisdiction with respect to each tax
period before it.9 We have concluded that there was an “actual controversy”, and
that we have jurisdiction, as to the 11 Gevity-reported quarters; but we must
separately determine jurisdiction as to the 5 self-reported quarters.
2. The IRS purportedly made audit determinations.
The NWDC states generally, without distinction as to the Gevity-reported
quarters and the self-reported quarters, that--
• We have determined that for purposes of federal employment
taxes, the individual(s) described or listed in Table 1 below
[which listed employees in all sixteen quarters] are to be legally
classified as employees for the tax periods indicated; [and]
• We have determined that with respect to such individual(s) you
are not entitled to relief from employment tax under the
9
See, e.g., Charlotte’s Office Boutique v. Commissioner, 121 T.C. 89 (2003)
(examining jurisdiction separately for various taxable periods), supplemented by
T.C. Memo. 2004-43, aff’d, 425 F.3d 1203 (9th Cir. 2005); see also O’Neil v.
Commissioner, 66 T.C. 105, 107 (1976) (holding that where a statutory notice
determined deficiencies for four years, jurisdiction was lacking for the fourth year
in the absence of a timely petition for that year); Arman v. Commissioner, T.C.
Memo. 1994-526 (observing in the income tax deficiency context that the Court
determines its jurisdiction on a year-by-year basis). In a case involving Social
Security taxes and ITW, the relevant tax period is a calendar quarter, and the IRS’s
NDWC issued to petitioner asserted liabilities by the quarter. Compare
sec. 7436(c)(1) (small case procedures where “the amount of employment taxes
placed in dispute is $50,000 or less for each calendar quarter” (emphasis added)),
with sec. 7463(a)(1) (small case procedures where the amount of income tax at
issue is “$50,000 for any one taxable year” (emphasis added)).
- 27 -
[*27] treatment described in section 530(a) of the Revenue Act of
1978 * * *. [Emphasis added.]
These two “determin[ations]” correspond to the two jurisdiction-conferring
determinations in section 7436(a)(1) (i.e., that the workers “are employees”) and
section 7436(a)(2) (i.e., that the employer “is not entitled to the treatment under
subsection (a) of section 503”).10
The IRS thereby purported to determine what were in fact undisputed
propositions; but for purposes of the existence of a “determination”, that lack of
dispute is beside the point. “[E]ven when a taxpayer has made a showing that
casts doubt on the validity of a determination * * *, the notice is generally not
rendered void, but remains sufficient to vest the Court with jurisdiction.”
Charlotte’s Office Boutique v. Commissioner, 121 T.C. 89, 104 (2003),
supplemented by T.C. Memo. 2004-43, aff’d, 425 F.3d 1203 (9th Cir. 2005).11
10
The NWDC made a third determination--i.e., “that for the tax periods
indicated, you owe additional employment tax, additions to tax, and/or penalties in
the amounts set forth in Table 2”--but that third determination does not correspond
to the provisions of section 7436(a)(1) and (2) that define the Tax Court’s
jurisdiction. Only if the IRS has made a “determination” under section 7436(a)(1)
or (2) can we then proceed to “determine * * * the proper amount of employment
tax under such determination.” Sec. 7436(a).
11
Respondent’s opening brief distorts the holding in Charlotte’s Office
Boutique by citing it to support the broad assertion that “[t]his Court has held on
numerous occasions that it is the Commissioner’s determination that provides the
(continued...)
- 28 -
[*28] Construed literally, those general determinations applied to all quarters. We
therefore conclude that, in the words of section 7436(a), even for the self-reported
quarters the IRS made “determination[s]”, “in connection with an audit” and “as
part of an examination”, that the individuals “are employees” and that petitioner
“is not entitled to the treatment under subsection (a) of section 530”. This leaves
us to decide whether these determinations addressed an “actual controversy” as to
the self-reported quarters.
3. There was no “actual controversy” as to those determinations in
the self-reported quarters.
a. It takes two to have a controversy.
As we have shown, see supra part III.B.2, one party (the IRS) can
unilaterally make a “determination” under section 7436. However, one party
11
(...continued)
predicate for jurisdiction under section 7436”. It is true that the determination,
whether or not valid, can satisfy the jurisdictional requirement of a
“determination”; but as we will show, under section 7436(a) the absence of an
“actual controversy”--measured by reference to what petitioner actually
contended--will defeat jurisdiction even if there is a purported “determination”
under section 7436(a)(1) or (a)(2). It is indeed fair to cite income tax deficiency
cases to make the point that a notice of deficiency (analogous to a NDWC) can be
valid under section 6213(a) as long as it reflects a deficiency determined under
section 6212(a) (analogous to a determination under section 7436(a)), even if the
deficiency determination turns out to have been invalid. However, jurisdiction in
an employment tax case under section 7436 depends on an additional
requirement--“actual controversy”--that is not required for a notice of deficiency
under section 6212(a) in income tax deficiency cases under section 6213(a).
- 29 -
[*29] cannot unilaterally make an “actual controversy”. A controversy requires
two opponents. That is, a controversy “must * * * touch[] the legal relations of
parties having adverse legal interests.” Aetna Life Ins. Co., 300 U.S. at 240-241.
Consequently, when we look to see whether there was an “actual controversy”, we
do not limit ourselves to the IRS’s determination but rather examine also the
taxpayer’s contentions. In SECC Corp. v. Commissioner, 142 T.C. at 236, for
example--
The essential facts relating to this [“actual controversy”] point
are: (1) during the tax periods at issue petitioner treated its workers
dually as employees and as independent providers of rental
equipment; (2) in the 30-day letter Ms. Buck, speaking for the
Examination Division, rejected petitioner’s approach and treated
petitioner’s workers as employees with respect to the equipment lease
payments; (3) in the protest petitioner continued to assert the position
the Examination Division had rejected in the 30-day letter and added
contentions disputing that its workers were employees with respect to
any of petitioner’s payments to them and claiming entitlement to
relief under RA ’78 sec. 530 and sections 3402 and 3509(a); and
(4) the case was subsequently considered by the Appeals Office and
reconsidered by the Examination Division and the Appeals Office
during which time petitioner continued to assert all of the positions
included in the protest. [Emphasis added.]
In SECC the employer was obviously an active contender in a two-sided “actual
controversy”. We now consider whether the same can be said in this case.
- 30 -
[*30] b. There was no “actual controversy” as to employee
status.
For all periods (including the self-reported quarters) the IRS purported to
determine that “the individual(s) * * * are to be legally classified as employees”,
and such a determination corresponds to section 7436(a)(1), which concerns a
determination that “one or more individuals performing services for such person
are employees”. However, respondent does not contend--and could not plausibly
contend--that there was any actual controversy on the issue of whether the
individuals were employees for the self-reported quarters. Petitioner contended
that for all periods it was the common law employer of the employees; and for the
self-reported quarters it reported itself as their employer and reported their wages
as such on its employment tax returns.
c. There was no “actual controversy” as to section 530
treatment.
For all periods (including the self-reported quarters) the IRS purported to
determine “that with respect to such individual(s) you are not entitled to relief
from employment tax under the treatment described in section 530(a)”, and such a
determination corresponds to section 7436(a)(2), which concerns a determination
that the employer “is not entitled to the treatment under subsection (a) of section
- 31 -
[*31] 530”. However, for the self-reported quarters there was no actual
controversy in connection with any entitlement to section 530 treatment.
Petitioner had no occasion to claim section 530 treatment. As we explained,
see supra part II, section 530 treatment is available only where “the taxpayer did
not treat an individual as an employee”. Sec. 530(a)(1)(A) (emphasis added).
Section 530 has no application to an employer who did treat the worker as an
employee. For the employer who treated the worker as an employee and has an
employment tax issue whose resolution does not turn on the status of the worker,
section 530 offers no relief.12 In petitioner’s self-reported quarters, it paid travel
expense reimbursements to its admitted employees and did not report those
payments as taxable wages. When we later address the issue of whether
12
We acknowledge the circumstance in which an admitted employee
receives, in addition to his wages, other amounts that the taxpayer-employer
contends were paid in another capacity--e.g., not as wages to him as an employee
but rather as rent for tools paid to him as a lessor. See SECC Corp. v.
Commissioner, 142 T.C. 225 (2014). In that circumstance there is a dispute about
the status of the employee in connection with the payment. He is an admitted
employee as to the wages he receives, but the dispute is about whether, in
receiving the other amounts, he is properly characterized not as an employee but
as a lessor. Such a dispute does concern worker status, and a determination that he
received those amounts as a lessor and not as an employee will support
jurisdiction under section 7436(a)(1). Likewise, a determination that section 530
relief is not available will support jurisdiction under section 7436(a)(2). Here, in
the self-reported quarters, the travel expense reimbursements were (like the wages)
paid to workers as employees, and their status in that connection as employees was
not in dispute.
- 32 -
[*32] employment tax is due on those payments for the self-reported quarters, the
issue will not be affected by section 530. Rather, for the periods in which
petitioner did treat its workers as employees, it has no possible valid basis13 for
invoking section 530.
Moreover, petitioner in fact did not invoke section 530 for the five self-
reported quarters. Respondent’s contrary contention relies on the July 2015
submission, which is the only circumstance in which petitioner did invoke
section 530--but petitioner did so only for the eleven Gevity-reported quarters.
The cover letter stated that “[t]he contract between Reflectxion and Gevity” was
“in place through the third quarter of 2010” and argued that “Reflectxion should
be subject to Section 530 relief from withholding for these [Gevity-reported]
periods.” (Emphasis added.) The attached “List of Authorities” quoted
section 530 and then argued about its effect “[d]uring the period that Reflectxion
had contracted with Gevity”. The attachment further stated that “Reflectxion
should be protected by Section 530 for all the period[s] for which Gevity’s
13
Respondent acknowledges that any section 530 argument for petitioner’s
self-reported quarters would be invalid--perhaps even “frivolous”--but contends
that a determination denying a frivolous section 530 argument could support
jurisdiction under section 7436(a)(2). We assume this is true, provided that the
taxpayer actually made the frivolous contention so that there was an “actual
controversy” about it. Here there was no such contention by petitioner for the
self-reported quarters.
- 33 -
[*33] contract was in effect”. (Emphasis added.) It projected that, in the Tax
Court, petitioner would contend that “section 530 applies to the period covered by
the Gevity contract”. (Emphasis added.)
We think respondent’s different reading of petitioner’s June 2015
submission--discerning in it a section 530 argument in connection with the self-
reported quarters--is strained, ignores the explicit description of petitioner’s actual
section 530 argument, and makes unwarranted interpolations. It is true that, in the
section of the “List of Authorities” that is entitled “Disputes over the Application
of Section 530 of the Revenue Act of 1978 Can Be Resolved in Tax Court”,
petitioner stated an intention to “file a Petition in Tax Court * * * with respect to
the tax periods in issue”, thus evidently including the self-reported quarters. If we
understand respondent’s point, he seems to contend that, since a petition could be
filed only for periods for which there had been a “determination” under
section 7436(a), such a statement must mean to imply that petitioner’s section 530
argument applied to the self-reported quarters.
However, what petitioner explicitly contended was “both that section 530
applies to the period covered by the Gevity contract, and, for all the years”, that
- 34 -
[*34] other arguments14 applied. Since these other arguments are not possible
subject matter for a “determination” under section 7436(a), the IRS’s rejection of
them could not--in the absence of such a “determination”--support jurisdiction
over a Tax Court petition. Thus, petitioner’s forecast that it would press these
contentions in connection with the self-reported quarters in a Tax Court suit under
section 7436(a) was mistaken. However, petitioner asserted these other arguments
“for all the years”, including the Gevity-reported quarters. For the Gevity-reported
quarters, IRS “determinations” were expected and a Tax Court petition was
reasonably forecast. For such a petition, the Tax Court would have jurisdiction for
the Gevity-reported quarters; and, if petitioner’s principal arguments for those did
not carry the day, the Tax Court could, as to the Gevity-reported quarters,
“determine * * * the proper amount of employment tax under such determination”,
sec. 7436(a), including addressing petitioner’s other arguments under sections 62
and 132. It was thus sensible to anticipate Tax Court litigation about all the
arguments, and petitioner’s imprecision or inaccuracy about the justiciability of
14
The other arguments that petitioner made were that it had, “for all the
years, its reasonable expectation that travel expenses would be incurred, and its
reasonable belief that these payments met the requirements of both the Code
section 62(c) regulations [concerning “reimburseable arrangements”] and Treas.
Reg. § 1.132-5(a)(1)(v) and (vi), and were excludable from wages under Code
section 132 [concerning “fringe benefits”].” These other arguments had no
evident relation to section 530.
- 35 -
[*35] the self-reported quarters per se does not warrant imputing to those self-
reported quarters the section 530 contention that petitioner explicitly restricted to
the Gevity-reported quarters.
Consequently, the IRS’s purported issuance of a “determination” on the
section 530 issue for the self-reported quarters addressed an uncontroverted
matter. There was no “actual controversy”, and we do not have jurisdiction over
the self-reported quarters.
To reflect the foregoing,
An appropriate order will be
issued.