120 T.C. No. 15
UNITED STATES TAX COURT
MEDICAL EMERGENCY CARE ASSOCIATES, S.C., AN ILLINOIS CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8259-01. Filed May 19, 2003.
P was a medical service corporation that provided emergency medical services to hospitals. P contracted with physicians to staff hospital emergency rooms. P treated those physicians as independent contractors. P failed to timely file required Forms 1096 and 1099, for 1996. P delinquently filed those forms on a basis consistent with its treatment of the physicians as independent contractors.
R determined that the physicians were employees, and that P was not eligible for relief under sec. 530 of the Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2885, as amended (sec. 530). R determined that P did not meet the filing requirement of sec. 530(a)(1)(B). R’s interpretation of sec. 530(a)(1)(B) requires that a taxpayer timely file all required returns in order to be eligible for sec. 530 relief. - 2 -
This Court granted R’s motion to sever and continue determinations of worker classification and proper employment taxes until after our consideration of P’s eligibility for relief under sec. 530.
Held: Because P did not treat the physicians as employees for any period, filed all Federal tax returns on a basis consistent with P’s treatment of the physicians as not being employees, and had a reasonable basis for not treating the physicians as employees, P is entitled to relief from employment tax liability pursuant to sec. 530. P’s untimely filing of information returns does not preclude P from qualifying for such relief, particularly in the circumstances of this case.
Carmen J. Mitchell, for petitioner.
Linda C. Grobe and David S. Weiner, for respondent.
NIMS, Judge: The petition in this case was filed in
response to a Notice of Determination Concerning Worker
Classification Under Section 7436 (notice of determination)
regarding petitioner’s liabilities pursuant to the Federal
Insurance Contributions Act (FICA), sections 3101-3128, and the
Federal Unemployment Tax Act (FUTA), sections 3301-3311, for
1996. Respondent also determined that petitioner is not entitled
to relief under section 530 of the Revenue Act of 1978, Pub. L.
95-600, 92 Stat. 2885, as amended (section 530).
On February 20, 2002, this Court granted respondent’s motion
to sever and continue determinations of worker classification and - 3 -
proper Federal employment taxes. Consequently, the only issue
presently before the Court is whether petitioner is entitled to
relief from employment tax liability pursuant to section 530.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue. For
convenience, FICA and FUTA taxes are collectively referred to as
employment taxes.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of the parties, with accompanying exhibits, are
incorporated herein by this reference. At the time the petition
was filed, petitioner’s principal place of business was in
Chicago, Illinois.
Petitioner was an Illinois medical service corporation,
incorporated in 1990 to provide emergency medical services to
hospitals. Larry Mitchell, M.D. (Dr. Mitchell), was petitioner’s
president and sole shareholder. Petitioner was involuntarily
dissolved by the Illinois Secretary of State as of November 1,
2001.
On April 15, 1996, Neena Mitchell, the multiple-handicapped
daughter of Dr. Mitchell, died after a chronic illness.
During and after 1990, petitioner entered into contracts
entitled “Emergency Department Services Agreements” (EDS
Agreements) with several Chicago area hospitals to furnish - 4 -
professional emergency medical services and full-time physician
staffing. In 1996, petitioner had 4 EDS Agreements with 3
Chicago area hospitals.
In order to fulfill its obligations under the EDS
Agreements, petitioner hired physicians to staff the hospital
emergency rooms. Petitioner entered into contracts entitled
“Independent Contractor Agreements” with such physicians. Twenty
five of these physicians were reclassified by respondent as
employees rather than independent contractors (reclassified
physicians).
Relying upon a longstanding, recognized practice of a
significant segment of the emergency medicine industry,
petitioner treated each of the reclassified physicians as an
independent contractor. During 1996, petitioner paid each of the
25 reclassified physicians more than $600. Petitioner did not
treat any of the reclassified physicians, or any other worker in
a substantially similar position, as an employee for any period
beginning after December 31, 1977.
Petitioner filed quarterly employment tax returns, Forms
941, for the quarters ended March 31, June 30, September 30, and
December 31, 1996, on July 2, July 31, and December 27, 1996, and
January 31, 1997, respectively. Petitioner filed a Federal
unemployment tax return, Form 940-EZ, Employer’s Annual Federal
Unemployment (FUTA) Tax Return, for 1996 on January 31, - 5 -
1997. Petitioner filed Federal income tax returns, Forms 1120,
U.S. Corporation Income Tax Return, for 1993, 1994, and 1995 on
February 5, 1997, and for 1996 on May 7, 1997.
The due date for filing Form 1096, Annual Summary and
Transmittal of U.S. Information Returns, together with Forms
1099, for 1996 was February 28, 1997. Petitioner did not request
an extension of time within which to file its Form 1096 for 1996.
Chris Ihejirika, petitioner’s accountant from 1991 through early
1997, prepared Forms 1099-MISC, Miscellaneous Income, for
petitioner’s workers. Petitioner determined that some of the
Forms 1099-MISC prepared by Mr. Ihejirika were incorrect, and it
prepared corrected Forms 1099-MISC. Petitioner mailed corrected
Forms 1099-MISC to each of the reclassified physicians during the
period from January 21 through March 5, 1997. After February 28,
1997, petitioner mailed only one corrected Form 1099-MISC to an
individual physician.
On May 20, 1997, petitioner mailed two Forms 1096, together
with Forms 1099-MISC, to respondent by cover letter dated May 16,
1997. Respondent has no record of receiving the Forms 1096 and
1099-MISC sent by petitioner on May 20, 1997. Sometime after
December 22, 1998, petitioner filed Form 1096, together with 46
Forms 1099-MISC, for 1996.
On or about March 4, 1998, respondent began an examination
of petitioner’s 1996 income tax liability. In December 1998, - 6 -
respondent began an examination of petitioner’s 1996 employment
tax liability. By letter dated January 8, 1999, respondent
notified petitioner of his proposed determinations that
petitioner was not entitled to relief under section 530 and that
certain workers should be reclassified as employees, and
respondent listed the attendant adjustments to petitioner’s
Federal employment tax liability for 1996. On May 14, 1999,
respondent provided petitioner with Publication 1976, which
provided written notice of the provisions of section 530.
OPINION
I. Section 530 Relief
Section 530 operates in enumerated circumstances to afford
relief from employment tax liability, notwithstanding the actual
relationship between the taxpayer and the individual performing
services. The statute provides, in part:
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 - 7 -
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.
Congress enacted section 530 to “alleviate what it perceived
as the ‘overly zealous pursuit and assessment of taxes’” against
employers who had, in good faith, classified their workers as
independent contractors. Ewens and Miller, Inc. v. Commissioner,
117 T.C. 263, 276 (2001)(quoting Boles Trucking, Inc. v. United
States, 77 F.3d 236, 239 (8th Cir. 1996)). Section 530 was
enacted both as an interim solution to the problems inherent in
increased enforcement by the Internal Revenue Service (IRS) of
the employment tax laws and in response to complaints by
taxpayers that proposed reclassifications by the IRS involved a
change of position by the IRS in interpreting how the common law
rules apply to their workers or industry. See Joseph M. Grey
Pub. Accountant, P.C. v. Commissioner, 119 T.C. 121, 133
(2002)(citing H. Rept. 95-1748 (1978), 1978-3 C.B. (Vol. 1) 629,
631-632). The purpose of section 530 was to “provide an interim
solution to controversies over common law employment status by,
in part, allowing taxpayers who had a reasonable basis for not
treating workers as employees under the traditional common law
tests to continue to do so”. Id. at 133. This interim solution - 8 -
was extended indefinitely by the Tax Equity & Fiscal
Responsibility Act of 1982, Pub. L. 97-248, sec. 269(c), 96 Stat.
324, 552.
II. Contentions of the Parties
As a preliminary matter, petitioner argues that its Forms
1096 and 1099 mailed to respondent on May 20, 1997, should be
deemed filed on that date, since there is proof that they were
mailed on that date. Respondent has no record of receiving those
forms. The due date for filing those forms for 1996 was February
28, 1997. Even if the Forms 1096 and 1099 mailed by petitioner
on May 20, 1997, were received and filed, petitioner would still
have failed to timely file those required forms. Since the
primary issue in this case is whether timely filing is required
by section 530(a)(1)(B), and reasonable cause for the filing
delay is not an issue, whether the Forms 1096 and 1099 are deemed
filed on May 20, 1997, is irrelevant. Consequently, we need not
consider petitioner’s claim that the Forms 1096 and 1099 mailed
on May 20, 1997, should be deemed filed on that date.
The parties agree that petitioner satisfied two of the three
requirements of section 530(a). Specifically, the parties agree
that petitioner satisfied the requirement of section
530(a)(1)(A), since petitioner did not treat any reclassified
physician as an employee for any relevant period. The parties
also agree that petitioner relied upon a longstanding, recognized - 9 -
practice of the emergency medicine industry, and thus had a
reasonable basis for not treating the reclassified physicians as
employees. Consequently, petitioner satisfied the requirement in
the flush language of section 530(a).
The parties disagree about whether petitioner satisfied the
requirement of section 530(a)(1)(B), which provides that the
taxpayer must file all required Federal tax returns (including
information returns) on a basis consistent with the treatment of
the individual as not being an employee. The parties agree that
petitioner ultimately filed all returns (including information
returns) on a basis consistent with the treatment of the
reclassified physicians as not being employees. However,
respondent maintains that “It is respondent’s position that part
of the reporting consistency requirement in section 530(a)(1)(B),
is that the required returns be filed timely.” Respondent argues
that since petitioner failed to timely file Forms 1096 and 1099
for the periods in question, the relief provided by section 530
is unavailable to petitioner.
Petitioner does not dispute that it was required to file
Forms 1096 and 1099. Petitioner, however, argues that since
section 530(a)(1)(B) is silent as to timeliness, the required
returns merely have to be filed, not timely filed, for a taxpayer
to satisfy the requirement of section 530(a)(1)(B). - 10 -
Petitioner argues that section 530 is to be liberally
construed in favor of taxpayers. Petitioner states that section
530 requires “only that Form 1099-MISC be filed for each worker,
and precludes relief for Petitioner only if the filing was never
made.” Petitioner further argues that “The fact that Petitioner
complied with the * * * [filing] requirement of Section 530 but
not in a timely fashion * * * does not warrant a denial of relief
under the safe harbor provisions of that statute, since the
statute does not speak to timing”.
Respondent claims that “Congress did not intend that the
filing requirement be interpreted or treated liberally.”
Respondent cites General Explanation of the Revenue Act of 1978,
at 304 (Comm. Print 1979), by the Staff of the Joint Committee on
Taxation, for the proposition that “Except for the filing
requirement, taxpayers’ eligibility for the prospective relief
from potential 1979 liabilities is to be determined under the
same tests and the same liberal interpretations of the tests
which determined eligibility for pre-1979 relief.” (Emphasis
added.) Further, respondent claims that “section 530 implicitly
requires that the necessary returns be filed timely, as is
mandated for all returns throughout the Internal Revenue Code”.
Respondent argues that given the requirement of timely filing
throughout the Internal Revenue Code, if Congress did not intend - 11 -
to require timely filing, Congress would have included explicit
language in section 530 permitting a taxpayer who files
delinquent returns to qualify for relief.
In addition to Congressional intent, respondent points to
his own longstanding interpretation of section 530(a)(1)(B) in
Rev. Proc. 85-18, 1985-1 C.B. 518. Rev. Proc. 85-18 states that
relief under section 530(a)(1) will not be granted if Form 1099
has not been timely filed for each worker for any period after
December 31, 1978.
Respondent argues that if Congress disagreed with
respondent’s position in Rev. Proc. 85-18, Congress would have
amended section 530(a)(1)(B) to allow delinquent filing.
Respondent claims that when Congress was considering amendments
to section 530 as part of the Small Business Job Protection Act
of 1996, Pub. L. 104-188, sec. 1122, 110 Stat. 1755, 1766, it was
aware of Rev. Proc. 85-18 and respondent’s positions stated
therein with respect to section 530 relief. Rev. Proc. 85-18 is
referenced in the legislative history of the 1996 amendments to
section 530. See, e.g., S. Rept. 104-281, at 24 n.38 (1996)
(citing Rev. Proc. 85-18). Respondent argues that where Congress
disagreed with respondent’s interpretation of section 530,
Congress amended the statute. For example, in the explanation of
the 1996 amendments to section 530, the Senate Report states that
“a worker does not have to otherwise be an employee of the - 12 -
taxpayer in order for section 530 to apply. The provision is
intended to reverse the IRS position, as stated in the IRS Draft
Training Guide”. Id. at 26. Respondent argues that given the
level of scrutiny Congress gave the area of section 530 relief in
1996, Congress would not have left the language of section
530(a)(1)(B) silent as to timeliness if it disagreed with
respondent’s position.
III. Analysis
As to the thrust of “timeliness” in the context of section
530, we conclude, for reasons hereinafter stated, that both
parties are off the mark. Petitioner unconvincingly argues that
because of the remedial nature of section 530, the Code-wide
pervasiveness of a timely filing requirement must give way to the
greater good of section 530 liberality. Respondent’s position
that denial of section 530 relief may be used as a (totally
disproportionate) penalty for petitioner’s offense of late filing
is likewise unconvincing in light of the fact that the Internal
Revenue Code contains a specific regime for dealing with the
consequences of late filing of information returns--which
respondent has apparently decided not to invoke. (See discussion
infra.) We agree with petitioner that its late filing of the
information returns does not prevent it from satisfying the
filing requirement of section 530(a)(1)(B). The plain language
of section 530(a)(1)(B) denies relief only if the required filing - 13 -
was not made or if the required filing was made on a basis not
consistent with treatment of the individual as not being an
employee. As respondent acknowledges, petitioner filed all
required returns for 1996 on a basis consistent with the
treatment of the reclassified physicians as not being employees.
But there is nothing in the language of section 530(a)(1)(B) that
requires timeliness along with consistent filing.
The unreality of respondent’s approach is illustrated by the
following colloquy that took place at trial:
THE COURT: Suppose a taxpayer is required to file the 1096 and the 1099s and the office burns down two weeks before the due date and the taxpayer writes a letter to the--well, I don’t know who, but somebody in the IRS and says, Look, our office burned down and our records are destroyed; we need some additional time. You’re not saying that the statute would preclude the Government from granting an extension of time, are you?
MS. GROBE: Yes, Your Honor. I am.
* * * * * * *
This is a relief section. They still have the ability to come in and argue that these workers are not independent contractors--rather, are not employees; they are independent contractors.
The “relief” proposed by respondent’s counsel presents
precisely the situation that section 530 was enacted to avoid.
In the case before us respondent has proposed a deficiency in the
amount of $256,628.61, to dispute which, under respondent’s
theory, petitioner would be required to prove the status of each - 14 -
of the reclassified physicians. The tax liability of each of the
reclassified physicians would likewise be affected.
We repeat that respondent correctly states that timely
filing of returns is required throughout the Internal Revenue
Code. This includes Forms 1096 and 1099. The consequences of
“Failure to Comply with Certain Information Reporting
Requirements” are contained in sections 6721 through 6724.
Section 6721(a) deals with “Failure to file correct information
returns”, which includes Forms 1096 and 1099 (see section 6041A),
and section 6721(a)(2)(A) describes a failure to file subject to
penalty as “any failure to file an information return with the
Secretary on or before the required filing date.” Section
6721(e) prescribes a “Penalty in case of intentional disregard”.
Section 6722 provides for similar penalties in the case of
“Failure to furnish correct payee statements”; section 6723
prescribes a penalty for “Failure to comply with other
information reporting requirements”, and section 6724 contains,
among other things, a reasonable cause waiver.
Nothing in the language or legislative history of section
530 leads us to the conclusion that denial of section 530 relief
was meant to be an additional penalty for the failure to timely
file information returns, particularly under the circumstances in
this case. Rather, as discussed above, section 530 was enacted
to protect taxpayers from having to litigate the status of - 15 -
individual workers under the common law employment rules. The
Commissioner is entitled to require timely filing and to impose a
penalty, when appropriate, for failure to timely file, but not
the penalty he seeks to impose here.
Respondent also cites the Commissioner’s interpretation of
section 530(a)(1)(B) in Rev. Proc. 85-18 and implies that it
warrants deference by this Court. In United States v. Mead
Corp., 533 U.S. 218 (2001), the Supreme Court held that an
administrative agency’s interpretation of a statute must be
accorded the level of deference set forth in Skidmore v. Swift &
Co., 323 U.S. 134 (1944). The deference required depends on the
thoroughness evident in the agency’s consideration, the validity
of its reasoning, its consistency with earlier and later
pronouncements, and all those factors which give it the power to
persuade. United States v. Mead, supra at 228 (citing Skidmore
v. Swift & Co., supra at 140).
Rev. Proc. 85-18 is consistent with Rev. Rul. 81-224, 1981-2
C.B. 197, which held that a taxpayer, who delinquently filed the
required returns during the course of an employment tax audit,
was not entitled to relief under section 530. Rev. Proc. 85-18
has been cited for its requirement of timely filing. See In re
Critical Care Support Servs., Inc., 138 Bankr. 378 (Bankr.
E.D.N.Y. 1992)(citing the timely filing requirement of Rev. Proc.
85-18, and holding that the debtor was not entitled to relief - 16 -
under section 530 based, in part, on the fact that the debtor did
not timely file the required tax forms). Rev. Proc. 85-18,
however, provides no reason why it requires timely filing. Thus,
we are unable to ascertain the thoroughness of the agency’s
consideration or the validity of its reasoning. Consequently, we
do not defer to its requirement of timely filing as a
prerequisite to section 530 relief in this case.
We conclude that petitioner’s untimely filing of information
returns does not preclude petitioner from qualifying for relief
pursuant to section 530(a).
IV. Reasonable Cause for Delinquent Filing
Petitioner argues that if section 530(a)(1)(B) requires
timely filing, that section should also provide a reasonable
cause exception to the timely filing requirement. Petitioner
claims to have made “a serious effort to overcome delinquencies
that occurred in the wake of great personal crisis and loss [the
illness, and subsequent death, of Neena Mitchell], and
ineffective accounting representation.” Since we conclude that
section 530(a)(1)(B) does not prevent petitioner from obtaining
section 530 relief, we need not consider this argument. - 17 -
We hold that petitioner is entitled to relief from
employment tax liability pursuant to section 530(a).
To reflect the foregoing,
Decision will be entered for
petitioner.