Independent Contractor Tax Reform Act of 1997

Summary: Independent Contractor Tax Reform Act of 1997 - Amends the Internal Revenue Code to consider a service provider as not being an employee if:  (1) the provider can realize a profit or loss, can incur unreimbursed expenses, and makes a time-limited or task-limited agreement; (2) the provider has a principal place of business, does not primarily provide service at a single service recipient's facilities, pays fair rent for the use of the recipient's facilities, or operates primarily with equipment not supplied by the recipient; and (3) there is a written contract providing that the provider will not be treated as an employee for Federal tax purposes.  Considers (in addition) a provider as not an employee if:  (1) there is such a written contract; and (2) the provider is a corporation or limited liability company and does not receive benefits that the recipient's employees receive.  Regulates the treatment of determinations by the Secretary of the Treasury that a service provider should have been treated as an employee.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Independent Contractor Tax Reform 
Act of 1997''.

SEC. 2. SAFE HARBOR FOR DETERMINING THAT CERTAIN INDIVIDUALS ARE NOT 
              EMPLOYEES.

    (a) In General.--Chapter 25 of the Internal Revenue Code of 1986 
(relating to general provisions relating to employment taxes) is 
amended by adding after section 3510 the following new section:

``SEC. 3511. SAFE HARBOR FOR DETERMINING THAT CERTAIN INDIVIDUALS ARE 
              NOT EMPLOYEES.

    ``(a) Safe Harbor.--
            ``(1) In general.--For purposes of this title, if the 
        requirements of subsections (b), (c), and (d), or the 
        requirements of subsections (d) and (e), are met with respect 
        to any service performed by any individual, then with respect 
        to such service--
                    ``(A) the service provider shall not be treated as 
                an employee,
                    ``(B) the service recipient shall not be treated as 
                an employer,
                    ``(C) the payor shall not be treated as an 
                employer, and
                    ``(D) compensation paid or received for such 
                service shall not be treated as paid or received with 
                respect to employment.
            ``(2) Availability of safe harbor not to limit application 
        of other laws.--Nothing in this section shall be construed--
                    ``(A) as limiting the ability of a service 
                provider, service recipient, or payor to apply other 
                applicable provisions of this title, section 530 of the 
                Revenue Act of 1978, or the common law in determining 
                whether an individual is not an employee, or
                    ``(B) as a prerequisite for the application of any 
                provision of law described in subparagraph (A).
    ``(b) Service Provider Requirements With Regard to the Service 
Recipient.--For purposes of subsection (a), the requirements of this 
subsection are met if the service provider, in connection with 
performing the service--
            ``(1) has the ability to realize a profit or loss,
            ``(2) incurs unreimbursed expenses which are ordinary and 
        necessary to the service provider's industry and which 
        represent an amount at least equal to 2 percent of the service 
        provider's adjusted gross income attributable to services 
        performed pursuant to 1 or more contracts described in 
        subsection (d), and
            ``(3) agrees to perform services for a particular amount of 
        time or to complete a specific result or task.
    ``(c) Additional Service Provider Requirements With Regard to 
Others.--For the purposes of subsection (a), the requirements of this 
subsection are met if the service provider--
            ``(1) has a principal place of business,
            ``(2) does not primarily provide the service at a single 
        service recipient's facilities,
            ``(3) pays a fair market rent for use of the service 
        recipient's facilities, or
            ``(4) operates primarily with equipment not supplied by the 
        service recipient.
    ``(d) Written Document Requirements.--For purposes of subsection 
(a), the requirements of this subsection are met if the services 
performed by the service provider are performed pursuant to a written 
contract between such service provider and the service recipient, or 
the payor, and such contract provides that the service provider will 
not be treated as an employee with respect to such services for Federal 
tax purposes.
    ``(e) Business Structure and Benefits Requirement.--For purposes of 
subsection (a), the requirements of this subsection are met if the 
service provider--
            ``(1) conducts business as a properly constituted 
        corporation or limited liability company under applicable State 
        laws, and
            ``(2) does not receive from the service recipient or payor 
        benefits that are provided to employees of the service 
        recipient.
    ``(f) Special Rules.--For purposes of this section--
            ``(1) Failure to meet reporting requirements.--If for any 
        taxable year any service recipient or payor fails to meet the 
        applicable reporting requirements of section 6041(a) or 
        6041A(a) with respect to a service provider, then, unless the 
        failure is due to reasonable cause and not willful neglect, the 
        safe harbor provided by this section for determining whether 
        individuals are not employees shall not apply to such service 
        recipient or payor with respect to that service provider.
            ``(2) Burden of proof.--For purposes of subsection (a), 
        if--
                    ``(A) a service provider, service recipient, or 
                payor establishes a prima facie case that it was 
                reasonable not to treat a service provider as an 
                employee for purposes of this section, and
                    ``(B) the service provider, service recipient, or 
                payor has fully cooperated with reasonable requests 
                from the Secretary or his delegate,
        then the burden of proof with respect to such treatment shall 
        be on the Secretary.
            ``(3) Related entities.--If the service provider is 
        performing services through an entity owned in whole or in part 
        by such service provider, the references to `service provider' 
        in subsections (b) through (e) may include such entity, 
        provided that the written contract referred to in subsection 
        (d) is with such entity.
    ``(g) Determinations by the Secretary.--For purposes of this 
title--
            ``(1) In general.--
                    ``(A) Determinations with respect to a service 
                recipient or a payor.--A determination by the Secretary 
                that a service recipient or a payor should have treated 
                a service provider as an employee shall be effective no 
                earlier than the notice date if--
                            ``(i) the service recipient or the payor 
                        entered into a written contract satisfying the 
                        requirements of subsection (d),
                            ``(ii) the service recipient or the payor 
                        satisfied the applicable reporting requirements 
                        of section 6041(a) or 6041A(a) for all taxable 
                        years covered by the agreement described in 
                        clause (i), and
                            ``(iii) the service recipient or the payor 
                        demonstrates a reasonable basis for determining 
                        that the service provider is not an employee 
                        and that such determination was made in good 
                        faith.
                    ``(B) Determinations with respect to a service 
                provider.--A determination by the Secretary that a 
                service provider should have been treated as an 
                employee shall be effective no earlier than the notice 
                date if--
                            ``(i) the service provider entered into a 
                        contract satisfying the requirements of 
                        subsection (d),
                            ``(ii) the service provider satisfied the 
                        applicable reporting requirements of sections 
                        6012(a) and 6017 for all taxable years covered 
                        by the agreement described in clause (i), and
                            ``(iii) the service provider demonstrates a 
                        reasonable basis for determining that the 
                        service provider is not an employee and that 
                        such determination was made in good faith.
                    ``(C) Reasonable cause exception.--The requirements 
                of subparagraph (A)(ii) or (B)(ii) shall be treated as 
                being met if the failure to satisfy the applicable 
                reporting requirements is due to reasonable cause and 
                not willful neglect.
            ``(2) Construction.--Nothing in this subsection shall be 
        construed as limiting any provision of law that provides an 
        opportunity for administrative or judicial review of a 
        determination by the Secretary.
            ``(3) Notice date.--For purposes of this subsection, the 
        notice date is the 30th day after the earlier of--
                    ``(A) the date on which the first letter of 
                proposed deficiency that allows the service provider, 
                the service recipient, or the payor an opportunity for 
                administrative review in the Internal Revenue Service 
                Office of Appeals is sent, or
                    ``(B) the date on which the deficiency notice under 
                section 6212 is sent.
    ``(h) Definitions.--For the purposes of this section--
            ``(1) Service provider.--The term `service provider' means 
        any individual who performs a service for another person.
            ``(2) Service recipient.--Except as provided in paragraph 
        (4), the term `service recipient' means the person for whom the 
        service provider performs such service.
            ``(3) Payor.--Except as provided in paragraph (4), the term 
        `payor' means the person who pays the service provider for the 
        performance of such service in the event that the service 
        recipient does not pay the service provider.
            ``(4) Exceptions.--The terms `service recipient' and 
        `payor' do not include any entity in which the service provider 
        owns in excess of 5 percent of--
                    ``(A) in the case of a corporation, the total 
                combined voting power of stock in the corporation, or
                    ``(B) in the case of an entity other than a 
                corporation, the profits or beneficial interests in the 
                entity.
            ``(5) In connection with performing the service.--The term 
        `in connection with performing the service' means in connection 
        or related to the operation of the service provider's trade or 
        business.
            ``(6) Principal place of business.--For purposes of 
        subsection (c), a home office shall in any case qualify as the 
        principal place of business if--
                    ``(A) the office is the location where the service 
                provider's essential administrative or management 
                activities are conducted on a regular and systematic 
                (and not incidental) basis by the service provider, and
                    ``(B) the office is necessary because the service 
                provider has no other location for the performance of 
                the essential administrative or management activities 
                of the business.
            ``(7) Fair market rent.--The term `fair market rent' means 
        a periodic, fixed minimum rental fee which is based on the fair 
        rental value of the facilities and is established pursuant to a 
        written agreement with terms similar to those offered to 
        unrelated persons for facilities of similar type and quality.''
    (b) Clarification of Rules Regarding Evidence of Control.--For 
purposes of determining whether an individual is an employee under the 
Internal Revenue Code of 1986 (26 U.S.C. 1 et seq.), compliance with 
statutory or regulatory standards shall not be treated as evidence of 
control.
    (c) Repeal of Section 530(d) of the Revenue Act of 1978.--Section 
530(d) of the Revenue Act of 1978 (as added by section 1706 of the Tax 
Reform Act of 1986) is repealed.
    (d) Clerical Amendment.--The table of sections for chapter 25 of 
such Code is amended by adding at the end the following new item:

                              ``Sec. 3511. Safe harbor for determining 
                                        that certain individuals are 
                                        not employees.''
    (e) Effective Dates.--
            (1) In general.--The amendments made by, and the provisions 
        of, this section shall apply to services performed after the 
        date of enactment of this Act.
            (2) Determinations by secretary.--Section 3511(g) of the 
        Internal Revenue Code of 1986 (as added by subsection (a)) 
        shall apply to determinations after the date of enactment of 
        this Act.
            (3) Section 530(d).--The amendment made by subsection (c) 
        shall apply to periods ending after the date of enactment of 
        this Act.