Court Opinion

ID: 4334367
Source: CourtListenerOpinion
Date Created: 2018-11-14 01:38:32.978212+00
Date Added: 2024-06-11T14:47:56.089638
License: Public Domain

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.