Independent Contractor Compliance Blog

In a recent article I briefly covered some points about the IRS Safe Harbor provision under Section 530 IRC.  Coincidently, the Sixth Circuit Court of appeals issued a decision that may add a ray of hope for all businesses using Independent Contractors.  That is, if you meet the requirements.

In Peno Trucking, Inc. v. Commissioner (6th Cir. Oct. 3, 2008), the United States Court of Appeals for the Sixth Circuit reversed a United States Tax Court’s determination.  The Sixth Circuit held that the company was entitled to the protections of Section 530, despite having misclassified its drivers as independent contractors.

Here is a simplified synopsis.

The trucking company had a contract with each driver under an agreement that expressly stated they were independent contractors. It issued the drivers a 1099 MISC.  The company also had two separate rulings from the State of Ohio.  One from the Industrial Commission (OIC) and another from the Bureau of Workers’ Compensation (BWC); both ruling the drivers were independent contractors.

However, The Internal Revenue Service (IRS) reclassified the drivers as employees anyway and issued an assessment, which the company appealed to the Tax Court. The company argued that the drivers were properly classified, but even if they were not, the company met the requirements for Section 530 relief.  The Tax Court ruled in favor of the IRS on the worker common law status, finding that:

• The drivers did not have a substantial investment in the tractor-trailers,
• The drivers’ services were continuous in nature,
• The driver’s services were essential to the company’s business,
• The drivers could not realize a profit or loss,
• The company controlled the driver’s responsibilities, work hours and loads hauled.

On appeal, the Sixth Circuit affirmed the determination that the drivers were common law employees and not Independent Contractors.

However, the company also argued they were relived under Section 530 tax relief.  To refresh your memory, from my previous article, to qualify for Section 530 relief you must have:

1.       Exercised Substantive Consistency in the treatment of these individuals.  If at any time in the past you treated this (or similar) workers as employees you fail this test.

2.       Exercised Reporting Consistency by properly filing all required federal tax returns (including information returns such as 1099 MISC) consistent with your belief they were IC’s.

3.       Have a Reasonable Basis for not treating a worker as an employee by having at least one of these:

1. 1. • A previous audit (after 1996) holding the individual or class of workers as IC’s.
      • There must be a ruling, such as a federal court decision (the IRS thinks…read on) holding them as IC’s that meets legal standards of application.
      • Show the industry substantially does it this way (this gets problematic in actual application).
      • Show you were following reliable legal advice (again-problematic).

The Sixth Circuit decided the company established a prima facie case that it met all three criteria.  The court found that the criteria of Section 530 were met because:

1.       The company had always treated the truckers in question as independent contractors.

2.       The company had always filed its tax returns in a manner consistent with this treatment.

3.       Then the Sixth Circuit found that the law applied by the state of Ohio appeared to be virtually identical to the federal common law 20-factor test; therefore, the determinations of the OIC and BWC were reasonable judicial precedents upon which the company could rely and satisfied the reasonable basis requirement.

At that point, in legal maneuvering and tactics, the burden shifted to the IRS to prove otherwise.  To cut this short, the IRS failed to do so and the company won!  Therefore, the Sixth Circuit held that the company was entitled to Section 530 tax relief.  In other words, they were forgiven the federal payroll taxes, penalty and interest and will be allowed to continue treating the drivers as ICs for federal tax purposes.

Keep in mind that won’t give them a Get Out of Jail Free pass for civil lawsuits should one pop up in the future.

I just thought you’d like some good news before the holidays.