Late Information Returns Do Not Preclude Employee Classification Relief

P incorporated in 1990 to provide emergency medical services to hospitals. During and after 1990, it entered into contracts entitled Emergency Department Services Agreements (EDS Agreements) with several area hospitals to furnish professional emergency medical services and full-time physician staffing. To fulfill its obligations under the EDS Agreements, P hired physicians to staff the hospitals emergency rooms. P entered into Independent Contractor Agreements with such physicians. The IRS reclassified 25 of the physicians as employees rather than independent contractors (reclassified physicians).

Relying on a longstanding, recognized practice of a significant segment of the emergency medicine industry, P treated each of the reclassified physicians as an independent contractor. During 1996, it paid each one more than $600. P 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 1977.

Issues and Contentions

Section 530 of the Revenue Act of 1978 operates to afford relief from employment tax liability, notwithstanding the actual relationship between the taxpayer and the individual performing services. Section 530(a), as amended, provides that an individual will not be deemed an employee for employment tax purposes if:

• The taxpayer had a reasonable basis for not treating the individual as an employee;

• The taxpayer did not treat an individual as an employee for purposes of employment taxes for any period; and

• For periods after 1978, all Federal returns (including information returns) required to be filed by the taxpayer for such individual are filed on a basis consistent with the taxpayers treatment of such individual as not being an employee.

P satisfied the first requirement, because it relied on a longstanding, recognized practice of the emergency medicine industry and, thus, had a reasonable basis for not treating the reclassified physicians as employees. P also satisfied the second requirement, because it did not treat any reclassified physician as an employee for any relevant period.

As to the final requirement (Section 530(a)(1)(B)), P ultimately filed all returns on a basis consistent with the treatment of the reclassified physicians as nonemployees. However, its information returns were filed late; the IRS maintains that Section 530(a)(1)(B) reporting consistency requires returns to be timely filed. Because Section 530(a)(1)(B) is silent as to timeliness, P argues that the required returns merely have to be filed.

Analysis

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., 117 TC 263 (2001)). Section 530 was enacted both as an interim solution to the problems inherent in increased enforcement of the employment tax laws and in response to taxpayer complaints that proposed IRS reclassifications involved a change of IRS position in applying common-law rules to their workers or industry. The purpose 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. The interim solution was extended indefinitely by Section 269(c) of the Tax Equity and Fiscal Responsibility Act of 1982.

In addition to Congressional intent, the IRS points to its own longstanding interpretation of Section 530(a)(1)(B) in Rev. Proc. 85-18, which states that it will not grant Section 530(a)(1) relief if the taxpayer has not timely filed a Form 1099 for each worker for any period after 1978. The IRS claims that if Congress disagreed with the taxpayers position in Rev. Proc. 85-18, it would have amended Section 530(a)(1)(B) to allow delinquent filing.

For example, in the explanation of the 1996 amendments to Section 530, the Senate Report states, a worker does not have to otherwise be an employee of the 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. Thus, given the level of scrutiny Congress gave Section 530 relief in 1996, the IRS contends that Congress would not have left the language of Section 530(a)(1)(B) silent as to timeliness if it disagreed with its position.

However, the plain language of Section 530(a)(1)(B) denies relief only if the taxpayer did not make the required filing or if it made the required filing on a basis inconsistent with treatment of the individual as not being an employee. As the IRS acknowledges, P filed all required returns for 1996 on a basis consistent with the treatment of the reclassified physicians as not being employees. However, nothing in the language of Section 530(a)(1)(B) requires timeliness along with consistent filing.

The IRS correctly states that timely filing of returns is required throughout the Code; this includes Forms 1096, Annual Summary and Transmittal of U.S. Information Returns, and 1099-MISC, Miscellaneous Income. However, the consequences of Failure to Comply with Certain Information Reporting Requirements are contained in Secs. 67216724. Nothing in the Section 530 language or legislative history leads 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, Congress enacted Section 530 to protect taxpayers from having to litigate the status of individual workers under the common-law employment rules. The IRS is entitled to require timely filing and to impose a penalty when appropriate for failure to timely file, but not the penalty it seeks to impose here.

The IRS also claims that its interpretation of Section 530(a)(1)(B) in Rev. Proc. 85-18 warrants deference by this court. In Mead Corp., 533 US 218 (2001), the Supreme Court held that an administrative agencys interpretation of a statute must be accorded the level of deference set forth in Skidmore v. Swift & Co., 323 US 134 (1944). The deference required de-pends on the thoroughness evident in the agencys consideration, the validity of its reasoning, its consistency with earlier and later pronouncements and all those factors that give it the power to persuade.

Rev. Proc. 85-18 is consistent with Rev. Rul. 81-224, 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 (1992). However, Rev. Proc. 85-18 provides no reason why it requires timely filing. Consequently, in this case, the court does not defer to its requirement of timely filing as a prerequisite to Section 530 relief.

Ps late information returns do not preclude it from qualifying for Section 530 relief.

Medical Emergency Care Associates, S.C., 120 TC No. 15 (5/19/03)