Ewens & Miller, Inc. v. Commissioner, 117 T. C. 263 (U. S. Tax Ct. 2001)

In Ewens & Miller, Inc. v. Commissioner, the U. S. Tax Court ruled that workers classified as independent contractors by a bakery company were actually employees for employment tax purposes. The court clarified its jurisdiction over employment tax disputes and established that the company’s attempt to reclassify its workers to avoid employment taxes was invalid, emphasizing the legal criteria for distinguishing between employees and independent contractors.

Parties

Ewens & Miller, Inc. , the petitioner, was a Virginia corporation engaged in the manufacture of bakery products. The Commissioner of Internal Revenue, the respondent, challenged the company’s classification of its workers as independent contractors for employment tax purposes. The case progressed through the United States Tax Court, where Ewens & Miller, Inc. sought a redetermination of the Commissioner’s Notice of Determination Concerning Worker Classification Under Section 7436.

Facts

Ewens & Miller, Inc. manufactured bakery products, employing various workers categorized as bakery workers, cash payroll workers (the Rusli group), route distributors, and outside sales workers. In 1992, the company attempted to convert all these workers to independent contractors, following a memorandum issued in November 1991, which stated that the company would subcontract all operations to outside groups or individuals starting January 1, 1992. Despite this conversion, the workers continued to perform the same duties as before, and the company paid them directly, with some checks labeled as “payroll”. The Commissioner issued a notice determining that these workers were employees and assessed employment taxes and penalties against the company. Ewens & Miller, Inc. challenged this determination, disputing the classification and the assessed amounts.

Procedural History

The Commissioner issued a Notice of Determination Concerning Worker Classification Under Section 7436, asserting that the workers were employees and that Ewens & Miller, Inc. was liable for employment taxes and penalties. The company filed a petition in the United States Tax Court to redetermine this notice. Initially, the court dismissed the company’s challenge to the amounts of employment taxes and penalties for lack of jurisdiction, following the precedent set in Henry Randolph Consulting v. Commissioner. However, subsequent legislative amendments to Section 7436(a) retroactively granted the court jurisdiction over such amounts, leading to a trial on the merits of the worker classification issue.

Issue(s)

Whether the workers performing services for Ewens & Miller, Inc. in 1992 were employees for employment tax purposes under Sections 3121(d)(2) and 3121(d)(3)(A) of the Internal Revenue Code?

Whether Ewens & Miller, Inc. was entitled to relief under Section 530 of the Revenue Act of 1978, which provides a safe harbor for employers who have consistently treated workers as independent contractors?

Whether the Tax Court has jurisdiction to decide the proper amount of employment taxes and related penalties under the amended Section 7436(a)?

Rule(s) of Law

Under Section 3121(d)(2), an individual who, under common law rules, has the status of an employee is considered an employee for employment tax purposes. Common law factors include the degree of control exercised by the principal, investment in work facilities, opportunity for profit or loss, right to discharge, whether the work is part of the principal’s regular business, permanency of the relationship, and the relationship the parties believed they were creating.

Section 3121(d)(3)(A) defines “employee” to include individuals performing services as agent-drivers or commission-drivers engaged in distributing specified products, including bakery products, provided they perform substantially all such services personally and do not have a substantial investment in facilities other than for transportation.

Section 530 of the Revenue Act of 1978 provides relief from employment tax liability if the taxpayer did not treat an individual as an employee for any period and filed all required federal tax returns on a basis consistent with such treatment, unless the taxpayer had no reasonable basis for not treating the individual as an employee.

Section 7436(a), as amended by the Community Renewal Tax Relief Act of 2000, grants the Tax Court jurisdiction over the proper amounts of employment taxes and related penalties that arise from worker classification determinations.

Holding

The Tax Court held that the bakery workers, cash payroll workers, and outside sales workers were common law employees under Section 3121(d)(2), and the route distributors were statutory employees under Section 3121(d)(3)(A). The court further held that Ewens & Miller, Inc. was not entitled to relief under Section 530 of the Revenue Act of 1978, as it had previously treated similar workers as employees and lacked a reasonable basis for treating them as independent contractors in 1992. Additionally, the court determined that it had jurisdiction to decide the proper amounts of employment taxes and related penalties under the amended Section 7436(a).

Reasoning

The court applied the common law factors to determine the employment status of the workers. For the bakery workers and cash payroll workers, the company’s control over the work environment, provision of facilities, and payment structure indicated an employer-employee relationship. The outside sales workers were deemed employees based on the company’s right to hire and fire them and the integral nature of their work to the company’s business. The route distributors were classified as statutory employees under Section 3121(d)(3)(A) because they distributed bakery products, served customers designated by the company, and did not have a substantial investment in facilities other than transportation.

The court rejected Ewens & Miller, Inc. ‘s claim for Section 530 relief because the company had previously treated similar workers as employees, failed to file consistent tax returns for all workers in 1992, and lacked a reasonable basis for treating them as independent contractors. The court noted that the company’s reliance on an alleged industry practice of “co-packing” was unsupported by evidence, and the company’s vice president admitted awareness of regulations classifying route distributors as employees.

The court’s jurisdiction over the amounts of employment taxes and penalties was established by the retroactive amendment to Section 7436(a), which explicitly included such jurisdiction in worker classification cases.

Disposition

The court issued a decision in favor of the Commissioner, determining that the workers were employees for employment tax purposes and that Ewens & Miller, Inc. was liable for the assessed employment taxes and penalties.

Significance/Impact

The decision in Ewens & Miller, Inc. v. Commissioner clarifies the Tax Court’s jurisdiction over employment tax disputes and emphasizes the importance of correctly classifying workers for tax purposes. It reinforces the common law factors used to determine employee status and the statutory criteria for classifying certain workers as statutory employees. The case also highlights the limitations of Section 530 relief, particularly when a company has previously treated similar workers as employees and lacks a reasonable basis for reclassification. The ruling serves as a cautionary tale for employers attempting to reclassify workers to avoid employment taxes, underscoring the need for consistent treatment and documentation to qualify for safe harbor provisions.