Historic Tax Case | Ewens and Miller, Inc. v. Commissioner

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon

Freeman Law is a tax, white-collar, and litigation boutique law firm. We offer unique and valued counsel, insight, and experience. Our firm is where clients turn when the stakes are high and the issues are complex.

Historic Tax Case | Ewens and Miller, Inc. v. Commissioner

Ewens and Miller, Inc. v. Commissioner, 117 T.C. No. 22 | December 11, 2001 | J. Vasquez | Docket No. 13069-99

Short Summary:

Prior to and during 1992, Ewens and Miller, Inc. (Petitioner) manufactured bakery products. Petitioner had multiple categories of workers: bakery workers[1]; cash payroll workers[2]; route distributors[3]; outside sales workers.[4]

On November 4, 1991, Petitioner issued a memorandum to all workers stating, among other things, that some workers had been treated as employees and some as independent contractors, however, starting January 1, 1992, all workers would be treated as independent contractors. Those that wished to remain employed as independent contractors would be required to sign a statement accepting responsibility for their own payroll taxes, and those that did not wish to remain employed following the change, would be discharged prior to the start of 1992. After January 1, 1992, there were no changes in the activities Petitioner’s various categories of workers performed. Petitioner’s reason for the conversion was to protect itself from lawsuits and to have better control over the activities of its workers.

Roger Miller, one of the named partners of Ewens and Miller, Inc., a CPA, prepared Petitioner’s Federal corporate income tax returns for 1991 and 1992, and signed Petitioner’s Federal employment tax returns for 1992. For 1991, Petitioner reported salaries and wages of $196,433 on its Federal corporate income tax return; issued 51 Forms W-2 to its employees reporting total wages of $196,432.60; reported $81,143 of sub-contractual labor; and issued 10 Forms 1099-MISC reporting total payments of $37,930.74. For 1992, Petitioner reported no salaries and wages on its Federal corporate income tax return; reported $115,287 of sub-contractual labor; and issued 36 Forms 1099-MISC reporting total payments of $115,287.05.

Petitioner filed Forms 941, Employer’s Quarterly Federal Tax Return, for the four quarters of 1992 and reported no wages subject to withholding, no withheld income tax, no Social Security nor Medicare tax. The final Form 941 filed in 1992 indicated that final wages were paid December 31, 1991, that Petitioner had no employees, and was out of business. Petitioner’s Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 1992 also reported no wages, that Petitioner had no employees, and was out of business.

The Commissioner of Internal Revenue (Commissioner) concluded that, for 1992, all of Petitioner’s workers were employees for employment tax purposes. Additionally, the Commissioner concluded Petitioner was not entitled to IRC § 530 (1978) relief for any of these workers and determined penalties pursuant to IRC § 6656.

Key Issues:

Issue 1: Whether the Tax Court’s jurisdiction to decide the proper amount of employment taxes provides the Tax Court with jurisdiction to decide the proper amount of additions to tax and penalties related to employment tax arising from worker classification of IRC § 530 (1978) treatment determinations?

Issue 2: Whether the workers performing services for Petitioner were employees during 1992?

Issue 3 [Issue of first impression]: Whether Petitioner is entitled to “safe harbor” relief as provided by IRC § 530 (1978)?

Primary Holding:

Issue 1: Yes, the Tax Court’s jurisdiction to decide the correct amounts of employment taxes also provides it with the jurisdiction to decide the proper amount of additions to tax and penalties related to employment tax arising from worker classification or IRC § 530 (1978) treatment determinations.

Issue 2: The cash payroll workers, bakery workers, and outside sales workers were common law employees under IRC § 3121(d)(2). The route distributors were statutory employees under IRC § 3121(d)(3).

Issue 3: No, Petitioner is not entitled to “safe harbor” relief as provided by IRC § 530 (1978) because Petitioner did not have a reasonable basis for treating the bakery workers, cash payroll workers, route distributors, and outside sales workers as independent contractors as opposed to employees.

Key Points of Law:

Issue 1: Jurisdiction

Issue 2: Employee v. Independent Contractor

Issue 3: IRC § 530 (1978)

Insight:

Particularly with respect to worker classification as either an employee or an independent contractor, this case emphasizes the importance of clearly defining a worker as one or the other. In reviewing a worker’s classification so as to determine whether it is proper, there is no one factor that is dispositive of being classified as an employee or an independent contractor – numerous factors are explored in order to allow an informed conclusion to be made.

Further, this case makes clear that there are consequences for employers who claim to treat their workers as independent contractors, when in reality, there is an employer-employee relationship. If an employer chooses to change the classification of its workers, meticulousness in establishing boundaries, expectations, and the relationships between the employer and workers cannot be overstated.

[1] The bakery workers worked at Petitioner’s plant using equipment and supplies provided by Petitioner. Petitioner did not set the bakery worker’s hours; however, bakery workers could not leave until the daily production quota was met. The bakery workers were paid a fixed amount based on the amount of product produced. In 1991, Petitioner treated the bakery workers as employees and issued each one a Form W-2.

[2] The cash payroll workers were a family of six or seven that had worked for Petitioner for many years prior to 1992. The cash payroll workers performed the same duties as the bakery workers and beginning in 1987, pursuant to an agreement between Petitioner and the family, the cash payroll workers also supervised the bakery workers.

[3] The route distributors used their personal vehicles to transport Petitioner’s products from the plant to individuals or businesses that purchased the products. The route distributors set their own schedules. Some route distributors bought the product and resold it at a higher price; others worked on a commission basis. In 1991, Petitioner issued at least one route distributor a Form W-2.

[4] The outside sales workers marketed Petitioner’s products. They used their own vehicles and set their own schedules. When an outside sales worker sold a product, they received a commission. Petitioner retained the right to hire and fire the outside sales workers. In 1991, Petitioner issued at least two outside sales workers a Form W-2.