Reflectxion Resources, Inc. v. Comm’r, T.C. Memo. 2020-114| August 3, 2020 | Gustafson, J. | Dkt. No. 12017-16
Short Summary: The case involves the analysis and discussion of the Tax Court’s jurisdiction over cases where the employer did not properly classify its workers as employees and seeks relief under section 530.
Reflectxion Resources, Inc. (the “taxpayer”), a medical staffing agency, hired travel therapists for one of its clients, Gevity. Under a services agreement, the taxpayer provided such staff to Gevity for 11 quarters. During the 11 quarters, it was Gevity who acted as employer of the staff and filed the respective employment tax returns. After such period and for the following 5 quarters, it was the taxpayer who filed employment tax returns. During all 16 quarters, the travel therapists were reimbursed travel expenses. Such reimbursements were never reported as wages for employment tax in all 16 quarters.
The IRS determined that for the 16 quarters, the reimbursements were subject to employment taxes. Taxpayer argued that for the first 11 quarters, Gevity was the statutory employer and consequently, it sought relief under section 530, which provides relief in instances where a common law employer has reasonably believed that the employee’s wages are exempt from payroll taxes. The IRS took the position that section 530 relief did not applied.
Focusing on the applicability of section 530, the Tax Court focused its analysis on whether it had jurisdiction over the dispute, considering the application of section 530 argued by the taxpayer. The taxpayer contended that the Court only had jurisdiction over the first 11 quarters, because under section 7436 of the Code, the Court has jurisdiction over any case in which there is a “dispute” about the application of section 530. The Court agreed with the taxpayer and rejected the argument of the IRS that it had jurisdiction over the full 16 quarters.
Key Issues: Does the application of section 530 constitutes an actual controversy for purposes of section 7436(a) and consequently, does it fall within the jurisdiction of the Tax Court.
Primary Holdings: The Tax Court has jurisdiction over disputes involving employment taxes as provided by section 7436(a). If there is an actual controversy that involves a determination in connection with an audit as part of an examination, the Tax Court has jurisdiction. To question the applicability of section 530 to a particular dispute constitutes an actual controversy for purposes of section 7436(a) which triggers the Tax Court’s jurisdiction. However, a unilateral determination made by the IRS that the taxpayer does not contend, does not constitute an “actual controversy”, consequently the Tax Court does not have jurisdiction over such dispute.
Key Points of Law:
Section 7436(a) provides that the Tax Court has jurisdiction over disputes involving employment taxes that (i) are in connection with an audit, (ii) there is an actual controversy that (iii) involves a determination made as part of an examination. If all these standards are met, the Tax Court has jurisdiction to hear the case.
In cases concerning the applicability of section 530, there is an actual controversy when the employer has not treated the worker as an employee. If the employer meets the three elements provided by section 530, then relief can be applied. The elements of section 530 are:
- The employer did not treat an individual as an employee.
- The employer filed tax returns “on a basis consistent with the taxpayer’s treatment of such individual as not being an employee” and,
- The employer must have reasonable basis for not treating such individual as employee.
In the instant case, there is an actual controversy under section 7436(a) only for the first 11 quarters because there is a question whether the taxpayer is entitled to relief under section 530. Because the IRS’ determination is made as part of an examination, all the elements provided by section 7436(a) are met, and thereby, the Tax Court has jurisdiction.
For the remaining quarters, the Tax Court does not have jurisdiction because the taxpayer did treat its medical therapists as employees, consequently, there is no contention to the IRS argument that the taxpayer was the employer of such individuals. Accordingly, there is no “actual controversy” for purposes of section 7436(a), which translates in the Tax Court having no jurisdiction.
Insight: This case confirms the line of cases that support the Tax Court’s jurisdiction over disputes involving employment taxes. The three standards provided by section 7436(a) are relevant to establish such jurisdiction in these types of cases. Moreover, taxpayers should be aware of the language used by the IRS when denying applicability of section 530, because it could lead to a controversy that could not fall within the Tax Court’s jurisdiction.