When discussing “Section 530 relief” regarding payroll tax issues we are not, as many initially assume discussing §530 of the Internal Revenue Code (which actually deals with Coverdell Education Savings Accounts). Rather that term refers to a provision in the Revenue Act of 1978 found in Section 530 of the act that provides relief from liability in certain cases from payroll tax liabilities.
The relevant portion of the Revenue Act of 1978 states:
(a) Termination of Certain Employment Tax Liability.--
(1) In general.--If--
(A) for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, and
(B) in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee, then, for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.
Under IRC §7436(a) the Tax Court has jurisdiction in limited cases when Section 530 is involved. That provision provides:
Creation of Remedy.--If, in connection with an audit of any person, there is an actual controversy involving a determination by the Secretary as part of an examination that--
(1) one or more individuals performing services for such person are employees of such person for purposes of subtitle C, or
(2) such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual,
upon the filing of an appropriate pleading, the Tax Court may determine whether such a determination by the Secretary is correct and the proper amount of employment tax under such determination. Any such redetermination by the Tax Court shall have the force and effect of a decision of the Tax Court and shall be reviewable as such.
The actual issues involved in the case of are not ones that many clients will run into—the IRS was arguing about whether American Airlines was required to withhold taxes on South American employees. However it does look at how far the Tax Court’s jurisdiction may be extended in a Section 530 case.
The Tax Court agreed that, absent the Section 530 jurisdictional authority granted it under §7436(a), it would lack jurisdiction to hear the matter in this case.
This was not first time American Airlines had been examined on this issue. A prior exam covering 1992-96 had dealt with the same issue. The employees in questions flew routes in South America, operations that American had acquired from the now defunct Eastern Airlines. These individuals flew on flights to/from Miami to their home countries and normally spent only a few hours in the Miami area. Eastern had never treated these individuals as U.S. employees and American continued this practice.
The 1992-96 exam eventually made it Appeals. Appeals found that Section 530 applied in this case, as American was treating these individuals consistently over the periods in question and there was a reasonable basis for not treating them as a U.S. employee. Appeals also found that the result should be the same for all future periods.
There the matter remained until the IRS decided to look into the issue seven years later. The IRS examined the period from 2003-2006 and decided that American was responsible either for withholding under §1446 on U.S. source income on these employees or, alternatively, was subject to the regular payroll tax liabilities on these individuals. American challenged this position, arguing that Section 530 continued to shield them from these liabilities, adopting the line given in the decision of Appeals in the earlier case.
American paid the payroll tax liabilities but then filed with the Tax Court for both the §1446 and payroll tax issues. The IRS argued that because it had not made a determination regarding employment status and had issued the employment tax assessment solely as a “backup” position if it was found that §1446 did not apply, the Tax Court had no jurisdiction to deal with the payroll tax issue.
At this point, though, the only issue to be decided is whether the Tax Court had jurisdiction. The IRS argued that, in fact, there was no jurisdiction because the IRS never made a finding that these individuals were employees—and, in fact, American essentially agreed they were employees, just not whether they had a U.S. tax issue related to these individuals.
The Court notes that four criteria must be met in order for the Tax Court to have jurisdiction over a matter under §7436(a). Those criteria are:
· An examination in connection with the audit “of any person”;
· A determination by the Secretary that “such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual”;
· An “actual controversy” involving the determination as part of an examination; and
· the filing of an appropriate pleading in the Tax Court.
The IRS disputed that this case met either the second or third requirement were met. A failure to meet just one of those two requirements would strip the Tax Court of jurisdiction, so the Court looked at those two issues.
The IRS argues that there must be a controversy regarding employment status to trigger the “actual controversy” provision—and the parties all agreed these individuals were employees. However the Tax Court ruled that the actual controversy rule did not limit itself to a question of whether individuals were employees—rather, a question regarding whether a taxpayer is eligible for Section 530 relief is enough to meet this test.
The IRS argued, regardless, that they had made no determination that American was not eligible for Section 530 relief. The IRS argued that, despite the Appeals determination in the earlier exam, Section 530 was not properly at issue here. The IRS’s belief is that Section 530 is limited to issues regarding whether someone is an employee, which is not an issue here. Therefore no determination under Section 530 is required here and, in this case, the IRS made no such determination.
The Court found the IRS’s logic wanting. A decision not to decide that someone qualifies for Section 530 relief is effectively a decision to deny relief—that is, the question of whether Section 530 is applicable would necessarily involve a determination of at least its applicability.
The IRS finally argues that the whole point of the §7436(a) grant of jurisdiction was to allow the Tax Court to decide issues of worker classification and if there is no issue of worker classification in the case the Tax Court cannot have jurisdiction. The Court summarizes the IRS argument thus:
Section 7436 is titled “Proceedings for Determination of Employment Status”, and subsection (a) is titled “Creation of Remedy.” Respondent suggests that these titles show that the Court’s jurisdiction is limited to instances where a determination of worker classification was made.
The Tax Court rejected that view as well. The Court first rules that the title of the statute does not override the unambiguous meaning of the actual text of the statute.
The Court then turns to the provisions of §7436(a) and notes that the section provides jurisdiction if either of the two conditions is met. Thus, a denial of Section 530 relief independent of any determination of whether individuals are employees is enough to trigger Tax Court jurisdiction.
Thus, the Court finds it does have the right to hear this case.