Tax Court in Brief | Pediatric Impressions Home Health, Inv. v. Comm’r | Common Law Employees, Section 530 Relief, and Penalties

The Tax Court in Brief – April 11th- April 15th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of April 11th, 2022, through April 15th, 2022

• The REDI Foundation, Inc. v. Comm’r, T.C. Memo. 2022-34 |April 11, 2022 |Nega, J. | Dkt. No. 23715-18
• Mihalik v. Comm’r | April 13, 2022 | Gustafson, D. | Dkt. No. 7881-19

Pediatric Impressions Home Health, Inc. v. Comm’r, T.C. Memo. 2022-35 | April 12, 2022 | Greaves, J. | Dkt. No. 5769-20

• Opinion

Short Summary:  Pediatric Impressions Home Health, Inc. (“Pediatric Home Health”) provides at-home nursing services to children with special needs.  When a nurse applied to work with Pediatric Home Health, the company required the nurse to complete a written job application, pass a background check, and complete a nursing skills assessment administered by the company.  After the nurses were hired, Pediatric Home Health informed them that they were “employed” and on a “full-time” basis with the company.  Pediatric Home Health had the sole authority to fire a nurse at will; however, a nurse could not end the working relationship without a minimum of two-weeks’ notice.  After services were performed, Pediatric Home Health received payment for the services.  Accordingly, the nurses had no contact with the patients’ insurance companies, the state, or Medicaid.  Pediatric Home Health also set the schedule for each nurse.  Finally, Pediatric Home Health required the nurses to attend in-service training sessions at the company’s office on issues relating to patient care, medical topics, emergency procedures, and other topics.  If a nurse failed to attend a particular training, the nurse was required to make it up at a later date or risk the withholding of pay and additional work or even termination.

Key Issue: 

• (1) Whether approximately 99 individuals (e., nurses) are properly classified as employees of Pediatric Home Health;
• (2) Whether Pediatric Home Health is entitled to section 530 relief for the periods at issue with respect to the nurses;
• (3) Whether Pediatric Home Health is liable for penalties under section 6651(a)(1), section 6656, and section 6662.

Primary Holding: 

• (1) Yes, under established Fifth Circuit precedent, the nurses are properly characterized as employees for federal tax purposes.
• (2) No, because Pediatric Home Health, among other things, treated the nurses as employees in prior employment tax years.
• (3) Yes, as to all penalties because Pediatric Home Health failed to provide evidence of reasonable cause necessary to negate the penalties.

Key Points of Law: 

• The IRS’s determinations in a notice of determination are presumed correct, and therefore the taxpayer bears the burden of proving these determinations are in error. Tax Court Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
• Employers are subject to “employment taxes,” which include taxes imposed by FICA and FUTA, and income tax withholding under section § 3402. Employers must make periodic deposits of amounts withheld from employees’ wages and amounts corresponding to the employer’s share of FICA and FUTA tax.  R.C. §§ 6302, 6157; Treas. Reg. § 31.6302-1, § 31.6302(c)-3.  But employment taxes do not apply to workers who are characterized as independent contractors.
• The Tax Court determines a worker’s employment status by applying common law concepts, while keeping in mind that doubtful questions should be resolved in favor of a finding of employment. Ewens & Miller, Inc. v. Comm’r, 117 T.C. 263, 268 (2001).  The relevant question is whether the alleged employee so economically depends upon the business to which he renders his services, such that the individual, as a matter of economic reality, is not in business for himself.  Hobbs v. Petroplex Pipe & Constr., Inc., 946 F.3d 824, 829 (5^th 2020).
• The U.S. Court of Appeals for the Fifth Circuit, the court to which an appeal of this case would lie under I.R.C. § 7482(b), considers five nonexhaustive factors to guide this inquiry: (1) the degree of control exercised by the alleged employer; (2) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer; (3) the extent of the relative investments of the worker and the alleged employer; (4) the permanency of the relationship; and (5) the skill and initiative required in performing the job.    However, no single factor is determination—instead, each factor is a tool used to gauge the economic dependence of the alleged employee, and each must be applied with this ultimate concept in mind.  Id.
• The right of the principal to exercise meaningful control over the agent, e., whether the worker is independent of his manager’s control or dependent for direction or control in carrying out his work, is the crucial test for determining the existence of an employer-employee relationship.  Hobbs, 946 F.3d at 830.  For an individual to be considered an employee, the employer must control not merely the end sought to be accomplished, but also the means and details of its accomplishment as well.  Consumers Cty. Mut. Ins. Co. v. P.W. & Sons Trucking, Inc., 307 F.3d 362, 364 n. 3 (5th Cir. 2002).
• The fact that a worker provides his own supplies, tools, and materials generally indicates independent contractor status. Breaux & Daigle, Inc. v. U.S., 900 F.2d 49, 53 (5th Cir. 1990).
• Greater skill and more demonstrated initiative counsel in favor of independent contractor status. Parrish v. Premier Directional Drilling, LP, 917 F.3d 369, 385 (5^th 2019).  Relevant to this inquiry is the extent of discretion the worker has over his daily tasks and whether he must take initiative to find consistent work.  Hobbs, 916 F.3d at 833.
• Section 530 affords a taxpayer relief from federal employment taxes even if the relationship between the principal and the worker would otherwise require the payment of those taxes. Charlotte’s Office Boutique v. Comm’r, 121 T.C. 89, 102 (2003).  To qualify for section 530 relief, a taxpayer:  (1) must not have treated the worker as an employee for any period for purposes of federal employment taxes (historic treatment requirement); (2) must have consistently filed all federal tax returns (including information returns) required to be filed by the taxpayer with respect to the individual for periods after 1978 on a basis consistent with the taxpayer’s treatment of that individual as not being an employee (reporting consistency requirement); (3) must have had a reasonable basis for not treating the worker as an employee, g., the taxpayer’s treatment of the worker was in “reasonable reliance” of one of the items specified in section 530(a)(2) (reasonable basis requirement); and (4) must not have treated as an employee any individual holding a position “substantially similar” to that of the worker in question (substantive consistency requirement).  Sec. 530(a)(1), (3).
• Section 6651(a)(1) provides for an addition to tax of 5% of the tax required to be shown on a return for each month, or fraction thereof, for which there is a failure to timely file a federal tax return, up to 25% in the aggregate.
• Section 6656(a) and (b) imposes a penalty equal to 10% of the amount of the underpayment in tax required to be deposited by an employer, if the deposit is more than 15 days late as determined by Section 6656(b).
• Section 6662(a) and (b)(1) imposes an accuracy-related penalty equal to 20% of the portion of the underpayment in tax required to be shown on a return which is attributable to negligence. For these purposes, “negligence” includes “any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return.”  Reg. § 1.6662-3(b)(1).
• The section 6651(a)(1) addition to tax and the section 6656(a) penalty may be reduced to the extent a taxpayer can establish that its failure to file or deposit was due to reasonable cause and not willful neglect. Similarly, a taxpayer may avoid the section 6662(a) penalty if it can show that there was a reasonable cause for, and it acted in good faith with respect to, the underpayment.  R.C. § 6664(c)(1).  To establish reasonable cause, the taxpayer must show that it exercised “ordinary business care and prudence’ but nonetheless was unable to meet its obligations.  U.S. v. Boyle, 469 U.S. 241, 245-46 (1985).

Insight:  Companies that hire workers and that desire to treat the workers as independent contractors need to be extremely careful in how they treat the workers.  As shown in the above case, there are a host of various factors that come into play in determining whether any given worker is an employee or, alternatively, an independent contractor.

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