Payroll Service Company's Claim for Refund of Employment Taxes Denied; Separate Wage Base Cap Applied to Each Individual Employer.
(Parker Tax Publishing October 2013)

A payroll service company was not entitled to a refund of employment taxes paid on behalf of individual motion picture and television production companies. Cencast Services, L.P. v. U.S., 2013 PTC 272 (Fed. Cir. 9/10/13). Cencast Services, L.P., a payroll service company, contracted with independent motion picture and television production companies to provide payroll and related services, including computing and paying compensation to production workers, reporting and paying compensation to multi-employer pension and benefit funds, providing post-production financial reporting, and paying employment taxes to the IRS. The production companies hired and supervised the individual production workers. From 1991 through 1996, Cencast paid over $7 billion in wages, on behalf of production companies, to workers on numerous productions. Cencast also filed tax returns and remitted employment taxes under the Federal Unemployment Tax Act (FUTA) and Federal Insurance Contribution Act (FICA) with respect to these employees. For the six years at issue, Cencast filed its FUTA and FICA employment tax returns and treated each employee as being in an employment relationship with Cencast rather than with the individual production companies. This treatment reduced Cencast's overall tax payments due to the statutory caps on FUTA and FICA taxes because Cencast applied a single wage base cap in calculating each employee's taxable wages. In 2001, the IRS assessed tax deficiencies totaling over $43 million for FUTA taxes and $15 million for FICA taxes and determined that Cencast was required to apply a separate wage cap to each production company that had an employment relationship with a production worker during each of the years in issue. Cencast paid a portion of the assessments and filed a claim for refund. The Court of Federal Claims found that the production companies were considered the employers of the production workers for purposes of calculating FUTA and FICA taxable wage bases. The Claims Court also rejected Cencast's claim that it erroneously overpaid taxes because certain workers were independent contractors. The court said the variance doctrine barred the independent contractor theory. Cencast appealed. Code Sec. 3306(b) provides that each employer is only liable to pay FUTA taxes on wages on the first $7,000 of wages paid with respect to employment. Code Sec. 3121(a) states that each employer is only liable to pay FICA taxes on wages paid with respect to employment up to the contribution and benefit wage base. Observation: An employer's use of a payroll service provider does not relieve the employer from its responsibility of ensuring that all of its federal employment tax obligations are met. The payroll service provider assumes no liability for its employer/client's employment tax withholding, reporting, payment and/or filing duties. Cencast argued that FUTA and FICA tax liability is imposed only on the entities that control the payment of wages and that Cencast was the relevant employer for purposes of imposing liability and defining the wage cap calculation. The Federal Circuit affirmed the Court of Federal Claims and held that, for purposes of calculating the FUTA and FICA wage base caps, the caps should be calculated as though the employees were in an employment relationship with each of the individual production companies, i.e., the common law employers, rather than with Cencast, which was the statutory employer. The court stated that both the common law employer and statutory employer are employers within the meaning of Code Sec. 3301. Under Code Sec. 3306(b)(1), the term employment refers to the common law employment relationship. It was undisputed that a common law employment relationship existed between the production companies and production workers, the court said. Thus, the common law employment rules governed the wage cap computation and not the relationship of the employees to Cencast. The court noted that the Code provision did not indicate a Congressional intent for having common law employers choose a different wage cap and reduce their tax liability depending on whether the employers administered payroll themselves or delegated that responsibility to another entity. The court found that Cencast was barred from raising in its refund suit a claim for taxes erroneously paid to independent contractors. To allow Cencast to amend its arguments two years after filing its original complaint to include the independent contractor issue would be prejudicial to the government since the addition of the new claim would be overly burdensome and time consuming. Further, Cencast's filing of its original refund claim was insufficient to preserve its independent contractor claim because the new claim substantially varied from the legal theories and factual bases asserted in Cencast's original refund claim. There was no equitable recoupment since no new or inconsistent theories were raised by the IRS. For a discussion of who is liable for FUTA and FICA wage bases, see Parker Tax ¶213,135 and ¶213,105, respectively. (Staff Editor Parker Tax Publishing)

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