Owner Had Reasonable Basis for Classifying Home Care Workers as Independent Contractors.

(Parker Tax Publishing MAY 2016)

A district court held that a company's owner had a reasonable basis for treating home care workers as independent contractors because, among other things, the IRS said nothing about the independent contractor classification of the workers when it audited the owner's personal tax returns in an earlier year. Nelly Home Care, Inc. v. U.S., 2016 PTC 164 (E.D. Pa. 2016).

Background

Nelly Home Care, Inc. was formed and managed by Helen Carney. Nelly Home Care provides non-medical homecare services to senior citizens. The business represents itself as a matchmaker between elderly customers and workers who provide homecare services. A prospective customer will contact Nelly Home Care requesting a homecare services worker, and the company will review the workers in its registry to determine if any are available for the times and tasks requested by the prospective customer. The vast majority of Nelly Home Care's customers live at the Beaumont in Bryn Mawr, Pennsylvania. According to Carney, Nelly Home Care does not supervise or direct its workers in the performance of their duties and the workers receive no training from Nelly Home Care, although she does host orientation or in-service sessions for workers going into certain facilities, such as the Beaumont. Carney does not give directions to workers on how to care for clients and any specific instructions provided to workers are done so by the host facility. Nelly Home Care obtains worker's compensation insurance for companions, something companies do for employees but not independent contractors.

Carney herself first worked as a provider of homecare services for residents at the Beaumont. While working there, she met other providers of these services and learned that they worked as independent contractors who contracted with home care agencies throughout the region. Carney then reached out to home care service providers such as Bayada, Griswold, and Golden Care, and learned that two of those firms treated their workers as independent contractors. She then decided to start her own company and hire workers as independent contractors. She also had her attorney draft an independent contractor agreement based on a contract reviewed from Bayada.

The IRS audited the personal income tax returns of Carney and her husband in 2007 for the 2004 and 2005 tax years, and as a part of that audit requested information on Nelly Home Care, including documents relating to gross receipts, expenses, and copies of the independent contractor agreements. This audit led to significant adjustments to the Carneys' tax liability. The IRS said that it requested documentation related to Nelly Home Care to analyze the Carneys' claim of the contract labor deduction and to resolve discrepancies in the Carneys' claimed expenses. In 2011, the Carneys again had their personal income tax returns audited, this time for the 2008 tax year. The IRS, however, resolved this audit with a "no change" determination.

The IRS then conducted an employment tax audit of Nelly Home Care in 2011 and assessed employment tax deficiencies for 2008 through 2012 after determining that the companions were employees, and not independent contractors, for federal employment tax purposes. Nelly Home Care paid the assessments and then filed suit to recoup the payments. Before a district court, Nelly Home Care argued that it had a reasonable basis for treating its workers as independent contractors in accordance with the safe harbor provisions of Section 530 of the Revenue Act of 1978. The IRS countered that Nelly Home Care could not reasonably rely on prior audits, industry practices, or any other basis for treating companions as independent contractors.

Analysis

Section 530 of the Revenue Act of 1978 provides a safe harbor for taxpayers who owe back employment taxes after they erroneously fail to classify certain workers as employees. It allows the taxpayer to avoid liability for certain federal employment taxes if the taxpayer had a reasonable basis for not treating an individual as an employee. A taxpayer can prove reasonable basis by showing reliance on: (1) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer; (2) a past IRS audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holdings positions substantially similar to the position held by this individual; or (3) long-standing recognized practice of a significant segment of the industry in which such individual was engaged. A business that fails to meet any of the three safe havens may nevertheless be entitled to relief if the taxpayer can demonstrate, in some other manner, any reasonable basis for not treating the worker as an employee.

The district court held that, while Nelly Home Care did not show it was entitled to relief under the three safe havens in Section 530, it did demonstrate that it was entitled to relief under the "other reasonable basis" safe harbor. According to the court, the facts, when viewed most favorably to the government, confirmed that Nelly Home Care had a reasonable basis to classify its companions as independent contractors because (1) before forming the business, Carney was a home care aide herself and spoke to other aides and learned that many of them were independent contractors; (2) Carney reached out to three other companion providers and learned that at least two of them treated their companions as independent contractors; (3) Carney did her own research and reviewed an independent contractor agreement used by another companion company; and (4) the IRS said nothing about the independent contractor classification of Nelly Home Care when it audited Carney's personal tax returns in 2007. The court noted that, in the earlier audit, the IRS requested and reviewed numerous documents regarding Nelly Home Care, including copies of contracts with independent contractors. Given that the IRS undertook an in-depth analysis of Nelly Home Care's business practices in that audit, the court concluded that it was reasonable for Carney to interpret the IRS's silence on the independent contractor classification as acquiescence.

OBSERVATION: The court stated that its decision in no way endorsed Nelly's classification of its workers as independent contractors. But, the court said, it could conclude that Nelly was entitled to relief on the taxes it paid for 2008 to 2012 without resolving that issue.

For a discussion of the misclassification of workers and Section 530 relief, see Parker Tax ¶210,115.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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