Originally published on Passive Activities and Other Oxymorons on June 20th, 2011.
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Kevin L. Sherar, et ux. v. Commissioner, TC Summary Opinion 2011-44
I didn't know there was a way for somebody to be taxed 131% on income received, but Mrs. Sherar's attorney managed to find a way. Linda Sherar was collecting workman's compensation insurance. Her attorney advised her that she also qualified for Social Security disability payments. She applied for them. She received a check for $3,796.38. Not a lot of money, but if it was laying on the street I would bend over to pick it up. The reason that she didn't get much in Social Security disability is because her benefit was offset by the workman's compensation. Here is where it gets ugly. Workman's compensation payments are excluded from income. Social Security payments are only partially excluded (85% included 15% excluded). The 85% is applied to the entire benefit including the portion that was offset by workman's compensation. So when the IRS looked at this they increased Mrs. Sherar's tax by $4,988. The Court felt kind of bad for her, but couldn't do anything about it:
We acknowledge that Mrs. Sherar applied for Social Security benefits on the advice of counsel. We also acknowledge that if Mrs. Sherar had not applied for Social Security benefits, then her workers' compensation benefits would not have been subject to Federal income tax. See secs. 104(a)(1), 86(d)(3). Under the circumstances we can appreciate petitioners' dismay. Nevertheless, as the Supreme Court of the United States has instructed, we are duty bound to apply the law as written by Congress to the facts as they occurred and not as they might have occurred.
Freddie Stromatt, et ux. v. Commissioner, TC Summary Opinion 2011-42
I almost didn't bother with this one, but it is a fairly nice hobby loss case that was won by the taxpayers. The IRS made an issue out of them putting that they were raising beef cattle on their Schedule F in the preliminary year when they just sold hay, but they did well on most of the factors.
In 1999 petitioners purchased an approximately 15-acre parcel of land near Dickson, Tennessee. Petitioner Edith Stromatt (Mrs. Stromatt) had retired before the land was purchased, and petitioner Freddie Stromatt (Mr. Stromatt) retired shortly thereafter.
In 2000 petitioners constructed a two-bedroom, one-bath house of approximately 792 square feet on the property. Mrs. Stromatt's father lived in the house from 2000 until his death in 2006. Petitioners did not live in the house or elsewhere on the property during the years at issue (2002-2004).
During 2000 and 2001 petitioners cleared the acreage, which had been untended for approximately 25 years and was overgrown with brush and trees, to prepare it for use as pasture, including the production of hay. Mr. Stromatt and Mrs. Stromatt's father operated the tractor and Bush Hog used for clearing the land, including pulling tree stumps. During 2001 and 2002 petitioners installed fencing and fertilized. This work was also performed by Mr. Stromatt and Mrs. Stromatt's father.
Petitioners harvested their first hay in 2001 and continued producing hay during the years at issue, harvesting it with rented equipment. Mr. Stromatt and Mrs. Stromatt's father performed this labor. Petitioners sold the hay, and these sales constituted the only income generated from the farming activity during the years at issue.
Petitioners first purchased cattle in 2005, acquiring six pregnant heifers. By the end of 2005 petitioners owned 17 head of cattle.
Mrs. Stromatt's father provided advice to petitioners on farming, including the number of cattle that could be supported on 15 acres of land.
Mrs. Stromatt's father was an experienced farmer, and Mrs. Stromatt grew up on a farm.
There were also substantiation issues which they probably should have settled at the agent level, but the Court was satisfied on that score also.
After weighing the regulatory factors and all other facts and circumstances, we conclude that petitioners engaged in their farming activity with an actual and honest profit objective. They and family members expended substantial amounts of physical labor to reclaim and fence land in an effort to establish a viable cattle operation. They did so at a pace that was not unreasonable in the circumstances, and they offset some losses by initially selling hay. They obtained knowledgeable advice. Their loss history was both brief (as of the close of the last year in issue) and not atypical for reclaiming land and establishing a cattle operation. The enterprise did not offer significant recreational opportunities
Jonathan C. Ladue, et ux. v. Commissioner, TC Summary Opinion 2011-41
This is about whether a deputy sheriff was subject to self-employment tax on pay that he received for "off duty services". I've always heard this type of thing referred to as "pay details". There is some support for the position that the deputy is functioning as an employee while on the assignment:
During 2007, petitioner was employed as a deputy sheriff by the Jacksonville Sheriff's Office (JSO). JSO permits deputies to provide off-duty services for entities other than JSO. JSO's General Order LIII. 10 (JSO General Order) contains detailed provisions that an officer must follow to obtain and maintain off-duty work.
Entities desiring to hire JSO deputies for off-duty services must submit an application to the Secondary Employment Unit of JSO. A JSO job scheduler acts as a liaison between JSO and the entity by completing the jobsite schedule for JSO employees working for a particular entity, “ensuring employee attendance is adhered to, and resolving employee/employer conflict when appropriate.” Entities that hire deputies for off-duty services are required to pay an administrative fee to JSO for each hour of off-duty service provided by each officer. Working while off duty is strictly voluntary; JSO deputies are not required to perform off-duty services.
The JSO General Order determines the off-duty minimum pay rate, limits the maximum monthly hours of off-duty work, and requires JSO deputies to wear their uniforms and monitor their police radios when providing off-duty law enforcement-related services. Deputies providing off-duty services are also subject to recall to regular duty by JSO. While working off duty, deputies are governed by all JSO policies, procedures, and directives, and the JSO Watch Commander may suspend a deputy's off-duty work if the work or the officer does not meet policy requirements
That was not enough for the Tax Court, though.
After considering these factors, as discussed below, we conclude that petitioner was not an employee of JSO but performed his off-duty services as an independent contractor.
First, petitioner's off-duty services were performed for, and were directly beneficial to, the third-party entity. See Milian v. Commissioner, supra (stating that performance of services by the employee for the employer is implicit in an employee relationship); March v. Commissioner, T.C. Memo. 1981-339 [¶81,339 PH Memo TC]. “Any benefit *** [the department] received by an increased police presence at petitioner's off-duty assignments was incidental and similar in nature to the benefit to a police department when officers increase the police presence in a community by driving their police cruisers home.”
A second factor of an employer-employee relationship is the ability to select and discharge at will. March v. Commissioner, supra. The mere approval from JSO to work off-duty jobs and the ability to suspend if department policies were not adhered to do not amount to the ability to hire and fire with regard to the off-duty positions.
Third, the source and method of payment may also help establish whether an employer-employee relationship exists. March v. Commissioner, supra. All of the third-party entities for which petitioner provided off-duty services operated separately from the city of Jacksonville and JSO; the third-party entities paid petitioner directly and treated him as an independent contractor, issuing him Forms 1099. The city of Jacksonville did not include off-duty pay in petitioner's Form W-2.
Slight changes in the way the pay details are structured would probably produce a different result.
CCA 201115022
If you think your joint account holder might be someone who is apt to be levied, it's time to get a separate account.
For purposes of determining ability to pay, ownership is presumed to be in equal shares unless the taxpayer demonstrates otherwise. See IRM 5.8.5.5. In the levy context, the Supreme Court held in the National Bank of Commerce case that where under state law the taxpayer has the unrestricted right to withdraw funds from a jointly held account a levy attaches to the entire account. The levy, however, is provisional and subject to a later claim by a codepositor that the money in fact belongs to him or her.
Showing posts with label employee. Show all posts
Showing posts with label employee. Show all posts
Sunday, July 13, 2014
Monday, June 9, 2014
You Figure it Out
Originally published on Passive Activities and Other Oxymorons on January 5th, 2011.
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STAHL v. U.S., Cite as 106 AFTR 2d 2010-7154, 11/29/2010
There are certain sections of the Internal Revenue Code that have worked their way into our language. There is even a joke where somebody says that thanks to the market collapse they now have a 201(k). I have this inquiring mind that reasons that if there is a 501(c)(3), which everybody knows about there must also be 501(c)(1) and 501(c)(2) and who knows maybe even 501(c)(4). Believe it or not it actually goes up to 29 (Co-op health issuers) and includes 501(c)(23) - Any veterans association organized before 1880, the principal purpose of which is to provide insurance and other benefits to veterans or their dependents. I guess the Grand Army of the Republic was still a force to be reckoned with in 1913. Even better it keeps going past (c). The Stahl case is about a 501(d) organization :
(d) Religious and apostolic organizations.
The following organizations are referred to in subsection (a) : Religious or apostolic associations or corporations, if such associations or corporations have a common treasury or community treasury, even if such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the taxable income of the association or corporation for such year. Any amount so included in the gross income of a member shall be treated as a dividend received.
501(d) organization file form 1065 and the members are taxed on their share of the profits. They are not, however, considered partnerships subject to the TEFRA audit rules. John Stahl is a member and president of the Stahl Hutterian Brethren .
SHB was organized to enable its members to live in accordance with the tenets of the Hutterite tradition. The Hutterite tradition is rooted in sixteenth century Germany. In accordance with their religious beliefs, SHB members live in a colony, and currently the SHB colony includes about 65 members. They are all part of the extended Stahl family, which includes eight brothers, two sisters, their spouses, and their children.
Hutterites disavow individual property ownership, so SHB does not pay a salary to any of its members. Moreover, the members do not contribute to or collect Social Security benefits. All of SHB's property is maintained by it and is used for the benefit of its members. SHB provides for the members' personal needs, such as food, shelter, clothing, and medical care.
According to the bylaws of SHB, any member may be expelled. Expulsion may occur for a variety of reasons, including: the member's refusing to obey SHB's rules; the member's “failing to give and devote all his or her time, labor, services, earnings and energies” to SHB; and the member's “failing to do and perform the work, labor, acts, and things required of him or her.” If a member is expelled, he forfeits all interest in SHB's property and leaves with nothing but the clothes on his back.
Stahl brought this action for the purpose of obtaining an income tax refund because, he asserts, corporate level income should have been reduced for tax purposes before it was passed through to him. He insists that the cost of meals and medical expenses of SHB's employees was an ordinary and necessary business expense. The government argued to the district court that none of the Hutterite members, including Stahl, are employees for tax purposes and that should end the inquiry. The district court agreed with the government, and this appeal followed.
After a fairly lengthy analysis, the Court concluded that the individual members are, in fact, employees even though they are not paid wages.
On balance, the individual Hutterites, who work for the SHB business, should be seen as common law employees of SHB insofar as they perform the work of that business. They are permanent workers on SHB's grounds and SHB can both insist that they perform their assigned tasks at the proper times and can direct the detail of that performance. Despite the fact that SHB and those members who work for it have a myriad of interconnected relationships, one of those relationships is operation of and working in a business. That connection is most like the relationship between an employer and employee, and should be so treated for tax purposes.
It must be nice being a judge in the appelate court. The implications of the members being employees are far reaching but :
SHB is a Hutterian corporation, which like others of its kind, is treated as a 26 U.S.C. § 501(d) entity. By its very nature, it is not exactly like an ordinary business corporation; nor is it like the more common 26 U.S.C. § 501(c)(3) organizations. Nonetheless, we see no reason to hold that its Hutterite workers are not employed by the SHB business when, as here, they essentially meet the definition of common law employees, even if they have many other relationships among themselves and with SHB. Thus, the district court erred when it held to the contrary and granted summary judgment to the government. “Employment” is the sole issue before us, and we will not divagate into others; we leave those to the district court in the first instance.
My spell checker doesn't think "divagate" is a word and I don't know what it means, but it seems like a cool word, so I'm leaving it there.
There are certain sections of the Internal Revenue Code that have worked their way into our language. There is even a joke where somebody says that thanks to the market collapse they now have a 201(k). I have this inquiring mind that reasons that if there is a 501(c)(3), which everybody knows about there must also be 501(c)(1) and 501(c)(2) and who knows maybe even 501(c)(4). Believe it or not it actually goes up to 29 (Co-op health issuers) and includes 501(c)(23) - Any veterans association organized before 1880, the principal purpose of which is to provide insurance and other benefits to veterans or their dependents. I guess the Grand Army of the Republic was still a force to be reckoned with in 1913. Even better it keeps going past (c). The Stahl case is about a 501(d) organization :
(d) Religious and apostolic organizations.
The following organizations are referred to in subsection (a) : Religious or apostolic associations or corporations, if such associations or corporations have a common treasury or community treasury, even if such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the taxable income of the association or corporation for such year. Any amount so included in the gross income of a member shall be treated as a dividend received.
501(d) organization file form 1065 and the members are taxed on their share of the profits. They are not, however, considered partnerships subject to the TEFRA audit rules. John Stahl is a member and president of the Stahl Hutterian Brethren .
SHB was organized to enable its members to live in accordance with the tenets of the Hutterite tradition. The Hutterite tradition is rooted in sixteenth century Germany. In accordance with their religious beliefs, SHB members live in a colony, and currently the SHB colony includes about 65 members. They are all part of the extended Stahl family, which includes eight brothers, two sisters, their spouses, and their children.
Hutterites disavow individual property ownership, so SHB does not pay a salary to any of its members. Moreover, the members do not contribute to or collect Social Security benefits. All of SHB's property is maintained by it and is used for the benefit of its members. SHB provides for the members' personal needs, such as food, shelter, clothing, and medical care.
According to the bylaws of SHB, any member may be expelled. Expulsion may occur for a variety of reasons, including: the member's refusing to obey SHB's rules; the member's “failing to give and devote all his or her time, labor, services, earnings and energies” to SHB; and the member's “failing to do and perform the work, labor, acts, and things required of him or her.” If a member is expelled, he forfeits all interest in SHB's property and leaves with nothing but the clothes on his back.
Stahl brought this action for the purpose of obtaining an income tax refund because, he asserts, corporate level income should have been reduced for tax purposes before it was passed through to him. He insists that the cost of meals and medical expenses of SHB's employees was an ordinary and necessary business expense. The government argued to the district court that none of the Hutterite members, including Stahl, are employees for tax purposes and that should end the inquiry. The district court agreed with the government, and this appeal followed.
After a fairly lengthy analysis, the Court concluded that the individual members are, in fact, employees even though they are not paid wages.
On balance, the individual Hutterites, who work for the SHB business, should be seen as common law employees of SHB insofar as they perform the work of that business. They are permanent workers on SHB's grounds and SHB can both insist that they perform their assigned tasks at the proper times and can direct the detail of that performance. Despite the fact that SHB and those members who work for it have a myriad of interconnected relationships, one of those relationships is operation of and working in a business. That connection is most like the relationship between an employer and employee, and should be so treated for tax purposes.
It must be nice being a judge in the appelate court. The implications of the members being employees are far reaching but :
SHB is a Hutterian corporation, which like others of its kind, is treated as a 26 U.S.C. § 501(d) entity. By its very nature, it is not exactly like an ordinary business corporation; nor is it like the more common 26 U.S.C. § 501(c)(3) organizations. Nonetheless, we see no reason to hold that its Hutterite workers are not employed by the SHB business when, as here, they essentially meet the definition of common law employees, even if they have many other relationships among themselves and with SHB. Thus, the district court erred when it held to the contrary and granted summary judgment to the government. “Employment” is the sole issue before us, and we will not divagate into others; we leave those to the district court in the first instance.
My spell checker doesn't think "divagate" is a word and I don't know what it means, but it seems like a cool word, so I'm leaving it there.
Friday, May 16, 2014
Booth Rental Upheld As Valid Independent Contractor Strategy
Originally published on Passive Activities and Other Oxymorons on December 1, 2010
Cheryl A. Mayfield Therapy Center, et al. v. Commissioner, TC Memo 2010-239
I sometimes come up with little rules of thumb to answer fairly complicated questions. One is the employee/independent contractor question. There is a twenty factor test (I'll share the 20 factors later in the post). My simple answer is that if you ask the question they are employees. Suppose you say that all those people are "independent contractors". And let's further suppose that one of your employees (Oh sorry. Meant to say "independent contractors") becomes disgruntled when they bring their 1099 to the likes of Refunds Now Inc to have their tax return prepared so they can get a big screen TV and find out they actually owe money. Somebody might mention to them that they could file Form SS-8 with the IRS. This will potentially save them the difference between SE tax and employee share of social security tax. More to the point it will make your life utterly miserable.
Employers do sometimes win against the IRS on independent contractor cases. Cheryl A. Mayfield Therapy Center (The Center) was assessed close to $100,000 in employment taxes. They were able to establish that the massage therapists, cosmetologists and nail technicians they worked with were, in fact, independent contractors.
The way they operated was to charge a minimum booth rent to the service providers and take a percentage of their gross. The providers were in fact quite independent. They furnished their booths and pretty much made their own schedule. There was a standard price schedule, but they could vary from it. They bought most of their own supplies.
What is troubling about this case is that it seems so obvious these people were independent, but the IRS still went after them. Below are the famous twenty factors:
(1) The putative employer's right to require compliance with instructions;
(2) training by the putative employer;
(3) integration of the worker's services into business operations;
(4) a requirement that the worker's services be rendered personally;
(5) the putative employer's hiring, supervising, and paying assistants;
(6) a continuing relationship;
(7) set hours of work;
(8) a requirement that the worker devote substantially full time for the putative employer rather than being free to work when and for whom he or she chooses;
(9) doing work on the putative employer's premises;
(10) requiring the worker to perform services in the order or sequence set by the putative employer;
(11) requiring the worker to submit oral or written reports;
(12) paying by the hour, week, or month, rather than by the job or on a straight commission;
(13) paying business and travel expenses;
(14) furnishing tools and materials;
(15) a lack of significant investment by the worker;
(16) an absence of ability by the worker to realize a profit or suffer a loss;
(17) working for no more than one firm at a time;
(18) the worker's not making his or her services available to the general public on a regular and consistent basis;
(19) a right to discharge the worker;
(20) a right by the worker to terminate the relationship without incurring liability.
Cheryl A. Mayfield Therapy Center, et al. v. Commissioner, TC Memo 2010-239
I sometimes come up with little rules of thumb to answer fairly complicated questions. One is the employee/independent contractor question. There is a twenty factor test (I'll share the 20 factors later in the post). My simple answer is that if you ask the question they are employees. Suppose you say that all those people are "independent contractors". And let's further suppose that one of your employees (Oh sorry. Meant to say "independent contractors") becomes disgruntled when they bring their 1099 to the likes of Refunds Now Inc to have their tax return prepared so they can get a big screen TV and find out they actually owe money. Somebody might mention to them that they could file Form SS-8 with the IRS. This will potentially save them the difference between SE tax and employee share of social security tax. More to the point it will make your life utterly miserable.
Employers do sometimes win against the IRS on independent contractor cases. Cheryl A. Mayfield Therapy Center (The Center) was assessed close to $100,000 in employment taxes. They were able to establish that the massage therapists, cosmetologists and nail technicians they worked with were, in fact, independent contractors.
The way they operated was to charge a minimum booth rent to the service providers and take a percentage of their gross. The providers were in fact quite independent. They furnished their booths and pretty much made their own schedule. There was a standard price schedule, but they could vary from it. They bought most of their own supplies.
What is troubling about this case is that it seems so obvious these people were independent, but the IRS still went after them. Below are the famous twenty factors:
(1) The putative employer's right to require compliance with instructions;
(2) training by the putative employer;
(3) integration of the worker's services into business operations;
(4) a requirement that the worker's services be rendered personally;
(5) the putative employer's hiring, supervising, and paying assistants;
(6) a continuing relationship;
(7) set hours of work;
(8) a requirement that the worker devote substantially full time for the putative employer rather than being free to work when and for whom he or she chooses;
(9) doing work on the putative employer's premises;
(10) requiring the worker to perform services in the order or sequence set by the putative employer;
(11) requiring the worker to submit oral or written reports;
(12) paying by the hour, week, or month, rather than by the job or on a straight commission;
(13) paying business and travel expenses;
(14) furnishing tools and materials;
(15) a lack of significant investment by the worker;
(16) an absence of ability by the worker to realize a profit or suffer a loss;
(17) working for no more than one firm at a time;
(18) the worker's not making his or her services available to the general public on a regular and consistent basis;
(19) a right to discharge the worker;
(20) a right by the worker to terminate the relationship without incurring liability.
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