Taxes and public entity employees: the scope of section 530 of the Revenue Act of 1978.

• Author: Simmons, Daniel L.

Public entities, particularly government-owned hospitals, are concerned about an obscure corner of the internal revenue law, with lots of money at stake. In certain circumstances, section 530 of the Revenue Act of 1978(1*) provides relief from worker classification controversies regarding "employment taxes" imposed under subtitle C of the Internal Revenue Code. In Technical Advice Memorandum (TAM) 9151004,(2) the IRS ruled that section 530 relief is not available to public employers. This position denies to the public employer the safe haven from employment tax controversies allowed to the private sector and forces the public employer into the cauldron of "common law factors"(3) to distinguish employees from independent contractors.

The IRS's interpretation of section 530 is based on the agency's analysis of legislative intent. It is an interesting example of administrative law-making in the face of unambiguous statutory language. This article examines the language, legislative history, and policy underlying section 530 of the 1978 Act in the context of the imposition of employment tax liability on state and local government. It concludes that both the initial premise and the logic of TAM 9151004 are faulty.

Section 530 In General

Section 530(a)(1) of the 1978 Act provides in part that 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.

Section 530(c)(1) defines "employment taxes" to which the provision applies as "any tax imposed by subtitle C of the Internal Revenue Code of 1954."(4)

The distinction between employee and independent contractor is significant, particularly for the employer. Employee status for a worker requires the employer to withhold income tax payments from the employee's wages,(5) requires employer payment of both the employer and employee portions of the Social Security tax (imposed under the Federal Insurance Contributions Act (FICA)),(6) and, with respect to private employers, employer and employee contributions under the Federal Unemployment Tax Act (FUTA).(7) For the worker, independent contractor status means that he or she must pay self-employment taxes with his or her individual return.(8) Many workers claiming independent contractor status will also claim they are engaged in a trade or business as an independent contractor for income tax purposes. Section 530, however, clearly provides that its safe-harbor relief is available only with respect to employment taxes under subtitle C of the Code.(9)

Section 530 was enacted in response to a period of increased enforcement of employment tax laws by the IRS that created disputes over the classification of workers as independent contractors or employees.(10) An IRS victory in a reclassification case often required the taxpayer to pay employment tax deficiencies that reflected self-employment and income taxes already paid by the employee.(11) In effect, therefore, the tax was collected twice. Although income tax payments by the reclassified worker were available to the employer as an offset against the employer's income tax withholding liability,(12) and the IRS had allowed offsets for employment taxes paid by the worker if the employer was able to provide worker's name and Social Security numbers, the information necessary to claim abatement was not always available to the employer.(13) Congress thus decided in 1978 to "provide interim relief for taxpayers who are involved in employment tax status controversies with the Internal Revenue Service, and who potentially face[d] large assessments, as a result of the Service's proposed reclassifications of workers ...."(14)

Section 530 was initially intended to provide only temporary relief for classification controversies while Congress developed a comprehensive solution.(15) To date, however, Congress has failed to find that solution. Section 530 remains in effect, essentially as enacted in 1978.(16)

Technical Advice Memorandum 9151004

Technical Advice Memorandum 9151004 concludes that Congress could not have intended to apply section 530 to public entities because, at the time section 530 was enacted, the FICA and FUTA taxes were not technically imposed on public employers. Subsequent imposition of FICA liability on governmental employers was limited to defined circumstances.(17) Governmental employers remain exempt from FUTA.(18) Since the enactment of section 530, however, public employers have been subject to income tax wage withholding.(19) The technical advice memorandum states:

The history of the treatment of workers for federal

employment tax purposes, which clearly indicates

that state and local government employers and

employees are accorded different treatment than

private employers and employees, leads to the inescapable

conclusion that Congress never intended to

provide section 530 relief to public employers.

Application of Section 530 Under

the Current Statutory Scheme

The first and most significant difficulty with the IRS position in TAM 9151004 is the unambiguous language of section 530: the statute explicitly states that it is applicable to any employer subject to taxes under subtitle C of the Code.(20) Public entities are...