Peno Trucking, Inc. v. Commissioner, CA6, 102 AFTR 2d ¶ 2008-5360
The U.S. Court of Appeals for the Sixth Circuit has affirmed a U.S. Tax Court ruling that a trucking company should have classified its drivers as employees, rather than independent contractors. However, the Sixth Circuit reversed the Tax Court ruling on whether the trucking company was entitled to employment tax relief under §530 of the Revenue Act of 1978.
Facts. Peno Trucking, Inc. (Peno) owned approximately 15 tractor-trailers (trucks), which it leased to the Ohio Transport Corporation. Under the lease agreements, Peno provided drivers to operate the trucks. Peno was responsible for all work performed by the drivers. Peno entered into an agreement with each of the drivers during the periods at issue which expressly provided that the drivers were independent contractors and not employees. Peno reported the income earned by the drivers on Forms 1099. IRS reclassified the workers as employees and issued an assessment against Peno. Peno appealed the IRS determination.
Employee versus independent contractor issue. In 2007, the Tax Court ruled in IRS‘s favor on the employee versus independent contractor issue. In ruling that the payments to the drivers constituted wages that should have been subject to federal employment tax, the Tax Court noted that: (1) Peno oversaw the drivers’ responsibilities, determined the days they could work, and controlled which loads they would haul. (2) Peno made a substantial investment to acquire and maintain the fleet of approximately 15 trucks. (3) There was no opportunity for the drivers to assume a risk of loss. (4) Peno had the right to discharge its drivers. (5) The drivers performed a service that was essential to Peno’s operations. (6) The drivers worked in the course of Peno’s business rather than having a transitory relationship with Peno. (7) Although Peno and its drivers entered into written agreements which expressly provided that the drivers were independent contractors, the facts indicated otherwise.
The U.S. Court of Appeals for the Sixth Circuit has now affirmed the Tax Court’s decision on the employee versus independent contractor issue. It agreed with the Tax Court’s analysis of the seven factors above.
Reversal on Section 530 Relief. Under §530 of the Revenue Act of 1978, employers are protected from potentially large employment tax assessments if there was a reasonable basis for categorizing workers as independent contractors. A taxpayer can qualify for §530 relief if there is judicial precedent for treating the workers as independent contractors. Peno believed it was entitled to §530 relief because the Ohio Industrial Commission (OIC) and the Ohio Court of Common Pleas had previously ruled that two of its drivers were independent contractors.
The Tax Court, however, denied Peno’s request for §530 relief (see Federal Taxes Weekly Alert 05/24/2007). The Tax Court said that for a taxpayer to have a reasonable basis for not treating an individual as an employee, the judicial precedent must have evaluated the employment relationship at issue through the federal common law tests. There was no evidence presented to the Tax Court that the OIC or the Ohio Court of Common Pleas had evaluated the employment relationship between Peno and its drivers under these tests. There was also no indication that the judicial rulings had been relied upon by Peno at the time it decided to classify the drivers as independent contractors.
The U.S. Court of Appeals for the Sixth Circuit disagreed with the Tax Court’s decision. The Sixth Circuit noted that Peno had always treated the truckers in question as independent contractors, and that the company had always filed its tax returns in a manner consistent with this treatment. In addition, IRS had failed to submit any evidence to support Peno’s treatment of the workers as anything other than independent contractors. The Sixth Circuit also said that the OIC appeared to have employed a 20-factor common law test for determining whether the drivers were employees or independent contractors that was virtually identical to the 20-factor test outlined by the IRS for the years at issue. Therefore, the OIC had used judicial precedent in ruling that two of Peno’s drivers were independent contractors. Based on the above analysis, the Sixth Circuit reversed the Tax Court’s decision and ruled that Peno was eligible for §530 relief.