On April 19, 2022, the Tax Court issued the full opinion in Treece Financial Services Group v. Commissioner (158 T.C. No. 6). The primary issue presented in Treece Financial Services Group v. Commissioner was whether the Tax Court had jurisdiction to determine whether Voluntary Classification Settlement Program (VCSP) entered into computation of taxes owed by the taxpayer.
Held: Indeed, it did.
Treece Financial Services Group v. Commissioner in a Nutshell
Treece Financial Services Group, a corporation, petitioned for review of a notice of employment tax determination under IRC § 7436. The parties agree that the IRS properly determined that Mr. Treece is an employee of Treece Financial Services Group, but they dispute the proper amount of employment tax under that determination.
Treece Financial Services Group asserts that the amount should be computed using the IRS’s Announcement 2012-45, and that it is entitled to use the Voluntary Classification Settlement Program (VCSP) to compute the employment tax. The IRS determined that Treece Financial Services Group may not use the VCSP to compute the proper amount of employment tax and argues that the Tax Court lacks jurisdiction to review that determination.
The IRS moved to partially dismiss for lack of jurisdiction. Treece Financial Services Group likewise moved for summary judgment.
Background to Treece Financial Services Group v. Commissioner
In October 2019, the IRS sent Treece Financial Services Group a Letter 3523, Notice of Employment Tax Determination Under IRC 7436 (notice), reclassifying Dock D. Treece (yes, that’s his given name) as an employee instead of an independent contractor for tax years 2015, 2016, and 2017 (years in issue). In the notice, the IRS determined additions to tax pursuant to IRC § 6651(a) and penalties pursuant to IRC § 6656 for the years in issue.
In September 2021, the parties filed a Stipulation of Settled Issues which resolved all but one issue. The remaining issue is the proper amounts of employment taxes which the petitioner seeks to have computed in accordance with the IRS’s VCSP.
The parties stipulated that Mr. Treece was the sole corporate officer of the petitioner for the years in issue. They further stipulated that he was an employee and not an independent contractor for the years in issue. We discuss the Thin Line Between Employees and Independent Contractors in this article. The parties also stipulated that the petitioner is not entitled to relief under § 530 of the Revenue Act of 1978, with respect to Mr. Treece’s treatment as an independent contractor. The petitioner owed a total of $18,562 in employment taxes.
The IRS abated additions to tax pursuant to IRC § 6651(a) and penalties pursuant to IRC § 6656.
The IRS’s Motion to Partially Dismiss
The VCSP provides partial relief from federal employment taxes for eligible taxpayers that agree to treat workers prospectively as employees. To be eligible for the VCSP, a taxpayer must:
- have consistently treated the workers as nonemployees;
- have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years; and
- not currently be under employment tax audit by the IRS.
The petitioner submitted Form 8952, Application for Voluntary Classification Settlement Program (VCSP), in October 2018. The IRS denied the petitioner participation in the VCSP in February 2019, on the basis that the petitioner was under an employment tax examination by the IRS.
The Tax Court may exercise jurisdiction only to the extent expressly provided by Congress. The Tax Court, however, has the authority to determine whether it has jurisdiction over a particular case. Generally, the Tax Court has jurisdiction under IRC § 7436(a) to determine:
- whether an individual providing services to a person is that person’s employee;
- whether the person, if an employer, is entitled to relief under IRC § 530 of the Revenue Act of 1978; and
- the proper amounts of employment taxes which relate to the IRS’s determination concerning worker classification.
The Tax Court’s deficiency jurisdiction includes reviewing administrative determinations that are necessary to determine the merits of the deficiency determinations. Under IRC § 7436(d), the principles of IRC § 6213(a), (b), (c), (d) and (f), IRC § 6214(a), IRC § 6215, IRC § 6503(a), IRC § 6512, and IRC § 7481 apply to cases that arise under IRC § 7436, as if the IRS’s notice of determination was a notice of deficiency.
There is a strong presumption that an act of administrative discretion is subject to judicial review. Under the VCSP, an eligible employer pays a lesser amount of employment tax than would have been due as to certain employees and is not liable for any interest and penalties.
In 2000, IRC § 7436(a) was amended to provide the Tax Court jurisdiction to “determine whether such a determination by the IRS is correct and the proper amount of employment tax under such determination.”
The U.S. Court of Appeals for the Ninth Circuit held that the amendment in 2000 “indicates that Congress did not intend to limit the Tax Court’s jurisdiction under IRC § 7436 to determining only whether an individual was an employee.”
Pursuant to statute and caselaw the Tax Court concluded that the Tax Court has jurisdiction to determine whether the liability is correct in proceedings for determination of employment status.
Because the denial of a taxpayer’s eligibility for VCSP directly affects the amounts of tax, the procedures that Congress has established for judicial review of the IRS’s determinations logically contemplate review of such a denial as one element of the determination.
The Tax Court concluded that it has jurisdiction to determine whether the VCSP enters into the computation of the petitioner’s taxes owed. Therefore, the Tax Court denied the IRS’s motion.
The petitioner’s Motion for Summary Judgment
Summary judgment may be granted where the pleadings and other materials show that there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. The burden is on the moving party to demonstrate that there is no genuine dispute as to any material fact and that the party is entitled to judgment as a matter of law.
After reviewing the pleadings and the motion with accompanying exhibits and declarations, the Tax Court concluded that there was a material dispute regarding the facts.
The petitioner contends that it has met all requirements for participation in the VCSP. The IRS contends that Mr. Treece’s misclassification as a nonemployee was uncovered as the result of an employment tax audit. If the IRS’s argument is correct, the petitioner does not meet the participation requirements of VCSP.
The Tax Court concluded that whether there was an employment tax audit was a dispute of material fact, and therefore the Tax Court denied the petitioner’s Motion for Summary Judgment.
- Pub. L. No. 95-600, § 530, 92 Stat. 2763, 2885, as amended ↑
- I.R.S. Announcement 2012-45, 2012-51 I.R.B. 724, 724. ↑
- Id. ↑
- See IRC § 7442; Breman v. Commissioner, 66 T.C. 61, 66 (1976). ↑
- Kluger v. Commissioner, 83 T.C. 309, 314 (1984). ↑
- See, e.g., Trimmer v. Commissioner, 148 T.C. 334, 345-48 (2017) (holding that the Tax Court has jurisdiction in a deficiency proceeding to review the IRS’s denial of the taxpayer’s request for a hardship waiver of the 60-day rollover requirement under IRC § 402(c)(3)(B)); Capitol Fed. Sav. & Loan Ass’n & Sub. v. Commissioner, 96 T.C. 204, 214-15 (1991) (holding that the IRS’s refusal to process an application for an accounting method change under IRC § 446(b) is subject to judicial review in a deficiency proceeding); Mailman v. Commissioner, 91 T.C. 1079, 1083 (1988) (holding that the IRS’s denial of waiver of the addition to tax under former IRC § 6661 is subject to judicial review in a deficiency proceeding); Estate of Gardner v. Commissioner, 82 T.C. 989, 1000 (1984) (holding that the IRS’s denial of a request under IRC § 6081(a) to extend the time for filing of an estate tax return is subject to judicial review in a deficiency proceeding). ↑
- Charlotte’s Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 103 n.8 (2003), supplemented by T.C. Memo. 2004-43, aff’d, 425 F.3d 1203 (9th Cir. 2005). ↑
- Trimmer, 148 T.C. at 346; Corbalis v. Commissioner, 142 T.C. 46, 56 (2014) (holding that denials of interest suspension under IRC § 6404(h) are subject to judicial review). ↑
- See I.R.S. Announcement 2012-45, 2012-51 I.R.B. at 725. ↑
- See Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, § 314(f), 114 Stat. 2763, 2763A-643 (2000); Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3103, 112 Stat. 685, 731. ↑
- Charlotte’s Office Boutique, 425 F.3d at 1208. ↑
- See IRC § 7436(a); see also Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 267-68 (2001). ↑
- See Trimmer, 148 T.C. at 347; Estate of Gardner, 82 T.C. at 996. ↑
- Tax Court Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). ↑
- FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74-75 (2001). ↑