An appropriate order decision will be entered.
MARVEL,
On July 15, 2009, we filed the parties' stipulation of settled issues and petitioner's motion for reasonable litigation costs. On September 14, 2009, we filed respondent's opposition to petitioner's motion. On October 14, 2009, we filed petitioner's reply to respondent's opposition. The parties have not requested a hearing, and we conclude that a hearing is not necessary to decide this motion. See
After concessions, 2 the issues for decision are: (1) Whether respondent's 2010 Tax Ct. Memo LEXIS 243">*244 position in the court proceeding was substantially justified, (2) whether petitioner unreasonably protracted the court proceeding, and (3) whether the litigation costs petitioner claims are reasonable.
The following facts are based on the entire record, which includes the declarations and exhibits submitted by the parties with respect to the motion for reasonable litigation costs, the parties' pleadings, the stipulation of settled issues, various other motions, and supporting documents.
Petitioner, which was incorporated in 1998, 3 provides medical transcription services to medical service providers. To carry out its business, petitioner hires home-based medical transcriptionists to type medical documents from medical dictation files.
The medical transcriptionists decide when and how often to work, 2010 Tax Ct. Memo LEXIS 243">*245 pay all expenses incurred in the business (e.g., the costs of maintaining a home office, a personal computer, medical reference texts, and Internet service), and are paid per line of completed transcription. Petitioner's medical transcriptionists are required to complete each assignment within 10 hours. Transcripts received after the 10-hour deadline are paid at only one-half of the medical transcriptionist's agreed-upon rate; transcripts that contain spelling errors are considered incomplete and are not paid at all. Petitioner treated the medical transcriptionists as independent contractors for Federal employment tax purposes for every taxable period during the calendar years 2000 through 2003.
In 2004 respondent began an employment tax examination of petitioner for all four quarters of calendar years 2000 through 2003. One of the issues in the examination was whether petitioner's medical transcriptionists were properly characterized as independent contractors or as employees. Petitioner cooperated with the examination, and petitioner's then counsel, Michael P. Kennedy (Mr. Kennedy), provided documents and information to respondent's auditor, 2010 Tax Ct. Memo LEXIS 243">*246 Mike Boeckmann (Mr. Boeckmann). Among the documents Mr. Kennedy provided were petitioner's completed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, copies of petitioner's Independent Contractor Agreement (ICA), and copies of the confidentiality agreement petitioner required its medical transcriptionists to sign. Mr. Boeckmann also conducted interviews in connection with the examination, but it is not clear whom he interviewed.
After reviewing the materials petitioner provided, Mr. Boeckmann determined that petitioner's medical transcriptionists were employees for purposes of the Federal Insurance Contributions Act (FICA),
On June 7, 2005, Mr. Kennedy sent a letter to Mr. Boeckmann disputing Mr. Boeckmann's conclusion that petitioner's medical transcriptionists were employees and asserting that petitioner was entitled to act section 530 relief. They were unable to resolve their differences, and on August 12, 2005, Mr. Kennedy rejected a settlement offer and requested 2010 Tax Ct. Memo LEXIS 243">*248 that Mr. Boeckmann transfer the matter to the IRS Office of Appeals.
After petitioner's request, its case was transferred to the IRS Office of Appeals and assigned to Appeals Officer Orville Holland (Mr. Holland). On September 25, 2006, Mr. Kennedy signed Form SS-10, Consent to Extend the Time to Assess Employment Taxes. On October 11, 2006, Mr. Holland mailed to petitioner a Summary of Issues, which concluded, inter alia, that petitioner's medical transcriptionists were statutory home workers pursuant to
Petitioner's case was subsequently transferred to Appeals Officer Catherine Folkerth (Ms. Folkerth), and on February 16, 2007, Ms. Folkerth proposed to settle the case pursuant to respondent's Classification Settlement Program. Ms. Folkerth offered to concede all of the tax proposed for 2000, 2001, and 2002 and 75 percent of the tax proposed for 2003. In exchange, 2010 Tax Ct. Memo LEXIS 243">*249 Ms. Folkerth proposed that petitioner begin treating its medical transcriptionists as employees beginning on July 1, 2007. Petitioner rejected the settlement offer, and on March 12, 2007, Ms. Folkerth issued a Notice of Determination of Worker Classification (notice of determination) which determined that (1) petitioner's medical transcriptionists were employees for Federal employment tax purposes, (2) petitioner was not entitled to act section 530 relief, and (3) petitioner owed employment tax of $477,617.74.
On June 14, 2007, we received and filed petitioner's Petition for Redetermination of Employment Status Under Code
On July 20, 2007, respondent mailed a letter to petitioner's counsel scheduling a pretrial conference for August 21, 2007, and requesting documents and information relating to petitioner's business, petitioner's relationship with the medical transcriptionists, and petitioner's tax filings. Respondent specifically requested "Any evidence of the safe harbor provisions of
Respondent 2010 Tax Ct. Memo LEXIS 243">*251 served on petitioner interrogatories, a request for admissions, and a request for production of documents. On August 4, 2008, petitioner's counsel served on respondent responses to respondent's interrogatories, request for admissions, and request for production of documents. In a letter accompanying the responses to discovery, petitioner asserted that even if its medical transcriptionists were employees for FICA tax purposes, it was entitled to act section 530 relief. Petitioner enclosed the declarations of three individuals--Ellen Drake, Jay Vance, and Toni Ranieri--each of whom had many years of experience in the medical transcription services industry, and a fourth individual--Gary David--who had completed an academic study of the industry. Each of the declarants stated that substantially more than 25 percent of the firms in the medical transcription services industry treated their medical transcriptionists as independent contractors for FICA tax purposes.
On October 1, 2008, petitioner provided additional Documents--including the declarations of Quentin Irey (Mr. Irey), an officer and shareholder of petitioner, and Mr. Kennedy--in support of its contention that it qualified for 2010 Tax Ct. Memo LEXIS 243">*252 act section 530 relief. After reviewing the declarations, respondent sought permission to interview Mr. Irey to determine whether he had relied on Mr. Kennedy's advice in treating the medical transcriptionists as independent contractors and to gauge his credibility as a witness. Petitioner agreed to the request, and the interview was held on December 12, 2008.
On January 28, 2009, respondent informed petitioner that he would fully concede the case on the basis of act
A taxpayer is the prevailing party if (1) the taxpayer substantially prevailed with respect to the amount in controversy or the most significant issue or set of issues, (2) the taxpayer meets the net worth requirements of
For purposes of
Petitioner contends that respondent's position in the court proceeding was not substantially justified because petitioner's medical transcriptionists could not have been statutory home workers pursuant to
Respondent counters that his position that petitioner's medical transcriptionists were statutory home workers was substantially justified because it had a reasonable basis in fact and in law. With respect to act section 530 relief, respondent asserts that petitioner has never established a prima facie case that it qualifies for any of the act section 530 safe harbors. Finally, respondent argues that petitioner unreasonably protracted the court proceeding and that the costs petitioner claims are not reasonable.
SEC. 3121. DEFINITIONS. (d) Employee.--For purposes of this chapter, the term "employee" means-- * * * * (3) any individual 2010 Tax Ct. Memo LEXIS 243">*257 (other than an individual who is an employee under paragraph (1) or (2)) who performs services for remuneration for any person-- * * * * (C) as a home worker performing work, according to specifications furnished by the person for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him; or * * * * if the contract of service contemplates that substantially all of such services are to be performed personally by such individual; except that an individual shall not be included in the term "employee" under the provisions of this paragraph if such individual has a substantial investment in facilities used in connection with the performance of such services (other than in facilities for transportation), or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed * * *
The regulations provide additional guidance with respect to the requirements listed in the flush language of The fact that an individual falls within 2010 Tax Ct. Memo LEXIS 243">*258 one of the enumerated occupational groups, however, does not make such individual an employee under this paragraph unless (
Petitioner argues that its medical transcriptionists could not have been statutory home workers because (1) the medical transcriptionists had the right to delegate (and in some cases did delegate) work to subcontractors, (2) the medical 2010 Tax Ct. Memo LEXIS 243">*259 transcriptionists had a substantial investment in the facilities used in connection with the work (e.g., personal computers, medical reference materials, and Internet service), and (3) some of the medical transcriptionists did not have a continuing relationship with petitioner. 52010 Tax Ct. Memo LEXIS 243">*260 Respondent counters that his position in the court proceeding was substantially justified because it had a reasonable basis in fact and in law. Because respondent's answer does not contain any significant analysis, we rely on the facts developed at the administrative level as the reasoning behind respondent's position. See
On the basis of his review of petitioner's Form SS-8, ICA, and confidentiality agreement, Mr. Boeckmann determined that petitioner contemplated that the medical transcriptionists would perform their work personally and that the work would be done as part of a continuing relationship between petitioner and the medical transcriptionists. Moreover, Mr. Boeckmann determined that petitioner's relationship with the medical transcriptionists was analogous to the relationships described in
Whether respondent properly classified petitioner's medical transcriptionists as statutory home workers is a close question, but we need not answer it. It is enough to note that respondent's position with respect to the classification of petitioner's medical transcriptionists had a reasonable basis in fact and in law. Accordingly, respondent has established that his position was substantially justified with respect to this issue.
In enumerated circumstances, act (A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer; (B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for 2010 Tax Ct. Memo LEXIS 243">*263 employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual, or (C) long-standing recognized practice of a significant segment of the industry in which such individual was engaged.
In addition to the specific safe harbors of act
In his answer respondent asserted that petitioner was not entitled to act section 530 relief. In the Appeals Office's Summary of Issues, which represents the reasoning behind respondent's position, see
Petitioner argues that respondent's position was not substantially justified because on the date he took a position in the court proceeding, i.e., on July 17, 2007, the date respondent's answer was filed, respondent already had enough information to conclude that petitioner was entitled to act section 530 relief. 72010 Tax Ct. Memo LEXIS 243">*265 In the alternative, petitioner argues that respondent's position was not substantially justified after August 4, 2008, the date when petitioner responded to respondent's formal discovery requests.
If the taxpayer establishes a prima facie case that it is entitled to act section 530 relief and has complied with all reasonable requests from the Commissioner, act
However, a position that was reasonable when first taken may become unreasonable in the light of changed facts and circumstances. See
Respondent argues that petitioner never established a prima facie case because the declarations submitted on August 4, 2008, merely reflect the personal experiences of the individual declarants. We disagree. While it is true that a taxpayer's personal experience, standing alone, is not evidence of the longstanding recognized practice of a significant segment of the industry,
Respondent also argues that the declarations do not establish a prima facie case for act section 530 relief because petitioner did not actually rely on the individual declarants in deciding to treat its medical transcriptionists as independent contractors. Respondent's argument misreads the statute. Act
Finally, soon after reviewing the declarations and other materials petitioner submitted on August 4, 2008, respondent agreed to fully concede the case, albeit on the basis that petitioner relied on professional advice rather than on the basis of the act section 530(a)(2)(C) safe harbor. Although respondent's concession does not establish that his position was not substantially justified, it is a factor to be considered. See
To summarize, petitioner had the burden of establishing its entitlement to act 2010 Tax Ct. Memo LEXIS 243">*269 section 530 relief. Petitioner had not met the burden on July 17, 2007, the date respondent first took his position with respect to act section 530 relief in the court proceeding. However, petitioner demonstrated a prima facie case for relief on August 4, 2008, thus shifting the burden of proof to respondent to establish that petitioner was not entitled to act section 530 relief. See act
Respondent contends that petitioner unreasonably protracted the court proceeding by repeatedly canceling pretrial conferences and failing to cooperate with respondent's informal requests for documents and information. Because respondent's argument relates to the period before August 4, 2008, and we have already concluded that petitioner is not entitled to recover litigation costs incurred during that period, we conclude that respondent's argument is moot.
The final issue we must resolve 2010 Tax Ct. Memo LEXIS 243">*271 is whether the litigation costs petitioner claims are reasonable. For purposes of section 7430 reasonable litigation costs include reasonable court costs; the reasonable expenses of expert witnesses in connection with the court proceeding; the reasonable cost of any study, analysis, engineering report, test, or project which is found by the court to be necessary to the party's case; and reasonable fees paid or incurred for the service of attorneys in connection with the court proceeding.
To summarize, we award petitioner reasonable litigation costs incurred during the period after August 4, 2008, of $22,547. We have considered the remaining arguments of both parties for results contrary to those expressed herein, and to the extent not discussed above, we conclude such arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at the time petitioner filed its petition or incurred its litigation costs, as appropriate, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Respondent concedes that petitioner meets the net worth requirements of
3. Petitioner elected S corporation status as of Dec. 31, 1998.↩
4. Act
5. Petitioner argues that respondent's position should be presumed to be not substantially justified under
6. In
7. Petitioner argues that under
8. On Aug. 4, 2008, declarant Ellen Drake had worked in the medical transcription industry for 39 years, Tony Ranieri had worked in the industry for 22 years, and Jay Vance had worked in the industry for 9 years.
9. Respondent did not offer any credible evidence to justify the time he took to concede that petitioner was entitled to act sec. 530 relief. See
10. Respondent argues that the costs associated with petitioner's responses to respondent's formal discovery requests are unreasonable in that they would have been unnecessary had petitioner responded to respondent's informal discovery requests. Because all costs associated with responding to formal discovery were incurred on or before Aug. 4, 2008, respondent's argument is moot.
