Boles Trucking, Inc. v. U.S.

• Decision Date: 22 February 1996
• Docket Number: Nos. 95-1826,95-2088,s. 95-1826
• Citation: 77 F.3d 236
• Parties: -909, 96-1 USTC P 50,112, Unempl.Ins.Rep. (CCH) P 15111B, Unempl.Ins.Rep. (CCH) P 22,152 BOLES TRUCKING, INC., Appellee/Cross-Appellant, v. UNITED STATES of America, Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 236

77 F.3d 236

77 A.F.T.R.2d 96-909, 96-1 USTC P 50,112,

Unempl.Ins.Rep. (CCH) P 15111B,

Unempl.Ins.Rep. (CCH) P 22,152

BOLES TRUCKING, INC., Appellee/Cross-Appellant, v. UNITED STATES of America, Appellant/Cross-Appellee.

Nos. 95-1826, 95-2088.

United States Court of Appeals Eighth Circuit.

Submitted Jan. 11, 1996.

Decided Feb. 22, 1996.

Tamara L. Schottenstein, Washington, DC, argued (Gary R. Allen and William S. Estabrook, on the brief), for appellant.

Howard N. Kaplan, Omaha, NE, argued (Michael S. Mostek, on the brief), for appellee.

Before BEAM and MORRIS SHEPPARD ARNOLD, Circuit Judges, and JONES, ¹ Senior District Judge.

JOHN B. JONES, Senior District Judge.

This appeal involves the attempt by the United States to collect employment taxes from plaintiff Boles Trucking, Inc.

The appeal by the United States presents two issues: first, what is the taxpayer's burden of proof when it asserts it had a "reasonable basis" for improperly classifying employees as independent contractors under Section 530 of the Revenue Act of 1978, 26 U.S.C. § 3401 note (Section 530) and secondly, whether the evidence was sufficient to support the jury's finding of a "reasonable basis". We find that the district court improperly instructed the jury on taxpayer's burden of proof, and reverse and remand on the appeal by the United States. In doing so, we do not reach the sufficiency of the evidence claim made by the United States.

Taxpayer's cross-appeal presents the issue of whether the district court properly assessed penalties against it because of its failure to pay employment taxes on behalf of David B. Boles (Boles), taxpayer's owner and president. We affirm on the issue raised in the cross-appeal.

I.

Taxpayer is a Nebraska corporation engaged in the business of leasing truck tractors, or "power units," to interstate trucking carriers. At all times relevant to this case, Boles was the sole stockholder, director, and president of taxpayer. In the relevant period from January 1984 through December 1987, taxpayer leased its tractors to Bee Line Motor Express, Inc. or to its successor, Cornhusker Motor Lines, Inc. Under the terms of the lease agreements taxpayer was to supply drivers with each leased tractor.

Although the lease agreements provided that the drivers were to be "employees" of taxpayer, during the years in question taxpayer treated its drivers as independent contractors. For tax purposes this means the taxpayer did not withhold any federal income (withholding tax or "WT") or Federal Insurance Contributions Act (FICA) taxes from the amount it paid to its drivers, nor did it make any payments of Federal Unemployment Tax Act (FUTA) taxes to the Internal Revenue Service. Rather than W-2's, taxpayer issued Forms 1099 to its drivers each year.

Boles was compensated by way of interest-free "loans against future profits" instead being paid a salary or wages. Under this arrangement the taxpayer was not withholding income taxes or FICA or FUTA taxes relative to Boles. There was also evidence that taxpayer paid many of Boles' personal living expenses and purchased a Lincoln Continental automobile for Boles' exclusive use.

Taxpayer underwent an employment tax examination in 1987 which resulted in the Commissioner of the I.R.S. reclassifying the truck drivers who worked for taxpayer as employees rather than independent contractors. The I.R.S. subsequently made assessments against the taxpayer for unpaid WT, FICA, and FUTA taxes, along with interest and penalties for years 1984 through 1987. The assessments also reflected the I.R.S.'s determination that Boles himself was an employee of taxpayer and that loans and other payments he received were actually wages.

In October 1991, taxpayer paid a small portion of the taxes, interest and penalties allegedly owed and thereafter filed administrative claims for a refund of the same. After the administrative claims were denied, taxpayer filed the present action against the United States seeking a refund of the taxes, interest, and penalties paid, along with a determination that it was not liable for the remaining taxes, interest, and penalties assessed against it. The United States filed a counterclaim for the outstanding balance of the unpaid taxes, interest, and penalties. The issues tried to the jury were: (1) whether taxpayer's drivers were employees or independent contractors; and (2) if taxpayer's treatment of its drivers as independent contractors was erroneous, whether it had a reasonable basis for such treatment pursuant to Section 530. ²

The jury found that taxpayer's drivers were employees. The jury went on to find that taxpayer had a reasonable basis for not treating the drivers as employees. When asked to state the basis for its finding on the latter issue, the jury made check marks by two of the four options; the long-standing practice of a significant segment of the industry and the advice of a CPA or tax return preparer.

II.

Under the Internal Revenue Code, an employer is required to pay one-half of the total FICA taxes assessed against its employees, and withhold from paychecks those FICA taxes owed by the employees themselves. 26 U.S.C. §§ 3101, 3102(a), 3402(a). Also, the employer is obligated to pay FUTA taxes for its employees. 26 U.S.C. § 3101. However, these obligations are incumbent upon an employer only if its workers are determined to be "employees" under the Tax Code.

Section 530 was created by Congress in 1978 to alleviate what was perceived as overly zealous pursuit and assessment of taxes and penalties against employers who had, in good faith, misclassified their employees as independent contractors. In Re Rasbury, 130 B.R. 990 (Bankr.N.D.Ala.1991). The statute is a relief provision and provides an alternative method by which to avoid employment tax liability where a taxpayer cannot establish his workers are or were independent contractors. Section 530(a)(1) provides in pertinent part that although a taxpayer mistakenly classified its workers as other than employees, "the individual [worker] shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee."

The statute goes on to explain methods by which a taxpayer may show it had a "reasonable basis" for the improper classification of its workers. Section 530(a)(2) provides that reasonable reliance on any of three "safe harbors" or "safe havens" shall be treated as a reasonable basis for not treating an individual as an employee. The provision states:

For the purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer's treatment of such individual for such period was in reasonable reliance on any of the following:

(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 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 three specific safe haven rules, a taxpayer may take advantage of Section 530 by demonstrating that it had some other reasonable basis for treating its workers as independent contractors. H.R.Rep. No. 95-1748, 95th Cong., 2d Sess. 5 (1978), reprinted in 1978-3 C.B. (vol. 1) 629, 633 (hereinafter House Report). As stated in Rev.Proc. 85-18, 1 C.C. 518, Sec. 3.01(c), "A taxpayer who fails to meet any of the three 'safe havens' may nevertheless be entitled to relief if the taxpayer can demonstrate, in some other manner, a reasonable basis for not treating the individual as an employee."

III.

Despite the relative breadth and complexity of the employment tax statutes discussed above, we are faced in the government's appeal with the narrow question of what is the taxpayer's burden in proving it had a reasonable basis for not treating its workers as employees under Section 530.

The district court instructed the jury that should it reach the reasonable basis issue, the taxpayer was not required to prove this issue by a preponderance of the evidence. The instruction concluded, "To prove reasonable basis, [taxpayer] need only show that the existence of a reasonable basis is just as likely true than not true. In other words, even if the evidence weighs out evenly, you must find that [taxpayer] had a reasonable basis for not treating the drivers as its employees."

The government contends these instructions erroneously shifted the burden of proof on the issue to the government. While we are not convinced the court's instruction actually shifted the burden to the government, we nevertheless conclude the instruction erroneously stated the taxpayer's burden.

We start with the well-established principle that the Commissioner's determination of tax liability is entitled to a presumption of correctness and that the burden is on the taxpayer to prove that the determination is erroneous. Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935); Day v. Commissioner, 975 F.2d 534, 537 (8th Cir.1992). It is further well established that the quantum of proof required is that of a preponderance of the evidence. Mattingly v U.S., 924 F.2d 785, 787 (8th Cir.1991). These general principles apply as well to the Commissioner's classification of a taxpayer's workers as employees, i.e., once such a determination is made, it is the taxpayer's burden to prove, by a preponderance of the evidence, that its workers are or were independent contractors. Beatty v. Halpin, 267 F.2d 561, 563 (8th Cir.1959); Kiesel v. U.S., 545 F.2d 1144, 1146 (8th Cir.1976). The district court's instructions in this regard...