Cencast Servs., L.P. v. United States

• Decision Date: 12 December 2013
• Docket Number: 2012–5147,2012–5144,2012–5151.,2012–5146,2012–5149,2012–5145,2012–5150,2012–5148,2012–5143,Nos. 2012–5142,s. 2012–5142
• Citation: 729 F.3d 1352
• Parties: CENCAST SERVICES, L.P., Cenex Services, L.P., Disc Acquisition Corp., Disc Management Services Group, Inc., Disc Talent Group, Inc., EP Management Services, L.P., EP Production Services, L.P., EP Talent Services, L.P., Pixpay Services, L.P., and Screenpay, Inc., Plaintiffs–Appellants, v. UNITED STATES, Defendant–Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

729 F.3d 1352

CENCAST SERVICES, L.P., Cenex Services, L.P., Disc Acquisition Corp., Disc Management Services Group, Inc., Disc Talent Group, Inc., EP Management Services, L.P., EP Production Services, L.P., EP Talent Services, L.P., Pixpay Services, L.P., and Screenpay, Inc., Plaintiffs–Appellants,

v.UNITED STATES, Defendant–Appellee.

Nos. 2012–5142, 2012–5145, 2012–5148, 2012–5143, 2012–5146, 2012–5149, 2012–5144, 2012–5147, 2012–5150, 2012–5151.

United States Court of Appeals, Federal Circuit.

Sept. 10, 2013.

Rehearing and Rehearing En Banc Denied Dec. 12, 2013.^*

Kent A. Yalowitz, Arnold & Porter, LLP, of New York, NY, argued for plaintiffs-appellants. With him on the brief was Maxwell C. Preston.

Patrick J. Urda, Attorney, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were Kathryn Keneally, Assistant Attorney General, Tamara W. Ashford, Deputy Assistant Attorney General, and Gilbert S. Rothenberg, Attorney.

Elizabeth Rosenfeld, Wohlner Kaplon Phillips Young & Cutler of Encino, California, for amicus curiae Studio Transportation Drivers, Union No. 399 of the International Brotherhood of Teamsters.

Dale W. Short, Short & Shepherd of Westlake, OH, for amicus curiae International Alliance of Theatrical Stage Employees, et al.

REX S. Heinke, Akin Gump Strauss Hauer & Feld LLP, of Los Angeles, CA, for amicus curiae Alliance of Motion Picture and Television Producers. With him on the brief was Jessica M. Weisel.

Before NEWMAN, DYK, and PROST, Circuit Judges.

DYK, Circuit Judge.

In these consolidated tax refund cases, Cencast Services, L.P. et al. are entities that, inter alia, remit payroll and employment taxes on behalf of motion picture and television production companies. For convenience we refer to these entities in the singular as “Cencast.” Cencast appeals from a final judgment of the United States Court of Federal Claims (“Claims Court”) rejecting its claims for tax refunds. We hold that the scope of Cencast's liability for employment taxes under the Federal Unemployment Tax Act (“FUTA”) and the Federal Insurance Contribution Act (“FICA”) is determined by reference to the employees' “employment” relationships with the common law employers for which Cencast remits taxes (i.e., the production companies), and that the common law employers cannot decrease their liability by retaining entities such as Cencast to actually make the wage payments to the employees. We also hold that Cencast is barred from raising its theory that it overpaid the FUTA and FICA taxes because some of the individuals classified as employees were independent contractors. We affirm.

Background

The evolution of the motion picture and television industries over the past century has resulted in this tax case concerning FUTA and FICA tax liability. In the early part of the twentieth century, motion picture productions were primarily controlled by large, major motion picture and television studios, and production workers enjoyed long-term, continuous employment relationships with those studios. These studios paid wages to these employees, and, as the common law employers of these workers, were liable for employment taxes on those wages, and remitted those taxes directly to the Internal Revenue Service (“IRS”).

Since the late 1970s, however, many smaller production companies have emerged and have created movies and television programs independently from the large studios. As a result of this trend, many production workers are now employed by several different production companies during the course of a year, rather than by a single large production studio. Thus, in any given year, a given production worker might earn wages from several production companies, all of whom (being common law employers) would be individually liable for employment taxes on those wages. The complex web of production companies and production workers that evolved made administration of payroll, benefits, collective bargaining agreements, and taxes increasingly difficult.

Entities like Cencast, which are also known as payroll service companies (“Service Companies”), emerged to address these problems. Over the last twenty-five years, virtually all independent production companies have contracted with Service Companies for payroll and related services. Cencast and other Service Companies compute and pay compensation to production workers, report and pay compensation to multi-employer pension and benefit funds, provide post-production financial reporting, and pay employment taxes to the IRS.

Although they contract with the Service Companies, production companies both hire and supervise the individual production workers—as they had done in the pre-Service Company era. In general, Cencast and other Service Companies have no role in selecting or supervising production workers. The only change is that entities like Cencast—and not the production companies—now pay the production workers and administer the production companies' payroll and employment tax obligations. It is undisputed in this case that Cencast is not the common law employer of production workers.

Around the time that Service Companies such as Cencast began to emerge, the Supreme Court decided Otte v. United States, 419 U.S. 43, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974), which involved the question of whether entities who are not the common law employers (but nonetheless pay wages to the employees) are required, inter alia, to withhold the employees' portion of the FICA tax. See id. at 49–51, 95 S.Ct. 247. That question arose in the context of the payment of wages by a bankruptcy trustee on behalf of a bankrupt common law employer. See id. at 45–46, 95 S.Ct. 247. The Court held that persons who formally pay the wages of employees (called “statutory employers”) are liable for the withholding of FICA taxes under I.R.C. § 3102(a), even where those persons were never in a common law employment relationship with those employees. See id. at 50–51, 95 S.Ct. 247. While Otte dealt only with the employee's portion of FICA, it is accepted that Otte applies equally to the employer's FUTA and FICA tax obligations. See Winstead v. United States, 109 F.3d 989, 991 (4th Cir.1997) (applying Otte to FUTA); In re Armadillo Corp., 561 F.2d 1382, 1386 (10th Cir.1977) (applying Otte to FUTA and to the employer's portion of FICA).

Under Otte, because Cencast and the other Service Companies pay the production workers, they are required to remit taxes imposed on employers and employees under FUTA and FICA. Only the employer's FUTA and FICA tax obligations are at issue here.

Between 1991 and 1996, Cencast paid over $7 billion in wages, on behalf of production companies, to hundreds of thousands of workers who worked on numerous different productions. Cencast also filed tax returns and remitted FUTA and FICA taxes to the federal government with respect to these employees. For the six tax years in question, Cencast remitted approximately $465 million in FUTA and FICA taxes as the employer contribution for the production worker employees.

When Cencast filed its FUTA and FICA employment tax returns, it treated each employee as being in an “employment” relationship with Cencast rather than with the production companies. This reduced the overall tax payments because of statutory caps on both FUTA and FICA taxes. Though both FUTA and FICA tax “all remuneration for employment,” seeI.R.C. § 3306(b) (FUTA); I.R.C. § 3121(a) (FICA), they both place caps on the wages subject to the tax. Under FUTA, each employer is only liable to pay taxes on the first $7,000 of wages paid “with respect to employment,” seeI.R.C. § 3306(b)(1), and under FICA, each employer is only liable to pay taxes on wages paid “with respect to employment” up to a specified FICA wage base, seeI.R.C. § 3121(a)(1) (excluding from FICA's definition of wages remuneration above “the [FICA] contribution and benefit base (as determined under section 230 of the Social Security Act)”). The FICA wage base varies by year. The relevant FICA wage base for 1996, for example, was $62,700. Thus, if employee A earned $50,000 from production company 1 and $50,000 from production company 2, Cencast paid FUTA tax on only $7,000 of wages instead of $14,000, and paid FICA tax on only $62,700 in wages instead of $100,000 (for the 1996 tax year). Thus, applying a single wage cap in calculating its taxable wages for both FUTA and FICA purposes, Cencast excluded a portion of the production workers' wages from employment taxes. The amount of tax that was avoided is exactly equal to the additional amounts of FUTA and FICA tax that individual production companies would have been liable for had those companies conducted their own payroll services and filed their own tax returns.

In 1994, the IRS began investigating Cencast's FUTA and FICA tax calculation practices. Eventually, the IRS issued Technical Advice Memorandum (“TAM”) 119980–97. See IRS Tech. Adv. Mem. 119980–97, available at http:// www. irs. gov/ pub/ irs_ wd/ 9918056. pdf. In the TAM, the IRS explained that FUTA and FICA taxes should be calculated as though each employee were in an employment relationship with each individual production company, rather than with Cencast. Thus, the TAM concluded that Cencast could not treat itself as being in an “employment” relationship with production workers (i.e., apply a single wage cap) in calculating its tax liability for FUTA and FICA purposes. Instead, Cencast was required to apply a separate wage cap with respect to each production company that had an employment relationship with the production worker during that year. In 2001, the IRS assessed Cencast FUTA and FICA tax deficiencies for the 1991–1996 tax years totaling approximately $43.7 million for FUTA taxes and $15.6 million for FICA taxes.

In November 2001, Cencast paid divisible portions of the IRS assessments totaling $637,000, representing additional tax owed with...