Howard's Yellow Cabs, Inc. v. U.S.

• Decision Date: 19 May 1997
• Docket Number: No. 5:93CV90-V.,5:93CV90-V.
• Court: U.S. District Court — Western District of North Carolina
• Parties: HOWARD'S YELLOW CABS, INC., Plaintiff, v. UNITED STATES of America, Defendant.

987 F.Supp. 469

HOWARD'S YELLOW CABS, INC., Plaintiff, v. UNITED STATES of America, Defendant.

No. 5:93CV90-V.

United States District Court, W.D. North Carolina, Stateville Division.

May 19, 1997.

COPYRIGHT MATERIAL OMITTED

T. Scott Tufts, Brian F.D. Lavelle, Roy W. Davis, Jr., Van Winkle, Buck, Wall, Starnes, & Davis, P.A., Asheville, NC, for Plaintiff.

Thomas Holderness, Michael J. Martineau, Washington, DC, for Defendant.

MEMORANDUM OPINION AND ORDER

RICHARD L. VOORHEES, Chief Judge.

THIS MATTER is before the Court for ruling upon proposed findings of fact and recommendations for disposition of certain motions as submitted by Chief Magistrate Judge Carl Horn. Pursuant to 28 U.S.C. § 636 and the standing order of designation, this Court had referred Defendant's Motion For Partial Summary Judgment, filed July 29, 1994 (doc. # 19), and Plaintiff's Motion For Summary Judgment, filed August 29, 1994 (doc. # 28) to Chief Magistrate Judge Horn for recommended disposition. On October 12, 1994, Chief Magistrate Judge Horn recommended; 1) that Defendant's Motion For Partial Summary Judgment be DENIED; 2) that Plaintiff's Motion For Summary Judgment be GRANTED; 3) that the $17,815.36 in assessments which Plaintiff paid to the IRS under protest be refunded, together with interest as provided by law; 4) that Defendant be enjoined from enforcing collection of the amounts it assessed as stated in its "Notice[s] Of Intent To Levy ...." dated September 8, 1993; and 5) that Plaintiff be awarded reasonable attorney's fees and costs in an amount to be determined (doc. # 35).

Defendant filed objections to the recommendation, Plaintiff responded in opposition, and Defendant replied (docs.# 36, 37, 38, respectively). Thereafter, Plaintiff moved for leave to file a supplemental brief in support of its Motion for Summary Judgment and the Magistrate's Recommendation, which was granted over Defendant's objection (docs.# 40, 41, 42, 43). Defendant responded in opposition to Plaintiff's supplemental authorities, Plaintiff moved to strike, and Defendant responded (docs.# 44, 45, 46, 47). After consideration of the record, briefs of the parties, and relevant case authority, and for the reasons stated below, the Court affirms in part and denies in part the recommendation.

FACTUAL BACKGROUND¹

Plaintiff Howard's Yellow Cabs, Inc., (President Howard Sumlin) operates a cab service in Lenoir, North Carolina, and surrounding communities. This service is the only public transportation in the area. Plaintiff and the drivers operate pursuant to a written agreement entitled "Acknowledgement of Independent Contractor Agreement," which states that the parties have a "50/50 fares" arrangement; that the driver is an independent contractor, and not an employee partner, agent, or joint venturer with Plaintiff; that Plaintiff does not deduct withholding taxes, FICA, or any other taxes required to be deducted by an employer and that the driver is responsible for payment of such taxes; and that the driver is not entitled to any fringe benefits, retirement, pension, profit sharing, or any other benefits which might accrue to an employee (doc. # 29, Ex. 1).

Plaintiff provided to the drivers a cab, radio, dispatcher services, and maintenance on the cabs, and one half of the fuel. Drivers were provided keys to the depot and had access to the cab keys. Drivers were financially liable for any damage to the cabs caused by their own negligence. Plaintiff and drivers equally split any loss which was sustained due to robbery or "run out" passengers. Drivers did not work any set shift or hours and had personal use of the cabs during the day.

Plaintiff and the drivers derived income from two sources. The drivers picked up public fares, with or without the assistance of the dispatcher. The cabs did not have meters, and the drivers were not required to keep a written log of their fares. The drivers collected the cash fares and their tips from the public. Additionally, drivers would transport special needs individuals pursuant to contract fare agreements which had been entered into by Plaintiff and third parties. At the time the transportation was provided, Plaintiff would credit the driver with 50% of the contract fare amount. Plaintiff was paid directly for the contract fares by the third parties on a monthly basis. In sum, the driver was responsible for collecting and disbursing the cash fares, while Plaintiff was responsible for collecting and disbursing the contract fares.

Plaintiff's dispatcher and the drivers would "settle up" approximately weekly. A driver would retain all of the cash which he had collected from the public fares, and this amount was reported to the dispatcher. The dispatcher reported to the driver the amount of contract fares to which the driver was entitled.² Fifty percent of the fuel cost was subtracted from the drivers' share, as was the cost of any damage to the cab. The driver and dispatcher then determined the amount of money which the driver owed to the Plaintiff (in the event that the cash fares due to Plaintiff exceeded the contract fares), or which Plaintiff owed to the driver (in the event that the contract fares due to the driver exceeded the cash fares which had been collected). Drivers kept the entirety of their tips from both the cash fares and the contract fares.

On June 7, 1993, the Internal Revenue Service ("IRS") assessed Plaintiff with $57,080.50 in FICA and withholding taxes for 1988, $59,385.32 for 1989, and $34,668.53 for 1990; and with $12,360.91 in FUTA taxes for 1988, $11,915.12 for 1989, and $6,404.64 for 1990. These assessments were based upon the IRS's conclusion that the taxicab drivers with whom Plaintiff had contracted were "employees" rather than "independent contractors", and that Plaintiff had failed to pay the applicable employment taxes for the years in question.

On July 13, 1993, Plaintiff paid to the IRS, under protest, the sum of $11,405.30, representing the amount of FICA and withholding taxes allegedly owed for one driver during the period in question; it paid $1,309.91 in FUTA taxes for one driver under the same circumstances; and paid an additional $100.00, representing a divisible portion of the interest and penalties with which it had been assessed. Along with its July 1993 payments, Plaintiff submitted twelve "Claim[s] For Refund" (for the quarters covered by the assessment), seeking to recover its $11,405.30 protest payment, and twelve "Claim[s] For Abatement," seeking relief from the balance of the aforedescribed assessments. While going through the IRS's administrative appeals process, on December 10, 1991, Plaintiff paid the IRS $5,000 toward the subject assessments.

By letters, all dated August 13, 1993, the IRS notified Plaintiff that its Claims For Refunds and Claims For Abatement were denied. On September 8, 1993, the IRS issued "Notice[s] Of Intent To Levy ..." to Plaintiff, advising of its intent to enforce collection of the balance of the assessments if they were not paid by October 6, 1993.

On September 17, 1993, Plaintiff filed the instant action, seeking a refund of the $17,815.36 in federal employment, unemployment, and withholding taxes and penalties which it had paid under protest, and an injunction preventing the IRS from collecting the balance of the subject assessments. In addition, Plaintiff seeks attorneys fees, costs, and interest on the amounts paid to the IRS under protest. Defendant filed a counterclaim for $177,742.94, which it asserts is the total amount of FICA, withholding, and FUTA taxes due for the subject period (as of the date the counterclaim was filed), along with penalties, interest, and statutory additions.

Plaintiff asserts that its drivers were not its employees, but rather independent contractors, for which the above tax liability is not proper. Further, Plaintiff argues that even if the drivers were determined to be its common law employees, that it is entitled to relief pursuant to § 530 of the Internal Revenue Act of 1978.

Defendant moved for partial summary judgment pursuant to Fed.Rule Civ.P. 56 with respect to Plaintiff's requested relief concerning the applicability of § 530. Defendant requests the Court to determine that Plaintiff is not entitled to relief pursuant to § 530 of the Revenue Act of 1978 with respect to drivers that made $600 or more in one year should those drivers be determined to be Plaintiff's employees (doc. # 19).

Plaintiff responded in opposition to Defendant's Motion for Partial Summary Judgment, and contemporaneously filed its Motion for Summary Judgment (doc. # 28). Plaintiff asserts that it is entitled to summary judgment because the drivers were not its employees; that even if the drivers are considered to be its employees, it is not an "employer" for tax purposes; that the moneys received by the drivers from third party passengers were not "wages"; that it was precluded from withholding and paying the subject taxes because of the nature of its operations; and that, in any event, it is entitled to relief pursuant to § 530.

After consideration of the parties' submissions, the magistrate judge concluded that "Based upon the pleadings and evidence, ... the undersigned finds overwhelming evidence of plaintiff's good faith reliance on the independent contractor status of its drivers. [P]laintiff is entitled, at a minimum, to § 530 relief from the retroactive assessments in dispute." The magistrate judge further found that, "Applied to the facts of this case, the plaintiff's fare splitting arrangement with the drivers would not constitute `payments' which required the filing of informational returns." (Form 1099). Accordingly, the magistrate judge recommended that Defendant's Motion for Partial Summary Judgment be denied; that Plaintiff's Motion for Summary Judgment be granted; that the $17,815.36 in assessments which Plaintiff paid to the IRS under protest be refunded, together with interest as provided by...