Opinion
FSTCV165015742S
02-14-2018
Gerald F. HENESY v. DIGITAL MEDIA, LLC
UNPUBLISHED OPINION
OPINION
POVODATOR, J.
This is a lawsuit commenced by the self-represented plaintiff in small claims court, seeking payment of amounts claimed to be due as a result of a terminated relationship between the parties. The corporate defendant moved to transfer the matter to the regular session of the Superior Court, leading to a substantial expansion of the scope of claims being asserted, plus the addition of the corporate principal as an additional defendant.
The defendants have moved to strike the 11th count in the third amended complaint, which count is based on 26 U.S.C. § 7434, creating a cause of action arising from the fraudulent filing of a federal informational tax form/return. This claim, in turn, is based on the fact that the plaintiff had been hired by the defendant with a designated characterization of independent contractor, but it was later determined by the State Labor Department that the plaintiff actually should have been characterized as an employee. As a consequence of that mischaracterization, the defendants had issued to the plaintiff a form 1099 MISC rather than a W-2 form, and it is that filing that is the focus of this claim.
The statute imposes liability for a fraudulent return, and dutifully, the plaintiff claims that the return was fraudulent. The issue at this point, however, as often is an issue in other reported and unreported decisions, is the extent to which the pleadings must satisfy some level of particularity as to the fraudulent nature and motive of the filing.
The plaintiff contends that he has satisfied the pleading requirement for the fraudulent quality of the return. The court has attempted to review the authorities he has cited- actual case citations were fragmentary if not nonexistent- and ultimately finds that the authorities relied upon by the plaintiff are not on point or are otherwise distinguishable from the situation at hand.
The first case cited by the plaintiff in support of his position is Pitcher v. Waldman, No. 1:11-CV-148, 2012 WL 5269060, at *2 (S.D. Ohio Oct. 23, 2012), report and recommendation adopted, No. C-1-11-148, 2013 WL 866510 (S.D. Ohio Mar. 7, 2013). Although the case did involve a claim that a 1099 MISC form rather than a W-2 had been generated, the court finds it to be a substantially-distinguishing feature that the case was not similar to this (or the prototypical situation) involving hiring someone as an independent contractor rather than a more appropriate engagement as an employee. Rather, this decision was in the context of ongoing litigation between the parties, and the specific mischaracterization arose in the context of payments required by a settlement agreement, including payments to lawyers. (And it was an accounting firm break-up that led to the litigation, such that a greater level of sophistication in such matters likely would be presumed.) The circumstances of the dispute provide a level of particularity absent here.
The plaintiff also refers to Leon v. Tapas & Tintos, Inc., 51 F.Supp.3d 1290 (S.D.Fla. 2014), but in that case, based on the then-current state of the pleadings, the court dismissed the case (the Federal equivalent of striking the claim):
Accordingly, Count V is dismissed without prejudice as to Defendant Tapas & Tintos. Plaintiff is granted leave to amend to add specific allegations supporting Tapas & Tintos’ willful and knowing issuance of fraudulent information returns. With respect to Defendant Justo, Count V is dismissed with prejudice as Plaintiff has failed to set forth a single allegation as to why Mr. Justo should be held liable. 51 F.Supp.3d 1298.
A determination of insufficiency, even if potentially curable, is not authority for the sufficiency of the plaintiff’s complaint. (The court found that the allegations of willfulness were insufficient.)
The court finds a recent decision to be persuasive, relying upon what is described as a more comprehensive analysis of the statutory framework and other recent decisions:
Defendants cite Liverett v. Torres Advanced Enterprise Solutions, LLC, 192 F.Supp.3d (E.D.Va. 2016). The same argument was made there as here, namely, that the employer’s willful treatment of employees as independent contractors in order to avoid paying employer taxes violates 26 U.S.C. § 7434(a). The court dismissed the claim. The court interpreted § 7434(a)’s phrase " willfully files a fraudulent information return with respect to payments purported to be made to any person" to mean that " the filing of an information return is actionable only if the information return is false or misleading as to the amount of payments purportedly made" to the employee, not whether the misclassification was false. Id. at 650-55. Accord, Jayo Vera v. Challenger Air Corp., No. 16-cv-62354, 2017 WL 2591946, at 2-3 (S.D.Fla. June 6, 2017); Derolf v. Risinger Bros. Transfer, No. 16-cv-1298, 2017 WL 1433307 at **6-7 (C.D.III. Apr. 21, 2017); Tran v. Tran, 239 F.Supp.3d 1296, 1297-98 (M.D.Fla. 2017). Because plaintiffs in the present case have alleged only that they were misclassified, not that Front Range falsely reported the payments made to them, defendants argue that the First Claim must be dismissed.
Plaintiffs’ responds that other district courts have interpreted § 7434(a) differently, i.e., that the filing of a Form 1099 based upon willful misclassification of an employee as an independent contractor does trigger a claim under the statute. See Leon v. Tapas & Tintos, Inc., 51 F.Supp.3d 1290, 1297-98 (S.D.Fla. 2014); Seijo v. Casa Salsa, Inc., No. 60892-Civ., 2013 WL 6184969, at *7 (S.D.Fla. Nov. 25, 2013); Pitcher v. Waldman, No. 1:11-cv-148, 2017 WL 526906, at **4-9 (W.D. Ohio Oct. 23, 2012).
Neither the parties nor I have located a circuit court decision on the issue to date. Having studied the several district cases, however, I am persuaded by the thorough examination of the issue and reasoning of Judge Ellis in Liverett, as were the three district courts that decided the issue subsequent to Liverett (Jayo Vera, Derolf and Tran ). Plaintiffs rely on pre-Liverett cases that did not have the benefit of Judge Ellis’ analysis and, respectfully, did not in my view examine the language of 26 U.S.C. § 7434(a), the context provided by § § 7434(e) and (f), and the legislative history in the same depth. Therefore, although I find that plaintiffs have adequately alleged that misclassification of Ms. Thornton as an independent contractor was willful, I nevertheless conclude that plaintiffs have not stated a claim of tax fraud in violation of 26 U.S.C. § 7434(a) as a matter of law." Sanchez v. Front Range Transportation, No. 17-CV-00579-RBJ, 2017 WL 4099896, at *3-4 (D.Colo. Sept. 15, 2017).
Further, the court rejects the plaintiff’s contention that he has alleged more than simple misclassification of his position. In his memorandum in opposition to the motion to strike, the plaintiff refers to ¶ 98 of the latest version of the complaint as containing a sufficiently detailed factual statement of the fraudulent nature of the return: " Moreover, plaintiff specifically asserts at (TAC ¶ 98) that the information forms were bereft of accurate (correct) amounts, SEE: Henry v. Synchrony Bank, (S.D.W.Va. 2016)."
The precise language of ¶ 98 varies, if slightly, from this characterization, but the nature and sufficiency of the claim must start with the actual language used. The actual text of that paragraph is: " Defendants’ fraudulent Information Returns when intentionally filed were bereft of any accurate employee withholding amounts found in the required Employees’ W-2 Tax Information Form." The court is required to give to the allegations a common-sense interpretation, and the court cannot read this allegation as asserting that the defendants had withheld required amounts but not reported such amounts on the 1099 or inaccurately reported some dollar value on the form; rather, the court reads this as an assertion that the defendants should have withheld money, which should have been reported on a W-2, but did not do so. In other words, this appears to be an allegation that the form filed did not include information that the proper form would have required- not that there was a misstated value or other error of commission.
The case cited by the plaintiff in the above quoted passage confirms that the typical if not required focus is on inaccurate reporting of an item rather than the mere act of misclassification of someone hired, with a corresponding filing of a form that is accurate for that characterization of the relationship.
The agreement specified a confidential amount of money that Defendant would pay to Plaintiff and included debt forgiveness on two other accounts. Id. at ¶ 10. Defendant allegedly issued a 1099-MISC form to Plaintiff that listed the settlement amount ‘in severe excess’ of the actual total. Id. at ¶ 11. According to Plaintiff, the amount listed in the form was double the amount of the settlement. Id. at ¶ 19." Henry v. Synchrony Bank, No. CV 3:16-5999, 2016 WL 6871269, at *1 (S.D.W.Va. Nov. 21, 2016).
(Note that in addition to the case involving a claimed gross overstatement of a dollar amount as reported on the form, but it also was in the context of a settlement of an earlier dispute rather than arising directly from, as here, a claimed misclassification of an individual as an independent contractor rather than as an employee.)
In effect, the plaintiff’s arguments would make a misclassification of an individual as an independent contractor rather than an employee, virtually a per se violation of 26 U.S.C. § 7434, because virtually all of the indicia and consequences asserted are inherent in such a misclassification- use of a 1099 MISC rather than a W-2; lack of retirement benefits; lack of unemployment compensation eligibility; no overtime eligibility; etc.
Recognizing that there always is a first time, the issue of whether an individual is an employee or an independent contractor has been around for a long time, to the extent that the so-called ABC test has been incorporated into General Statutes § 31-222(a)(1)(B)(ii) (see, e.g., Kirby of Norwich v. Administrator, Unemployment Compensation Act, 328 Conn. 38, 41-42 (2018) ), yet there is no apparent body of law relating the misclassification of an individual as an independent contractor to this type of consequential liability, certainly in the absence of egregious (alleged) circumstances.
For all of the foregoing reasons, the court concludes that the 11th count fails to allege sufficient facts to assert a legally sufficient claim of liability under 26 U.S.C. § 7434, and therefore grants the motion to strike that count.