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explaining that the fact that an individual "could take time off without approval" weighed in favor of contractor status
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No. 01 CV 0145 (ARR)(VVP).
December 14, 2004
Paul R. Fitzmaurice Pelino Lentz, Philadelphia, PA, Counsel for Plaintiffs.
Bartholomew Cirenza Stephen J. Turanchik, U.S. Dept. Of Justice, Tax Division, Washington, D.C., Counsel for Defendant.
OPINION AND ORDER
Plaintiffs, VTA Management Services, Inc. ("VTA") and Rehab Resources, Inc. ("Rehab Resources"), filed this lawsuit seeking a combined recovery of assessed and partially paid federal employment taxes in the amount of $41,204.87 and federal unemployment taxes in the amount of $495 as a result of an Internal Revenue Service ("IRS") determination that licensed therapists who provided services to plaintiffs' clients should have been classified as employees rather than as independent contractors. The United States asserted a counterclaim against VTA seeking $22,573,450.81 for federal employment taxes and $2,693,348.24 for federal unemployment taxes allegedly due for tax periods ending March 31, 1990 through December 31, 1995, together with statutory interest, penalties, and additions. The United States also counterclaimed against Rehab Resources seeking $894,939.92 for federal employment taxes and for $122,384.06 for federal unemployment taxes allegedly due, together with statutory interest, penalties, and additions. Currently before the court are motions for summary judgment filed by both VTA and Rehab Resources, and a cross-motion for partial summary judgment against VTA filed by the United States.
VTA seeks a recovery of employment taxes totaling $38,603.08; Rehab Resources seeks a recovery of employment taxes totaling $2,601.79.
VTA seeks a recovery of unemployment taxes totaling $336; Rehab Resources seeks a recovery of unemployment taxes totaling $159.
Each plaintiff seeks summary judgment (1) on its claim seeking a refund of the federal employment taxes paid under protest, and (2) dismissing the United States' counterclaim against it. Plaintiffs contend they should prevail on their motions for two independent reasons. First, they claim to be entitled to relief from federal employment taxes in accordance with § 530 of the Revenue Act of 1978, as amended ("§ 530"). Section 530 provides tax relief for certain employers who, in good faith, classified as independent contractors workers who were subsequently deemed by the IRS to be employees, thereby subjecting the employer to large sums of back taxes. Second, plaintiffs claim that the therapists are employees of neither the agencies nor the health care and educational facilities to which their services are contracted. If no employer/employee relationship exists between any of these parties, and instead the workers are properly characterized as independent contractors under common law, plaintiffs are not liable for employment taxes.
The United States seeks summary judgment against VTA's argument that it qualifies for relief under § 530. Specifically, the United States contends that VTA has failed to satisfy a specific requirement of § 530, namely the substantive consistency requirement that the employer not have treated as an employee any worker holding a position "substantially similar" to the licensed therapists classified as independent contractors (the "substantive consistency requirement"). The United States does not allege that Rehab Resources has failed to satisfy the substantive consistency requirement of § 530.
FACTS
The following facts are undisputed unless otherwise noted. VTA is a management consulting company that provides services to nursing homes, long-term care facilities, schools, hospitals, and similar facilities (collectively the "Facilities") to meet their temporary and/or supplemental staffing needs by providing licensed physical therapists, licensed occupational therapists, and licensed speech-language pathologists (collectively the "Licensed Therapists"). VTA Rule 56.1 Stmt. ¶¶ 23-25. VTA was formed jointly by Steven Ostrovsky and Saul Kamelhar, both speech-language pathologists. Id. ¶ 20. In 1978, Mr. Ostrovsky, who had worked for four years as a speech-language pathologist in the New York area, id. ¶ 17, formed a sole proprietorship which acted as an intermediary between therapists and health care Facilities, id. ¶ 19. In approximately 1979, Mr. Kamelhar, a speech-language pathologist in New York State for nine years,id. ¶ 12, formed a consulting company named Visiting Therapy Associates, which advised health care Facilities about how to establish rehabilitation departments, id. ¶ 14. In 1980, the two combined their companies into a business called Visiting Therapy Associates and within a year changed its name to VTA Management Services, id. ¶ 20, incorporating it in 1984, id. 21.
VTA provides the services of Licensed Therapists to Facilities in need of supplemental therapy staff due to staff shortages, vacations, or other reasons. Id. 23-25. Facilities in need of supplemental staff contact VTA, which provides Licensed Therapists for short-term, as well as longer-term, assignments.Id. 26; United States Rule 56.1 Stmt. Re: VTA ¶ 26. In order to obtain Licensed Therapists to meet the Facilities' staffing needs, VTA advertises in trade magazines and New York City newspapers. VTA Rule 56.1 Stmt. ¶ 29. VTA verifies the Licensed Therapists' professional credentials, such as licenses, and malpractice insurance. Id. ¶ 31. In addition, VTA pays the Licensed Therapists' compensation, allowing the Facilities to await payment from third-party health care providers and disburse funds to VTA on a monthly or bi-monthly basis. Id. For the services that VTA provides to the Facilities, VTA is compensated by the Facilities at a higher rate than it pays to the Licensed Therapists. Id. ¶ 32.
When VTA first began its business in approximately 1980, Mr. Ostrovsky decided to treat the Licensed Therapists as independent contractors. Id. ¶ 33. This decision was made based upon his own experience working as an independent contractor providing speech-language pathology services through agencies in the New York area. Id. ¶ 33. It is contested whether this decision was also confirmed as the proper tax treatment by any attorney. Id. ¶ 37; United States Rule 56.1 Stmt. Re: VTA ¶ 37. VTA claims that it sought the advice of the Fink Weinberger law firm prior to, or concurrently with, its decision to treat the Licensed Therapists as independent contractors. VTA Rule 56.1 Stmt. ¶ 37. The United States contests this, arguing that the record does not support this statement. United States Rule 56.1 Stmt. Re: VTA ¶ 37. A subsequent legal advisor, however, testified to giving VTA similar advice. Harvey Werblowsky, an attorney who represented VTA from approximately 1984 until 1996 or 1997, testified that he confirmed the appropriateness of the Licensed Therapists' treatment as independent contractors, at least in part because their treatment as employees would violate a New York State law prohibiting the corporate practice of medicine. Werblowsky Dep. at 14-15; VTA Rule 56.1 Stmt. ¶¶ 41, 42.
In keeping with their treatment as independent contractors, the Licensed Therapists signed a document entitled "Independent Contractor Status," VTA Rule 56.1 Stmt. ¶ 44. VTA did not supervise the therapy provided by the Licensed Therapists to individuals, id. ¶ 45, did not control the manner in which the Licensed Therapists provided therapy services, id. ¶ 46, and did not reimburse the Licensed Therapists for costs associated with the provision of therapy services, id. ¶¶ 47, 48, 57. The Licensed Therapists were required to provide their own insurance,id. ¶¶ 53-54, and pay for any necessary license renewals, id. ¶ 56. Further, the Licensed Therapists determined how many hours they worked each week, id. ¶ 61, were under no obligation to accept work assignments offered by VTA, id. ¶ 60, and were free to pursue employment for private individuals or other agencies while working for VTA, id. ¶¶ 62-63.
There was one group of workers, however, who were treated not as independent contractors but as employees by VTA. Id. ¶ 84. These workers were completing a "Clinical Fellowship Year" ("CFY"), required for licensure under New York law prior to obtaining a license to practice speech pathology. Id. ¶ 83. The work of these individuals (the "Clinical Fellows") was supervised during the CFY, id., and VTA classified the Clinical Fellows as employees, providing them with Form W-2's, id. ¶ 84. After completing their CFY and obtaining licenses to practice speech-language pathology, these individuals were no longer treated as employees. Id. ¶ 85.
One Therapist, Marcelle Bichotte, testified that upon completion of her CFY, she was given the choice of maintaining her employee status or being treated as an independent contractor. Bichotte Dep. at 29. After consulting with others, Ms. Bichotte chose to work as an independent contractor. Id.
The IRS audited VTA for employment taxes for the years 1990, 1991, 1992, 1993, 1994 and 1995. Id. ¶ 6. As a result of the audit, the IRS made an assessment requiring VTA to pay employment taxes for the Licensed Therapists, finding that they should have been classified as VTA's employees, not as independent contractors. Id. ¶ 7. As a result of the audit and assessment, VTA filed Amended Employer's Quarterly Federal Tax Returns for each quarter of 1990-95, and Amended Employer's Annual Federal Unemployment Tax Returns for calendar years 1990-95, and made a tax payment with the amended returns in the total amount of $38,603.08. Id. ¶ 8. VTA also filed Claims for Refunds and Requests for Abatement for each of those quarters with respect to employment taxes and for each of those years with respect to unemployment taxes. Id. ¶ 9.
Rehab Resources, a Delaware corporation doing business in New Jersey, Rehab Resources Rule 56.1 Stmt. ¶ 1, was incorporated in 1991, and was a wholly-owned subsidiary of Continental Medical Systems, which at the time also owned VTA. Id. ¶ 25. Steven Ostrovsky, one of the principals of VTA, was involved in the decision to form Rehab Resources. Id. ¶ 26. Like VTA, Rehab Resources provided Licensed Therapists to Facilities in need of supplemental staffing, id. ¶ 5, at least some of which were located in New Jersey, id. ¶ 6. Like VTA, Rehab Resources treated the Licensed Therapists as independent contractors, id. ¶ 48, but, unlike VTA, Rehab Resources did not employ any Clinical Fellows, id. The IRS audited Rehab Resources for employment taxes for the years 1993-95, id. ¶ 7, and made an assessment requiring Rehab Resources to pay employment taxes for the Licensed Therapists, who had been classified as independent contractors, id. ¶ 8. Like VTA, Rehab Resources filed Amended Employer's Quarterly Federal Tax Returns for each quarter of 1993-95 and Amended Employer's Annual Federal Unemployment Tax Returns for calendar years 1993-95.Id. ¶ 9. Rehab Resources made a tax payment with the amended returns in the total amount of $2,760.79. Id. ¶ 9. Rehab Resources also filed Claims for Refunds and Requests for Abatement for the periods at issue. Id. ¶ 10.
After more than six months had passed since VTA and Rehab Resources filed Claims for Refunds, they commenced this action to recover the taxes they had paid. VTA Rule 56.1 Stmt. ¶ 10; Rehab Resources Rule 56.1 Stmt. ¶ 11.
DISCUSSION
A. Standard of Review for Summary Judgment
Under Rule 56, summary judgment is proper if the pleadings, depositions, answers, interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.Proc.56(c). An issue of fact is genuine when "a reasonable jury could return a verdict for the nonmoving party," and facts are material to the outcome of the litigation if application of the relevant substantive law requires their determination. See Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). The moving party has the initial burden of "informing the district court of the basis for its motion" and identifying the matter that "it believes demonstrate[s] the absence of a genuine issue of material fact." Celotex Corp. v. Cartrett, 477 U.S. 317, 323 (1986). The substantive law determines the facts that are material to the outcome of a particular litigation. See Anderson, 477 U.S. at 250; Heyman v. Commerce Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir. 1975). In determining whether summary judgment is appropriate, a court must resolve all ambiguities, and draw all reasonable inferences against the moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)).
If the moving party meets its burden, the burden then shifts to the non-moving party to come forward with "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.Proc. 56(e). The non-moving party must "do more than simply show there is some metaphysical doubt as to the material facts."Matsushita, 475 U.S. at 586. "[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact."Anderson, 477 U.S. at 247-48. Only when it is apparent that no rational finder of fact "could find in favor of the non-moving party because the evidence to support its case is so slight" should summary judgment be granted. Gallo v. Prudential Residential Servs. Ltd. Partnership, 22 F.2d 1219, 1223 (2d Cir. 1994).
B. Relief Under § 530 of the Revenue Act of 1978
Under the Internal Revenue Code, employers are required to pay employment taxes for their employees but are not required to do so for independent contractors. Hospital Resource Personnel, Inc. v. United States, 68 F.3d 421, 424 (11th Cir. 1995). In the latter case, employers are required only to file forms with the IRS indicating the amount earned by the independent contractor in a given year. Id. In response to an apparent change in policy by the IRS regarding classification of "employees" and an increase in enforcement of the employment tax laws, Congress enacted § 530 to protect employers who faced potentially large assessments for employment taxes that were not paid because they had in good faith categorized those workers as independent contractors. Boles Trucking, Inc. v. United States, 77 F.3d 236, 239 (8th Cir. 1996). Section 530 provides:
(a) Termination of certain employment tax liability.
(1) In general. If
(A) for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, and
(B) in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer's treatment of such individual as not being an employee, then for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.
(2) Statutory standards providing one method of satisfying the requirements of paragraph (1). 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.
(3) Consistency required in the case of prior tax treatment. Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for any period ending after December 31, 1978, if the taxpayer (or a predecessor) has treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any perid beginning after December 31, 1977.
In summary, "a taxpayer qualifies for relief under § 530 only if the taxpayer can show that: (1) the taxpayer has not treated any individual as an employee who holds a substantially similar position as those classified as independent contractors (the substantial consistency requirement); (2) the taxpayer has filed all required federal tax returns on a basis consistent with the taxpayer's treatment of an individual as an independent contractor (the reporting consistency requirement); and (3) the taxpayer had a reasonable basis for treating the individual as an independent contractor." Halfhill v. United States, 927 F.Supp. 171, 175 (W.D. Pa. 1996).
Section 530 is essentially a defense to an otherwise valid claim against a taxpayer who has failed to pay employment taxes for workers misclassified as independent contractors. If an employer has consistently treated an individual as a non-employee "then that individual is not to be considered an employee unless the employer had no reasonable basis for not treating the individual as an employee." Institute for Resource Management, Inc. v. United States, 22 Cl. Ct. 114, 116 (1990). Section 530 was enacted by Congress "explicitly to eliminate the need for courts to engage in the balancing of complex factual issues in determining whether an individual is an independent contractor or an employee under common law." Queensgate Dental Family Practice, Inc. v. United States, 1991 U.S. Dist. LEXIS 13333, *6, 91-2 U.S. Tax Cas. (CCH) 50,536 (Sept. 5, 1991) (rejecting government's argument that the court first must evaluate whether the dentists were employees or independent contractors according to common law before applying Section 530). "Irrespective of whether a worker is in fact an employee or an independent contractor," § 530 protects taxpayers who acted in good faith from any subsequent IRS determination based on the common law factors that such workers must be treated as employees and the application of retroactive tax liability.Howard's Yellow Cabs v. United States, 987 F.Supp. 469, 467 (W.D.N.C. 1997); Queensgate, 1991 U.S. Dist. LEXIS 13333 at *6.
A threshold inquiry in the instant case is whether plaintiffs qualify for the safe harbor relief provided by § 530. If plaintiffs meet the requirements of that provision, this court need not analyze the relationship between the Licensed Therapists and either plaintiffs or the Facilities to determine what common law relationship existed.
C. The United States' Motion for Partial Summary Judgment Against VTA Based on the Substantive Consistency Requirement
The United States makes no contention that Rehab Resources does not satisfy the substantive consistency requirement of § 530.
As noted above, Congress included in § 530 a substantive consistency requirement, providing that an employer does not qualify for relief under § 530 if he has treated any worker holding a "substantially similar position" as an employee for any period beginning after December 31, 1977. § 503(a)(3). This consistency requirement was included "[t]o prevent taxpayers from changing the way they treat workers for employment tax purposes solely to take advantage of the relief provisions." H.Rep. No. 95-1748, at 6 (1978). "[A] showing of lack of consistency eliminates the applicability of Section 530 entirely, irrespective of a strong showing of other elements." In re Compass Marine Corp., 146 B.R. 138, 156 (E.D. Pa. 1992) (citingLowen Corp. v. United States, 785 F.Supp. 913, 916 (D. Kan. 1992)). The determination of whether workers occupy a substantially similar position is one of fact, and the burden lies with the taxpayer seeking relief pursuant to § 530 to prove substantial similarity by a preponderance of the evidence.McLaine v. United States, No. Civ. A. 98-832, 1999 WL 164930, *3 (W.D. Pa. 1999); see also Lambert's Nursery and Landscaping, Inc. v. United States, 894 F.2d 154, 156 (5th Cir. 1990).
In its motion for summary judgment, the United States alleges a failure by VTA to satisfy this substantive consistency requirement. Specifically, the United States contends that VTA treated seventeen individuals differently in successive years — as employees one year and as independent contractors the next. The United States alleges that these seventeen individuals held substantially similar positions each year and held positions substantially similar to those of the other Licensed Therapists consistently treated as independent contractors. In support of this argument, the United States urges that whether workers held substantially similar positions is analyzed only from the standpoint of job duties, citing Ren-Lyn Corp. v. United States, 968 F.Supp. 363 (N.D. Ohio 1997).
The precise claim advanced by the United States in its memorandum of law, United States Mem. Supp. Partial Summ. J. at 11-12, is that VTA treated two VTA workers, Frances Price and Kim Mallar-Salsberg, as employees during one period and as independent contractors during another period, although each performed the same therapeutic duties during both periods. Those two workers' situations are analogous to those of the fifteen other individuals mentioned more generally in the government's brief.
In response, VTA acknowledges that seventeen individuals were classified as employees rather than independent contractors in the year 1991, but urges that these individuals were Clinical Fellows, completing their mandated CFY with VTA, and that their position was not substantially similar to the position held by the Licensed Therapists. VTA maintains that the different employment treatment of the Clinical Fellows does not preclude § 530 relief because it consistently treated all Licensed Therapists as independent contractors.
No Second Circuit authority or district court opinion within this Circuit has been found addressing the meaning of the phrase "substantially similar position" used in § 530(a)(3). The Fifth Circuit, however, has done so in an analogous context, see Lambert's Nursery, 894 F.2d 154, and a number of district courts in other circuits have considered the meaning of the specific provision presented here, see e.g., North Louisiana Rehabilitation Center v. United States, 179 F.Supp.2d 658 (W.D. La. 2001); Select Rehab, Inc. v. United States, 205 F.Supp. 2d 376, 379 (M.D. Pa. 2002); McLaine v. United States, 1999 WL 164930 at *4. The vast majority of these authorities have held the phrase to denote not simply the job function or type of work performed, but also various aspects of the relationship between the taxpayer and individual workers, specifically including the degree of control the taxpayer may exercise over the workers in the performance of their duties.
In Lambert's Nursery, 894 F.2d 154, the Fifth Circuit said that the taxpayer was entitled to the protection of the prior audit safe harbor provision of § 530(a)(2)(B) if the landscape workers whom the IRS had previously determined to be independent contractors were "substantially similar" to the janitorial workers whom the taxpayer now sought to characterize in the same manner. The Fifth Circuit upheld the district court's determination that the two were substantially similar because, although their job functions differed, "both groups of workers were treated similarly `in terms of control, supervision, pay and demands.'" Id. at 156. The court further noted that "[t]he IRS . . . provided no authority to support its assertion that the type of work done, rather than the structure of the relationship between the taxpayer and his workers," should be the controlling factor in determining whether the workers were "substantially similar," and concluded that "[t]he relationship of the taxpayer to his workers is the most important" factor. Id. at 157.
Although in Lambert's Nursery the Fifth Circuit was tasked with interpreting the phrase "substantially similar" found in the prior audit safe harbor provision, § 530(a)(2)(B), which is not at issue in the instant case, it is a basic rule of statutory construction that "identical words used in different parts of the same act are intended to have the same meaning." Atlantic Cleaners Dyers, Inc. v. United States, 286 U.S. 427, 433 (1932). It is accordingly reasonable to adopt the Fifth Circuit's definition of "substantially similar" in interpreting § 530(a)(3), the subdivision at issue here, which employs the identical phrase in providing that a taxpayer fails to satisfy the substantive consistency requirement of § 530 if it has "treated any individual holding a substantially similar position as an employee for purposes of the employment taxes" (emphasis added).
Specifically addressing subdivision (a)(3) of § 530, the substantive consistency provision at issue here, the courts in both North Louisiana Rehabilitation Center, 179 F.Supp.2d 658, and Select Rehab, 205 F.Supp. 2d 376, attributed significance to the degree of control the employer exercised over individuals treated as employees as compared to others treated as independent contractors. In North Louisiana Rehabilitation, the court found on summary judgment that an employee doctor's position was not substantially similar to the medical director positions held by independent contractors due in part to the different nature of the hospital's control over the employee's schedule and duties. 179 F.Supp.2d at 666. In Select Rehab, also on summary judgment, the employee physicians were found to have responsibilities different from the independent contractor physicians because they did not have private practices, they were required to work more hours and oversee the hospitals, and they lacked job freedoms given to the independent contractors. 205 F.Supp. 2d at 379. See also Kentfield Medical Hospital Corp. v. United States, 215 F.Supp.2d 1064 (N.D. Ca. 2002) (court could not find substantive consistency requirement met as matter of summary judgment partly because there was no evidence in the record regarding differences in the relationship of the taxpayer to the workers even though there was evidence of differences in the amount of administrative work performed).
In its reply brief, United States Reply Supp. Mot. Summ. J. at 10, the United States contends that the Select Rehab court's discussion of the substantive consistency requirement was mere dicta. This court does not agree. The Select Rehab court explicitly found that the two physicians at issue held positions that were not substantially similar to the physicians who were classified as independent contractors. 205 F.Supp.2d at 381. Although the court subsequently acknowledged the disagreement by the parties over whether employees of other subsidiaries of the same parent company are properly considered in assessing substantive consistency, the court found it "irrelevant" which company technically employed the doctors because, in any event, their positions were substantially dissimilar as a matter of law. Because the two doctors held dissimilar positions from those held by the medical directors, the court found their treatment as employees did not violate the substantive consistency requirement of § 530. Id.
In McLaine, 1999 WL 164930 at *4, the district court rejected the United States' argument that job function or type of work was the sole criterion that the court should consider in determining whether positions were substantially similar in the context of the substantive consistency requirement, § 530(a)(3). There, two groups of workers, one treated as employees, the other treated as independent contractors, performed the same basic job function — namely, hauling freight. Nevertheless, the court did not end its analysis there, finding instead that evidence in the record that the independent contractors owned the trucks they used, were not trained by the taxpayer, set their own hours, could take time off without approval, designed their own routes, and had a greater choice regarding the freight they hauled, could lead a fact finder to conclude that the positions were substantially different. Id.
In making its statement that consistency is viewed from the standpoint of job duties, the Ren-Lyn court itself relies on authorities that analyze factors other than job function to determine whether or not workers held substantially similar positions. For example, Ren-Lyn cites to Halfhill, 927 F.Supp. 171, in which the court found that truck drivers treated as individual contractors held substantially similar positions to those held by persons classified as employees based not only on the fact that all of the individuals drove trucks, but also because all "negotiated with carriers regarding the leasing of [the taxpayer's] vehicles, and were paid a percentage of what [the taxpayer's] trucks actually earned." 927 F.Supp. at 176. The court in Lowen, 785 F.Supp. 913, also cited by Ren-Lyn, similarly considered factors other than mere job function, including whether transportation was provided to workers, the degree of supervision exercised over them, and the compensation structure. 785 F.Supp. at 915-16.
The reliance of the above courts on factors other than basic job function as part of their determinations of whether two disparately treated groups occupied substantially similar positions under the substantive consistency requirement undermines the United States' simplistic argument that this court need not — and in fact may not — consider the factual circumstances surrounding VTA's relationship with and treatment of the Licensed Therapists and Clinical Fellows as independent contractors or employees. The court finds persuasive the strong weight of authority holding that, in circumstances such as those presented here, it is proper to look not merely to the fact that both the Licensed Therapists and Clinical Fellows provided therapy, a fact not in dispute, but also to other factors relating to their relationship with VTA, including the level of supervision exercised by VTA over the Clinical Fellows as compared with VTA's supervision of the Licensed Therapists.
Applying these standards, summary judgment on the current record is precluded by genuine issues of material fact concerning whether or not the Licensed Therapists occupied a substantially similar position to the Clinical Fellows completing their CFY with VTA. While neither party contests that the basic job function of both the Clinical Fellows and the Licensed Therapists was the provision of therapy services, there are facts in the record that may lead a reasonable juror to conclude that the positions held by each group were not substantially similar. Most significantly, it is clear from the record that the Clinical Fellows received substantial supervision from VTA, while many of the Licensed Therapists testified to receiving no supervision from VTA, and no or limited supervision from the Facilities themselves. Compare Mallar-Salsberg Dep. at 24-25 (explaining that during her CFY, the VTA supervisor spent three to five hours per week reviewing all of her paperwork and observing therapy sessions, was required to approve all patient evaluations before they could be placed in the patients' files, and provided daily advice via telephone) and Bichotte Dep. at 53 (detailing high level of supervision by VTA supervisor during CFY) with Greenspan Dep. at 48 (no VTA supervision for Licensed Therapists)and Appel Dep. at 25 (same). In fact, the United States has conceded that VTA did not control the specific manner in which the Licensed Therapists provided therapy services. VTA's 56.1 Stmt. ¶ 46.
Moreover, whereas Clinical Fellows were required to remain at the Facilities for a full day regardless of the number or availability of patients awaiting treatment, Mallar-Salsberg Dep. at 32, Licensed Therapists had discretion over their schedules and could leave when they had completed therapy sessions with all of the scheduled patients,id. at 46. Finally, Licensed Therapists were paid only for the patients they actually treated, Altschuler Dep. at 38, whereas the Clinical Fellows testified that they received set compensation regardless of the number of patients they saw, Mallar-Salsberg Dep. at 48.
As indicated above at n. 5, in its memorandum in support of its motion for partial summary judgment, the United States focuses on two of the seventeen individuals, Frances Price and Kim Mallar-Salsberg, whom VTA treated first as employees and then as independent contractors. United States Mem. Supp. Partial Summ. J. at 4-9. The United States has not provided evidence sufficient to conclude, as a matter of law, that these two individuals, while treated as employees, held positions substantially similar to the positions they held while treated as independent contractors. Ms. Price was treated as an employee in 1990 and 1991, prior to obtaining her New York speech pathology license. See Price Decl. Ex. A (online license verification showing that Ms. Price received her license in 1992). Similarly, Ms. Mallar-Salsberg was treated as an employee while pursuing her CFY through VTA. After these individuals received their licenses, VTA treated them as independent contractors. With respect to these two workers, as in the case of other workers discussed above, the record indicates certain differences in their job descriptions before and after licensure precluding the conclusion on summary judgment that no reasonable juror could deem the positions substantially dissimilar as a matter of law.
Based on this record, a reasonable juror could conclude that the Clinical Fellows occupied a position that was not substantially similar to that of the Licensed Therapists. Accordingly, the United States' motion for partial summary judgment on this issue must be denied.
D. Plaintiffs' Motions for Summary Judgment on the Basis of § 530
Plaintiffs VTA and Rehab Resources each move for summary judgment on their claims that they are entitled to tax relief pursuant to the safe harbor provision of § 530. As discussed above, a taxpayer qualifies for § 530 relief only if it can show that it consistently treated workers as independent contractors, filed tax forms consistent with such treatment, and had a reasonable basis for treating the workers as other than employees.
1. The Substantive Consistency Requirement
As has already been concluded, a genuine issue of material fact precludes a determination on summary judgment that VTA did not satisfy the substantive consistency requirement of § 530 because a reasonable juror could deem the positions held by the Licensed Therapists to be substantially different from those held by the Clinical Fellows. For the same reasons, this court cannot find as a matter of law that those positions were dissimilar, and thus summary judgment for VTA on this issue is likewise precluded. Because substantive consistency is a necessary prerequisite to § 530 relief, this court cannot grant VTA's motion for summary judgment entitling it to relief from the employment taxes assessed by the IRS. Nevertheless, for completeness, the court will address the other contested elements of VTA's § 530 claim.
The government did not move for summary judgment against Rehab Resources based on the substantive consistency requirement. Further, there is no evidence in the record that Rehab Resources ever employed any Clinical Fellows, nor did they treat any Licensed Therapists as employees. Thus, this court finds as a matter of law that Rehab Resources satisfied the substantive consistency requirement of § 530.
2. The Reasonable Basis Requirement
To qualify for tax relief under § 530, in addition to satisfying the substantive consistency requirement, an employer must show that it had a "reasonable basis" for treating its workers as non-employees (the "reasonable basis requirement"). § 530(a)(1)(B). Section 530 does not define the phrase "reasonable basis," but affords three statutory safe harbor provisions. If a taxpayer's actions were made "in reasonable reliance on" any of these three bases, the taxpayer "shall . . . be treated as having a reasonable basis" for treating its workers as independent contractors within the meaning of section 530(a)(1)(B), even if under common law they might be considered employees. Specifically, a taxpayer is deemed to have a reasonable basis for treating workers as independent contractors if it reasonably relied upon (a) judicial precedent, published rulings, or technical advice, (b) a past IRS audit, or (c) a long-standing practice of a significant segment of the industry. § 530(a)(2). Additionally, "[a] taxpayer who can demonstrate a reasonable basis for the treatment of an individual [as an independent contractor] in some other manner also is entitled to termination of employment tax liabilities." H.R. Rep. No. 95-1748, at 3-4 (1978). Section 530's reasonable basis requirement is to be construed liberally in favor of the taxpayer. 303 W. 42nd St. Enterp. v. IRS, 181 F.3d 272, 276 (2d Cir. 1999); see also H.R. Rep. No. 95-1748 (1978).
VTA and Rehab Resources claim to be justified in their treatment of the Licensed Therapists as independent contractors because they fall within two of the three enumerated statutory safe harbors and because they are able to demonstrate a reasonable basis for their treatment on two other grounds. Relying on the safe harbor of subsection (A) of § 530(a)(2), plaintiffs allege that they based their decisions to treat the Licensed Therapists as independent contractors on (1) legal advice, (2) judicial precedent, and (3) published IRS rulings. Next, relying on the safe harbor in subsection (C) of § 530(a)(2), plaintiffs allege reliance on a long-standing recognized practice of a significant segment of the industry. Finally, plaintiffs rely on the general catch-all provision allowing relief if a taxpayer demonstrates a reasonable basis in any other manner, claiming (1) that employing the Licensed Therapists would have caused plaintiffs to violate a New York State law prohibiting the practice of medicine by for-profit business corporations, and (2) that an analysis of the employment relationship between plaintiffs and the Licensed Therapists under common law led plaintiffs reasonably to conclude that they could treat the Licensed Therapists as independent contractors.
Each claim pertaining to the reasonable basis test advanced by VTA is also adopted by Rehab Resources. Rehab Resources Mem. Supp. Summ. J. at 7. Because they make identical claims on these issues, the court will address the taxpayers together.
a. The Relevant Relationship
As a threshold matter, the United States argues that plaintiffs' claims regarding their reasonable bases for treating the Licensed Therapists as independent contractors focus on the wrong relationship. This contention is rooted in the United States' theory that plaintiffs are responsible for employment taxes attributable to the Licensed Therapists not because plaintiffs are the direct employers of the Licensed Therapists, but because, under 26 U.S.C. § 3401(d)(1), they are the Licensed Therapists' statutory employers. 26 U.S.C. § 3401(d)(1), defining "employer," provides, "if the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services, the term `employer' . . . means the person having control of the payment of such wages."Id. The "person having control of the payment of . . . wages" is known as the statutory employer. Because the United States asserts that VTA and Rehab Resources were statutory employers of the Licensed Therapists, rather than their common law employers, the United States insists that the determination of whether plaintiffs have met the reasonable basis requirement of § 530 involves an assessment of the relationship between the Licensed Therapists and the Facilities to which they were contracted, rather than the relationship between the Licensed Therapists and plaintiffs themselves. The government, however, does not provide any support for this pronouncement. The court cannot find, as a matter of law, that in contending that they relied on reasonable bases in treating the Licensed Therapists as independent contractors, plaintiffs wrongly assessed their own relationship with the workers.
First, the United States has not provided, nor can the court find, any case in which an asserted statutory employer under § 3401(d)(1), in order to qualify for the safe harbor relief provided by § 530, was required to prove that it had a reasonable basis for treating its workers as independent contractors based not on it own relationship with them but rather on an analysis of the relationship between the common law employer (here, allegedly the Facilities) and the workers. In similar cases, the United States has taken the opposite position, focusing its analysis under § 530 on the relationship between the statutory employer and the employee, ignoring the employee's relationship with the common law employer. For example, in Hospital Resource Personnel v. United States, 860 F.Supp. 1557 (S.D. Ga. 1994), the taxpayer operated a business similar to that of VTA — a registry of nurses from which hospitals could fill supplemental staffing needs. The court held, as a matter of law, that the taxpayer had multiple reasonable bases for treating the nurses as independent contractors, any one of which would have been sufficient, and that the taxpayer was thus entitled to relief under § 530. Among these reasonable bases was the taxpayer's reasonable reliance on the practice of a significant segment of the industry, defined as nurse registry services in the area, not the facilities to which the nurses provided their services. Another reasonable basis, according to the court, was a determination by the agency that, under a common law employment analysis focusing on the relationship between the agency and the nurses, treatment of the nurses as independent contractors was proper. There is no indication that, in Hospital Resource Personnel, the United States considered the argument it advances here that the decision to treat the workers as independent contractors was unreasonable because it was made after an analysis of the relationship between the taxpayer agency and the workers, which the United States here deems to be the "wrong relationship." Similarly, in Critical Care Register Nursing, Inc. v. United States, 776 F.Supp. 1025 (E.D. Pa. 1991), the district court, examining the jury's verdict post-trial, found sufficient evidence in the record to prove that the taxpayer, a nurse registry similar to the taxpayers in bothHospital Resource Personnel and the instant case, had a reasonable basis to treat the nurses as independent contractors based on an analysis of its own relationship with the nurses.
Furthermore, in the instant case, although pronouncing that plaintiffs' improper focus on their own relationships with the Licensed Therapists precludes any finding under § 530(a)(1)(B) that plaintiffs had a reasonable basis for treating the Licensed Therapists as independent contractors, the United States assumes, in analyzing the substantive consistency requirement of § 530(a)(3), discussed above, that it was the relationship between plaintiffs and the Licensed Therapists that mattered. Thus, the United States' positions with regard to the proper analyses of these two elements of the statute — the substantive consistency requirement and the reasonable basis requirement — are contradictory.
The United States' insistence that plaintiffs could reasonably decide to treat the workers as non-employees only by examining the relationship between the Facilities and the Licensed Therapists also appears to run counter to the policy behind § 530. As established by legislative history and legal authority, § 530 relief was intended to allow the court to avoid the common law analysis of the employer/employee relationship by finding § 530 relief available. Howard's Yellow Cabs v. United States, 987 F.Supp. 469, 467 (W.D.N.C. 1997); Queensgate, 1991 U.S. Dist. LEXIS 13333 at *6; H.R. Rep. No. 95-1748 (1978). Yet the government's interpretation of the statutory employer provision in conjunction with § 530 would have the employer, and this court, conclude or assume that the Licensed Therapists were employees of the Facilities, such that plaintiffs were their statutory employers, before conducting the reasonable basis analysis to determine whether plaintiffs are entitled to § 530 relief. In so doing, the United States ignores § 530's purpose of avoiding the factually intensive analysis necessary under common law. Moreover, the reasonable basis requirement is to be construed liberally, in favor of the taxpayer, giving the taxpayer the benefit of tax relief where he has reasonably and in good faith made a decision to treat the workers as independent contractors rather than employees. See 303 W. 42nd St. Enterp., 181 F.3d at 276; H.R. Rep. No. 95-1748 (1978). Requiring plaintiffs, in order to avail themselves of the safe harbor provision of § 530, to analyze a relationship of which they were not part — the relationship between the Facilities and the Licensed Therapists — seems antithetical to this policy.
Finally, the cases offered by the United States to support its argument that only an evaluation of the relationship between the Facilities and the Licensed Therapists could form a basis sufficient for § 530 relief are inapposite. None of the cases cited involved § 530, but rather posed the question of whether the taxpayers at issue had "control of the payment of [the] wages" such that they were statutory employers under 26 U.S.C. § 3401(d)(1). See, e.g., Winstead v. United States, 109 F.3d 989 (4th Cir. 1997) (taxpayer appealed district court decision finding him to be a statutory employer under 26 U.S.C. § 3401(d)(1)); Consolidated Flooring Services v. United States, 38 Fed. Cl. 450 (Fed.Cl. 1997) (same).
For these reasons, this court cannot say as a matter of law that plaintiffs looked to the wrong relationship in making their decision to treat the Licensed Therapists as independent contractors.
b. The Necessity of Reliance
The plain language of § 530(a)(2) makes clear that, in order to prove a reasonable basis for treating a worker as a non-employee, the taxpayer must have reasonably relied on the enumerated statutory safe harbors or other reasonable grounds. "To fall within the safe harbors of § 530(a)(2), the taxpayer must have relied on the alleged authority during the periods in issue, at the time the employment decisions were being made." Veterinary Surgical Consultants, P.C. v. Commissioner, T.C. Memo 2003-48; 2003 Tax Ct. Memo LEXIS 52, *24-25 (2003); see also Select Rehab, 205 F.Supp.2d at 380 ("The taxpayer must show that it relied upon those grounds [alleged as a reasonable basis], and that the reliance was reasonable."); West Virginia Personnel Services, Inc. v. United States, 1996 U.S. Dist. LEXIS 14450, *26, 96-2 USTC par. 50,544 (S.D.W. Va. 1996) ("[O]nly evidence known to and relied upon by the taxpayer is relevant."). "The statute does not countenance ex post facto justification."Veterinary Surgical Consultants, 2003 Tax. Ct. Memo LEXIS at *25. The Second Circuit has explicitly adopted this interpretation of the reasonable reliance requirement. In303 W. 42nd St. Enters., 181 F.3d at 277, the Second Circuit reversed and remanded the case to the district court precisely because it was "unclear from the record whether . . . [the taxpayer] . . . in fact relied on any specific industry practice in reaching its decision to treat its . . . [workers] as non-employee tenants, let alone whether such reliance was reasonable." 181 F.3d at 277.
Although plaintiffs allege in their papers to have several reasonable bases for treating the Licensed Therapists as independent contractors, it will become clear in the discussion below that, with regard to a number of those bases, plaintiffs have failed to submit evidence sufficient to establish as a matter of law that Mr. Ostrovsky — the ultimate decision-maker with regard to how to treat the Licensed Therapists for tax purposes — in fact relied on the information cited in making the decision to treat the Licensed Therapists as independent contractors.
The United States argues that once Mr. Ostrovsky made the decision, concurrently with or prior to the inception of VTA in 1980, to treat the Licensed Therapists as independent contractors, no subsequent action by plaintiffs could entitle them to § 530 relief for periods thereafter. The court does not agree. Even if VTA acted arbitrarily in making its decision in 1980, or reached the decision on the basis of information insufficient to invoke § 530 relief, had the plaintiffs then sought out information forming a sound basis for continued treatment of the Licensed Therapists as independent contractors, and had they actually relied upon that information in doing so, they would be able to meet the reasonable basis requirement for § 530 relief for periods subsequent to that investigation.
c. Advice of Counsel
Plaintiffs claim that they had a reasonable basis for treating the Licensed Therapists as independent contractors due to technical advice, namely advice of counsel. Advice of counsel and other professional advisors qualifies as technical advice. See Select Rehab, 205 F.Supp.2d at 383-84; North Louisiana Rehabilitation, 179 F.Supp.2d at 669; Queensgate, 1991 U.S. Dist. LEXIS 13333. Nevertheless, plaintiff has failed to submit evidence sufficient to establish as a matter of law that Mr. Ostrovsky did, in fact, rely on the advice of counsel in making his decision to treat the Licensed Therapists as independent contractors. The record demonstrates the existence of an issue of material fact regarding whether the taxpayers had a reasonable basis for treating the Licensed Therapists as independent contractors by reliance upon legal advice.
Although plaintiffs state in their memoranda in support of their summary judgment motions that Mr. Ostrovsky "consulted with VTA's attorneys regarding New York's prohibition against the corporate practice of medicine, and they confirmed his understanding that the employment of Licensed Therapists by VTA would violate New York law," VTA's Mem. Supp. Summ. J. at 12, the record is not as clear as plaintiffs urge. At his deposition, Mr. Ostrovsky could not remember when or whether he discussed the issue with counsel. He admitted that the decision had predated VTA's representation by Mr. Werblowsky, VTA's counsel from 1984 through approximately 1996, explaining that VTA "had another law firm before that that was involved as well." Ostrovsky Dep. at 75. When asked if that other law firm participated in the decision to treat the Licensed Therapists as independent contractors, Ostrovsky testified that he "assume[d] [he] discussed it with them." Id. at 76. Due to the equivocal testimony of Mr. Ostrovsky, it is impossible to find, as a matter of law, that VTA relied on the advice of counsel in making its original decision to treat the Licensed Therapists as independent contractors.
Plaintiffs state that a second law firm later confirmed that VTA's treatment of the Licensed Therapists as independent contractors was appropriate, specifically in light of the New York law prohibiting the corporate practice of medicine, discussed infra. VTA Rule 56.1 Stmt. ¶ 41; Rehab Resources Rule 56.1 Stmt. ¶ 27 (incorporating ¶¶ 23-44 of VTA's Rule 56.1 Stmt.). Were the record clear that VTA had sought out legal advice subsequent to its initial characterization of the Licensed Therapists, reconsidered its earlier decision, and made a conscious decision to treat the Licensed Therapists as independent contractors from that point forward, such evidence could perhaps lead the court to conclude, as a matter of law, that VTA reasonably relied on technical advice in subsequent periods. The record is not so clear, however. Mr. Werblowsky, VTA's counsel beginning in 1984, testified that early in his relationship with VTA, he researched VTA's treatment of the Licensed Therapists as independent contractors, "look[ing] at the various rules [and] regulations under New York State," and confirmed advice that he understood VTA had been given by its previous counsel. Werblowsky Dep. at 14-15. There is no clear evidence in the record, however, that Mr. Ostrovsky sought this advice from Mr. Werblowsky or, more importantly, relied upon any advice by Werblowsky as a basis for revisiting the decision to treat the Licensed Therapists as independent contractors. Absent evidence in the record establishing as a matter of law that Mr. Ostrovsky specifically relied on legal advice in reaching his determination to treat the Licensed Therapists as independent contractors, see 303 W. 42nd St., 181 F.3d at 277, summary judgment for plaintiffs on this basis must be denied.
d. Judicial Precedent
Plaintiffs next allege reliance on judicial precedent as a reasonable basis satisfying § 530(a)(2). In support of this claim, plaintiffs cite to Queensgate, 1991 U.S. Dist. LEXIS 13333, Critical Care, 776 F.Supp. 1025, Hospital Resource Personnel, 860 F.Supp. 1557 (S.D. Ga. 1994), and White River Area Agencies on Aging, Inc. v. United States, 1994 WL 479532 (E.D. Ark. May 3, 1994). The record fails to establish, however, that Mr. Ostrovsky actually relied on these cases prior to making his decision to treat the Licensed Therapists as independent contractors, a requirement for § 530 relief. See 303 W. 42nd St., 181 F.3d at 277; Veterinary Surgical Consultants, 2003 Tax Ct. Memo LEXIS 52 at *24-25; West Virginia Personnel Services, 1996 U.S. Dist. LEXIS 14450 at * 26.
Plaintiffs concede that Mr. Ostrovsky made this employment decision at the time of VTA's inception in 1980, VTA's 56.1 Stmt. ¶ 33 — eleven years before the earliest case upon which plaintiffs rely. Moreover, there is no conclusive proof in the record that either Mr. Ostrovsky or another executive at VTA reevaluated this decision following, much less in reliance upon, these judicial opinions. Therefore, the court cannot say as a matter of law that judicial precedent gave plaintiffs a reasonable basis for treating the Licensed Therapists as other than employees.
e. IRS Published Rulings
Third, plaintiffs urge that they had a reasonable basis for classifying the Licensed Therapists as independent contractors based on IRS published rulings. In support of this contention, plaintiffs cite Treasury Regulation § 31.3401(c)-1(c) and three Revenue Rulings (Revenue Ruling 61-196, 1961-2 C.B. 155; Revenue Ruling 72-203, 1972-1 C.B. 324; Revenue Ruling 87-41, 1987-1 C.B. 296) that they allege constituted a basis upon which they could reasonably designate the Licensed Therapists as independent contractors. Even assuming that these IRS rulings would have sufficed to create a reasonable basis upon which plaintiffs could properly rely, there is insufficient evidence in the record to support a conclusion, as a matter of law, that these rulings were actually relied upon when plaintiffs made their decisions to treat the Licensed Therapists as independent contractors. See 303 W. 42nd St., 181 F.3d at 277; Veterinary Surgical Consultants, 2003 Tax Ct. Memo LEXIS 52 at *24-25; West Virginia Personnel Services, 1996 U.S. Dist. LEXIS 14450 at *26. Mr. Ostrovsky did not refer to these rulings at his deposition when explaining the impetus for his decision. Absent undisputed evidence of actual reliance, this court cannot find as a matter of law that plaintiffs reasonably relied on the revenue rulings warranting the protection of the safe harbor of § 530(a)(2)(A).
f. Long-Standing Recognized Practice of a Significant Segment of the Industry
As its fourth purported reasonable basis for treating the Licensed Therapists as independent contractors, plaintiffs discuss an alleged "long-standing recognized practice of a significant segment of the industry." § 530(a)(2)(C). In support of this claim, plaintiffs point to the testimony of multiple Licensed Therapists that they had been treated as independent contractors by a number of agencies offering services similar to plaintiffs'. See, e.g., Adrien Dep. at 54; Byers Dep. at 49; Rabinowitz Dep. at 24. In response, the United States again argues that plaintiffs' analysis focuses on the wrong relationship. As discussed above, the court cannot find as a matter of law that plaintiffs were obligated to look at a relationship other than their own relationship with the Licensed Therapists in reaching a determination satisfying § 530's reasonable basis requirement.
Nevertheless, the court cannot find as a matter of law that plaintiffs had a reasonable basis to treat the Licensed Therapists as independent contractors due to a "long-standing recognized practice of a significant segment of the industry." Although some of the Licensed Therapists testified that several individual agencies treated them as independent contractors at various times, plaintiffs have not offered evidence sufficient to support the conclusion that these agencies constituted a "significant segment" of the relevant industry. Plaintiffs define the industry to include agencies providing services similar to plaintiffs in the New York City area. VTA Mem. Supp. Summ. J. at 20. Plaintiffs then list twenty agencies that treat their workers as independent contractors, id. at 20-22, but fail to calculate what percentage of the total industry these agencies represent.
Nor is there enough evidence in the record conclusively to determine the practice in the industry at the time of VTA's decision to treat the Licensed Therapists as independent contractors, as opposed to the practice in subsequent years. Some Licensed Therapists upon whose deposition testimony plaintiffs rely did not give clear information as to the dates during which they were treated as independent contractors by other agencies. Others testified only that they were treated in this manner during periods post-dating Ostrovsky's initial decision to treat the Licensed Therapists as non-employees. See, e.g., Rabinowitz Dep. at 13, 37-38 (treated as independent contractor by other agencies after 1984); Adrien Dep. at 110 (treated as independent contractor by another agency since 1990). The sole evidence of the practice dating back to 1980 is Mr. Ostrovsky's deposition testimony on the matter, in which he states only that "[he] was a practicing therapist . . . [a]nd [he] was treated as an independent contractor by the places [he] worked at." Ostrovsky Dep. at 77. There is no evidence in the record regarding the number of agencies or health care Facilities for which Mr. Ostrovsky had worked prior to forming VTA, nor is there evidence that he worked for a sufficient number of agencies to represent a "significant segment of the industry." Moreover, there is insufficient evidence in the record to conclude, as a matter of law, that plaintiffs later reconsidered the decision to treat the Licensed Therapists as independent contractors as a result of similar treatment by a significant segment of the industry at a date subsequent to Mr. Ostrovsky's initial decision. Although VTA is correct in asserting in its brief that proof of reliance on an industry practice, like proof that any of the safe harbor provisions is met, creates a conclusive presumption that a taxpayer had a reasonable basis for not treating an individual as an employee, see General Inv. Corp. v. United States, 823 F.2d 337, 340 (9th Cir. 1987), such proof is lacking here.
Rehab Resources, too, offers insufficient evidence to conclude that its relevant industry consists of the same agencies as the industry relevant to VTA. While plaintiffs list some agencies located in the New York City area that treat therapists as independent contractors, there is no evidence in the record of the practice of agencies conducting business in New Jersey, where Rehab Resources carried on its business. Instead, in its memorandum in support of summary judgment, Rehab Resources argues only that "[f]or the reasons discussed in VTA's memorandum of law supporting its motion for summary judgment, Rehab Resources had a reasonable basis for treating the Licensed Therapists as independent contractors." Rehab Resources Mem. Supp. Summ. J. at 7. Rehab Resources fails to provide support sufficient for a grant of summary judgment not only with regard to whether it relied upon the practice of a "significant segment of the industry," but also concerning whether the industry relevant to Rehab Resources is identical to the industry relevant to VTA.
g. Catch-all provision of § 530
Plaintiffs' final two alleged bases for treating the Licensed Therapists as independent contractors fall under the general catch-all provision allowing relief for taxpayers who "can demonstrate, in some other manner, a reasonable basis for not treating the individual[s] as . . . employee[s]." Rev. Proc. 85-18, 1 C.B. 518, Sec. 3.01(c).
(i) New York State Law
Plaintiffs allege that they reasonably treated the Licensed Therapists as independent contractors due to a New York State law precluding their treatment as employees. According to plaintiffs, New York State law and New York Department of Education regulations prohibit the unlicensed provision of medical services by business corporations. Consequently, plaintiffs argue, private for-profit companies, such as VTA and Rehab Resources, cannot legally employ Licensed Therapists like those at issue here.
The United States contests the relevance of this New York law to the employment decisions of both plaintiffs for two reasons, and contests its relevance to Rehab Resources for a third reason. First, the United States asserts that plaintiffs are confusing their obligation to withhold employment taxes under the Internal Revenue Code with whether plaintiffs practiced medicine in violation of New York State law, claiming that New York State law is inapplicable to a determination of how to treat one's workers for federal tax purposes. The United States is correct in asserting that state law is not applicable when determining whether a statutory employer must withhold federal taxes. However, the existence of such a state law cannot be dismissed as legally irrelevant to a determination of whether plaintiffs, in reliance on such a prohibition, could have had a reasonable basis to treat the Licensed Therapists as non-employees, permitting them to qualify for tax relief under § 530. See Queensgate, 1991 U.S. Dist. LEXIS 13333 (finding that because taxpayer was advised by the counsel of the Pennsylvania Dental Board that it would be considered illegal, under Pennsylvania law, for the taxpayer, a non-licensed business corporation, to employ licensed dentists, taxpayer satisfied the reasonable basis test of § 530).
Second, the United States reiterates its argument that plaintiffs are looking to the wrong relationship, and that since plaintiffs are not the Licensed Therapists' common law employers, but rather only their statutory employers under 26 U.S.C. § 3401 (d)(1), withholding taxes from the salaries of the Licensed Therapists would not have caused plaintiffs to violate New York State law. As discussed above, this court cannot say as a matter of law that plaintiffs were required to look to the relationship between the Facilities and the Licensed Therapists to determine whether it was proper to treat them as employees rather than independent contractors. Nor can the court determine here that the New York State law prohibiting business corporations from employing Licensed Therapists could not, if actually relied upon by plaintiffs, have provided the basis for a reasonable determination by plaintiffs that treating the Licensed Therapists as independent contractors was the sole way to avoid violating the law.
Nevertheless, based on the record before the court, plaintiffs have failed to submit evidence sufficient to find, as a matter of law, that Mr. Ostrovsky did, in fact, rely on the New York State prohibition in making his decision to treat the Licensed Therapists as independent contractors. Although plaintiffs state in their memoranda in support of their summary judgment motions that Mr. Ostrovsky "consulted with VTA's attorneys regarding New York's prohibition against the corporate practice of medicine, and they confirmed his previous understanding that the employment of Licensed Therapists by VTA would violate New York law," VTA's Mem. Supp. Summ. J. at 12, the record is not as clear as plaintiffs purport. At his deposition, Mr. Ostrovsky could not remember when or whether he discussed the issue with counsel. He admitted that the decision had predated VTA's representation by Mr. Werblowsky, VTA's counsel from 1984 through approximately 1996, explaining that VTA "had another law firm before that that was involved as well." Ostrovsky Dep. at 75. When asked if that "other" law firm participated in the decision to treat the Licensed Therapists as independent contractors, Ostrovsky testifed that he "assume[d] [he] discussed it with them." Id. at 76. Similarly, Mr. Kamelhar, VTA's other founder, stated that he and Mr. Ostrovsky "must have had conversations about independent contractors, not necessarily as versus employees, but as related to the fact that [VTA was] a management company and . . . had to do things that particular way." Kamelhar Dep. at 73. On the current record, this court cannot find, as a matter of law, that Mr. Ostrovsky relied on the prohibition set out in New York State law to reasonably conclude that the Licensed Therapists were properly to be treated as independent contractors.
Rehab Resources' incorporation of VTA's New York law argument is flawed. Rehab Resources was incorporated in Delaware and doing business in New Jersey. This court, on the present record, cannot find, as a matter of law, that any New York prohibition against employing the Licensed Therapists is applicable to Rehab Resources.
(ii) The Common Law Relationship
Finally, plaintiffs allege that they "acted reasonably under the common law principles in treating the Licensed Therapists as independent contractors." VTA Mem. Supp. Summ. J. at 27. See Hospital Resource Personnel, 860 F.Supp. at 1562 ("A reasonable basis under the general safe haven may be established through reference to the twenty common law indicia of an employee/employer relationship, the most significant of which is the right to control the manner and means of the person's work."); Critical Care, 776 F.Supp. at 1029 (analyzing employment relationship based on common law factors to conclude that taxpayer qualified for § 530 relief).
Although reliance on a reasonable belief of the absence of a common law employment relationship can serve as a proper basis for § 530 relief, the record does not conclusively show that Mr. Ostrovsky relied on an analysis of that relationship in making his decision to treat the Licensed Therapists as independent contractors. At his deposition, Mr. Ostrovsky testified that this decision resulted from his own experience of being treated as an independent contractor while working as a speech-language pathologist. Ostrovsky Dep. at 77. He did not testify that he undertook any analysis of the existence or absence of a common law employment relationship between plaintiffs and the Licensed Therapists. This court thus cannot determine, as a matter of law, that plaintiffs relied on any such analysis. See 303 W. 42nd St., 181 F.3d at 277; Veterinary Surgical Consultants, 2003 Tax Ct. Memo LEXIS 52 at *24-25; West Virginia Personnel Services, 1996 U.S. Dist. LEXIS 14450 at * 26.
In summary, this court cannot find, as a matter of law, that VTA or Rehab Resources relied on any reasonable basis proffered for treating the Licensed Therapists as independent contractors rather than as employees. Accordingly, this court cannot say that plaintiffs are entitled to § 530 relief from the IRS' employment tax assessments.
E. Plaintiffs' Motions for Summary Judgment Finding that the Licensed Therapists Were Not Employees of the Facilities
Although the court cannot determine, as a matter of law, that plaintiffs are entitled to the safe harbor protection of § 530, plaintiffs have no tax liability unless they are the statutory employers of the Licensed Therapists. VTA and Rehab Resources move for summary judgment on the ground that the Licensed Therapists were not employees of the Facilities. Because there remain genuine issues of material fact regarding whether the Therapists were common law employees of the Facilities, plaintiffs' motions for summary judgment on this ground must be denied.
The United States concedes that VTA and Rehab Resources are not themselves the common law employers of the Licensed Therapists. United States' Mem. Supp. Summ. J. at 2 ("VTA's-client facilities were the common law employers of the disputed therapists.").
The Internal Revenue Code defines an "employee" as "any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of employee." 26 U.S.C. § 3121(d)(2) (FICA); 26 U.S.C. § 3306(i) (FUTA, incorporating § 3121(d)(2)'s definition of "employee"). Consequently, for federal employment tax purposes, common law principles distinguish independent contractors from employees. The United States Supreme Court has declared that the common law test for determining employment status focuses on "the hiring party's right to control the manner and means by which the product is accomplished." National Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-24 (1992) (quoting Community for Creative Non-Violence v. Reid, 490 U.S. 730, 751-52 (1989)). The Court enumerated the following factors to be among those relevant to this inquiry:
(1) the skill required;
(2) the source of the instrumentalities and tools;
(3) location of the work;
(4) duration of the relationship between the parties;
(5) whether the hiring party has the right to assign additional projects to the hired party;
(6) the extent of the hired party's discretion over when and how long to work;
(7) the method of payment;
(8) the hired party's role in hiring and paying assistants;
(9) whether the work is part of the regular business of the hiring party;
(10) whether the hiring party is in business;
(11) the provision of employee benefits;
(12) tax treatment of the hired party.
Id.
The IRS has deemed other factors relevant to the common law test, using a non-exclusive twenty-factor test in determining whether a worker was an employee or an independent contractor. Rev. Rul. 87-41, 1987-1 C.B. 296. Whereas an employee is subject to control by his employer not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished, an independent contractor relationship is subject to control merely as to the result. See Consolidated Flooring Services v. United States, 38 Fed. Cl. 450, 456-57 (Ct. Fed. Cl. 1997). The ability to have some control over the worker's efforts, however, does not transform an independent contractor into an employee. Id.
The twenty factors are: "instructions"; "training"; "integration"; "services rendered personally"; "hiring, supervising and paying assistants"; "continuing relationship"; "set hours of work"; "full time required"; "doing work on employer's premises"; "order or sequence set"; "oral or written reports"; "payment by hour, week, month"; "payment of business and/or traveling expenses"; "furnishing of tools and materials"; "significant investment"; "realization of profit or loss"; "working for more than one firm at a time"; "making service available to general public"; "right to discharge"; and "right to terminate." Rev. Rul. 87-41, 1987-1 C.B. 296 (1987).
Although both parties have painstakingly examined the common law factors to argue their respective positions, it is not necessary for the court to undertake such a detailed analysis at this time because there is plainly a genuine issue of material fact as to the amount of control exercised by the Facilities over the Licensed Therapists contracted to them by plaintiffs.
Plaintiffs point out in their reply briefs that many Licensed Therapists and representatives of Facilities testified at their depositions that the Licensed Therapists were subject to no supervision. Others, however, testified that the Facilities supervised their provision of therapy services. For example, Lisa Byers testified that the supervisor at the Herberg G. Birch School purposefully observed her performance on a regular basis. Byers Dep. at 16. Similarly Alexander Kagan, Mitchel Rabinowitz, and Zoraido Santiago all testified to receiving supervision.See Kagan Dep. at 27-28, 41 (received supervision from the director of physical therapy at the Jewish Home Hospital, and at other Facilities his supervisor occasionally reviewed his progress notes and required Kagan to meet with him); Rabinowitz Dep. at 42 (took his "marching orders" from facility staff, doing whatever they told him to do when they told him to do it); Santiago Dep. at 73 (received some supervision at nursing homes from the chief of the therapy department). In addition, Arthur Vichnis testified that he was supervised or advised by a supervising physical therapist or senior therapist at one school at which he worked, Vichnis Dep. at 32, and Gail Savidis testified that her work at St. Elizabeth Ann Nursing Home was supervised by the director of rehabilitation, who "would check our charts and make sure that we were doing what we were supposed to be doing with the residents, [and that] our treatments were following protocol." Savidis Dep. at 23-24. Ms. Savidis was also required to attend rehabilitation department staff meetings, and was subject to direction regarding her methods of service if the nursing home was not satisfied with how she was doing her work. Id. at 25. Additionally, C. McFarlene, representing the Greater Harlem Nursing Home, said that the work performance of the VTA-supplied Licensed Therapists was evaluated by the nursing home by "making rounds in the departments, sitting in on therapy sessions, [and] evaluating their documentation." McFarlene Dep. at 76.
Because there is conflicting testimony regarding the amount and nature of control held by the Facilities over the Licensed Therapists provided by plaintiffs, this court cannot find, as a matter of law, that the Licensed Therapists are not the employees of the Facilities. If the Licensed Therapists qualified as employees of the Facilities, plaintiffs, as their statutory employers, would be responsible for their employment taxes. Accordingly, plaintiffs' motions for summary judgment finding that each bears no tax liability on this ground must be denied.
CONCLUSION
For the reasons stated above, the United States' motion for partial summary judgment against VTA and VTA's and Rehab Resources' cross-motions for summary judgment are all denied. The United States' motion fails because this court cannot find, as a matter of law, that the positions held by the Clinical Fellows were substantially similar to those held by the Licensed Therapists. VTA's and Rehab Resources' cross-motions for summary judgment are denied because (1) material issues of fact remain regarding, with respect to VTA, the substantive consistency element of § 530 and, with respect to both plaintiffs, the reasonable basis element of § 530, and (2) material issues of fact preclude a finding that the Licensed Therapists were not the employees of the Facilities.SO ORDERED.