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Kumpel v. Comm'r: Administrative Assistant for Small Business Classified as Employee

A federal tax court has considered the validity of the Internal Revenue Service's ("IRS") determination that solo practioneer lawyer owed employment taxes for his administrative assistants, whom he considered to be independent contractors.

In 1993, Frederick Kumpel ("Attorney") started up his own law practice. Over the years, he first hired Nanci Smith and then Teanna Mawson to service as his administrative support (collectively, "Assistants"). The Assistants were paid hourly, were free to work for other people, and sometimes worked from home. They performed tasks such as typing, filing, bill paying, copying, preparing invoices for clients, and court filings. The Attorney had systems in place for all of these tasks which he required the Assistants to follow, such as how the documents should be filed and reviewing all correspondence prepared by the Assistants before it was transmitted.

The Attorney never filed Form 941 (for withheld wages from employees) or a Form 1099-MISC (reflecting payments for services from nonemployees) with the IRS for the Assistants. The Attorney did take a tax deduction for the payments he made to the Assistants over the years. However, the Attorney claimed that the understanding between the parties was that the Assistants were independent contractors.

The IRS sought penalties for the Attorney's failure to properly treat the Assistants as employees for federal tax purposes, claiming he failed to file the necessary forms and failed to pay FICA taxes. The Attorney challenged the IRS's determination of the proper tax treatment for the Assistants.

The United States Tax Court affirmed the IRS's determination that the Assistants were employees for federal taxation purposes. The court stated that the test for determining an employer-employee relationship is set forth in the IRS regulations, which contain a series of factors courts will use in making this determination- click here to read the factors. The most important factor in making this determination is the right to control the actions of another, especially when the other party controls the details of how an individual accomplishes a desired result. In this case, the court looked the following factors: the right to control the individual's work; the investment in work facilities; the opportunity for profit or loss in the business; right to discharge; whether the work was part of the principal's regular business; the permanency of the relationship; and the relationship the parties believe existed between them.

Looking at the first factor, the court found that the Attorney exercised a high level of control over the actions of the Assistants. The Attorney specified how the work should be performed, right down to how his mail should be opened. The court did not find it conclusive that the Assistants maintained a flexible schedule and worked for other people, as they were under the direct control of the Attorney when they worked for him. Thus, this factor favored the finding of employee status.

The second factor also favored the finding of employee status, as all of the office supplies and office equipment was supplied by the Attorney. Similarly, the third factor as favored the finding of an employer-employee relationship, as the Assistants had no opportunity to profit from the Attorney's law practice. The next three factors also favored the finding of an employer-employee relationship, as the Attorney had the right to terminate the Assistants at any time; the Assistants' work was integral to the functioning of the Attorney's law practice; and the Assistants' relationship with the Attorney was not transitory in nature, as he had to have administrative support to conduct his law practice. Thus, the first six factors all favored the finding of an employer-employee relationship.

Finally, the court considered the relationship the parties had intended to create. The Attorney argued that there was an understanding between the parties that the Assistants were independent contractors. However, the court found that the evidence did not support this argument, as the Attorney had failed to file Forms 1099-MISC on behalf of the Assistants for the tax years in question, which is what he should have done if he was paying independent contractors. Since the IRS factors favored the finding of an employer-employee relationship, the court ruled that the Attorney had such a relationship with the Assistants. Thus, the court affirmed the IRS's determination that the Attorney was liable for tax penalties.

Kumpel v. Comm'r, 86 T.C.M. (CCH) 358 (T.C. 2003).
TO COMPLY WITH CERTAIN U.S. TREASURY REGULATIONS, WE INFORM YOU THAT, UNLESS EXPRESSLY STATED OTHERWISE, ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THE TEXT OF THIS COMMUNICATION, IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER THE INTERNAL REVENUE CODE.