This case is before the Court on the parties' cross-motions for partial summary judgment under Rule 121.
The record establishes and/or the parties do not dispute the following. Petitioner was a Delaware corporation with its principal place of business in Fort Worth, Texas, when it filed the petition.
A. Petitioner's Business and Petitioner's Workers
Petitioner is a subsidiary of AMR Corp., one of the largest commercial airlines in the world. Petitioner has South American air route authority, among others, and runs the routes and operations in four South American countries: Argentina, Chile, Colombia, and Peru (South American routes). The South American routes include flights that originate and terminate in South America without making landfall in the United States, as well as flights between South American cities and Miami, Florida. The South American routes do not involve any city or airport in the United States besides Miami.
This case involves petitioner's foreign flight attendants who staff the South American routes. The foreign flight attendants are domiciled in Argentina, Chile, Colombia, or Peru. The foreign flight attendants who work on flights that originate or terminate in Miami are issued restrictive C-1/D combined transit and crewman visas.
The foreign flight attendants who work on flights between South America and Miami spend minimal time in the United States. When they are working on a flight to or from Miami, time in the United States includes pre- and post-flight time, flight time in U.S. airspace, rest time in the United States after a flight to Miami, and FAA-mandated training at least once per year. The foreign flight attendants typically leave the United States within 12 hours of arrival and nearly always leave within 24 hours of arrival. They currently are paid on a "block-to-block" basis, meaning that they are compensated only for the period beginning when the aircraft pushes off from the blocks of the departure gate and ending
The foreign flight attendants were hired by petitioner's foreign branches (not subsidiaries) in the respective South American countries, and the branches manage the foreign flight attendants and pay their salaries. Petitioner's domestic payroll headquarters in Tulsa, Oklahoma, does not participate in the foreign branch payroll. The foreign branches are responsible for issuing the foreign flight attendants' checks (which are paid in the local foreign currency) and withholding taxes under the law of the country of origin. The foreign branches withhold only the country of origin's income taxes and its equivalent social security taxes if applicable.
Petitioner originally acquired the South American routes around 1990 from the now-dissolved Eastern Airlines. Petitioner continued Eastern Airlines' practice of foreign branch withholding and has never withheld U.S. income or FICA taxes from the foreign flight attendants' salaries. Moreover, petitioner has never paid employment taxes, including FICA or FUTA taxes, with respect to the foreign flight attendants. The foreign flight attendants have never submitted Forms W-4, Employee's Withholding Allowance Certificate, nor has petitioner ever issued Forms W-2, Wage and Tax Statement, to the foreign flight attendants.
B. 1992-96 Audit
Initially petitioner's returns for tax periods 1992-96 were audited. The focus of respondent's audit was petitioner's potential liability for employment taxes
C. 2003-04 Audit
Respondent conducted an audit for petitioner's 2003 and 2004 taxable periods. The focus of the examination was substantially similar to that of the 1992-96 audit. Petitioner contended that it was not liable for employment taxes or the mandatory 30% withholding tax on nonresident aliens under section 1441
Respondent's exam team and petitioner did not reach an agreement, and respondent sent petitioner a 30-day letter on February 3, 2010. On March 11, 2010, petitioner timely sent a formal protest challenging the 30-day letter on the basis of petitioner's continuously maintained position that it is eligible for RA '78 sec. 530 relief with respect to the remuneration paid to the foreign flight attendants by the foreign branches for services performed in the United States. Petitioner and its representatives had several conferences with Appeals but did not settle the case. As in the first audit, Appeals created an Appeals Case Memorandum, this time stating: "The classification of the NRA flight attendants (under section 530) is not relevant in this case, other than it was cited by Appeals as a basis for granting complete relief in a prior cycle. Accordingly, although Appeals has concluded
At this point respondent took a bifurcated approach to petitioner's tax liabilities. On April 14, 2011, respondent sent petitioner a notice of deficiency determining that pursuant to section 1441 petitioner was liable for a 30% withholding tax on the foreign flight attendants' U.S. source income for 2003 and 2004. The deficiencies totaled $796,654. Respondent did not issue a formal notice of determination of worker classification with respect to employment taxes. However, on April 25, 2011, respondent assessed employment taxes under subtitle C in the amounts of $549,810.73 for liabilities from Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and $3,302,226.76 for liabilities from Form 941, Employer's Quarterly Federal Tax Return, plus interest and penalties, for the 2003 and 2004 taxable periods. Petitioner timely filed a petition with this Court on July 7, 2011.
Petitioner paid the assessed employment taxes on May 9, 2011. Petitioner filed a timely administrative refund claim that was denied by Appeals on August 22, 2013. The notice of disallowance said that petitioner could seek review in either a U.S. District Court or the U.S. Court of Federal Claims within two years of the notice. To the best of the Court's knowledge, petitioner has not filed a refund claim in either court to date.
Respondent asserts that the determinations reflected in the notice of deficiency, although it was issued first, is a secondary, alternative position to protect the Government's interest if respondent's assessment of employment taxes is successfully challenged by petitioner in an appropriate refund forum. Respondent agrees that if subtitle C applies, section 1441 is automatically inapplicable. See sec. 1.1441-4(b)(1), Income Tax Regs.
In the petition, petitioner challenges respondent's determinations under section 1441 (the only determinations reflected in the notice of deficiency) and also asserts that this Court has jurisdiction to decide whether petitioner is liable for employment taxes under subtitle C even though respondent has not issued a notice of determination of worker classification. On September 6, 2013, petitioner filed
The Tax Court is a court of limited jurisdiction and may exercise jurisdiction only when Congress has expressly authorized it to do so. See sec. 7442; Breman v. Commissioner, 66 T.C. 61, 66 (1976); see also Rule 13(b). The Court has jurisdiction to determine whether it has jurisdiction over a particular case. Kluger v. Commissioner, 83 T.C. 309, 314 (1984). Moreover, the Court's jurisdiction cannot be enlarged by the parties' agreement, or waiver, or failure to object. Romann v. Commissioner, 111 T.C. 273, 281 (1998).
A. Section 7436(a)
The parties disagree about the scope of the Court's jurisdiction under section 7436(a). Section 7436 was enacted as part of the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, sec. 1454(a), 111 Stat. at 1055, and grants the Court limited jurisdiction over cases involving employment taxes imposed under subtitle C. Section 7436(a), as amended by the Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, sec. 314(f), 114 Stat. at 2763A-643 (2000), provides:
As the Court has noted previously: "[I]n response to the expressed intent of Congress to provide a convenient, prepayment hearing, this Court and the Courts of Appeals have given the jurisdictional provisions a broad, practical construction rather than a narrow, technical meaning." Lewy v. Commissioner, 68 T.C. 779, 781 (1977) (fn. refs. omitted). Therefore, where a statute is capable of various interpretations, the Court is inclined to "adopt a construction which will permit the Court to retain jurisdiction without doing violence to the statutory language." Smith v. Commissioner, 140 T.C. 48, 51 (2013).
B. Section 7436(a)(1) and (2)
Petitioner contends that the Court has jurisdiction in this case under section 7436(a)(1) and (2), while respondent asserts that the Court does not have jurisdiction under either paragraph. The Court need not consider the parties' contentions relative to section 7436(a)(1) in light of our holding below relative to our jurisdiction under paragraph (2).
Four requirements must be satisfied before the Court has jurisdiction under section 7436(a)(2). There must be: (1) an examination in connection with the audit "of any person"; (2) a determination by the Secretary that "such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual"; (3) an "actual controversy" involving the determination as part of an examination; and (4) the filing of an appropriate pleading in the Tax Court. Sec. 7436(a). Requirements (1) and (4) are clearly satisfied, and respondent does not object. The remaining issues are whether there was an actual controversy and a determination that petitioner is not entitled to treatment under RA '78 sec. 530.
1. The "actual controversy" Requirement Under Section 7436(a)(2)
Section 7436(a)(2) requires that the Secretary's determination be related to an "actual controversy". The record clearly indicates an actual controversy. The parties disputed petitioner's entitlement to RA '78 sec. 530 treatment during the
Respondent argues that for this Court to have jurisdiction section 7436(a)(2) requires an actual controversy regarding employment status as well as RA '78 sec. 530 relief. However, the plain language of the statute indicates that there need only be an actual controversy regarding RA '78 sec. 530 relief. See Charlotte's Office Boutique, Inc. v. Commissioner, 425 F.3d 1203, 1211 (9th Cir. 2005) (finding an actual controversy even after the Commissioner conceded that the taxpayer had treated its president and director as an employee for the relevant taxable periods), aff'g as supplemented 121 T.C. 89 (2003). Respondent has provided no convincing authority that there must be an actual controversy about the employment status of a taxpayer's workers. Accordingly, the Court finds that the "actual controversy" requirement has been satisfied.
2. The Determination Under Section 7436(a)(2) That Petitioner Was Not Entitled to RA '78 Sec. 530 Relief
Next the Court considers whether respondent made a "determination" under section 7436(a)(2). The absence of a notice of determination of worker classification or any other
As described above, petitioner's returns were first audited on employment taxes for the 1992-96 taxable periods. Respondent's administrative file for those periods contains an Appeals Case Memorandum that addresses substantially the same issues regarding employment tax liability as the 2003-04
Despite this concession pertaining to the 1992-96 taxable periods, respondent iterated his position that petitioner was not entitled to RA '78 sec. 530 relief for the 2003 and 2004 taxable periods at least three different times throughout the audit process.
The TAM, the 30-day letter, and the Appeals Case Memorandum for the 2003 and 2004 taxable periods all contain a substantially similar analysis and nearly identical wording discussing petitioner's RA '78 sec. 530 relief claim. The three documents each acknowledge that petitioner claimed entitlement to such relief, describe legislative history and caselaw about RA '78 sec. 530, and conclude that RA '78 sec. 530 "is not properly at issue in this case." The Appeals Case Memorandum for 2003-04 also acknowledges that in the 1992-96 audit Appeals concluded that petitioner was entitled to RA '78 sec. 530 relief but nevertheless concluded, without explaining the distinction from the 1992-96 audit, that RA '78 sec. 530 relief was inapplicable here.
The 30-day letter specifically states that "[t]here is a question whether the taxpayer is entitled to relief under section 530 of the Revenue Act of 1978 from any U.S. employment tax liability with respect to the remuneration paid to the
These three documents show a clear "failure to agree" on the issue of RA '78 sec. 530 relief. See SECC Corp. v. Commissioner, 142 T.C. at 233 (looking at a 30-day letter, an Appeals Case Memorandum, and a letter regarding assessment to decide whether the Commissioner had made a determination under section 7436(a)). They all recognize petitioner's position regarding RA '78 sec. 530 and reject that position. The 30-day letter and the Appeals Case Memorandum also state the amounts of the proposed adjustments.
Respondent assessed the employment taxes on April 25, 2011, in the amounts of $549,810.73 for Form 940 liabilities and $3,302,226.76 for Form 941 liabilities, finding that RA '78 sec. 530 relief is inapplicable for the 2003-04 taxable periods. The Court finds that respondent's decision to assess employment tax was preceded by a determination rejecting petitioner's RA '78 sec. 530 claim as explained in the TAM, the 30-day letter, and the Appeals Case Memorandum.
3. A Determination of Worker Classification as a Jurisdictional Prerequisite Under Section 7436(a)(2)
Respondent contends that this Court lacks jurisdiction under section 7436(a)(2) unless respondent makes a determination of worker classification. Respondent contends that because petitioner has always treated its foreign flight
Respondent asserts that RA '78 sec. 530 relief is unavailable when there has been no determination of worker classification. This proposition seems doubtful. See RA '78 sec. 530(e)(3) ("Nothing in this section shall be construed to provide that subsection (a) only applies where the individual involved is otherwise an employee of the taxpayer."); S. Rept. No. 104-281, at 26 (1996), 1996 U.S.C.C.A.N. 1474, 1500 (explaining that an amendment to RA '78 sec. 530 in the Small Business Job Protection Act of 1996, Pub. L. No. 104-188, sec. 1122, 110 Stat. at 1766, adding subsection (e) "is intended to reverse the IRS position * * * that there first must be a determination that the worker is an employee under the common law standards before application of section 530"). The Court need not decide this question today, however, because it goes to the merits of an RA '78 sec. 530 claim—that is, whether a taxpayer is entitled to relief under that section. But that is not the question before the Court. Rather, the question before the Court is jurisdictional, and the Court need not consider the requirements of RA '78 sec. 530 here. Instead, the Court looks to the statute that provides our jurisdiction in the instant case, section 7436(a).
Section 7436 is titled "Proceedings for Determination of Employment Status", and subsection (a) is titled "Creation of Remedy." Respondent suggests that these titles show that the Court's jurisdiction is limited to instances where a determination of worker classification was made. It is a well-accepted tenet of statutory construction that "the title of a statute and the heading of a section cannot limit the plain meaning of the text." Bhd. of R.R. Trainmen v. Balt. & O.R.
We next turn to the text of section 7436(a). As discussed above, section 7436(a) grants the Court jurisdiction when, among other requirements, there is an actual controversy involving a determination by the Secretary that
Here the word "or" is vital. "The plain meaning of legislation * * * [is] conclusive, except in the `rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'" United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982)); see Pollock v. Commissioner, 132 T.C. 21, 30 (2009) ("We look past plain meaning to determine congressional intent only if the language is ambiguous, applying the plain meaning would lead to an absurd result, or (maybe) where there is clear evidence of contrary legislative intent."). By inserting the word "or" between paragraphs (1) and (2) of section 7436(a), Congress unambiguously indicated that the two provisions must be read in the disjunctive. Congress divorced a determination of worker classification from a determination of denial of RA '78 sec. 530 relief with the
This reading does not lead to an absurd result or obstruct legislative intent. This reading of section 7436 comports with other accepted rules of statutory interpretation. The Court must "`give effect, if possible, to every clause and word of a statute'" and, whenever possible, read a statute so that no portion of it is rendered superfluous. United States v. Menasche, 348 U.S. 528, 538-539 (1955) (quoting Inhabitants of Montclair Tp. v. Ramsdell, 107 U.S. 147, 152 (1883)); see Guardian Indus. Corp. v. Commissioner, 143 T.C. 1, 14-15 (2014); Caltex Oil Venture v. Commissioner, 138 T.C. at 30. If section 7436(a)(2) were read as requiring a determination of worker classification, the entire paragraph would be rendered superfluous. Paragraph (1) already addresses our jurisdiction when the Secretary has made a determination of worker classification. If this requirement were also embedded in paragraph (2), Congress would have no need to specify that the Court has jurisdiction when the Secretary has made a determination of worker classification and when there has been a denial of relief under RA '78 sec. 530. This scenario would be encapsulated in paragraph (1), and paragraph (2) would essentially be nothing but an example of an issue that might accompany a determination of worker classification.
Finally, section 7436(a)(2) does not limit the Court's jurisdiction to instances where the Secretary has made a determination of worker classification. As stated above, section 7436(a)(2) grants us jurisdiction when there is a determination that "such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual". Nothing in the language of the statute requires a determination of worker classification before the Court has jurisdiction over the Secretary's determination under RA '78 sec. 530. Although neither party asserts that the phrase "with respect to such an individual" in section 7436(a)(2) imposes this additional jurisdictional prerequisite, the Court addresses this phrase for the sake of completeness. See Neely v. Commissioner, 115 T.C. 287, 290 (2000) (stating that the Court may question its own jurisdiction sua sponte). The Court finds that the phrase "with respect to such an individual" does not require that the Secretary first determine the individual to be an employee
Accordingly, the Court holds that it may have jurisdiction under section 7436(a)(2) whether or not the Secretary has made a determination of worker classification. Respondent has made a determination to deny petitioner relief under RA '78 sec. 530, thereby fulfilling the final jurisdictional predicate of section 7436(a)(2).
All the jurisdictional predicates of section 7436(a)(2) have been satisfied, and the Court holds that it has jurisdiction over both the RA '78 sec. 530 determination and the notice of deficiency asserting liability under section 1441. Petitioner's motion for partial summary judgment will be granted in part,
To reflect the foregoing,
An appropriate order will be issued.