Archive for August 14th, 2012

Just one week after a worker classification decision rocked the stripping community,  yesterday the Tax Court ruled that the masons and laborers used by a construction subcontractor were employees rather than independent contractors.

In Atlantic Coast Masonry, Inc. v. Commissioner, T.C. Memo 2012-233, an S corporation was wholly owned by James Dempsey and his wife. Dempsey would procure masonry jobs from general contractors, then hire a team comprised of a foreman, masons and laborers.

The masons and laborers were hired on a job-to-job basis; they worked 8 hours per day, provided their own tools, and Dempsey had the ability of fire them. Most of the masons and laborers worked exclusively for Dempsey.

On the corporate tax returns, Dempsey treated the foreman, masons and laborers as independent contractors. As a result, no payroll taxes were remitted on their behalf.

The IRS initiated an employment tax audit, challenging Dempsey’s worker classification.

As it tends to do, the Tax Court examined the following factors to determine whether the foreman, masons and laborers were employees or independent contractors:

  1. The degree of control exercised by the principal over the details of the work;
  2. Which party invests in the facilities used by the worker;
  3. The opportunity of the worker for profit or loss;
  4. Whether the principal can discharge the individual;
  5. Whether the work is part of the principal’s regular business;
  6. The permanency of the relationship; and
  7. The relationship the parties believe they were creating.

Based on the foregoing factors, the court held that the individuals hired by Dempsey were all employees, rather than independent contracts. The decision was based primarily on Dempsey’s ability to control and approve the quality of the laborers’ work (factor 1), the inability of the workers to generate profit or loss depending on the results of the project (factor 3), Dempsey’s ability to fire the workers (factor 4), and the fact that the workers were an integral part of the normal operations of the S corporation (factor 6).

The lesson? As always, proper  classification of a businesses’ workers is critical. Dempsey was ultimately held responsible for nearly $500,000 in additional payroll taxes and over $200,000 in related penalties.

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Some times in life, failure to read the fine print will cost you. And other times, failure to read the not-so-fine print will cost you just the same.

Consider the case of Larry Beach. Larry — as I envision most men named Larry are — was the proud owner of a Ford Mustang. In February 2007, the Mustang was damaged in an accident caused by an uninsured motorist. Some key facts.

  • Beach’s basis in the Mustang was $25,482.
  • The Mustang’s fair market value (FMV) just before the accident was $28,500.
  • Its FMV immediately after the accident and before any repairs was $2,250.
  • The total cost to repair the Mustang was $18,772.79.

Beach filed a claim with his insurance company, which then paid $18,522.79 of the repair cost directly to an auto body shop, with Beach’s only out-of-pocket expense his deductible of $250. Soon after, Beach got his beloved ‘Stang back.

On his Form 1040, Beach claimed a casualty loss of $17,287. The IRS denied the loss, based on a rather obvious read of the statute.

Section 165(a) provides: “There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.” Are you starting to see the problem?

Beach was compensated by his insurance company to the tune of $18,552. The only expense he incurred personally was his deductible of $250.

Section 165(h) further provides that a casualty loss is only deductible to the extent it exceeds $100 and 10% of the taxpayer’s adjusted gross income. Because Beach’s $250 loss did not exceed 10% of his adjusted gross income, no loss was deductible pursuant to I.R.C. § 165.

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