UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
HOPE NETWORK,
Plaintiff,
v No. 1:98-CV-771
UNITED STATES OF AMERICA,
Defendant.
_______________________________/
OPINION AND ORDER GRANTING UNITED STATES'
MOTION TO DISMISS
In this action, plaintiff Hope Network ("Hope"), a not-for-profit organization, seeks refunds of Federal Insurance Contribution Act ("FICA") payments totaling $287,331.65. These payments were made by Hope on behalf of persons who perform work for it--persons whom Hope deems clients or "consumers," and whom the United States deems "employees" for purposes of the FICA.
The matter is currently before the court on the United States' Motion to Dismiss (docket no. 5).1 Hope has opposed the motion. For the following reasons, the court grants the motion and hereby dismisses Hope's claim based on the alleged violation of Section 530(b) of the Revenue Act of 1978. However, Hope's claims for refund based on the alleged non-employee status of its workers, which are not the subject of the United States' motion, are not affected by
____________________
1
The United States has filed two separate motions to dismiss. This decision addresses only the motion filed on March 5, 1999. The second motion to dismiss, filed on January 25, 2000, is not ripe for decision as of this writing.whom receive benefits from the Social Security Administration during the period they participate in Hope's programs, is performed primarily for rehabilitative and therapeutic purposes. Specifically, Hope contends that the payments its clients receive are intended
as an incentive to remain in [Hope's] vocational and rehabilitative programs, to provide an incentive for the [client] to increase his or her level of productivity and to thereby achieve his or her rehabilitative goals, and to increase the [client's] sense of self-worth. Such remuneration is not paid by [Hope] to provide its [clients] a means to earn a living.
Complaint, ¶ 11(i). Therefore, Hope alleges, it does not establish an employer-employee relationship between itself and its clients.
Hope alleges that during the years 1992, 1993, 1994, and 1995, it withheld FICA tax from, and paid the employer excise tax on, remuneration it paid to its clients. Because these clients were not in fact employees, Hope contends, it erred in withholding FICA tax and in paying these amounts over to the Internal Revenue Service ("IRS"). Hope now seeks a refund of these amounts for each of the years in question. Hope alleges that for each of the years in question, it filed timely claims for refund. The IRS denied in full claims for two of the years in question, and denied the bulk of the claims for the remaining two years. As the basis for its denial of the refunds, the IRS indicated that it had determined that the persons participating in Hope's programs were employees. Complaint, Exhibits C, F, J. At one point, the IRS indicated its position that once a client completes a "finite training period," if they remain in the program "for whatever reason, they are treated as employees." Complaint, Exhibit G. On October 30, 1998, Hope filed its complaint in this action, demanding refunds totaling $287,331.65. Hope nominally divides its complaint into four separate "counts," each
3
representing one of the tax years in question. With respect to each of these "counts," Hope's complaint includes the following allegations, among others:
In 1965, the [IRS] issued a Revenue Ruling (Revenue Ruling 65-165) in which it determined that individuals receiving services substantially similar to those offered by [Hope] . . . are not employees for FICA tax purposes[.] (Complaint, ¶ 21; see also Complaint, ¶s 42, 61, 71)3
Between 1965 and 1994, the [IRS] issued numerous private letter rulings to charitable organizations which provide vocational and rehabilitation training services similar to [Hope's]. Such private letter rulings provided that consumers of vocational and rehabilitation services are not employees for FICA tax purposes under the circumstances described [herein]. (Complaint, ¶s 22, 43, 61, 71)
Upon information and belief, the [IRS'] disallowance of [Hope's] claim for refund was based, in whole or in substantial part, on the decision of the [IRS] to cease following the interpretation of Revenue Ruling 65-165 which [it] had followed consistently between 1965 and 1994. (Complaint, ¶ 27)
More recently, Hope alleges, the [IRS] has issued private letter rulings which reflect the Service's "new position" with respect to the employment classification of persons similar to Hope's clients; now, according to Hope, the IRS requires "as a condition to a finding of non-employee status, a training period of finite duration." Complaint, ¶s 48, 61, 71 (emphasis supplied). Hope alleges that this "change in position" with respect to the tax classification of its clients violates Section 530(b) of the Revenue Act of 1978, Pub.L. No. 95-600, 92 Stat. 2763 (1978). Complaint, ¶s 51,61,71,
________________________
3
In Revenue Ruling 65-165, the IRS determined, among other things, that blind individuals who were being trained in a charitable organization's sheltered workshop under a program of rehabilitation were not employees of the organization for Federal employment tax purposes. However, the Service also determined that blind individuals who, after completion of training, continued working in the sheltered workshop either temporarily while awaiting placement in industry or permanently because they were unable to compete in industry, were employees of the organization for Federal employment tax purposes.4
ANALYSIS
In its motion, the United States argues that certain specified paragraphs of Hope's complaint are subject to dismissal pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief may be granted. These portions of the complaint, according to the United States, fail to state a claim because even assuming that the IRS has changed the position taken in earlier private letter rulings, Section 530(b) on its face only applies to regulations and revenue rulings, and not to private letter rulings.4
Section 530(b) provides as follows:
SEC. 530. CONTROVERSIES INVOLVING WHETHER INDIVIDUALS ARE EMPLOYEES FOR PURPOSES OF THE EMPLOYMENT TAXES.
***
(b) Prohibition Against Regulations and Rulings on Employment Status.--No regulation or Revenue Ruling shall be published on or after the date of the enactment of this Act and before January 1, 1980 (or, if earlier, the effective date of any law hereafter enacted clarifying the employment status of individuals for purposes of the employment taxes) by the Department of the Treasury (including the Internal Revenue Service) with respect to the employment status of any individual for purposes of the employment taxes.
At first blush, it seems that the parties disagree on the effect of Hope's allegations that the IRS violated Section 530(b). The United States argues that Hope has asserted two separate reasons why it is entitled to refunds for each of the periods in question: (1) because Hope's workers are not employees, and (2) because even if Hope's workers are employees, the employment taxes at issue were improperly assessed because the IRS violated Section 530(b) by
____________________
4
At one point in its reply brief, the United States argued that Hope lacks standing to assert a claim that the private letter rulings revoked or modified Revenue Ruling 65-165. United States' Reply to Plaintiff's Response to Motion to Dismiss, at 5. Subsequently, upon discovering that Hope had received an adverse determination letter, the United States withdrew its standing argument. See generally United States' Motion to Amend its Motion to Dismiss.5
issuing private letter rulings that purportedly changed the IRS' position. According to the United States, it has not addressed its motion to Hope's first theory of recovery; more specifically, the United States has stated that it "does not dispute that the claims based on alleged non-employee status state a claim upon which relief could be granted." United States' Reply to Plaintiff's Response to Motion to Dismiss, at 2. Instead, the United States argues, it has directed its motion to Hope's second theory of recovery, which is akin to an estoppel argument based on Section 530(b).
In response to the United States' motion, Hope argues that the motion, which directs itself to certain specified paragraphs of the complaint, is in reality a motion to strike under Fed.R.Civ.P. 12(f). Hope also argues that its allegations regarding violation of Section 530(b) form an integral part of its claims for each of the years in question, and therefore they cannot reasonably be stricken from the complaint. However, what Hope fails to recognize is that the court is not bound by labels which a party attaches to its complaint. Construed liberally, Hope's complaint asserts a cause of action for refund of the amounts in question, but the cause of action is based on two separate theories of recovery. That Hope has split its complaint into four 14 counts," each of which mingles its two theories of recovery, does not impact on the United States' ability to file a Rule 12(b)(6) motion attacking the legal sufficiency of one of the theories of recovery.
That the United States has chosen to enumerate in its motion those specific paragraphs of the complaint which are implicated in Hope's Section 530(b) theory of recovery is therefore not fatal to its request for relief. However, this may be beside the point, for even Hope has been forced to admit that its sole claim or "theory of recovery" (as Hope calls it) is that its clients--
6
whom it calls "consumers"--are not employees under the authority of Revenue Ruling 65-165. Plaintiff's Response to United States' Reply to Plaintiff's Response to Motion to Dismiss, at 1. Hope can continue to claim this--but in doing so it cannot rely on Section 530(b).
As noted above, substantively, the United States' position is that the prohibition of Section 530(b) does not apply to private letter rulings or technical advice memoranda, and that because Hope's claim that the IRS violated the statute is based solely on various private letter rulings issued by the IRS to third parties, Hope has no claim under the statute. Hope has not even responded to the substance of this argument.
The language of Section 530(b) is clear--it applies only to a "regulation" or "revenue ruling." No reason exists to read the statute otherwise, for it is clear that the IRS is not bound to follow, with respect to Hope, the private letter rulings on which Hope relies. "Neither the courts nor the IRS may rely on letter rulings as precedent." Bankers Life and Casualty Co. v. United States, 142 F.3d 973, 978 (7th Cir. 1998) (citing I.R.C. § 61100)(3) (1988); Treas. Reg. § 301.6110-7(b)); see Fox Valley & Vicinity Construction Workers Pension Fund, 897 F.2d 275, 280 n.2 (7th Cir. 1990) ("A private ruling . . . may not be used or cited as precedent"); Comerica Bank, N.A. v. United States, 93 F.3d 225, 229 (6th Cir. 1996) ("While private letter rulings are not binding authority, they may be cited as evidence of administrative interpretation"); Phi Delta Theta Fraternity v. Commissioner of Internal Revenue, 887 F.2d 1302, 1308 (6th Cir. 1989) ("Although private letter rulings are helpful in determining the contours of tax statutes and may be considered when evaluating the consistency of application of statutes, such letter rulings have no precedential effect"). Therefore, to the extent that Hope claims that the IRS "has violated Section 530(b) of the Revenue Act" thus entitling Hope "to the relief demanded in its
7
Complaint," Memorandum of Law in Opposition, at 4, such a claim is deficient as a matter of law.
CONCLUSION
For the foregoing reasons, the court grants the United States' motion to dismiss Hope's claim alleging violation of Section 530(b) of the Revenue Act of 1978.
So ordered this 16th day of February, 2000.
Wendell A. Miles, Senior Judge
8