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Tax Court Hands a Taxpayer a Rare Win in a Worker Classification Case

By Joel N. Crouch on June 22, 2020

On June 17th, U.S. Tax Court Judge Tamara Ashford issued an opinion in Leticia C. Santos v. Commissioner holding for a taxpayer on a worker classification case.  We have previously discussed how the IRS usually tries bad-fact cases, so a taxpayer win regarding worker classification is something to write about.

In Santos, the taxpayer, Leticia Santos owned Campos Cleaning Co. which provided residential cleaning services. Campos Cleaning provided cleaning services to both homes and apartment complexes and had contracts with several apartment complexes to do “Unit Turnover Cleaning” i.e., cleaning recently vacated apartments for future tenant occupation.  Campos Cleaning also had a contract to clean the apartment complexes common areas.  During the years at issue, Mrs. Campos and her husband did some of the cleaning but also hired individuals workers to do some of the cleaning.  Mr. Campos did not treat the individuals as employees, but instead paid them a per-apartment rate and the accountant prepared Forms 1099-MISC for some, but not all, of the workers.  The IRS conducted an employment tax examination and issued a notice of determination that the workers should have been treated as employees and that Mr. Campos was liable for employment taxes.

Whether an individual is an employee or an independent contractor is a factual question to which common law principles apply.  Employment Tax Reg. Section 31.3121(d)-1(c)(2) provides, “generally… an employer-employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, 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”. 

In Santos, the Court focused on the following factors to determine whether the workers were employees or independent contractors:
 
 

  1. The degree of control exercised by Campos Cleaning over the workers;
  2. Which party invested in the work facilities used by the workers;
  3. The workers’ opportunity for profit of loss;
  4. Whether Campos Cleaning could discharge a worker;
  5. Whether the work was part of Campos Cleaning’s regular business;
  6. The permanency of the relationship; and
  7. The relationship the parties believed they were creating.


The Court was quick to point out that “no single factor is dispositive, and all facts and circumstances must be considered.”

The Court agreed with Mrs. Santos that she did not control her workers in a, “manner that would establish an employer-employee relationship because she did not have the right to control the manner and means by which the cleaning work should be accomplished.”  The Court said she was more of a dispatcher, acting as a financial and linguistic bridge or intermediary between her workers and the apartment complexes.  The Court made numerous references to Mrs. Santos “credibly” testifying about various issues regarding the relationship with the workers and brushed aside all of the IRS arguments. 

This is a very nice win for Mrs. Santos and it shows that the U.S. Tax Court can hold for a taxpayer who has good facts and provides credible testimony.

For any questions on this or any other tax-related matter, please feel free to contact me at (214) 749-2456 or jcrouch@meadowscollier.com.