Judgment summary
Barrett Business Services, Inc. (Barrett) is a professional employer organization based in Vancouver, Washington. It claimed the Work Opportunity Tax Credit (WOTC) and the Empowerment Zone Employment Credit (EZEC) for its clients' worksite employees for the years 2017 through 2020. The Commissioner issued a Notice of Deficiency disallowing the credits.
The parties filed cross-Motions for Partial Summary Judgment disputing whether a statutory employer under section 3401(d)(1) can claim the WOTC or the EZEC as an "employer" under sections 51, 1396, and 1397.
The Court held that common law employers are eligible for the WOTC and the EZEC, while statutory employers under section 3401(d)(1) and agents of common law employers under section 3504 are not. The Court granted the Commissioner's Motion and denied Barrett's Motion.
Background
Barrett is a professional employer organization (PEO) based in Vancouver, with its principal place of business in the State of Washington when it filed its Petition. Barrett is not a certified PEO pursuant to section 7705.
Barrett provides employment-related services to small and mid-sized businesses throughout the United States. These services are provided with respect to "worksite employees" who work for and at the sites of Barrett's clients. The clients supervise the day-to-day activities of the worksite employees. Barrett's clients are the worksite employers.
Barrett's services always include onboarding worksite employees into its payroll system, processing and paying wages, and withholding, paying, and reporting applicable federal, state, and local taxes and unemployment contributions. Barrett may also provide and administer employee benefits, manage the costs of employment, advise on human resources issues, provide and administer workers' compensation insurance, advise on workplace safety, recruit worksite employees, and provide training. Barrett does not supervise the day-to-day activities of the worksite employees.
The WOTC allows employers to claim a credit for a percentage of wages paid to individuals of a "targeted group," including certain veterans, ex-felons, individuals with disabilities, or long-term unemployment recipients. The EZEC allows employers to claim a credit for a percentage of qualified zone wages paid for services performed by qualified zone employees who both live and work in an empowerment zone.
When a client hires a new worksite employee, Barrett requires the client to prepare a new hire packet including a questionnaire indicating whether the worksite employee is a member of a targeted group. Barrett claimed the WOTC and the EZEC on its returns for its clients' worksite employees who were members of targeted groups. For 2018, Barrett claimed the EZEC on its Form 1120-X, Amended U.S. Corporation Income Tax Return.
The Commissioner issued a Notice of Deficiency for the years in issue, disallowing the credits and resulting in a deficiency for each year. The Notice also included adjustments from a reduction in research expenses for 2017, which were not at issue in the Motions.
Core dispute
The central question was whether a statutory employer under section 3401(d)(1) can claim the WOTC or the EZEC as an "employer" under sections 51, 1396, and 1397.
Barrett argued that limiting the WOTC and the EZEC to common law employers would thwart Congressional intent. It argued that the section 3401(d)(1) definition of a statutory employer should be applied to sections 51, 1396, and 1397 because those sections do not define "employer." Barrett also relied on section 51(k)(2), arguing it contemplates a three-party arrangement in which an employer other than the common law employer can claim the credit. In addition, Barrett argued it could claim the credits as a section 3504 agent.
The Commissioner argued that the provisions and the legislative history show Congress's intent to provide the credits to common law employers, and that neither section 3401(d)(1) nor section 3504 shifts the "employer" away from the common law employer for purposes of the WOTC and the EZEC.
Court findings
The Court noted that sections 51, 1396, and 1397 do not define "employer" for purposes of these credits. Citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322-23 (1992), the Court explained that where Congress uses terms with a settled common law meaning, courts infer that Congress intended the established meaning. In the absence of a definition, the Court looked to common law concepts to determine the existence of an employer-employee relationship, applying the multifactor test set out in Weber v. Commissioner, 103 T.C. 378, 387 (1994).
The Court found that section 3401(d)(1) defines "employer" only "[f]or purposes of this chapter," being subtitle C relating to employment taxes, chapter 24. Sections 51, 1396, and 1397 fall within subtitle A relating to income taxes, chapter 1. The Court saw no reason to substitute a term defined for employment taxes into provisions determining income tax credits, and read "employer" to mean "common law employer."
The Court found that the legislative history supported this reading, noting that Congress enacted these credits to encourage employers to hire disadvantaged individuals and to revitalize economically distressed areas. Barrett was not the entity providing the work opportunity and was therefore not Congress's intended beneficiary.
The Court distinguished TriNet Group, Inc. v. United States, 979 F.3d 1311 (11th Cir. 2020), noting that the credit there was predicated on an amount "paid or incurred by the taxpayer," whereas the credits at issue here are predicated on "wages paid or incurred by the employer."
On Barrett's section 3504 agent argument, the Court found the record did not include information enabling it to conclude that Barrett is a section 3504 agent. Even if it were, section 3504 makes an agent subject to provisions of law applicable in respect of employers in their capacity as employers, and the WOTC and EZEC are income tax credits that are not such provisions.
On section 51(k)(2), the Court found that the mere performance of services for a third party does not make the third party the common law employer, and that section 51(k) consistently refers to the third party as "another person." The Court found the legislative history, including H.R. Rep. No. 98-861, at 1254, undermined Barrett's position.
Outcome
The Court held that common law employers may claim the WOTC and the EZEC under sections 51 and 1396 if they are otherwise eligible. Someone other than the common law employer is not eligible for these credits merely by virtue of being a statutory employer under section 3401(d)(1) or an agent under section 3504.
The Court granted the Commissioner's Motion for Partial Summary Judgment and denied Barrett's Motion for Partial Summary Judgment. An appropriate order was to be issued.
Major issues / areas of contention
- Whether a statutory employer under section 3401(d)(1) can claim the Work Opportunity Tax Credit or the Empowerment Zone Employment Credit as an "employer" under sections 51, 1396, and 1397.
- Whether the term "employer" in sections 51, 1396, and 1397 should be read to mean a common law employer.
- Whether an agent under section 3504 is eligible to claim the WOTC or the EZEC.
- Whether section 51(k)(2) permits someone other than the common law employer to claim the credits in a three-party employment arrangement.
- Whether summary judgment should be granted where there is no genuine dispute as to any material fact.