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IRS denies relief to government employers.

The IRS has concluded in a technical advice memorandum that state and local government employers are not entitled to claim relief from liability for Federal employment taxes under Section 530 of the Revenue Act of 1978 (Letter Ruling (TAM) 9151004). Section 530 was enacted to provide interim relief for taxpayers facing large employment tax assessments due to proposed reclassifications of workers. As a result of inaction on the part of Congress to statutorily resolve the complex issue of worker classification, this interim relief is still in effect more than 13 years later. Prior to this ruling, there was no indication in the legislative history of the provision that government employers would be treated differently than private employers.

The basis of the Service's position is that, when Section 530 was enacted in 1978, government employers were not subject to FICA and FUTA taxes and their employees were not subject to FICA tax. (This has been subsequently changed, in part, by Sec. 3121(b)(7)(E) and (F), which expands FICA coverage.) Furthermore, with respect to the only tax withholding government employers were required to perform (Federal income tax under Sec. 3401), they were only secondarily liable because such amounts are abatable under Sec. 3402(d) if the employee paid his income taxes. Thus, the Service concluded that "for federal employment tax purposes, state and local governments have been treated significantly different than private employers." It apparently did not bother anyone at the Service that all employers (not just government employers) are permitted to avail themselves of the abatement opportunity under Sec. 3402(d).

It is this supposedly different treatment that government employers and employees have historically enjoyed that results in the Service's "inescapable conclusion that Congress never intended to provide section 530 relief to public employers." After reading the legislative history of Section 530, it is difficult to reach the same conclusion as the Service, since there is no mention whatsoever of private versus public employers. The committee reports refer only to "taxpayers" who face exposure to employment tax liabilities (Federal income tax withholding, FICA taxes and FUTA taxes). (See H. Rep. No. 95-1748, 95th Cong., 2d Sess. (1978), and S. Rep. No. 95-1263, 95th Cong., 2d Sess. (1978).)

If the Service persists in denying Section 530 relief to state and local employers, it seems inevitable that this issue will be litigated.
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Article Details
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Author:Friedman, Steven M.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Jun 1, 1992
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