Tax Court Has Jurisdiction in American Airlines Employment Tax Case

A. Petitioner's Business and Petitioner's Workers

Petitioner is a subsidiary of AMR Corp., one of the largest commercial airlines in the world. Petitioner has South American air route authority, among others, and runs the routes and operations in four South American countries: Argentina, Chile, Colombia, and Peru (South American routes). The South American routes include flights that originate and terminate in South America without making landfall in the United States, as well as flights between South American cities and Miami, Florida. The South American routes do not involve any city or airport in the United States besides Miami.

This case involves petitioner's foreign flight attendants who staff the South American routes. The foreign flight attendants are domiciled in Argentina, Chile, Colombia, or Peru. The foreign flight attendants who work on flights that originate or terminate in Miami are issued restrictive C-1/D combined transit and crewman visas.²

The foreign flight attendants who work on flights between South America and Miami spend minimal time in the United States. When they are working on a flight to or from Miami, time in the United States includes pre- and post-flight time, flight time in U.S. airspace, rest time in the United States after a flight to Miami, and FAA-mandated training at least once per year. The foreign flight attendants typically leave the United States within 12 hours of arrival and nearly always leave within 24 hours of arrival. They currently are paid on a "block-to-block" basis, meaning that they are compensated only for the period beginning when the aircraft pushes off from the blocks of the departure gate and ending when it arrives at the blocks of the destination gate. The foreign flight attendants are uncompensated for any other time they are required to be at work, including pre- and post-flight time and training sessions.

The foreign flight attendants were hired by petitioner's foreign branches (not subsidiaries) in the respective South American countries, and the branches manage the foreign flight attendants and pay their salaries. Petitioner's domestic payroll headquarters in Tulsa, Oklahoma, does not participate in the foreign branch payroll. The foreign branches are responsible for issuing the foreign flight attendants' checks (which are paid in the local foreign currency) and withholding taxes under the law of the country of origin. The foreign branches withhold only the country of origin's income taxes and its equivalent social security taxes if applicable.

Petitioner originally acquired the South American routes around 1990 from the now-dissolved Eastern Airlines. Petitioner continued Eastern Airlines' practice of foreign branch withholding and has never withheld U.S. income or FICA taxes from the foreign flight attendants' salaries. Moreover, petitioner has never paid employment taxes, including FICA or FUTA taxes, with respect to the foreign flight attendants. The foreign flight attendants have never submitted Forms W-4, Employee's Withholding Allowance Certificate, nor has petitioner ever issued Forms W-2, Wage and Tax Statement, to the foreign flight attendants.

B. 1992-96 Audit

Initially petitioner's returns for tax periods 1992-96 were audited. The focus of respondent's audit was petitioner's potential liability for employment taxes³ relating to the foreign flight attendants. Petitioner, then as now, contended that it was not obligated to pay employment taxes with respect to the foreign flight attendants because petitioner was entitled to "section 530 relief". Respondent's Appeals Office (Appeals) fully conceded the employment tax liabilities for the 1992-96 tax periods pursuant to section 530 of the Revenue Act of 1978, Pub. L. No. 95-600, 92 Stat. at 2885, as amended.⁴ In the course of the audit, Appeals created an administrative file, entitled the Appeals Case Memorandum, summarizing petitioner's and respondent's positions and explaining its conclusions. Petitioner obtained the Appeals Case Memorandum for the 1992-96 audit through a Freedom of Information Act request. The Appeals Case Memorandum states that petitioner is entitled to RA '78 sec. 530 relief for taxable periods 1992-96 and should be entitled to relief from employment taxes for workers in substantially similar positions for other periods. See RA '78 sec. 530(a)(2)(B). At the close of the audit respondent agreed not to audit petitioner's returns on this issue for tax periods 1997-2002.

C. 2003-04 Audit

Respondent conducted an audit for petitioner's 2003 and 2004 taxable periods. The focus of the examination was substantially similar to that of the 1992-96 audit. Petitioner contended that it was not liable for employment taxes or the mandatory 30% withholding tax on nonresident aliens under section 1441⁵ with respect to the foreign flight attendants' salaries because the "business visitor exception"⁶ and/or RA '78 sec. 530 relief applied. In connection with the 2003-04 examination, respondent issued Technical Advice Memorandum (TAM) 201014051 on December 18, 2009. The TAM concluded that petitioner was liable for employment taxes with respect to the remuneration paid to foreign flight attendants for services performed in the United States unless the "business visitor exception" applied pursuant to sections 861(a)(3) and 864(b)(1). Because the employment tax regime under subtitle C applied (whether or not the business visitor exception waived withholding requirements), the TAM held that the flight attendants' remuneration was not subject to withholding under section 1441. See sec. 1.1441-4(b)(1), Income Tax Regs. Moreover, the TAM stated that "entitlement to relief under section 530 is not properly at issue in this case" because the case did not involve a worker classification.⁷

Respondent's exam team and petitioner did not reach an agreement, and respondent sent petitioner a 30-day letter on February 3, 2010. On March 11, 2010, petitioner timely sent a formal protest challenging the 30-day letter on the basis of petitioner's continuously maintained position that it is eligible for RA '78 sec. 530 relief with respect to the remuneration paid to the foreign flight attendants by the foreign branches for services performed in the United States. Petitioner and its representatives had several conferences with Appeals but did not settle the case. As in the first audit, Appeals created an Appeals Case Memorandum, this time stating: "The classification of the NRA flight attendants (under section 530) is not relevant in this case, other than it was cited by Appeals as a basis for granting complete relief in a prior cycle. Accordingly, although Appeals has concluded that entitlement to relief under section 530 is not properly at issue in this case, it has been addressed since it was the basis for concession when last considered."

At this point respondent took a bifurcated approach to petitioner's tax liabilities. On April 14, 2011, respondent sent petitioner a notice of deficiency determining that pursuant to section 1441 petitioner was liable for a 30% withholding tax on the foreign flight attendants' U.S. source income for 2003 and 2004. The deficiencies totaled $796,654. Respondent did not issue a formal notice of determination of worker classification with respect to employment taxes. However, on April 25, 2011, respondent assessed employment taxes under subtitle C in the amounts of $549,810.73 for liabilities from Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and $3,302,226.76 for liabilities from Form 941, Employer's Quarterly Federal Tax Return, plus interest and penalties, for the 2003 and 2004 taxable periods. Petitioner timely filed a petition with this Court on July 7, 2011.

Petitioner paid the assessed employment taxes on May 9, 2011. Petitioner filed a timely administrative refund claim that was denied by Appeals on August 22, 2013. The notice of disallowance said that petitioner could seek review in either a U.S. District Court or the U.S. Court of Federal Claims within two years of the notice. To the best of the Court's knowledge, petitioner has not filed a refund claim in either court to date.

Respondent asserts that the determinations reflected in the notice of deficiency, although it was issued first, is a secondary, alternative position to protect the Government's interest if respondent's assessment of employment taxes is successfully challenged by petitioner in an appropriate refund forum. Respondent agrees that if subtitle C applies, section 1441 is automatically inapplicable. See sec. 1.1441-4(b)(1), Income Tax Regs.

In the petition, petitioner challenges respondent's determinations under section 1441 (the only determinations reflected in the notice of deficiency) and also asserts that this Court has jurisdiction to decide whether petitioner is liable for employment taxes under subtitle C even though respondent has not issued a notice of determination of worker classification. On September 6, 2013, petitioner filed a motion for partial summary judgment asking the Court to hold that it has jurisdiction over both the section 1441 liabilities on the basis of the notice of deficiency and the employment tax liabilities on the basis that respondent made a determination with respect to those employment taxes. On December 16, 2013, respondent filed his own motion for partial summary judgment asserting that the Court does not have jurisdiction over the employment tax liabilities because respondent did not issue a notice of determination of worker classification.

Section 7436(a)

The parties disagree about the scope of the Court's jurisdiction under section 7436(a). Section 7436 was enacted as part of the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, sec. 1454(a), 111 Stat. at 1055, and grants the Court limited jurisdiction over cases involving employment taxes imposed under subtitle Section 7436(a), as amended by the Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, sec. 314(f), 114 Stat. at 2763A-643 (2000), provides:

Section 7436(a)(1) and (2)

Petitioner contends that the Court has jurisdiction in this case under section 7436(a)(1) and (2), while respondent asserts that the Court does not have jurisdiction under either paragraph. The Court need not consider the parties' contentions relative to section 7436(a)(1) in light of our holding below relative to our jurisdiction under paragraph (2).

Four requirements must be satisfied before the Court has jurisdiction under section 7436(a)(2). There must be: (1) an examination in connection with the audit "of any person"; (2) a determination by the Secretary that "such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual"; (3) an "actual controversy" involving the determination as part of an examination; and (4) the filing of an appropriate pleading in the Tax Court. Sec. 7436(a). Requirements (1) and (4) are clearly satisfied, and respondent does not object. The remaining issues are whether there was an actual controversy and a determination that petitioner is not entitled to treatment under RA '78 sec. 530.

Respondent argues that for this Court to have jurisdiction section 7436(a)(2) requires an actual controversy regarding employment status as well as RA '78 sec. 530 relief. However, the plain language of the statute indicates that there need only be an actual controversy regarding RA '78 sec. 530 relief. See Charlotte's Office Boutique, Inc. v. Commissioner, 425 F.3d 1203, 1211 (9th Cir. 2005) (finding an actual controversy even after the Commissioner conceded that the taxpayer had treated its president and director as an employee for the relevant taxable periods), aff'g as supplemented 121 T.C. 89 (2003). Respondent has provided no convincing authority that there must be an actual controversy about the employment status of a taxpayer's workers. Accordingly, the Court finds that the "actual controversy" requirement has been satisfied.

As described above, petitioner's returns were first audited on employment taxes for the 1992-96 taxable periods. Respondent's administrative file for those periods contains an Appeals Case Memorandum that addresses substantially the same issues regarding employment tax liability as the 2003-04 audit. The 1992-96 Appeals Case Memorandum states in relevant part:

The TAM, the 30-day letter, and the Appeals Case Memorandum for the 2003 and 2004 taxable periods all contain a substantially similar analysis and nearly identical wording discussing petitioner's RA '78 sec. 530 relief claim. The three documents each acknowledge that petitioner claimed entitlement to such relief, describe legislative history and case-law about RA '78 sec. 530, and conclude that RA '78 sec. 530 "is not properly at issue in this case." The Appeals Case Memorandum for 2003-04 also acknowledges that in the 1992-96 audit Appeals concluded that petitioner was entitled to RA '78 sec. 530 relief but nevertheless concluded, without explaining the distinction from the 1992-96 audit, that RA '78 sec. 530 relief was inapplicable here.

The 30-day letter specifically states that "[t]here is a question whether the taxpayer is entitled to relief under section 530 of the Revenue Act of 1978 from any U.S. employment tax liability with respect to the remuneration paid to the NRA flight attendants." It also summarizes petitioner's arguments that RA '78 sec. 530 should apply, including a quotation spanning two pages from a letter that petitioner sent to respondent on May 12, 2009. The 30-day letter also contains the words "CONCLUSION: Section 530 is irrelevant because this case does not involve the issue of worker classification" in bold print.

These three documents show a clear "failure to agree" on the issue of RA '78 sec. 530 relief. See SECC Corp. v. Commissioner, 142 T.C. at ___ (slip op. at 13) (looking at a 30-day letter, an Appeals Case Memorandum, and a letter regarding assessment to decide whether the Commissioner had made a determination under section 7436(a)). They all recognize petitioner's position regarding RA '78 sec. 530 and reject that position. The 30-day letter and the Appeals Case Memorandum also state the amounts of the proposed adjustments.¹⁰

Respondent assessed the employment taxes on April 25, 2011, in the amounts of $549,810.73 for Form 940 liabilities and $3,302,226.76 for Form 941 liabilities, finding that RA '78 sec. 530 relief is inapplicable for the 2003-04 taxable periods. The Court finds that respondent's decision to assess employment tax was preceded by a determination rejecting petitioner's RA '78 sec. 530 claim as explained in the TAM, the 30-day letter, and the Appeals Case Memorandum.

Respondent contends that because petitioner has always treated its foreign flight attendants as employees,¹¹ respondent had no need to make a determination of worker classification, and therefore the Court does not have jurisdiction under section 7436(a)(2). Whether petitioner has ever treated its foreign flight attendants as employees is a disputed material fact not appropriately decided on summary judgment. However, it is unnecessary at this stage to analyze how petitioner treated its foreign flight attendants because section 7436(a)(2) does not require that respondent make a determination of worker classification.

Respondent asserts that RA '78 sec. 530 relief is unavailable when there has been no determination of worker classification. This proposition seems doubtful. See RA '78 sec. 530(e)(3) ("Nothing in this section shall be construed to provide that subsection (a) only applies where the individual involved is otherwise an employee of the taxpayer."); S. Rept. No. 104-281, at 26 (1996), 1996 U.S.C.C.A.N. 1474, 1500 (explaining that an amendment to RA '78 sec. 530 in the Small Business Job Protection Act of 1996, Pub. L. No. 104-188, sec. 1122, 110 Stat. at 1766, adding subsection (e) "is intended to reverse the IRS position * * * that there first must be a determination that the worker is an employee under the common law standards before application of section 530"). The Court need not decide this question today, however, because it goes to the merits of an RA '78 sec. 530 claim -- that is, whether a taxpayer is entitled to relief under that section. But that is not the question before the Court. Rather, the question before the Court is jurisdictional, and the Court need not consider the requirements of RA '78 sec. 530 here. Instead, the Court looks to the statute that provides our jurisdiction in the instant case, section 7436(a).

Section 7436 is titled "Proceedings for Determination of Employment Status", and subsection (a) is titled "Creation of Remedy." Respondent suggests that these titles show that the Court's jurisdiction is limited to instances where a determination of worker classification was made. It is a well-accepted tenet of statutory construction that "the title of a statute and the heading of a section cannot limit the plain meaning of the text." Bhd. of R.R. Trainmen v. Balt. & O.R. Co., 331 U.S. 519, 528-529 (1947); see Strathearn S.S. Co. v. Dillon, 252 U.S. 348, 354 (1920); Cornell v. Coyne, 192 U.S. 418, 430 (1904); United States v. Fisher, 6 U.S. (2 Cranch) 358, 386 (1805); Stanley Works & Subs. v. Commissioner, 87 389, 419 (1986). Titles are not meant to override or substitute for the provisions of the text; neither are they meant as reference guides or synopses. Bhd. of R.R. Trainmen, 331 U.S. at 528-529. They are available as a tool when helpful to resolve an ambiguous provision but may fail even as that because "matters in the text which deviate from those falling within the general pattern are frequently unreflected in the headings and titles." Id. Therefore, the title of section 7436 need not be read to limit the section to instances when the Secretary has made a determination of worker classification.

We next turn to the text of section 7436(a). As discussed above, section 7436(a) grants the Court jurisdiction when, among other requirements, there is an actual controversy involving a determination by the Secretary that

This reading does not lead to an absurd result or obstruct legislative intent. This reading of section 7436 comports with other accepted rules of statutory interpretation. The Court must "'give effect, if possible, to every clause and word of a statute'" and, whenever possible, read a statute so that no portion of it is rendered superfluous. United States v. Menasche, 348 U.S. 528, 538-539 (1955) (quoting Inhabitants of Montclair Tp. v. Ramsdell, 107 U.S. 147, 152 (1883)); see Guardian Indus. Corp. v. Commissioner, 143 T.C. ____, ____ (slip op. at 23-24) (July 17, 2014); Caltex Oil Venture v. Commissioner, 138 T.C. at 30. If section 7436(a)(2) were read as requiring a determination of worker classification, the entire paragraph would be rendered superfluous. Paragraph (1) already addresses our jurisdiction when the Secretary has made a determination of worker classification. If this requirement were also embedded in paragraph (2), Congress would have no need to specify that the Court has jurisdiction when the Secretary has made a determination of worker classification and when there has been a denial of relief under RA '78 sec. 530. This scenario would be encapsulated in paragraph (1), and paragraph (2) would essentially be nothing but an example of an issue that might accompany a determination of worker classification.

Finally, section 7436(a)(2) does not limit the Court's jurisdiction to instances where the Secretary has made a determination of worker classification. As stated above, section 7436(a)(2) grants us jurisdiction when there is a determination that "such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual". Nothing in the language of the statute requires a determination of worker classification before the Court has jurisdiction over the Secretary's determination under RA '78 sec. 530. Although neither party asserts that the phrase "with respect to such an individual" in section 7436(a)(2) imposes this additional jurisdictional prerequisite, the Court addresses this phrase for the sake of completeness. See Neely v. Commissioner, 115 T.C. 287, 290 (2000) (stating that the Court may question its own jurisdiction sua sponte). The Court finds that the phrase "with respect to such an individual" does not require that the Secretary first determine the individual to be an employee before jurisdiction arises. The adjective "such" relates back to the individuals described in section 7436(a)(1). The term "individuals" in section 7436(a)(1) is modified by the present participle phrase "performing services for such person" and is not defined in the first instance by reference to "employees". Therefore, the individuals that section 7436(a)(2) refers to are workers who are performing services, and they need not be classified as employees before section 7436(a)(2) jurisdiction arises.

Accordingly, the Court holds that it may have jurisdiction under section 7436(a)(2) whether or not the Secretary has made a determination of worker classification. Respondent has made a determination to deny petitioner relief under RA '78 sec. 530, thereby fulfilling the final jurisdictional predicate of section 7436(a)(2).

To reflect the foregoing,

An appropriate order will be issued.

² C-1 and D visas are nonimmigrant visas. Holders of these visas have not been authorized by the Department of Homeland Security (DHS) to work in the United States. See 8 U.S.C. sec. 1101(a)(15)(D)(i) (2012); see also 8 C.F.R. sec. 274a.12(c)(17)(iii) (2011) (listing classes of aliens who may apply for authorization for work in the United States and including only foreign airline employees who have been issued B-1 visas); Social Security Administration's Program Operations Manual System RM 10211.420G.3 (classifying holders of C-1 and D visas as nonimmigrants who may not work and cannot apply for employment authorization). Generally, DHS must authorize nonimmigrant aliens a classification permitting work in the United States to obtain a Social Security number. 20 C.F.R. sec. 422.105 (2004).

³ In this case, the Court uses the term "employment taxes" as it is defined by sec. 7436(e) to refer to taxes imposed pursuant to subtitle C of the Internal Revenue Code, including taxes imposed under secs. 3402 (Federal income tax withholding), 3102 and 3111 (FICA tax), and 3301 (FUTA tax).

⁴ The Revenue Act of 1978 (RA '78), Pub. L. No. 95-600, sec. 530, 92 Stat. at 2885, as amended, provides in relevant part:

⁶ The business visitor exception relieves compensation for labor or personal services performed in the United States from being categorized as U.S. source income if: (1) the labor or services are performed by a nonresident alien who is present in the United States 90 days or less during the taxable year; (2) the compensation does not exceed $3,000; and (3) the labor or services are performed, relevantly, for a foreign branch of a domestic corporation. Sec. 861(a)(3).

⁷ The TAM stated, and respondent contends, that petitioner has not in any way affirmatively treated the individuals as nonemployees, and therefore respondent is not attempting to reclassify them from nonemployees to employees and RA '78 sec. 530 relief is not relevant. Petitioner claims in regard to the foreign flight attendants that RA '78 sec. 530 relief may be available whether or not there has been an employee classification.

⁸ It is the determination, not the piece of paper, that provides a basis for our jurisdiction. See SECC Corp. v. Commissioner, 142 T.C. ____, _____ (slip. op. at 11) (Apr. 3, 2014).

⁹ The record does not reveal what, if anything, changed between the two audits such that petitioner was determined to be no longer entitled to RA '78 sec. 530 relief. See, e.g., RA '78 sec. 530(a)(3) (denying relief if an employer treated any individual holding a substantially similar position to the position held by the individual whose status is at issue as an employee for any period beginning after December 31, 1977).

¹⁰ Respondent argues that the "failure to agree" standard is unworkable because respondent could make a determination without petitioner's ever knowing about it or without knowing precisely when it was made. The Court addressed these arguments in SECC Corp. v. Commissioner, 142 T.C. at ____ (slip op. at 19), with regard to when the period allowed by statute to file a petition in the Tax Court begins to run. In that case, relying on the text of sec. 7436(b)(2), the Court held that a 90-day (or any other) time limit does not apply where the Commissioner does not send a notice by certified or registered mail. Id. at ____ (slip op. at 25). Therefore, a taxpayer is not harmed when the Commissioner makes a determination but does not send formal notice.

¹¹ Petitioner disputes this fact and contends that it has never treated the foreign flight attendants as employees.

¹² The Court will grant petitioner's motion for partial summary judgment insomuch as it relates to our jurisdiction pursuant to sec. 7436(a)(2). We do not address petitioner's argument in its motion for partial summary judgment regarding our jurisdiction pursuant to sec. 7436(a)(1).