A Costly Victory p.10

By: Debra Gersh-Hernandez

FOR SOME NEWSPAPERS, the fights over Internal Revenue Service's attempts to reclassify independent contractors as employees ended as Pyrrhic victories.
When he testified in June before the House Ways and Means Committee's Subcommittee on Oversight, American Association of Independent Newspaper Distributors president Clyde Northrop told the panel about the audit struggles of a handful of newspapers, including the Kansas City Star Co.
As Northrop told the subcommittee:
"Beginning in 1994, the local IRS offices in Kansas City began a special audit program to reclassify distributors of the Kansas City Star Co. as employees rather than as independent contractors.
"The IRS individually audited over 100 distributors during a two-year period, causing distress, distraction and disruption among the distributors, who didn't know how they should file their returns, in light of conflicting IRS approaches, and didn't know how they would pay their tax bill if the IRS found them to be employees.
"At first," Northrop related, "the IRS took the position that all distributors were employees."
As the audits and the appeals process progressed, the IRS began to take the position that some distributors were employees, while conceding that others were independent contractors.
"Without drawing any clear line, the IRS seemed to be saying that smaller distributors are employees, but that larger distributors are independent contractors, even though all operated under the same contracts," he continued.
"That left the IRS taking the anomalous position that one larger carrier was an independent contractor, but that other family members, who also were distributors under similar contracts, were employees simply because their routes and scale of operations were somewhat smaller.
"In another case, the IRS took the position that a distributor was an employee of the Kansas City Star, while allowing him to be an independent contractor for another newspaper under a similar contract.
"In order to end the controversy," Northrop explained, "two carriers filed test cases in the tax court to establish their independence and the independence of other similarly situated distributors. . . ."
"On the eve of the trial, the IRS conceded that the two distributors ? and two additional distributors who had filed tax court petitions ? were independent contractors.
"In addition," he said, "the IRS indicated that it was conceding the classification issue in all pending and open cases involving Kansas City Star distributors, and that it had terminated the special audit program to reclassify Kansas City Star distributors as employees."
"The controversy ended with the right result," Northrop pointed out, "but look at the cost: two years of wasteful and costly IRS audits that threatened distributors with financial ruin."