In January, 2008 Tim Spartan incorporated Spartan Truck Lines, Inc (STLI). STLI made an election to be treated as an S-Corporation. STLI is now and has, since inception, been based in Plant City, Florida. STLI obtained contracts for shipping fresh produce and live tropical fish to from Florida to customers located in states along the eastern seaboard and Midwestern states. STLI often was able to arrange shipping from destination states back to Florida hauling consumer goods and freight from distribution centers near the outbound destination locations.
STLI does not own any trucks or trailers but rather enters into agreements with individual truckers often on a load by load basis. Individual truckers are often referred to in the business as "owner-operators" since these individuals often own their trucks and trailers and haul loads wherever the owner-operator can get the best deal.
STLI's business prospered largely on account of low overhead. STLI used a computer algorithm to offer loads to independent drivers using a proprietary "app" developed for both iphone and android devices. Drivers could bid for particular jobs using their smartphones which proved to be popular allowing assignments to go out quickly.
STLI treated all the drivers as independent contractors and each driver signed a contract agreeing to be treated as an independent contractor. Paying self-employment taxes and workers compensation insurance was left to the drivers since STLI was, effectively, just assigning loads to drivers based on bids and timing from the "app". STLI asked their law firm (Dewey, Cheateam & Howe) for an opinion on whether the arrangement would be treated as an employer-employee or independent contractor relationship. The opinion from the law firm was that "more likely than not" the arrangement would be considered an independent contractor arrangement.
In 2010 one of the drivers was severely injured in a vehicle collision and filed to collect workers compensation benefits under STLI's workers compensation insurance. The Florida Bureau of Workers Compensation (FBWC) rejected the injured driver's claim and noted that the driver was an independent contractor.
In 2012 the Internal Revenue Service examined STLI's tax returns and re-classified the labor pool as employees determining that STLI controlled the details of the work, the drivers were paid based on the load and could not lose on an accepted assignment, STLI could terminate the driver for any number of reasons, the arrangements were regular business and that many drivers drove solely for STLI and had done so for years. By classifying the drivers as employees STLI became responsible for paying employment taxes and relieved the drivers' obligations to pay self-employment taxes. The assessment (requiring STLI to pay) for employment taxes (social security and Medicare) was upheld by the tax court when STLI litigated the determination (of employee status) for federal tax purposes.
STLI seeks to avoid payment of the employment tax based on the position that STLI reasonably believed that it properly treated the drivers as independent contractors relying on the FBWC decision and the opinion of its legal counsel at the time that drivers were issued 1099's for their payments. Will STLI prevail?