Court of Federal Claims Upholds Additional SUI Credit

By Pannese, Danny A. | Journal of Accountancy, February 2010 | Go to article overview

Court of Federal Claims Upholds Additional SUI Credit


Pannese, Danny A., Journal of Accountancy


In an unreported decision, the U.S. Court of Federal Claims held that plaintiffs in 10 consolidated tax refund cases were entitled to an additional state unemployment insurance (SUI) credit against their FUTA tax liabilities for years 1991-1996.

Although the case selected as the lead was that of Cencast Services LP, the opinion and an earlier decision set forth the facts of another co-plaintiff, E.P. Talent Services LP (E.E), as representative of the plaintiffs as a whole. E.P entered into agreements with production workers to provide payroll services as well as place the workers on projects at various film production companies. The workers submitted records to E.E showing the amount of time they worked at each production project. E.P. paid the workers out of its own funds and was later reimbursed by the production companies. In addition, E.P. handled all payroll filings as well as withholding and paying FICA and FUTA taxes. The employees' earnings from the production projects were aggregated for FICA and FUTA tax purposes.

The underlying dispute in this case was addressed in a 2004 Court of Federal Claims decision (Cencast Services LP et al. v. U.S., 62 Fed. C1. 159). In it, the court held that although the plaintiffs were the statutory employers, the common-law employers were the various production companies that engaged the employees. The fact that E.P. contracted the workers was not sufficient to prove it was the employer for FICA and FUTA purposes. The IRS took the position that E.P could not aggregate employees' wages in applying the FICA and FUTA wage base limits under IRC [section][section] 3121(a)(1) and 3306(b)(1), respectively Instead, the wage base calculation had to be applied separately to each production company As a result, the employees' wage bases were substantially increased, and E.P. paid additional FICA and FUTA taxes. E.P sued for a refund, and the government countersued for penalties and interest.

E.P. and its co-plaintiffs pointed to section 3401 (d)(1), which defines "employer" as the person for whom an employee performs services, except in cases where that person does not also have control of the payment of wages. In that case, the employer is the person who controls payment of wages. Since the plaintiffs, not the production companies, controlled payment of wages, the plaintiffs were the employers for purposes of determining the FICA and FUTA wage base, they argued. …

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