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Today’s post is by Shu-Yi Oei (Boston College) & Diane M. Ring (Boston College), and originally appeared at TaxProf Blog:

Senate Republicans released their version of tax reform legislation on Thursday, November 9. The legislative language is not available yet, but the Description of the Chairman’s Mark (prepared by the Joint Committee on Taxation) suggests that one of the key provisions in the bill will clarify the treatment of workers as independent contractors by providing a safe harbor that guarantees such treatment. The JCT-prepared description tracks the contents of the so-called “NEW GIG Act” proposed legislations introduced by Congressman Tom Rice (R-S.C.) in the House and Senator John Thune (R-S.D.) in the Senate in October and July 2017, respectively. “NEW GIG” is short for the “New Economy Works to Guarantee Independence and Growth (NEW GIG) Act.” But notably, and as we further discuss below, the legislation is not limited in its application to gig or sharing economy workers.

Assuming the Senate Bill adopts the basic parameters of the NEW GIG proposed legislation — which looks to be the case based on the JCT-prepared description — we have some concerns. In brief, this legislation purports to simply “clarify” the treatment of workers as independent contractors and to make life easier for workers by introducing a new 1099 reporting threshold and a new withholding obligation. But the legislation carries potentially important ramifications for broader fights over worker classification that are raging in the labor and employment law area. Despite possibly alleviating tax-related confusion and reducing the likelihood of under-withholding, we worry that there are quite a few underappreciated non-tax hazards for workers if these provisions go through.

Summary of the Legislation

The legislation (assuming the Senate Bill more or less tracks the NEW GIG Act language) purports to achieve such “clarification” of worker classification status by doing the following:

First, the legislation introduces a safe harbor “which, if satisfied, would ensure that the worker (service provider) would be treated as an independent contractor, not an employee, and the service recipient (customer) would not be treated as the employer.” The legislation creates three objective tests, which, if met, ensure that the worker would be treated as an independent contractor rather than an employee. Very generally, those tests focus on (1) the relationship between the parties (including specificity of the task, exclusivity of the relationship, and whether the service provider incurs their own expenses), (2) the location of services or means by which they are provided, and (3) the existence of a written contract stating the independent-contractor relationship and acknowledging responsibility for taxes and a reporting/withholding obligation. (See JCT-prepared Description pp. 155-57.)

The first two tests are pretty easy for any sharing economy business to meet. In fact, many non-sharing businesses, such as those contracting with a broad swath of freelancers, could satisfy the safe harbor requirements, thereby extending the true reach of the legislation well beyond the gig economy. The “written contract” test is also not onerous. That requirement is essentially met if there is a written contract that makes the right noises in which the parties agree to independent contractor treatment. (Unsurprisingly, a contractual limitation is often not really a limitation at all.)

Second, the legislation clarifies the information reporting rules: It establishes a $1,000 threshold for Form 1099-K reporting and raises the 1099-MISC threshold from $600 to $1,000. (Under current law, there is some question of whether a Form 1099-K needs to be provided if the transactions do not exceed $20,000 and more than 200 transactions. We detail this issue in our article, “Can Sharing Be Taxed?”.)

Third, the legislation also requires the service recipient/payor to withhold limited amounts on payments made to independent contractor workers covered by the safe harbor. From the JCT-prepared description: “The proposal imposes an income tax withholding requirement with respect to compensation paid pursuant to a contract between a service provider and a service recipient (or payer) that meets the [safe harbor] requirements. For this purpose, a payment of such compensation is treated as a payment of wages by an employer to an employee. However, the amount required to be withheld is five percent of the compensation and only on compensation up to $20,000 paid pursuant to the contract.”

Fourth, the legislation limits the IRS’s ability to reclassify service providers as employees (and service recipients/payors as employers) in cases where the parties try in good faith to comply with the safe harbor but fail. The legislation only allows the IRS to recharacterize the relationship as an employment relationship on a prospective basis.

Finally, the legislation amends Tax Court jurisdiction: Under the current IRC § 7436 mechanism for challenging worker classification, only the person for whom the services are performed may petition the Tax Court regarding misclassification of workers. The bill would expand current law to allow the worker/service provider to bring such a case as well. 

[More under the cut]

SEC Commissioner Jay Clayton recently gave a speech where he remarked:

I have become increasingly concerned that the voices of long-term retail investors may be underrepresented or selectively represented in corporate governance. For instance, the SEC staff estimates that over 66% of the Russell 1000 companies are owned by Main Street investors, either directly or indirectly through mutual funds, pension or other employer-sponsored funds, or accounts with investment advisers… And, if foreign ownership is excluded, that percentage approaches approximately 79%.

… A question I have is: are voting decisions maximizing the funds’ value for those shareholders?

In situations where the voting power is held by or passed through to Main Street investors, it is noteworthy that non-participation rates in the proxy process are high. … This may be a signal that our proxy process is too cumbersome for retail investors and needs updating.

What’s interesting is that there are two different ideas here.  One concerns the voting power of mutual funds and pension funds; the other concerns the votes of retail shareholders themselves.

As for retail votes, Jill Fisch has an article on this very subject forthcoming in the Minnesota Law Review.  She recommends that retail shareholders be given…

Last week, I posted about the Trump Administration’s hypocritical policy toward Cuba and how the U.S. embargo hurts American businesses (not to mention the Cuban people). The embargo, among other things, focuses on preventing human rights violators in Cuba from profiting from Americans. Wednesday, the Administration significantly rolled back some of the Obama-era changes making it much harder for Americans to travel and making it certain that even fewer U.S. airlines will try to make their fledgling Cuba itineraries work.

Ironically, the Administration released the new regulations while the President is in China and within days of his meeting with the President of Russia in Communist Vietnam. Both China and Russia have a significant number of state-owned enterprises and very few restrictions on U.S. firms conducting business with them. The new policy, which goes into effect Thursday, once again requires people under U.S. jurisdiction to travel under the OFAC  license of U.S. tour groups. As anyone who has traveled to Cuba before the Obama liberalization knows, this significantly increases the cost of the trip. The Trump Administration may not realize that those U.S. tour companies have no choice but to work with the Cuban government, which controls the tourism industry, so…

The GOP unveiled its tax bill this week.  Below are a collection of links to commentary that I found interesting (taking a page from Stefan’s book, some are in the form of embedded tweets):

A lot to like and a lot to dislike in the Republican tax bill: “The tax bill aggressively takes on deductions in the individual income tax code, and channels the proceeds towards across-the-board cuts in income tax.  Unfortunately, that good work is undone by expensive giveaways to the owners of firms, and unnecessary windfalls to the heirs of the rich.”

Tax Bill May Deal a Body Blow to LBOs: “The legislation includes a provision that would cap interest deductibility at 30 percent of adjusted taxable income, a dramatic shift from the 100 percent allowed now.”

Sports Stadiums Would Lose Access to Tax-Exempt Bonds Under House Tax Plan: “Lawmakers of both parties have long sought to limit the use of municipal bonds to benefit sports teams.”

Apple Among Giants Due for Foreign Tax Bill Under House Plan: “Earnings held in cash would be taxed at 12 percent while profits invested in less liquid assets like factories and equipment face a 5 percent rate.”…

I don’t have time for a substantive post today, but thought I would direct you to a post I wrote for the Miler Method online magazine, available here. The post focuses on competition and community.

I think the discussion in that post is relevant to law school, as so much emphasis is put on class rank and thus the competition can become especially fierce, potentially destroying community. Competition can certainly be a good thing, and can lead to progress and accomplishment, but competition does need to be contained at times.