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SELECT REHAB, INC. v. U.S.

April 8, 2002

SELECT REHAB, INC., PLAINTIFF,
V.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: A. Richard Caputo, United States District Judge.

  MEMORANDUM

Plaintiff, Select Rehab, Inc., filed the present action seeking a refund of taxes paid when Defendant determined that Plaintiff's medical directors were employees rather than independent contractors for purposes of federal employment tax liability.

Presently before the Court is Plaintiff's motion for summary judgment. (Doc. 4.) The motion has been fully briefed and is ripe for disposition. Because I find that Plaintiff acted reasonably and in good faith in making the decision to treat the physicians as independent contractors, Plaintiff's motion for summary judgment will be granted.

BACKGROUND

Plaintiff, a subsidiary of Continental Medical Systems, Inc. (CMS),*fn1 provided a management team to rehabilitation units in acute care hospitals, (Marcus Dep., Doc. 22, Ex. 1 at 58-59), and contracted with physicians and therapists to serve as a medical directors and program directors. (Welsh Dep., Doc. 11, Ex. 3 at 11-12.) Plaintiff treated these physicians as independent contractors for employment tax purposes, and did not pay any federal employment or unemployment tax with respect to their compensation. (LaMonna Decl., Doc. 22. Ex. 11 at ¶¶ 3-4.)

Plaintiff was audited by the Internal Revenue Service (IRS) for the years 1992, 1993, 1994, and 1995. At that time, the IRS determined that the physicians should have been treated as employees rather than as independent contractors for employment tax purposes. (Id.) Accordingly, Plaintiff was assessed additional employment and unemployment taxes (and failure to deposit penalties). Plaintiff unsuccessfully appealed, and ultimately filed fourteen (14) amended employment tax returns, paid a portion of the tax due, and filed a claim for a refund and request for abatement for each of the amended returns. After waiting the mandatory six (6) month period without action by the IRS, Plaintiff filed the instant action seeking a refund of the $7,644.20 paid for the employment taxes based on Defendant's assessment that the physicians were independent contractors. Defendant filed a counterclaim seeking $638,926.13, the total amount of the assessment. Plaintiff now moves for summary judgment.*fn2

STANDARD OF REVIEW

Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A disputed fact is material if proof of its existence or non-existence might affect the outcome of the suit under the applicable substantive law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510 (1986).

Where there is no material fact in dispute, the moving party need only establish that it is entitled to judgment as a matter of law. Where, however, there is a disputed issue of material fact, summary judgment is appropriate only if the factual dispute is not a genuine one. See id. at 248. An issue of material fact is genuine if a reasonable jury could return a verdict for the nonmoving party under the governing standard. See id. at 248-53.
Where there is a material fact in dispute, the moving party has the initial burden of proving that: 1) there is no genuine issue of material fact; and 2) she is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 329, 106 S.Ct. 2548, 2554 (1986). The moving party may present its own evidence or, where the nonmoving party has the burden of proof, simply point out to the court that "the nonmoving party has failed to make a sufficient showing of an essential element of her case." Id. at 323. All doubts as to the existence of a genuine issue of material fact must be resolved against the moving party, and the entire record must be examined in the light most favorable to the nonmoving party. See Colburn v. Upper Darby Township, 838 F.2d 663, 666 (3d Cir. 1988).

DISCUSSION

The sole issue in this case is whether Plaintiff had a reasonable basis to classify the physicians as independent contractors rather than employees. Plaintiff argues that long-standing industry practice supports treating such physicians as independent contractors. In the alternative, Plaintiff argues that it is entitled to the safe harbor relief of § 530 of the Revenue Act of 1978. Defendant argues that other medical directors were treated as employees, and that Plaintiff's assertions of reliance on industry practice, advice of counsel, and states' prohibitions against corporations employing doctors are based on overbroad, generalized testimony.
A. § 530 of the Revenue Act of 1978

Section 530 of the Revenue Act of 1978 provides in relevant part:

(a) Termination of certain employment tax liability purpose for ...

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