CCA 200020004: Sheltered work participants treated as employees on stated activities

Plain-English summary

A tax exempt organization provided training and sheltered work for people with developmental disabilities. Participants were paid by the piece, received no fringe benefits, and generally stayed in the program indefinitely. Field Service Advice concluded that they were employees for federal employment tax purposes to the extent their activities resembled the second class of workers in Rev. Rul. 65-165. The IRS saw no material difference from workers addressed in an earlier technical advice memorandum. It rejected a proposed test based on a participant's level of functioning as inconsistent with its published position.

Ruling snapshot

• Question: Are participants in the sheltered employment program employees for federal employment tax purposes?
• Outcome: Advice given: yes, to the extent their activities match the described class of workers.
• Key authorities: IRC §§ 3121, 3401; Rev. Rul. 65-165; TAM 9801003.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
I NTERNAL REVENUE SERVI CE
WASHINGTON, D.C. 20224
January 31, 2000

Number: 200020004
Release Date: 5/19/2000
CC:EBEO:Br6
TL-N-6459-99
UILC: 3121.04-01, 3401.04-02

INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE

MEMORANDUM FOR DISTRICT COUNSEL, KENTUCKY-TENNESSEE DISTRICT, NASHVILLE
Attn: Vicki Miller

FROM: Chief, Branch 6 CC:EBEO:BR6
Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations)

SUBJECT:
This Field Service Advice responds to your memorandum dated November 26, 1999. Field Service Advice is not binding on Examination or Appeals and is not a final case determination. This document is not to be cited as precedent.

LEGEND

X=
ISSUE

Whether developmentally disabled individuals in the sheltered employment program of X are employees for federal employment tax purposes.

CONCLUSION

Developmentally disabled individuals in the sheltered employment program of X are employees for federal employment tax to the extent their activities most closely resemble those of the second class of individuals described in Rev. Rul. 65-165.

FACTS

X is a non-profit organization which is exempt from taxation under Internal Revenue Code section 501(c)(3). X maintains sheltered employment and supported living programs. The subject of this FSA is the sheltered employment program.

2

X provides training, job placement and on-site employment for individuals (clients) who are developmentally disabled. X asserts that its goal is to provide a therapeutic program for developmentally disabled clients to become self-sufficient by improving social skills and self help. Disabled individuals are initially evaluated for current and future employment potential and clients adjustment needs. The vocational evaluation program lasts approximately thirty days. Thereafter, clients are placed in a work program most suited to their skills. The clients of X sheltered employment program are paid on a piece-rate basis and do not receive fringe benefits. Clients are not terminated for inability to work and are not laid off when work is not available. Clients generally remain in X’s sheltered employment program for an indefinite period.

LAW AND ANALYSIS

We see no material distinction between the activities of the clients in X’s sheltered employment program and the activities of the individuals held to be employees in Technical Advice Memorandum 9801003. Therefore, the position as described in Rev. Rul. 65-165 is applicable to X.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

In your incoming memorandum, you suggest that the appropriate solution to these cases is to develop a “functionality” standard to determine the level at which a client would be deemed to be an employee. We are aware of various alternative approaches such as this. However, these approaches are not consistent with the position of the Service as announced in Rev. Rul. 65-165

Please call Lisa Tavares at 202-622-6090 if you have any questions.

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HARRY BEKER