[Congressional Record Volume 143, Number 36 (Wednesday, March 19, 1997)]
[Senate]
[Pages S2559-S2560]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BOND (for himself and Mr. Nickles):
  S. 473. A bill to amend the Internal Revenue Code of 1986 to clarify 
the standards used for determining that certain individuals are not 
employees, and for other purposes; to the Committee on Finance.


           THE INDEPENDENT CONTRACTOR TAX REFORM ACT OF 1997

  Mr. BOND. Mr. President, I ask unanimous consent that the text of the 
bill be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 473

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Independent Contractor Tax 
     Reform Act of 1997''.

     SEC. 2. SAFE HARBOR FOR DETERMINING THAT CERTAIN INDIVIDUALS 
                   ARE NOT EMPLOYEES.

       (a) In General.--Chapter 25 of the Internal Revenue Code of 
     1986 (relating to general provisions relating to employment 
     taxes) is amended by adding after section 3510 the following 
     new section:

     ``SEC. 3511. SAFE HARBOR FOR DETERMINING THAT CERTAIN 
                   INDIVIDUALS ARE NOT EMPLOYEES.

       ``(a) Safe Harbor.--
       ``(1) In general.--For purposes of this title, if the 
     requirements of subsections (b), (c), and (d), or the 
     requirements of subsections (d) and (e), are met with respect 
     to any service performed by any individual, then with respect 
     to such service--
       ``(A) the service provider shall not be treated as an 
     employee,
       ``(B) the service recipient shall not be treated as an 
     employer,
       ``(C) the payor shall not be treated as an employer, and
       ``(D) compensation paid or received for such service shall 
     not be treated as paid or received with respect to 
     employment.
       ``(2) Availability of safe harbor not to limit application 
     of other laws.--Nothing in this section shall be construed--
       ``(A) as limiting the ability of a service provider, 
     service recipient, or payor to apply other applicable 
     provisions of this title, section 530 of the Revenue Act of 
     1978, or the common law in determining whether an individual 
     is not an employee, or
       ``(B) as a prerequisite for the application of any 
     provision of law described in subparagraph (A).
       ``(b) Service Provider Requirements With Regard to the 
     Service Recipient.--For purposes of subsection (a), the 
     requirements of this subsection are met if the service 
     provider, in connection with performing the service--
       ``(1) has the ability to realize a profit or loss,
       ``(2) incurs unreimbursed expenses which are ordinary and 
     necessary to the service provider's industry and which 
     represent an amount at least equal to 2 percent of the 
     service provider's adjusted gross income attributable to 
     services performed pursuant to 1 or more contracts described 
     in subsection (d), and
       ``(3) agrees to perform services for a particular amount of 
     time or to complete a specific result or task.
       ``(c) Additional Service Provider Requirements With Regard 
     to Others.--For the purposes of subsection (a), the 
     requirements of this subsection are met if the service 
     provider--
       ``(1) has a principal place of business,
       ``(2) does not primarily provide the service at a single 
     service recipient's facilities,
       ``(3) pays a fair market rent for use of the service 
     recipient's facilities, or
       ``(4) operates primarily with equipment not supplied by the 
     service recipient.
       ``(d) Written Document Requirements.--For purposes of 
     subsection (a), the requirements of this subsection are met 
     if the services performed by the service provider are 
     performed pursuant to a written contract between such service 
     provider and the service recipient, or the payor, and such 
     contract provides that the service provider will not be 
     treated as an employee with respect to such services for 
     Federal tax purposes.
       ``(e) Business Structure and Benefits Requirement.--For 
     purposes of subsection (a), the requirements of this 
     subsection are met if the service provider--
       ``(1) conducts business as a properly constituted 
     corporation or limited liability company under applicable 
     State laws, and
       ``(2) does not receive from the service recipient or payor 
     benefits that are provided to employees of the service 
     recipient.
       ``(f) Special Rules.--For purposes of this section--
       ``(1) Failure to meet reporting requirements.--If for any 
     taxable year any service recipient or payor fails to meet the 
     applicable reporting requirements of section 6041(a) or 
     6041A(a) with respect to a service provider, then, unless the 
     failure is due to reasonable cause and not willful neglect, 
     the safe harbor provided by this section for determining 
     whether individuals are not employees shall not apply to such 
     service recipient or payor with respect to that service 
     provider.
       ``(2) Burden of proof.--For purposes of subsection (a), 
     if--
       ``(A) a service provider, service recipient, or payor 
     establishes a prima facie case that it was reasonable not to 
     treat a service provider as an employee for purposes of this 
     section, and
       ``(B) the service provider, service recipient, or payor has 
     fully cooperated with reasonable requests from the Secretary 
     or his delegate,

     then the burden of proof with respect to such treatment shall 
     be on the Secretary.
       ``(3) Related entities.--If the service provider is 
     performing services through an entity owned in whole or in 
     part by such service provider, the references to `service 
     provider' in subsections (b) through (e) may include such 
     entity, provided that the written contract referred to in 
     subsection (d) is with such entity.
       ``(g) Determinations by the Secretary.--For purposes of 
     this title--
       ``(1) In general.--
       ``(A) Determinations with respect to a service recipient or 
     a payor.--A determination by the Secretary that a service 
     recipient or a payor should have treated a

[[Page S2560]]

     service provider as an employee shall be effective no earlier 
     than the notice date if--
       ``(i) the service recipient or the payor entered into a 
     written contract satisfying the requirements of subsection 
     (d),
       ``(ii) the service recipient or the payor satisfied the 
     applicable reporting requirements of section 6041(a) or 
     6041A(a) for all taxable years covered by the agreement 
     described in clause (i), and
       ``(iii) the service recipient or the payor demonstrates a 
     reasonable basis for determining that the service provider is 
     not an employee and that such determination was made in good 
     faith.
       ``(B) Determinations with respect to a service provider.--A 
     determination by the Secretary that a service provider should 
     have been treated as an employee shall be effective no 
     earlier than the notice date if--
       ``(i) the service provider entered into a contract 
     satisfying the requirements of subsection (d),
       ``(ii) the service provider satisfied the applicable 
     reporting requirements of sections 6012(a) and 6017 for all 
     taxable years covered by the agreement described in clause 
     (i), and
       ``(iii) the service provider demonstrates a reasonable 
     basis for determining that the service provider is not an 
     employee and that such determination was made in good faith.
       ``(C) Reasonable cause exception.--The requirements of 
     subparagraph (A)(ii) or (B)(ii) shall be treated as being met 
     if the failure to satisfy the applicable reporting 
     requirements is due to reasonable cause and not willful 
     neglect.
       ``(2) Construction.--Nothing in this subsection shall be 
     construed as limiting any provision of law that provides an 
     opportunity for administrative or judicial review of a 
     determination by the Secretary.
       ``(3) Notice date.--For purposes of this subsection, the 
     notice date is the 30th day after the earlier of--
       ``(A) the date on which the first letter of proposed 
     deficiency that allows the service provider, the service 
     recipient, or the payor an opportunity for administrative 
     review in the Internal Revenue Service Office of Appeals is 
     sent, or
       ``(B) the date on which the deficiency notice under section 
     6212 is sent.
       ``(h) Definitions.--For the purposes of this section--
       ``(1) Service provider.--The term `service provider' means 
     any individual who performs a service for another person.
       ``(2) Service recipient.--Except as provided in paragraph 
     (4), the term `service recipient' means the person for whom 
     the service provider performs such service.
       ``(3) Payor.--Except as provided in paragraph (4), the term 
     `payor' means the person who pays the service provider for 
     the performance of such service in the event that the service 
     recipient does not pay the service provider.
       ``(4) Exceptions.--The terms `service recipient' and 
     `payor' do not include any entity in which the service 
     provider owns in excess of 5 percent of--
       ``(A) in the case of a corporation, the total combined 
     voting power of stock in the corporation, or
       ``(B) in the case of an entity other than a corporation, 
     the profits or beneficial interests in the entity.
       ``(5) In connection with performing the service.--The term 
     `in connection with performing the service' means in 
     connection or related to the operation of the service 
     provider's trade or business.
       ``(6) Principal place of business.--For purposes of 
     subsection (c), a home office shall in any case qualify as 
     the principal place of business if--
       ``(A) the office is the location where the service 
     provider's essential administrative or management activities 
     are conducted on a regular and systematic (and not 
     incidental) basis by the service provider, and
       ``(B) the office is necessary because the service provider 
     has no other location for the performance of the essential 
     administrative or management activities of the business.
       ``(7) Fair market rent.--The term `fair market rent' means 
     a periodic, fixed minimum rental fee which is based on the 
     fair rental value of the facilities and is established 
     pursuant to a written agreement with terms similar to those 
     offered to unrelated persons for facilities of similar type 
     and quality.''
       (b) Clarification of Rules Regarding Evidence of Control.--
     For purposes of determining whether an individual is an 
     employee under the Internal Revenue Code of 1986 (26 U.S.C. 1 
     et seq.), compliance with statutory or regulatory standards 
     shall not be treated as evidence of control.
       (c) Repeal of Section 530(d) of the Revenue Act of 1978.--
     Section 530(d) of the Revenue Act of 1978 (as added by 
     section 1706 of the Tax Reform Act of 1986) is repealed.
       (d) Clerical Amendment.--The table of sections for chapter 
     25 of such Code is amended by adding at the end the following 
     new item:

``Sec. 3511. Safe harbor for determining that certain individuals are 
              not employees.''

       (e) Effective Dates.--
       (1) In general.--The amendments made by, and the provisions 
     of, this section shall apply to services performed after the 
     date of enactment of this Act.
       (2) Determinations by secretary.--Section 3511(g) of the 
     Internal Revenue Code of 1986 (as added by subsection (a)) 
     shall apply to determinations after the date of enactment of 
     this Act.
       (3) Section 530(d).--The amendment made by subsection (c) 
     shall apply to periods ending after the date of enactment of 
     this Act.
                                 ______