Court Denies Refund Claim on Collection Action of Divisible Tax Due to Variance Rule

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In his tax procedure blog, Jack Townsend posted some material on Cencast Services LP v. United States,  a Court of Appeals for the Federal Circuit case decided  on September 10, 2013, which upheld the Court of Federal Claims decision that a taxpayer’s refund claim was barred by the variance doctrine.  From Mr. Townsend’s tax procedure blog, the holding was as follows:

1. “Cencast’s liability for employment taxes under the Federal Unemployment Tax Act (‘FUTA’) and the Federal Insurance Contribution Act (‘FICA’) is determined by reference to the employees’ “employment” relationships with the common law employers for which Cencast remits taxes (i.e., the production companies), and that the common law employers cannot decrease their liability by retaining entities such as Cencast to actually make the wage payments to the employees.”

2. Cencast is barred by the doctrine of variance from raising a theory in its refund suit not raised in its claim for refund. The new argument was that some of the workers were independent contractors rather than employees.


The entire post can be found here, and it is a great summary of an interesting case, which gives some insight into the production of movies, and has an in depth discussion of the refund rules, substantial variance doctrine, divisible taxes, and some clever (but failed) arguments to circumvent the variance doctrine.

We recently updated our variance discussion in Saltzman and Book to include the lower court holding in ¶11.06[5].  I write here to supplement’s Jack’s post just to note some of the implications of the case with the Flora full payment rule that were focused on more by the lower court. From our update based on the lower court holding:

The taxpayer responded to the counter-claim, taking the position that it could defend the counter-claim with any legal theory, thereby vesting the Court with jurisdiction to hear the independent contractor theory.  The Court stated that new arguments could only be raised by the taxpayer when the counter-claim presented new theories that the taxpayer had previously not responded to, still barring the taxpayer’s new theory.

Cencast had tried to argue in its response to the government’s counter-claim that the workers were not truly employees, but were independent contractors, an argument it had not made in its refund claim, which focused rather on who was the employer. The divisible nature of the tax, and the multiple collection actions arising from the divisible nature, did not provide Cencast with the ability to raise new arguments unless the counter-claim stated new issues not originally raised when dealing with the refund claim for the portion of the tax paid under Flora.  Prepayment of a portion under Flora put the full amount at issue.

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Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.


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