The Cave case could have the the after shocks of an earth quake in  

The Tax Court also found that the firm’s sole shareholder, Donald G. Cave, was a statutory employee, and that no Section 530 relief was available. However, because the firm did not address the statutory employee holding on appeal, the Fifth Circuit deemed the issue waived. The Fifth Circuit’s decision did not address the Section 530 relief holding.


The Court of Appeals upheld the Tax Courts decision and has held that associate attorneys and a law clerk were employees of an S corporation law firm. As a result, the firm was liable for employment taxes and penalties for 2003 and 2004.


 Whether a worker is an independent contractor or employee under the common law rules generally is determined by whether the law firm has the right to control and direct workers regarding the job they are to do and how it is to be done.


These factors are taken into the decision whether a worker is an employee or independent contractor (no payroll taxes paid and no benefits given to the worker)


Employee including the following:

(1) The degree of control the principal has over the worker;

(2) the worker’s opportunity for profit or loss;

(3) the worker’s investment in facilities;

(4) the permanence of the relationship; and

(5) the skill required in the operation.



Donald G. Cave A Professional Law Corp. (Firm) was incorporated on Feb. 18, ’93 as a Louisiana professional law corporation. Its business consisted primarily of representing individuals injured in accidents. Fees generated from the provision of legal services were its only source of income in 2003 and 2004.

All attorney’s fees and reimbursements of case expenses were paid directly to Firm, which then paid a portion of the gross fee (generally one-half or one-third) to the attorney who handled the case.

Firm was an S corporation for Federal income tax purposes in 2003 and 2004. Donald Cave was Firm’s president and sole shareholder. For 2003 and 2004, Firm did not treat three associate attorneys and a law clerk as employees for employment tax purposes. Firm issued Forms 1099-MISC to them for those years.

Donald Cave believed it was appropriate for Firm to treat the associate attorneys and law clerk as independent contractors because he did not have sufficient control over their work.

In a notice of determination of worker classification issued to Firm, IRS determined that the associate attorneys and the law clerk were Firm’s employees for 2003 and 2004. Consequently, IRS determined that Firm was liable for employment taxes and penalties. The Tax Court agreed with IRS.


Cave  argued that the Tax Court incorrectly determined that the associate attorneys were employees. Firm asserted that it exercised little control over the associate attorneys, noting that they were not required to work fixed hours or to work from a particular location and that they could handle their cases as they saw fit or refuse cases on which they did not want to work. It also argued that the attorneys could increase their pay by generating their own cases.

The Tax Court held that Firm exercised sufficient control over the attorneys to show an employer-employee relationship because of its ability to affect the course of litigation by its decisions regarding the funding of litigation, work assignments, and working conditions, including the supervision of associate attorneys on cases generated by Firm or Donald Cave. The Fifth Circuit said that this holding was not clearly erroneous.

The Fifth Circuit also concluded that the Tax court didn’t clearly err in its factual findings on the remaining factors. Firm correctly noted that the attorneys’ opportunity for profit was subject to their ability to generate their own cases, but Firm did not address the Tax Court’s corresponding finding that the attorneys were not exposed to losses.

Firm also provided offices and office equipment, secretarial support, business cards, letterhead, and access to its law library and legal research services, showing a general lack of investment in the facilities of the business. oreover, there was no indication that any of the attorneys were required to supply personal equipment to perform their jobs, and their choice to work from home on occasion did not negate the fact that Firm provided all necessary equipment and support at its office.

The attorneys also maintained continuous and exclusive relationships with Firm, working there for periods ranging from twelve years to three years. They did not work for any other law firms and they did not offer their services to the public in any capacity other than as attorneys of the Cave Law Firm.

Accordingly, the Fifth Circuit concluded that the Tax Court did not clearly err in its factual findings, and, in light of the totality of the factors, correctly determined that the associate attorneys were Firm’s employees rather than independent contractors.



Cave argued that the law clerk was independent because he provided legal research services to other lawyers and law firms and also engaged in other forms of employment. The Fifth Circuit said that the record showed that Donald Cave hired the law clerk and exercised complete control over the assignment of his work for Firm. The law clerk did work for other lawyers and law firms. However, the Fifth Circuit said that providing services to multiple employers does not necessitate treatment as an independent contractor.

The law clerk was paid a salary by Firm of approximately $1,250 every two weeks, regardless of the amount of work he performed during that time period. Furthermore, the law clerk could neither increase his profit through his own skill and initiative, nor would he suffer the risk of any losses. He made no investment in the facilities because Firm provided him with the amenities needed to complete his work.

 Jeffrey Brooks, CPA  JBrooks Wealth Advisors, PC  Jeff Brooks, CPA, CFP, MBA

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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