Ba 478 Unit 1 Assignment Due July 10, 2017 Beach Gear Gripes

Ba 478unit 1 Assignment Due July 10, 2017beach Gear Gripesfacts you A

You are a certified public accountant providing tax and general business advice to your client Cynthia Bradley. Cynthia is considering purchasing a “beach gear” store from the existing owner, Jared Eddy. Jared is a sole proprietor, and the business is located on the public beach in Malibu, California, selling towels, sun tan lotion, beach toys, and other items for beachgoers.

The beach gear is sold by individuals on a commission basis in a staked-out area managed by Jared. Salespersons keep a fixed percentage of each sale as full payment and return the rest to Jared. They are paid in cash with no withholdings or formal wage statements, and Jared refers to their payments as “rent.” Purchasers are beach visitors, and business is exceptionally profitable. Competitors are barred from selling similar items due to Jared’s enforcement, which involves intimidation by Dan and Elaine, former kickboxers banned from competition for violent behavior. They use force to prevent others from selling within Jared’s territory, and authorities have not intervened due to local police disinterest and reluctance to confront the intimidation.

Each morning, Jared claims and secures a beach area by paying Dan and Elaine to patrol and keep out trespassers. Jared pays them in cash, and they enforce his territorial claims aggressively. Jared knows little of their personal history but relies on their ability to maintain the exclusivity of his area. The beach gear salespeople pay Jared “rent” equal to 25% of their gross daily earnings, paid in cash. Business is high-volume, with each salesperson earning over $175,000 annually. They are satisfied with their income but complain about Dan and Elaine’s micromanagement, including strict controls over their hours, attire, and sales approach.

In addition to paying rent, each salesperson pays Jared a commission based on sales and tips. Jared provides all equipment, supplies, security, and advertising, as well as paying for expenses related to Dan and Elaine’s security activities. All salespersons work exclusively for Jared, with no other clients, and Jared has always classified them as independent contractors, avoiding taxes and employment-related withholdings.

Recently, a salesperson injured by a volleyball was told Jared’s business has no workers’ compensation insurance, as Jared claims the groomers (including Dan and Elaine) are not employees. Jared has not paid employment taxes, withheld income taxes, or purchased workers’ compensation or unemployment insurance, effectively avoiding employer obligations. A recent injury and lack of insurance raise questions about employment classification and potential liability, especially as Jared’s statements suggest the groomers are independent contractors.

Questions from Susan regarding relationship status and liabilities

Research Oregon Revised Statutes (ORS) section 670.600 and relevant IRS guidelines. What is the probable status of the relationship between Phil (the new buyer) and the groomers (including Dan and Elaine)? Why? What is Phil’s potential liability concerning his relationship with Dan and Elaine and, by extension, Susan if she purchases the business and assumes Phil’s liabilities? What should Phil have done differently to mitigate liabilities? How can he address existing problems if any?

Analysis of relationship factors and legal implications

Discuss the factors indicating an independent contractor relationship versus an employment relationship, referencing IRS criteria and court standards. Analyze the worst-case scenario if Jared and the groomers are deemed employees, including legal liabilities for back taxes, fines, and damages. Use reputable sources such as IRS guidelines (see IRS Publication 15-A and Revenue Rulings), state statutes, and recent legal cases to support claims.

Recommendations for Cynthia if purchasing the business

If Cynthia proceeds with buying the business, what specific steps should she require Jared, Phil, and the sellers to undertake beforehand? Focus on establishing clear employment classifications, proper tax withholding, insurance coverage, and legal compliance to avoid future liabilities. Suggest contractual modifications, employment audits, and obtaining legal advice to ensure proper classifications and liability protections.

Conclusion and advice

Summarize key considerations regarding employment status, liabilities, and steps to mitigate risks. Emphasize the importance of legal and tax compliance for sustainable business operations. Provide an informed recommendation based on the analysis to assist Cynthia in her decision-making process regarding the purchase.

References

  • IRS Publication 15-A, Employer’s Supplemental Tax Guide. (2023). IRS. https://www.irs.gov/pub/irs-pdf/p15a.pdf
  • Oregon Revised Statutes (ORS) Section 670.600. (2023). Oregon Legislature. https://www.oregonlegislature.gov
  • IRS Revenue Ruling 87-41, 1987-1 CB 296. (1987). Internal Revenue Service. https://www.irs.gov
  • California Labor Code Section 3351. (2023). California Legislature. https://leginfo.legislature.ca.gov
  • Schultz v. Department of Revenue, 78 Wash. App. 657 (1995).
  • Clackamas Gastroenterology Assocs., P. C. v. Wells, 338 Or. 322 (2004).
  • Employer-Employee Relationship Analytical Framework. IRS Webinar, 2022.
  • Legal Perspectives on Contractor vs. Employee Classification. National Law Review, 2021.
  • California Division of Labor Standards Enforcement, Guidance on Independent Contractors, 2022.
  • California Employers’ Guide, DLSE, 2023. https://www.dir.ca.gov/dlse/dlse-forms-and-publications.html

Related Assignments