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U.S. Tax Court: Employment tax obligations of charter yacht operator

Employment tax obligations of charter yacht operator

The U.S. Tax Court today issued an opinion granting summary judgment for the government in a case concerning the employment tax obligations of a charter yacht operator that was determined to be an “American employer” and that was not entitled to the “crewmen’s exemption.”

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The case is: DAF Charters, LLC v. Commissioner, 152 T.C. No. 14 (May 9, 2019). Read the Tax Court’s opinion [PDF 127 KB]

Summary

The taxpayer (a Florida limited liability company) was wholly owned by a Cayman Islands corporation and was disregarded as an entity separate from its owner for most federal tax purposes. However, the taxpayer was not disregarded as an entity separate from its owner and instead was treated as a corporation for federal employment tax purposes.

During the tax period ending December 31, 2012:

  • The taxpayer operated a charter yacht, registered in the Cayman Islands, that traveled in and out of the United States and its territorial waters.
  • The taxpayer employed U.S. citizens as crewmen for the yacht.
  • The taxpayer filed a timely employment tax return but did not pay employment taxes on the wages it paid to those employees, claiming that those wages were exempt from employment taxes under the “crewmen’s exemption” of section 3121(b)(4) because the taxpayer was not an “American employer” pursuant to section 3121(h) (the definition of an “American employer” includes “a corporation organized under the laws of the United States or of any State”).

The IRS assessed the applicable amount of employment taxes and notified the taxpayer of an intention to levy to collect the outstanding liability. In response, the taxpayer requested and received a collection due process hearing after which, the IRS upheld the proposed levy.

The Tax Court concluded that because the taxpayer was treated as a corporation for employment tax purposes, and was organized under the laws of a U.S. state, the taxpayer was an American employer pursuant to section 3121(h) and thus was not entitled to the crewmen’s exemption. The court held that the taxpayer was liable for employment taxes on wages paid during the subject tax period and that the IRS could proceed with the proposed collection action.

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