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Law firm associates who receive a fee separate from their salary for referring cases to their employer can be deemed independent contractors for state tax withholding purposes, an administrative law judge has held. Dennis M. Galliher, in a matter involving the Manhattan personal injury firm Fuchsberg & Fuchsberg, determined that the New York State Division of Taxation wrongly held that the practice was responsible for withholding and remitting income taxes. Central to the finding was the fact that Fuchsberg & Fuchsberg associates are not required to refer cases to the firm, and “were hired as legal practitioners and not as sources of client referrals.” In Matter of Fuchsberg & Fuchsberg, 817914, the administrative law judge concluded that a person can simultaneously function as an employee and an independent contractor. Galliher, in his 26-page determination, examined the custom among New York personal injury lawyers and the traditions and policies of Fuchsberg & Fuchsberg. The matter arises from a Division of Taxation determination that the Church Street law firm improperly failed to deduct withholding tax from monies paid to its associates for referrals. There was no dispute that the associates involved timely reported the income and properly paid the required taxes. The firm claimed that when its associates referred cases, they were functioning as independent contractors. The state argued that the associates were expected to refer cases to the firm on a right of first refusal, and that was a component of their working relationship with Fuchsberg & Fuchsberg. Galliher said that the Fuchsberg firm, like other personal injury practices, operates on a contingency fee basis. Its associates are paid a salary, on which payroll taxes are withheld. In addition, when an associate is able to refer a case to the firm, that attorney is afforded the same referral fee as attorneys outside the practice. For instance, if a solo practitioner refers a general negligence case to Fuchsberg & Fuchsberg, he or she is typically rewarded with 50 percent of the contingency fee if the plaintiff prevails. Similarly, associates who refer cases to the employer receive the same benefit. Fuchsberg & Fuchsberg does not deduct taxes from the amount it pays for outside referrals. Nor does it deduct taxes for in-house referrals. At a hearing, Manhattan attorney Mark R. Bower, who has worked for Fuchsberg & Fuchsberg and is now in his own practice, testified that it is generally acknowledged that associates in personal injury firms have an obligation to offer their employer whatever business they generate on a right-of-first-refusal basis. He said that through their outside activities with religious, educational, professional and other organizations, attorneys frequently stumble on potential clients and cases. ‘ENVIABLE POSITION’ Also testifying was Abraham Fuchsberg, the longtime managing partner of the firm. Fuchsberg testified that client referrals are not a part of an associate’s job, and that many associates never refer a case to the firm. Additionally, Fuchsberg associates are free to refer cases to other firms, and may collect a referral fee for doing so. In a footnote, Galliher remarks that Fuchsberg & Fuchsberg “appears to be in the enviable position” where it does not want for work and does not need referrals. What turned the matter in Fuchsberg’s favor was largely the firm’s hands-off approach. Galliher noted that the associates’ employment is in no way contingent on referrals, that there are no rules on how associates should refer cases, that associate bonuses are not linked to referrals and that associates are even free to refer to another firm a case that Fuchsberg & Fuchsberg has turned down. “In practice, petitioner’s associates were free to do as they saw fit and as opportunities for referrals arose,” Galliher said. “Apparently, referrals occurred commonly or frequently for some associates, occasionally or infrequently for others, and never for still others.” Further, Galliher said that even if the wages were subject to withholding, Fuchsberg & Fuchsberg would be shielded from liability under the “safe harbor” provisions of � 530 of the Federal Revenue Act of 1978, 26 U.S.C.A. � 3401. Stephen Hochberg and Theodore Silver appeared for the firm. Kevin R. Law argued for the Division of Taxation.

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