article: SECTION 1. SHORT TITLE. This Act may be cited as the ``Home-Based Business Fairness Act of 1997''. SEC. 2. DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS INCREASED. (a) In General.--Section 162(l)(1) of the Internal Revenue Code of 1986 (relating to special rules for health insurance costs of self- employed individuals) is amended to read as follows: ``(1) Allowance of deduction.--In the case of an individual who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, the taxpayer's spouse, and dependents.'' (b) Effective Date.--The amendment made by this section shall apply to taxable years beginning after December 31, 1996. SEC. 3. CLARIFICATION OF DEFINITION OF PRINCIPAL PLACE OF BUSINESS. (a) In General.--Subsection (f) of section 280A of the Internal Revenue Code of 1986 (relating to definitions and special rules) is amended by redesignating paragraphs (2), (3), and (4) as paragraphs (3), (4), and (5), respectively, and by inserting after paragraph (1) the following new paragraph: ``(2) Principal place of business.--For purposes of subsection (c), a home office shall in any case qualify as the principal place of business if-- ``(A) the office is the location where the taxpayer's essential administrative or management activities are conducted on a regular and systematic (and not incidental) basis by the taxpayer, and ``(B) the office is necessary because the taxpayer has no other location for the performance of the essential administrative or management activities of the business.'' (b) Effective Date.--The amendment made by this section shall apply to taxable years beginning after December 31, 1996. SEC. 4. SAFE HARBOR FOR DETERMINING THAT CERTAIN INDIVIDUALS ARE NOT EMPLOYEES. (a) In General.--Chapter 25 of the Internal Revenue Code of 1986 (relating to general provisions relating to employment taxes) is amended by adding after section 3510 the following new section: ``SEC. 3511. SAFE HARBOR FOR DETERMINING THAT CERTAIN INDIVIDUALS ARE NOT EMPLOYEES. ``(a) Safe Harbor.-- ``(1) In general.--For purposes of this title, if the requirements of subsections (b), (c), and (d), or the requirements of subsections (d) and (e), are met with respect to any service performed by any individual, then with respect to such service-- ``(A) the service provider shall not be treated as an employee, ``(B) the service recipient shall not be treated as an employer, ``(C) the payor shall not be treated as an employer, and ``(D) compensation paid or received for such service shall not be treated as paid or received with respect to employment. ``(2) Availability of safe harbor not to limit application of other laws.--Nothing in this section shall be construed-- ``(A) as limiting the ability of a service provider, service recipient, or payor to apply other applicable provisions of this title, section 530 of the Revenue Act of 1978, or the common law in determining whether an individual is not an employee, or ``(B) as a prerequisite for the application of any provision of law described in subparagraph (A). ``(b) Service Provider Requirements With Regard to the Service Recipient.--For purposes of subsection (a), the requirements of this subsection are met if the service provider, in connection with performing the service-- ``(1) has the ability to realize a profit or loss, ``(2) incurs unreimbursed expenses which are ordinary and necessary to the service provider's industry and which represent an amount at least equal to 2 percent of the service provider's adjusted gross income attributable to services performed pursuant to 1 or more contracts described in subsection (d), and ``(3) agrees to perform services for a particular amount of time or to complete a specific result or task. ``(c) Additional Service Provider Requirements With Regard to Others.--For the purposes of subsection (a), the requirements of this subsection are met if the service provider-- ``(1) has a principal place of business, ``(2) does not primarily provide the service at a single service recipient's facilities, ``(3) pays a fair market rent for use of the service recipient's facilities, or ``(4) operates primarily with equipment not supplied by the service recipient. ``(d) Written Document Requirements.--For purposes of subsection (a), the requirements of this subsection are met if the services performed by the service provider are performed pursuant to a written contract between such service provider and the service recipient, or the payor, and such contract provides that the service provider will not be treated as an employee with respect to such services for Federal tax purposes. ``(e) Business Structure and Benefits Requirement.--For purposes of subsection (a), the requirements of this subsection are met if the service provider-- ``(1) conducts business as a properly constituted corporation or limited liability company under applicable State laws, and ``(2) does not receive from the service recipient or payor benefits that are provided to employees of the service recipient. ``(f) Special Rules.--For purposes of this section-- ``(1) Failure to meet reporting requirements.--If for any taxable year any service recipient or payor fails to meet the applicable reporting requirements of section 6041(a) or 6041A(a) with respect to a service provider, then, unless the failure is due to reasonable cause and not willful neglect, the safe harbor provided by this section for determining whether individuals are not employees shall not apply to such service recipient or payor with respect to that service provider. ``(2) Burden of proof.--For purposes of subsection (a), if-- ``(A) a service provider, service recipient, or payor establishes a prima facie case that it was reasonable not to treat a service provider as an employee for purposes of this section, and ``(B) the service provider, service recipient, or payor has fully cooperated with reasonable requests from the Secretary or his delegate, then the burden of proof with respect to such treatment shall be on the Secretary. ``(3) Related entities.--If the service provider is performing services through an entity owned in whole or in part by such service provider, the references to `service provider' in subsections (b) through (e) may include such entity, provided that the written contract referred to in subsection (d) is with such entity. ``(g) Determinations by the Secretary.--For purposes of this title-- ``(1) In general.-- ``(A) Determinations with respect to a service recipient or a payor.--A determination by the Secretary that a service recipient or a payor should have treated a service provider as an employee shall be effective no earlier than the notice date if-- ``(i) the service recipient or the payor entered into a written contract satisfying the requirements of subsection (d), ``(ii) the service recipient or the payor satisfied the applicable reporting requirements of section 6041(a) or 6041A(a) for all taxable years covered by the agreement described in clause (i), and ``(iii) the service recipient or the payor demonstrates a reasonable basis for determining that the service provider is not an employee and that such determination was made in good faith. ``(B) Determinations with respect to a service provider.--A determination by the Secretary that a service provider should have been treated as an employee shall be effective no earlier than the notice date if-- ``(i) the service provider entered into a contract satisfying the requirements of subsection (d), ``(ii) the service provider satisfied the applicable reporting requirements of sections 6012(a) and 6017 for all taxable years covered by the agreement described in clause (i), and ``(iii) the service provider demonstrates a reasonable basis for determining that the service provider is not an employee and that such determination was made in good faith. ``(C) Reasonable cause exception.--The requirements of subparagraph (A)(ii) or (B)(ii) shall be treated as being met if the failure to satisfy the applicable reporting requirements is due to reasonable cause and not willful neglect. ``(2) Construction.--Nothing in this subsection shall be construed as limiting any provision of law that provides an opportunity for administrative or judicial review of a determination by the Secretary. ``(3) Notice date.--For purposes of this subsection, the notice date is the 30th day after the earlier of-- ``(A) the date on which the first letter of proposed deficiency that allows the service provider, the service recipient, or the payor an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent, or ``(B) the date on which the deficiency notice under section 6212 is sent. ``(h) Definitions.--For the purposes of this section-- ``(1) Service provider.--The term `service provider' means any individual who performs a service for another person. ``(2) Service recipient.--Except as provided in paragraph (4), the term `service recipient' means the person for whom the service provider performs such service. ``(3) Payor.--Except as provided in paragraph (4), the term `payor' means the person who pays the service provider for the performance of such service in the event that the service recipient does not pay the service provider. ``(4) Exceptions.--The terms `service recipient' and `payor' do not include any entity in which the service provider owns in excess of 5 percent of-- ``(A) in the case of a corporation, the total combined voting power of stock in the corporation, or ``(B) in the case of an entity other than a corporation, the profits or beneficial interests in the entity. ``(5) In connection with performing the service.--The term `in connection with performing the service' means in connection or related to the operation of the service provider's trade or business. ``(6) Principal place of business.--For purposes of subsection (c), a home office shall in any case qualify as the principal place of business if-- ``(A) the office is the location where the service provider's essential administrative or management activities are conducted on a regular and systematic (and not incidental) basis by the service provider, and ``(B) the office is necessary because the service provider has no other location for the performance of the essential administrative or management activities of the business. ``(7) Fair market rent.--The term `fair market rent' means a periodic, fixed minimum rental fee which is based on the fair rental value of the facilities and is established pursuant to a written agreement with terms similar to those offered to unrelated persons for facilities of similar type and quality.'' (b) Clarification of Rules Regarding Evidence of Control.--For purposes of determining whether an individual is an employee under the Internal Revenue Code of 1986 (26 U.S.C. 1 et seq.), compliance with statutory or regulatory standards shall not be treated as evidence of control. (c) Repeal of Section 530(d) of the Revenue Act of 1978.--Section 530(d) of the Revenue Act of 1978 (as added by section 1706 of the Tax Reform Act of 1986) is repealed. (d) Clerical Amendment.--The table of sections for chapter 25 of such Code is amended by adding at the end the following new item: ``Sec. 3511. Safe harbor for determining that certain individuals are not employees.'' (e) Effective Dates.-- (1) In general.--The amendments made by, and the provisions of, this section shall apply to services performed after the date of enactment of this Act. (2) Determinations by secretary.--Section 3511(g) of the Internal Revenue Code of 1986 (as added by subsection (a)) shall apply to determinations after the date of enactment of this Act. (3) Section 530(d).--The amendment made by subsection (c) shall apply to periods ending after the date of enactment of this Act.
summary: Home-Based Business Fairness Act of 1997 - Amends the Internal Revenue Code to increase the deduction allowed for the health insurance costs of a self-employed individual to allow as a deduction an amount equal to the amount paid by such individual for insurance which constitutes medical care for such individual, such individual's spouse, and dependents. Adds to provisions defining the disallowance of certain expenses in connection the business use of the home to provide that a home office shall in any case qualify as the principal place of business if the office is: (1) in the location where the taxpayer's essential administrative or management activities are conducted on a regular and systematic basis; and (2) necessary because the taxpayer has no other location for the performance of the essential management or administrative activities of the business. Considers a service provider as not being an employee if the provider: (1) can realize a profit or loss, can incur unreimbursed expenses, and makes a time-limited or task-limited agreement; (2) has a principal place of business, does not primarily provide service at a single service recipient's facilities, pays fair rent for the use of the recipient's facilities, or operates primarily with equipment not supplied by the recipient; and (3) if there is a written contract providing that the provider will not be treated as an employee for Federal tax purposes. Considers (in addition) a provider as not an employee if: (1) there is such a written contract; and (2) the provider is a corporation or limited liability company and does not receive benefits that the recipient's employees receive. Regulates the treatment of determinations by the Secretary of the Treasury that a service provider should have been treated as an employee.