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IRS says FedEx may owe $319 million

By Ron DaParma
TRIBUNE-REVIEW
Tuesday, December 25, 2007

FedEx Corp. is remaining steadfast in defense of its business model despite its disclosure that the IRS is challenging its long-held assertion that drivers for the company's FedEx Ground division are independent contractors rather than employees.

The company disclosed in a Securities and Exchange Commission filing Friday that the IRS "has tentatively concluded" through a 2002 audit that contract drivers with FedEx Ground should have been classified as company employees.

"The IRS has indicated that it anticipates tax and penalties of $319 million plus interest for 2002," FedEx said. "Similar issues are under audit by the IRS for calendar years 2004 through 2006."

"We were surprised by this preliminary finding and we disagree with it," Maury Lane, a spokesman for the Memphis, Tenn., headquartered FedEx, said on Monday.

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"In 1994, the IRS, through a settlement agreement and ruling letter, affirmed our use of owner-operators to perform pickup and deliveries as independent contractors for tax purposes," Lane said. "We believe that reversal of that original determination is unwarranted and that the associated tax assessment is inappropriate."

The decision is the latest in a series of attacks on FedEx Ground's system for contracting with independent pickup and delivery drivers who own and maintain their own trucks while lacking access to work benefits provided for company employees.

It faces lawsuits from unhappy Fedex Ground drivers from around the country and is in the process of making major changes with its independent driver system in California because of legal challenges.

More than 50 lawsuits brought by drivers in 36 states have been consolidated in federal court in South Bend, Ind.

Among their complaints, drivers argue they should be company employees with full employee benefits and should be reimbursed for on-the-job expenses and lost wages.

In November, the California Supreme Court rejected the company's claim that state trial and appeals courts erred in deciding that FedEx's independent contractor drivers are full-time employees.

In California, FedEx Ground is offering financial incentives to single-route contract drivers to take on multiple routes. A research note filed in October by analysts with Credit Suisse said those incentives could total up to $20 million.

FedEx Ground became a part of FedEx when the company acquired the former Roadway Packaging in 1998. The unit, which is headquartered in Moon, was branded as FedEx Ground in 2000, said spokesman Rob Boulware.

According to the company's second-quarter earnings report issued Thursday, the division had revenues of $1.7 billion, up 12 percent from last year, for the period ending Nov. 30.

The unit has 15,000 independent contractors nationwide, including about 175 in the Pittsburgh region, Boulware said.

It operates three facilities in Western Pennsylvania -- Neville Island and Greenfield in Allegheny County, and Hunker in Westmoreland County -- from which its independent drivers are dispatched.

FedEx Ground, which serves commercial customers, and FedEx Home Delivery, which provides residential service, work out of the same facilities.

In its earnings report, which was released the day before the IRS disclosure, FedEx noted that "increased regulatory and legal uncertainty" with the independent contractor model could eventually cut into earnings at FedEx Ground.

But despite the preliminary determination by the IRS, FedEx is not required to set aside any money for or take any immediate action to pay any money until an appeals process is completed, said Lane, who noted that cases of this type can take nearly a decade to decide.

"We will meet with the IRS to better understand their concerns, and if necessary after that, we will appeal," he said.

Ron DaParma can be reached at rdaparma@tribweb.com or 412-320-7907.
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