<<<<<sent on behalf of James B. SImpson, Public Health Institute>>>>>

Peggy,

I think most people would find it difficult to believe that an individual
who is not otherwise an institutional employee would become one by agreeing
to participate to as a research subject. However, there is an IRS ruling
that indicates that in certain circumstances the government would consider
such person to be an employee of the institution. The IRS ruling is Private
Letter Ruling number 9234024 (Aug. 21, 1992). It involves a unique situation
in which an institution paid research subjects to live for 4-6 months in a
controlled environment and undergo frequent testing as part of a nutrition
study. The IRS ruling only applies to the taxpayer in question, but it does
give some insight into how the government analyzes employment tax issues. It
may be that your tax department believes that the circumstances that your
institution are analogous. I don't think private letter rulings are
available on the Web yet. However, you should be able to get a copy of the
IRS ruling from them or your institution's outside accounting firm. If not,
let me know and I will send you a copy.

Although I don't know of any specific rulings, I don't think it is
surprising that your tax department would consider treating incentive
payments to research subjects who are already employees of the institution
as additional compensation. Generally speaking, the IRS is highly skeptical
about arrangements in which an individual is claimed to be both an employee
and an independent contractor of an institution at the same time.

Good luck,

Jim Simpson

General Counsel

Public Health Institute

Berkeley, CA

(510) 644-8200

xxxxxx@phi.org

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