Martin S. Azarian, P.A. v. Comm'r of Internal Revenue , 897 F.3d 943 ( 2018 )

United States Court of Appeals
For the Eighth Circuit
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No. 17-2134
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Martin S. Azarian, P.A.
lllllllllllllllllllllAppellant
v.
Commissioner of Internal Revenue
lllllllllllllllllllllAppellee
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Appeal from The United States Tax Court
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Submitted: May 15, 2018
Filed: July 27, 2018
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Before BENTON, KELLY, and STRAS, Circuit Judges.
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BENTON, Circuit Judge.
Martin S. Azarian, P.A., petitioned the Tax Court1 for relief from a
determination that it owed additional employment tax. The Tax Court dismissed for
1
The Honorable Joseph W. Nega, United States Tax Court Judge.
lack of jurisdiction. The taxpayer appeals. Having jurisdiction under section
7482(a)(1),2 this court affirms.
Attorney Martin S. Azarian is the sole owner and officer of the taxpayer, an S
corporation. Each year from 2012 through 2014, Azarian performed services for the
taxpayer, which paid him about $32,500 to $40,000 as wages subject to Federal
Insurance Contributions Act (FICA) tax. See §§ 3101(a)-(b), 3111(a)-(b). The
taxpayer also paid him some larger amounts, which it reported as dividends.
The Commissioner of Internal Revenue performed an employment tax
examination of the taxpayer for the years 2012 through 2014. Examining the
taxpayer’s nature and condition, Azarian’s role in operations, and similar firms’
compensation, the Commissioner concluded that “reasonable compensation” for
Azarian’s services was $125,000 yearly—meaning some of the dividends were, in
substance, wages. In the end, the taxpayer owed $38,808 more in FICA tax and
$7,762 in penalties. The Commissioner sent the taxpayer a “Summary of
Employment Tax Examination” and an “Employment Tax Examination Changes
Report” for each year.
The taxpayer petitioned the Tax Court, arguing that Azarian’s reported wages
were reasonable compensation (or, at least, that reasonable compensation was less
than $125,000). The Commissioner moved to dismiss for lack of jurisdiction. The
Tax Court agreed. This court reviews de novo the Tax Court’s “determination
regarding its jurisdiction.” Bartman v. Commissioner, 446 F.3d 785, 787 (8th Cir.
2006).
The taxpayer argues the Tax Court has jurisdiction under section 7436(a)(1).
That section grants jurisdiction if “there is an actual controversy involving a
2
All statutory citations are to 26 U.S.C.
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determination by the Secretary as part of an examination that . . . one or more
individuals performing services . . . are employees . . . for purposes of subtitle C . .
. .” § 7436(a)(1). Subtitle C governs FICA employment taxes. See §§ 3101-28. The
question here is whether there is an actual controversy involving a determination that
Azarian is an employee for FICA purposes.
The taxpayer believes there is an actual controversy whether some payments
were wages. But even assuming there is an actual controversy, it does not involve a
determination that Azarian is an employee for FICA purposes. An “employee” for
FICA purposes is, as relevant here, an “officer of a corporation” or an employee
under “common law rules.” § 3121(d)(1)-(2). By reporting wages to him each year,
the taxpayer claimed he is an employee, so the Commissioner did not make a
determination on the issue. Instead, the Commissioner relied on the taxpayer’s
classification of Azarian as an employee.
Emphasizing Azarian’s dual role as employee and owner, the taxpayer says that
the Commissioner’s determination that some of the payments were wages, not
dividends, was a determination that—as to those payments—Azarian is an employee,
not an owner. But whether a payment is wages does not turn solely on the recipient’s
status as employee. “Wages,” ignoring irrelevant exceptions, “means all
remuneration for employment,” which generally includes “any service . . . performed
. . . by an employee . . . .” § 3121(a)-(b). The question is not only whether the
recipient is an employee, but also whether the payment is remuneration for services.
Here, the only issue the Commissioner examined is the amount of remuneration for
Azarian’s services. Cf. David E. Watson, P.C. v. United States, 668 F.3d 1008,
1017-18 (8th Cir. 2012) (in a “reasonable compensation” dispute, the question is
“whether the payments at issue were made as remuneration for services performed”).
Thus, the only determination was that some of the payments reported as dividends are
remuneration for his services. This determination does not give the Tax Court
jurisdiction.
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The taxpayer relies on Charlotte’s Office Boutique, Inc. v. Commissioner, 121
T.C. 89 (2003), aff’d 425 F.3d 1203 (9th Cir. 2005). There, the employer reported
both wages and royalties to an owner. Id. at 95. The Tax Court held it had
jurisdiction to determine whether some of the royalties were, in substance, wages.
Id. at 104. But the Tax Court relied on the fact that the Commissioner’s “Notice of
Determination Concerning Worker Classification Under Section 7436” listed
determinations that the owner and “Other Workers” “are to be legally classified as
employees for purposes of federal employment taxes under subtitle C . . . .” Id. at 98,
103. The Tax Court said these “determination[s] of worker classification . . .
provide[] the predicate for our jurisdiction under section 7436(a),” and that
jurisdiction was not lost when the Commissioner later conceded some of its
determinations after the petition was filed. Id. at 103. The Ninth Circuit agreed that
jurisdiction was “properly invoked” initially and that the Tax Court did not later lose
jurisdiction. Charlotte’s Office, 425 F.3d at 1208. The holdings of the Tax Court
and the Ninth Circuit do not apply here, where the Commissioner never made a
determination (in a formal notice or otherwise) about the classification of any worker.
The taxpayer also discusses a Tax Court case. In that case, an employer
classified individuals as both employees and independent contractors, reporting
wages and non-wage payments. SECC Corp. v. Commissioner, 142 T.C. 225, 227
(2014). The Commissioner concluded that some non-wage payments were wages and
notified the employer in a letter. Id. 228-29. The Tax Court held that the letter,
although not formally a “Notice of Determination of Worker Classification,” was a
determination. Id. at 233. The Tax Court found jurisdiction. Id. at 241. But there,
the determination “dealt with worker classification disputes . . . including whether
workers can serve in a dual capacity[ and] whether . . . workers are employees.” Id.
at 235. Here, no determination concerned worker classification disputes.
Finally, the taxpayer argues that ruling for the Commissioner leads to “absurd
results.” First, the taxpayer asserts that if it had reported no wages—arguably less
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FICA compliant—there would be jurisdiction, but because it reported some wages,
there is no jurisdiction. According to the taxpayer, this punishes partial compliance.
But section 7436(a)(1) grants jurisdiction based on the type of controversy, not the
relative level of compliance. If the taxpayer had never claimed Azarian as an
employee, the Commissioner would have determined he was, and the right type of
controversy could exist—one involving a determination of Azarian’s status as an
employee. Second, the taxpayer asserts that even if it had reported just one dollar of
yearly wages, there would be no jurisdiction, and it is absurd that such a small amount
can determine jurisdiction. But by reporting wages in any amount, the taxpayer
claimed Azarian as an employee.
The Tax Court correctly dismissed for lack of jurisdiction.
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The judgment is affirmed.
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