-
Kelbern M. Simpson and Gisela Simpson, Petitioners v. Commissioner of Internal Revenue, RespondentSimpson v. CommissionerDocket No. 3441-73August 28, 1975, Filed
United States Tax Court *74
Decision will be entered for the respondent .During 1970, petitioner worked as an insurance agent for Farmers Insurance Group under a contract that provided, inter alia, that he was an independent contractor and not an employee. Although the contract restricted petitioner as to the policies he could sell for other insurance companies, he sold insurance for 19 other companies during 1970. Farmers Insurance Group did not exercise a significant degree of control over the details of petitioner's work. Petitioner was responsible for and paid for the facilities used in selling insurance. He was compensated solely on a commission basis and, with certain limited exceptions, could only be discharged upon 3 months' written notice.
Held , during 1970, petitioner was not an employee of Farmers Insurance Group for purposes of exclusion from self-employment tax.Ralph L. Jacobson , for the petitioner. andNicholas G. Stucky Thomas F. Kelly , for the respondent.Forrester,Judge .FORRESTER*975 Respondent has determined a deficiency of $ 538 in petitioners' 1970 self-employment tax.
Some of the facts have been stipulated and are so found.
In addition, the buff contract contained the following provisions:
1. Embezzlement of monies belonging to the Companies.
2. Switching insurance from the Companies to another carrier.
5. Wilful misrepresentation that is material to his Agency Operation.
As a Farmers' agent, Simpson was paid solely on a commission basis and, other than "quality rater" bonuses *980 pension or profit-sharing plan nor did Farmers pay for his medical and hospitalization insurance.
Respondent has determined that, during 1970, petitioner was an independent contractor and, therefore, liable for self-employment tax. Petitioner contends that he operated as Farmers' "employee" and that he is not liable for self-employment tax due to the exclusion accorded "employees" by section 1402(c)(2).
290 U.S. 111">290 U.S. 111 (1933);Welch v. Helvering ,Rule 142, Tax Court Rules of Practice and Procedure. He has not carried that burden, and we hold for respondent. *93 *984 In defining the term "employee" for self-employment tax purposes, section 1402(d) requires that we look to section 3121(d), which defines "employee" for purposes of the Federal Insurance Contributions Act. Section 3121(d) provides, in pertinent part, that the term "employee" means, "any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee." Sec. 3121(d)(2).Another definition*94 is found in
section 220 of 1 Restatement of Agency 2d:Among the relevant factors to which the courts have looked in determining the substance of the employment relationship are the following: (1) The degree of control exercised by the principal over the details of the work, (2) which party invests in the *985 facilities used in the work, (3) the opportunity of the individual for profit or loss, (4) whether or not the principal has the right to discharge the individual, (5) whether the work is*95 part of the principal's regular business, (6) the permanency of the relationship, and (7) the relationship the parties believe they are creating.
Sec. 31.3121(d)-1(c)(2), Employment Tax Regs. ; 331 U.S. 704">331 U.S. 704, 716 (1947);United States v. Silk , ;J. G. Ellison, supra at 153 , 353 F.2d 216">353 F. 2d 216, 228 (1965); 1 Restatement of Agency 2d,Illinois Tri-Seal Products, Inc. v. United States , 173 Ct. Cl. 499">173 Ct. Cl. 499supra .In assessing all of the pertinent factors, no one factor is controlling; rather, the result should be governed by the entire situation and the special facts and circumstances of each case.
Sec. 31.3121(d)-1(c)(3), Employment Tax Regs. ; supraUnited States v. Silk, ; , 636-637, 330 F.2d 961">330 F. 2d 961, 965 (1964).Cape Shore Fish Co. v. United States , 165 Ct. Cl. 630">165 Ct. Cl. 630*96 Petitioner argues that numerous elements in his relationship with Farmers show a high degree of control exercised by that company over the details of his work. We agree with petitioner that, in order to show the requisite control over the details of an employee's work, the alleged employer need not "stand over the employee and direct every move that he makes."
, 630 (E.D.S.C. 1948). However, a reading of the entire record reveals little, if any, such control existed.Atlantic Coast Life Ins. Co. v. United States , 76 F. Supp. 627">76 F. Supp. 627In this regard, we note that Simpson was free to solicit insurance throughout the State of California. He set his own office hours and took vacations without Farmers' prior approval. He was not required to attend meetings nor was he provided with "leads" to aid him in selling insurance. With the sole exception of the Agent's Remittance Advice, he submitted no regular written reports to Farmers or his district manager. He was free to use his own methods and style in selling insurance. In short, the record reveals that in the day-to-day conduct of his business activities, petitioner was his own man and operated free from any*97 substantial control by Farmers.
*986 We fail to see how the right to audit his books, the requirement that he post a fidelity bond, or the restrictions placed on his handling of premium moneys bear on Farmers' control over the details of his work. These restrictions illustrate nothing more than Farmers' desire to protect itself against fraudulent and illegal acts on the part of its agents.
Likewise, the provision in the buff contract restricting the amount for which Simpson could sell his agency to the "contract value" does not reflect any degree of control over the manner in which he sold insurance. In fact, we concur with respondent who argues that "the concept of an agent acquiring a quasi-property right for which a principal will pay money at the termination of the relationship is inconsistent with an employer-employee relationship."
In attempting to show the significant degree of control exercised by a Farmers' district manager over his agents, petitioner relies heavily on the incident in 1967 with Temps and the statement in the Planning Guide that district managers are responsible for the "supervision" of their agents. *98 With regard to the Temps incident, no evidence was presented to show that Temps had the authority to consummate his threat and replace Simpson with new agents. Simpson himself was never discharged and no evidence was presented to show that any Farmers' agent was ever terminated for low production. Had petitioner presented a series of incidents with his district manager showing a pattern of supervision and control similar to that illustrated by the Temps incident, we would be more persuaded by his argument. However, from this one isolated instance we are unable to conclude that such a pattern existed.
Although the degree of control exercised by Farmers over the details of Simpson's work is important, it is by no means the only *988 relevant factor we must consider in making our determination. *101 First, it is clear that Simpson and not Farmers, was the party responsible for investing in the facilities utilized in the sale of insurance. He maintained his own office for which he purchased the needed equipment and supplies without reimbursement from Farmers. He maintained a separate office in his home although not required to do so by Farmers. He employed his own secretary and fixed all the terms and conditions of her employment. Other than paying for approximately one-half of Simpson's advertising expenses during 1970, no evidence was presented to show any investment in the facilities by Farmers.
Finally, although we realize that the contract's designation of Simpson as an independent contractor does not thereby create such a status,
390 U.S. 254">390 U.S. 254 (1968), is misplaced. InNLRB v. United Insurance Co .,United Insurance Co . the Supreme Court did not hold, as petitioner*103 claims, that the agents were employees. Rather, the Court simply held that the Court of *989 Appeals for the Seventh Circuit had not accorded proper weight to an NLRB determination holding the agents to be employees and should not have set aside the Board's decision merely because it would have decided the case another way. .NLRB v. United Insurance Co., supra at 260Likewise, we are not persuaded by the other cases petitioner has cited to us involving determinations that certain insurance agents were employees. *104 We recognize that certain indicia of an employer-employee relationship do exist in the present case. The parties intended their relationship to be a permanent one, and Simpson's work was clearly part of Farmers' regular business. However, from an examination of the entire record and after weighing all of the relevant factors, we must conclude that, during 1970, Simpson was not Farmers' employee for purposes of exclusion from self-employment tax.
Footnotes
2. Unless otherwise specified, all statutory references are to the Internal Revenue Code of 1954.↩
3. "Quality rater" bonuses were calculated by assigning points to certain factors in a particular life insurance policy, i.e., the age and income of the insured, the method of premium payment, etc. If the points added up to a certain amount, the agent was paid a bonus on the policy. Farmers retained no discretion as to the payment of the bonus if the minimum number of points were achieved on the policy.↩
4. SEC. 1402. DEFINITIONS.
(c) Trade or Business. -- The term "trade or business", when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 (relating to trade or business expenses), except that such term shall not include --
* * *
(2) the performance of service by an individual as an employee * * *↩
5. Simpson and Farmers entered into a contract in which they agreed that Simpson would be accorded the status of an independent contractor. Simpson, in this case, is attempting to show that, notwithstanding this agreement, he was in fact Farmers' "employee." This raises the issue of whether Simpson should thereby be held to a stronger burden of proof in order to contradict the express terms of the contract into which he freely entered.
The Ninth Circuit, to which this case is appealable, generally follows what is known as the "strong-proof" doctrine.
, 55 (9th Cir. 1961). This doctrine has been applied with respect to the value to be assigned to a covenant not to compete and provides that, "when the parties to a transaction such as this one have specifically set out the covenants in the contract and have there given them an assigned value, strong proof must be adduced by them in order to overcome that declaration."Schulz v. Commissioner , 294 F.2d 52">294 F. 2d 52 , 307, 308 (2d Cir. 1959).Ullman v. Commissioner , 264 F.2d 305">264 F. 2d 305Even though petitioner here is attempting to contradict the express terms of a contract, we are of the opinion that the "strong-proof" doctrine does not apply.
One of the cornerstones of the doctrine is that "the countervailing tax considerations upon each taxpayer should tend to limit schemes or forms which have no basis in economic fact."
. In the type of case with which we are concerned here, the countervailing considerations are not solely those of tax. The principal may well be equally, if not more, concerned with tort liability (respondeat superior) or the power of the agent to bind it contractually. Thus, unlike those agreements assigning a certain value to a covenant not to compete, the parties in this situation may not have equal incentives in making their determination as to the proper status they wish to create.Schulz v. Commissioner, supra at 55Also, as we point out,
infra , one of the factors in determining the existence of a common law employer-employee relationship is the relationship the parties believe they are creating. In cases involving the existence of an agency contract (as in the instant case), the parties' belief will be derived primarily from a contractual provision similar to the one here. One of the basic principles in making an employee versus independent contractor determination is that no one factor should be controlling; rather all factors must be weighed in making the final determination.We think that to isolate the relationship provided for in the contract and, by virtue of that provision, to impose a much stronger burden of proof on petitioner would be to cause the parties' belief to weigh much more heavily on the final determination than is proper under the common law rules.
In any event, we do not feel petitioner in this case has overcome his ordinary burden of proof and, therefore, we do not feel compelled to decide the question of whether the "strong-proof" doctrine should be applicable.↩
6. We note that on three separate occasions the NLRB has been called upon to determine the status of Farmers' agents as "employees" under the National Labor Relations Act. Applying the common law rules, the NLRB has, on two occasions, held such agents to be "employees." However, its most recent determination (Apr. 8, 1974) held the agents to be independent contractors. We are not, of course, bound by any one of the NLRB decisions. We read all three cases with interest and note only that our decision here comports with the NLRB's most recent finding.↩
7. Contrary to respondent's objection, we find both of these matters relevant to Simpson's status during 1970, notwithstanding that one occurred 3 years prior and the other 3 years subsequent to the year at issue.
In addition to the actual control exercised over Simpson, we must also be concerned with Farmers' right to control.
Sec. 31.3121(d)-1(c)(2), Employment Tax Regs. The Planning Guide was published in 1973, at a time when Simpson and Farmers were operating under the buff contract. It is relevant, therefore, to Farmers' right to control Simpson during 1970 under that contract. The incident with Temps occurred 1 year prior to the execution of the buff contract. However, for purposes of our determination here, we accept petitioner's contention that the relationship between the district manager and his agents under the 1966 contract was not affected by the execution of the buff contract in 1968. Thus, we feel both matters bear on the issue at hand. See
, 154, 155↩ (1970).J. G. Ellison , 55 T.C. 142">55 T.C. 1428. Our somewhat extended discussion of the alleged control by Farmers over the details of Simpson's work is a function of the emphasis placed by petitioner on this element and not of its relative importance vis-a-vis other relevant factors. We recognize that an employer-employee relationship may exist where the employer has little, if any, control over the details of the employee's work. See 1
Restatement of Agency 2d, sec. 220, comment (d)↩ , p. 487 (1957).9.
Sec. 31.3121(d)-1(a)(3), Employment Tax Regs. , provides:If the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. Thus, if such relationship exists, it is of no consequence that the employee is designated as a partner, coadventurer, agent, independent contractor, or the like.↩
10.
(E.D.S.C. 1948);Atlantic Coast Life Ins. Co. v. United States , 76 F. Supp. 627">76 F. Supp. 627 (1970);J. G. Ellison , 55 T.C. 142">55 T.C. 142 (1952).Golden State Agency, Inc., and Insurance and Allied Workers Organizing Committee (CIO) , 101 N.L.R.B. 1775">101 NLRB 1775↩
Document Info
Docket Number: Docket No. 3441-73
Citation Numbers: 64 T.C. 974, 1975 U.S. Tax Ct. LEXIS 74
Judges: Forrester
Filed Date: 8/28/1975
Precedential Status: Precedential
Modified Date: 11/14/2024