Determining whether someone is a statutory employee

Fund-Raising Consultant Liable for Self-Employment Tax (Tavella, TCS) An individual who consulted with others in fund-raising matters while working as a "consultant" and independent contractor for a sole proprietorship was liable for self-employment tax because he was not a statutory employee under Code Sec. 3121(d)(3). He had argued that he was a statutory employee (and, thus, not subject to self-employment taxes) because his work was similar to that of life insurance agents and he competed with them for clients. However, Code Sec. 3121(d) lists discreet and specific categories of service. The categories are not so ambiguous as to allow him, in his service profession, to fit the prescribed definition of a statutory employee. Further, the legislative history states that it was the intent of Congress to exclude from the definition individuals performing services that were not included in one of the designated groups. T.R. Tavella, TC Summary Opinion 2009-76
Thomas R. Tavella v. Commissioner. Docket No. 11463-07S . Filed May 14, 2009.

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DEAN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Employee and Wages: Insurance agents

Amounts received by a retired insurance agent as termination payments were not self-employment income because the payments did not "derive" from his prior business activity. The termination payments were linked only to the agent's previous status as a two-year-plus independent contractor for the insurance company. Because the taxpayer had already been fully compensated for his services, none of his business activity was the source of the termination payments.

R.E. Milligan, CA-9, 94-2 USTC ¶50,565, 38 F3d 1094 (Nonacq.).

Followed.

W.R. Jackson, 108 TC 130, Dec. 51,965. (Acq.).

Note: The holding of Jackson is applied by the IRS to payments made on or before December 31, 1997, and has been codified, effective for payments made after that date ( Code Sec. 1402(k)).

Similarly.

L.W. Dunn, 68 TCM 503, Dec. 50,068(M), TC Memo. 1994-414.

L. Koszewa, 68 TCM 714, Dec. 50,121(M), TC Memo. 1994-458.

A termination payment received by married taxpayers following the husband's retirement as an insurance agent was taxable as ordinary income and did not qualify for capital gain treatment. The insurance company owned all of the assets used in the daily course of the independent agent's business. Thus, the termination payment did not represent gain from the sale or exchange of a capital asset.

W.L. Baker, Jr., CA-7, 2003-2 USTC¶50,604, 338 F3d 789.

Monthly payments received by a retired insurance salesman from an insurance company were not derived from his sales activities and, thus, did not represent self-employment income. The monthly payments represented extended earnings that were calculated by reference to the taxpayer's policy renewal fees during his last 12 months of service. The payments were not equivalent to deferred compensation because the taxpayer had already received all of the renewal commissions to which he was entitled. Even though the payments were determined with reference to the level of renewal commissions generated by the taxpayer in his final year of service, they were not tied to the quantity or quality of his labor.

H.J. Gump, CA-FC, 96-1 USTC ¶50,312.

Where a renewal commission contract of a retired insurance salesman was amended to provide for payment of commissions at the rate of $400 per month for 15 years, the amendment did not alter the nature of the renewal commissions as self-employment income.

E.J. Becker, DC Fla., 62-1 USTC ¶9446.

Married taxpayers' suit seeking a refund of self-employment taxes paid on termination payments received upon retirement from an insurance company was dismissed. They did not file their claim either within three years after filing their tax return or two years after paying their taxes. The taxpayers filed their claim upon obtaining information that the IRS had announced its acquiescence, in result only, to H. Gump (CA-FC), 96-1 USTC ¶50,312, which held that monthly payments received by a retired insurance salesman from an insurance company were not self-employment income.

E.O. Schelling, FedCl, 98-2 USTC ¶50,828.

An insurance agent was an independent contractor for self-employment tax purposes. The employment contract stated that he was intended to be an independent contractor and it did not prohibit him from placing policies with other insurance companies. There was no evidence that the company's district manager had the authority to replace him. Moreover, the agent paid with his own money, without reimbursement from the company, the costs of opening, furnishing and maintaining his office and he paid his own secretary.

K.M. Simpson, 64 TC 974, Dec. 33,402.

Amounts received by a terminated insurance salesman under a settlement agreement with his employer that superseded another agreement providing fluctuating payments regarding future renewal commissions on previously sold insurance policies were self-employment income subject to the self-employment tax. Under the settlement agreement, the income received was of the same character as that received under the previous agreement, the settlement was intended to satisfy concerns that new products would adversely affect future renewal commissions, fixed monthly payments were provided over the specified term, and there was no evidence of a sale of an insurance business or assets.

N.D. Erickson, 64 TCM 963, Dec. 48,555(M), TC Memo. 1992-585. Aff'd, CA-1 (unpublished opinion 8/2/93).

"Extended earnings" paid by an insurer to an individual following his retirement from service as an independent insurance agent constituted self-employment income that was subject to the self-employment tax. The quantity, quality, and duration of the taxpayer's labor for the insurer directly affected the amount of his extended earnings. Thus, there was a nexus between the income received and a trade or business carried on by the taxpayer. He unsuccessfully contended that the extended earnings arose from the sale of assets used in a business and, thus, qualified for capital asset treatment. The record clearly demonstrated that no express sales agreement existed, and there was no evidence of vendible business assets.

R. Schelble, 71 TCM 3166, Dec. 51,393(M), TC Memo. 1996-269.

Married taxpayers were liable for the self-employment tax with respect to residual premiums received by the husband, a retired insurance agent. Their liability was considered to have been conceded because they did not address the issue in their briefs. Payments received by the husband in lieu of renewal commissions were also subject to the self-employment tax because the funds retained the character of the commissions that they replaced.

J.J. Lencke, 73 TCM 3152, Dec. 52,110(M), TC Memo. 1997-284.

Contract value termination payments received by a married couple following the husband's retirement from his employment with an insurance company were subject to self-employment taxes. The husband's right to the payment of the contract value termination payments upon retirement was conditioned upon his agreement to have the retention amounts withheld during the course of his employment, therefore, a causal relationship existed between the right to the payments and the retention requirement. Because the payments were based upon his length of service and the quality of the services he rendered, in addition to the causal relationship, the payments were subject to the self-employment tax.

O.F. Farnsworth, 83 TCM 1153, Dec. 54,634(M), TC Memo. 2002-29.

Payments made to a former district manager for a group of insurance companies following the cancellation of his "District Manager Appointment Agreement" constituted income from self-employment, rather than installment sale proceeds taxable at long-term capital gain rates. Because the earnings, which spanned three years, were tied to the quantity, quality, and duration of his prior labor as an insurance agent, a nexus between the payments and the business was shown, and the payments were characterized as net earnings from self-employment.

E.L. Parker, 84 TCM 649, Dec. 54,960(M), TC Memo. 2002-305.

An insurance agent was liable for self-employment taxes on unreported commissions and additional income resulting from the denial of unsubstantiated Schedule C expenses. The taxpayer conceded that he was self-employed as an insurance agent.

E.J. Diers, 86 TCM 207, Dec. 55,251(M), TC Memo. 2003-229.

An agent whose principal activity is the solicitation of insurance contracts primarily for one life insurance company is an "employee." Also, renewal commissions received after 1950 by a full-time salesman from an insurance policy sold prior to 1951, when the salesman was not an "employee" for Federal employment tax purposes, constitute income from self-employment. However, commissions on policies sold after 1950 constitute wages subject to the employment tax.

Rev. Rul. 54-312, 1954-2 CB 327.

Renewal commissions on the sale of insurance policies by an employee of an insurance company are regarded as "wages" paid for the prior month in which the policy was sold. However, where the salesman is an independent contractor, the renewal commissions are self-employment income.

Special Ruling, September 26, 1952.

An individual who is engaged primarily in the sale of accident and health insurance, and who does not have the status of an employee under the usual common law rules applicable in determining the employer-employee relationship, is not an "employee" under the rules applicable to full-time life insurance salesmen. Those rules apply only to individuals engaged primarily in the sale of life insurance and annuities. Such accident-health insurance salesman's commissions are self-employment income.

Rev. Rul. 59-103, 1959-1 CB 259.

An industrial insurance debit agent engaged by two related companies (which provide desk space, forms and collection books, and selling training) is not self-employed, where he is required to file reports, make regular collections, and perform services solely for the two companies.

Rev. Rul. 57-177, 1958-1 CB 351.

Commissions, including deferred or renewal commissions, received by a part-time insurance salesman who is neither a common-law employee of the insurance company nor a statutory "employee" under the Federal Insurance Contributions Act, constitute earnings from self-employment.

Rev. Rul. 54-309, 1954-2 CB 261.

The value of whole life insurance coverage, for which a husband and wife, as insureds, paid premiums and were subsequently reimbursed by the insurance company's agent, was income to the insureds. The income received by the husband from the reimbursed premiums was subject to self-employment tax because he was also an insurance agent and the transaction was similar to a commission-sharing arrangement.

IRS Letter Ruling 9214007, December 12, 1991.

The following payments received by insurance salespersons and agents after retirement are subject to the self-employment tax: (1) amounts paid after retirement, but calculated as a percentage of commissions received prior to retirement; (2) renewal commissions; and (3) deferred commissions paid after retirement for sales made prior to retirement.

Notice 90-72, 1990-2 CB 353.


Respondent determined a deficiency in petitioner's Federal income tax of $9,922 for 2004. The issue for decision is whether petitioner is subject to self-employment tax.


Background

Some of the facts and one of the issues has been stipulated. The stipulated facts and issue are so found. The stipulation of facts and the exhibits received in evidence are incorporated herein by reference. At the time the petition was filed, petitioner resided in California.

During 2004 petitioner worked as a "consultant" and independent contractor for the sole proprietorship of Mark H. Randall (Mr. Randall), who was doing business as "The Mark Randall Company" (Mark Randall). Petitioner entered into an oral contract "sealed with a handshake" with Mr. Randall to "work together and build his business and make it successful." Petitioner has worked exclusively for Mark Randall since 1994. Petitioner described his work with Mark Randall as "collaborative", but petitioner does not handle any account completely on his own.

Petitioner used the title "President" of Mark Randall because it conveyed to clients his importance to the business of Mark Randall. Petitioner, however, maintained no ownership interest in and had no executive responsibility for Mark Randall. As Mark Randall had no offices, petitioner maintained a home office for his work. Any travel required for petitioner's work was usually on weekends; he usually called on his clients on Sunday.

Typically, petitioner consulted with synagogues in fundraising matters. He conducted interviews from his home with members of the client congregations to determine their feelings about their synagogue and whether they would be willing to increase their donations. Petitioner might also conduct meetings with volunteer congregants to help them solicit funds. Mark Randall paid petitioner a fixed rate per month per client until either the contract between Mark Randall and the client ended or the fee to the client was reduced.

Petitioner included a Schedule C, Profit or Loss From Business, with his Federal income tax return for 2004, stating his business or profession as consultant. Petitioner, however, did not report any self-employment tax. Respondent examined petitioner's return and determined that petitioner owes self-employment tax on his income from Mark Randall. As a result of the adjustment to self-employment tax respondent made other computational adjustments that will be resolved by the Court's decision on the self-employment tax issue.


Discussion

Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer has the burden of proving that those determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In some cases the burden of proof with respect to relevant factual issues may shift to the Commissioner under section 7491(a). Because there is no dispute as to any factual issue in this case, section 7491(a) is inapplicable.



"Statutory Employee"
Petitioner argues that he is a so-called statutory employee and therefore is not subject to self-employment taxes. Generally, the tax on self-employment income applies to the "net earnings from self-employment" of an individual. Secs. 1401, 1402(b). In simplified terms, net earnings from self employment means the "gross income derived by an individual from any trade or business carried on by such individual," less the deductions attributable to the trade or business. Sec. 1402(a). The term "trade or business" generally does not include the performance of services by an individual as an employee. Sec. 1402(c)(2). The term "employee" for employment tax purposes has the same meaning as in section 3121(d). Sec. 1402(d).

An employee for employment tax purposes is defined in pertinent part by section 3121(d) as follows:

SEC. 3121(d). Employee. --For purposes of this chapter, the term "employee" means-

(1) any officer of a corporation; or

(2) any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee; or

(3) any individual (other than an individual who is an employee under paragraph (1) or (2)) who performs services for remuneration for any person * * *

as an agent or commission driver who distributes certain food products, as a life insurance salesman, as a home worker working on certain materials or goods, or as a traveling or city salesman, who is not an agent or commission driver, who meets certain other requirements. The listed individuals, if the contract of service contemplates that substantially all of such services are to be performed personally by such individual, will be classified as employees except that an individual will not be included in the term "employee" if he has a substantial investment in facilities used in connection with the performance of the services (other than in facilities for transportation). Sec. 3121(d).

The Social Security Act Amendments of 1950 "restyled the predecessor" of section 3121(d) and extended coverage to specified classes of workers "irrespective of their common-law status." See United States v. W.M. Webb, Inc., 397 U.S. 179, 186 n. 12 (1970). According to S. Rept. 1669, 81st Cong., 2d Sess. (1950), 1950-2 C.B. 302, 346-347, the definition of "employee" was to be expanded to include individuals performing "certain categories of service which are subject to clear-cut definition," and if "the services are not performed in one of the designated occupational groups," the paragraph is inapplicable with respect to such services.

Petitioner takes the position that his work was similar to that of life insurance agents and that he competed with them for clients. According to petitioner: "it is reasonable to assume that the list of jobs was meant to be examples of and not a finite list to the exclusion of all others who may work in the same manner." Section 3121(d), however, does not provide that the term "employee" includes the occupations on the list. It defines the term "employee" and lists discrete and specific categories of service that are not so ambiguous as to allow petitioner in his service profession, to fit the definition of "statutory employee" as prescribed by that section. The legislative history clearly states the intention of Congress to exclude from the definition of "employee" individuals performing services that "are not performed in one of the designated occupational groups".

If the statute does not include him, petitioner counters by arguing that since he competes with life insurance salesmen, allowing them to be classified as statutory employees while denying him the same classification is unfair and violates his right of equal protection.

Under equal protection analysis, a classification in a Federal statute is subject to strict scrutiny only if it "impermissibly interferes with the exercise of a fundamental right or operates to the peculiar disadvantage of a suspect class." Mass. Bd. of Ret. v. Murgia, 427 U.S. 307, 312 (1976); San Antonio Indep. Sch. Dist. v. Rodriguez, 411 U.S. 1, 16-17 (1973). Neither of these circumstances applies here. Consequently, the rational basis standard is the appropriate one to apply. Under the standard, where a rational basis exists for divergent treatment of different classes of persons under a tax statute, the statute is not in violation of the Fifth Amendment because of the divergent treatment. Regan v. Taxation With Representation, 461 U.S. 540 (1983); United States v. Maryland Savings-Share Ins. Corp., 400 U.S. 4 (1970). Generally, under this standard, a differentiation in treatment is not violative of equal protection principles if any state of facts rationally justifying it is demonstrated to or perceived by the courts. United States v. Maryland Savings-Share Ins. Corp., supra at 6. The Supreme Court has stated that "the presumption of constitutionality can be overcome only by the most explicit demonstration that a classification is a hostile and oppressive discrimination against particular persons and classes. The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it." Madden v. Commonwealth of Kentucky, 309 U.S. 83, 88 (1940). The presumption of the existence of a rational basis for a classification in a revenue statute is particularly strong. Black v. Commissioner, 69 T.C. 505, 507-508 (1977); Nammack v. Commissioner, 56 T.C. 1379, 1385 (1971), affd. per curiam 459 F.2d 1045 (2d Cir. 1972).

The Supreme Court, in United States v. W.M. Webb, Inc., supra at 186, suggests that Congress intended by the statutory revision to limit those occupations that might be considered to be filled by employees.

Petitioner has not shown that Congress did not rationally decide to include individuals in specific service professions in the category of "employee" regardless of the common law rules for determining the employer-employee relationship and to exclude others. The Court finds that the legislative classification is constitutional.

Petitioner, therefore, cannot be a "statutory" employee under section 3121(d)(3). It follows that petitioner had income from self-employment and is liable for self-employment tax for 2004. See secs. 1401 and 1402.

To reflect the foregoing,

Decision will be entered for respondent.

Employer-Employee Relationship: Insurance agents and adjusters

The branch manager of an insurance office was an independent contractor because he had a high degree of control over the way in which the branch office was run, personally paid most business expenses and bore the risk of loss to the extent expenses exceeded the insurance company's office expense allowance. He was not an employee despite the fact that the insurance company retained the right to review poor performance and suggest corrective action, provided him with fringe benefits, and required him to attend training programs.

D.P. Butts, CA-11, 95-1 USTC ¶50,213, 49 F3d 713.

Followed.

A.W. Smithwick, 66 TCM 1545, Dec. 49,457(M), TC Memo. 1993-582.

An inside insurance salesperson who became an outside agent for the same company was an independent contractor because the company did not significantly control the manner in which he sold insurance. The salesperson was compensated on a straight commission basis, set his own hours, and was not required to report to the company on a regular basis.

A. Ware, CA-6, 95-2 USTC ¶50,553.

A life insurance company was not the employer, for withholding purposes, of general agents or soliciting agents. The company's control and its right to control were limited to the result to be accomplished by the agents --their receipt of insurance applications and premiums therefor. The company did not control the means and methods by which the agents solicited the applications.

Standard Life and Accident Ins. Co., DC, 75-1 USTC ¶9352.

The taxpayer was not required to withhold taxes from the compensation paid to certain of its life insurance agents where such agents were determined not to be employees for purposes of federal taxation.

Investors Heritage Life Ins. Co., DC, 79-1 USTC ¶9246.

Similarly.

Investors Heritage Life Ins. Co., DC, 79-1 USTC ¶9394.

Taxpayer was an independent contractor as a result of the following circumstances of her employment: She was unrestricted as to her territory, received compensation only in commissions on sales of burial insurance policies and on collection of premiums on such policies, paid all of her own expenses, and was not under the direction or control of the insurance company as to hours of work or working operations.

I.L. Bell, 13 TC 344, Dec. 17,192 (Acq., 1949-2 CB 1).

An employer-employee relationship existed between taxpayer and his employer, an insurance company, where the elements of control, salary, full time service, etc., were present.

R.E. Kershner, 14 TC 168, Dec. 17,478.

Similarly as to branch managers.

Rev. Rul. 69-287, 1969-1 CB 257.

Most of the evidence, especially the slight degree of control exercised by an insurance company over an agent, supported for tax purposes a contractual provision that the agent was an independent contractor rather than an employee.

K.M. Simpson, 64 TC 974, Dec. 33,402.

A district manager for an insurance company was an independent contractor, not an employee, because the company did not control his performance of services. Restrictions on the sale of products of other insurers, a requirement that the manager maintain regular business hours for customer service, and mandatory participation in new product training and development programs did not constitute control. The manager exercised a high degree of control over the performance of his services and bore the risk of turning a profit or loss.

F.D. Feivor, 69 TCM 2078, Dec. 50,519(M), TC Memo. 1995-107.

An individual who sold insurance exclusively for one insurance company was an independent contractor. Insurance company business reviews were the implementation of quality control standards rather than the exercise of control over the individual's operations.

M. Mosteirin, 70 TCM 305, Dec. 50,809(M), TC Memo. 1995-367.

Married insurance agents were independent contractors rather than employees. The essential facts were indistinguishable from those presented in D.P. Butts, 95-1 USTC ¶50,213, and the taxpayers presented no legal arguments that were not addressed in D.P. Butts and M. Mosteirin, Dec. 50,866(M), at 41,743.80. The taxpayers exercised a high degree of control over the manner in which they operated their business, personally incurred most of their business expenses, and bore the burden of risk of loss from the business.

J.E. Lozon, 73 TCM 2914, Dec. 52,070(M), TC Memo. 1997-250.

A district manager for an insurance company was an independent contractor; thus, he was liable for self-employment taxes and was required to include company contributions to his pension, profit-sharing and health plans in income. Although "full-time life insurance salesmen" qualify for statutory employee status under Code Sec. 3121(d)(3)(B), the accident and health insurance that the taxpayer sold was distinguished from life insurance under state (North Dakota) law; consequently, he did not fall within the classification of "full-time life insurance salesman." In addition, the insurance company did not exert sufficient control over the manner and means by which he performed his job to allow for his classification as a common-law employee. The taxpayer used independent means, had little supervision, was responsible for his own business expenses and bore the risk of loss.

W.C. Wickum, 76 TCM 152, Dec. 52,806(M), TC Memo. 1998-270.

Insurance adjusters or agents who operate independently established businesses with their own clerical staff are not employees of a board of fire underwriters that engages them on a part-time basis to determine and settle fire losses.

Rev. Rul. 68-426, 1968-2 CB 442.

Rev. Rul. 69-288, 1969-1 CB 34.

Insurance adjusters engaged on a full-time basis by an insurance company that requires them to work in the company's offices during regular working hours and follow its clerical procedures are employees of the company.

Rev. Rul. 68-427, 1968-2 CB 443.

An agent remunerated solely by way of commission who sells insurance for an association on the industrial or debit plan is an employee of the association for purposes of income tax withholding on wages.

Rev. Rul. 58-176, 1958-1 CB 349.

Officers of an insurance company who sell insurance on the same basis as self-employed agents are employees of the company as to their wages earned as officers and are self-employed as to their earnings from the sale of insurance policies.

Rev. Rul. 58-505, 1958-2 CB 728.

Individuals who performed services for the taxpayer as private investigators of insurance claims when the subject matter was too technical or unfamiliar to the taxpayer's full-time employees were employees for purposes of FICA, FUTA and federal income tax withholding. The investigators were employees because, among other factors, they performed their services under the taxpayer's business name, their services were an integral part of the taxpayer's business, and the taxpayer had the right to direct and control the investigators' services.

IRS Letter Ruling 9151006, March 26, 1991.

A district manager for an insurance company was classified as an employee of the company for federal income tax purposes. Although the manager had a financial investment in facilities, could realize a profit or incur a loss and paid all of his own business expenses, the company exercised sufficient control over the performance of the manager's duties to establish an employer-employee relationship.

IRS Letter Ruling 9342001, April 21, 1993.

An insurance agent who sold insurance products and magazine subscriptions for a corporation was an independent contractor subject to the SECA tax. He was not subject to the control and direction of the firm, performed work off the company's premises, paid his own business expenses and his compensation was based solely on commissions received.

IRS Letter Ruling 9518001, January 20, 1995.

Individuals who contracted with a business and its predecessor to sell insurance and financial products were independent contractors. The evidence established that the parties intended to create an independent contractor relationship. The workers entered into written contracts that designated them as independent contractors. They received no employee-type benefits and they paid their own operating expenses. Moreover, no employment taxes were withheld from their earnings, which were reported on Forms 1099. Although there was some evidence of an employer-employee relationship in the areas of training and instructions, the businesses' right to control the workers did not involve sufficient day-to-day control necessary to overcome the independent manner in which the workers operated their businesses.

IRS Letter Ruling 9736002, May 21, 1997.