Ware v. U.S., 94-1293

• Decision Date: 16 October 1995
• Docket Number: No. 94-1293,94-1293
• Citation: 67 F.3d 574
• Parties: -6772, 95-2 USTC P 50,553, Unempl.Ins.Rep. (CCH) P 14813B Albert and Helen R. WARE, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 574

67 F.3d 574

76 A.F.T.R.2d 95-6772, 95-2 USTC P 50,553,

Unempl.Ins.Rep. (CCH) P 14813B

Albert and Helen R. WARE, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 94-1293.

United States Court of Appeals, Sixth Circuit.

Argued April 14, 1995.

Decided Oct. 16, 1995.

James R. Hulbert (argued and briefed), Grand Rapids, MI, for Plaintiffs-Appellees.

Richard Farber, David English Carmack, Paula K. Speck (argued), Gary R. Allen, Acting Chief (briefed), U.S. Dept. of Justice, Appellate Section, Tax Div., Washington, DC, for Defendant-Appellant.

Before: NELSON and BOGGS, Circuit Judges; and GILMORE, District Judge. ^*

BOGGS, Circuit Judge.

The district court granted summary judgment for plaintiffs Albert and Helen Ware in their suit to recover taxes that they overpaid in 1988, 1989, and 1990. The district court found that because Albert Ware was an independent contractor of the Automobile Association of America ("AAA") rather than an employee, the plaintiffs could deduct Mr. Ware's unreimbursed business expenses from gross income. The district court entered summary judgment for the Wares, and the United States timely appeals that final judgment.

Because we agree with the district court's conclusion that Mr. Ware was an independent contractor rather than an employee of AAA, we affirm the district court's decision.

I

In 1992, plaintiffs sought to amend their federal tax returns for 1988, 1989, and 1990 to reflect Albert Ware's status as an independent contractor. The amendments would have deducted from the plaintiffs' gross income Albert Ware's unreimbursed business expenses ¹ as a "Profit or Loss from Business" on Schedule C of Form 1040; the Wares had previously claimed the deduction as "Employee Business Expenses" on Form 2106. Schedule C deductions are subtracted from gross income to establish adjusted gross income ("AGI"), while employee business expenses are an itemized deduction that is subtracted from AGI to arrive at taxable income. However, itemized deductions on Form 2106 are excludable only to the extent that they exceed 2% of an individual's AGI. The net result of these amendments would have been federal income tax refunds of $491, $984, and $2,388, plus interest.

Moreover, the Wares state that the effect on their Michigan state taxes would have been even greater. Michigan assesses its income tax solely on the basis of federal AGI, so if the business expenses were treated as an itemized deduction (Employee Business Expense), the Wares' unreimbursed expenses would not be deducted on the state tax at all. Mich.Comp.Laws Ann. Sec. 206.30(1)(a)-(b) (West 1986).

In a letter dated June 8, 1992, the Internal Revenue Service ("IRS") denied the Wares' claimed refund on the basis of the amended returns. Consequently, the Wares sued the IRS to recover "internal-revenue tax ... erroneously or illegally assessed or collected," under 28 U.S.C. Sec. 1346(a)(1). The parties submitted to the district court a set of stipulated facts, from which the district court concluded that Albert Ware was an independent contractor of AAA, not an employee, and therefore was entitled to deduct the full amount of his unreimbursed business expenses from gross income. The district court entered a final judgment granting the Wares a refund, and the United States now appeals from that decision.

II

For the most part, the facts are undisputed. Ware has sold insurance for AAA since 1962. In 1986, AAA offered him and two other sales agents the opportunity to become general agents and open their own insurance sales office. After conducting a market analysis, the three rented an office in Grand Rapids, and AAA approved the general layout and location of the office pursuant to provisions in its General Agents Manual. Ware was limited to selling only AAA policies, except that he could place business through other companies when the risk to be insured did not meet AAA standards.

The initial cost for leasing an office and buying furniture, a copier, a sign, and a telephone system was between $8,000 and $10,000, which was divided among the three general agents. AAA paid for the office's local phone service, but this was necessary in order for AAA to regulate Ware's Yellow Pages advertisement; payment for all other advertising was Ware's responsibility. Ware agreed to obtain all personnel through a temporary agency specified by AAA, so that when Ware wanted to hire a new employee, he would first direct the person to the agency and then hire that person through the agency. ² Ware also agreed to keep the agency open at least 45 hours per week, including 9 a.m. to 5 p.m., Monday through Friday. He was not required to be present personally at any particular time, since it was expected that agents would be out of the office making sales calls. Ware used a computer system that wrote policies through AAA and was connected directly to a AAA mainframe. However, this system was used only to submit the policies for approval and receive confirmation. AAA supplied various insurance forms and business cards at no cost. Ware was free to utilize whatever sales techniques he preferred, although his applications and policies had to satisfy AAA guidelines. AAA offered various training meetings and seminars, but attendance was at Ware's option.

The contract between Ware and AAA allowed termination by either party at will, established production requirements, and contained a ninety-day post-termination agreement not to compete. Ware also agreed that his "book of business" was property of AAA and would be returned to AAA within three days of termination. Ware worked solely for a commission, which was paid on a semi-monthly basis. He received extensive benefits, including paid vacation and sick days, was covered by a company-sponsored health and dental plan, and was eligible for a 401(k) and pension plan in which AAA matched Ware's contributions. State, federal, and FICA taxes were deducted from Ware's commission checks, as were his contributions to his medical insurance.

III

This court reviews de novo the district court's entry of summary judgment. Baggs v. Eagle-Picher Industries, Inc., 957 F.2d 268, 271 (6th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 466, 121 L.Ed.2d 374 (1992). The parties in this case do not disagree about the facts and circumstances of Ware's relationship with AAA, but instead dispute the legal meaning and weight that those facts should be given individually and in the aggregate.

The Supreme Court has consistently held that where a statute does not specifically define an "employee," that term is interpreted by incorporating the common law of agency. Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322-24, 112 S.Ct. 1344, 1347-49, 117 L.Ed.2d 581 (1992); Community for Creative Non-Violence v. Reid, 490 U.S. 730, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989); see NLRB v. United Ins. Co. of America, 390 U.S. 254, 258, 88 S.Ct. 988, 991, 19 L.Ed.2d 1083 (1968) (no "shorthand formula or magic phrase"; a court must assess and weigh "all of the incidents of the relationship ... with no one factor being decisive").

In Community for Creative Non-Violence v. Reid, the Court distinguished between an employee and an independent contractor for purposes of the "work made for hire" provisions of the Copyright Act of 1976. Reid involved a dispute between an artist and a non-profit organization over the copyright ownership of a sculpture. "In determining whether a hired party is an employee under the general common law of agency," the Court "consider[ed] the hiring party's right to control the manner and mean by which the product is accomplished." 490 U.S. at 751, 109 S.Ct. at 2178. For this inquiry, the Court evaluated a non-exclusive list of factors, with no single element being determinative:

Among the other factors relevant to this inquiry are the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party's discretion over when and how long to work; the method of payment; the hired party's role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.

Id. at 751-52, 109 S.Ct. at 2178-79, citing Restatement of Agency Sec. 220 ³ (footnotes omitted).

Despite the Court's language emphasizing control and its finding that "CCNV members directed enough of Reid's work to ensure that he produced a sculpture that met their specifications," the Court held that Reid was an independent contractor because "the extent of control the hiring party exercises over the details of the product is not dispositive." 490 U.S. at 752, 109 S.Ct. at 2179. Instead, "all the other circumstances weigh heavily against finding an employment relationship," among them: Reid's use of his own tools and studio, his freedom to decide when and how long to work, and that CCNV did not pay payroll or Social Security taxes, provide employee benefits, or contribute to workers' compensation or unemployment insurance funds.

The Court again grappled with the employee/independent contractor distinction in Nationwide Mut. Ins. Co. v. Darden, where the question was whether the plaintiff was an employee, and thus a benefit plan "participant" under 29 U.S.C. Sec. 1132(a), for purposes of enforcing ERISA. 503 U.S. 318, 112 S.Ct. 1344, 117 L.Ed.2d 581 (1992). The statute's definition of employee was "completely circular and explains nothing," id. at 323, 112 S.Ct. at 1348, and the Fourth Circuit had utilized an "employee expectation" test for determining hiring status. The Court rejected the Fourth Circuit's test as too unpredictable and subjective, and it reiterated that the general common law of agency...