Professional & Executive Leasing, Inc. v. C.I.R., 87-7379

Citation862 F.2d 751
Decision Date06 December 1988
Docket NumberNo. 87-7379,87-7379
Parties-427, 88-2 USTC P 9622, 10 Employee Benefits Ca 1627 PROFESSIONAL & EXECUTIVE LEASING, INC., an Idaho corporation, Petitioner- Appellant, v. COMMISSIONER INTERNAL REVENUE SERVICE, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Thomas G. Walker, Jr., Twin Falls, Idaho, for petitioner-appellant.

Michael J. Roach, Asst. U.S. Atty., Washington, D.C., for defendant-appellee.

Appeal from a Decision of the Tax Court of the United States.

Before FLETCHER, BOOCHEVER and TROTT, Circuit Judges.

BOOCHEVER, Circuit Judge:

Professional & Executive Leasing, Inc. (PEL) appeals a decision by the tax court in its action for declaratory relief. The tax court determined that PEL's retirement plans did not qualify under I.R.C. Sec. 401 because the plans covered individuals who were not employees of PEL. Thus, the requirement of Sec. 401(a)(2) that a qualifying plan be for the "exclusive benefit" of the employer's employees was not met. We Affirm.

FACTS

PEL is a for profit corporation organized under the laws of the State of Idaho for the purpose of "leasing" management personnel, consultants, and licensed professionals (such as attorneys, accountants, dentists, and engineers) to businesses (recipients).

PEL filed a petition for declaratory relief seeking a determination that its retirement plans met the requirements of I.R.C. Sec. 401. PEL entered into an arrangement entitled "Contract of Employment" (contract) with the individuals covered by the plans. Workers under the contract participate in a pension plan, benefit plan, and a fringe benefit program. PEL also entered into an arrangement with the recipients entitled "Personnel Lease Contract" (lease).

PEL prepares the workers' paychecks and withholds Federal and state income taxes and pays Social Security and Federal unemployment taxes for each worker. PEL also pays workmen's compensation premiums and state unemployment insurance premiums for all workers.

Of the 73 workers in contract agreements in August 1985, almost all had a pre-existing ownership or equity interest in the recipient to which they were leased. The lease requires that any worker employed by a recipient must terminate their employer-employee relationship before the lease is executed.

The only review of workers conducted by PEL is to determine that they are licensed under state or local law to practice their professions. Under the contract, PEL retains the right to terminate a worker or reassign a worker to a different recipient. Although PEL has terminated one worker, none has been reassigned. The lease provides that PEL and the recipients may increase or decrease monthly lease payments for the services of a worker at any time. The contract provides that PEL and the worker can also increase or decrease the salary of the worker at any time.

Equipment, tools, and office space for the workers are provided by recipients. The lease also requires the recipient to provide the worker with malpractice insurance in appropriate cases. The contract provides that PEL cannot infringe on the worker's exercise of his professional judgment in rendering services to the public. Workers control the details of their performance of services. Either PEL or the worker may terminate the contract at any time by written notification.

ANALYSIS

The issue we address here is whether the tax court erred in determining that the retirement plan offered by PEL did not qualify under I.R.C. Sec. 401 because it included non-employees and therefore was not exclusively for the benefit of employees.

The appellate court reviews decisions of the United States tax court on the same basis as decisions in civil bench trials in district court. Mayors v. Commissioner of Internal Revenue, 785 F.2d 757, 759 (9th Cir.1986). The trial judge's findings of fact will not be set aside unless clearly erroneous, Fed.R.Civ.P. 52(a), and legal issues are reviewed de novo. United States v. McConney, 728 F.2d 1195, 1200-01 (9th Cir.1984) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984); Fed.R.Civ.P. 52(a).

The determination of an employer-employee relationship involves a mixed question of law and fact. Because the decision is predominantly one of fact and does not involve constitutional issues we apply a clearly erroneous standard of review. See Id. at 1202-03. The Tenth Circuit has similarly concluded that the determination of an employer-employee relationship is a question of fact. Marvel v. United States, 719 F.2d 1507, 1515 (10th Cir.1983).

The courts have considered several factors in determining the existence of the employer-employee relationship. Among those factors are: (1) the right to control the details of the work; (2) furnishing of tools and the work place; (3) withholding of taxes, workmen's compensation and unemployment insurance funds; (4) right to discharge; and (5) permanency of the relationship. See United States v. Silk, 331 U.S. 704, 714-16, 67 S.Ct. 1463, 1468-69, 91 L.Ed. 1757 (1947); see also Simpson v. Commissioner, 64 T.C. 974, 984-85 (1975) Treas.Reg. Sec. 31.3121(d)-1(c) (1980); Rev.Rul. 57-21, 1957-1 C.B. 317.

Although each factor is important, the test usually considered fundamental is set out in a Treasury regulation:

Generally, such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to...

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