Prof'l & Executive Leasing, Inc. v. Comm'r of Internal Revenue

• Decision Date: 03 August 1987
• Docket Number: Docket No. 18547-86R
• Citation: 89 T.C. 225,8 Employee Benefits Cas. 2153,89 T.C. No. 19
• Parties: PROFESSIONAL & EXECUTIVE LEASING, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

8 Employee Benefits Cas. 2153

89 T.C. 225

89 T.C. No. 19

PROFESSIONAL & EXECUTIVE LEASING, INC., Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18547-86R

United States Tax Court

Filed August 3, 1987.

Petitioner corporation seeks a declaratory judgment that its pension and profit-sharing plans qualify under sec. 401, I.R.C. 1954. Petitioner leases management and professional personnel (Workers) to commercial businesses and professional practices (Recipients). During the plan years in issue, almost all of the Workers who entered into a contract of employment with petitioner previously were employed by the Recipients to which they were leased. In addition, almost all the Workers had an equity or ownership interest in the Recipient to which they were leased. Recipients provide the equipment, tools and office space for the Workers. Each Worker controls the details of his or her performance of services, including selection of assignments. Recipients pay petitioner a setup fee, a monthly service fee and compensation for the Workers in accordance with a schedule adopted for each Worker. Petitioner prepares the Workers' paychecks and performs all withholding functions.

HELD, Workers are not ‘employees‘ of petitioner leasing organization under common law principles and respondent's regulations. Therefore, petitioner's plans violate the ‘exclusive benefit‘ rule of sec. 401(a)(2), I.R.C. 1954. Thomas G. Walker, Jr., for the petitioner.

Paul S. Horn, for the respondent.

STERRETT, CHIEF JUDGE:

This case is before the Court upon a petition for declaratory judgment pursuant to section 7476 ¹ and Rule 211 alleging that petitioner's pension and profit-sharing plans qualify under section 401(a). The case was submitted without trial on the basis of the pleadings and the facts recited in the jointly stipulated administrative record filed with the Court on September 9, 1986.

The issue presented for our decision is whether petitioner's pension and profit-sharing plans fail to qualify under section 401(a) because such plans cover individuals who are not employees of petitioner.

The administrative record is incorporated herein by reference. Any evidentiary facts or representations contained therein are assumed to be true for the purposes of this proceeding. The following facts relevant to our decision are drawn from the administrative record.

Petitioner, Professional & Executive Leasing, Inc., is a corporation organized under the laws of Idaho and has its principal place of business at 184 Second Street West, Twin Falls, Idaho. Petitioner submitted its defined benefit plans and money purchase plans for determination to respondent during 1984 and 1985. On or about February 24, 1984, a request for determination with respect to the qualified status of the Rodney D. Swartling, M.D., Money Purchase Pension Plan & Trust Agreement was filed with the District Director in Seattle, Washington. ² On or about April 23, 1984, a request for determination with respect to the qualified status of the Rodney D. Swartling, Defined Benefit Plan was filed with respondent. On or about March 19, 1985, a request for determination as to amendments to both the Rodney D. Swartling, M.D., Money Purchase Pension Plan & Trust Agreement and the Rodney D. Swartling, Defined Benefit Plan were filed with respondent.

Petitioner describes itself in its promotional materials (under its prior name of MAS Enterprises, Inc.) as a corporation organized primarily for the purpose of leasing management personnel to commercial businesses and licensed professionals to operating professional practices. Its promotional materials describe the benefits of its program as follows:

Since its inception on November 1, 1982, MAS Enterprises has been able to obtain significant discounts in the purchase of various insurance products. In addition, MAS Enterprises continues to seek out providers of goods and services willing to take into consideration the benefits of selling to a large upscale group.

Further, as an employee of MAS Enterprises, the small business manager or professional practitioner can obtain a very liberal fringe benefit package and retirement plan for himself. Since each individual subscribing to the leasing program will be, for all purposes, an employee of MAS Enterprises, he will be eligible to participate in all of the leasing company's benefit programs. Other employees of the operating entity or practice will not be covered under these programs, but rather will continue to be covered under the benefit programs, if any, made available by the operating company or practice entity. MAS Enterprises has established an extremely flexible benefit package which enables each employee to have his program tailored to his particular needs and desires.

The individuals covered by petitioner's plans are professionals and executives consisting of medical doctors, lawyers, dentists, veterinarians, and business operators. Petitioner has entered into an arrangement entitled ‘Contract of Employment‘ (COE) with these individuals (Workers). ³ Petitioner has also entered into an arrangement with the operating businesses and professional practices (Recipients) for which the Workers provide their services entitled ‘Personnel Lease Contract‘ (PLC).

Workers under a COE with petitioner participate in a money purchase pension plan, a defined benefit plan, and an extensive fringe benefit program as adopted by petitioner for that Worker. The money purchase pension plans provide for: (1) a non-integrated employer contribution equal to 7- 1/2 percent of covered compensation; (2) immediate participation; and (3) full and immediate vesting. The defined benefit plans provide for contributions determined in accordance with generally accepted actuarial principles. Contributions have been made each year in accordance with the terms of the plans.

The fringe benefit program in effect as of November 1983 permitted Workers to elect to participate in a financial planning and asset management program, group health and accident insurance, a medical expense payment and reimbursement plan, life insurance, disability insurance, prepaid group legal services, dependent care assistance, athletic and health club membership, survivor's death benefit, vacation pay, and severance pay.

The COE allows Workers the option to defer the payment for their services which they provide to the Recipients. Workers are given the opportunity under the COE to take purported loans from petitioner, the security for which consists of the Workers' future or deferred compensation. ⁴ Petitioner prepares the Workers' paychecks and withholds Federal and state income taxes and pays Social Security and Federal unemployment taxes for each Worker. In addition, petitioner pays workmen's compensation premiums and state unemployment insurance premiums on behalf of all workers.

On August 24, 1984, petitioner had 52 Workers in COE arrangements. ⁵ In August 1985, petitioner had 73 Workers in COE arrangements. As of November 19, 1985, petitioner had 61 workers in COE arrangements. Of the 73 Workers in a COE arrangement in August 1985, almost all had a pre-existing ownership or equity interest in the Recipient to which they were ‘leased.‘ ⁶ The PLC provides that, if any Worker was employed by a Recipient prior to execution of the PLC, the employer-employee relationship shall be definitely terminated prior to the contract's effective date. Each of the Workers with a prior ownership or equity interest provided services to the same Recipient for which the Worker previously performed services. No Worker having an equity or ownership interest in a Recipient performed services for any other Recipient.

The only review of the qualifications of the workers that petitioner undertakes is to determine whether the Workers are licensed under state or local law to engage in their particular professions or businesses. Petitioner retains the apparent right under the COE to terminate a Worker's services or reassign a Worker to another Recipient. Petitioner has terminated the services of one Worker but has made no reassignments. The PLC provides that petitioner and the Recipient may, at any time, increase or decrease the compensation paid to a Worker for the provision of his services. The COE provides that petitioner and the Worker may, at any time, increase or decrease the Worker's compensation.

Recipients provide the equipment, tools and office space for the Workers. In appropriate instances the PLC requires that the Recipient furnish the Worker with malpractice insurance and that petitioner be named as an insured.

Under the PLC, the Recipient agrees to pay a setup fee of $1,500 for each position staffed by petitioner and a service rate payment of $110 per month for each position staffed. In addition, the Recipient agrees to pay petitioner the compensation for the Workers in accordance with a schedule of compensation adopted for each worker.

The COE provides that the Worker shall not have the right to make any representations on behalf of or to bind petitioner to any contract, obligation or transaction but no such restriction applies to the Worker vis-a-vis the Recipient. The COE provides that petitioner shall not infringe on the Worker's exercise of his professional judgment in rendering services to the public. Each Worker controls the details of his or her performance of services, including selection of assignments. Petitioner or the Worker may terminate the COE by giving the other party written notice.

On May 27, 1986, respondent issued a final adverse determination letter for the plan years ended October 31, 1982, 1983, 1984 and 1985 with respect to the Rodney D. Swartling, M.D., Money Purchase Pension Plan & Trust Agreement, the Rodney D. Swartling, Defined Benefit Plan, and the other defined benefit plans and the money purchase plans adopted by petitioner for the other workers.

Petitioner has notified all interested parties...