Aparacor, Inc. v. United States

• Decision Date: 18 May 1977
• Docket Number: No. 139-73.,139-73.
• Citation: 556 F.2d 1004
• Parties: APARACOR, INC., formerly Queen's-Way to Fashion, Inc. v. The UNITED STATES.
• Court: U.S. Claims Court

556 F.2d 1004

APARACOR, INC., formerly Queen's-Way to Fashion, Inc. v. The UNITED STATES.

No. 139-73.

United States Court of Claims.

May 18, 1977.

Warren C. Seieroe, Chicago, Ill., attorney of record, for plaintiff; Lawrence Gerber, Michael R. Fayhee and McDermott, Will & Emery, Chicago, Ill., of counsel.

Richard F. Treacy, Jr., Washington, D.C., with whom was Acting Asst. Atty. Gen., Myron C. Baum, Washington, D.C., for defendant, Theodore D. Peyser, Jr., and Donald H. Olson, Washington, D.C., of counsel.

Before COWEN and SKELTON, Senior Judges, and KUNZIG, Judge.

OPINION

PER CURIAM:

This case comes before the court on defendant's exceptions to the recommended decision of Trial Judge Louis Spector, filed April 7, 1976, pursuant to Rule 134(h), having been submitted on the briefs and oral argument of counsel. Upon consideration thereof, since the court agrees with the trial judge's recommended decision, with minor modifications by the court, it hereby adopts the decision as modified and hereinafter set forth^* as the basis for its judgment in this case. Therefore, it is concluded that plaintiff is entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined in further proceedings under Rule 131(c) in accordance with this opinion.

OPINION OF TRIAL JUDGE

SPECTOR, Trial Judge:

This is a tax case in which the issue is whether or not many thousands of individuals and groups or organizations of individuals engaged in distributing and selling plaintiff's products at retail, and solely on a commission basis, are employees of plaintiff or independent contractors and, therefore, whether or not the commissions they received are "wages," within the intendment of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and the statutory provisions on Collection of Income Tax at Source on Wages (Chapters 21, 23 and 24, Internal Revenue Code). At issue are employment taxes for the years 1968, 1969 and 1970. To test the assessment of additional taxes of $2,440,923.05¹ for those 3 years, plaintiff paid and promptly sued for refund of the nominal sum of $101,021.92 in Federal Unemployment Tax for the year 1970.

Early in the case, an independent issue arose out of plaintiff's motions for production of unpublished rulings of the Commissioner of Internal Revenue, other IRS documents and studies, and for parallel depositions of designated officials to show prior employment tax treatment of other individuals engaged in the business of direct selling on a commission basis. The purpose of the motions was to develop evidence that IRS officials had abused their discretion and acted arbitrarily and capriciously in not according plaintiff the same tax treatment as its competitors, in placing on plaintiff the burden of collection from the individuals primarily liable, and in changing the prior course of conduct on which plaintiff had relied, thus creating an estoppel. By order of April 12, 1974,² the court vacated without prejudice the trial judge's allowance of those motions, and directed severance of the "abuse of discretion" and "discrimination" issue, pending prior trial addressed solely to the nature of the relationship of the above-described persons and groups of persons to plaintiff.

Whether the relationship of employee or independent contractor exists in a given case is determined by the usual common law tests, and depends essentially upon the facts present in each particular case.³ In opinions involving different facts, certain criteria and factors have been developed and discussed for use as guidelines in analyzing the relationships present in those factual contexts.⁴ Although the factors thus developed cannot usefully be discussed and applied in the abstract, and outside of a specific factual situation under study, they do govern the relevancy and materiality of the underlying facts selected and emphasized to make the record in the case at bar. A very large and excellent record has been developed by able counsel in this instance.

On the basis of that record, it is concluded that the individuals and groups or organizations of individuals above-described, who were engaged during the years in question in the distribution and sale of plaintiff's products on a commission basis, were not plaintiff's employees within the intendment of Chapters 21, 23 or 24 of the Internal Revenue Code. Virtually none of the characteristics of an employer-employee relationship are demonstrated by this record. Their relationships to plaintiff were, on the contrary, those of independent entrepreneurs to the supplier of a product.

Detailed findings of fact⁵ have been furnished to both parties. The facts are sufficiently summarized hereinafter to provide a basis for decision.

Plaintiff is engaged in the business of designing and supplying merchandise, principally women's apparel. At time of trial, plaintiff had 400 employees on whom employment tax forms are regularly filed. The apparel is sold at retail by others, usually by the so-called party plan method. This is a large, nationwide business which had very modest beginnings back in 1952. Its founder, Mrs. Mabel Westerberg, having earned a respite from her family duties, conceived the idea of buying women's apparel and making it available at wholesale to other housewives and mothers, to be distributed and sold at retail in their spare time.

The original retail distributors were personally recruited by the Westerbergs and by a friend who became a partner. In the beginning, shipment would be made on open account to the distributors who would sell at retail and retain the difference as their profit. As the business prospered beyond all original expectations, a more elaborate commission system, characteristic of party plan selling in general, was developed to meet the competition. It was, in fact, a system learned by the Westerbergs from some of the experienced party plan distributors whom they had recruited from other party plan businesses.

Merchandise is shipped c.o.d. for the full retail price, following which commission is paid to the distributor, and so-called "override" commissions are paid to "district," "region," "field" and (for a time) "area" distributors who have recruited and developed larger and larger organizations of individual distributors. Mrs. Westerberg testified that throughout the entire history of her business she had viewed the company's relationship with these distributors as one where the latter are helped to get into business for themselves; as one where her company designed and provided a line of products in which she took justifiable pride; as one where each distributor had complete freedom as to the method and manner in which she conducted her business; and as one where the company has been ready and willing to help with suggestions, but that they are only suggestions which the distributors are totally free to accept or ignore.

The word "termination" is used in company procedures simply to signify that a relationship with a particular distributor has come to an end because of a lack of interest on the part of the distributor. Maintaining an inactive distributor on the company mailing list is expensive, and "termination" is essentially the act of removal from the mailing list. Mrs. Westerberg testified: "We never gave up a girl. She gave us up, but we didn't give her up." If the company's efforts to keep a distributor failed, her name was eventually stricken from mailing lists, but all she had to do to get her name restored was to send in another order.

The current president of the company testified that Queen's-Way has itself never "terminated" a distributor actively engaged in selling its products because that would be incompatible with the company's main objective, namely, increase in sales of its products. There have been a few isolated cases of dishonesty or similar circumstances where on instructions from the leader of a district, region or field, an individual was removed from the mailing list.

Persons engaged individually and directly in party plan distributing and selling are known, in company parlance, as fashion counselors, or merely "counselors." If they are successful in recruiting a number of other counselors, they usually continue to act as an individual counselor earning commissions, but would also earn an override commission on the sales of the counselors they had recruited, and would thereafter be known as "district leaders." By similarly developing additional districts, they could become "regional managers" earning a regional override, or "field supervisors" (the field override). There were also at one time a few "area directors" (area override), but this latter designation was discontinued in 1971. Individuals earning override commissions as district leaders, regional managers, field supervisors or (for a while) area directors, are usually referred to collectively as "managers."

As a matter of general, but not necessarily actual, practice new counselors are actively sought by plaintiff and by the thousands of individuals already engaged in the sale and distribution of plaintiff's products through advertising, and by other less formal means. Advertising by existing distributors is of the cooperative type, that is, plaintiff ordinarily reimburses counselors and managers for one-half the cost of advertising placed by them.

Generally speaking, when sales are by the party plan method, a retail distributor (counselor) persuades another individual to be a "hostess" and to sponsor a party in her home. The latter invites a number of her friends and neighbors. The counselor sets up her sample display, and, after refreshments have been served, she explains the garments she sells in an informal party atmosphere.

Orders of guests are combined into a "party order" sent to plaintiff by the counselor. A combined c.o.d. shipment is later sent to the hostess. As an inducement to...