Chin v. U.S., 93-17232
| Decision Date | 07 June 1995 |
| Docket Number | No. 93-17232,93-17232 |
| Citation | 57 F.3d 722 |
| Parties | -2631, 95-1 USTC P 50,302, Unempl.Ins.Rep. (CCH) P 14626B William CHIN; Cecily Chin, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Loretta C. Argrett and Kevin M. Brown, U.S. Dept. of Justice, Washington, DC, for defendant-appellant.
Sandra G. Scott, San Francisco, CA, for plaintiffs-appellees.
Appeal from the United States District Court for the Northern District of California.
Before: CUMMINGS, * SCHROEDER, and RYMER, Circuit Judges.
The United States appeals the district court's judgment after a bench trial in favor of Dr. William Chin and his spouse Cecily Chin in Dr. Chin's action for a refund of federal income taxes for the 1985 tax year. The government claims the district court clearly erred in finding that Chin was an independent contractor, rather than an employee, of the Agency for International Development ("AID"). If Chin was an independent contractor for tax year 1985, he qualifies for the "foreign earned income" exclusion from gross income under Sec. 911 of the Internal Revenue Code, 26 U.S.C., and is thus entitled to a refund of federal income taxes, penalties, and interest in the amount of $35,878 for 1985. We have jurisdiction, 28 U.S.C. Sec. 1291, and affirm.
William Chin is a world renowned specialist in malariology and holds both a master's degree in Public Health and a medical degree. In December of 1982, Dr. Chin entered into a two-year "personal services contract" with AID to serve as the malaria control advisor to the Country of Pakistan. AID, a U.S. agency, establishes this country's development assistance policy and provides information, technical advice, supplies and personnel to foreign countries for particular projects. AID specifically hired Dr. Chin to provide technical assistance to the Pakistani Directorate of Malaria Control in Dr. Chin was hired under a personal services contract ("PSC"). The contract included specific provisions regarding salary and continuing education which Chin negotiated with AID. At the time, AID hired three categories of personnel: (1) direct hires, (2) personal services contractors and (3) non-personal services contractors. Direct hires were hired without contracts and for an indefinite term. Personal and non-personal services contractors had written employment contracts that covered specific periods of time. The choice of a PSC format automatically triggered the issuance of biweekly earnings statements that showed, inter alia, the amount of federal income and social security withheld by AID, as well as the accrual of vacation and sick leave.
its Ministry of Health and Social Welfare to implement the country's malaria control program, a project funded in part by AID. AID extended Chin's contract twice to January of 1987.
In the late 1980s, the Internal Revenue Service audited many individuals that had PSCs with AID overseas. In response, AID created a procedure whereby either the IRS or a taxpayer could request an opinion and AID would review the PSC to determine if the contract created an employer/employee relationship or independent contractor status. AID sent out a General Notice to contracting officers listing factors indicative of employee status. 1 AID reviewed Dr. Chin's contract and determined that AID did not supervise Chin in the administration of Chin's contract. AID further concluded that the PSC format should not have been used.
For the tax years before 1985, Dr. Chin included his AID salary as taxable gross income on his tax returns. After discussions with other individuals who had contracts with AID and his review of information prepared by the American Foreign Service Agents Association, Chin claimed the foreign income tax exclusion on his AID income for the first time in 1985. When the IRS issued a notice of deficiency disallowing the foreign income tax exclusion, Chin administratively appealed this assessment and the IRS Appeals Office refused to abate the tax deficiency. Dr. Chin then paid the tax and filed an administrative claim for a refund of the $35,878 tax amount for 1985. After the IRS denied his claim for a refund, he brought this suit in district court.
The district court concluded that Dr. Chin was an independent contractor and not an employee of AID, and that he therefore qualified for the foreign income exclusion. The district court founded its holding upon specific findings of fact that included the following:
* Dr. Chin's office was located at the Ministry of Health, Government of Pakistan, which provided Dr. Chin with a secretary and office furniture.
* Dr. Chin went to the AID Mission only to collect his mail, to cash checks, to use the cafeteria, and to attend an occasional meeting.
* He set his own schedule, which generally paralleled the hours of the Ministry of Health--a six-day work week. By contrast, employees at AID worked a five-day week.
* Dr. Chin's territory comprised the entire country of Pakistan and he spent over one-third of his time in the field, on location.
* AID did not directly supervise Dr. Chin on a daily basis, nor did it control the details of his work. Chin prepared yearly and quarterly reports for, and attended monthly meetings with, Dr. Davis, the Chief of AID's Health, Population and Control Department.
* Dr. Chin negotiated with AID for his salary and for continuing education.
* AID determined that Dr. Chin was not an employee of AID because AID did not supervise him in the administration of the contract and because the contract schedule was not written as one establishing an employee relationship. AID determined that the PSC format should not have been used and that the contract should have been written either as one establishing an independent contractor relationship or as a host country contract.
The district court entered judgment in favor of Dr. Chin. The government timely appealed.
The determination of an individual's status as an employee or an independent contractor for tax purposes involves a mixed question of law and fact that is predominantly one of fact which this court reviews for clear error. Professional and Executive Leasing, Inc. v. CIR, 862 F.2d 751, 753 (9th Cir.1988) (); McGuire v. United States, 349 F.2d 644, 646 (9th Cir.1965) (question of fact).
Section 911(a) of the Internal Revenue Code, 26 U.S.C., permits certain electing individuals, who are bona fide residents in a foreign country for a specified period of time, to exclude from their gross income money earned from sources outside the United States. Subsection (b)(1)(B)(ii) provides that such excludable foreign earned income does not include amounts "paid by the United States or an agency thereof to an employee of the United States or an agency thereof." Section 911 contains no definition of the term "employee." Under federal tax law, courts look to "the usual common law rules" when distinguishing between employees and independent contractors. Treas.Reg. Sec. 31.3121(d)-1(c)(1) (1980). These common law factors include:
(1) the right to control the details of the work;
(2) furnishing of tools and the workplace;
(3) withholding of taxes, workmen's compensation and unemployment insurance funds;
(4) right to discharge; and
(5) permanency of the relationship.
Professional and Executive Leasing, Inc., 862 F.2d at 753.
The first Professional factor, right to control, has been deemed the "fundamental test" in distinguishing employees from independent contractors. Id. at 753; McGuire, 349 F.2d at 646. The Treasury Regulations similarly make control the locus of concern:
Generally [an employer/employee] 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 be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and...
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