Eastern Inv. Corp. v. U.S., 94-3029

• Decision Date: 01 March 1995
• Docket Number: No. 94-3029,94-3029
• Citation: 49 F.3d 651
• Parties: -1445, 95-1 USTC P 50,188, Unempl.Ins.Rep. (CCH) P 14515B EASTERN INVESTMENT CORP. and Lowen Corporation, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 651

49 F.3d 651

75 A.F.T.R.2d 95-1445, 95-1 USTC P 50,188,

Unempl.Ins.Rep. (CCH) P 14515B

EASTERN INVESTMENT CORP. and Lowen Corporation, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 94-3029.

United States Court of Appeals Tenth Circuit.

March 1, 1995.

Brian G. Grace of Grace, Unruh & Pratt, L.C., Wichita, KS (Jana C. Werner, Grace, Unruh & Pratt, L.C., and Jack D. Flesher, Bever, Dye, Mustard & Belin, with him on the briefs), for appellants.

William J. Patton, Tax Div., Dept. of Justice, Washington, DC (Loretta C. Argrett, Asst. Atty. Gen., Ann B. Durney, Tax Div., Dept. of Justice, Washington, DC, and Randall K. Rathbone, U.S. Atty., Topeka, KS, of counsel, with him on the brief), for appellee.

Before ANDERSON and HOLLOWAY, Circuit Judges, and DOWNES, ^* District Judge.

STEPHEN H. ANDERSON, Circuit Judge.

Eastern Investment Corporation and its subsidiary, Lowen Corporation (collectively "Lowen"), appeal from the district court's judgment holding Lowen liable for federal employment taxes, penalties, and interest. For the reasons stated below, we conclude that the district court did not err and, therefore, affirm.

BACKGROUND

Lowen Company Inc. (now Eastern Investment Corporation) was incorporated in Kansas in 1961. From the date of its incorporation until June 30, 1984, Lowen Company Inc. custom designed, manufactured, and marketed decals and real estate signs. In the late 1970s or early 1980s Lowen Company Inc. divided into two parts, the decal division and the real estate sign division. Lowen's decal division designs and manufactures custom decals, which are sold predominantly to large trucking fleets and to original equipment manufacturers. Decal sales, therefore, is a specialized and individualized business which requires the decal salesperson to be knowledgeable about Lowen's products. Appellants' App. at 136-37. It also requires extensive contact between the salesperson, the customer, and Lowen's home office because the decals are designed and manufactured to the customer's specifications. Lowen's sign division, however, does not require such a high level of specialization. The sign division predominantly makes real estate signs which are sold to real estate brokers, nationwide real estate accounts, and home builders. Although each customer has its own specific logo, design, and colors, the size and design of the real estate signs are fairly standard. Id.

In the early 1980s, a few states audited Lowen Company Inc. to collect sales tax for goods sold by Lowen employees within those states. In July 1984, apparently in response to these complications, Lowen Company Inc. underwent a corporate change. Lowen Company Inc. transferred all of its sales functions to a newly formed company, Lowen Sales Corporation (now Lowen Corporation), and decided to treat all of its sales representatives as independent contractors to prevent future exposure to state sales taxes. To effectuate its plan, on July 1, 1984, Lowen required all of its sales representatives, whether in the sign or decal division, to sign an "Independent Sales Representative Agreement" with the new corporation. There was, however, little or no difference in the way Lowen interacted with the sales representatives before and after July 1, 1984.

In 1987, the Internal Revenue Service ("IRS") audited Lowen and determined that all the Lowen salespersons were employees during the relevant period, January 1, 1984, through December 1, 1986. The IRS assessed federal employment taxes and various related penalties based on this determination. Lowen disagreed and filed the instant suits by paying the employment and withholding taxes attributable to one employee of each of the corporations and filing claims for refund. The government counterclaimed for the balance of the assessments.

Following a bench trial, the district judge concluded that of the 113 sales representatives at issue, 15 were employees and the remaining 98 were independent contractors. The court further concluded that the IRS properly assessed penalties and interest with respect to the taxes owed for those 15 employees. Appellants' App. at 175-76. The parties each filed motions to alter or amend the judgment. The trial court denied Lowen's motion, but sustained the government's motion to include three more decal salespersons on the list of employees.

On appeal, Lowen contends that the district court erred in (1) placing undue emphasis on a single factor--compensation based on fixed fees--in determining that 18 of its sales representatives were employees; (2) concluding that the IRS properly assessed penalties because it found Lowen had failed to show that it used ordinary business care and prudence and had reasonable cause for failing to file and pay taxes on these employees; and (3) concluding that Lowen owed interest on the unpaid taxes.

DISCUSSION

A. Employees or Independent Contractors

Lowen contends that, in determining the 18 sales representatives were employees, the district court placed undue emphasis on the single factor of compensation by fixed fees, and failed to consider the totality of the circumstances. Appellants' Br. at 41. Lowen concedes that the trial court's factual findings are correct, see Appellants' Br. at 14, but asserts that the court reached the wrong conclusion in applying the law to those facts. We review the district court's conclusions of law de novo. Steiner Corp. Retirement Plan v. Johnson & Higgins, 31 F.3d 935, 939 (10th Cir.1994), cert. denied, --- U.S. ----, 115 S.Ct. 732, 130 L.Ed.2d 635 (1995); see United States v. Wholesale Oil Co., Inc., 154 F.2d 745, 747 (10th Cir.1946); see also Pullman-Standard v. Swint, 456 U.S. 273, 287, 102 S.Ct. 1781, 1789, 72 L.Ed.2d 66 (1982).

The term "employee" is defined in each of the statutes pertaining to the three types of taxes employers are required to withhold from the salaries of their employees, see 26 U.S.C. Secs. 3121(d) (FICA), 3306(i) (FUTA), 3401(c) (income tax withholding), and guidelines for determining employee status are found in three substantially similar sections of the employment tax regulations, see 26 C.F.R. Secs. 31.3121(d)-1(c) (FICA), 31.3306(i)-1 (FUTA), 31.3401(c)-1 (income tax). Consistent with these guidelines, courts have identified various factors relevant for determining whether an employer-employee relationship exists. Bartels v. Birmingham, 332 U.S. 126, 130, 67 S.Ct. 1547, 1549-50, 91 L.Ed. 1947 (1947); United States v. Silk, 331 U.S. 704, 716, 67 S.Ct. 1463, 1469-70, 91 L.Ed. 1757 (1947); Dole v. Snell, 875 F.2d 802, 804-05 (10th Cir.1989); Doty v. Elias, 733 F.2d 720, 722-23 (10th Cir.1984); Marvel v. United States, 719 F.2d 1507, 1514 (10th Cir.1983); Avis Rent a Car Sys., Inc. v. United States, 503 F.2d 423, 429 (2d Cir.1974). Each factor may not have application to every situation, however, and no one of these factors in isolation is dispositive; rather, "it is the total situation that controls." Bartels, 332 U.S. at 130, 332 U.S. at 1550; see Silk, 331 U.S. at 719, 67 S.Ct. at 1471; Dole, 875 F.2d at 805; Avis, 503 F.2d at 430.

In analyzing the relationship between Lowen and its sales representatives, the district court used a 20-factor test based on the IRS interpretation of the applicable statutes and regulations as set forth in Rev.Rul. 87-41, 1987-1 C.B. 269. See Appellants' App. at 137-52. The district court's multi-factor test encompassed each and every factor we have set forth in prior decisions, including "method of payment." See, e.g., Dole, 875 F.2d at 803, 805 (FLSA case); Doty, 733 F.2d at 722-23 (FLSA case); Marvel, 719 F.2d at 1514.

The district court, in its consideration of Lowen's method of payment, noted that "[u]nder the 1984 agreement, each [of the 18 individuals at issue on appeal] was paid on the basis of commissions plus a fixed fee, the amount of which was essentially the same as the salary and expenses paid prior to 1984." Appellants' App. at 168. The court found the evidence "uncontroverted" that "Lowen's intent in switching to the fixed fee was to place the individuals in the same compensation position." Id. Accordingly, the district court stated, "[i]f any one factor in this case is more determinative than any other, it is the distinction between salespersons who were paid a straight commission as opposed to those who were paid a commission plus a fixed monthly amount." Id. However, it was not until after extensively describing and analyzing the present facts in light of all 20 factors that the district court concluded that 18 of Lowen's sales representatives were employees. Moreover, the district court explicitly acknowledged that the presence or absence of one factor is not determinative of the nature of the relationship, id. at 156, and stated that it was persuaded by the "totality of the evidence," id. at 165.

The district court also explained that the method of payment, aside from being an independent factor to consider, significantly impacts other factors which are critical to the court's employee-independent contractor determination. The court stated that the payment of fixed fees affects the factor of "financial risk" because "[o]ne who obligates himself to pay another without any direct correlation to the performance of the payee assumes most of the financial risk of the relationship." Id. at 169. Accordingly, the court determined, the fact that these 18 sales representatives could not realize a profit or suffer a loss as a result of their services (in addition to the profit or loss ordinarily realized by workers) weighed in favor of finding that these sales representatives were employees. ¹ The court also suggested that the method of payment affects the significant factor of "control." The court stated: "Common sense if nothing else indicates that the payor of regular payments has a greater right of control over the payee." Id. at 169.

Moreover, in addition to these factors, there were other...