Gilmore v. United States

• Decision Date: 26 September 1977
• Docket Number: Civ. No. K-75-754.
• Citation: 443 F. Supp. 91
• Parties: Robert J. GILMORE v. UNITED STATES of America.
• Court: U.S. District Court — District of Maryland

443 F. Supp. 91

Robert J. GILMORE v. UNITED STATES of America.

Civ. No. K-75-754.

United States District Court, D. Maryland.

September 26, 1977.

Allen L. Schwait, Paula M. Junghans and Garbis & Schwait, P. A., Baltimore, Md., for plaintiff.

F. Gerald Burnett, U. S. Dept. of Justice, Washington, D. C., and Gerard P. Martin, Asst. U. S. Atty., Baltimore, Md., for defendant.

FRANK A. KAUFMAN, District Judge.

Plaintiff instituted this tax refund case, seeking to recover $418.38 paid in partial satisfaction of assessments for federal taxes relating to income withholding, social security and unemployment. Defendant, in turn, by counterclaim, seeks to recover $119,588.95 of such taxes plus interest and penalties. All of the taxes relate to the calendar years 1967, 1968 and 1969. Trial has been held and memoranda and oral argument have been presented as to (a) whether any such taxes are due and owing by plaintiff for those years, and if so, (b) whether or not penalties as well as taxes and interest should be assessed.¹

I

The crux of this case is whether plaintiff's solicitors were employees or independent contractors. The Federal Insurance Contributions Act, 26 U.S.C. §§ 3101-3126, provides in part with regard to old-age, survivors and disability insurance (section 3101(a)) that a certain tax is "imposed on the income of every individual * * * received by him with respect to employment (as defined in section 3121(b))"; and with regard to hospital insurance (section 3101(b)) that a certain tax is "imposed on the income of every individual * * * received by him with respect to employment (as defined in section 3121(b)), * *." Section 3102(a) states that "the tax imposed by section 3101 shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid." Section 3111(a) provides that as to old age, survivors and disability insurance, "there is hereby imposed on every employer an excise tax, with respect to having individuals in his employ, equal to the following percentages of the wages (as defined in section 3121(a)) paid by him with respect to employment (as defined in section 3121(b))." Section 3111(b) states that as to hospital insurance, "there is hereby imposed on every employer an excise tax, with respect to having individuals in his employ, equal to the following percentages of the wages (as defined in section 3121(a)) paid by him with respect to employment (as defined in section 3121(b)), * * *." Section 3121 provides in part:

Definitions

(a) Wages. — For purposes of this chapter, the term "wages" means all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash * * *.

(b) Employment. — For purposes of this chapter, the term "employment" means any service, of whatever nature, performed * * * either (A) by an employee for the person employing him * * *.

* * * * * *

(d) Employee. — For purposes of this chapter, the term "employee" means —

* * * * * *

(2) any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee; or * * *.

The Federal Unemployment Tax Act, 26 U.S.C. §§ 3301-3311, provides in part that "there is hereby imposed on every employer (as defined in section 3306(a)) * * * an excise tax, with respect to having individuals in his employ, equal to 3.1 percent of the total wages (as defined in section 3306(b)) paid by him during the calendar year with respect to employment (as defined in section 3306(c)) * * *." Section 3306, prior to amendment on August 10, 1970, provided in part:

Definitions

* * * * * *

(b) Wages. — For purposes of this chapter, the term "wages" means all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash * * *.

(c) Employment. — For purposes of this chapter, the term "employment" means * * * any service, of whatever nature, performed * * * by an employee for the person employing him * * *.

* * * * * *

(i) Employee. — For purposes of this chapter, the term "employee" includes an officer of a corporation, but such term does not include —

(1) any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an independent contractor, or

(2) any individual (except an officer of a corporation) who is not an employee under such common law rules.

As a result of the 1970 amendment, section 3306(i) adopts the language of section 3121(d) set forth above.

26 U.S.C. 3401 provides in part, with respect to collection of income tax at source on wages:

Definitions

(a) Wages. — For purposes of this chapter, the term "wages" means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash * * *.

* * * * * *

(c) Employee. — For purposes of this chapter, the term "employee" includes an officer, employee, or elected official of the United States, a State,² or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term "employee" also includes an officer of a corporation.

Section 3402(a) provides with regard to income tax collected at source that "every employer making payment of wages shall deduct and withhold upon such wages * * a tax determined in accordance with tables prescribed by the Secretary."³

Each of those statutes relating to federal withholding, social security and unemployment taxes defines "employee" in substantially identical terms and all are based upon the common law. Avis Rent A Car System, Inc. v. United States, 503 F.2d 423, 428 n.2 (2d Cir. 1974).⁴ Many factors enter into that common law definition including "degrees of control, opportunities for profit or loss, investment in facilities, permanency of relation and skill required * * *." United States v. Silk, 331 U.S. 704, 716, 67 S.Ct. 1463, 1469, 91 L.Ed. 1757 (1947). In the same year as Silk was decided, Mr. Justice Reed, in Bartels v. Birmingham, 332 U.S. 126, 67 S.Ct. 1547, 91 L.Ed. 1947 (1947), after discussing specific factors, observed (at 130, 67 S.Ct. at 1550): "It is the total situation that controls." In Avis, Judge Hays (at 429) culled from Silk and Bartels⁵ the following seven factors:

1) If the person receiving the benefit of a service has the right to control the manner in which the service is performed, the person rendering the service may be an employee.

2) If a person rendering a service has a substantial investment in his own tools or equipment, he may be an independent contractor.

3) If a person performing a service undertakes a substantial cost, say by employing and paying his own laborers, he may be an independent contractor.

4) If a person performing a service has an opportunity to profit depending on his management skill, he may be an independent contractor.

5) If a service rendered requires a special skill, the person rendering it may be an independent contractor.

6) If the relationship between a person rendering a service and the person receiving it is permanent, it may be an employment relationship.

7) If a person rendering a service works in the course of the recipient's business, rather than in some ancillary capacity, he may be an employee. Footnote omitted.

And see Filipidis v. United States, 27 A.F.T. R.2d 71-595 (D.Md.1970) (Harvey, J.).

In this case, plaintiff, Robert J. Gilmore, conducted a magazine subscription sales operation under an arrangement with Local Readers Service, a company based in Terre Haute, Indiana, which represented various magazines and publishers. The magazines sold in plaintiff's operations included only those publications which Local Readers Service was authorized to accept. Local Readers Service agreed to pay to plaintiff as the latter's commission 80% of the sales price of the magazine to the purchaser. Out of those commissions plaintiff paid his expenses including commissions to the individual solicitors engaged by him. Those solicitors did the actual selling of the magazines, primarily on a door-to-door basis. The commission of each solicitor was generally 25% of the sales price of the magazine to the purchaser.

Plaintiff's solicitors were usually recruited through newspaper advertisements. One such advertisement, captioned "Boys — Free Travel," stated in part: "Major cities USA as reps of Ebony, Jet, Tan & others. (Girls also.) No exp nec, we train you in circulation." Another, titled "Girls — Free Travel," read in part: "Large chaperoned group has openings for neat, single people." Each solicitor signed a written contract with both plaintiff and Local Readers Service. Both contracts stated specifically that the nature of the relationship was that of independent contractor.

During the years in question, the total number of solicitors working varied from 20 to 60. Most of them traveled with plaintiff and one or more of his lieutenants from city to city in automobiles provided by certain of them or by plaintiff. In any event, plaintiff paid for the costs of inter-city auto transportation. Most of the solicitors stayed as a group in each city at a hotel chosen and resided in by plaintiff and his lieutenants. The cities were chosen by plaintiff or by his lieutenants at his direction. Plaintiff advanced for his solicitors their room and food costs, deducting such advances from commissions earned. There was no formal training program; rather, training was acquired by having new solicitors observe more experienced solicitors in operation and by conversations among old and new solicitors. Given the nature of the job, more extensive training was not deemed necessary. Plaintiff, in his testimony in this case, has emphasized the unstructured aspects of those and other working relationships and arrangements, and has minimized elements of...