Kiddie v. Comm'r of Internal Revenue , Docket No. 7108-76.
| Decision Date | 30 March 1978 |
| Docket Number | Docket No. 7108-76. |
| Citation | 69 T.C. 1055,1 Employee Benefits Cas. 1610 |
| Parties | THOMAS KIDDIE, M.D., INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, a professional medical corporation, provided a pathological unit for a hospital from Dec. 17, 1971, until Nov. 30, 1972. At that time petitioner joined with another professional medical corporation to form a partnership. Each corporation had a 50-percent interest in the partnership. The partnership provided pathological services to the hospital as of Dec. 1, 1972.
Petitioner signed a flat benefit pension plan and retirement trust on Dec. 1, 1972, effective Jan. 1, 1972. Held, the four persons working for petitioner and, subsequently, the partnership, were employees rather than independent contractors. Held, further, employment of these persons by the partnership may not be attributed to petitioner. Held, further, these persons were properly excluded from participation pursuant to the provisions of the plan. William A. Seligmann, for the petitioner.
John O. Kent, for the respondent.
Respondent, on April 30, 1976, issued a statutory notice of deficiency in which he determined the following deficiencies in petitioner's Federal corporate income taxes:
+----------------------------+
¦Taxable year ¦Deficiency ¦
+---------------+------------¦
¦ ¦ ¦
+---------------+------------¦
¦1971 ¦$7,962.31 ¦
+---------------+------------¦
¦1972 ¦16,972.52 ¦
+---------------+------------¦
¦1973 ¦4,613.50 ¦
+----------------------------+
Due to concessions made by the parties the sole issue remaining for our determination is whether petitioner's 1972 and 1973 contributions to its pension plan are deductible.
Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Petitioner Thomas Kiddie, M.D., Inc., is a professional medical corporation which was incorporated in California on November 26, 1971. Petitioner commenced medical practice as a corporation on December 17, 1971. Initially, and at all times relevant herein, Thomas Kiddie, M.D. (hereinafter Kiddie), was the sole shareholder, sole director, president, and treasurer of petitioner. Mary F. Kiddie, wife of Thomas Kiddie, was at all relevant times vice president and secretary thereof. Prior to incorporation Kiddie practiced medicine in his individual capacity.
Petitioner's corporate income tax returns for the taxable years 1972 and 1973 were timely filed with the Internal Revenue Service Center, Fresno, Calif. Petitioner's tax year was the calendar year. Its place of business was located in Long Beach, Calif., at the time of filing the petition herein.
William C. Smith, M.D. (hereinafter Smith), was hired by Kiddie as a clinical pathologist on August 25, 1969. Smith incorporated in California on September 17, 1971, as William C. Smith, M.D., Inc. (hereinafter Smith, Inc.). Petitioner and Smith, Inc., joined forces on August 25, 1972, to form the Thomas Kiddie, M.D., Inc., and William C. Smith, M.D., Inc., partnership (hereinafter Partnership). Each corporation has at all times owned a 50-percent interest in the partnership.
Kiddie established a pathological laboratory unit (hereinafter Unit) at St. Mary's Hospital (hereinafter Hospital) in July of 1951. Kiddie was the owner of Unit. The contractual agreement between Kiddie and Hospital, which set forth the details of their relationship, was terminated on December 17, 1971. In its stead, an agreement between petitioner and Hospital was executed. Such contract, in turn, was terminated November 30, 1972. That contract was replaced by a contract between Partnership and Hospital executed on December 1, 1972.
To fulfill the terms of the contract with Hospital, Kiddie, in his various relevant capacities, obtained the services of Herbert O. Carne (hereinafter Carne), a biochemist, in 1956; Kenneth M. Brown, M.D. (hereinafter Brown), a pathologist, in 1958; Carl J. Schneider, Jr. (hereinafter Schneider), an immuno-serologist, in 1966; and Ernest T. Mashiyama, M.D. (hereinafter Mashiyama), a pathologist, in 1971.
Petitioner signed a flat benefit pension plan and employees' retirement trust on December 1, 1972 (hereinafter Plan). The effective date of the Plan was January 1, 1972. Respondent determined Carne, Brown, Schneider, and Mashiyama to be employees of petitioner, who have been improperly excluded from the Plan causing its disqualification for the taxable years 1972 and 1973, resulting in the disallowance of a deduction for petitioner's contribution to the Plan for those years.
OPINIONSection 404(a)(1) provides, in general, that contributions to a qualified pension trust are deductible in the year paid. Respondent has determined that petitioner's Plan is not qualified because four of its employees were excluded from participation therein.
Petitioner initially contends that all four of the individuals in question should not be characterized as employees but as independent contractors. After an extensive review of the cases which have considered this distinction we must reject petitioner's premise.
Whether an individual is an employee or independent contractor is determined by the application of the common law concepts defining those terms. Packard v. Commissioner, 63 T.C. 621, 628 (1975). The legal issue of the character of the worker is determined by considering the total factual situation. Alsco Storm Windows, Inc. v. United States, 311 F.2d 341, 343 (9th Cir. 1962). The majority of cases which discuss this distinction enumerate seven factors:
Among the relevant factors to which the courts have looked in determining the substance of the employment relationship are the following: (1) The degree of control exercised by the principal over the details of the work, (2) which party invests in the facilities used in the work, (3) the opportunity of the individual for profit or loss, (4) whether or not the principal has the right to discharge the individual, (5) whether the work is part of the principal's regular business, (6) the permanency of the relationship, and (7) the relationship the parties believe they are creating. (Simpson v. Commissioner, 64 T.C. 974, 984-985 (1975).) The following additional factors have also been considered:
(1) The manner of payment, by the job or by the hour.
(2) Skill required.
(3) The offering of services to the general public rather than to one individual.
(4) Distinct occupation or recognized trade or calling involved.
(5) Custom in the trade.
Bonney Motor Express, Inc. v. United States, 206 F. Supp. 22, 26 (E.D. Va. 1962).
Petitioner hinges its argument on the degree of control exercised by the principal; the investment in the tools used; the offering of services to the general public rather than to one individual; the intent and belief of the parties; and the occupation and skill involved. It claims the remaining factors are not determinative when the factual situation encompasses an independent contractor involved in the performance of services.
Regardless of the latter claim, petitioner's argument is weak. Although the four individuals were given control over the manner in which they accomplished the required results, the test is whether the principal has the right to control these details not whether he actually asserts that right. Packard v. Commissioner, supra at 629. When professionals are involved, the techniques and standards of their profession naturally cause an employer's control to be more general. James v. Commissioner, 25 T.C. 1296, 1301 (1956). The factual situation before us parallels that in James. We find that the principal had the right to control more than results.
A significant portion of the equipment used by these individuals was supplied by Hospital. Because the principal rather than the individuals had contracted with Hospital with respect to such equipment, the principal should be considered to have supplied the necessary equipment as between the principal and the individuals. In addition, we question whether the libraries supplied by the individuals were any different from the libraries that others in their respective professions maintain regardless of their characterization as independent contractors or employees. We fail to see how these individuals could be portrayed as offering their services to the general public. They provided their services to Hospital, not to individual patients. They received semimonthly salaries that were not based on patients seen. Although Kiddie obviously intended that these individuals be independent contractors for tax purposes, this factor cannot, alone, be determinative. Neither do we find the occupation or skill involved determinative. James v. Commissioner, supra. The remaining factors uniformly point to employee status. We find the four individuals to be employees.
For the taxable years here involved section 401(a)(3)1 provided that a plan must not discriminate in favor of employees who are officers, shareholders, supervisors. or highly compensated.
Petitioner contends that, even if these individuals are found to be employees rather than independent contractors, the prohibited discrimination does not exist because these individuals each fit within at least one of the above categories, i.e., highly compensated.2 We find petitioner's argument novel, even ingenious, but it overlooks the use of the...
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