Marlar, Inc. v. U.S.

Decision Date05 August 1998
Docket NumberNos. 96-36036,96-36104 and 96-36218,s. 96-36036
Citation151 F.3d 962
Parties-5476, 98-2 USTC P 50,619, Unempl.Ins.Rep. (CCH) P 16060B, 98 Cal. Daily Op. Serv. 6134, 98 Daily Journal D.A.R. 8491 MARLAR, INC., Plaintiff-Appellee-Cross-Appellant, v. UNITED STATES of America, Defendant-Appellant-Cross-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Wendy S. Pearson (argued), Pearson Law Offices, Seattle, WA; F. Michael Kovach, Mair, Camiel & Kovach, Seattle, WA, for plaintiff-appellee-cross-appellant.

Bruce R. Ellisen (argued) and Alice L. Ronk, Tax Division, United States Department of Justice, Washington, DC, for defendant-appellant-cross-appellee.

Appeals from the Judgment and Order of the United States District Court for the Western District of Washington; Carolyn R Dimmick, Chief District Judge, Presiding. D.C. No. CV-95-00729-CRD.

Before: BROWNING, SKOPIL, and O'SCANNLAIN, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

We must decide whether an adult-entertainment club, on the facts of this case, is liable for federal employer taxes on the amounts nude dancers received from customers.


Marlar, Inc., operates an adult entertainment establishment, known as "Club Extasy," offering nude and seminude dancing to the public. During the two tax years at issue, 1990 and 1991, Marlar's operations were as follows. Upon entering the club, customers had to pay a cover charge and buy a soft drink. Without further expense, they could mingle with the dancers and watch them perform on the main stage. Alternatively, they could pay extra for more, one might say, personalized attention. Any customer could offer a "ladies' drink" (a $10, 12-ounce soft drink) to the dancer of his choice. If the dancer accepted the drink, she would sit and talk with the customer in return. During this conversation, she would usually take the opportunity to market one of the performances in her repertoire, such as a "table dance" ($5), a "couch dance" ($12), or a "private stage dance" (prices variable). 1

Consistent with near-uniform industry practice in the Seattle area, Marlar treated its dancers as "lessees" rather than employees or independent contractors. Each dancer signed a "Dancer Performance Lease," under which Marlar, as "landlord," provided stages and dance facilities. In exchange, the dancer, as "tenant," paid a "rental fee." 2

The dancers received no payment from Marlar or the customers for main-stage dancing, aside from the occasional tip. They earned their money from the one-on-one performances. Their compensation came in three forms. First, customers usually paid cash for the personal performances. The dancers kept 100% of the amounts received. Second, customers sometimes paid the dancers with scrip, known as "Extasy Bucks," which the customers purchased from the club with their credit cards. The dancers redeemed the scrip for cash from the club, which retained ten percent of the face value as a "service charge." Third, the dancers received from the club a $10 credit (treated as a rent abatement) for each of the first four ladies' drinks purchased for them on a given night. 3 The dancers do not report their earnings to Marlar, and Marlar claims not to know their relative incomes.

Marlar has never paid employment taxes on the dancers' remuneration or filed employment tax returns. In 1994, the IRS audited Marlar, determined that the dancers were employees, and assessed employment taxes totalling $282,082.11 (plus interest and penalties) for tax years 1990 and 1991. Marlar made a partial payment of this assessment and then brought this action for a refund. 4 The United States filed a counterclaim for the balance of the assessment.

Before the district court, Marlar moved for summary judgment. Marlar contended that: (1) the dancers were its lessees, rather than its employees; and (2) even if the dancers were its employees, it was nonetheless entitled to the protections of § 530 of the Revenue Act of 1978, Pub.L. No. 95-600, 92 Stat. 2763, 2885-86, § 530. 5 This section provides a safe-harbor which shields a taxpayer of employment tax liability if, inter alia, (a) the taxpayer's treatment of the workers as non-employees was in reasonable reliance on industry practice, and (b) the taxpayer filed all requisite federal tax returns consistent with the treatment of the workers as non-employees. See id. The United States opposed the motion for summary judgment, contending that there were genuine issues of material fact as to (1) whether the dancers were lessees, as opposed to employees, and (2) whether Marlar met the two requirements for relief under § 530.

The district court granted Marlar's motion for summary judgment. See Marlar v. United States, 934 F.Supp. 1204, 1210 (W.D.Wash.1996). Although the court agreed with the government that there was a genuine issue as to whether the dancers were lessees, see id. at 1208, it held that § 530 relieved Marlar from employment tax liability, see id. at 1210. The court found that a significant segment of the industry treats the dancers as lessees, not employees, and that Marlar patterned its business relationship with its dancers on this industry practice. See id. at 1209.

Marlar then applied for an award of litigation costs, including attorney's fees, under Internal Revenue Code (I.R.C.) § 7430. The district court granted the costs after finding that the government's position "was not consistent with the plain language of section 530" and that "[t]he government offered no evidence that Marlar's practice was inconsistent with 'long-standing recognized practices of a significant segment of the industry.' " The court, however, capped the hourly rate of attorney's fees at $75, on the basis that there were no special circumstances justifying a larger amount. The court thus awarded Marlar $27,332.65 in costs and fees.

The government appealed both the grant of summary judgment and the grant of litigation costs. Marlar cross-appealed, challenging the $75-per-hour limitation on attorney's fees. 6


There are two federal taxes at issue in this appeal: Federal Insurance Contributions Act ("FICA") taxes and Federal Unemployment Tax Act ("FUTA") taxes. 7 Whereas an employer is subject to both taxes, a lessor is subject to neither. When a lessee receives payments from its customers, the lessor does not incur either FICA or FUTA tax liability. The government's theory in this case is that Marlar chose to treat the dancers as "lessees" only to avoid paying these taxes.

Section 530 of the Revenue Act of 1978 is a safe-harbor rule which shields certain persons from employment tax liability even if they might be employers. 8 To reiterate, except as provided elsewhere in the statute, § 530 relieves a taxpayer of employment tax liability if both (1) the taxpayer reasonably relied on something such as industry practice, and (2) the taxpayer filed all necessary forms consistent with the treatment of the workers as not being employees. Consequently, as applied to this case, § 530 shields Marlar from employment tax liability--even if the dancers are actually "employees"--provided Marlar shows that it (1) reasonably relied on the long-standing recognized practice of the Seattle-area nude-dancing industry, and (2) filed all requisite forms consistent with the treatment of the dancers as lessees.

The government contends that the district court's grant of summary judgment was in error because of two genuine issues of material fact. First, the government argues, although Marlar relied on industry practice, there is sufficient evidence demonstrating that this reliance was not "reasonable." Second, the government claims there is a genuine issue as to whether Marlar filed all necessary forms; specifically, the government claims that Marlar may have been required, with respect to each dancer, to file Form 1099, which reports payments made in a trade or business, a form it never filed. We address these two arguments in turn.


The district court held that Marlar satisfied the first requirement of § 530 because "it is undisputed that the industry treats dancers as lessees" and because Marlar relied on this practice. Marlar, 934 F.Supp. at 1210. The court did not grapple with the issue of whether Marlar's reliance on industry practice was reasonable. Instead, the court simply concluded "that § 530's safe haven provision applies to Marlar, when virtually the entire industry treats dancers as lessees." Id. at 1209.

The government challenges the district court's interpretation of the statute. According to the government, the statute requires that reliance on industry practice be reasonable. In this case, the government claims, there is at least a genuine factual issue as to whether Marlar's reliance was reasonable.

As an initial matter, we must agree with the government that, under § 530, any reliance on industry practice must be "reasonable." As Congress provided, in no uncertain terms:

[A] taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer's treatment of such individual for such period was in reasonable reliance on any of the following:


(C) long standing recognized practice of a significant segment of the industry in which such individual was engaged.

Revenue Act of 1978, § 530(a)(2) (emphasis added). The text unmistakably requires "reasonable reliance," not just mere reliance. When "the statute's language is plain, 'the sole function of the courts is to enforce it according to its terms.' " United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917)).

Marlar's interpretation of § 530--that mere reliance on industry practice is sufficient--ignores the word "reasonable." To Marlar, it would seem, Congress could have...

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