Marlar, Inc. v. US, C95-729D.

• Decision Date: 02 August 1996
• Docket Number: No. C95-729D.,C95-729D.
• Citation: 934 F. Supp. 1204
• Parties: MARLAR, INC., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Washington

934 F. Supp. 1204

MARLAR, INC., Plaintiff, v.UNITED STATES of America, Defendant.

No. C95-729D.

United States District Court, W.D. Washington.

August 2, 1996.

F. Michael Kovach, Jr., Seattle, WA, Wendy S. Pearson, Pearson Law Offices, Seattle, WA, for plaintiff.

Diane E. Tebelius, U.S. Attorney's Office, Seattle, WA, W. Carl Hankla, U.S. Department of Justice, Tax Division, Washington, DC, for defendant.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

DIMMICK, Chief Judge.

THIS MATTER is before the Court on plaintiffMarlar, Inc.'s ("Marlar")motion for summary judgment, pursuant to Fed. R.Civ.P. 56.Marlar, owner of a club which features nude and semi-nude dancing, protests its liability for certain employment taxes, which the Internal Revenue Service ("IRS") insists should have been paid for the dancers.Marlar paid the taxes for one of the dancers for each quarter in question and brought this action for refund; the government counterclaimed for taxes, penalties, and interest.

Marlar seeks summary judgment on two alternative bases: (1) that the dancers are lessors of spaces in Marlar's club and therefore are not employees; or (2) that Marlar falls under an exception granting a safe haven to an employer who has a reasonable basis for his tax treatment (§ 530).

After hearing oral argument and fully considering the briefs filed by counsel, the Court grants summary judgment pursuant to § 530.

FACTS

October 10, 1994 — The IRS assessed Marlar for FICA and withholding taxes (Form 941 taxes), and FUTA (Form 940 taxes), plus penalties and interest for taxes accruing in 1990 and 1991.¹Marlar paid the FICA and withholding tax assessments for one employee for each quarter ending March 31, 1990 through December 31, 1991 for a total of $2,060, and the FUTA tax assessment for one employee for 1990 and 1991 in the amount of $868.²

The government counterclaimed and requested judgment in the amount of $282,082.11 plus interest and penalties accruing since October 10, 1994.The Court has jurisdiction pursuant to 26 U.S.C. § 7402and28 U.S.C. §§ 1340,1345, and1346(c).

Marlar operates an adult entertainment establishment, Club Extasy.Dancers who entertained at the club during the period in question obtained a license as required by the City of Seatac and signed a Dancer Performance Lease with the club which obligated them to pay the following rents:

PERFORMER agrees to pay rent to OWNER, for each scheduled shift a summ (sic) equal to $40.00 plus $2.00 for each couch dance per shift.For ladies drink, sold by PERFORMER, subject to a maximum a (sic) four (4). $10.00 shall be deducted from the rent due for each scheduled shift.All rental shall be to OWNER immediately upon completion of any shift.

The agreement also established scheduling and public dance requirements.Apparently, the lease agreement was not enforced in all particulars.Marlar insists that it never collected a percentage of the dancer's earnings and never kept track of them.

The government contends that the following facts establish at least an issue of fact as to the lessor/lessee relationship: Marlar interviewed, hired and fired its dancers; Marlar advanced dancers the money to obtain SeaTac entertainment licenses; Marlar kept possession of the licenses, restricting the dancers' ability to work at other clubs; Marlar had a manager on duty in the club at all times; Marlar instructed the dancers as to when, where and how their work was to be performed by conducting private and "house" meetings regarding rules of conduct; Marlar required dancers to attend "house" meetings and has fired at least one dancer for failing to attend; Marlar penalized dancers for tardiness and breaking other rules; Dancers could not "sublet" — their services are personal; Marlar set standard charges for dance performances and posted a schedule of those charges in the club; Marlar required dancers to work a minimum number of shifts per week, with a minimum number of consecutive hours per shift; Marlar required dancers to dance in rotation on the main stage pursuant to a schedule prearranged by Marlar's disc jockey; and Marlar required or expected dancers to provide occasional "house dances" at no charge.Dances on the main stage were essential to Marlar's business, but dancers were not paid for these dances by the customers.Customers could also pay for their private dances with script purchased from the management.The dancers could then redeem the script for cash, with a 10% deduction.³

Additionally, the government insists that there are issues of fact as to industry practices, and asserts that Marlar did not have an opinion from a tax expert as to its treatment of dancers as non-employees.These latter facts go to the issue of § 530 safe haven, and will be discussed in detail in that section.

DISCUSSION

The issues are the following:

(1) Are the dancers employees of Marlar for purposes of FICA and withholding taxes, and FUTA?

(2) Can Marlar be liable for the taxes if it does not pay the dancers' wages?

(3) Is Marlar entitled to relief under the provisions of § 530 because its treatment of dancers as lessors was based on the "long-standing recognized practice of a significant segment of the industry in which such individual was engaged"?

Characterization of Relationship

Marlar characterizes its relationship with the dancers as lessor/lessee, and emphasizes the independence of the dancers and their receipt of payment directly from their customers.Its basic premise is that it cannot be held liable for employment taxes where it paid no wages, but merely rented space to the dancers, with this rent reported as income by Marlar.See, e.g., Manchester Music Co., Inc. v. United States,733 F.Supp. 473(D.N.H.1990)(discussing meaning of "payment" for purposes of filing a Form 1099).Pointing to the statutes themselves, Marlar defines wages as payments:

... there is hereby imposed on every employer an excise tax ... equal to the following percentages of the wages ... paid by him....

26 U.S.C. § 3111(emphasis added).

... there is hereby imposed on every employer (as defined in section 3306(a)) ... an excise tax on the total wages ... paid by him with respect to employment....

26 U.S.C. § 3301(emphasis added).

"Wages" in this context are amounts paid by the putative employer for services rendered to that employer, as the applicable statutes make clear:

... the term "wages" means all remuneration ... for services performed by an employee for his employer....

26 U.S.C. § 3401(a);

... the term "wages" means all remuneration for employment....

26 U.S.C. § 3306(b).

The obligation to withhold taxes is also imposed upon employers who pay wages:

... every employer making payment of wages shall deduct and withhold upon such wages a tax....

26 U.S.C. § 3402(emphasis added).

The government counters with the statute, contending that FICA itself provides that an employee will be defined by common law:

For purposes of this chapter, the term "employee" means — ... any individual who, under the usual common law rules applicable in determining the employeremployee relationship, has the status of an employee....

26 U.S.C. § 3121(d)(2).Wages are defined in 26 U.S.C. § 3121 as meaning "all remunerations for employment, including the cash value of all remunerations (including benefits) paid in any medium other than cash...." with certain exceptions.

The government further argues that the degree of control that Marlar exercised over the dancers is indicative of an employer/employee relationship.The common law looks to a number of indices of employer-employee, but the most significant is degree of control.See, e.g., Alsco Storm Windows, Inc. v. United States,311 F.2d 341(9th Cir.1962).

The government cites to a Ninth Circuit case in which the court held that a contractual relationship between the parties did not conclusively define a licensee/licensor relationship for taxi dancers.Matcovich v. Anglim,134 F.2d 834(9th Cir.), cert. denied,320 U.S. 744, 64 S.Ct. 46, 88 L.Ed. 441(1943).Relying on the control exerted by the dance hall proprietor, the court held that the proprietor was an employer liable for social security taxes, quoting Griffiths v. Helvering,308 U.S. 355, 60 S.Ct. 277, 84 L.Ed. 319(1939):

Legislative words are not inert, and derive vitality from the obvious purposes at which they are aimed....Taxes cannot be escaped "by anticipatory arrangements and contracts however skillfully devised ... by which the fruits are attributed to a different tree from that on which they grew."Lucas v. Earl,281 U.S. 111, 115, 50 S.Ct. 241 241, 74 L.Ed. 731(1930)....

Matcovichat 837.The government contends that the relationship between Marlar and the dancers is analogous.The dancers in Matcovich, however, received tickets purchased by patrons from the establishment, and the dancers redeemed the tickets and received a percentage in return.

A Fifth Circuit opinion also offers instructive analysis.United States v. T.S. Fleming,293 F.2d 953(5th Cir.1961).The issue in Fleming was whether taxi drivers paid directly by their customers could be characterized as employees, thus requiring the company which received a percentage of the fees to pay federal employment taxes.In determining that the drivers were employees, the court relied on the degree of control and supervision exercised by the company.The collection of payments was determined to be for the account of the employer, with a commission withheld for the driver.The Fifth Circuit took pains to distinguish this case from an earlier one.New Deal Cab Co. v. Fahs,174 F.2d 318(5th Cir.), cert. denied,338 U.S. 818, 70 S.Ct. 62, 94 L.Ed. 496(1949).In the New Deal case, the company had little or no control over the drivers as to the amount they received."The drivers paid fixed sums for the use of the cabs, and receiving this the cab company, neither knew nor cared what the drivers were doing."Flemingat...