Martin S. Azarian, P.A. v. Comm'r of Internal Revenue

• Decision Date: 27 July 2018
• Docket Number: No. 17-2134,17-2134
• Citation: 897 F.3d 943
• Parties: MARTIN S. AZARIAN, P.A., Appellant v. COMMISSIONER OF INTERNAL REVENUE, Appellee
• Court: U.S. Court of Appeals — Eighth Circuit

897 F.3d 943

MARTIN S. AZARIAN, P.A., Appellant

v.COMMISSIONER OF INTERNAL REVENUE, Appellee

No. 17-2134

United States Court of Appeals, Eighth Circuit.

Submitted: May 15, 2018

Filed: July 27, 2018

Eric Johnson, Saint Paul, MN, for Appellant.

Arthur Thomas Catterall, Supervisory Attorney, John Schumann, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC, Jeremy H. Fetter, Jason D. Laseter, Internal Revenue Service, Special Trial Attorney, Dallas, TX, Julie A. Schwoebel, Chicago, IL, for Appellee.

Before BENTON, KELLY, and STRAS, Circuit Judges.

BENTON, Circuit Judge.

Martin S. Azarian, P.A., petitioned the Tax Court¹ for relief from a determination that it owed additional employment tax. The Tax Court dismissed for lack of jurisdiction. The taxpayer appeals. Having jurisdiction under section 7482(a)(1),² this court affirms.

Attorney Martin S. Azarian is the sole owner and officer of the taxpayer, an S corporation. Each year from 2012 through 2014, Azarian performed services for the taxpayer, which paid him about $32,500 to $40,000 as wages subject to Federal Insurance Contributions Act (FICA) tax. See §§ 3101(a)-(b) , 3111(a)-(b) . The taxpayer also paid him some larger amounts, which it reported as dividends.

The Commissioner of Internal Revenue performed an employment tax examination of the taxpayer for the years 2012 through 2014. Examining the taxpayer’s nature and condition, Azarian’s role in operations, and similar firms' compensation, the Commissioner concluded that "reasonable compensation" for Azarian’s services was $125,000 yearly—meaning some of the dividends were, in substance, wages. In the end, the taxpayer owed $38,808 more in FICA tax and $7,762 in penalties. The Commissioner sent the taxpayer a "Summary of Employment Tax Examination" and an "Employment Tax Examination Changes Report" for each year.

The taxpayer petitioned the Tax Court, arguing that Azarian’s reported wages were reasonable compensation (or, at least, that reasonable compensation was less than $125,000). The Commissioner moved to dismiss for lack of jurisdiction. The Tax Court agreed. This court reviews de novo the Tax Court’s "determination regarding its jurisdiction." Bartman v. Commissioner , 446 F.3d 785, 787 (8th Cir. 2006).

The taxpayer argues the Tax Court has jurisdiction under section 7436(a)(1). That section grants jurisdiction if "there is an actual controversy involving a determination by the Secretary as part of an examination that ... one or more individuals performing services ... are employees ... for purposes of subtitle C...." § 7436(a)(1) . Subtitle C governs FICA employment taxes. See §§ 3101-28 . The question here is whether there is an actual controversy involving a determination that Azarian is an employee for FICA purposes.

The taxpayer believes there is an actual controversy whether some payments were wages. But even assuming there is an actual controversy, it does not involve a determination that Azarian is an employee for FICA purposes. An "employee" for FICA purposes is, as relevant here, an "officer of a corporation" or an employee under "common law rules." § 3121(d)(1)-(2) . By reporting wages to him each year, the taxpayer claimed he is an employee, so the Commissioner did not make a determination on the issue. Instead, the Commissioner relied on the taxpayer’s classification of Azarian as an employee.

Emphasizing Azarian’s dual role as employee and owner, the taxpayer says that the Commissioner’s determination that some of the payments were wages, not dividends, was a determination that—as to those payments—Azarian is an employee, not an owner. But whether a payment is wages does not turn solely on the recipient’s status as employee. "Wages," ignoring irrelevant exceptions, "means all remuneration for employment," which generally includes "any service ... performed ... by an employee...." § 3121(a)-(b) . The question is not only whether the recipient is an employee, but also whether the payment is remuneration for services. Here, the only issue the Commissioner examined is the amount of remuneration for Azarian’s services. Cf. David E. Watson, P.C. v. United States , 668 F.3d 1008, 1017-18 (8th Cir. 2012) (in a "reasonable compensation" dispute, the question is "whether the payments at issue were made as remuneration for services performed"). Thus, the only determination was that some of the payments reported as dividends are remuneration for his services. This determination does not give the Tax Court jurisdiction.

The taxpayer relies on Charlotte’s Office Boutique, Inc. v. Commissioner , 121 T.C. 89 (2003), aff'd 425 F.3d 1203 (9th Cir. 2005). There, the employer reported both wages and royalties to an owner. Id. at 95. The Tax Court held it had jurisdiction to determine whether some of the royalties were, in substance, wages. Id. at 104. But the Tax Court relied on the fact that the Commissioner’s "Notice of Determination Concerning Worker Classification Under Section 7436" listed determinations that the owner and "Other Workers" "are to be legally classified as employees for purposes of federal employment taxes under subtitle C...." Id. at 98, 103. The Tax Court said these "determination[s] of worker classification ... provide[ ] the predicate for our jurisdiction under section 7436(a)," and that jurisdiction was not lost when the Commissioner later conceded some of its determinations after the petition was filed. Id. at 103. The Ninth Circuit agreed that...