Nebraska Nat. Hotel Co. v. O'MALLEY

• Decision Date: 02 October 1945
• Docket Number: Civ. A. No. 489.
• Parties: NEBRASKA NAT. HOTEL CO. v. O'MALLEY, Collector of Internal Revenue.
• Court: U.S. District Court — District of Nebraska

63 F. Supp. 26

NEBRASKA NAT. HOTEL CO. v. O'MALLEY, Collector of Internal Revenue.

Civ. A. No. 489.

District Court, D. Nebraska, Omaha Division.

October 2, 1945.

William J. Hotz, of Omaha, Neb., for plaintiff.

Samuel O. Clark, Jr., Asst. Atty. Gen., Harold D. Cohen and Andrew D. Sharpe, Sp. Assts. to Atty. Gen., and Joseph T. Votova, U. S. Atty., of Omaha, Neb., for defendant.

DONOHOE, District Judge.

In this case the plaintiff brings action against the defendant, as Collector of Internal Revenue, seeking to recover moneys paid to the defendant as such collector, under protest, on the 6th day of November, 1942, and for which a claim for refund was filed and rejected.

The claim consists of the following items:

                (a) Social Security Tax from January 1
                     1940, through September 30, 1942 ...............  $1,332.24
                (b) Unemployment tax for the year
                     1940 .................................. $760.64
                    Plus 6% interest to October 30
                     1940 ..................................   79.87      840.51
                                                             _______
                (c) Unemployment tax for the year
                     1941 .................................  $687.68
                    Plus 6% interest to October 31
                     1942 .................................    30.95      718.63
                                                             _______   _________
                        Total ......................................   $2,891.38
                

The disputed claim grows out of social security taxes levied against the plaintiff covering certain contracts made and entered into by the plaintiff with some twenty-five different orchestra leaders to furnish music and musicians for various engagements from one to four weeks each. These entertainments were contracted for and rendered in the Paxton Hotel, owned and operated by the plaintiff.

The contracts were of two classes, referred to in the evidence as "Form A" and "Form B". In the "Form A" contracts, the plaintiff was designated as the employer, party of the first part, and the band or orchestra leader as representative of the employees, party of the second part. It was recited that it was an agreement of employment between the party of the first part, the employer of (different numbers of musicians, members of Local No. _____), parties of the second part, by their agent. Then there followed a statement of the services and conditions of service, from which I quote a sample from one of the contracts: "Service to consist of nine musicians and girl singer, advertised as `Music by Gary', to play in Paxton Hotel, Monday through Friday: 4 til 9; and 9:30 til 12:30 A. M. Saturday 12:45 til 2:45; 7 til 9; 10 til 1:00 A. M. Sunday; 7 til 8:45 P. M. Above hours subject to change by mutual agreement. Musicians employed hereunder may work thirty hours weekly at the rate of $37.50 per man per week; Leader or contractor 50% additional. * * * Price $386.25 per week for 30 hours work. Overtime at $1.25 per hour per man. The individual musicians are the employees, to whom the employer is directly responsible. Any payment by the employer to the musicians' representative shall be as their agent for distribution among them. Settlement to be made on or before ........ End of each week. * * * Musicians of any band or orchestra performing on this engagement must be members of the American Federation of Musicians. * * * As the Musicians engaged under the stipulations of this contract are members of the American Federation of Musicians, nothing in this contract shall be so construed as to interfere with any obligation which the Musicians owe to the American Federation of Musicians by reason of their prior obligations to the American Federation of Musicians as members thereof."

"Form B", which is the contract really involved in this case, as will later appear, recites that it is a contract for the personal services of musicians made by the undersigned employer (Paxton Hotel) and seven musicians, referred to in the contract as employees "represented by the undersigned representative" (orchestra leader). The terms of the contract are recited as follows: "That the employer employs the personal services of the employees, as musicians severally, and the employees severally, through their representative, agree to render collectively to the employer services as musicians in the orchestra under the leadership of ______ (orchestra leader)." "* * * The employer shall at all times have complete control of the services which the employees will render under the specifications of this contract. On behalf of the employer the Leader will distribute the amount received from the employer to the employees, including himself, as indicated on the opposite side of this contract, or in place thereof on separate memorandum supplied to the employer at or before the commencement of the employment hereunder and take and turn over to the employer receipts therefor from each employee, including himself. The amount paid to the Leader includes the cost of transportation, which will be reported by the Leader to the employer. The employer hereby authorizes the Leader on his behalf to replace any employee who by illness, absence, or for any other reason does not perform any or all of the services provided for under this contract. The agreement of the employees to perform is subject to proven detention by sickness, accidents, or accidents to means of transportation. * * * The musicians performing services under this contract must be members of the American Federation of Musicians and nothing in this contract shall ever be so construed as to interfere with any obligation which they may owe to the American Federation of Musicians."¹

"It is agreed that all the rules, laws and regulations of the American Federation of Musicians, and all the rules, laws and regulations of the Local in whose jurisdiction the musicians perform, insofar as they are not in conflict with those of the Federation, are made part of this contract."

The defendant now concedes that the taxes levied on all contracts of the "Form A" Class were erroneous and that the plaintiff is entitled to a refund of all of such items, but contends that by reason of the change in the contracts from "Form A" to "Form B", and the specific language contained in "Form B", that the relationship of the Hotel Company to the musicians has changed to that of employer and employee, and hence the assessment of the taxes is valid.

To determine the question presented necessitates a construction of the application of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, Section 1400 et seq. and Section 1600 et seq., Title 26 U.S.C.A. Internal Revenue Code, or, simply stated, the question is whether musicians, including leaders of various orchestras and bands, who performed at the Paxton Hotel, were employees of the Hotel within the meaning of Sections 1426(b), and 1607(c) of the Internal Revenue Code.

It appears from the evidence, as is likewise a matter of common knowledge, that orchestras such as are involved in this litigation are known as "named orchestras" or "named bands" and are numerous throughout the country. They are made up of a number of persons especially trained in music and entertainment under the leadership, if successful, of a specially qualified leader. These qualifications must necessarily include business leadership, showmanship, personality, special talent in music and with musical instruments, and talent for organization. The inception of the band or orchestra is generally the brain child of the leader. He plans the number of performers, the musical instruments which are to be played, the number and type of each, and generally plans a classification of his organization with reference to the type of music and performance. With these plans perfected, he then seeks the assistance of talented musicians especially trained on the different instruments which he plans to include in his orchestra. With these individuals, he contracts separately, either express or implied, for their services to either himself individually or to the organization as a whole. For the purpose of the organization, the leader must advance or secure the contribution from the musicians to obtain the necessary moneys covering expenses such as the cost of music, musical instruments, and the expenses of rehearsals. In the selection of the various musicians, many auditions of applicants are necessary in order to select those best fitted. When the organization is perfected, the leader undertakes to secure commercial engagements from dance halls, hotels, theaters, and so forth. These engagements are largely obtained through booking agents. The members usually find it necessary to join the American Federation of Musicians and the contract for the services of the organization is generally dictated by the Federation of Musicians. In the different orchestras involved in this case the musicians were required to be members of the Federation, and the bylaws of the Federation are made a part of that contract.

Attached hereto, marked "Note No. 1", are pertinent provisions of the by-laws made a part of the contracts.

If, under the provisions of Section 1400 et seq., Title 26 U.S.C.A. Int.Rev.Code, the persons constituting the orchestra or band are employees, then the employer is liable for the tax of 1% based upon the wages paid to all of the employees, and an additional 1% is assessed against each employee on his wage. This sum is withheld by the employer and, with his own 1%, paid to the Collector of Internal Revenue at stated intervals, and under the Unemployment Act, Section 1600 et seq., Title 26 U.S.C.A. Int.Rev.Code, the employer of eight or more persons is liable for a tax of 3% of the wages paid by the employer to his employees.

By the terms of the statutes and the regulations of the Commissioner of Internal Revenue, which follow the common law, the term "employment" means the legal relationship of employer and employee, and this relationship...