Rancheria v. U.S.

• Decision Date: 11 August 2011
• Docket Number: No. 10–15519.,10–15519.
• Citation: 11 Cal. Daily Op. Serv. 10189,108 A.F.T.R.2d 2011,2011 Daily Journal D.A.R. 12172,653 F.3d 1112
• Parties: BLUE LAKE RANCHERIA; Blue Lake Rancheria Economic Development Corporation, Plaintiffs–Appellants,v.UNITED STATES of America, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

653 F.3d 1112

108 A.F.T.R.2d 2011-5698

11 Cal. Daily Op. Serv. 10,189

2011 Daily Journal D.A.R. 12,172

BLUE LAKE RANCHERIA; Blue Lake Rancheria Economic Development Corporation, Plaintiffs–Appellants,

v.UNITED STATES of America, Defendant–Appellee.

No. 10–15519.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 11, 2011.Filed Aug. 11, 2011.

Frank R. Lawrence, Kathleen M. Nilles, Jonathan E. Strouse (argued), William Wood, and Zehava Zevit of Holland & Knight LLP, Los Angeles, CA, for the plaintiffs-appellants.John A. DiCicco, Kenneth L. Greene, Patrick J. Urda, and Gilbert S. Rothenberg (argued) of the United States Department of Justice, Tax Division, Washington, DC, for the defendant-appellee.Appeal from the United States District Court for the Northern District of California, Samuel Conti, Senior District Judge, Presiding. D.C. No. 3:08–cv–04206–SC.Before: PROCTER HUG, JR., BARRY G. SILVERMAN, and SUSAN P. GRABER, Circuit Judges.

OPINION

SILVERMAN, Circuit Judge:

Blue Lake Rancheria, an Indian tribe, seeks a refund of Federal Unemployment Tax Act taxes paid by Mainstay Business Solutions, an employee leasing company wholly owned by the Tribe. Section 3306(c)(7) of Title 26 of the United States Code excepts from the definition of “employment”—and thus exempts from the payment of employment tax—“services performed in the employ of an Indian tribe, or any instrumentality” of a tribe. We hold today that this exception does not apply where a tribe is merely a “statutory employer”—in essence, nothing more than a paymaster. The exception granted by § 3306(c)(7) applies only where a tribe is the common-law employer. However, undisputed facts show that Mainstay was, indeed, the common-law employer of the workers at issue here and, therefore, was entitled to the special tax treatment Congress saw fit to grant to Indian tribes.

I. Background

Blue Lake Rancheria is a 53–member, federally recognized Indian tribe located in Humboldt County, California. In May 2003, the Tribe established Mainstay Business Solutions as a for-profit business owned by and operated for the benefit of the Tribe. Mainstay provided employee leasing and temporary staffing for small- and medium-sized businesses located in California, Hawaii, and Nevada. Mainstay contracted with each of its clients to hire the client's employees as its own and then “lease” those employees back to the client. The client supervised the leased employees on a day-to-day basis, but Mainstay paid their wages, provided benefits, and performed other human resources functions. According to Mainstay, this arrangement allowed the client to free itself from H.R. responsibilities and focus on its business, and resulted in better benefits for employees. During the years at issue in this case (2003 and 2004), Mainstay paid wages for approximately 39,000 workers.

Mainstay reported and paid $722,047.77 in FUTA taxes for 2003 and $1,283,892.86 for 2004. Mainstay later filed claims for refunds with respect to these tax payments, asserting that, as a tribally owned business entity, it was exempt from FUTA tax liability under 26 U.S.C. § 3306(c)(7).¹ Having received no formal response from the IRS regarding the refund claims, the Tribe filed suit in the Northern District of California. The complaint sought a full refund of the FUTA taxes paid by Mainstay for 2003 and 2004 ($2,005,939), plus statutory interest.

The Tribe and the United States filed cross-motions for summary judgment. The district court granted the United States' motion for summary judgment and denied the Tribe's motion. The court held that § 3306(c)(7)'s exception for services performed “in the employ of” an Indian tribe applies only where the tribe is a common-law employer. The court further held that the Tribe failed to present facts sufficient to establish that Mainstay was the common-law employer of the workers in question.

The Tribe now appeals. We have jurisdiction under 28 U.S.C. § 1291.

II. Discussion

A. Standard of Review

The first question presented by this case—the scope of § 3306(c)(7)' s exception from “employment”—is one of statutory interpretation, which we review de novo. See Idaho Farm Bureau Fed'n v. Babbitt, 58 F.3d 1392, 1399 (9th Cir.1995).

The second question—whether Mainstay is the common-law employer of its leased employees—is a mixed question of law and fact. See Chin v. United States, 57 F.3d 722, 725 (9th Cir.1995) (citing Prof'l & Exec. Leasing, Inc. v. Comm'r, 862 F.2d 751, 753 (9th Cir.1988)). Where a case turns on a mixed question of law and fact and, as here, the only disputes relate to the legal significance of undisputed facts, “the controversy collapses into a question of law suitable to disposition on summary judgment.” Thrifty Oil Co. v. Bank of Am. Nat'l Trust & Sav. Ass'n, 322 F.3d 1039, 1046 (9th Cir.2003). We review de novo the district court's decision on cross-motions for summary judgment. Trunk v. City of San Diego, 629 F.3d 1099, 1105 (9th Cir.2011).

B. Scope of § 3306(c)(7)'s Exception

This case requires us to interpret § 3306(c)(7), which excepts “services performed in the employ of” an Indian tribe from the definition of “employment” for purposes of FUTA. Statutory interpretation begins with the text of the statute itself. See Brock v. Writers Guild of Am., W., Inc., 762 F.2d 1349, 1353 (9th Cir.1985). The plain meaning of a statute controls where that text is unambiguous. See Green v. Comm'r, 707 F.2d 404, 405 (9th Cir.1983).

Subtitle C of the Internal Revenue Code governs employment taxes on individuals and their employers. See §§ 3101–3510. Subtitle C includes the Federal Insurance Contributions Act (Chapter 21, §§ 3101–3128), FUTA (Chapter 23, §§ 3301–3311), and provisions regarding income tax withholding (Chapter 24, §§ 3401–3406). FUTA funds the joint federal-state unemployment insurance program by imposing an employment tax:

There is hereby imposed on every employer (as defined in section 3306(a)

[²) for each calendar year an excise tax, with respect to having individuals in his employ, equal to ... 6.2 percent ... of the total wages (as defined by section 3306(b)) paid by him during the calendar year (or portion of the calendar year) with respect to employment (as defined in section 3306(c)).

§ 3301. The FUTA tax applies only to the first $7,000 an employer pays to each employee during the year. § 3306(b)(1). Employers may take a credit against the tax for amounts paid to state unemployment funds, reducing the minimum effective FUTA tax rate to 0.8%. § 3302.

Central to this case is FUTA's definition of “employment.” Section 3306(c) defines “employment” as, in relevant part, “any service, of whatever nature, performed after 1954 by an employee for the person employing him, irrespective of the citizenship or residence of either.” § 3306(c). FUTA incorporates by reference the definition of “employee” from FICA, § 3121(d), which defines the term in relevant part as “any individual who, under the usual common law rules applicable in determining the employer-employee relationship,

has the status of an employee.” See § 3306(i) (referring to § 3121(d)).

Section 3306(c) contains a number of exceptions to the definition of employment. See § 3306(c)(1)–(21). Services falling under one of these exceptions are not considered “employment” and, therefore, do not give rise to FUTA tax liability. Among § 3306(c)'s exceptions is the governmental and tribal employer exception, which excludes from “employment”

service[s] performed in the employ of a State, or any political subdivision thereof, or in the employ of an Indian tribe, or any instrumentality of any one or more of the foregoing which is wholly owned by one or more States or political subdivisions or Indian tribes....

§ 3306(c)(7).

This case turns on the interpretation of § 3306(c)(7)'s exception from “employment” of services performed “in the employ of” an Indian tribe. The government argues—and the district court agreed—that this exception applies only where a tribe is the common-law employer of a worker; the Tribe, on the other hand, contends that the phrase “in the employ of” also covers situations where a tribe is only the statutory employer. A “common-law employer” is the employer under the general common law of agency. See Cmty. for Creative Non–Violence v. Reid ( CCNV ), 490 U.S. 730, 740, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989). In contrast, a “statutory employer” is merely a paymaster—“the person having control of the payment of ... wages,” where “the person for whom [an] individual performs or performed ... services does not have control of the payment of the wages for such services.” § 3401(d)(1).

The Tribe asks us to hold that an Indian tribe or instrumentality thereof is exempt from paying FUTA taxes whenever it acts as a statutory employer—in other words, whenever it controls the payment of wages for services performed for another entity. To support this argument, the Tribe relies primarily on the Supreme Court's decision in Otte v. United States, 419 U.S. 43, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974), which extended the application of § 3401(d)(1)'s definition of “employer” to the context of FICA. In Otte, a bankruptcy case, the Supreme Court had to decide whether priority claims for wages earned prior to an employer's bankruptcy, but paid by the trustee after the inception of bankruptcy proceedings, were subject to withholding of income and FICA taxes. 419 U.S. at 44, 95 S.Ct. 247. Section 3402(a) requires “every employer making payment of wages” to “deduct and withhold [income tax] upon such wages,” and § 3102(a) provides that “[FICA tax] shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid.” Otte, the bankruptcy trustee, argued that he did not have to withhold income or FICA taxes because he was not the “employer” and because the claim payments were not “wages.” 419 U.S. at 49, 95 S.Ct. 247. The Court...