Simpson v. Comm'r of Internal Revenue
| Decision Date | 28 August 1975 |
| Docket Number | Docket No. 3441-73. |
| Citation | 64 T.C. 974 |
| Parties | KELBERN M. SIMPSON AND GISELA SIMPSON, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ralph L. Jacobson, for the petitioner.
Nicholas G. Stucky and Thomas F. Kelly, for the respondent.
During 1970, petitioner worked as an insurance agent for Farmers Insurance Group under a contract that provided, inter alia, that he was an independent contractor and not an employee. Although the contract restricted petitioner as to the policies he could sell for other insurance companies, he sold insurance for 19 other companies during 1970. Farmers Insurance Group did not exercise a significant degree of control over the details of petitioner's work. Petitioner was responsible for and paid for the facilities used in selling insurance. He was compensated solely on a commission basis and, with certain limited exceptions, could only be discharged upon 3 months' written notice. Held, during 1970, petitioner was not an employee of Farmers Insurance Group for purposes of exclusion from self-employment tax.
Respondent has determined a deficiency of $538 in petitioners' 1970 self-employment tax.1 The sole issue for our determination is whether Kelbern Simpson is liable for the self-employment tax imposed by section 1401(a)2 or whether he is excluded from liability for such tax because he is an ‘employee’ within the meaning of section 1402(c)(2).
Some of the facts have been stipulated and are so found.
Kelbern and Gisela Simpson are husband and wife who resided in San Anselmo, Calif., at the time the petition was filed. Petitioners' income tax return for the calendar year 1970 was filed with the Internal Revenue Service Center in Ogden, Utah.
From 1958 through 1974, petitioner Kelbern Simpson (Simpson) was an agent for Farmers Insurance Group. Farmers Insurance Group (Farmers) is a trade name identifying a group of casualty, property, and life insurance companies owned or managed by Farmers Group, Inc., a Nevada corporation with its principal office located in Los Angeles, Calif.
Farmers is organized into nine regional offices located in Merced, Los Angeles, and Santa Ana, Calif.; Portland, Oreg.; Colorado Springs, Colo.; Pocatello, Idaho; Austin, Tex.; Aurora, Ill.; and Kansas City, Kans. Simpson worked as a Farmers' agent in the Merced region which covers the northern portions of California and Nevada. There are over 700 full-time Farmers' agents in the Merced region, with over 2,000 agents in the State of California, and approximately 5,500 such agents in the United States. The Merced region is composed of 55 districts, and each district has a district manager.
In June 1958, Simpson, who had no prior experience in the insurance business, was hired by Robert Thomas (Thomas), a Farmers' district manager located in San Rafael, Calif. Thomas presented Simpson with a Farmers' contract, which he signed without negotiation. After signing the contract, Simpson participated in a Career Trainee Program for a period of 18 months beginning on June 11, 1958.
Together with other Farmers' agents, Simpson worked out of the San Rafael district manager's office until 1962, when the district office and agents moved to Northgate, Calif. While Simpson worked out of the San Rafael and Northgate district offices, he paid no rent or business expenses in connection with the operation of the offices.
In 1966, Simpson moved into his own office, located in San Anselmo, Calif. He shared office space with another Farmers' agent, Andrew Gillespie (Gillespie), though Farmers did not require him to do so.
In that same year, Simpson signed a new contract with Farmers. Shortly thereafter, however, Farmers developed another contract for its agents, known as the ‘buff contract,‘ and afforded Simpson and other agents an opportunity either to sign and operate under the buff contract or continue to operate under the 1966 contract. As did most other Farmers' agents in 1968, Simpson chose to execute the buff contract. It is this contract under which Simpson operated during 1970, the year in issue.
During 1970, in addition to selling casualty and life insurance for Farmers, Simpson also represented and solicited insurance for 19 other insurance companies. However, the buff contract restricted Simpson so that he could not place insurance with other companies unless: (1) The policy involved an unacceptable risk as defined by Farmers' published rules and manuals; (2) the policy class or line of insurance was not written by Farmers; (3) the policy was first submitted to Farmers for approval and declined, or (4) the policy was canceled by Farmers. Thus, unless the policy fell within the above four categories, Simpson was required to place the policy with Farmers, notwithstanding that he might obtain a higher commission from a policy placed with another company or that a policy offered by another company might be more favorable to a particular client.
Under the buff contract, Farmers reserved the right to review and examine Simpson's records for purposes of verifying compliance with the contract.
Also, Simpson was required to collect and promptly remit moneys due Farmers and to provide a fidelity bond in favor of Farmers. He remitted the premiums he collects 3 times a week directly to Farmers together with a report entitled ‘Agent's Remittance Advice.’
In addition, the buff contract contained the following provisions:
This Agreement terminates upon the death of the Agent and may be terminated by either the Agent or the Companies (Farmers) on three (3) months written notice.
If the provisions of this Agreement are breached by either the Agent or the Companies, the Agreement may be terminated by the other party on thirty (30) days written notice. This Agreement may be terminated immediately by mutual consent or by the Companies for the following reasons:
1. Embezzlement of monies belonging to the Companies.
2. Switching insurance from the Companies to another carrier.
3. Abandonment of the Agency.
4. Conviction of a felony.
5. Wilful misrepresentation that is material to his Agency Operation. * * *
The Agent or his heirs may sell all or any part of this Agency to a member(s) of the Agent's immediate family at any time, provided the purchaser is acceptable to the Companies, and provided the sale price does not exceed the proportionate share of the ‘Contract Value’ (as hereinafter defined) of the Agency.
In the event of termination of this Agreement, the Companies will normally pay ‘Contract Value’ to the Agent or his heirs. If the Companies do not pay the ‘Contract Value’, the Agent or his heirs may, in writing, nominate a successor(s). Such nominee(s) must be acceptable to the Companies, and be ready, willing, and able to operate the Agency within thirty (30) days of termination of this Agreement.
The Agent, or his heirs, may negotiate with such nominee(s) for the purchase of his interests under this Agreement, but the sale price shall in no event exceed the ‘Contract Value’.
Contract value is based upon (1) the amount of service commissions paid to the Agent on his active policies during either the six month or twelve month period immediately preceding termination; (2) the number of policies in the Agent's active code number; (3) the number of years of continuous service as an Agent for the Companies immediately prior to termination.
* * *
Nothing contained herein is intended or shall be construed to create the relationship of employer and employee; rather, the Agent is an independent contractor for all purposes.
The time to be expended by the Agent is solely within his discretion, and the persons to be solicited and the area wherein solicitation shall be conducted is at the election of the Agent.
The Agent shall, as an independent contractor, exercise sole right to determine the time, place and manner in which he carries out the objectives of this Agreement, provided only that he conform to normal good business practice, and to all State and Federal laws governing the conduct of the Companies and their Agents.
On certain occasions, Farmers directly contacted Simpson's clients regarding the purchase of different or expanded insurance coverage.
Under Farmers' operating procedures, when a policyholder moved out of an agent's effective service area, Farmers would reassign the policy to a district in the area where the risk was located. The policy was then assigned by the district manager to an agent within his district for servicing. The policyholder could, however, retain his original agent by making a written request to Farmers.
In 1970, all Farmers' agents had the same authority to bind customers with Farmers' preferred-rate automobile insurance company. During 1969 and 1970, numerous insurance companies, including Farmers, experienced large automobile underwriting losses. In order to decrease such losses, Farmers instituted a ‘Field Underwriting Program’ in 1971. By the middle of 1972, the Field Underwriting Program was fully implemented, and all agents were assigned either preferred, advanced, standard (basic), or limited underwriting authority. An agent was placed in one of these four categories based generally upon his period of service as a Farmers' agent, the number of policies in force, and his retention and loss ratios.
The difference between the four underwriting categories involved the types of automobile insurance coverage to which the agent could bind Farmers without advance approval. Those agents in the preferred category could bind the most risks without Farmers' advance approval while those in the limited category could bind the fewest. Simpson was an advanced underwriter, as were most other Farmers' agents.
In setting up his office with Gillespie, Simpson purchased, with his own funds, a variety of office assets including desks, chairs, file drawers, recorders, and typewriters. Farmers neither...
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