whether the salespersons were employees, the dispute tried involved only the years 1983 through 1987, inclusive. The plaintiff contended he was entitled to the relief found in § 530 of the Revenue Act of 1978 with respect to all of the assessed taxes, including 1988.
4. The plaintiff purchased Douglas Motors, an established used car business, in 1981. Douglas Motors was operated by Mr. Springfield as a sole proprietorship.
5. The business was operated out of a warehouse in Santee, California, until February of 1988. The warehouse location included both indoor and outdoor space for displaying the vehicles to the public.
6. Between 1981 and 1983, Douglas Motors' business primarily consisted of purchasing automobiles at wholesale prices in the San Diego area, transporting many of the vehicles to the Los Angeles area, and reselling them at wholesale auctions. The difference in the prices which could be obtained in the wholesale markets provided the business with most of its operating profit.
7. After he purchased the business, Springfield entered into agreements with several persons whom he allowed to sell automobiles from Douglas Motors' inventory to retail customers and provided "Douglas Motors" business cards to at least one of these salespersons.
8. The nature of the relationship between the plaintiff and the salespersons did not change substantially between 1983 and 1989 and were typically long term relationships.
9. Plaintiff gave his salespeople keys to the Santee warehouse and allowed them to sell used cars from his business inventory.
10. All of the salespeople whom Springfield hired had extensive experience in the used automobile sales industry.
11. Potential retail customers would view Douglas Motors' automobiles at the Santee warehouse location and the salespersons would conduct the sales transaction on behalf of the business and under Douglas Motors' Dealers License. Mr. Springfield attracted retail customers by offering the vehicles for sale in a weekly used car magazine, the "Auto Trader."
12. Mr. Springfield spent very little time himself at the warehouse. His time and attention was devoted to wholesale activity and vehicle purchasing.
13. Douglas Motors' salespeople were paid on a commission-only basis, receiving no fixed salary. The plaintiff set and recorded a "cost" for each vehicle kept at the warehouse location. This was based on his cost purchasing the vehicle, detailing and repair as well as a "pack" to cover overhead. The plaintiff also noted the price he expected to receive at auction for the vehicle.
14. The commissions were paid on the difference between the actual sales price obtained by the salesperson and the "cost" set by Mr. Springfield. The salespeople were paid 30% of the net proceeds with 70% going to the dealership. Retail customers made their checks payable to Douglas Motors, not the individual salespeople.
15. The salespeople had no investment in the used vehicles in the Douglas Motors inventory. Mr. Springfield and/or Douglas Motors purchased the vehicles, expended the money for any detailing, repairs or re-conditioning, and determined which vehicles would be sold at a wholesale auction and which vehicles would be sold at retail.
16. Mr. Springfield knew that at least one of the salespersons would be on the business premises during normal business hours to provide service to potential retail customers.
17. While the salespeople negotiated trade-in values with customers, trade-ins were subject to re-appraisal and approval by Mr. Springfield. He had the final decision.
18. The salespeople would handle customer complaints, but if a major problem rose after the sale of a vehicle, it was handled by Mr. Springfield.
19. Mr. Springfield carried a beeper so that the salespeople could call him if they needed to clear something concerning the business activity.
20. Mr. Springfield benefited financially from the presence of the salesmen on the premises on a daily basis by the virtue of the sales of the inventory to the retail public.
21. As opposed to per transaction, the plaintiff paid the salespeople the total amount of the commissions they had earned at various intervals averaging once every two weeks.
22. Mr. Springfield provided worker's compensation insurance for the salespeople.
23. Mr. Springfield maintained the right to terminate the relationship of any or all of the salespeople at any time as well as the right to take the keys to the warehouse from them.
24. In February of 1988, Mr. Springfield moved Douglas Motors' operations to a location in La Mesa, California. The nature of the business continued to involve both wholesale and retail sales of used vehicles.
25. Mr. Springfield characterized the used car salespeople as independent contractors and, accordingly, did not file employment tax returns or withhold or pay employment taxes.
26. Mr. Springfield entered into written agreements with at least three of the salespeople (Creason, Little and McFall). The agreements themselves were never placed in evidence.
27. Consistent with his treatment of the salespersons as independent contractors, Springfield filed Forms 1099 (Information Returns) and 1096 (Transmittal of Information Returns) with the Internal Revenue Service in Fresno, California, each year from the inception of the business through 1988.
28. The Form 1099's showed plaintiff's Social Security Number, name and business address, as the payor and the Social Security Number, name, address and compensation paid for each salesperson for the period. The form showed in block four that no taxes had been withheld from the compensation paid.
29. Beginning with the taxable quarter ending June 30, 1989, the plaintiff began treating his salespeople as employees.
30. On March 11, 1991, after determining Douglas Motors' salespeople should have been classified as employees, a delegate of the Secretary of the Treasury made assessments of withheld income tax (WH) Federal Insurance Contribution Act (FICA) taxes, Federal Unemployment Tax Act (FUTA) taxes, interest, and various civil penalties against Springfield for the taxable periods and in the amounts as set forth on the certified Transcripts of Assessments and Payments (Forms 4340) which were received in evidence at the trial of this matter.
31. A distinction is drawn in the used automobile sales industry between retail salespersons and wholesale salespersons.
32. Retail salespeople have traditionally been treated as employees.
33. While some distinction may exist between franchise dealers and independent dealers, there does not appear to be a long standing practice of a significant segment of the used automobile sales industry in treating retail salespersons as independent contractors. To the contrary, the weight of the evidence supports the factual finding that retail salespeople are treated as employees.
34. The plaintiff did not conduct a thorough investigation into the relevant law and practice at the time he began hiring said salespersons. Plaintiff did not consult with attorneys, certified public accountants, or representatives of the Internal Revenue Service of Employment Development Department concerning applicable standards and requirements with regard to the characterization of salespeople.
35. Any Finding of Fact which is more appropriately a Conclusion of Law shall be deemed as such.
CONCLUSIONS OF LAW
1. The statute of limitations does not bar the collection by the Internal Revenue Service of assessments for the employment taxes, penalties and interest for the years 1983 through 1987, inclusive.
The plaintiff contends at trial that, notwithstanding the Court's Order of May 10, 1993 denying a motion to dismiss Defendant's claims based upon the Statute of Limitations, he may raise the issue of whether the assessments of tax made against him were barred by the statute of limitations. The United States contends that such argument is prohibited by the law of the case doctrine.
Under the law of the case doctrine, a court is generally precluded from reconsidering an issue that has already been decided by the same court, or a higher court in the identical case. Thomas v. Bible, 983 F.2d 152, 154 (9th Cir. 1993). For the doctrine to apply, the issue in question must have been "'decided either expressly or by necessary implication in [the] previous disposition' [citations omitted]." Bible, 983 F.2d at 154.
In his motion to dismiss, the plaintiff argued that the filing of Forms 1096 and 1099 began the running of the statute of limitations on the assessment of the taxes at issue in this case. As a result, according to the plaintiff, the assessments were made too late and the case had to be dismissed. The United States contended that the proper tax returns, Forms 940 and 941, had to be filed to begin the running of the statute of limitations and, because such returns were not filed, the statute never began to run. Following briefing and argument, Judge Rhoades of the District Court, relying on the reasoning set forth in Ginter v. United States, 815 F. Supp. 1289 (W.D. Mo. 1993), expressly denied the plaintiff's motion to dismiss.
This Court finds that the issue of the statute of limitations was resolved by Judge Rhoades and that the law of the case doctrine applies. Even if the law of the case doctrine did not dispose of the issue, this Court agrees with Judge Rhoades that Ginter v. United States, is controlling. Ginter did establish that the filing of the Form 1099 did not trigger the three year statute of limitation of 26 U.S.C. 6501 by its holding that the 1099 informational return was not "the return" contemplated by the statute. The 1099 Forms were simply not the proper returns to have been filed in this context. The issue pressed by the plaintiff in this case is that the filing of the Form 1099 along with the filing of his Form 1040
and a Schedule C would be sufficient to alert I.R.S. officials to the fact of mischaracterization of employees. Ginter found that the Form 1099 was not sufficient in and of itself to alert the I.R.S. officials as to a mischaracterization. This Court agrees. This Court also feels that Commissioner v. Lane-Wells Co., 321 U.S. 219, 88 L. Ed. 684, 64 S. Ct. 511 (1944) is dispositive. In that case, a Form 1120 Corporate Income Tax Return and a Form 1120H were required to be filed by the defendant. The company filed only the Form 1120 and responded that it was not a personal holding company. Despite the company's good faith, the corporate tax return was not enough to trigger the statute of limitations. The Court found "the returns did not show the facts in which liability would be predicated," 321 U.S. at 223. Neither Plaintiff's Form 1040 with its Schedule C, nor the Form 1099s would show the facts in which liability would be predicated in this case. Those documents do not provide any clues that the recipients are in actuality employees. While they demonstrate the existence of claimed independent contract workers, standing alone they do not show a mischaracterization issue nor the basis upon which additional tax liability would be predicated. See also, Cline v. Commissioner, T.C. Memo 1988-144.
2. The assessment of civil penalties under 26 U.S.C. § 6652, § 6676 and § 6722 were not improper in this case nor is there a legal basis for relief established by plaintiff.
Plaintiff asserts that the assessment of civil penalties when a taxpayer has filed returns containing the information required and a change in legal theory by the IRS creates the need for a different return form is not appropriate. As a result, plaintiff seeks relief from the civil penalties imposed in this case and made part of the counterclaim. For this premise, plaintiff cites Maitland A. Wilson v. Commissioner, 7 T.C. 395 (1946) and Atlas Oil and Refining Corp. v. Commissioner, 22 T.C. 552 (1954). Neither Wilson nor Atlas Oil support the proposition asserted. Wilson challenges the method of calculation of the 50 percent penalty for fraud and lends no authority or insight on the issue before the Court. Atlas Oil deals predominately with the statute of limitations issue and involves a petitioner who had a discrepancy in the calendar versus fiscal year reporting. The Court finds nothing in that case which supports the premise or basis for relief as to the propriety of the civil assessments in this case. The Court also cannot accept the assertion that the requirements of the W-2 form were effectively resolved by the filing of forms 1099 in this case. No authority was cited nor any located to support that proposition. Clearly, the Employment Tax Examination Changes Reports provided to plaintiff in December of 1989, identified the need to file a form W-2 for the subject salespeople and extended time for compliance. This is illustrated in court Exhibit 6. Court Exhibit 6 also alerts plaintiff to the potential that failure to file W-2's as requested at that time, would subject plaintiff to penalties prospectively. Here, plaintiff did not file the forms which would have mitigated the amount of outstanding sums in dispute in this case.
3. The salesmen were common law employees from 1983 through 1987 for federal employment tax purposes under applicable law.
The characterization of the salespeople is the heart of this dispute. The plaintiff contends that the salespeople were independent contractors and that there is no tax liability due from his operation of Douglas Motors. The Government asserts that the salespeople were, in fact, employees, covered under Social Security Unemployment Taxes and rendered the employer liable for the withholding and payment of said sums.
The burden of establishing a worker's status as an independent contractor rests upon the employer. Marvel v. United States, 719 F.2d 1507, 1516 (10th Cir. 1983); Beatty v. Halpin, 267 F.2d 561, 564 (8th Cir. 1959); In re Pearson, 86 Bankr. 179, 180 (E.D. Mo. 1988); Chase Mfg., Inc. v. United States, 446 F. Supp. 698, 701 (E.D. Mo. 1978).
Sections 3111 and 3301 of the Internal Revenue Code (Title 26, U.S.C.) impose on employers FICA (i.e., Social Security) and FUTA (i.e., unemployment) taxes with respect to wages paid to their employees. Collectively, these two taxes are referred to as employment taxes. In addition, employers must withhold FICA and federal income taxes from employees' wages and remit the amounts withheld to the Internal Revenue Service. 26 U.S.C. §§ 3101 and 3401.
Wages paid to employees are subject to FICA and FUTA taxes which must be paid by the employer. Conversely, payments to independent contractors are subject to the Self Employment Contributions Act (SECA) tax, which must be paid by the independent contractor. S. Rep. No. 1263, 95th Cong., 2d Sess. 209, reprinted in 1978 U.S.C.C.A.N. 6761. See also 26 U.S.C. § 1401 et seq.
26 U.S.C. § 3121 provides several tests employers may use in determining the status of an individual worker for employment tax purposes. 26 U.S.C. § 3121(d)(2) provides that the term "employee" for purposes of Federal Insurance Contributions Act (FICA) tax, means:
"any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee."