T .C. Su m m ary Op i n io n 2 02 0 -1 0

UNITED STATES TAX COURT

JAM ES H. DUNLAP AND EILEEN M . DUNLAP, Pet i t io n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 5 8 1 1-1 7S. Fi l edFeb ru ary 1 8 , 2 0 2 0
.

J am es H. Dun l ap an dEi l een M . Du n l ap , p ro s es e. Am y Ch an g an d Greg o ry

M i ch ael Hah n , fo r res p o n d en t
.

SUM M ARY OPINION GERBER, J u d g e: Th i s cas e was h eard p u rs u an tt o the p ro v i s i o n s o f s ect i o n 7 4 6 3 o f t h e In t ern al Rev en u e Co d e i n effect wh en th e p et i t i o n was fi l ed
. 1

1 Un l es s o t h erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev en u e Co de i n effect atal l rel ev an tt i m es .- 2
-

Pu rs u an t t o s ect i o n 7 4 6 3(b ), th e d eci s i o n t o b e en t ered i s n o trev i ewab le b y an y
o t h er co u rt , an dth i s o p i ni o n s h al l n o t b e t reat ed as p reced en tfo r an y o th er cas e. Res p o n d en td et erm i n edi n co m e t ax d efi ci en ci es o f $ 1 4 ,1 8 1 an d$ 1 4 , 0 9 6 fo r p et i t i o n ers ’ 2 0 14 an d2 0 1 5 t ax y ears , res p ect i v el y . Th e s o l e i s s u e fo r o u r
co n si d erat io n i s wh eth er p aym en t s recei v edb y p et i t i o n er Ei l een Du nl ap are
s ub jectt o s el f-em

pl o ym en tt ax . Back gro u n d Wh en th ei r p et i t i o n was t i m el y fi l ed , p et i t i o n ers res i d edi n W as hi n g t o n St at e. M s . Du n lap recei ved$ 1 1 5 , 2 6 0 .9 6 i n p aym en ts fro m M ary Kay Co sm et i cs , In c. (M ary

Kay ), duri n g each o f 2 0 1 4 an d2 0 1 5. M ary Kay i s s uedFo rm

1 09 9
- M ISC, M i s cel lan eo u s In co m e, t o h er fo r each y ear d es i g n at i n g the i nco m e as
n o n em p l o y ee co m

p en s at i o n. Sh e rep o rt edth e p aym en t s as “ Oth er In co m e”. Res po n d en t ’ s det erm i n at i on th atth e p aym en t s were al s o s ub jectt o s el fem pl o y m en tt ax g av e ri se t o th e t ax d efi ci en ci es fo r 2 0 1 4 an d 2 0 1 5
. M s . Du n l ap b eg anh er career wi t h M ary Kay , a m an u fact u rer an d s el l er o f
co s m et i cs an drel at edp ro du ct s , as a b eau t y co ns u lt an t. M ary

Kay co n s ul t an t s are i n d ep en den tco n t ract o rs an d are n o t em p l o y ees . In it i al l y , s h e co n du ct eds k i n care cl as s es i n o rd er t o s el l M ary Kay p ro du ct s . An y

p ro du ct s s h e s o l dwere p urch as ed atwh ol es al e an ds o l datret ai l . Sh e recei vedco m m is si o n s an db o n u s es fro m M ary- 3
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Kay fo r th e p ro du ct s s o l db as edo n th e v o l u m e o f p ro du ct p u rch as es fro m M ary Kay : th e l arg er th e v o lu m e o f p u rch as es , th e h i g h er t h e p ercen t ag e o f
co m m i s s io n s an d b o nu s es . M ary Kay ’ s rem

u n erat i o n ap p ro ach wi t h co n s u l t an t s
an d d i rect o rs i s d es i g n edt o b e an i n cen t i ve co m m i s s i on an d b o n u s p ro g ram . M s . Du n l ap b ecam e a M ary Kay s al es d i rect or du ri n g 1 9 8 1 . On ce s al es
s k i l l s are acq u i red , a b eau t y co n s u l t an tcan t ak e t h e n ex ts t ep , wh ich i s t o recru i t
an d t rai n o th ers t o s el l M ary Kay p ro du ct s. Th e s al es d i rect o rs m ak e co m m i s s i on s
o n th e s al es o f t h e M ary

Kay b eau t y co n s ul tan t s wh o wo rku nd er t h ei r g u i d an ce. M ary Kay en co u rag es t h i s ap p ro ach t o ex p o n en t i al ly ex p an dthe co m

p an y ’ s s al es b y p ro v i d i n g i n cen t i v es t o m o ti v at e s al es d irect o rs t o co nt i n u al l y ex pan d t hei r t i ers
o f b u si n es s . M ary

Kay wo u l dm ak e m o n th l y

p aym en t s t o i t s i n d ep en d en t
co n tract ors , an d n o t ax es were wi t hh el dfro m th e p aym en t s . If o n e o f M s . Du n l ap ’ s b eau t y

co n s u l t an ts d eci d edt o n o l o n g er s el l the p ro du ct s an dretu rn ed t h em t o M ary Kay , a redu ct io n wo u l db e m ad e t o h er m on t h l y p aym en tt o acco u n t fo r t h e ret u rn edp ro duct s . As a s al es d i rect o r, M s . Du n l ap h ada wri t t en ag reem en twi th M ary Kay that
s etfo rt h h er du ti es , ri g h t s , an dco m m i s s io n s t ru ctu re. Sh e d i dn o th av e a wri t t en ag reem en twi t h th e co n s u l t an t s th ats h e recru i ted . Th e recru i t edco n s u l t an t s h ad ag reem en t s wi t h M ary

Kay
.- 4
-

A s al es d i rect o r can ach iev e t he n ex t l ev el , n at i o n al s al es d i rect o r, an di n t h atp o s i t i o n wo u l db e i n v o l v edwi t h a t h i rdt i er o f b u s i n es s . In o rd er t o ach i ev e t h atl ev el M s . Du n l ap was req u i redt o recru ita cert ai n n u m b er o f s al es d i rect o rs . Nat i o n al s al es d irect o rs h av e s al es d i rect o rs an dco n s u l t an t s i n th ei r t iered
o p erat i o n b u th av e n o d i rect au t h o ri t y o v er t h em . M ary

Kay d eci d edth e t erm s o f t h e rel at i o n s h i p b et w een n at i o n al s al es d irect o rs , s al es d i rect ors , an d co n s u l t an t s . Each p ers o n ’ s co n t ract u al ag reem en twas b et ween h er an dM ary Kay
. Th e t erm s
o f t h e ag reem en t s were “ d i ct at ed ” b y M ary Kay , an dei t h er co n s u l t an t s o r s al es d i rect o rs ag reed o r t h ere was n o rel at i o n s hi p. Th e rel at i o ns h ip b et ween M ary Kay
an d n at i o n al s al es d i rect o rs , s al es d i rect o rs , an dco n s u lt an t s was n o t t h at o f
em pl o y er-em

p l o y ee. On ce s h e b ecam e a n at i o n al s al es d i rect or, M s . Du n lap co u l d p art i ci p at e i n t h e Fam il y Secu ri t y

Pro g ram (FSP). M ary Kay

co ns u l tan t s an ds al es d i rect o rs
were n o t en t i t l ed to p art i ci p at e i n th e FSP. Th e b en efi t o f th e FSP was thati t p ro v id eda n at i o nal s al es d i rect o r wi t h fi n an ci al s ecu ri t y s ho u lds h e ret i re o r b e
u n ab le t o wo rk . Un d er t h e FSP, at 6 5 y ears o f ag e, M s. Du n l ap ’ s rel at i o n s h i p wi t h M ary Kay an dan y p aym en t s fo r s al es o r co m m i s s i o n s fro m

M ary Kay wo u l den d
. At6 5 s he was el i g i b le t o recei v e FSP p aym en t s , b u ts h e co u l dn o l on g er b e i n v o l v ed i n a t i ered b u s i n es s rel at i o n sh i p u n d er M ary Kay . Ino t h er wo rd s h er- 5
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b u s i n es s rel at i on s h ip wi t h M ary Kay t erm i n at ed , b u tu n der t h e FSP s h e o r h er
es t at e wo u l drecei v e 1 5 y ears o f p aym en ts b as edo n h er h i g h av erag e t iered s al es act i vi t y . Th e t erm s o f t h e FSP are s etb y M ary Kay , an d t h ere i s n o n eg o ti at i o n o f t h e FSP t erm s . M s . Du n l ap b ecam e a n at i o n al s al es d i rect o r du ri n g 1 9 88 , aro u n dth e t i m e t h atM ary Kay b eg an t h e FSP. M ary

Kay es t ab l is hedth e FSP as a ret i rem en t p ro g ram fo r n at i o n al s al es d i rect o rs . Th e FSP ag reem en treq u ired1 5 y ears o f
n at i o n al s al es d i rect o rs h i p an dat tai n m en to f th e ag e o f 6 5 . Sh e at t ai n edth atag e wi t h s u ffi ci en t y ears o f s erv i ce al l o wi n g h er t o recei v e FSP p aym en t s b eg in n i n g i n J an u ary 2 0 0 6 . Un d er t h e ag reem en ts h e was en t i t l edt o 6 0 % o f h er fi n al av erag e
o f co m m i s s i o n s duri ng h er l as t 1 5 y ears o f s erv i ce. Th e FSP ag reem en t s tat edthat
s h e was n o tan em

p l o y ee o f M ary

Kay
. A p ream b l e t o a J u ly

1 , 1 9 9 1 , FSP res t at em en ts p eci fi cal l y p rep ared fo r M s . Du n l ap s t at es th ath er p art i ci p at i o n i n t he p ro g ram i s i n reco g n i t i on o f h er

“ v al u ab l e co n t ri bu t i o n ” as a n at i o nal s al es d i rect or. Itfu rt h er s t at es : [E] ach Nat io nal Sal es Di rect o r d es ires t o p art i ci p at e i n t h i s p ro g ram i n ex ch an g e fo r t h e o ffer b y M ary Kay Co s m et i cs , In c. t o acq u i re at ret i rem en tth e v al u ab l e g o o dwi l l an dal l o t h er ri g h t s as s o ci at edwi th t h e b u s i n es s , i ncl u d i ng fu tu re g o o dw i l l g en erat edb y h er co n t i n u ed s up p o rtan dl oy al t y

t o M ary Kay Co s m et i cs , In c.- 6
-

An y el ect i on u nd er t h e p ro g ram was i rrev o cab le. Paym en t s u n d er t h e p l an were b as edo n th e h ig h av erag e t iered s al es act iv i t y fo r a p res cri bedp eri o d . M s . Du n l ap h ad a “ n o rm al ” ret i rem en tu n d er t h e FSP, wh i ch m ean s t h ats h e h ad at t ai n edag e 6 5 . Th e p aym en tam o un t s u n der t h e FSP were fi x edb as edo n h er M ary Kay b u s i n es s act i v i t y , an dres u l t edfro m h er effo rt s an ds erv i ces b efo re ret i rem en t . Th e p aym en t s d i dn ot rep res en ti n co m e t h ath adp rev i o u s ly b een rep o rt edas g ro s s i n co m e o r s ub

j ect edt o s el f-em

p l o ym en tt ax . Th e FSP p l an was fu nd edo n th e b as i s o f a co n t ract ual o b l ig at i o n o f M ary Kay fro m th e g en eral as s et s o f t h e fi rm . FSP p art i ci p an t s d o n o tacq u ire an y i n t eres tg reat er t h an an u n s ecu red cred i t or’ s. Th e FSP b o ardap p o i n t ed b y th e
co m p an y was em p o weredt o “ am en d , m o d i fy o r t erm i n at e t he Pl an atan y t i m e an d i n an y m an n er.” If i twere t erm i n at ed , n at i o n al s al es d i rect o rs wh o are b ei ng p ai d
u n d er t h e p l an wo u l db e p ai das s ch edu l edi n acco rdwi t h th e p l an . Th e p l an i s
co n st ru edi n acco rdwi t h th e l aw o f th e St at e o f Tex as . A J u l y 1 , 2 0 0 1 , res t at em en to f t h e FSP p l an s t at ed : “ Th e Pl an i s i n ten d edt o b e a n o n-q ual ifi edd eferred co m p en s at io n arran g em en t an di s n o ti n ten d ed t o m eet t h e req u i rem en t s o f Sect i o n 4 0 1 (a) o f th e [In t ern al Rev en u e] Co d e. Th e Pl an i s i n t en d edt o m eetth e requ i rem en t s o f Sect i o n 4 0 9A o f t h e Co d e an ds h al l b e
co n st ru edan d i n t erp ret ed i n acco rd an ce wi t h s u ch i n t en t
. ”- 7
-

In Decem b er 2 0 08 an ad d en du m

res t at i n g t h e FSP p l anb ecam e effect i v e. Th e cen t ral d o cu m en to f t h e ad d en du m , d at edJ u l y 1 , 2 0 0 5 , ap pl i edt o i n di v i du al s wh o were n at i on al s al es d i rect o rs o n Decem b er 3 1 , 1 9 8 7, i ncl u d i n g M s . Du n l ap . Th e ad d en du m ’ s p ream

b l e ex p res s ed , i n s i m i l ar t erm s as o l der v ers io n s, M ary Kay ’ s m ot i v at io n fo r es t ab li s h i n g th e FSP, i n cl u d i n g t h e referen ce t o g o od wi l l
. Th e ad d en du m

s t at edthatthe p l an was i n t en d edt o b e a n o n qu al i fi ed d eferred
co m p en s at i o n arran g em en tan dn o ti n t en d edt o m eetthe req u i rem en t s o f s ect i o n 4 0 1 (a). Itfu rt h er s t at ed t h atth e p l an was i nt en d edt o m eetthe req ui rem en t s o f
s ect i on 4 0 9 A. In an Oct o b er 2 5 , 1 9 9 5, l et t er t o n at io n al s al es d i rect o rs , M ary Kay ad v i s ed t h atth e recei p to f FSP p aym en t s wo u l dn o tredu ce an y So ci al Secu ri t y

b en efi t s t o wh i ch th e p art i ci pan t s m i g h tb e en t i t l ed . OnSep t em b er 2 6 , 2 0 0 8, t he FSP was
am en d edt o co m

p l y wi t h ch an g es i n th e In t ern al Rev en u e Co d e. M ary Kay ad v is edth atch an g es t o s ect i o n 4 0 9 A “ are l i k el y ” ap p l i cab l e t o t h e FSP. M ary Kay ch aract eri zeds ect i o n 4 0 9A as g en eral ly p ro vi d in g “ t h atu n l es s s p eci fi ed req u i rem en t s are m et , al l am o u n t s d eferred u n d er a n o n qu al i fi edd eferred
co m p en s at i o n p l an * * * are s ub jectt o t ax at i o n.” In th e o p i n i o n o f M ary Kay
m an ag em en tth e FSP cam e wi t h i n th e p ro vi s i o n s o f s ect io n 4 0 9 A. Inp art i cu l ar t h e am en d m en t s t o s ect i o n 4 0 9 A were, as p er M ary Kay , t o affect t h e s t artd at e o f- 8
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FSP p aym en t s . Th e m at eri al s s en tt o n at i o nal s al es d i rect ors rei t erat edthatth e FSP was i n t en dedt o b e a n on qu al ifi edd eferred co m p en sat i on arran gem en tan d
n o ti n t en d edt o m eetth e req u i rem en t s o f s ect i o n 4 01 (a). Pet i t i o ner rem ai n edret i reddu ri n g 2 0 1 4 an d2 0 1 5 an dd i dn oth av e a t rad e
o r b u si n es s duri ng th o se y ears . Itwas th e o p i n i o n o f M ary Kay , as ex p res s edt o
n at i o n al s al es d i rect o rs o n Oct o b er 2 5 , 1 9 95 , th atFSP p aym en ts were s ub jectt o
s el f-em p l o ym en t t ax wh en p ai dt o a ret i red n at i o n al s al es d i rect o r. Di s cu ss i o n Th e qu es ti o n u n der co n si d erat i on i s wh et h er p aym en t s M s . Du n lap recei v ed fro m M ary Kay du ri n g 2 0 1 4 an d2 01 5 are s ub jectt o s el f-em

p l o ym en tt ax . Res po n d en trel i es h eav i l y o n Pet ers o n v . Co m

m is s i o n er, 8 2 7 F.3 d9 6 8 (1 1 t h Ci r. 2 0 1 6 ), aff’ g T.C. M em o . 2 0 1 3 -2 7 1. Pet i t io n ers ’ p ri m ary arg u m en ti s thatM s . Du n l ap s o l dh er b u s i n es s o r g o o dwi l l t o M ary Kay an dth atth e FSP p aym en t s were fo r t h e s al e o f a cap i t al as s et . Th ey fu rt h er arg u e t h atPet ers o n was affi rm ed b y th e Ci rcu i tCo u rto f Ap p eal s fo r t h e El ev en th Ci rcu i tan dth at s he res i d es i n W as h i n g t o n St at e wh ere an y ap p eal wo u l d b e t o t h e Co urto f Ap p eal s fo r t h e Ni n th Ci rcu i t . Pet i ti o n ers al s o m ak e s ev eral arg um en t s rel y in g o n s t atu t es an d reg u l at i o n s , each o f wh i ch are co n s i d ered i n t h i s o p i n i o n. Fi n al l y , p er t h e p art i es ’
s t ip u l at i o n , th e p aym en t s “ are d eferred co m p en sat i o n p aym en t s fro m M ary Kay- 9
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p ai dp urs u an tt o a n o n -qu al i fi edd eferred co m pen s at i o n n o n -acco u n tb al an ce p l an d es cri b edi n ei t h er Treas . Reg . s ect i on 1 .4 0 9 A-1 (c)(2 )(i )(C)(1 ) o r (2 ).” Th e St atu tes
. Sect i o n 4 0 9 A p ro v i d es fo r t h e i n cl u s i o n i n g ro s s i n co m e o f d eferred co m

p en sat i o n fro m a n o n qu al i fi edd eferred co m p en sat i on p l an . Th e p art i es d i s ag ree ab o u tth e ap pl i cat i o n o f s ect i o n 1
. 4 0 9A-1 (c)(2 )(i )(C), In co m e Tax Reg s., t o t h e M ary

Kay FSP p aym en t s . Th e reg ul at i o n co nt ai n s d efi n i ti o n s an d fu rt her ex p l ai n s wh i ch p l an s co m e wi t h i n th e p u rv i ew o f s ect i o n 4 0 9 A
. Pet i t io n ers fav or s ubd i v i s i o n (i )(C)(1 ) an d res po n den ts ub d i vi s i o n (i )(C)(2 ) o f
s ect i on 1 .4 0 9 A-1 (c)(2 ), In co m e Tax Reg s. Th e p art i es ag ree t hatth e M ary Kay p l an was a n o n acco u n t b al an ce p lan . Th e reg u l at i o n co nt ai ns al t ern at i v e d efi n i t i o n s fo r t h e t erm

“ no nacco u n tb al an ce p l an ”. Sub d i v i s io n (i )(C)(1 ) refers t o
a s i tu at i o n wh ere t he reci p ien twas an em pl oy ee o f t he co m

p an y m ak i ng th e d eferred p aym en t s. Sub d iv i s i o n (i )(C)(2 ) refers t o a s i tu at i on wh ere t h e reci p i en t
was an i n d ep en d en t co n tract o r, s u ch as M s . Du nl ap . W e can o n l y s p ecu lat e t h at M s . Du n l ap ch o se s ub di v i s i o n (i )(C)(1 ) b ecau s e i t co n t ai n s a referen ce t o s ect i o n 3 1 .3 1 2 1 (v )(2 )-1 (c)(2 )(i ) an d (1 )(i i i )(B), Em p l o ym en tTax Reg s ., wh i ch s he rel i es
o n i n o n e o f h er arg u m en ts . See i n fra p . 1 6
. Th e o t her ap p li cab l e s t atu t es are s ect i o n s 1 4 0 1 an d1 4 0 2 , wh i ch p ro v i d e fo r t h e i m p o si t i o n o f s el f-em

pl o ym en tt ax an dd efi n it i o n s , res p ect i v el y . Sect i o n- 1 0 -

1 .1 40 2 (a)-1 , In co m e Tax Reg s ., p ro vi d es ad di t i o n al d efi ni t i o n s an dd et ai l o f
earn i n g s fro m

s el f-em p l o y m en t . Sect i o n 1 .1 4 0 2 (a)-1 (c), In co m e Tax Reg s ., p ro v id es : Gro s s i n co m e d eri v edb y an i n d i v i du al fro m

a t rad e o r b u s i n es s i n cl u d es g ro s s i n co m e recei v ed(i n the cas e o f an i nd i v i du al rep o rt i n g i n co m e o n t h e cas h recei p t s an dd i s b u rs em en t s m et h o d) o r accru ed(i n t h e cas e o f an i n d i v i du al rep o rt i ng i n co m e o n th e accru al m et h o d ) i n t h e t ax ab l e y ear fro m

a t rad e o r b u s i n es s ev en th o u gh s u ch i n co m e m ay b e at t ri b u t ab le i n wh o l e o r i n p artt o s erv i ces ren d ered o r o t h er act s p erfo rm edi n a p ri o r t ax ab l e y ear as t o wh ich th e i nd i v i du al was n o ts ub jectt o th e t ax o n s el f-em pl o ym en t i n co m e. Th i s d efi n i t i o n p l aces M ary Kay ’ s FSP p aym en ts t o M s . Du n l ap cl earl y wi t h i n th e
s t atu to ry fram ewo rk fo r i n co m e t h ati s s ub ject t o s el f-em

p l o y m en tt ax . M s . Du n l ap , h o wev er, m ak es s ev eral ad d it i on al arg u m en t s , wh i ch are ad dres s edfo r
co m p l et en es s . Cas e Preced en t s . Th e fo cal p o i n to f res p o n den t ’ s p os i t i o n i s Pet ers o n , th e fact s o f wh i ch are i n al l i m p ort an tres pect s t h e s am e as t h o s e we co n s id er i n p et i t i o n ers ’ cas e. M rs . Pet ers o n was a n at i o n al s al es d i rect o r wh o en tered i n t o an FSP ag reem en t wi t h M ary Kay an d recei v ed p aym en t s th atth e Co m m i s s i o n er d et erm i n edwere s ub

j ectt o s el f-em

p l o ym en tt ax . M rs . Pet ers on , l i k e M s . Du n l ap , arg u ed t h atth e FSP p aym en t s were m ad e i n ex ch an g e fo r t h e s al e o f h er M ary Kay b u s i n es s b ackt o M ary Kay . Th ere are t wo d i fferen ces i n th e fact s o f t h es e cas es :- 1 1 -

(1 ) M rs . Pet ers o n ret ireddu ri n g 2 0 0 9 an d M s. Du n l ap ret i reddu ri n g 2 0 0 6 an d (2 ) t h e Co u rto f Ap p eal s fo r t h e El ev en t h Ci rcu i taffi rm edth is Co u rt ’ s o p i n i o n i n Pet ers o n wh ereas M s . Du n lap res i d edi n t h e Ni n t h Ci rcu i twh enth e p et i t i o n was fi led
. See Go l s en v . Co m m i s s i o n er, 5 4 T.C. 7 4 2 (1 9 7 0 ), aff’ d , 4 4 5 F.2 d9 8 5 (1 0 t h Ci r. 1 9 71 ). In Pet ers o n v . Co m

m i s s i o n er, T.C. M em o . 2 0 1 3 -2 7 1 , th i s Co u rtd eci d edth at t h e FSP p aym en ts were s ub jectt o s el f-em

p l oym en tt ax . Inp ert i nen tp artth e Co urt
ex p lai n ed : Sect io n 1 4 0 1 i m p os es a t ax o n a t ax p ay er’ s s el f-em p lo ym en t i n co m e. Sel f-em

p l o ym en ti n co m e co ns i s ts o f g ro ss i n co m e d eri v ed b y an i n d i v idu al fro m

an y trad e o r b u si n es s carri edo n b y th at i n d i vi du al . See s ec. 1 4 02 (a) an d(b ). M rs . Pet ers o n fo rm erl y carri ed o n a t rad e o r b us i n es s . Th erefo re, M ary Kay ’ s 2 0 09 d i s t ri b ut i o ns p u rs uan tt o the FSP * * * ag reem en t s are s ub jectt o s el f-em

p l o ym en t t ax i f t h ey

were “ d eri v ed ” fro m

M rs . Pet ers o n’ s b u s i n es s (i .e., “ ‘ t i ed t o th e qu an t i ty

o r qual i t y

o f * * * [h er] p ri o r l ab o r’ ”). See J ack s on v . Co m m is s i o n er, 1 0 8 T.C. 1 3 0 , 1 3 5 -1 3 6 (1 9 9 7) (q uo t i n g M i l li g an v . Co m m is s i o n er, 3 8 F.3 d1 0 9 4 , 1 0 9 8 (9 t h Ci r. 1 9 9 4 ), rev ’ g T.C. M em o . 1 9 9 2 -6 5 5 ). Th e M ary

Kay d i s tri b u t i o ns were “ ti edt o ” t he q u an t i t y an dqu al i t y

o f M rs . Pet ers o n ’ s p ri or l ab o r. See i d . Pu rs u an tt o the FSP ag reem en t, M rs . Pet ers o n ’ s d i s t ri b u t io n s were b as ed o n h er av erag e co m

m is s i o n s o v er t h e fi v e y ears p ri o r t o h er ret i rem en t . * * * In ad d i t i o n , M ary

Kay ’ s d i s t ri b u t io n s p u rs u an tt o b o th p l an s were b as edo n Mrs . Pet ers on ’ s ag e atret i rem en tan dm in im u m y ears o f s erv ice. M o reo v er, t h e FSP * * * ag reem en t s ex p res s l y p ro v id edth at t h e d i st ri b u t i o ns were d eferred co m p en sat i on (i .e., rel at edt o M rs . Pet ers o n ’ s p ri o r l ab o r). Pet i t i on ers fai l edt o ad du ce p ro o f s u ffi ci en t t o al t er t h e co n s t ru ct io n o f t hes e u n am b i g uo u s ag reem en t s o r s h o w t h atth ey were u nen fo rceab l e. See Pl an t e v . Co m m i s si on er, 1 6 8 F.3 d- 1 2 -

1 2 7 9 , 1 2 8 0 -1 2 8 1 (1 1 t h Ci r. 1 99 9 ), aff’ g T.C. M em o . 1 99 7 -3 8 6 ; Co m m is s i o n er v . Dan i el s o n , 3 7 8 F.2 d7 7 1, 7 7 5 (3 dCi r. 1 9 67 ), v acat i n g an drem an d i n g 4 4 T.C. 5 4 9 (1 9 6 5 ). Acco rd i n g l y , th e 2 0 0 9 FSP * * * d i s t ri b ut io n s are s ub jectt o s el f-em

p l oym en tt ax p u rs u an tt o s ect i o n 1 4 0 1. [Id . at* 8 -* 9 .] In Pet ers o n the Co u rto f Ap p eal s fo r t h e El ev en t h Ci rcu i taffi rm edth i s Co u rt ’ s ru l i n g th atth e 2 0 09 M ary Kay FSP p aym en t s were s ub

ject t o s el fem pl o y m en tt ax . Th e Co u rto f Ap p eal s’ o p i n io n d et ai l ed al l o f th e i n fo rm at i o n t h atth e p art i es i n t h atcas e h ades t ab l is h ed i n th e l o wer Co u rtreco rd . Th o s e d et ai ls are, wi t h l im i tedan di n si g n i fi can tex cep t i o ns , th e s am e as are i n cl u dedi n t h e reco rdo f p et i t i o n ers ’ cas e. Th e Co u rto f Ap p eal s em p l o y ed t h e h o l d in g i n Co m m i s s i o n er v . Dan i el s o n , 3 7 8 F.2 dat7 7 5 , t o d eci d e t h atM rs . Pet ers o n h adn ot
s h o wn th atth e d o cu m en t ary d es i g n at i o n o f t h e p aym en t s as d eferred
co m p en s at i o n b y

M ary Kay was i n co rrect
. Th e Co u rto f Ap p eal s ex p l ai n edth e ru l e i n Dan i el so n as fo l l o ws : Wh en a t ax pay er ch aract eri zes a t ran sact i o n i n a cert ai n fo rm , t h e Co m m i ss i o n er m ay

b i n dth e t ax p ay er t o th atfo rm fo r t ax p u rp o s es . Th i s i s th e ru l e: “ a p art y can ch al l en g e t h e t ax co n s eq u en ces o f h i s ag reem en tas co n s t ru edb y th e Co m m i s s i o n er o n l y b y ad du ci n g p ro o f wh i ch i n an act i o n b et ween th e p art i es [t o t h e ag reem en t ] wo u l db e ad m i s s i b l e t o al ter t h atco n s t ru ct i o n o r t o s h o w i t s u n en fo rceab i l i ty

b ecau s e o f m i s t ak e, u n du e i n fl u en ce, frau d , du res s , et cet era.” [Pet ers o n v . Co m m i ss i on er, 8 2 7 F.3 dat9 87 (qu o t i n g Pl an t e v . Co m

m i s s i o n er, 1 6 8 F.3 d at1 2 8 0 -1 28 1 ).]- 1 3 -

Th e fact th atM s . Du n lap an dM rs . Pet ers on were b o t h n at i o n al s al es d i rect o rs an dco nt em

p o rari es i n th e M ary Kay b u s i n es s u n d er t h e s am e ag reem en t s
an d t erm s p res en t s M s . Du n l ap wi t h a d iffi cu l tb u rd ent o s h o w th atth e res u l ti n h er cas e s h o u l dn o tb e t he s am e. Her b as i c arg u m en ti s t h at s he res id es i n th e Ni n th Ci rcu i tan dth ats h e i s n o tb o u n d b y th e Co u rto f Ap p eal s fo r t h e El ev en t h Ci rcu i t ’ s h o l d i ng . M s . Du n l ap , h o w ev er, o v erl oo k s th e fact t h atth i s Co urti s a
co u rto f n at i o n al juri s d i ct i o n an d o u r h o l d i n g s wo u l d b e ap p l i edequ al ly t o al l t ax p ay ers , u n l es s t h ey res i d e i n a St at e wh ere t h e Co u rt o f Ap p eal s fo r t h atci rcu i t h as h el do t h erwi s e i n a d eci s i o n “ wh i ch i s s qu arel y i n p o i n t ”. Go l s en v . Co m m i s s i o n er, 5 4 T.C. at 7 5 7
. In an at tem

ptt o s ho w th atth e res u l ti n th e Co u rto f Ap p eal s fo r t h e Ni n t h Ci rcu i two u l db e d i fferen t , p et it i o n ers ci t e M i l l i g anv . Co m m i s si o n er 3 8 F.3 d1 0 9 4 (9 t h Ci r. 1 9 9 4 ), rev ’ g T.C. M em o . 1 99 2 - 6 5 5 . Th atcas e i n v ol v eds el fem pl o y m en tt ax d et erm i n edb y

th e Co m m i s s i o n er fo r ani n su ran ce ag en t’ s t erm i n at i o n p aym en t s. M r. M il l i g an h adb een an i n s u ran ce ag en tfro m 1 9 4 9 u n t i l h e ret iredi n 1 9 83 atag e 6 2 . Up o n ret i rem en tth e i n s u ran ce co m p an y m ad e

“ t erm in at i o n ” p aym en t s t o hi m th atwere b as edo n a co m p l ex fo rm u l a co n t ai n edi n a t erm i n at i o n ag reem en t
.- 1 4 -

Th e Co u rto f Ap p eal s fo r t h e Ni nt h Ci rcu i t, i n rev ers i n g th i s Co u rt ’ s d eci s i o n , h el d :

W e are n o tp rep aredt o ch aract eri ze t h e p reci s e rel at io n s h i p b et ween the Term i nat i o n Paym en t s an d M i l l i g an ’ s p ri o r b u si nes s act i v i t y . Am

b i g ui ti es i n th e Ag en t’ s Ag reem en tp rev en tu s fro m d o i n g s o . Bu t , d es p i t e t he am b ig u it i es , we can s ee t hatth e Term i nat i o n Paym en t s d i dn o t“ d eri v e” fro m M i l l i g an ’ s p ri or b u s i n es s act i v i t y

wi t h i n th e m ean i n g o f t he s el f-em p l o ym en tt ax . To b e t ax ab l e as s el f-em

p l o ym en ti n co m e, earn i n g s m u s t b e t i edt o th e qu an t i t y o r qu al it y

o f t h e t ax p ay er’ s p ri or l ab o r, rat h er th an the m ere fact th atthe t ax p ay er wo rk edo r wo rk s fo r th e p ay o r. [Id . at1 0 9 8 ; fn
. ref. o m i tt ed .] In i t i al l y , we n o t e th atth e M ary Kay d ocu m en t s an d ag reem en t s are n o t
am bi g uo u s o n t h i s p o i n t . Ap p l y i n g th e “ qu an t i t y o r qu al i t y ” reas on i n g t o p et i t i o n ers ’ fact s , we co nt i n u e t o co n cl u de t h atth e p aym en ts M s . Du n l ap recei ved du ri n g 2 0 1 4 an d2 0 1 5 are s ub j ectt o s el f-em

p lo ym en tt ax . Inth e Ni nt h Ci rcu i t M s . Du n l ap i s n o t b o u n d b y th e Dan i el s o n ru l e, an d s he m ay p res en t ev i d en ce t o
s h o w th atth e s ub s t an ce o f h er rel at i o n s h ip wi t h M ary Kay , as o p p o s edt o M rs . Pet ers o n ’ s , was d i fferen tfro m th e fo rm s etfo rt h i n th e ag reem en t s . Th e reco rd h ere s h o w s th atth e FSP ag reem en tch aract eri zes th e p aym en ts as d eferred
co m p en s at i o n , wh i ch s h e h as s t i p u l at edan dth erefo re co n ced ed . M o reo v er, t h e p aym en t s were cal cu l at edan dd eri v edo n th e b as i s o f h er p ri o r wo rkan di n co m e act i vi t y wi t h M ary

Kay an dare, u n l i k e t h os e i n M i l l i gan , t i edt o th e quan ti t y an d- 1 5 -

qu al i t y o f th at s erv ice. In th is cas e M s . Du nl ap recei ves a fi x edp aym en tfo r 1 5 y ears b as edo n h er p ri o r s al es an dco m m i s s io n s . Acco rd i n g l y , the FSP p aym en t s were fi x edo n th e b as i s o f p ri o r b u s i n es s act i v i t y . Fi nal l y , p et i t i o n ers h av e n o t
s h o wn th atth e reco rd co n t rad i ct s th e t erm i n ol o g y i n the d o cu m en t s an d ag reem en t s . Sal e o f Go o dwi l l
. Pet it i o n ers arg u e t h at , i n effect , M s . Du n l ap s o ldth e g o o dwi l l o f h er t rad e o r b u s i n es s t o M ary Kay . Th e arg um en td eri v es fro m s o m e
o f t h e p ream

b l e t ex t i n v ari o u s ag reem en td o cu m en t s co ncern i n g t he FSP p ro g ram . Th e fo l l o wi n g t ex ti s i n th e p ream b l e t o th e J u l y

1 , 1 9 9 1 , M ary

Kay FSP ag reem en t : “ [E] ach Nat i o n al Sal es Di rect o r d es ires t o p art i ci p at e i n th i s p ro g ram i n ex ch an g e fo r t h e o ffer b y M ary Kay Co s m et i cs , In c. t o acq u i re atret i rem en tth e
v al u ab l e g o o dw i l l an d al l o t h er ri g h t s as s o ci at edwi t h th e b u s in es s , i n cl u d i n g fu tu re g o o dwi l l g en erat ed b y h er co nt i n ueds upp o rt an d l o y al t y t o M ary Kay Co s m et i cs , In c.” Pet i t i o ners co n t en d s t h atth e ab o ve t ex ti s ev i d en ce t h atM ary Kay FSP p aym en t s were m ad e i n ex ch an g e fo r M s. Du n l ap ’ s b u s i n es s an d/o r g o o dwi l l
. Th ey fu rth er arg u e thatM s . Du n l ap s ho u l d b e en t i t l edt o cap i tal g ai n s t ax rat es o n t h e i n co m e. Onthe 2 0 1 4 an d2 0 1 5 return s , h o w ev er, s h e rep o rt edth e p aym en t s as
o rd i n ary i n co m e.- 1 6 -

Th e fact s h ere b el i e p et i ti o n ers ’ s al e arg u m en t . Th ere was n o ag reem en t b et ween M ary

Kay an d M s . Du n l ap wi t h res p ectt o an y s al e o f a b u s i n es s o r g o o dwi l l . Oth er t h anth e referen ce t o g o o dwi l l i n th e p ream b l e t o s om e d o cu m en t s , th ere i s n o ev id en ce i n th e reco rdth atwo ul d s up p o rta s al e o f a b u s i n es s i n t eres t . Th e p aym en t s u n d er t he FSP are cal cu lat ed o n th e b as i s o f s al es
an d co m m i s s i o n s an dare b ei n g p ai data rat e o f 6 0 % o f a h i gh av erag e t i ered s al es act i vi t y . Las tl y , M s . Du nl ap h adn o ri g h t s o r l eg al rel at i o ns h ip wi th th e
co n su l t an t s an d s al es d i rect o rs i n h er t i ered M ary Kay act i v i t y . Acco rd i n g ly , h er g o o dwi l l arg u m en td oes n o t ch an g e t h e o ut co m e o f t h i s cas e. Deferred Co m

p en s at i on Pl an . Pet i t io n ers m ak e s ev eral t ech n i cal arg u m en t s t h atth e FSP i s n o t , i n real i t y , a d eferred co m p en s at i o n p l an . Th ey

m ak e t hi s arg u m en tev en th ou g h th e p art i es s t i p u l at ed t hatM s . Du n l ap recei v ed“ d eferred
co m p en s at i o n p aym en t s fro m M ary Kay p ai dp u rs u an tt o a n o n qu al i fi ed d eferred
co m p en s at i o n n o n -acco u n tb al an ce p l an .” Th e b as i s fo r t h ei r p os i t i o n ap p ears b as edi n rel i an ce o n s ect i on 3 1 .3 1 2 1 (v )(2 )-1 (c)(2 )(i ) an d(1 )(i i i )(B), Em p l o ym en t Tax Reg s ., wh ich i s referen cedi n s ect i o n 1 .4 0 9 A-1 (c)(2 )(i )(C)(1 ), In co m e Tax Reg s. As we h av e al read y ex p lai n ed , i n o rd er fo r M s . Du n l ap t o co m e wi th i n
s ub d iv i s i o n (i )(C)(1 ) o f t h atreg u l at io n , s h e wo ul dh av e t o h av e b een an em p l o y ee
o f M ary Kay
. As p arto f h er reas o n i n g s h e p o i n t s o u tth atth ere was n o t ax- 1 7 -

wi t h h o l d i n g fro m

M ary Kay i nco m e b efo re h er ret i rem en t . Sh e al s o n o t es t h at
s o m e o f h er i n co m e was at t ri b ut ab l e t o th e effo rt s o f o t hers , i .e., co n s u l tan t s an d
s al es d i rect o rs wi t h in h er t i ers as a n at i o n al s al es d i rect o r. Fro m th es e p o s tu l at i on s , s h e co n cl u d es th atth ere m u s t b e a p res en tv al u e cal cu l at i o n t o d et erm i n e t h e am o u n ti n cl u d i b l e fo r 2 0 1 4 an d2 0 1 5 . Us i n g th i s l i ne o f reas o n i n g , s h e u lt i m at el y

cal cu l at edth ath er p res en tv al u e an n u al s el f-em p l o y m en t t ax wo u l d b e $ 7 0 2 . M s . Du nl ap ’ s ap p ro ach d ep en d s s ev eral p rem i s es wh ich are n o t fo u n d ed i n the reco rdo r l aw. Th e reco rdi s cl ear t h atM s . Du n l ap ’ s p ri o r earn in gs were t he b as i s fo r t h e
an n ual FSP p aym en t s an dth at t h e qu an t i t y an d qual i t y

o f h er l ab or were t he
reas on fo r t h e p os t ret i rem en t p aym en t s . In ad d i t io n h er FSP p aym en ts were n o t
s ub jectt o p o st ret i rem en t ad

ju s t m en t s an dwere fi x edo n th e b as i s o f h er p ri o r l ab o r. Fi n al ly , th e p aym en t s h adn o t p rev io u s ly b een rep o rt edas i nco m e o r
s ub ject edt o s el f-em

p l o ym en tt ax . St at edan o t h er way , th e FSP p aym en t s are b ei n g p ai dco n t em

p o ran eo u s ly

al t h o u g h th ey

were earn edi n p ri or y ears . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r
res p o nd en t
.