Court Opinion

ID: 4486362
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:22.798564+00
Date Added: 2024-06-11T14:53:48.958107
License: Public Domain

WELLS, J., dissenting: The majority has brushed aside our precedent for determining when income should be reallocated from a personal service corporation (PSC) to its sole service-performer and in so doing has adopted a new test. While characterizing the instant case as “a classic situation for the application of the assignment of income doctrine,” the majority, by relying upon Professional & Executive Leasing, Inc. v. Commissioner, 89 T.C. 225 (1987), affd. 862 F.2d 751 (9th Cir. 1988), imports authorities from the qualified plan and employment tax areas to decide the issue. Because the majority fails to follow the approach we have taken in recent decisions involving situations nearly identical to that presented in the instant case, I must dissent. I submit that the analysis of whether income should be reallocated between a corporation and its sole service-performer should be made in accordance with Haag v. Commissioner, 88 T.C. 604 (1987), affd. without published opinion 855 F.2d 855 (8th Cir. 1988); Johnson v. Commissioner, 78 T.C. 882 (1982), affd. without published opinion 734 F.2d 20 (9th Cir. 1984), cert. denied 469 U.S. 857 (1984); Pacella v. Commissioner, 78 T.C. 604, 618-619 (1982); and Keller v. Commissioner, 77 T.C. 1014 (1981), affd. 723 F.2d 58 (10th Cir. 1983).1  In Johnson v. Commissioner, supra, we considered a situation in which a professional “team player,” more specifically, a basketball player, assigned the rights to his services and payment therefor to certain corporations in exchange for fixed monthly fees. In analyzing that situation, we set forth “the two requirements that must be met employee, will be considered the controller of the income and taxable thereon.” Haag v. Commissioner, supra at 611. Those requirements are: (1) The service-performer employee must be an employee of the corporation whom the corporation has the right to direct or control in some meaningful way; and (2) there must exist between the corporation and the person or entity using the services a contract or similar indicium recognizing the corporation’s controlling position. [Johnson v. Commissioner, supra at 891.] The majority’s analysis in the instant case renders the first requirement of Johnson a nullity in the very context in which it was articulated — namely, that of team sports. In Johnson, we assumed arguendo that a basketball player’s contractual arrangement with a corporation satisfied the first requirement of Johnson, thus conveying the impression that a team player could potentially meet such a requirement. 78 T.C. at 891-892. The majority, however, without directly confronting the issue, now appears to conclude that a team player and his PSC can never, as a matter of law, satisfy the first requirement of Johnson. Such a conclusion runs contrary to our statement in Johnson that: the realities of the business world prevent an overly simplistic application of the Lucas v. Earl rule whereby the true earner may be identified by merely pointing to the one actually turning the spade or dribbling the ban * * * that test may easily become sheer sophistry when the “who” choices are a corporation or its employee. [78 T.C. at 891. Fn. ref. omitted.] The recognition of the “tension” between the nature of the corporate business form (i.e., Moline Properties v. Commissioner, 319 U.S. 436 (1943)) and assignment of income notions (i.e., Lucas v. Earl, 281 U.S. 111 (1930)), which tension is “most acute” in the context of a PSC, is the foundation and framework of the Johnson analysis. In Johnson, we specifically pointed out the “inherent impossibility of logical application of a per se actual earner test.” Johnson v. Commissioner, 78 T.C. at 890-891. Our recent opinion in Haag v. Commissioner, supra, which analyzed the Johnson requirements, confirms that the first requirement of Johnson must be interpreted in recognition of the tension between Moline Properties and Lucas v. Earl. In Haag, we held that a doctor was “an employee” of his PSC over whom the PSC could “exercise control in a meaningful sense,” thus satisfying the first requirement of Johnson. The PSC in Haag was in the business of providing services as a partner in a medical partnership. In reaching our conclusion in Haag, we quoted the provisions of the employment contract between the doctor and his PSC under which the PSC employed the doctor “to perform professional services on behalf of the Corporation” and under which the doctor agreed to “devote his entire time, attention, knowledge and skill to such employment.” We then stated: Respondent contends that this agreement did not give the [PSC] any real control over petitioner’s services because, as the [PSC’s] sole director and one of only two shareholders (the other being the ESOP), petitioner could modify or rescind the agreement or could, and did, ignore it. We find respondent’s argument to be without merit. There is nothing in the record to indicate that petitioner ignored the employment agreement. The ability of a majority or sole shareholder to ignore, rescind, or modify an agreement entered into with his corporation exists in every closely held corporation. A holding that such ability precludes a corporation from exercising control over its employee’s earning of income, and thus being taxable on that income, would violate the longstanding recognition of corporations as entities independent of their shareholders. See Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 438-439 (1943). [88 T.C. at 612.] The foregoing quote makes apparent the majority’s mischaracterization of Haag as a case in which “we proceeded on the basis that the taxpayers were employees of their personal service corporations” (Majority opinion at 582). In the instant case, as in Haag, the contracts between petitioners and their PSCs grant the PSCs the right to control petitioners’ services, and the majority in no way suggests that those contracts were ignored by petitioners. Haag was affirmed by the Eighth Circuit, the Circuit to which venue for appeal of the instant case lies. Absent the finding of a sham, the Keller — Johnson—Haag line of cases requires that petitioners’ employment agreements with their PSCs should not be completely disregarded. Moreover, where an employment contract exists between the service-performer individual and the PSC, and a second contract exists between the PSC and a third-party service-recipient, how can it be said that the service-performer individual is the “employee” of the third-party? As we have previously stated, in Achiro v. Commissioner, 77 T.C. 881, 902 (1981), the only way to reach such a conclusion is to disregard the contracts. The majority does just that, in essence treating the arrangement provided for by the agreements as a sham, without making such a finding. There is good reason why the majority shies away from analyzing the arrangement as a sham. In Keller, we stated: The business of [the PSC] is that of providing pathology services as a partner of [the medical partnership]. The corporation employs petitioner to perform the requisite services. Petitioner, in turn, is in the business of providing services as an employee of his wholly owned corporation. * * * The patent artificiality of the corporate fiction is strikingly illustrated when there is a business activity which could be conducted by the corporation’s sole shareholder outside of the corporation. Nonetheless, this conceptual analysis is mandated by the policy that corporations be recognized, apart from their shareholders, regardless of their size. Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943). [77 T.C. at 1024. Fn. ref. omitted.] The foregoing quotation from Keller is followed by a footnote explaining that a corporation may be ignored under Moline Properties if it is “so unreal as to constitute a ‘bald and mischievous fiction,’ ” and noting that respondent did not argue that the corporation in Keller was a sham. 77 T.C. at 1024, n. 8. Similarly, in the instant case, the majority states that respondent has not questioned the tax viability of Chiefy-Cat or RIF.2 Nevertheless, its holding effectively renders those corporations nullities for Federal income tax purposes. The majority disregards the separateness of the PSC’s by analyzing the issue in the framework of whether petitioners are “common-law employees” of the Club.3 Even though the agreements in the instant case were apparently the subject of arms-length negotiations, the majority fails to analyze whether, under those agreements, the Club gave up its right to “common-law” control of the petitioners. Indeed, it appears that the Club agreed to deal with petitioners only pursuant to the contractual arrangements provided under the agreements. Although the majority purports to decide merely whether petitioners were the “employees” of their PSC’s, the distinction between finding that petitioners were not the PSC’s employees, and disregarding the existence of the PSC’s entirely, is “largely semantic rather than substantive.” Keller v. Commissioner, supra at 1030-1031. The logical outgrowth of the majority’s unique analysis is that only “traditional” independent contractors (i.e., those over whom service-recipients do not exercise “control”) can avail themselves of PSC’s while “traditional” employees cannot. Such a rule, while perhaps appealing from the standpoint of predictability,4 finds no meaningful support in our precedent. We should not create new tests for their predictability, policy value, or other appeal. That role should be left to Congress, which can forge new law unconstrained by stare decisis. Congress responded to Keller when it enacted section 269A. H. Rept. 97-760 (Conf.), pages 633-634 (1982), 1982-2 C.B. 600, 679-680. In forging that provision, Congress did not resort to an analysis of control, but instead gave the Secretary of the Treasury broad powers to reallocate income under certain specified circumstances. Indeed, the majority’s new “judicial cure” may well go beyond the legislative remedy contained in section 269A. The new test adopted by the majority adds confusion to the law by making “control” the lynchpin of its holding. The majority’s action today reminds me of the admonition of the Seventh Circuit in Fogelsong v. Commissioner, 621 F.2d 865, 872 (7th Cir. 1980),5 that “there is no need to crack walnuts with a sledgehammer.” Nims, Kórner, Shields, Hamblen, and Clapp, JJ., agree with this dissent.   Dahlberg v. Commissioner; T.C. Memo. 1989-551; Willett v. Commissioner, T.C. Memo. 1988-439.    It should also be noted that fn. 7 and the accompanying text of the majority opinion indicate that respondent’s main dispute here is over the pension plan contribution. If that is respondent’s complaint, he should have challenged the qualified status of the plan. Respondent must have recognized, however, that we would be unwilling to disregard the existence of the PSC’s or to allocate all of the PSC’s income to petitioners on the ground that the PSC’s were formed for the principal purpose of securing the tax benefits of retirement plans. Achiro v. Commissioner, 77 T.C. 881, 892-903 (1981); Keller v. Commissioner, 77 T.C. 1014, 1029-1030 (1981), affd. 723 F.2d 58 (10th Cir. 1983).    See Rubin v. Commissioner, 429 F.2d 650 (2d Cir. 1970), reversing and remanding 51 T.C. 251 (1968).    See Banoff, “Reducing the Income Tax Burden of Professional Persons by Use of Corporations, Joint Ventures, Subpartnerships, and Trusts,” 58 TAXES 968, 984-985 (1980). Respondent appears to have adopted the reasoning from Mr. Banoff’s article in framing his litigation position for the instant case. See General Counsel Memorandum 39553 (Sept. 3, 1986).    Reversing and remanding T.C. Memo. 1976-294, on remand Fogelsong v. Commissioner, 77 T.C. 1102 (1981), revd. 691 F.2d 848 (7th Cir. 1982).