Court Opinion

ID: 2803322
Source: CourtListenerOpinion
Date Created: 2015-05-26 16:21:00.969874+00
Date Added: 2024-06-11T11:29:47.775274
License: Public Domain

FILED 

                                                                       MAY 26, 2015 

                                                             In the Office of the Clerk of Court 

                                                            WA State Court of Appeals, Division III 

          IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON 

                             DIVISION THREE 

ARMAND DeFELICE,                            )        No. 32382-0-111
                                            )
                    Appellant,              )
                                            )
             v.                             )
                                            )
STATE OF WASHINGTON,                        )        PUBLISHED OPINION
EMPLOYMENT SECURITY                         )
DEPARTMENT,                                 )
                                            )
                    Respondent.             )

      BROWN, J. - Dr. Armand DeFelice1 appeals the Employment Security Department

Commissioner's decision affirming an order and notice of assessment requiring Dr.

Armand to pay $1,896.37 in unemployment insurance back taxes, penalties, and

interest. Dr. Armand contends the commissioner erred when it found Drs. Loretta and

Louise were in his employment and not partners excluded under the Employment

Security Act. Because substantial evidence supports the commissioner's factual

findings and the conclusions of law are consistent, we affirm the commissioner's

decision and deny Dr. Armand's attorney fees request.

                                        FACTS

      1  This appeal concerns Dr. Armand DeFelice and his family members, Dr.
Loretta DeFelice and Dr. Louise DeFelice. Because they share the same last name,
they are referred to as Dr. Armand, Dr. Loretta, and Dr. Louise for clarity.
    No. 32382-0-111
    DeFelice v. Emp't Sec. Dep't

                                             FACTS

           In 1966, Dr. Armand began a dental practice and registered it as a sole

    proprietorship. On February 1, 1990, Dr. Armand entered into an association

    agreement with Dr. Loretta. On January 2, 2004, Dr. Armand entered into another

    association agreement with Dr. Louise. Both association agreements provided that Dr.

    Armand "agree~ to have Associate associate with him for the purpose of practicing

    dentistry on [Dr. Armand's] patients." Admin. Record (AR) at 241,247. The association

    agreements specifically stated all dentists "agreed that the doctors are not partners."

    AR at 241,247. The association agreements provided for the manner of termination.

          The association agreements specified each dentist's responsibilities. While each

    dentist remained responsible for determining how much to charge for their respective

    services, charges were billed under Dr. Armand's name and payments were deposited

    into his account. In addition, Dr. Armand had to provide necessary facilities and

    equipment and pay the rent and all expenses. Both Drs. Loretta and Louise received 35

    percent of the fees they produced. This amount later increased to 40 percent.

           In 2012, after it was discovered Dr. Armand was not paying unemployment

    insurance taxes, the Employment Security Department (the Department) audited the

    dental practice to determine whether the dental practice had to pay back taxes,

    penalties, and interest. Thus, the principal focus of the audit was to ascertain whether

    Drs. Loretta and Louise were employees of Dr. Armand's dental practice. The audit

    covered the years 2010,2011, and the first quarter of 2012.

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      DeFelice v. Emp't Sec. Dep't

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1            The auditor, Angela Hughes, reviewed various tax returns, quarterly and annual
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I     reports, check registers, and general ledger accounts. Ms. Hughes requested any

      agreements between the dentists; the. dental practice's bookkeeper complied. Ms.
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      Hughes never asked if the association agreements were still valid and enforceable. Ms.

      Hughes' review revealed (1) the dental practice was registered as a sole proprietorship

      with both the Department and the Washington Department of Revenue, (2) Dr. Armand

      listed the dental practice on his tax returns as a sole proprietorship, and (3) payments

      made to Drs. Loretta and Louise were reported as miscellaneous income on Internal

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      Revenue Service (IRS) Form 1099s. 2 She concluded Drs. Loretta and Louise were

      employees of the dental practice and unemployment insurance taxes should have been

      paid. The Department issued Dr. Armand an order and notice of assessment requiring
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      him to pay $1,896.37 in back taxes, penalties, and interest. Dr. Armand first

      administratively appealed.

            At the administrative hearing, Dr. Armand testified the association agreements

      were no longer valid as the three dentists had orally entered into a partnership. He

      stated Drs. Loretta and Louise receive 40 percent of their production, their share of the

      dental practice's profits. The remaining 60 percent of production is applied to overhead.

      Dr. Armand then took home what was left after overhead was paid, which he claimed

      was about 40 percent of his production.

            2    In 2013, the dental practice formed and registered a professional limited
      liability company (PLLC).

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    No. 32382-0-111
    DeFelice v. Emp't Sec. Dep't

           The administrative law judge (ALJ) concluded Drs. Loretta and Louise were

    employees of the dental practice and affirmed. Dr. Armand petitioned the Department's

    commissioner for review of the ALJ's decision; the commissioner adopted the ALJ's

    findings of fact and conclusions of law and affirmed the ALJ. Dr. Armand sought

    superior court review. The superior court affirmed, finding substantial evidence

    supported the commissioner's decision. Dr. Armand appealed.

                                            ANALYSIS

           The issue is whether the Department's commissioner erred in deciding Dr.

    Loretta and Dr. Louise were "in employment" under Washington's Employment Security

    Act as found by the ALJ and approving the order to pay unemployment insurance back

    taxes, penalties, and interest. Dr. Armand contends Drs. Loretta and Louise are his

    partners, and thus, he argues, they are not in his employment.

           Because unemployment taxes "exist to aid a class of people that society has

    chosen to protect," an employer's claim of exemption is closely scrutinized. W Ports

    Transp., Inc. v. Emp'tSec. Dep't, 110Wn. App. 440, 451, 41 P.3d 510 (2002). The

    Administrative Procedure Act (APA), ch. 34.05 RCW, governs judicial review of a final

    decision of the Employment Security Department Commissioner. Tapper v. Emp't Sec.

    Dep't, 122 Wash. 2d 397, 402,858 P.2d 494 (1993). "The []APA allows a reviewing court

    to reverse an administrative decision when, inter alia: (1) the administrative decision is

    based on an error of law; (2) the decision is not based on substantial evidence; or (3)

    the decision is arbitrary or capricious." Id. (citing RCW 34.05.570(3)).

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     No. 32382-0-111

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     DeFelice v. Emp't Sec. Dep't

            We sit in the same position as the superior court, applying APA standards

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     directly to the agency record. Id.; see RCW 34.05.558. While we review the

     commissioner's decision, when the commissioner adopts the ALJ's findings and
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~	   conclusions, we review the underlying ALJ findings and conclusions supporting the

     decision. Smith   v. Emp't Sec. Dep't, 155 Wn. App. 24,32,226 P.3d 263 (2010);
     Tapper, 122 Wash. 2d at 406. The commissioner's decision is considered prima facie

     correct. Smith, 155 Wash. App. at 32. The burden of demonstrating the decision's

     invalidity is on the party asserting invalidity. W Ports Transp., Inc., 110 Wash. App. at

     449.

            "We review questions of law de novo, giving substantial weight to the agency's

     interpretation of the statutes it administers." Smith, 155 Wash. App. at 32. The

     commissioner's findings of fact are reviewed for substantial evidence in light of the

     whole record. Id. '''Substantial evidence' is evidence that would persuade a fair-minded

     person of the truth or correctness of the matter." Id. at 32-33. We defer to factual

     decisions, with the evidence viewed in the light most favorable to the party who

     prevailed in the highest forum that exercised fact-finding authority; here, the

     Department. William Dickson Co.     v. Puget Sound Air Pollution Control Agency, 81 Wn.
     App. 403, 411,914 P.2d 750 (1996). As such, we "will not substitute [our] judgment on
I    witnesses' credibility or the weight to be given conflicting evidence." W Ports Transp.,

I    Inc., 110 Wash. App. at 449. "When reviewing mixed questions of law and fact, [appellate

I    courts] accept the [c]ommissioner's unchallenged factual findings, apply the substantial

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No. 32382-0-111
DeFelice v. Emp't Sec. Dep't

evidence standard to the challenged findings of fact, independently determine the

applicable law, and apply the law to the facts." 'd. at 450 (stating application of law to

facts is de novo). An agency's decision is arbitrary and capricious if the decision is

"willfully unreasonable, without consideration and in disregard of facts or

circumstances." 'd. It is not arbitrary and capricious if the decision is "exercised

honestly and upon due consideration, even where there is room for two opinions." 'd.

       Dr. Armand incorrectly contends the evidence solely shows a partnership existed

between him and Drs. Loretta and Louise. In determining whether an employer is

responsible for.contributions to the unemployment fund, the first question is whether an

individual is in '"employment.''' Penick v. Emp't Sec. Dep't, 82 Wash. App. 30, 38, 917
P.2d 136 (1996). "Employment" is defined as "personal service, of whatever nature,

unlimited by the relationship of master and servant as known to the common law or any

other legal relationship, ... performed for wages or under any contract calling for

performance of personal services, written or oral, express or implied." RCW 50.04.100.

If Drs. Loretta and Louise were partners, they would not be in "employment" as defined

by the Employment Security Act.

      "[T]he association of two or more persons to carry on as co-owners a business

for profit forms a partnership." RCW 25.05.055(1). Required is joint ownership of the

business and a joint right of control over the business' affairs. Bengston v. Shain, 42
Wash. 2d 404, 409, 255 P.2d 892 (1953). "A person who receives a share of the profits of

a business is presumed to be a partner in the business, unless the profits were received

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No. 32382-0-111
DeFelice v. Emp't Sec. Dep't

in payment" as wages to an employee. RCW 25.05.055(3)(c)(ii); see also Bengston, 42
Wash. 2d at 409 ("The mere sharing of the net proceeds of a business venture with an

employee, without more, does not of itself convert the relationship between the parties

concerned into a partnership.").

       The burden of proving a partnership is on the party asserting its existence.

Bengston, 42 Wash. 2d at 409. Just because the parties call their arrangement a

partnership does not make it a partnership. State v. Bartley, 18 Wash. 2d 477, 481,139
P.2d 638 (1943). Essential to the creation of a partnership is an express or implied

partnership contract. Ederv. Reddick, 46 Wash. 2d 41, 49,278 P.2d 361 (1955). Whether

a partnership contract exists depends on the parties' intentions, manifested by all facts

and circumstances, including the parties' actions and conduct. Bartley, 18 Wash. 2d at

482; see also Douglas v. Jepson, 88 Wash. App. 342, 347,945 P.2d 244 (1997). While a

partnership's existence can be established by circumstantial evidence, "circumstantial

evidence does not tend to prove the existence of a partnership unless it is inconsistent

with any other theory." Eder, 46 Wash. 2d at 49. Another important test in determining

whether a partnership is formed is sharing losses. Gottlieb Bros. v. Culbertson's, 152
Wash. 205, 209, 277 P. 447 (1929); see also Bengston, 42 Wash. 2d at 409 ("A partnership

is formed by agreement to place money, effects, labor and skill ... in a lawful business

and to divide the profits and bear the losses in certain proportions.").

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DeFelice v. Emp't Sec. Dep't

       Dr. Armand challenges 16 of the commissioner's findings of fact and four

conclusions of law. 3 The majority of Dr. Armand's error assignments involve disputes

with the commissioner's findings regarding the association agreements. He argues the

association agreements were orally modified and/or revoked and a partnership formed.

But the record contains other facts that do not support his argument.

       In 1966, Dr. Armand registered his dental practice as a sole proprietorship with

the Department and the Washington Department of Revenue. In 1990, Dr. Armand and

Dr. Loretta entered into an association agreement which specifically stated Dr. Loretta

was not a partner. In 2004, Dr. Armand and Dr. Louise entered into a substantially

similar association agreement which again explicitly stated Dr. Louise was not a partner.

These association agreements provided for each of the dentist's responsibilities,

providing for the manner of termination in paragraphs seven and eight. 4 However,

terminable-at-will contracts5 may be unilaterally modified provided reasonable notice is

given; once given, the old contract is effectively displaced. See Duncan v. Alaska USA

Fed. Credit Union, Inc., 148 Wash. App. 52, 76-78, 199 P.3d 991 (2008).

      The commissioner, by adopting the ALJ's findings and conclusions, found the

association agreements remained effective and rejected Dr. Armand's partnership

       3 Dr. Armand assigns error to the following findings of fact: 1-14, 16, and 17. He
assigns error to the following conclusions of law: 6, 7, 8, and 11.
       4 These paragraphs provide the association agreement could be terminated
upon 30 days' notice by either party or in the event of incapacity.
       5 A terminable-at-will employment relationship is one where the employment is of
indefinite duration and may be terminated at any time, with or without cause, by either
the employer or the employee. Quedado v. Boeing Co., 168 Wash. App. 363, 367, 276
P.3d 365, review denied, 175 Wash. 2d 1011 (2012).

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No. 32382-0-111
DeFelice v. Emp't Sec. Dep't

claims. We do not reexamine evidence weight and witness credibility determinations on

review. Sufficient evidence supports the commissioner's determinations. Calling a

business arrangement a partnership does not make it a partnership. For example, Dr.

Armand continued to retain control over billing patients. For income, Dr. Armand

received whatever was left over after he paid Drs. Loretta and Louise their 40 percent of

production and overhead expenses. Dr. Armand argues there is equal sharing of profits

because he too received 40 percent of his production. But his share is calculated

differently than Drs. Loretta and Louise and is not exact. Drs. Loretta and Louise did

not share losses. Drs. Loretta and Louise always took home 40 percent of their

production regardless of whether the patients actually paid their bills.

       Notably, the dental practice registration remained unchanged with the

Department and the Washington Department of Revenue. If Drs. Loretta and Louise

were considered partners, they would have had an account at the Department because

the Department requires employers to report changes in owners and partners at the

same time the quarterly tax and wage report is due. WAC 192-310-010(2}(a}. The

Washington Department of Revenue requires an owner to obtain new registration and

license documents when there is a change in ownership. WAC 458-20-101(11}(a)(iii)

(stating a change in ownership occurs with the "addition of one or more partners where

the general partnership continues as a business organization and the change in the

composition of the partners is equal to or greater than fifty percent"). Instead, Dr.

Armand continued to report the income and expenses of the dental practice on his

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No. 32382-0-111
DeFelice v. Emp't Sec. Dep't

individual income tax return as a sole proprietorship. Dr. Armand continued to report

payments made to Drs. Loretta and Louise as miscellaneous income on Form 1099s.

       Regarding the failure to file an IRS Form 1065, the commissioner used that

failure as cumulative circumstantial evidence not showing a partnership. While Dr.

Armand and the commissioner debate filing requirements, we note the penalty, not the

filing requirement, may be waived for small partnerships. Rev. Proc. 84-35, 1984-1 C.B.

509. In light of the other circumstantial evidence demonstrating a partnership was not in

existence, the issue of the failure to file a Form 1065 is not critical.

       Dr. Armand argues the commissioner disregarded certain evidence tending to

show a partnership existed. First, he points to his testimony at the administrative

hearing regarding ownership of equipment where he stated the equipment is owned by

all of the dentists. No documentation supported this assertion, and the commissioner

was entitled to weigh its credibility. We do not re-weigh the credibility of witnesses. W

Ports Transp., Inc., 110 Wash. App. at 449. Second, he discusses the discretion and

control Drs. Loretta and Louise exercised in caring for their patients. While control is

relevant in establishing a partnership, doctors who are employees exercise control in

treating their patients; professional discretion is an essential element of being a doctor.

Third, he pOints to Dr. Louise's membership in the family limited liability company that

owns the building where the dental practice leases space. But this is irrelevant to

whether she is a partner in the dental practice. Fourth, Dr. Armand argues Ms. Hughes'

failure to ask if the association agreements were still valid demonstrates bias. But the

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No. 32382-0-111
DeFelice v. Emp't Sec. Dep't

commissioner apparently found her process testimony more credible. Fifth, Dr. Armand

argues the 40 percent production payments to Drs. Loretta and Louise show the

association agreements were terminated, however, these could be explained as

contract modifications. Sixth, while the creation of the PLLC in January 2013 and

individual maintenance of insurance may tend to show the existence of a partnership,

this circumstantial evidence is inconsistent with other evidence.

       Given our analysis, we conclude the commissioner's findings of fact are

supported by substantial evidence. Next, we conclude the commissioner's conclusions

of law rejecting a partnership and deciding Drs. Loretta and Louise were in employment

are supported by the findings of fact.

       Drs. Loretta and Louise must be in "employment" in order to for Dr. Armand to be

covered by the Employment Security Act. RCW 50.04.100. '''[E]mployment' exists if (1)

the worker performs personal services for the alleged employer, and (2) if the employer

pays wages for those services (or pays under any contract calling for personal

services)." W Ports Transp., Inc., 110 Wash. App. at 451.

      To meet the first prong of this test, "the personal services must clearly be

performed for the alleged employer or for its benefit." Language Connection, LLC v.

Emp't Sec. Dep't, 149 Wash. App. 575, 582, 205 P.3d 924 (2009). Dr. Armand's dental

practice requires dentists in order to perform dental services. Drs. Loretta and Louise

provided such services for Dr. Armand's benefit. Thus, Drs. Loretta and Louise

performed personal services for Dr. Armand.

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No. 32382-0-111
DeFelice v. Emp't Sec. Dep't

       For the second prong, the contract called for the performance of personal

services with Drs. Loretta and Louise receiving remuneration from Dr. Armand.

'"Wages''' are "remuneration paid by one employer during any calendar year to an

individual in its employment." RCW 50.04.320(1). '"Remuneration''' includes "all

compensation paid for personal services." RCW 50.04.320(4). The money collected

from the dental practice's patients was collected by Dr. Armand and deposited into Dr.

Armand's account. Dr. Armand then paid Drs. Loretta and Louise out of this account.

Drs. Loretta and Louise did not receive their payment when they finished a procedure.

See Penick, 82 Wash. App. at 41 (holding employer paid wages when he collected

payment from customers without evidence of separate accounts between sole

proprietor and his employees and employees did not receive payment when a

transaction closed but bi-weekly).

                                     CONCLUSION

      We hold the Department's commissioner, by adopting the ALJ's findings of fact

and conclusions of law, correctly decided Dr. Loretta and Dr. Louise were covered

employees under Washington's Employment Security Act. Because Dr. Armand does

not argue Drs. Loretta and Louise were independent contractors, we do not address the

Department's briefing on that subject. Finally, considering our holding, we do not reach

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No. 32382-0-111
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      Dr. Armand's attorney fee requests because the Department prevails.

      Affirmed.

                                               Brown, J.

I CONCUR:

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                                         No. 32382-0-111

       SIDDOWAY, C.J. (dissenting)         The initial decision of the administrative law

judge (ALI) in this matter, which the commissioner ofthe Department of Employment

Security adopted and the Superior Court then affirmed, was not based on the ALl's

resolution of factual disputes. It was based on four legal conclusions urged by the

department: (1) that the written employment agreements entered into at the time Dr.

Armand DeFelice's daughters joined his practice could not be replaced years later by a

partnership relationship without terminating the employment agreements in writing; (2)

that the Washington revised Uniform Limited Partnership Act (RUPA), chapter 25.05

RCW, mandates precisely equal profit sharing among partners; (3) that the RUPA

mandates an agreement to share all losses equally; and (4) that the conduct of business by

three professionals in a form other than a partnership, standing alone, supports the

conclusion that they are not partners.

       The four legal conclusions were in error, and under the Administrative Procedure

Act, a court shall grant relief from an agency order in an adjudicative proceeding if it

determines that the agency has erroneously interpreted or applied the law. RCW

34.05.570(3)(d). The decision ofthe commissioner should be reversed.

           The Department ofEmployment Security's assessment was based on
                  ,            form, not substance.

       Department tax specialist Angela Hughes assumed upon beginning her audit of the

DeFelice Dentistry practice that it was a sole proprietorship because Dr. Armand
DeFelice v. Emp '( Sec. Dep '(
No. 32382-0-111- dissent

DeFelice (whom 1 will refer to hereafter as "Dr. Armand" for purposes of clarity, as the

majority does)) was registered with the department as a sole proprietor doing business as

Armand V. DeFelice DDS. Administrative Record (AR) at 222. He reported federal

income and other taxes on the same basis. At the outset of the audit, and armed with

three forms 1099 that Dr. Armand had filed with his federal tax return, Ms. Hughes asked

the dental practice's bookkeeper for any written agreements with recipients of the forms

1099. She was provided with association agreements that Drs. Loretta and Louise had

signed with their father upon joining his practice in 1990 and 2004, respectively. She

was also provided with an agreement with a janitorial service that proved to Ms. Hughes'

satisfaction to be an independent contracting relationship. Ms. Hughes admitted that she

never asked, and was never told, whether the association agreements from the practice

files were in effect at the time of her June 2012 audit.

       Because Ms. Hughes never considered the possibility that the dentists had begun

operating as a partnership, she spoke only briefly with Dr. Armand, characterizing her

conversation with him as a casual, "[H]ere is what 1 found, this is what is happening, this

is what is next." AR at 112. Dr. Armand agrees that to the best of his recollection, Ms.

Hughes did not ask him any questions. Jd. at 131. Ms. Hughes spoke with only one of

       ILike the majority, 1 will likewise refer to Dr. Armand's daughters and co-partners
as "Dr. Loretta" and "Dr. Louise."
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     DeFelice v. Emp 't Sec. Dep't 

     No. 32382-0-III- dissent 

     the women dentists-and so passingly that not only did she make no notes of the

     conversation, she couldn't even remember whether she spoke to Dr. Loretta or Dr.

     Louise. Id Dr. Louise testified that Ms. Hughes never spoke with her. AR at 155.

            Ms. Hughes therefore had no occasion to ask anyone about which dentists made

     decisions about operations, whether individual dentists had their own patients, whether

     the dentists shared profits, or other business or financial matters relevant to operation as a

     partnership. Although DeFelice Dentistry had some employees and filed reports and paid

     unemployment insurance taxes, Ms. Hughes evidently never asked why the dental

     practice was paying employment taxes with respect to some of its employees but not with
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     respect to Drs. Loretta and Louise.
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i           When the lawyer for DeFelice Dentistry was informed that Ms. Hughes had
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I    concluded that an assessment of contributions, interest and penalties against Dr. Armand

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     dba Armand V. DeFelice DDS was in order based on his asserted employment of Drs.

     Loretta and Louise, the lawyer asked Ms. Hughes if there could be an exit interview in

     order to explain why an assessment would be in error. Ms. Hughes declined, stating that

     Dr. Armand could appeal. While Ms. Hughes was entitled to close her-audit without

     granting further interviews, the result was that the department did not have any occasion

     to further inquire about the substance of the dentists' business relationship before the

     appeal hearing.

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No. 32382-0-III- dissent

       Dr. Armand did appeal. In his prehearing memorandum filed three months before

the administrative hearing, he characterized the association agreements as "ancient

document[s]," stated that the relationship between the dentists had been amended orally

before the audit period as "can be established by a quick review ofthe Income

Statement," and stated that by the time of the audit period, the dentists "are in fact

partners." AR at 259.

       One might infer from the majority's opinion that the department then developed

and presented evidence at the hearing relevant to the substance of the dentists' business

relationship during the audit period, so that the ALJ's task was to determine whose

evidence about the actual dental practice operations, financial and otherwise, was worthy

of belief. But at the time of the administrative hearing, the department did not offer

evidence on the substance ofthe dentists' relationship. It called only one witness-Ms.

Hughes, who knew nothing about actual practice operations during the audit period. In

an examination in the department's opening case that comprises only eight pages of the

administrative record (the department's rebuttal case is reflected on an additional two

pages), the department presented Ms. Hughes' evidence on the only two facts it viewed

as mattering: (1) Dr. Armand was registered with and reported to several agencies as a

sole proprietorship, and (2) Ms. Hughes was given two association agreements for Drs.

Loretta and Louise, dated 1990 and 2004, respectively, that the department argued were

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No. 32382-0-III- dissent

required by their terms to be terminated in writing, but never were. See AR at 102-09,

125 (department examination in opening case); AR at 83-84 (rebuttal evidence).

      Dr. Armand's defense case was itself not long, although longer than the

department's. At issue, after all, was only a $1,869 assessment. AR at 222. Through Dr.

Armand's petition for review, his testimony and that of Dr. Louise, and the cross-

examination of Ms. Hughes, Dr. Armand presented evidence and argument on the

following matters:

          o 	 That Ms. Hughes never asked whether the association agreements were in
              effect during the audit period and was never told by any representative of
              the practice that they were (AR at 108, 112-13);

          o 	 That the dental practice had evolved into a partnership; according to Dr.
              Louise, this was in or about 2008 (AR at 73-74, 78-79, 86-87);

          o 	 That based on the practice's operating overhead of 60 percent of total
             collected revenues, the three dentists had arrived at a profit sharing
             arrangement designed to distribute to each dentist a 40 percent profit on his
             or her production, although Drs. Loretta and Dr. Louise took distribution
             checks based on a flat 40 percent profit, while Dr. Armand agreed to
             assume the benefit or burden of a somewhat higher or lower percentage
             (depending on whether the overhead proved to be a lower or higher
             percentage of total collected revenues) (AR at 156-57, 159);

          o 	 That based on the daughters' 40 percent profit sharing distribution
             established at the hearing, one could determine by analyzing the income
             statements that Dr. Armand had received a similar share of the profits (AR
             at 36-37);

          o 	 That Dr. Armand did not control the work of his daughters, who were
              experienced and successful professionals and together produced

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DeFelice v. Emp't Sec. Dep't
No. 32382-0-III- dissent

              approximately 63 percent of the total production of the practice in 2010
              CAR at 119-20, 163-64)2;

          o 	 That "the practice"-meaning the three dentists, as partners--owned the
              equipment of the practice and operated its business CAR at 145-47);

          o 	 That each dentist had his or her own patients (AR at 71-73; 156); and

          o 	 That the home page ofthe practice website for DeFelice Dentistry
              characterized the practice in partnership terms, stating that "Dr. Armand
              DeFelice, Dr. Lorrie Rosier and Dr. Louise DeFelice work together as a
              team to provide you with the highest standard of dental care available."
              (AR at 207, 230)

      The department cross-examined Dr. Armand and Dr. Louise about the profit-

sharing arrangement. The ALJ also asked a number of questions. The department's

lawyer elicited Dr. Louise's agreement that under the dentists' distribution arrangement,

if Dr. Louise hypothetically did not work for a month, then she would not contribute

towards that month's overhead. AR at 159-60.

       In rendering its decision following the hearing, the ALJ did not make a factual

finding as to whether the dentists had or had not orally agreed to begin operating as

partners sometime before 2010. The department had not thought it mattered; its position

was and remains that because the dentists admit that they never terminated the

association agreements in writing then the agreements were not terminated, period. The

       2 The evidence at the hearing was in dollar terms; I substitute percentages out of
respect for the dentists' financial privacy. By the same analysis, Drs. Loretta and Louise
together produced approximately 64 percent of the total production in 2011. See AR at
234.
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No. 32382-0-III- dissent

ALJ adopted the department's position and, on that basis, relied upon association

agreements that it treated as continuing to control as a matter of law, not fact, for a dozen

findings. See AR at 292-94 (findings 1-12).

       The department responded to testimony and financial record evidence that Drs.

Loretta and Louise indisputably collected a 40 percent profit from their production during

the audit period (an amount inconsistent with the association agreements) by taking the

position that it is not "profit sharing" ifpartners agree that some of them will take

distributions based on projected profit while others will assume the risk that the actual

profit might be higher or lower than projected. The ALJ implicitly adopted the

department's position. AR at 296 (conclusion 7).

       The department also took the position that partners are required to share losses. It

took the position that partners are not sharing losses ifthere is a conceivable, even if

implausible scenario under which one partner alone could incur a loss. The ALJ

implicitly adopted that position. See id.

       Finally, the department took the position that the sole proprietorship form in which

Dr. Armand had reported and registered with it and other agencies was sufficient,

standing alone, to support the conclusion that the dentists were not operating as a

partnership. The ALJ adopted that position. See id.

       Each of these conclusions was wrong as a matter of law.

                                              7
I
i
I
     DeFelice v. Emp 't Sec. Dep't

I    No. 32382-0-111- dissent

                                Partner services are not employment.

I
          There is no employer-employee relationship when an owner provides services to a

I    business. Accordingly, partners of a partnership are not covered for unemployment

I
     insurance purposes. WAC 192-300-190; RCW 50.40.100. While the department argues

     that a party claiming an exemption from taxation bears the burden of proof (see Br. of

I    Resp't at 13), DeFelice Dentistry does not rely on an exemption but on its position that an

     owner's services are not "employment" under the Employment Security Act.
j
            A partnership is an association of two or more persons to carry on as co-owners a

     business for profit; in Washington, at the time Drs. Armand, Loretta and Louise testify

     they began to operate as partners, the formation of a partnership was governed by RCW

     25.05.055. RCW 25.05.005(6). These are provisions of the RUPA, which was adopted

     in Washington in 1998. LAWS OF 1998, ch. 103, § 1302.

            Few reported Washington decisions apply the RUPA in determining whether

     individuals have formed a partnership. Since RCW 25.05.904 provides that the RUPA

     "shall be applied and construed to effectuate its general purpose to make uniform the law

     with respect to the subject of the act among states enacting it" it is appropriate to look to

     the official comments to the Uniform Partnership Act (1997), promulgated by the

     National Conference of Commissioners on Uniform State Laws, as aids in its

     construction. Cf Townsend v. Quadrant Corp., 153 Wash. App. 870, 878 n.7, 224 P.3d
8
DeFelice v. Emp 't Sec. Dep't
No. 32382-0-III- dissent

818 (2009) (looking to comments to the uniform arbitration act as aids in construing the

Washington statute). RCW 25.05.904's command that the chapter be applied and

construed with a view to uniformity is also direct legislative authority for looking to case

law from other adopting states.

       Under the RUP A, it is the attribute of co-ownership that distinguishes a

partnership from a mere agency relationship:

       A business is a series of acts directed toward an end. Ownership involves
       the power of ultimate control. To state that partners are co-owners of a
       business is to state that they each have the power of ultimate control.

UNIF. P'SHIP ACT (1997) § 202 cmt.l, 6 pt. 1 U.L.A. 93 (2001). RCW 25.05.055(3)(c)

provides three rules of construction that apply in determining whether a partnership has

been formed. Relevanthere is the rule that "[aJ person who receives a share of the profits

of a business is presumed to be a partner in the business," subject to a few exceptions.

By its plain terms, and as reflected in the comments to the RUP A, profit sharing gives

rise to a rebuttable presumption of a partnership. Id. The presumption applies whether

the profit share is a single flat percentage or a ratio that varies. Id.

       The association agreements offered in evidence by the department could be
       terminated by a mutual oral agreement to begin operating as a partnership.
                        It was legal error to conclude otherwise.

       Dr. Armand and Dr. Louise both testified that during the tax years covered by the

audit, the parties were operating as a partnership. Dr. Louise testified that the three

                                                9
DeFelice v. Emp 't Sec. Dep't
No. 32382-0-111- dissent

dentists began operating as a partnership in or about 2008. The ALJ's finding that Ms.

Hughes asked the practice bookkeeper for "copies of any agreements to show the

relationship between Dr. Armand, Dr. Louise and Dr. Loretta" (AR at 294, finding 10), is

not supported by the evidence; Ms. Hughes admitted she only asked if there were

agreements with the form 1099 recipients and simply assumed that the dentists stood in

an employment relationship from the two association agreements that were produced in

response. 3 Those agreements, which indisputably created an employment relationship,

      3   Ms. Hughes testified as follows:
      Q.    Were you provided with any copies of any written contracts or
      agreements between Loretta and Armand DeFelice?

      A.     Yes. 1 asked for-when 1 saw their names on the 1099,1 asked for
      any agreements and did receive a-the agreements for each of them, that
      they had signed with Dr. Armand.

AR at 108. On cross-examination, she testified:

      Q.    Did you ask either lady or anyone that gave you the agreement or
      agreements whether or not the agreements were valid and enforceable?

      A.     Well, since 1 had-was talking to the bookkeeper and had asked for
      the agreement, 1 assumed the one she gave me would be valid.

      Q.       You assumed, but you didn't ask?
      A.       1 didn't ask if what she was giving me was valid, no.
AR at 112-13.
                                             10
DeFelice v. Emp 't Sec. Dep't
No. 32382-0-111- dissent

would have been 22 and 8 years old by the time of the department's 2012 audit. AR at

113-14, 125.

       It was the position of the department that it didn't matter ifthe dentists had orally

agreed to change the nature of their relationship, because they had never terminated the

association agreements in writing. The ALJ adopted the position of the department,

finding that the association agreements "[were] to continue until termination in a manner

set forth in the agreement, specifically paragraph 7 and 8." AR at 292 (finding 2). Many

of the ALJ's other findings are predicated on this legal proposition that the association

agreements remained operative because they had not been terminated in the manner set

forth in paragraph 7 or 8.

       When, as here, the interpretation of a contract does not depend on the use of

extrinsic evidence, it presents a question of law. Viking Bank v. Firgrove Commons 3,

LLC, 183 Wash. App. 706, 711, 334 P.3d 116 (2014). A conclusion oflaw is reviewed as a

conclusion of law, even if erroneously labeled as a finding of fact. Dave Johnson Ins.

Inc. v. Wright, 167 Wash. App. 758, 778, 275 P.3d 339 (2012). We review conclusions of

law de novo.

       Section 3 of the association agreements provide the date on which the term of

agreement begins and that the agreement "shall continue until terminated in a manner set

forth in paragraphs 7 and 8." AR at 241,247. Section 7 of the association agreements

                                             11 

DeFelice v. Emp 't Sec. Dep't
No. 32382-0-111- dissent

addresses the manner by which "either" party may terminate the agreement-thereby

addressing the fact that the relationship is terminable at the will of either party, as the

majority observes. 4 AR at 243,249; see majority at 8. Section 8 deals with termination

in the event of a party's incapacity by reason of illness or other causes, an event that no

one suggests ever arose. Neither section 7 nor 8 deals with termination ofthe agreement

by mutual agreement of the parties. Notwithstanding the language of section 3 of the

agreements, the parties could mutually agree, orally, to terminate or modifY the

agreement.

       It is hornbook law that a contract in writing, but not required to be so by the statute

of frauds "may be dissolved or varied by a new oral contract, which mayor may not

adopt as part of its terms some or all of the provisions of the original written contract."

29 RICHARD A. LORD, WILLISTON ON CONTRACTS § 73.21 at 67 (4th ed. 2003); Bader v.

Moore Bldg. Co., 94 Wash. 221,224, 162 P. 8 (1917); Sherman v. Sweeny, 29 Wash.

321,69 P. 1117 (1902). This is true even if there is no express agreement that the new

contract shall have that effect. E.g., Dunlap v. Fort Mohave Farms, Inc., 89 Ariz. 387,

363 P.2d 194 (1961) and cases cited therein.

       4The section provides, "Owner and Associate may terminate their relationship
upon thirty (30) days' written notice by either party." AR 243,249 (emphasis added).
                                              12 

DeFelice v. Emp 't Sec. Dep't
No. 32382-0-111- dissent

       A related principle is that parties to a bilateral contract may make an agreement of

rescission discharging each other from all remaining obligations under an existing

agreement and that such an agreement "need not be expressed in words. Other conduct

may show an intent by both parties to abandon their contract." RESTATEMENT (SECOND)

OF CONTRACTS § 283, cmt. a (1981);     Lockhart v. Greive, 66 Wash. App. 735, 741, 834
P.2d 64 (1992).

       Parties may orally modify even agreements that prohibit oral modification. As

explained in Pacific Northwest Group A v. Pizza Blends, Inc., 90 Wash. App. 273, 277-78,

951 P.2d 826 (1998), it is "[a] paradox of the common law is that a contract clause

prohibiting oral modifications is essentially unenforceable because the clause itself is

subject to oral modification." The common law rule permitting oral modification "has

been consistently followed in Washington." Id. Accordingly, even if section 3 of the

association agreements could be construed to prohibit the parties from orally terminating

or modifying the association relationship it would be meaningless, since section 3 was

itself subject to oral modification.

       In the context of professional service providers, it is not unusual for an

employment relationship to ripen into a partnership. An experienced dentist, like any

experienced professional, will often want the right of control over a new professional in

his practice and to have the right to terminate a relationship that might not work out.

                                             l3
DeFelice v. Emp '( Sec. Dep '(
No. 32382-0-111- dissent

Once the professionals have worked together successfully over time, however, the hiring

professional may well be comfortable relinquishing control and sharing ownership, and

the junior professional might insist on becoming a partner. If not, she might leave in

order to practice where she is better compensated and entitled to share more control.

       There is no question that Dr. Armand and his daughters could implicitly terminate

the association agreements by orally agreeing to begin operating as a partnership. A

partnership agreement may be oral and may even be implied. RCW 25.05.005(7)

(defining "partnership agreement"); Roediger v. Reid, 133 Wash. 608,234 P. 452 (1925)

(a partnership may be established without a formal contract and may be made by oral

agreement),

       If the issue of whether the dentists had modified or terminated the association

agreements had been treated as an issue of fact, we would review whether substantial

evidence supported the ALJ's finding. But here, the ALJ implicitly accepted the

department's argument that there was no issue of fact because the association agreements

were never terminated in writing; as a result, it must treat the relationship as governed by

those agreements. The ALJ made no findings addressing the actual nature of the dentists'

business relationship during the audit period.

       The ALl's implicit conclusion that the association agreements remained binding

as a matter oflaw is subject to de novo review, and was in error. As a result, the

                                             14
     DeFelice v. Emp't Sec. Dep't 

     No. 32382-0-111- dissent 

     commissioner's adopted findings 1 through 12, all of which are predicated on the

     conclusion that the association agreements remained in effect as a matter of law, are

II
§
     unsupported.

              Sharing profits does not require strictly equal sharing and it was legal
I                                  error to conclude otherwise.
,
            Dr. Armand and Dr. Louise both testified that in arriving at a partnership

II   arrangement, they recognized that the dental practice ordinarily operates with overhead

     amounting to 60 percent of collected revenues, with the result that there is ordinarily 40

     percent in profits available to share. Both testified, and the ALJ found, that by the time

I
,    of the audit, Drs. Loretta and Louise were paid 40 percent of their production. AR at 294

     (finding 13). This is contrary to the association agreements' provisions that the daughters

     would be paid 35 percent. Dr. Armand received whatever was left-which, if the parties

     were right about the overhead, would be something close to 40 percent of the remaining

     production. As Dr. Louise testified, the arrangement was designed so that all three would

     receive 40 percent of their production: "[B]asically all of us get-end up getting 40

     percent of the amount we--of production on our patients and we split the overhead,

     which is 60 percent." AR at 156. The lawyer for the dental practice undertook to

     illustrate this from the 2010 operating results during the hearing and reproduced the

     analysis in his brief. See AR at 119-20; Br. of Appellant at 7-8.

                                                  15
I
I
j
     DeFelice v. Emp 'f Sec. Dep 'f
     No. 32382-0-111- dissent
I,
!           The commissioner's pivotal conclusion of law identifying the basis for rejecting
I    DeFelice Dentistry's claim to be a partnership is conclusion 7, which offers three reasons
i
,I

i    that 1 address here, and in the two sections that follow.
I
!
I
J           The first was that the dentists did not share profits. The ALJ implicitly accepted
~
~
!I   the department's position that it is not enough for partners to arrive at a system for profit
1

I    sharing that they conclude is fair-and in this case, that the partners concluded was close

I    enough to giving each partner an equal profit percentage on his or her production. 5

j           The dentists' agreement that the daughters would receive paychecks equal to 40

I    percent of the professional fees collected from their services, while Dr. Armand would
II   take "whatever was left" is not inconsistent with the existence of a partnership. RCW

I    25.05.015(1) provides that with respect to most matters, "relations among the partners

     and between the partners and the partnership are governed by the partnership agreement."

     Many provisions of the RUPA govern the partners' relations when the partners fail to

     agree on a contrary rule; a few "nonwaiveable" provisions are identified by RCW

            5   Conclusion 7 states in relevant part:

            First, Dr. Louise and Dr. Loretta did not share in the profits .... They were
            each paid exclusively a percentage of their own respective gross
            production.... After payments to Dr. Louise and Dr. Loretta, Dr. Armand
            earned only whatever was left each month.

     ARat296.
                                                    16
DeFelice v. Emp '( Sec. Dep '(
No. 32382-0-III- dissent

25.05.015(2). How partners share profits and losses is one ofthe matters that partners are

free to decide. 6 It is only a default provision of the RUP A that provides for an equal

sharing of profits and equal charging of losses if the partners have no different

agreement. See RCW 25.05.150.

       The dearth of Washington case law addressing partners' prerogatives under

modern partnership statutes might have contributed to the department's and the ALl's

error. Bright line rules that might be implied by old cases on which the department relies

have been rejected with the legislature's enactment, first, of the Uniform Partnership Act

(UPA), and then (and even more clearly) with RUPA. As the reporters for the RUPA

have explained:

              Across all substantive areas, RUP A reflects the policy judgment that,
       with rare exceptions, partners are permitted to govern relations among
       themselves by agreement. Almost all ofRUPA's rules governing the
       relations among partners are merely default rules rather than mandatory
       rules. That is, the statutory rules apply only in the absence of a partnership
       agreement to the contrary.

       6 For federal tax purposes, the Internal Revenue Service also respects the parties'
agreement as to distributive shares of income, gain, loss, deduction or credit (including
different ratios for profits vs. losses), as long as the allocations have "substantial
economic effect." 26 U.S.C. § 704. Simply stated, the requirement of "substantial
economic effect" means that the allocation must be reasonably expected to substantially
affect the partner's shares independent of tax consequences, and that the recipient partner
must erUoy the economic benefits or bear the economic burdens associated with the
allocation. Treas. Reg. § 1.704-1.
                                             17
DeFelice v. Emp't Sec. Dep't
No. 32382-0-III- dissent

Donald 1. Weidner & John W. Larson, The Revised Uniform Partnership Act: The

Reporters' Overview, 49 Bus. LAW. 1,2 (1993). While observing that under the

predecessor UPA "it [was] not clear which rules are merely default rules and which rules

are mandatory rules," the reporters state, "Under RUPA, every rule governing the

relations among partners is a default rule unless it is separately listed as a mandatory

rule."

         This is not to say that how parties share profits and losses will not have a bearing

on whether they are found to have "associate[ed] ... to carry on as co-owners a business

for profit," as is required to form a partnership under the RUPA. As the Supreme Court

of Nebraska observed, applying the RUPA, the indicia of co-ownership, which include

profit sharing and loss sharing, "are only that; they are not all necessary to establish a

partnership relationship, and no single indicium of co-ownership is either necessary or

sufficient to prove co-ownership." In re Key Tronics, 274 Neb. 936, 744 N.W.2d 425,

441 (2008).

         In Stuart v. Overland Medical Center, 510 S.W.2d 494,497-98 (Mo. Ct. App.

1974), a court applying the Uniform Partnership Act (UPA), the predecessor to the

RUPA (the UPA was in effect in Washington from 1945 until its repeal in 1998 7) held

        Former chapter 25.04 RCW, adopted by LAWS OF 1945, ch. 137, §§ 1-43;
         7

repealed by LAWS OF 1997, ch. 103, § 1308.
                                               18
DeFelice v. Emp't Sec. Dep't
No. 32382-0-III- dissent

that an economic arrangement under which professionals received an amount equal to the

revenues they produced less a percentage determined by their shared expenses was profit-

sharing, explaining that "because the expenses each doctor had to pay bore no

relationship to the actual expenses of each doctor, some doctors were receiving profits

that otherwise might have been distributed to the doctor or doctors whose actual expenses

were slight when compared to the actual expenses of other doctors." Stuart's holding

that individuals who share expenses indirectly accomplish profit-sharing and thereby

function as a partnership has been followed under RUPA by the District of Columbia

Court of Appeals. Brown v. 1401 New York Ave., Inc., 25 A.3d 912,916 n.8 (2011).

       In a dental practice that the partners evidently believed had a reasonable

predictable overhead burden it was reasonable that, rather than close out the books each

pay period or take draws subject to a later accounting, Dr. Armand agreed that his

daughters would be paid the projected net profit on their production and he would enjoy

the benefit or bear the burden of any discrepancy between the projected and actual

overhead.

       This is not tantamount to saying that any owner of a business could pay employees

a commission based on a percentage of production, call it "profit sharing," and thereby

claim partnership status for purposes of the Employment Security Act. The facts in this

case are distinguishable from that scenario in two respects. The first is that the

                                             19
DeFelice v. Emp 't Sec. Dep't
No. 32382-0-111- dissent

department never challenged that the flat 40 percent paid to Drs. Loretta and Louise was

the parties' reasonable, good faith projection of net profits, supported by the income

statements, with the objective that all three partners receive a fair share but without

requiring more complete accounting. The second is that Drs. Armand, Loretta and

Louise were prepared to argue that they operated in other respects as co-owners. If the

substance of their relationship during the audit period was not more fully investigated and

debated at the hearing, it was because the department, and ultimately the commissioner,

concluded that what the dentists were doing in/act didn't matter.

       By way of example, the commissioner adopted the finding that Dr. Louise and Dr.

Loretta were "likely" subject to at least some direction and control by their father during

the audit period, based on the 1990 and 2004 association agreements. The finding is not

supported by any evidence of actual operations. Dr. Louise, the newest dentist in the

practice, testified:

       Q.     [D]oes he ever kind of tell you-I know he is your father-as part as
       your dental practice, as fathers would do, does he ever tell you how to do
       things?

       A.      No.

       Q.    Okay. You are kind of on your own, you have total discretion with
       your patients?

       A.      Yes. 100 percent.

AR at 163-64.
                                             20
DeFelice v. Emp 't Sec. Dep't
No. 32382-0-111- dissent

       If the issue of whether the dentists were operating as a partnership during the audit

period had been treated as an issue of fact, taking into consideration the evidence of the

dentists' intent and the aspects of their actual operations between 2010 and 2012 that

would reflect on an intent to operate as co-owners, then we would review whether

substantial evidence supported the ALl's finding. One piece of that evidence would be

the dentists' profit-sharing understanding. But here, the ALJ was not examining all of the

evidence bearing on whether Drs. Armand, Loretta and Louise intended to operate as co­

owners. Instead, the ALJ accepted the department's position that the distribution of

something other than exactly equal percentages of profits was another bright-line reason

for finding as a matter of law that there was no partnership. That implicit conclusion is

subject to de novo review.

       The more a profit-sharing arrangement deviates from what is equal or what can

otherwise be defended as reasonable among partners, the more likely it will not be

viewed as consistent with the intent "to carry on as co-owners a business for profit."

RCW 25.05.055(1). But the RUPA expressly provides that how partners choose to divide

profits is a matter for their agreement. For the commissioner to conclude that anything

other than exactly equal profit-sharing prevented the formation of a partnership is

contrary to Washington statutes.

                                            21 

DeFelice v. Emp 't Sec. Dep't
No. 32382-0-111- dissent

             It is not necessary that partners always share losses equally and it
                was legal error to conclude otherwise-particularly based on
                      hypothetical losses that are unlikely ever to occur.

       The commissioner's second reason for concluding that DeFelice Dentistry was not

a partnership was its acceptance of the department's position that the partners do not

share losses, since "if [the daughters] did not work, they did not contribute to overhead"

leaving the burden to fall disproportionately on Dr. Armand. AR at 296 (finding 7}.8

This was based on Dr. Louise's response to a hypothetical question from the

department's lawyer who inquired whether, "[i]f [she] decide[d] to take the month off,"

she would contribute anything to overhead. 9 Dr. Louise acknowledged that in that event,

based on the dentists' compensation agreement, she would not contribute to overhead.

She immediately added, "But 1 can also tell you I have never taken a month off." AR at

159-60.

      8   Conclusion 7 further states:
      Dr. Louise and Dr. Loretta did not share in ... losses.... If they did not
      work, they did not contribute to overhead. After payments to Dr. Louise
      and Dr. Loretta, Dr. Armand earned only whatever was left each month.

ARat296.
      9 Somewhat inconsistent with its ultimate position, the department's hypothetical
suggestion that Dr. Louise might decide to take a month off attributes to her the
prerogatives of an owner, not an employee. The association agreement that she signed in
2004 contemplated that she would work three days, more or less, per week. AR at 247.
                                             22
     I
     !i
     !

     !
     Ij

     ~      DeFelice v. 	 Emp't Sec. Dep't
     !j 	
     •      No. 32382-0-111- dissent
 Ii
    ~l 	           First, and as with profits, a sharing of losses is not required by chapter RCW
     j
    I
     t	

I,
 ;
            25.05. See RCW 25.05.015(1) (with respect to most matters, "relations among the
 !
            partners and between the partners and the partnership are governed by the partnership

            agreement"); UNIF. P'SHIP ACT (1997) § 401 cmt. 3, 6 pt. 1 U.L.A. 134 (2001) ("If

I           partners agree to share profits other than equally, losses will be shared similarly to
I
J

            profits, absent agreement to do otherwise .... Of course, by agreement, they may share

I
:1          losses on an entirely different basis from profits."). 

I
I!                 Washington cases have long supported partners' flexibility when it comes to

I
!
            sharing losses. In two decisions involving the same partnership accounting, the

            Washington Supreme Court reversed and remanded the accounting because the trial court

I!          failed to determine the partners' understanding as to how losses were to be borne. In the

I	          first, Richert v. Handly, 50 Wash. 2d 356, 361-62, 311 P.2d 417 (1957), the Supreme Court

            recognized that the partners could, but need not, agree to share losses equally; it

            remanded because the trial court's findings were inconsistent as to what the partners in

            that case had agreed to do. In the second, Richert v. Handly, 53 Wash. 2d 121,.123,330

            P.2d 1079 (1958), the Supreme Court held that since the trial court found upon remand

            that the parties never agreed upon the basis on which losses would be shared, then the

            court could not simply leave the parties where it found them; it was required to apply the

            default provisions of the former UPA. See also Dow v. Dempsey, 21 Wash. 86, 93, 57 P.
23
DeFelice v. Emp 't Sec. Dep't
No. 32382-0-111- dissent

355 (1899) (citing a treatise for the proposition that "it is natural to suppose" that partners

intended to share losses "ifthey have said nothing to the contrary"); Refrigeration

Engineering Co. v. McKay, 4 Wash. App. 963, 974, 486 P.2d 304 (1971) (while the law

will assume an agreement to share losses from silence, "Ifjoint venturers wish to have a

contrary agreement as to the sharing of losses, they can easily make an express agreement

to that end.").

       Washington cases recognize that some "loss sharing" is reflected in the fact that

partners share net profits rather than gross revenues. See, e.g., Oriental Realty Co. v.

Taylor, 69 Wash. 115, 120, 124 P. 489 (1912) ("It is true no mention is made of the

losses, but losses, if any, must first be deducted before there could be profits, and

necessarily must be borne equally"). Courts in Ohio, which has adopted the RUPA, have

concluded that even limited partners, who are statutorily protected from liability, are

treated as employers for unemployment contribution purposes as long as they act and are

treated like general partners in virtually every important respect other than their limited

liability. Appeal ofAnderson, 29 Ohio App.3d 248,504 N.E.2d 1155, 1159 (1985),

       In this case, given the dentists' use ofa projected overhead factor that was based

on all collected revenues and all practice expenses, each dentist risked loss in two

respects. First, and as discussed in the Stuart case, supra, each dentist faced the risk that

one or two dentists might operate less economically, with the result that the overhead

                                              24 

DeFelice v. Emp 'f Sec. Dep 'f
No. 32382-0-III- dissent

borne by an efficient dentist would be higher than it would be if she or he were practicing

alone. Second, the partners' projection ofthe overhead factor might prove in a given

year to be too high or too low, with the result that Dr. Armand might receive a higher

profit percentage or a lower percentage in some years than Drs. Loretta and Louise. 1o

       The prospect of un shared loss on which the department focused and that the ALJ

relied upon as a basis for its conclusion that there was not a partnership, was the prospect

that one of the daughters would simply not work. The hypothetical assumed that

overhead would remain the same and fall disproportionately on Dr. Armand. The

hypothetical was pure conjecture. Dr. Louise testified that she had never taken a month

off and the income statements in evidence demonstrated that Drs. Loretta and Louise

were successful professionals, producing a substantial portion of the collected revenues

of the practice.

       Here, as with profit-sharing, the more a loss-sharing arrangement deviates from

what is equal or what can otherwise be defended as reasonable among partners, the more

likely it will not be viewed as consistent with the intent "to carry on as co-owners a

business for profit." RCW 25.05.055(1). If a loss contingency is either (1) theoretically

       10 If the actual overhead proved to be less than 60 percent of total collected
revenue, then Drs. Loretta and Louise would receive a smaller percentage profit from
their production than Dr. Armand. If the actual overhead proved to be more than 60
percent of total collected revenue, then Dr. Armand would receive a smaller percentage
profit on remaining revenue than was received by Drs. Loretta and Louise.
                                             25
DeFelice v. Emp 't Sec. Dep't
No. 32382-0-IU- dissent

possible but highly implausible, or (2) would occur over time and could be addressed

through the partners' agreement that financial interests may need to be adjusted, then it

might not weigh heavily, if at all, against finding formation of a partnership. In this case,

both Dr. Armand and Dr. Louise testified that when unforeseen contingencies arose in

their family partnership, they "talk about it." AR at 138-39, 147 (Dr. Armand).

       In any event, dispositive here is that the RUP A expressly provides that how

partners choose to divide losses is a matter for their agreement. For the commissioner to

conclude that anything other than exactly equal loss-sharing prevented the formation of a

partnership is contrary to Washington statutes.

          The form in which Dr. Armand reported and registered the practice is
       insufficient as a matter oflaw to support characterization as a partnership.
                         It was legal error to conclude otherwise.

       The third basis for the commissioner's pivotal conclusion that the dentists were

not operating as a partnership was its findings that Dr. Armand did not update his 1966

registration with the department in 2008 to reflect the fact that he had begun operating in

partnership with his daughters; that the daughters also failed to establish accounts with

the department upon becoming partners in 2008; that Dr. Armand did not update his

registration with the Department of Revenue to reflect partnership operations; and that

Dr. Armand had continued through 2012 to report liability for federal taxes as a sole

                                             26 

DeFelice v. Emp 't Sec. Dep't
No. 32382-0-III- dissent

proprietorship. AR at 294 (findings 14, 15, and 16).11 As the majority recognizes, the

Internal Revenue Service has published a revenue procedure recognizing that a small

partnership (less than 10 partners) whose partners have fully reported their shares of the

income, deductions and credits of the partnership on their timely filed individual income

tax returns will satisfy the "reasonable cause" test for failure to timely file a partnership

tax return. Rev. Proc. 84-35, 1984-1 C.B. 509.

       In determining the character of the business relations of parties, "[m]any times

form must give way to substance." State v. Bartley, 18 Wash. 2d 477,481-82, 139 P.2d 638

(1943) (arrangement was partnership in form, but not in substance).

       The RUP A is even more explicit on this score. It provides that "the association of

two or more persons to carry on as co-owners a business for profit forms a partnership,

whether or not the persons intend tolorm a partnership." RCW 25.05.055(1) (emphasis

       II   Conclusion 7 provided in part:

       [M]ore significantly, although claiming to be a tax partnership entity, the
       business was registered as a sole proprietorship and did not file any
       notification with the state regarding its changed status. Nor did it file any
       federal income tax returns evidencing a partnership entity, such as a Form
       1065. Dr. Armand was reporting income and expenses for the business on
       his individual tax return as a sole proprietorship. This is absolutely
       inconsistent with the Petitioner's claim the business was a partnership tax
       entity during the [time] period at issue.

ARat296.

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DeFelice v. Emp 't Sec. Dep't
No. 32382-0-III- dissent

added). In other words, even if Drs. Armand, Loretta and Louise had intended to operate

as a sole proprietorship but were acting in substance as partners, the "sole proprietorship"

form of their registration and tax reporting would not matter-they would still be treated

as a partnership.

       A fortiori, if they were not only acting in substance as partners but also intended to

form a partnership, the fact that they reported and registered as a sole proprietorship

cannot possibly matter. To conclude otherwise is contrary to RCW 25.05.055(1).

       Courts of the State of Tennessee, which has adopted the RUPA, have come to the

same conclusion, reasoning that because it is not necessary under the RUP A that the

parties know the legal results of their actions in creating a partnership "the terminology

used by the parties to describe their business relationship is of little import." Messer

Griesheim Indus. v. Cryotech ofKingsport, Inc., 45 S.W.3d 588, 605 (Tenn. Ct. App.

2001) (citing Bass v. Bass, 814 S.W.2d 38, 41 (Tenn. 1991».

       For the commissioner to conclude that the form in which the practice was

registered and reported was sufficient to defeat the existence of a partnership is contrary

to Washington statutes.

                                        Conclusion

       When one sets aside the commissioner's unsupported factual findings and

erroneous legal conclusions, there is no basis for his ultimate conclusion that DeFelice

                                             28 

DeFelice v. Emp '( Sec. Dep '(
No. 32382-0-111- dissent

Dentistry was not a partnership for tax purposes during the period covered by the audit.

Because the commissioner's decision should be reversed, 1 respectfully dissent.

                                               :)ztih ~ ~&:
                                                   Siddoway, C.J.
                                                                        I

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