Court Opinion

ID: 9475333
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:24:09.702565+00
Date Added: 2024-06-11T17:44:39.270597
License: Public Domain

BARKER, District Judge.
Sister Francine Schuster (“Schuster”) filed a petition in the Tax Court contesting a determination by the Commissioner of Internal Revenue that her income was taxable against her individually for wages she earned in 1980. The Tax Court sustained the Commissioner’s determination. We affirm.
I.
Schuster, a Roman Catholic nun, is a member of the Order of the Adorers of the Blood of Christ (“the Order”). The Order is a tax-exempt religious organization whose purposes are “to conduct schools and places of learning and to promote education, to advance the cause of religious and social work, to conduct hospitals and institutions for the care and treatment of suffering humanity and to do all and everything necessary or convenient for the accomplishment of any of the purposes or objects and powers above mentioned or incidental thereto.”
As a condition of membership in the Order, Schuster was required to make perpetual vows of poverty, chastity, and obedience. In accordance with her vow of poverty, Schuster executed a declaration in which she agreed “never [to] claim or demand, directly or indirectly, any wages, compensation, remuneration, or reward ... for the time or for the services or work that I devote for or with ... [the Order] during the time I may remain there or elsewhere in the name of or upon commission from said [Order].”
Members may withdraw from the Order either with or without official dispensation from the Church. Withdrawing members are entitled to receive any personal property they owned before joining the Order, any property received by gift or inheritance, and any dowries they may have had.
Members are allowed to secure employment in occupations that relate to the Order’s general purposes, subject to approval *674by a Provincial Superior of the Order. Approval turns upon whether the proposed mission relates to religious and charitable works that promote education, relieve suffering, and otherwise provide assistance to those in need. However, pursuant to a member’s vow of obedience, she may not accept employment without approval of the Order. No member can voluntarily terminate her employment without the Order’s approval. In addition, each member promises to abide by any direction of the Provincial Superior, even if such direction relates to the performance of the employment itself or requires the member’s withdrawal from the employment. The Order has, on occasion, required members to terminate their assigned employment.
Pursuant to their vows, members are not entitled to retain any funds generated by their employment; rather, the Order is entitled to all such funds. After a member transfers such funds to the Order, she maintains no control over the disposition of the funds.
Members generally live in a convent. When, however, a member's employment is not located near a convent, the Order rents a residence for the member. These members living away from the convent submit monthly budget statements of living expenses to the Order, which the Order pays if the expenses are approved. In addition, the Order provides its members with a personal expense allowance.
In October, 1978, Schuster, who has a bachelor’s degree in nursing, was awarded an educational grant from the federal government under Section 822(b) of the Public Health Service Act. The award covered the cost of Schuster’s tuition, books, fees, living and moving expenses for the Nurse Midwife Program at the University of Mississippi Medical Center. As a condition of receiving the grant, Schuster agreed to reside and practice in a “health man-power shortage area” (as defined in Section 332 of the Public Health Service Act) for a 12-month period upon her completion of the training program. In addition, Schuster agreed to repay in full the amount of the grant if she failed to fulfill the practice commitment.
Upon completion of the Nurse Midwife Program, Schuster obtained permission from the Order to apply and to interview for positions in health manpower shortage areas. One position Schuster applied for was with Su Clinica Familiar (“the Clinic”), a family health service clinic in Raymond-ville, Texas.
During the year at issue, the National Health Services Corps (“NHSC”), a division of the United States Public Health Service, furnished the services of a number of health professionals in its employ to the Clinic. The health professionals provided by the NHSC to the Clinic were employed and compensated by the federal government, and not by the Clinic.
Schuster filed an application for employment with the NHSC in conjunction with her application to the Clinic. She applied for the job in order to fulfill her commitment to practice in a health manpower shortage area. She stated on her application to the NHSC that she would accept a position only if she were assigned to work at the clinic at a salary of at least $16,-000.00 per year.
Schuster was interviewed over the telephone by an employee of the NHSC. In late May, 1979, the NHSC paid for Schus-ter to travel to the Clinic to visit as a prospective NHSC assignee. On June 27, 1979, the Clinic informed the NHSC that it intended to employ Schuster as a staff nurse-midwife beginning on July 23, 1979.
After Schuster was offered employment with the NHSC as a nurse-midwife at the Clinic, she requested and was granted permission from the Order to accept it. Accordingly, on July 1,1979, Schuster wrote a letter to the NHSC confirming her acceptance of the appointment, effective July 29, 1979.
Also on July 1, 1979, the Acting Provincial Administrator of the Order wrote two letters. One letter was written to the director of the Clinic’s nurse-midwifery service, and a second, virtually identical letter, *675was written to NHSC. These letters stated in part:
Sister Francine Schuster has informed us of your recent phone notification of a current job opening in nurse-midwifery at Su Clinica Familiar, Raymondville-Harlingen, Texas.
The Community of Adorers of the Blood of Christ [the Order] would like to contract with you for the services of Sister Francine Schuster, ASC, for the position of nurse-midwife for one year at Su Clini-ca Familiar.
If our offer is acceptable, we request that payment for her services be made to the Adorers of the Blood of Christ.
In response to the letter addressed to the Clinic, the director of the nurse-midwifery service at the Clinic in a July 9, 1979 letter to the Acting Provincial Administrator of the Order, wrote, in pertinent part:
Consider this letter as formal acceptance of Sister Francine Schuster on our nurse-midwifery staff. She will be beginning on the pay period that starts July 23. Sister Francine’s checks will be paid to her and she can endorse them and send them to you. I endorse my checks “paid to the order of the Sisters of St. Mary. Sister Angela Murdaugh.” There is no problem with them going through the mail like that.
The NHSC did not respond to the July 1, 1979 letter from the Acting Provincial Administrator of the Order.
Schuster began to work at the Clinic on July 25, 1979, even though her NHSC appointment was not effective until July 29. As a result, the Clinic paid Schuster for July 25-27 and terminated payments effective July 27. Contrary to the Order’s request, Schuster’s paychecks were issued payable to her individually.
Schuster’s appointment by the NHSC became effective on July 29, 1979. As an employee of the NHSC, Schuster was a civil service employee subject to the standards of conduct set by the Department of Health, Education and Welfare, and her performance as a midwife was evaluated yearly by means of the Department’s employee performance appraisal system. As an NHSC staff member, Schuster qualified for and received continuing professional education at the expense of the federal government. In addition, Schuster was protected against malpractice claims arising from her employment pursuant to Section 224 of the Public Health Service Act.
Schuster’s initial annual salary as a nurse-midwife was $15,920, the rate applicable to federal employees at the GS-9 level. During her tenure at the Clinic, Schuster received both a within-grade increase in her salary and an increase pursuant to Executive Order. In addition, Schus-ter accumulated annual and sick leave at the same rate as did other federal employees with comparable service. The Order did not provide the NHSC or the Clinic with a replacement when Schuster used sick leave.
While employed by the NHSC, Schuster was paid by checks drawn on the United States Treasury and made payable to her individually. Neither the Clinic nor the NHSC imposed any restriction on her use of payroll checks. Schuster endorsed to the Order each check tendered to her, and she mailed each check to a lockbox maintained by the Order in St. Louis.
Schuster terminated her association with the Clinic in 1982, when the federal funding for her position with the NHSC was discontinued. Upon her separation from the NHSC, Schuster was paid for 128 hours of accrued, but unused, annual leave.
On her 1980 federal income tax return, Schuster reported that she had received $18,771.20 in wages, but that the compensation was not taxable to her because she had received it as an agent on behalf of the Order. On May 14, 1982, the Commissioner of Internal Revenue issued a notice of deficiency to Schuster reflecting his determination that Schuster’s wages were taxable to her individually and not to the Order, because she was not working as an agent of a religious order when she earned her wages. On August 10, 1982, Schuster filed a petition in the Tax Court contesting *676that determination. The Tax Court affirmed the Commissioner’s decision. Schuster then brought this appeal.
On appeal, Schuster makes the following claims: (1) that the Tax Court erred by misstating the applicable principles of agency law, (2) that state law governs whether she should be treated as an agent of her Order, (3) that the Tax Court erred in adopting the Commissioner’s “agency triangle” theory and his conclusion that the employee of one person cannot simultaneously be the agent of another person, and (4) that the Commissioner cannot reverse his previous position on the issue when Congress has acquiesced in it.
The Commissioner argues that the Tax Court correctly concluded that Schuster earned the wages in her individual capacity, relying heavily on the recent decision of the Court of Appeals for the Federal Circuit in Fogarty v. United States, 780 F.2d 1005 (Fed.Cir.1986).
II.
Before discussing the agency issue, which is determinative of the outcome in this case, we must address the preliminary issue raised by Schuster: whether the Commissioner’s agency theory is inconsistent with several published revenue rulings. Schuster argues that, in taking the position he does with respect to her tax status, the Commissioner is attempting to reverse a long-standing administrative position, despite congressional acquiescence in previous revenue rulings advancing that position.
While Schuster may be correct, we need not determine whether there has been or need be consistency among the Commissioner’s positions on the issues presented in this case. The Supreme Court’s decision in Dickman v. Commissioner, 465 U.S. 330, 104 S.Ct. 1086, 79 L.Ed.2d 343 (1984), fully authorizes the Commissioner to change his position on an issue, if he chooses to do so. Id. 104 S.Ct. at 1094. In Dickman, the Commissioner issued notices of gift tax deficiency to a taxpayer who had made interest-free loans. The taxpayer argued that the Commissioner’s position was a departure from prior Internal Revenue Service practice, because prior to 1966 the Commissioner had not construed the gift tax statutes and regulations to authorize the levying of a gift tax on the value of the use of the money. The Supreme Court dismissed the taxpayer’s arguments, stating:
Even accepting the notion that the Commissioner’s present position represents a departure from prior administrative practice, which is by no means certain, it is well established that the Commissioner may change an earlier interpretation of the law, even if such a change is made retroactive in effect. E.g., Dixon v. United States, 381 U.S. 68, 72-75 [85 S.Ct. 1301, 1304-06, 14 L.Ed.2d 223] (1965); Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 183-184 [77 S.Ct. 707, 709-10, 1 L.Ed.2d 746] (1957). This rule applies even though a taxpayer may have relied to his detriment upon the Commissioner’s prior position. Dixon v. United States, supra, at 73 [85 S.Ct. at 1304].
Id. (footnotes omitted). Thus, even assuming the Commissioner has changed his position in the present case regarding whether the wages earned by Schuster would be includable in her gross income, such a change is legally permissible.
III.
Section 61(a)(1) of the Internal Revenue Code of 1954 reads: “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including compensation for services, including fees, commissions, and similar items.” 26 U.S.C. § 61(a)(1) (1982). The fact that compensation for services is in-cludable in gross income nonetheless leaves unsettled the issue of whose gross income is to include that compensation.
Schuster argues that her compensation is not includable in her gross income because she received compensation only as an agent acting on behalf of the Order. The Commissioner, on the other hand, argues that *677Schuster earned the compensation in her individual capacity and that it must be included as a part of her gross income. Because the statute does not address the agency issue, we look elsewhere for guidance in resolving this question.
In Fogarty v. United States, 780 F.2d 1005 (Fed.Cir.1986), the court of appeals thoroughly addressed the issue of whether a member of a religious order, who is subject to a vow of poverty, earns income in an individual, rather than representative, capacity. Id. at 1012-13. In that case, the taxpayer, a Roman Catholic priest, accepted employment as an associate professor at the University of Virginia. He received paychecks from the University made payable to him individually. Under canon law of the Catholic Church, Fogarty was not entitled to keep the amounts earned as compensation; instead, the Order received Fogarty’s paychecks and provided him with a living expense allowance.
After the IRS determined Fogarty was obligated to report the income as his own, he paid it and sought a refund. His refund claims were denied, and he brought suit in the United States Court of Claims. The court of claims granted summary judgment in favor of the government, from which judgment Fogarty appealed.
The Court of Appeals for the Federal Circuit affirmed the court of claims’ decision, stating that the agency determination is a question of law subject to general rules of agency, to be resolved upon consideration of all the underlying facts. The Fo-garty court cited six relevant factors in making this determination: 1) the degree of control exercised by the Order over the member; 2) ownership rights between the member and the Order; 3) the purposes or mission of the Order; 4) the type of work performed by the member vis-a-vis the purposes or mission; 5) the dealings between the member and the third-party employer, including the circumstances surrounding inquiries and interviews, and the control or supervision exercised by the employer; and 6) the dealings between the employer and the Order.
After applying these factors to the facts, the court concluded in Fogarty that the priest had earned the income in his individual capacity, and affirmed the tax court decision. We agree with the Fogarty court’s conclusion that the agency determination requires a flexible test which allows consideration of all the relevant factors. Thus, we also adopt such a flexible test in this case requiring and directing a consideration of all the underlying facts.
In adopting this flexible test approach, we reject the so-called “agency triangle” theory relied upon by the Commissioner. Under the “agency triangle” theory, a finding that the income generated by an individual’s personal services was actually earned on behalf of a separate and distinct principal is premised upon a preliminary finding that a contract or other express agreement existed between the payor of the income and the alleged principal, in which the alleged principal has expressly granted the payor the right to use the individual’s services on the principal’s behalf. Thus, the Commissioner argues, absent a contract between the Order and the NHSC, Schuster could not have earned compensation from the NHSC on behalf of the Order.
As support for this theory, the Commissioner cites Johnson v. United States, 698 F.2d 372 (9th Cir.1982). In Johnson, a professional athlete, who had conveyed the exclusive rights to his personal services to a corporation, contended that the corporation was taxable on amounts paid directly to it by his employer. The court, however, held that the player, and not the corporation, was to be taxed for the earnings. The court stated that, in order for the corporation to be taxed, two requirements must be met: 1) the corporation must have the right to control the player’s services and to negotiate the player’s compensation, and 2) the third-party employer must recognize the corporation’s control over the player. Because the basketball teams employing the player refused to contract with the corporation, the court found that the second requirement had not been met and that the *678earnings were properly taxable to the player.
In our view, the two-part test applied by the Johnson court and the “agency triangle” theory too narrowly restrict the inquiry into an alleged agency relationship. While the dealings between the third-party employer and the alleged principal are an important factor to be considered in assessing the agency determination, there are several other important factors. A flexible test, allowing consideration of all of those factors, better serves our analysis in attempting to determine whether income is to be taxed against the person or entity who actually earned it or against someone else.
IV.
Applying the factors cited by the Fogarty court to the facts in the present case, we conclude that Schuster, like Fogarty, earned her wages in her individual capacity, rather than as an agent on behalf of her Order. This conclusion is supported, first, by examining the degree of control the Order exercised over Schuster. The Order required Schuster to take a vow of obedience, under which Schuster was obligated to subjugate her will to that of the Order. However, Schuster remained free to withdraw from the Order at any time. The Provincial Superior approved Schuster’s acceptance of the job with the Clinic and Schuster’s living expenses. The Order also approved Schuster’s request to apply and interview for positions in health manpower shortage areas and her request to accept the position with the Clinic. While, pursuant to Schuster’s vow of obedience, the Order retained authority to control Schuster’s daily routine, the Order did not in fact exercise such day-to-day control.
Second, Schuster’s entitlement to the compensation was clearly superior to the Order’s. Schuster’s paychecks were made payable to her individually. The fact that she endorsed the checks over to the Order before mailing them to the lockbox maintained by the Order in St. Louis demonstrates the superiority of her control over the wages. In addition, Schuster’s receipt of personal benefit from employment perquisites, such as annual and sick leave, continuing professional education, and malpractice protection in return for her services provides further support for a conclusion that what Schuster earned, she earned individually.
The third and fourth factors cited by the Fogarty court are best considered together: the purpose of the Order and the type of work performed by the member in light of that purpose. The purposes of the Order, generally stated, were to undertake religious and charitable works that promote education and provide health care. Schuster's employment in providing health care services to patients of the Clinic was indisputably consistent with those purposes. Arguably, in these respects, Schus-ter was acting as an agent for the Order and not on her own behalf.
However, when the purpose of the Order and the work of the member are considered in light of the fifth and sixth factors suggested by the Fogarty court, the conclusion seems inescapable that Schuster was not acting merely as an agent of her Order. Factors five and six from Fogarty require an analysis of the dealings between the member, the Order, and the employer, and this analysis is very revealing.
Schuster filed an application for employment with the NHSC. Although she was willing to specify a salary level as a condition of her accepting employment with the NHSC, Schuster said nothing on her application about working as an agent on behalf of her Order. Schuster was interviewed over the telephone by a NHSC employee, but again there was no mention of any agency relationship. Schuster also traveled alone to the Clinic as a prospective NHSC assignee at the NHSC’s expense. Then, when offered the job at the Clinic, Schuster wrote a letter dated July 1, 1979, to the NHSC confirming her acceptance. Schuster’s employment was in no way conditioned upon her status as a member of the Order. Admittedly, the Acting Provincial Administrator of the Order also wrote a letter on July 1, 1979, which appears to *679make an employment offer to the NHSC for Schuster’s services. But, by Schuster’s own admission, she had already accepted an offer on the date the Order’s offer was made. All the contact between Schuster and the NHSC, especially as related to her acceptance of employment, which occurred without reference to or conditioned upon her alleged agency relationship with the Order, suggests that Schuster was not operating as an agent of the Order.
In addition, once employed, Schuster was under the direct supervision and control of the Clinic and the NHSC. In her daily tasks, Schuster was supervised by other Clinic employees. Schuster’s performance was evaluated under the same employee appraisal system used by the Department of Health, Education and Welfare for other civil service employees. The Order was not supervising her work in a day-to-day sense, as evidenced by the fact that the Provincial Superior or another member of the Order’s Placement Board made only periodic visits to the mission site. Though a person may, at times, act as an agent on behalf of two principals, the fact that day-to-day control over Schuster was exercised by the Clinic is, at least, consistent with the conclusion that, in performing her duties as an employee of the Clinic, she was acting on her own behalf.
The dealings between the NHSC, the Clinic, and the Order also evidence a conclusion that Schuster earned wages in her individual capacity. The first contact between the Order, the NHSC, and the Clinic was effected via the July 1, 1979 letters from the Acting Provincial Administrator of the Order to the NHSC and the Clinic. In these letters, Schuster’s services were offered and. a request was made that her wages be paid directly to the Order. The letters also expressly stated that Schus-ter’s services “are performed ... on behalf of the Order as its agent.” The NHSC did not respond to the letter it received. The Director of the Nurse-Midwifery Service at the Clinic sent a reply letter to the Order that, in addition to conveying a formal acceptance of the Order’s offer, took exception with the procedure requested by the Order, directing instead that Schuster’s checks would be made payable to her, making her free to endorse them over to the Order, if that was Schuster’s choice. At most, there was no agreement regarding the manner in which the paychecks would be written. Moreover, when Schuster accepted payment for her services, she accepted it in the form of paychecks made out to her individually. Her failure to insist on direct payment to the Order further disputes her subsequent claim that she had earned her wages as an agent of the Order.
Upon consideration of all of these factors, we conclude that the decision of the tax court should be and is Affirmed.