Court Opinion

ID: 9399043
Source: CourtListenerOpinion
Date Created: 2023-06-01 18:03:49.206231+00
Date Added: 2024-06-11T17:19:38.313420
License: Public Domain

IN THE
            ARIZONA COURT OF APPEALS
                            DIVISION ONE

 LAW OFFICE OF ANNE BRADY, PLLC, dba BRADY’S TAX SERVICE,
                       Appellant,

                                   v.

  STATE OF ARIZONA, DEPARTMENT OF ECONOMIC SECURITY,
                      ESA TAX UNIT,
                         Appellee.

                         No. 1 CA-TX 20-0011
                           FILED 6-1-2023

                  Appeal from the Arizona Tax Court
                         No. TX 2020-000688
                 The Honorable Danielle J. Viola, Judge

                             AFFIRMED

                              COUNSEL

Law Office of Anne Brady, PLLC, Phoenix
By Anne Brady
Counsel for Appellant

Arizona Attorney General’s Office, Tucson
By Michelle Nimmo
Counsel for Appellee
                    BRADY v. ADES/ESA TAX UNIT
                        Opinion of the Court

                                OPINION

Presiding Judge D. Steven Williams delivered the opinion of the court, in
which Judge David B. Gass and Judge James B. Morse Jr. joined.

W I L L I A M S, Judge:

¶1           The Law Office of Anne Brady, PLLC, d/b/a Brady’s Tax
Service (“Brady’s Tax Service”), challenges the tax court’s judgment
upholding the Arizona Department of Economic Security’s (“ADES”)
determination of unemployment insurance tax liability on commissions it
paid to two tax preparers. Because the record supports the tax court’s
conclusion that the tax preparers did not operate “independent of the
control of the employing unit, other than that required by the internal
revenue service for correct preparation of the returns,” they were not
exempt under A.R.S. § 23-617(23) for unemployment insurance tax
purposes. We further strike down Arizona Administrative Code (“A.A.C.”)
R6-3-1720(B)(4) because it contravenes A.R.S. § 23-617(23). Accordingly, we
affirm.

               FACTUAL AND PROCEDURAL HISTORY

¶2             Anne Brady, an attorney, owned and operated Brady’s Tax
Service, an income tax preparation business. Her husband, Richard Brady,
worked for Brady’s Tax Service as an enrolled agent (an individual
designated by the Internal Revenue Service (“IRS”) authorized to prepare
tax returns). Between 2015 and 2018, Brady’s Tax Service paid Frank Fieszel,
also an enrolled agent, to prepare tax returns for the business’s clients. As
outlined in their written agreement, Fieszel worked as an independent
contractor and Brady’s Tax Service paid him on a commission-only basis
for each tax return he prepared. Under the parameters established by
Brady’s Tax Service, Fieszel performed all work on the business’s premises
during regular business hours, using only the business’s computers and
software. The Bradys supervised Fieszel, a computer software program
tracked his time, Richard Brady reviewed and signed all tax returns Fieszel
prepared, and Brady’s Tax Service retained all copies of those returns.
Brady’s Tax Service did not pay unemployment insurance tax on payments
it made to Fieszel.

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                    BRADY v. ADES/ESA TAX UNIT
                        Opinion of the Court

¶3            In 2017, Brady’s Tax Service employed Connor Webb in a
support staff position and paid unemployment insurance tax on wages paid
to him. Apart from providing clerical support, Webb prepared tax returns
using the business’s tax preparation software. When Webb’s employment
ended, he applied for and received unemployment benefits.

¶4            In 2018, Brady’s Tax Service rehired Webb to prepare tax
returns as an independent contractor. As with Fieszel, Brady’s Tax Service
paid Webb on a commission-only basis and required him to perform all
work onsite, using only the business’s computers and software. Likewise, a
computer program tracked Webb’s time, the Bradys supervised his work,
Richard Brady reviewed and signed all tax returns he prepared, and
Brady’s Tax Service retained all copies of the returns. Brady’s Tax Service
did not pay unemployment insurance tax on payments it made to Webb in
2018.

¶5           In 2018, ADES audited Brady’s Tax Service from January 1,
2017 through June 30, 2018 for compliance with the unemployment
insurance tax program. ADES then issued a Determination of
Unemployment Insurance Liability, finding the commissions Brady’s Tax
Service paid Fieszel and Webb during the audit period constituted wages
for purposes of the unemployment insurance tax. Brady’s Tax Service
challenged the determination and ADES affirmed it on reconsideration.

¶6            Brady’s Tax Service then petitioned for review before the
Appeals Board, which conducted an evidentiary hearing. Brady’s Tax
Service asserted that Fieszel and Webb worked as independent contractors,
not employees, but, regardless of their status, A.R.S. § 23-617(23) exempted
their tax preparation services from unemployment insurance coverage.

¶7            Applying A.R.S. § 23-617(23) and its implementing
regulation, A.A.C. R6-3-1720(B)(4), the Appeals Board concluded that
Fieszel and Webb worked for Brady’s Tax Service as employees rather than
independent contractors. Evaluating the indicia of control, the Appeals
Board found: (1) Brady’s Tax Service required the tax preparers to perform
their work exclusively on the business’s premises, (2) Brady’s Tax Service
required the tax preparers to perform their work using only the business’s
computers and software, (3) Brady’s Tax Service restricted the tax
preparers’ working hours to the business’s normal hours, (4) Anne and
Richard Brady supervised the tax preparers as they worked, (5) Richard
Brady reviewed and signed all returns prepared by the tax preparers, and
(6) Brady’s Tax Service retained all records of the returns. Despite
recognizing the tax preparers’ flexibility in determining their own

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                      BRADY v. ADES/ESA TAX UNIT
                          Opinion of the Court

schedules, albeit limited to regular business hours, the Appeals Board
determined Fieszel and Webb “were denied control and gave up control”
to Brady’s Tax Service, pointing specifically to Richard Brady’s signing of
all completed tax returns and the business’s retention of all copies of the
returns. Given its findings and conclusions, the Appeals Board affirmed
ADES’s reconsidered determination of unemployment insurance tax
liability.

¶8            Brady’s Tax Service appealed the final administrative
decision to the tax division of the superior court, which affirmed the
Appeals Board’s decision. This timely appeal followed. We have
jurisdiction under Article 6, Section 9, of the Arizona Constitution and
A.R.S. §§ 12-120.21(A)(1), -2101(A)(1), and 41-1994.

                                 DISCUSSION

¶9            Without challenging the determination that Fieszel and Webb
operated as employees rather than independent contractors, see Van Loan v.
Van Loan, 116 Ariz. 272, 274 (1977) (“The failure to raise an issue . . . in briefs
on appeal constitutes a waiver of the issue.”), Brady’s Tax Service contends
that A.R.S. § 23-617(23) exempted their services from the state
unemployment insurance program. In making this argument, Brady’s Tax
Service challenges the tax court’s interpretation of both A.R.S. § 23-617(23)
and A.A.C. R6-3-1720(B)(4) and argues that, as applied, the regulation
impermissibly conflicts with the statute.

¶10             On review of a final administrative decision, we must “affirm
the agency action unless . . . [it] is contrary to law, is not supported by
substantial evidence, is arbitrary and capricious or is an abuse of
discretion.” A.R.S. § 12-910(F). But we review statutory interpretation de
novo. Pinal Vista Props., L.L.C. v. Turnbull, 208 Ariz. 188, 190, ¶ 6 (App. 2004).
“Statutory interpretation requires us to determine the meaning of the words
the legislature chose to use.” S. Ariz. Home Builders Ass’n v. Town of Marana,
522 P.3d 671, 676, ¶ 31 (Ariz. 2023). “Absent ambiguity or absurdity, our
inquiry begins and ends with the plain meaning of the legislature’s chosen
words . . . .” Welch v. Cochise Cnty. Bd. of Supervisors, 251 Ariz. 519, 523, ¶ 11
(2021).

¶11            We apply the same principles of construction to the
interpretation of administrative regulations. Stapert v. Ariz. Bd. of Psych.
Exam’rs, 210 Ariz. 177, 179, ¶ 7 (App. 2005). An agency regulation, however,
“is of no effect to the extent that it conflicts with the proper interpretation
of a statute.” Pima Cmty. Coll. v. Ariz. Dep’t of Econ. Sec., 148 Ariz. 302, 304

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                     BRADY v. ADES/ESA TAX UNIT
                         Opinion of the Court

(App. 1986); see also Dioguardi v. Superior Court, 184 Ariz. 414, 417 (App.
1995) (providing that an appellate court will strike down an agency’s rule
that “would defeat the legislative purpose”).

¶12            The legislature enacted the Employment Security Act (“the
Act”), A.R.S. §§ 23-601 to -799.01, “to allow compensation for a limited
period to those who are capable of working and available for work and are
involuntarily unemployed through no fault of their own.” Ferguson v. Ariz.
Dep’t of Econ. Sec., 122 Ariz. 290, 291 (App. 1979); see also A.R.S. § 23-601
(stating the underlying policy of the Act is that “the public good and the
general welfare of the citizens of this state require the enactment of this
measure, under the police powers of the state, for the compulsory setting
aside of unemployment reserves to be used for the benefit of persons
unemployed through no fault of their own”). Because the Act is remedial,
we must construe it “to include as many types of employment relationships
as possible,” Ariz. Dep’t of Econ. Sec. v. Little, 24 Ariz. App. 480, 483 (1975),
and an employing unit seeking exemption from payment of unemployment
contributions bears the burden of showing that its workers were free from
control other than that expressly permitted, First Nat’l Benefit Soc’y v. Sisk,
65 Ariz. 1, 6–7 (1946).

¶13           Under the Act, certain types of employment are “not
considered in determining whether an employing unit constitutes an
‘employer’” for the purpose of unemployment insurance coverage,
including, in relevant part:

       (23) Services performed by an individual for an employing
       unit in the preparation of tax returns and related schedules
       and documents, if all services are performed for remuneration
       solely by way of commissions, independent of the control of the
       employing unit, other than that required by the internal revenue
       service for correct preparation of the returns . . . .

A.R.S. § 23-617(23) (emphasis added).

¶14          Given a plain reading, the statute exempts from
unemployment insurance coverage the services of a tax preparer if
performed on a commission-only basis and independent of unnecessary
control. But the statute does not expressly delineate the parameters of
permissible control.

¶15           Under the last antecedent rule, “a qualifying phrase [is]
applied to the word or phrase immediately preceding as long as there is no
contrary intent indicated.” Phoenix Control Sys., Inc. v. Ins. Co. of N. Am., 165

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                     BRADY v. ADES/ESA TAX UNIT
                         Opinion of the Court

Ariz. 31, 34 (1990). Applying this rule of construction to A.R.S. § 23-617(23),
the phrase “other than that required by the internal revenue service for
correct preparation of the returns” modifies the preceding phrase
“independent of the control of the employing unit.” Read with that
understanding, the permissible control exercisable by the employing unit
—to maintain the exemption for a tax preparer’s services—is limited to the
control the IRS requires employing units to exercise to ensure the correct
preparation of tax returns. “This interpretation is [also] supported by the
principle that each word or phrase in a statute must be given meaning so
that no part is rendered void, superfluous, contradictory, or insignificant.”
Obregon v. Indus. Comm’n, 217 Ariz. 612, 615, ¶ 16 (App. 2008). A contrary
interpretation would render the phrase “independent of the control of the
employing unit” meaningless. See Collins v. State, 166 Ariz. 409, 415 (App.
1990) (providing that we apply a sensible construction to avoid absurd
results). Stated differently, A.R.S. § 23-617(23) exempts the services of a tax
preparer from unemployment insurance coverage insofar as the employing
unit exercises no control over the tax preparer except for that required of
the employing unit by the IRS for the correct preparation of returns.

¶16          Here, without question, Brady’s Tax Service paid Fieszel and
Webb to prepare tax returns on a commission-only basis. Whether A.R.S.
§ 23-617(23) exempted the tax preparers’ services from unemployment
insurance coverage, therefore, turns on whether Brady’s Tax Service
exercised control over them other than that required by the IRS.

¶17            Because the Act does not identify what controls the IRS
requires, it necessarily incorporates not only the regulations promulgated
by the IRS, but also the enabling legislation—the Internal Revenue Code, 26
U.S.C. § 1 et seq. But the Appeals Board and tax court instead looked to
A.R.S. § 23-617(23)’s implementing regulation, A.A.C. R6-3-1720(B),
concluding that Brady’s Tax Service deprived Fieszel and Webb of the
control that the IRS required them to exercise by denying them the
opportunity to sign and keep copies of the returns they prepared.1 Under
the interpretation adopted by both the Appeals Board and the tax court, the
services of a tax preparer are statutorily exempt only if the tax preparer,
personally, complies with A.A.C. R6-3-1720(B)(4).

¶18           The regulation provides, in relevant part:

1Although both the Appeals Board and the tax court found that Fieszel and
Webb were not “permitted to retain copies of the returns,” the record
reflects only that Brady’s Tax Service retained all copies of the returns.

                                      6
                   BRADY v. ADES/ESA TAX UNIT
                       Opinion of the Court

      (B) Income Tax Preparers. This subsection governs the
      determination of whether employment is exempt under
      A.R.S. § 23-617(23).

      ...

             4. The services of the tax preparer will not be exempt if
             such individual doing the work is subject to any
             controls, whether exercised or not, other than those
             required by the IRS. The IRS exercises control over tax
             preparers by imposing a penalty if the tax preparer:

                    a. Does not sign the return (manual signature).

                    b. Does not furnish an employer’s ID number
                    and a Social Security Number.

                    c. Does not show the business address where
                    the return was completed.

                    d. Does not keep copies or records of a return
                    for three years available for inspection by the
                    IRS.

                    e. Does not provide a copy of the complete
                    return to the taxpayer.

                    f. Negligently or intentionally disregards the
                    rules and regulations for preparing tax returns.

                    g. Willfully understates tax liability (preparer
                    must ask reasonable questions when the
                    information furnished by the taxpayer seems to
                    be incomplete or incorrect, and some
                    deductions require specific documentation
                    which a preparer must be satisfied actually
                    exists).

                    h. Endorses a refund check (excepting bank tax
                    preparers).

                    i. Does not file an annual information report,
                    Form 5717, by July 31 of each year.

A.A.C. R6-3-1720(B)(4) (emphasis added).

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                      BRADY v. ADES/ESA TAX UNIT
                          Opinion of the Court

¶19           We interpret A.A.C. R6-3-1720(B)(4) to “further the statutory
policy contained in its enabling legislation.” Marlar v. State, 136 Ariz. 404,
411 (App. 1983). Our reading of the regulation, therefore, is informed by
our holding that A.R.S. § 23-617(23) exempts a tax preparer’s services from
unemployment insurance coverage only if the employing unit exercises no
control over the tax preparer other than that required of the employing unit
by the Internal Revenue Code and the IRS for the correct preparation of
returns. We will strike down a regulation that defeats its statutory purpose.
See Maldonado v. Ariz. Dep’t of Econ. Sec., 182 Ariz. 476, 478 (App. 1994)
(providing a regulation which defeats the legislative purpose behind its
enabling legislation must be stricken down).

¶20             By adding the list in subsections (a) through (i), ADES
impermissibly restricted the intended scope of the statutory exemption. See
Pima Cmty. Coll., 148 Ariz. at 303–04 (striking down ADES regulation
defining a student as “an individual registered for full-time attendance”
because      it    impermissibly      limited     the    scope    of    A.R.S.
§ 23-617(9), which exempted from unemployment insurance coverage
“students enrolled and regularly attending classes” at a college or
university). While A.R.S. § 23-617(23) authorizes an employing unit to
exercise control over the tax preparer to the extent required by the IRS for
the correct preparation of returns, the regulation delimits the permissible
control exercisable by an employing unit to only enforcing compliance with
certain, enumerated IRS rules for which the IRS directly imposes a penalty
on noncomplying tax preparers. Whether the list is construed as delineating
the only controls an employing unit may impose without running afoul of
the exemption or establishing controls an employing unit must impose for
the exemption to apply, its application conflicts with the intent and
language of the statute it was meant to implement. Because the narrow
scope of the implementing regulation contravenes the legislative purpose,
it cannot stand. Accordingly, we strike down A.A.C. R6-3-1720(B)(4)
holding it void and of no effect. See A.R.S. § 23-617(23); Pima Cmty. Coll., 148
Ariz. at 304 (striking down agency regulation when it “impermissibly
restricted the intended scope of the statutory exemption”).

¶21            Guided by A.R.S. § 23-617(23), the Internal Revenue Code,
and the applicable IRS regulations, we must determine whether, by signing
and retaining all copies of the returns prepared by Fieszel and Webb,
Brady’s Tax Service exceeded the control required of it for the correct
preparation of returns. Under 26 U.S.C. § 6695(b), “[a]ny person who is a
tax return preparer with respect to any return . . . who is required by [IRS]
regulations . . . to sign such return . . . shall pay a penalty [for failure to sign
the return].” Of particular relevance here, a corresponding IRS regulation

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                     BRADY v. ADES/ESA TAX UNIT
                         Opinion of the Court

distinguishes between “a signing tax return preparer”—an “individual tax
return preparer who has the primary responsibility for the overall
substantive accuracy of the preparation of such a return”—and a
“non-signing tax return preparer”—a “tax return preparer who is not a
signing tax preparer but who prepares all or a substantial portion of a
return.” 26 C.F.R. § 301.7701-15(b)(1), (b)(2)(i).

¶22           Applying these provisions, Richard Brady, by reviewing each
of the tax preparers’ returns, assumed the primary responsibility for
ensuring the overall accuracy of the returns. See 26 C.F.R.
§ 301.7701-15(b)(1). Therefore, Richard Brady was required to sign the
returns, not Fieszel and Webb. See 26 C.F.R. § 1.6695-1(b). As such, Brady’s
Tax Service did not exceed the authority required of it under the Internal
Revenue Code and applicable IRS regulations when Richard Brady signed
the returns that Fieszel and Webb prepared.

¶23           Likewise, the Internal Revenue Code requires only signing
tax return preparers to retain copies of their signed returns for the
three-year period after the close of the return. 26 U.S.C. § 6107(b), (c) (noting
that, by regulation, when two or more persons are tax return preparers with
respect to the same return, compliance with the requirement of subsection
(b) by one tax return preparer shall be deemed to be compliance with the
requirements of such subsection by the other tax return preparer); 26 C.F.R.
§ 1.6107-1(b)(i)(A) (providing only the signing tax return preparer is
required to keep a copy of the return). In this case, the signing tax return
preparer, Richard Brady, complied with the statute when Brady’s Tax
Service maintained copies of the tax returns.

¶24           Given the limited scope of their services and Richard Brady’s
supervisory role, neither Fieszel nor Webb was required to sign or maintain
the tax returns they prepared. Accordingly, Brady’s Tax Service did not
impose controls beyond that required by the Internal Revenue Code and
applicable IRS regulations—or fail to impose necessary controls—when
Richard Brady signed the tax returns Fieszel and Webb prepared, and the
business retained all copies of the returns.

¶25            This determination does not, however, end our inquiry.
ADES contends that Brady’s Tax Service imposed other, disqualifying
controls. Specifically, ADES asserts that Brady’s Tax Service impermissibly
required the tax preparers to perform all their work exclusively on the
business’s premises during regular business hours and using only the
business’s computers and software. In response, Brady’s Tax Service argues
that federal regulations necessitated these controls.

                                       9
                     BRADY v. ADES/ESA TAX UNIT
                         Opinion of the Court

¶26            Citing 31 U.S.C. § 330, which governs the practice of
representatives before the United States Department of the Treasury, and
its implementing regulation, 31 C.F.R. § 10.22, which imposes a standard of
due diligence on such practitioners, Brady’s Tax Service contends that
because it relied on the tax preparers’ work product, it was required to use
“reasonable care in engaging, supervising, training and evaluating” them.
31 C.F.R. § 10.22(b). In other words, Brady’s Tax Service argues that the
Bradys only exerted control over the tax preparers as necessary to comply
with their federal due diligence requirements. Relying on Loving v. IRS, 742
F.3d 1013 (D.C. Cir. 2014), ADES counters that 31 U.S.C. § 330 has no
application here because the tax preparers were not appearing before the
Department of the Treasury.

¶27           In Loving, three tax return preparers sued the IRS, challenging
the validity of regulations that required tax preparers to pass a qualifying
exam, pay annual fees, and complete 15 hours of continuing-education
courses each year. Id. at 1014–15. The tax preparers argued the regulations
impermissibly exceeded the scope of the enabling statute, see 31 U.S.C.
§ 330(a)(1), which allows for the IRS to “regulate the practice of
representatives of persons before the Department of the Treasury.” Loving,
742 F.3d at 1014. The United States Court of Appeals for the D.C. Circuit
held the regulations invalid as applied to tax preparers whose actions in
merely preparing a return cannot be equated to “practice . . . before the
Department of the Treasury.” Id. at 1016–18. Indeed, the Circuit Court made
clear “that the IRS’s statutory authority under [31 U.S.C. § 330] cannot be
stretched so broadly as to encompass authority to regulate tax-return
preparers.” Loving, 742 F.3d at 1015.

¶28           Although ADES correctly points out that 31 U.S.C. § 330 and
its implementing regulation did not govern the tax preparers’ work in this
case, Loving does not relieve practitioners, including the Bradys, of their due
diligence obligations. 31 C.F.R. §§ 10.2(a)(5), 10.3(a), (c), 10.22(b).
Nonetheless, applying 31 C.F.R. § 10.22(b) here, we conclude Brady’s Tax
Service failed to show that the contested controls were necessary to ensure
the accuracy of the tax preparers’ returns. To be sure, the Appeals Board
found that Fieszel and Webb (1) “were required to use [Brady’s Tax
Service’s] computers and software exclusively”; (2) “could not work
remotely, and they could not put a copy of the software on their own
business computers or laptops”; and (3) “were precluded from purchasing
professional tax preparation software elsewhere and running it on their
[business] computers.” Record evidence supports these findings. And Anne
Brady testified that Brady’s Tax Service required the tax preparers to
perform all their work exclusively on the business’s premises during

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                     BRADY v. ADES/ESA TAX UNIT
                         Opinion of the Court

regular business hours to protect client confidentiality, not to ensure the
correct preparation of the tax returns.

¶29            While the federal regulations required the Bradys to exercise
due diligence before relying on the tax preparers’ work, Brady’s Tax Service
has not pointed to any evidence, and our review of the record reveals none,
that it was required to impose the controls at issue. Given (1) the remedial
nature of the Act, (2) our obligation to construe it “to include as many types
of employment relationships as possible,” Little, 24 Ariz. App. at 483, and
(3) Brady’s Tax Service’s failure to demonstrate that all of the controls it
imposed on the tax preparers were necessary to ensure the accuracy of the
returns, First Nat’l Benefit Soc’y, 65 Ariz. at 6–7, we conclude that A.R.S. §
23-617(23) did not exempt the tax preparers’ services from unemployment
insurance coverage. See Glaze v. Marcus, 151 Ariz. 538, 540 (App. 1986)
(explaining appellate courts will uphold a superior court’s ruling if “correct
for any reason, even if that reason was not considered by the [superior]
court”). To be sure, an employer can impose lawful controls over its
employees as it sees fit, including reasonable restrictions to protect client
confidentiality, but it cannot claim an exemption from the unemployment
insurance tax program if those controls exceed the parameters established
by A.R.S. § 23-617(23).

                              CONCLUSION

¶30           For the foregoing reasons, we affirm the determination of the
tax court. As the prevailing party, ADES may recover its costs on appeal
upon compliance with Arizona Rule of Civil Appellate Procedure 21.

                          AMY M. WOOD • Clerk of the Court
                          FILED: AA

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