B-145022, APR. 27, 1961

B-145022: Apr 27, 1961

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THE ACTING JUDGE ADVOCATE GENERAL QUOTES 26 U.S.C. 3122 AS FOLLOWS: "IN THE CASE OF THE TAXES IMPOSED BY THIS CHAPTER WITH RESPECT TO SERVICE PERFORMED IN THE EMPLOY OF THE UNITED STATES OR IN THE EMPLOY OF ANY INSTRUMENTALITY WHICH IS WHOLLY OWNED BY THE UNITED STATES * * * THE DETERMINATION WHETHER AN INDIVIDUAL HAS PERFORMED SERVICE WHICH CONSTITUTES EMPLOYMENT AS DEFINED IN SECTION 3121 (B). OR "/3) ANY INDIVIDUAL (OTHER THAN AN INDIVIDUAL WHO IS AN EMPLOYEE UNDER PARAGRAPH (1) OR (2) ( WHO PERFORMS SERVICES FOR REMUNERATION FOR ANY PERSON. ACCORDING TO SPECIFICATIONS FURNISHED BY THE PERSON FOR WHOM THE SERVICES ARE PERFORMED. ON MATERIALS OR GOODS FURNISHED BY SUCH PERSON WHICH ARE REQUIRED TO BE RETURNED TO SUCH PERSON OR A PERSON DESIGNATED BY HIM.

B-145022, APR. 27, 1961

TO THE SECRETARY OF THE ARMY:

ON MARCH 22, 1961, REFERENCE JAGT 1961/6133, THE ACTING JUDGE ADVOCATE GENERAL SUBMITTED THE REPORT REQUESTED BY US ON MARCH 8, REGARDING THE WITHHOLDING OF INCOME AND FEDERAL INSURANCE CONTRIBUTIONS ACT (FICA) TAXES AND THE PAYMENT OF THE FICA EMPLOYERS' TAX IN CONNECTION WITH PAYMENTS MADE TO INSTRUCTORS, EDUCATIONAL ADVISORS, AND ACADEMIC RECORD CLERKS ENGAGED BY NONPERSONAL SERVICE CONTRACTS UNDER ARMY REGULATION 621-5 AT FORT BLISS, TEXAS.

THE CITED REGULATION DIRECTS PROCUREMENT OF THE PART TIME SERVICES OF THE PERSONNEL IN QUESTION BY NONPERSONAL SERVICE CONTRACT AND REQUIRES DEDUCTION FROM CONTRACT PAYMENTS OF THE REFERRED-TO TAXES AS WELL AS PAYMENT OF EMPLOYERS' FICA TAX BASED UPON SUCH CONTRACT PAYMENTS.

THE ACTING JUDGE ADVOCATE GENERAL QUOTES 26 U.S.C. 3122 AS FOLLOWS:

"IN THE CASE OF THE TAXES IMPOSED BY THIS CHAPTER WITH RESPECT TO SERVICE PERFORMED IN THE EMPLOY OF THE UNITED STATES OR IN THE EMPLOY OF ANY INSTRUMENTALITY WHICH IS WHOLLY OWNED BY THE UNITED STATES * * * THE DETERMINATION WHETHER AN INDIVIDUAL HAS PERFORMED SERVICE WHICH CONSTITUTES EMPLOYMENT AS DEFINED IN SECTION 3121 (B), THE DETERMINATION OF THE AMOUNT OF REMUNERATION FOR SUCH SERVICE WHICH CONSTITUTES WAGES AS DEFINED IN SECTION 3121 (A), AND THE RETURN AND PAYMENT OF THE TAXES IMPOSED BY THIS CHAPTER, SHALL BE MADE BY THE HEAD OF THE FEDERAL AGENCY OR INSTRUMENTALITY HAVING THE CONTROL OF SUCH SERVICE, OR BY SUCH AGENTS AS SUCH HEAD MAY DESIGNATE.'

WE UNDERSTAND HIS VIEW TO BE THAT SECTION 3122 AUTHORIZES THE SECRETARY OF DEFENSE TO APPLY THE TAXES IMPOSED BY THE FEDERAL INSURANCE CONTRIBUTIONS ACT, 26 U.S.C. 3101-3125, TO PAYMENTS MADE TO INDIVIDUALS WITHOUT REGARD TO THE EXISTENCE OF THE EMPLOYER-EMPLOYEE RELATIONSHIP, AND THAT THE SECRETARY OF THE ARMY UNDER DELEGATION OF AUTHORITY CONTAINED IN DEPARTMENT OF DEFENSE DIRECTIVE NO. 5160.24, NOVEMBER 4, 1957, HAS BY THE PROVISIONS OF AR 621-5, DETERMINED THAT THE INDIVIDUALS INVOLVED SHALL BE COVERED BY THE FEDERAL INSURANCE CONTRIBUTIONS ACT.

26 U.S.C. 3121 (D) PROVIDES IN PART:

"FOR PURPOSES OF THIS CHAPTER, THE TERM EMPLOYEE MEANS---

"/1) ANY OFFICER OF A CORPORATION; OR

"/2) ANY INDIVIDUAL WHO, UNDER THE USUAL COMMON LAW RULES APPLICABLE IN DETERMINING THE EMPLOYER-EMPLOYEE RELATIONSHIP, HAS THE STATUS OF AN EMPLOYEE; OR

"/3) ANY INDIVIDUAL (OTHER THAN AN INDIVIDUAL WHO IS AN EMPLOYEE UNDER PARAGRAPH (1) OR (2) ( WHO PERFORMS SERVICES FOR REMUNERATION FOR ANY PERSON---

"/A) AS AN AGENT-DRIVER OR COMMISSION-DRIVER ENGAGED IN DISTRIBUTING MEAT PRODUCTS, VEGETABLE PRODUCTS, FRUIT PRODUCTS, BAKERY PRODUCTS, BEVERAGES (OTHER THAN MILK), OR LAUNDRY OR DRY-CLEANING SERVICES, FOR HIS PRINCIPAL;

"/B) AS A FULL-TIME LIFE INSURANCE SALESMAN;

"/C) AS A HOME WORKER PERFORMING WORK, ACCORDING TO SPECIFICATIONS FURNISHED BY THE PERSON FOR WHOM THE SERVICES ARE PERFORMED, ON MATERIALS OR GOODS FURNISHED BY SUCH PERSON WHICH ARE REQUIRED TO BE RETURNED TO SUCH PERSON OR A PERSON DESIGNATED BY HIM; OR

"/D) AS A TRAVELING OR CITY SALESMAN, OTHER THAN AS AN AGENT-DRIVER OR COMMISSION-DRIVER * * "

CONCEDING THAT THE TERM "EMPLOY" WITHIN THE PURVIEW OF THE FEDERAL INSURANCE CONTRIBUTIONS ACT MAY BE BROADER THAN THE EMPLOYER-EMPLOYEE RELATIONSHIP CONTEMPLATED BY COMMON LAW, WE CANNOT AGREE THAT THE COVERAGE OF THE ACT MAY BY THE EXERCISE OF ADMINISTRATIVE DISCRETION, BE EXTENDED TO INCLUDE SITUATIONS OF EMPLOYMENT NOT COMPREHENDED BY 26 U.S.C. 3121 (B), OR "EMPLOYEES" NOT CONTEMPLATED BY PARAGRAPHS (1), (2) AND (3) OF SUBSECTION 3121 (D). TO VIEW THE SITUATION OTHERWISE, WOULD BE TO HOLD THAT ALL INDIVIDUAL INDEPENDENT CONTRACTORS WITH THE GOVERNMENT MIGHT--- IN THE EXERCISE OF ADMINISTRATIVE DISCRETION--- BE BROUGHT WITHIN THE COVERAGE OF THE ACT. WE FIND NOTHING IN THE ACT OR IN ITS LEGISLATIVE HISTORY THAT WOULD SUSTAIN SUCH A POSITION.

IF IT BE ESTABLISHED AS A MATTER OF LAW THAT THE INDIVIDUALS HERE CONCERNED ARE IN FACT INDEPENDENT CONTRACTORS OUR VIEW IS THAT THE APPROPRIATIONS INVOLVED LAWFULLY MAY BE OBLIGATED ONLY TO THE EXTENT OF THE CONTRACT PRICE OF PROCURING THE NECESSARY SERVICE. SINCE 26 U.S.C. 3111 IMPOSES ON EMPLOYERS AN ADDITIONAL OBLIGATION TO CONTRIBUTE AN EXCISE TAX OVER AND ABOVE THE PAYMENT OF WAGES WE ARE ESPECIALLY CONCERNED WITH THE ANOMALOUS SITUATION CREATED BY REGARDING THE INDIVIDUALS AS INDEPENDENT CONTRACTORS ON THE ONE HAND AND AS EMPLOYEES ON THE OTHER.

REGARDING THE COLLECTION OF INCOME TAX AT SOURCE ON WAGES, REQUIRED BY 26 U.S.C. 3401 ET SEQ., EVEN LESS AUTHORITY IS FOUND FOR SUCH PRACTICE THAN APPEARS TO EXIST FOR THE WITHHOLDING AND CONTRIBUTIONS REQUIRED UNDER THE FEDERAL INSURANCE CONTRIBUTIONS ACT.

THEREFORE, IF THE INDIVIDUALS HERE CONCERNED ARE IN FACT INDEPENDENT CONTRACTORS RATHER THAN EMPLOYEES UNDER THE USUAL COMMON LAW RULES APPLICABLE IN DETERMINING THE EMPLOYER-EMPLOYEE RELATIONSHIP (SEE SUBSECTION 3121 (D) (2) (, WE FEEL THAT THE PRESENT PRACTICE OF WITHHOLDING TAXES AND PARTICULARLY THE CONTRIBUTIONS MADE FROM APPROPRIATED FUNDS ARE IMPROPER.

WE SHOULD APPRECIATE YOUR INFORMING US OF THE ACTION TAKEN BY THE DEPARTMENT PURSUANT TO THIS DECISION.