876 F2d 896 Gamal-Eldin v. Commissioner of Internal Revenue
876 F.2d 896
NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.
Atef A. GAMAL-ELDIN; Dee H. Gamal-Eldin, Petitioners-Appellants,
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted May 11, 1989.
Decided June 2, 1989
Before JAMES R. BROWNING, CYNTHIA HOLCOMB HALL and LEAVY, Circuit Judges.
Appellants timely appeal from the decision of the United States Tax Court which held that appellants were subject to self-employment tax on taxpayer's1 1984 earnings from the Egyptian law firm of Gamal-Eldin, Khalil, Abu Bakr & Associates (hereinafter "the firm") under section 1401 of the Internal Revenue Code of 1954.2 Taxpayer challenges the tax court's rejection of his argument that he was an "employee" of the firm, and thereby exempt from self-employment tax under section 1402(c)(2) of the Code. Taxpayer further contends that the tax court: (1) failed to consider Egyptian law in determining whether an employer-employee relationship existed between taxpayer and the firm; and (2) erred in its factual findings. We conclude that taxpayer failed to prove he was an "employee" of the firm for purposes of exemption from the self-employment tax, and we affirm.
* The facts underlying the determination of an individual's status as an employee or an independent contractor will not be disturbed on appeal unless it is clearly erroneous. General Inv. Corp. v. United States, 823 F.2d 337, 341 (9th Cir.1987); McGuire v. United States, 349 F.2d 644, 646 (9th Cir.1965). The legal effect of those facts--whether taxpayer was an "employee" for purposes of section 1402 of the Code under the common law rules--is a question of law which we review de novo. Bonnette v. California Health and Welfare Agency, 704 F.2d 1465, 1469 (9th Cir.1983), cited in In re Brown, 743 F.2d 664, 666 (9th Cir.1984).
The burden of proof to show that the Commissioner's determination regarding the existence of an employment relationship between taxpayer and the firm was incorrect falls on taxpayer. Baxter v. C.I.R., 816 F.2d 493, 495 (9th Cir.1987) (citing Welch v. Helvering, 290 U.S. 111, 115 (1933) (Commissioner's ruling has support of presumption of correctness, and petitioner has the burden of proving it to be wrong)).
Taxpayer contends that the tax court should have applied Egyptian law in determining whether he was an "employee" of the firm. Taxpayer further argues that the tax court improperly avoided the conflict of law issue entirely in its analysis.
Section 1401 of the Internal Revenue Code of 1954-3 imposes a tax on "self-employment income,"4 as defined by section 1402(b),5 in order to fund social security benefits for self-employed individuals. United States v. Lee, 455 U.S. 252, 258 (1982) (the social security system requires support by mandatory and continuous contributions). Section 1402(c)(2), however, provides that net earnings derived from the performance of service by an individual as an "employee" does not qualify as "self-employment income" and need not be taxed under section 1401 of the Code. 26 U.S.C. Sec. 1402(c)(2) (1954). Under section 1402(d), the "term 'employee' ... shall have the same meaning as when used in chapter 21 (sec. 3101 and following, relating to Federal Insurance Contributions Act)." Id. at Sec. 1402(d). Section 3121(d)(2) defines "employee" as "any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee." Id. at Sec. 3121(d)(2), quoted in McGuire, 349 F.2d at 646 n. 1; see also General Inv. Corp., 823 F.2d at 341.
Consequently, because Congress has specifically provided under the Code that "the usual common law rules" are to be applied in determining whether an employer-employee relationship exists for purposes of the self-employment tax, taxpayer's argument that Egyptian law should be considered in determining the existence of such a relationship lacks merit. See General Inv. Corp., 823 F.2d at 341; McGuire, 349 F.2d at 645-46. Similarly, because the common law determines "employee" status, Egyptian law is irrelevant, and there is no conflict of law issue.6
Taxpayer contends that the tax court's factual finding that he was not an "employee" was erroneous. Generally, courts look to several factors in determining whether an individual who performs services for another is an "employee" or independent contractor. The most critical factor to consider is the right of the purported employer to control the manner and means of accomplishing the result desired. General Inv. Corp., 823 F.2d at 341-42 (employer control over the manner in which the work is performed, "either actual or the right to it, is the basic test"); McGuire, 349 F.2d at 646; see also United States v. Silk, 331 U.S. 704, 714 (1946). If the employer has the authority to exercise complete control, whether or not that authority is actually exercised with respect to all details, then an employer-employee relationship exists. See General Inv. Corp., 823 F.2d at 341-42; McGuire, 349 F.2d at 646. However, if taxpayer is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, then he is an independent contractor.7 See Silk, 331 U.S. at 714 n. 8 (quoting Treas.Reg. Sec. 90, 26 C.F.R. Sec. 400.205); General Inv. Corp., 823 F.2d at 341-42; McGuire, 349 F.2d at 646. Another important factor to consider is taxpayer's opportunity for profit or loss in his employment. Silk, 331 U.S. at 716; Real v. Driscoll Strawberry Assoc. Inc., 603 F.2d 748, 754 (9th Cir.1979) (citing Avis Rent A Car System, Inc. v. United States, 503 F.2d 423, 429 (2d Cir.1974)).8
Applying these factors to the present case, it is evident that taxpayer is not an "employee" of the firm. It appears that taxpayer had the right to direct and control the manner and methods in which his legal work was performed. In addition to being one of the founders and one of the first senior partners of the firm, the record shows that taxpayer was the most educated and senior in age, and that the firm needed him for his knowledge of foreign laws, American law, conflict of laws, comparative law and multinational disputes. It is also clear from the record that other members of the firm relied upon him and that the firm itself was economically dependent upon him because of his expertise in international law. Taxpayer did testify that the needs of the firm's clients determined his assignment and that the firm's lawyers assigned cases to him. Despite this assignment process, however, there is clearly no one in the firm who could have reviewed his assigned work product in any meaningful way simply because there was no one senior to him in ability or knowledge in matters of international law.
It is evident from the firm's consent to restructure its relationship with taxpayer from senior partner to senior consultant that taxpayer exercised significant control over the firm even as he surrendered his partnership status.9 Furthermore, there is no evidence that anyone in the firm exercised any more control over the details of taxpayer's work after the restructuring than before. On the contrary, the record shows that the restructuring was merely a change in form designed solely to alter taxpayer's status for Egyptian tax purposes.
In sum, we are not persuaded that taxpayer was actually relegated to the status of "employee," or that such designation was even contemplated, after the restructure because there is no evidence that the firm ever directed or controlled the details of the work that taxpayer performed on non-Egyptian matters. The tax court was, therefore, correct in finding that taxpayer "retained the right to direct the manner and the methods in which his legal work was performed." See Atef A. Gamal-Eldin, p 88,150 PH Memo T.C. 805, 806-807.
Additionally, although the precise nature of taxpayer's compensation agreement with the firm is not clear from the record, it appears that taxpayer did have an opportunity for profit or loss. He was not paid a salary for his services,10 but rather his compensation was dependent on the amount of the firm's earnings from non-Egyptian sources. Thus, on the state of the record, the tax court properly found that taxpayer did have an opportunity for profit commensurate with the level of non-Egyptian matters undertaken by him on behalf of the firm. See id. at 807-808.
In conclusion, the factual findings of the tax court are not clearly erroneous. The factors of control and of opportunity for loss or profit strongly support the tax court's conclusion that taxpayer is not an "employee." Taxpayer had the burden of proof to show that he was an "employee" of the firm, which he failed to do.11
The judgment of the tax court is, therefore, affirmed.12
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3
Appellants Atef A. and Dee H. Gamal-Eldin both appeal from the decision of the tax court. The appeal, however, centers around Atef A. Gamal-Eldin's employment status with the Egyptian law firm. Thus, we will refer only to Atef A. Gamal-Eldin, with the designation of "taxpayer." Our disposition of this issue, however, also disposes of Dee H. Gamal-Eldin's appeal
Section 2 of the Tax Reform Act of 1986, Pub.L. No. 99-514, 100 Stat. 2085, has redesignated the "Internal Revenue Code of 1954" "as heretofore, hereby, or hereafter amended" the "Internal Revenue Code of 1986." The tax year involved in this case, however, antedates the Tax Reform Act of 1986. Accordingly, references to the Internal Revenue Code provisions at issue here will be to the Internal Revenue Code of 1954, unless otherwise indicated
26 U.S.C. Sec. 1401 (1954)
Section 911 of the Code provides that income earned by an individual from sources within a foreign country is excluded from gross income if a taxpayer so elects. 26 U.S.C. Sec. 911 (1954). Under section 1402(a)(11), however, for taxable years beginning in 1984, self-employment tax is imposed by section 1401 on self-employment income irrespective of whether section 911 has been properly elected to exclude those same earnings from gross income for income tax purposes. 26 U.S.C. Sec. 1402(a)(11) (1986)
Section 1402(b) defines "self-employment income" as the "net earnings from self-employment derived by an individual." 26 U.S.C. Sec. 1402(b) (1954). "Net earnings from self-employment" is defined by section 1402(a) as "the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business." Id. at Sec. 1402(a)
Under section 1, every citizen of the United States is subject to United States income tax on his worldwide income. 26 U.S.C. Sec. 1 (1954). An individual normally possesses only one citizenship. Egypt, however, confers citizenship on Egyptians who have also become naturalized citizens of the United States. Nevertheless, a United States citizen who maintains dual citizenship still remains subject to United States tax. Cf. United States v. Matheson, 532 F.2d 809, 816-17 (2d Cir.), cert. denied, 429 U.S. 823 (1976)
In this case, taxpayer is a citizen of the United States. Accordingly, that taxpayer was also a citizen of Egypt and earned income in Egypt is irrelevant in determining his liability under Section 1401 of the Code.
Individuals who perform services as independent contractors are not employees. Silk, 331 U.S. at 714 n. 8. "Generally, ... lawyers ... are independent contractors and not employees." Id. (quoting Treas.Reg. Sec. 90, 26 C.F.R. Sec. 400.205)
The courts also look to other common-law factors to define a taxpayer's employment status. Among them are: (1) whether the individual in question invests in the facilities used in his work; (2) whether or not the principal has the right to discharge the individual; (3) whether the work is part of the principal's regular business; (4) the permanency of the relationship; and (5) the relationship the parties believe they are creating. See General Inv. Corp., 823 F.2d at 342 (citing Treas.Reg. Secs. 3121(d)-1(c)(2), 31.3306(i)-1(b), 31.340(c)(1)(b)); Real, 603 F.2d at 754 (citing Avis, 503 F.2d at 429). We agree with the tax court that these factors disfavor taxpayer's claim of "employee" status. See Atef A. Gamal-Eldin, p 88,150 PH Memo T.C. 805, 806-807 (April 22, 1988) (there was no capital contribution made by any partner at the firm's formation, there was no indication that taxpayer's restructured relationship changed the relatively permanent status he possessed as a partner, and the firm depended upon taxpayer's specialized knowledge, business relationships and personal skills)
At trial, taxpayer explained that he restructured his relationship with the firm because, as a partner in an Egyptian law firm practicing law in Egypt, he would have been subject to a full range of Egyptian taxes. As a foreign consultant employed by the firm, in contrast, his earnings would be excluded from Egyptian taxation
His compensation for 1984 was paid to him in one lump sum of $52,300
In his briefs, taxpayer raises several other questions concerning alleged controverted facts which he claims are a result of the tax court's unwarranted speculation, but which are either unsubstantiated by references to the record or are contradictory to his own testimony at trial. Rules 28(a)(3) and (e) require that appellant's brief contain a statement of the facts relevant to the issues presented for review, with appropriate reference to the record. Fed.R.App.P. 28(a)(3) and (e) (emphasis added). In raising these factual questions, taxpayer has failed to comply with Rule 28. Consequently, we will not address these issues on appeal. See Mitchel v. General Elec. Co., 689 F.2d 877, 878-79 (9th Cir.1982) (appeal dismissed for failure to comply with Fed.R.App.P. 28(a)(3) and (e), requiring appellant's brief contain a statement of the facts relevant to the issues presented for review, with appropriate reference to the record); Stevens v. Security Pacific Nat. Bank, 538 F.2d 1387, 1389 (9th Cir.1976) (non-compliance with Rule 28 itself would justify dismissal of the appeal)
Taxpayer contends that the district court erred in assessing a deficiency of $4,271.40 because such tax was levied on his total gross income without allowance for deductions, such as travel, entertainment, branch office expenses, and overseas housing expenses. However, taxpayer never presented this to the tax court below. "An issue not presented to the trial court cannot be raised for the first time on appeal." United States v. Whitten, 706 F.2d 1000, 1012 (9th Cir.1983), cert. denied, 465 U.S. 1100 (1984); People of the Territory of Guam v. Okada, 694 F.2d 565, 570 n. 8 (9th Cir.1982), cert. denied, 469 U.S. 1021 (1984) (courts do not depart from this general appellate rule unless appellant falls within certain exceptions). Consequently, we do not decide this issue