Unpublished Disposition, 876 F.2d 896 (9th Cir. 1989)

MEMORANDUM^* 

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)).

II

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. § 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 

III

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.

IV

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