Appeal from the United States District Court for the District of Idaho. D.C. No. CV-90-00492-EJL. Edward J. Lodge, District Judge, Presiding.
Before: John T. Noonan, Jr., Diarmuid F. O'Scannlain, and Edward Leavy, Circuit Judges. Opinion by Judge O'Scannlain.
O'SCANNLAIN, Circuit Judge:
We must decide whether physicians who were officers of a corporation operating a clinic are also employees of the corporation for federal income tax purposes.
Idaho Ambucare Center ("Ambucare"), an Idaho corporation, provides an out-patient surgery facility and support staff for physicians in the Nampa, Idaho area. Incorporated in 1982, Ambucare was initially owned by nine physicians, each of whom was a shareholder and a member of Ambucare's Board of Directors. Dr. William Crepps was one of these original shareholders. Dr. Crepps also served as Ambucare's secretary and treasurer from the opening of the business in February 1983 until his resignation from Ambucare in February 1985.
Dr. Crepps, through his professional corporation, Dr. William F. Crepps, M.D., P.A. ("Crepps, P.A."), entered into a contract with Ambucare, whereby Crepps, P.A. would provide managerial services; in exchange, Ambucare would pay Crepps, P.A. $2500 per month. The management agreement expressly stated that Dr. Crepps was an independent contractor, and not an employee; as such, the agreement did not entitle Crepps to any employee benefits from Ambucare. The agreement was effective for a three-year term and could be terminated by either party only upon ninety days notice.
As administrator, Dr. Crepps managed the Ambucare facility, oversaw its finances, hired its employees, and supervised the scheduling of surgeries. Crepps, P.A. was not paid periodically for Dr. Crepps' managerial services, however; instead, when Dr. Crepps resigned from Ambucare in February 1985, Crepps, P.A. received a $59,000 lump sum payment. Ambucare did not withhold from this amount any payment for Federal Insurance Contributions Act ("FICA") taxes or Federal Unemployment Tax Act ("FUTA") taxes.
For a short period following Dr. Crepps' resignation, Ambucare was without an administrator. In early 1986, however, Dr. Gregory Schaefer, Ambucare's President, began performing the duties of administrative manager. Like Dr. Crepps, Dr. Schaefer made day-to-day business decisions, oversaw Ambucare's finances, managed the building and its grounds, and hired and fired employees. Dr. Schaefer also represented Ambucare in its dealings with insurers, accountants, and attorneys, and he reported to the Board of Directors on a regular basis, all the while actively practicing medicine, which was the source of the majority of his income and the source of his employee benefits. Dr. Schaefer resigned from his position as administrator in late 1988.
Dr. Schaefer did not have a written contract with Ambucare. He performed all administrative services gratuitously until September 1986, when Ambucare's Board voted to compensate him for his services in the amount of $500 per month. Again, Ambucare did not treat any of the compensation paid to Dr. Schaefer as subject to FICA and FUTA taxes.
In 1989, the Internal Revenue Service ("IRS") conducted an audit of Ambucare. The IRS determined that both Dr. Crepps and Dr. Schaefer were employees of Ambucare and, on this ground, assessed against Ambucare the related FICA and FUTA tax deficiencies, penalties, and interest for the tax years involved. Ambucare paid these taxes and sued for a refund, contending that Dr. Crepps and Dr. Schaefer were independent contractors whose compensation was exempt from employment taxes.
The district court agreed with Ambucare and ordered the IRS to refund the taxes paid. The government appeals from such judgment.
Sections 3111 and 3301 of the Internal Revenue Code impose FICA (social security) and FUTA (unemployment) taxes on employers for wages paid to their employees.*fn1 For FICA and FUTA tax purposes, section ...