Technology Engineering and Construction, Inc. v. United States of America

96-5715 (U.S. Dist. Ct. D. N.J. 1999) (Unpublished)
  • Opinion Date: March 23, 1999

CORPORATIONS; OFFICERS; TAXES—For federal tax purposes, corporate officers are employees, not independent contractors.

Three engineers formed a corporation to act as a consulting company, in part to obtain liability insurance for their individual engineering projects. Their clients contracted with the corporation, paid the corporation, and employees were hired and compensated by the corporation. The three engineers were equal shareholders, were all directors, and each held an officership. None of them supervised the work of the others “for each was to be free to do what [they] liked to do without any impediments.” Each of the three officers solicited business for the corporation, but the three did not necessarily collaborate on every project. Together, they decided bonuses, conferred on hiring decisions, and collaborated on promotional materials. For three years, the officers treated themselves as independent contractors, pursuant to service agreements. The Internal Revenue Service (IRS) audited the corporation, reclassified the three officers as employees, and assessed unpaid social security and unemployment taxes. The company and one of the officers filed suit alleging that the IRS had illegally assessed taxes against the company and its officers. In response, the IRS contended that their active involvement in the corporation made the shareholders employees of the corporation rather than independent contractors. The company and its shareholder-officer argued that genuine issues of material fact existed as to whether the officers were, in fact, employees. The Court held that the IRS was correct. Whether a person is an employee or an independent contractor is a mixed question of law and fact. Officers of a corporation are defined as employees in the Internal Revenue Code. Thus, officers are presumed to be employees, but despite the definition, they are not per se employees. “If, for example, an officer performs only minor services for the corporation or does not accept remuneration for his or her efforts, he or she may not be deemed an employee for tax purposes.” It is the level of involvement of an officer in a business that determines whether or not an officer is an employee.

The company and its shareholder-officer argued that the company’s officers, while working under the umbrella of the corporation, actually functioned as independent contractors in their separate fields of engineering. They maintained that because the officers were not supervised and were largely responsible for their own clients, they were not as integral to the success of the corporation as the law requires. Finally, they claimed that should one of the officers leave the corporation, the profits of the two remaining officers would have been unaffected. The Court, however, found the following factors to be more important. The officers made collaborative decisions as to hiring, bonuses, and promotional materials. Each officer worked solely for the corporation. Each officer was paid solely by the corporation. Each officer solicited business solely for the corporation. The officers worked on projects together, at times often providing two or more engineering services to the customer. Moreover, they consulted with each other with respect to each one’s specialties on any given project. Although profits were defined according to each officer’s responsibility for a particular project, decisions to retain profits for the corporation’s use were made by the officers together. In the Court’s mind, the bottom line was that clients did business with the corporation as an entity, not with any individual as an independent contractor.