Independent Petroleum Corp. v. Fly
141 F.2d 189, 152 ALR 928
(5th Cir. 1944)
Opinion
No. 10764.
March 3, 1944.
Appeal from the District Court of
the United States for the Southern District of Mississippi; Sidney C. Mize,
Judge.
Action by the Independent Petroleum
Corporation against Eugene Fly, Collector of Internal Revenue, to recover
social security taxes exacted from plaintiff for the year 1938. From an adverse
judgment, plaintiff appeals.
Reversed, with directions.
Harold Cox, of Jackson, Miss., for
appellant.
Carlton Fox, Sewall Key, and Helen R.
Carloss, Sp. Assts. to the Atty. Gen., Samuel O.
Clark, Jr., Asst. Atty. Gen., and Toxey Hall, U.S.
Atty., and A.Y. Harper, Asst. U.S. Atty., both of Jackson, Miss., for appellee.
Before SIBLEY, McCORD,
and WALLER, Circuit Judges.
SIBLEY, Circuit Judge.
The appellant sued in the district
court to recover social security taxes exacted from it for the year 1938 as an
employer of eight persons. Recovery was denied on the authority of Nicholas v. Richlow Co., 10 Cir., 126 F.2d 16, the
court holding that Congress had provided that all officers of a corporation are
to be counted as employed, regardless of whether they work or not. We are not
able to agree.
The facts are stipulated, the
important ones being these: During 1938 the appellant was a Mississippi
corporation entirely owned by its president E.H. Simpson. At its organization
all the shares were issued to him save one which for organizational purposes
was issued but not delivered to Mrs. Louise C. Simpson, his wife. On the
dissolution of the corporation in 1941 she relinquished to her husband her
ostensible interest. She was elected Secretary of the Corporation and held that
office throughout the year 1938. "Mrs. Simpson actually had no connection
with the business of the Corporation and gave no attention thereto. E.H.
Simpson as president and general manager and sole owner performed all the
duties both of president and secretary, except that in 1938 Mrs. Simpson signed
two tax returns and the minutes of an annual stockholders meeting, all prepared
by him and presented to her at their home for her signature. She never
performed any duty provided by the by-laws for the Secretary of the Corporation
except signing her name to these three instruments as aforesaid." She
received no salary, wages or other compensation, directly or indirectly, and
did nothing else whatever for the Corporation. It is stipulated that the
Corporation was liable for the tax if Mrs. Simpson be counted as one of eight
persons employed by it, but was not liable if she is not to be counted.
The tax is laid by Title IX of the
original Social Security Act, Section 901, 49 Stat. p. 639, 42
U.S.C.A. § 1101. Title IX was re-enacted Feb. 10, 1939, into the Internal
Revenue Code, Secs. 1600 and following, 26 U.S.C.A. Int.Rev.
Code, § 1600 et seq., but some changes were made, so we will cite the original
Act of force in 1938. Title VIII, 42
U.S.C.A. § 1001 et seq., laid a tax on employers generally, as well as on
those they employed. Title IX laid an additional tax on the larger employers,
and is headed, "Tax on Employers of Eight or More." The tax is
imposed in these words: "Every employer (as defined in Section 907) shall
pay for each calendar year an excise tax, with respect to having individuals in
his employ, equal to the following percentages of the total wages * * * payable
by him," etc. The definition in Section 907(a) is: "The term `employer'
does not include any person unless on each of some twenty days during the
taxable year, each day being in a different calendar week, the total number of
individuals who were in his employ for some portion of the day (whether or not
at the same moment of time) was eight or more." If this taxpayer is not
included in the quoted words it is not taxed. Let it be carefully noted that
nowhere is the term "employee" used. In a seemingly studious
avoidance of that term the periphrasis "individual in his employ" is
used, and it occurs frequently throughout Title IX. We think the common and
usual meaning of that phrase is natural persons who serve or work for another.
We do not think that Mrs. Simpson was an individual in the employ of this
corporation in any common or usual understanding of the words. On only one, or
possibly two, occasions did she do anything for it, and if in that gratuitous
service she could be thought employed, it falls far short of twenty days in
different weeks. E.H. Simpson, giving his time and attention to the
Corporation's business can well be thought of as in its employ, as of course
the six hirelings were, but Mrs. Simpson was not employed on any twenty days.
The contention of appellee,
supported by the Nicholas case, supra, is that the picture is wholly changed by
a definition found at the end of the Social Security Act in Title XI, Sec.
1101: "When used in this Act * * * (6) the term `employee' includes an
officer of a corporation." The trouble with the argument is that the term "employee"
is not used in the parts of the Act which we are discussing. As we have pointed
out above, that term was not used, but where it might most naturally have been
used a periphrasis was resorted to. Title IX has in Sec. 907 its own
definitions, but "employee" is not among the terms there defined, for
it is not made use of. An artificial definition at the end of the Act of
"employee" cannot be attached to the phrase "individual in his
employ", because that definition is expressly made applicable only when
that very term "employee" is used by the Act. It was not used in
imposing the tax in Title IX.
We think Congress took pains not to
say "employee", but if the definition at the end of the Act is to be
forced into Title IX we would still think that the words "`Employee'
includes an officer of a corporation" do not necessarily mean that all
officers of a corporation are employees, but only such as work for it in fact.
The Social Security Act as a whole had in contemplation the various Acts on the
subject in the States. Some of these Acts have used the term
"employee", and the question has been raised whether an officer of a
corporation was entitled to employee benefits. In common speech the officers
and employees are different classes. It has been held that an officer as such
is generally not to be considered an employee, but if he actually works for the
corporation his being an officer will not prevent his being an employee also.
See Shriver v. Carlin Fulton Co., 155 Md. 51, 141 A. 434, 58 A.L.R. 767,
13 Am.Jur., Corporations, § 866. We think
Congress intended by its definition that "employee" in the Act was
not meant to exclude officers if they were really employed by the corporation.
Nominal officers such as honorary Vice-presidents and this Secretary, who do
nothing and are paid nothing, were not intended to be made into employees
throughout the Act.
It is lastly argued that the
Regulations 90, Art. 205, in treating of "Individuals in the employ of
another", declare that all officers of a corporation are to be included.
It is true that the author, after speaking accurately in the statutory language
of the persons meant, drops into the use of the term "employee",
which the statute does not use, and then at the end, evidently referring to the
statutory definition of "employee", declares "An officer of a
corporation is an employee". This, however, falls short of declaring that
all officers in all circumstances are employees. And it is in conjunction with
the statement that directors as such are not employees, but are employees if
they perform services outside of directors' meetings. Directors are in a broad
sense officers themselves. But whatever may have been
intended by this language, we think the power to make regulations does not
extend to making taxpayers of those whom the Act, properly construed, does not
tax.
The judgment is reversed, with
direction to enter a judgment for recovery of the tax.