Opinion
Docket No. 53125.
1956-03-22
WENDELL E. AND EVELYN C. JAMES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Harold W. James, Esq., for the petitioners. Frank D. Moran, Esq., for the respondent.
Petitioner is a doctor of medicine and a specialist in pathology. During the taxable year he occupied positions successively in two hospitals as pathologist and laboratory head receiving an annual salary and a small percentage of the hospitals' receipts from outpatient work. Held, petitioner was an employee of the hospitals and not an independent contractor. Harold W. James, Esq., for the petitioners. Frank D. Moran, Esq., for the respondent.
Respondent determined a deficiency in the income tax liability of petitioners for the year 1950 in the sum of $221.28. Petitioner Wendell E. James, hereinafter referred to as petitioner, was and is a doctor of medicine specializing in pathology who held positions with two hospitals during the taxable year. The statement attached to respondent's notice of deficiency contained the following explanation for the adjustments resulting in the deficiency determined:
It has been determined that the relationship between you and Peoples Hospital, Akron, Ohio and The Rutland Hospital, Rutland, Vermont was that of employer and employee. Therefore, you are not entitled to the deductions claimed in schedule ‘C’ of your return for the year 1950 as an independent contractor. However, the amount of deductions claimed in schedule ‘C’ has been allowed in computing your taxable net income in lieu of the standard deduction claimed in your return.
It is also determined that you are not entitled to the additional deductions for contributions, interest, and taxes claimed in your protest because these alleged deductions have not been substantiated by competent evidence.
The amended petition filed herein alleges that respondent erred ‘a. In determining that the taxpayer, Dr. Wendell E. James, was not engaged in business during the taxable year 1950,’‘b. In determining that Dr. Wendell E. James was an employee.’ and (c) in the alternative and in the event that Dr. James is held to be an employee, in disallowing deductions for contributions, interest, and taxes claimed by petitioner. With regard to this last alternative assignment of error the petition alleged the following facts: ‘Charitable contributions in the amount of $53; taxes in the amount of $136.18 and interest in the amount of $293.65, totaling $482.83 were paid in the current year 1950 by petitioners which constitute proper deductions under the Internal Revenue Code.’ Respondent's answer denied the allegations of error and of facts in the amended petition. At the hearing herein no evidence was adduced by petitioner in support of his alternative allegation of error, and therefore on brief respondent assumed that issue had been abandoned. In his reply brief petitioner stated: ‘No evidence relative to this issue was offered at the hearing * * * as it was presumed, that if the relationship of employer-employee were held to exist between petitioner and the hospital, the Court would order the case remanded to the Internal Revenue Service for proof of additional deductions, the validity of the allowance of the same being unquestioned.’ In this presumption petitioner is in error.
Therefore, the sole question before us in this proceeding is whether the petitioner was engaged in business during the taxable year or was an employee.
FINDINGS OF FACT.
Petitioners live in Rutland, Vermont, and filed their income tax return for the calendar year 1950 with the collector of internal revenue for the district of Vermont.
Petitioner Wendell E. James is a doctor of medicine licensed to practice in the States of Vermont, West Virginia, New Hampshire, and Ohio.
As a physician, petitioner has certain annual expenses consisting of medical society dues, automobile expenses, malpractice insurance, business interruption insurance, depreciation on equipment such as microscope and camera equipment, and miscellaneous expenses.
Petitioner is and was during the taxable year a pathologist certified as such by the American Board of Pathology and Clinical Pathology after having taken approved training in that field for a number of years and having passed oral and written examinations given by that board. There are between 2,500 and 2,600 physicians in the United States who are certified pathologists.
During the greater part of 1950 petitioner occupied the position of clinical pathologist in Peoples Hospital in Akron, Ohio, and during the last 2 months of that year he occupied the position of director of the laboratory at the Rutland Hospital at Rutland, Vermont. His services at both hospitals were practically identical except that at Peoples Hospital he confined himself to clinical laboratory medicine.
Petitioner's services at Peoples Hospital in Akron began in 1948 under conditions outlined in two letters. The first letter dated October 2, 1948, was written to petitioner by Dr. George R. Dochat, director of laboratories at Peoples Hospital, and reads as follows:
MY DEAR DOCTOR JAMES:
As I mentioned to you on the afternoon of your departure from Akron, our executive committee would meet that following Wednesday and probably the matter of your salary would be brought up for discussion at this meeting. Our medical council also met the following day and discussed quite thoroughly with the administration the possibility of your coming into our institution.
I am happy to say that our professional staff members whom you met were very high in their praises and the administration was also favorably impressed. All of us here trust that you will accept the position we have to offer. As you point out the remuneration is not as great as you would receive elsewhere, but the position has certain other definite aspects of value which I know you are aware of.
The executive committee has authorized Miss Craig to offer you a starting salary of $800.00 per month with an immediate starting percentage of 10 per cent of the out-patient laboratory work. This out-patient laboratory work at the present time averages now around $1500.00 to $1600.00 a month and this, therefore, would build your yearly salary very close to the $12,000.00 figure which you had mentioned.
We here feel quite certain that a man of your ability and training could very definitely increase our volume of out-patient work which is principally clinical pathologic procedure. Your salary, therefore, would rise accordingly.
I trust that I may have the pleasure of hearing your response in this respect and I sincerely hope that you will accept this position.
The second, dated October 22, 1948, was written to petitioner by Eva P. Craig, superintendent of Peoples Hospital, and reads in material part as follows:
DEAR DOCTOR JAMES:
We are very happy that you have accepted the position of Clinical Pathologist in Peoples Hospital and look forward to having you join our staff on November 15.
As stated in Doctor Dochat's letter of October 2, your salary will be eight hundred dollars ($800) a month plus 10 per cent of the amount collected on outside laboratory work. This, at the present time would amount to approximately twelve thousand dollars ($12,000) yearly. We hope that as you build up the department this figure will materially increase.
Petitioner's services at the Rutland Hospital began October 30, 1950 pursuant to a written agreement dated October 15, 1950, and reading as follows:
The following agreement is entered into between The Rutland Hospital, Inc., and Dr. Wendall (sic) James. The agreement becomes effective on October 30, 1950, which is the day on which Dr. James assumes his duties.
Definition of the Position— The position is to be that of Director of the Laboratory in all of its phases. It is understood that there will be close cooperation between the Director, the Administrator of the Hospital and the Medical Staff.
Compensation— Compensation of the Director is to consist of a salary of $12,000.00 per year, to be paid in semi-monthly amounts, plus 10% of the outpatient work, minus free out-patient work, this percentage to be paid monthly on the 10th of each month.
Vacations— The annual vacation is to be one month, which may or may not be taken at one time. It is understood that attendance at medical meetings or conventions for reasonable periods of time does not count as vacation time.
Length of Agreement— It is mutually understood that this arrangement is made for a period of three (3) years.
Terminal Agreement— It is mutually agreed that in the event of a decision on the part of the Hospital or the Director to terminate this agreement, written notice three months in advance shall be given to the second party.
In order for a hospital to obtain and keep the approval of the American Medical Association and the American Hospital Association it has become necessary for it to secure the full-time services of a pathologist. The greater part of the pathologist's work is done at the hospital upon requests made from physicians and surgeons practicing in the hospital with whom the pathologist works on a consultation basis. It includes the usual laboratory work of biochemistry, bacteriology, the taking of blood counts, and the making of urine analyses, and also, in the field of surgery, the diagnosis of tissues. It also includes the performance of autopsies.
Some part of petitioner's work was so-called out-patient work consisting of cases referred to him by other hospitals and institutions and by doctors and dentists, some of whom were not connected with the hospital.
Most of petitioner's work is done at the hospital although some of the written work, such as writing descriptions of surgical issues, is done by him at night at his own home. The laboratories in which petitioner worked were provided by the hospitals, together with most of the equipment and supplies, supplemented on occasion by petitioner. Technical assistants were provided to petitioner by the hospitals who employed them on the recommendation of petitioner. These assistants worked under petitioner's supervision on a time schedule which he prepared. Since the laboratories were officially open 24 hours a day, the technical assistants were subject to call for emergency work at any time.
All bills covering pathological services extended to both in-patients and out-patients were made out and presented for payment by the hospitals, being included in the statement covering all the fees of the hospital.
During the taxable year petitioner was an employee of the Peoples Hospital and the Rutland Hospital.
OPINION.
KERN, Judge:
The question of whether petitioner was an employee or an independent contractor arises under the provisions of section 22(n) of the Internal Revenue Code of 1939.
It is a factual question, see Chester C. Hand, Sr., 16 T.C. 1410, and, in the circumstances presented by the instant case, is not free from doubt.
Sec. 22(n). Definition of ‘Adjusted Gross Income’.— As used in this chapter the term ‘adjusted gross income’ means the gross income minus—(1) Trade and Business Deductions.— The deductions allowed by section 23 which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee;
The hospitals needed the full-time services of a pathologist in order to obtain and keep the valuable approval of the American Medical Association and the American Hospital Association, and in order to render proper and expected service to their patrons. Petitioner was employed for this purpose at a substantial annual salary plus a small percentage of the fees charged by the hospitals to out-patients. The great bulk of petitioner's work was compensated for by his salary and consisted of pathological and laboratory services rendered by petitioner to the in-patients of the hospitals at the request of and in consultation with the physicians and surgeons practicing in the hospitals. Fees for these services were billed by the hospitals to the patients, and, in the absence of evidence to the contrary, we must assume that they were fixed in amount by the hospitals themselves. The record does not show whether there was a profitable margin to the hospitals collected by the hospitals and the expenses of their pathological department and laboratory, including the salary and percentage compensation of petitioner. Since petitioner only received 10 per cent of the paying out-patient work, it may be assumed that the hospitals collected amounts from the pathological and laboratory work considerably in excess of those paid to petitioner. His employment was referred to as a ‘position’ and his compensation was to be a ‘salary’ plus a small percentage on certain work. The terms of one employment specified a ‘vacation.’ His employment was continuous and general, that is, to do the pathological and laboratory work necessary and customary in hospitals over an extended period of time for an annual salary. It was not to do such work for individual patients on a case basis. He was working for the hospital corporation by the year and not for individual patients ‘by the job.’
All of these circumstances tend, in varying degrees, to indicate that petitioner was an employee of the hospitals as respondent has determined. The fact which tends to indicate that petitioner was an independent contractor is the apparent lack of supervision exercised by the hospitals over the manner in which petitioner performed the individual duties of his position. See A. P. Dowell, Jr., 13 T.C. 845.
Petitioner's agreement with the Rutland Hospital provided that he should work in ‘close cooperation’ with the administration of the Hospital, and that the hospital could terminate his employment on 3 months' notice to petitioner.
Therefore, it would appear that there was some general control over petitioner's performance on the part of the hospital. The question is whether that control is sufficient to warrant a finding that petitioner is an employee rather than an independent contractor.
Petitioner testified that his service in both hospitals was ‘practically identical.’
We are of the opinion that under the facts of this case, in which petitioner is a professional man, the control of the hospitals is sufficient to constitute petitioner an employee rather than an independent contractor. The methods by which professional men work are prescribed by the techniques and standards of their professions. No layman should dictate to a lawyer how to try a case or to a doctor how to diagnose a disease. Therefore, the control of an employer over the manner in which professional employees shall conduct the duties of their positions must necessarily be more tenuous and general than the control over nonprofessional employees. Yet, despite this absence of direct control over the manner in which professional men shall conduct their professional activities, it cannot be doubted that many professional men are employees. To give an example outside of the medical profession, there are many eminent lawyers who are full-time employees of corporations and who carry on their professional work with a minimum of direct supervision or control over their methods on the part of their employee.
In the instant case it is our judgment that the general control of the hospitals over petitioner, to which we have referred, coupled with the controls over his method of working furnished by the high standards of his profession (controls which must have been assumed by the hospitals when they employed a person of such distinguished professional qualifications), are sufficient to constitute petitioner an employee rather than an independent contractor.
Decision will be entered for the respondent.