Rev. Rul. 54-471

Advice is requested relative to the status, for purposes of the Federal Insurance Contributions Act, Federal Unemployment Tax Act, and Collection of Income Tax at Source on Wages (subchapters A, C, and D, respectively, chapter 9, Internal Revenue Code of 1939) of individuals paid by an advertising agency on behalf of a State citrus commission to demonstrate products under the commission's jurisdiction at the markets.

In the instant case a division manager of a State citrus commission in charge of arranging for demonstrations of certain citrus products solicited the assistance of an advertising agency in simplifying his dealings with individuals engaged, for a 2-day period, to demonstrate the products in various markets. At the end of the period the manager notified the agency that the demonstrations had been completed and authorized the agency to pay each demonstrator for the services performed. The agency, in accordance with its agreement with the manager, then billed the main office of the commission for the total amount disbursed, plus a commission on each demonstrator, and received payment from the commission.

The manager in some instances, and the agency in others, selected and engaged the demonstrators. However, in all instances the manager fixed the amount and authorized payment of the demonstrator's wages. The agency acted as paying agent for the commission. The manager made all necessary arrangements for the demonstrations, assigned a location to each demonstrator, instructed each demonstrator as to the nature of the services to be rendered and the manner of performance, and exercised such control as he considered necessary over the demonstrators to insure proper performance of their services.

For Federal Insurance Contributions Act and Federal Unemployment Tax Act purposes, every individual is an employee if under the usual common law rules the relationship between him and the person for whom he performs services is the legal relationship of employer and employee. Generally, such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. Whether the relationship of employer and employee exists under the common law rules is determined upon the particular facts existing in each case.

In the instant case, it is held that the State citrus commission exercised such control over the demonstrators in the performance of their services as is necessary to establish the relationship of employer and employee for Federal Insurance Contributions Act and Federal Unemployment Tax Act purposes. The fact that in some instances the agency selected and engaged the demonstrators on behalf of the commission does not negative the existence of an employer-employee relationship between the commission and the demonstrators.

The State citrus commission, created by statute as a body corporate, acts as a general supervisory authority over the administration and enforcement of the State citrus code. Its powers are delegated by statute, including the express power to employ and, at its pleasure, to discharge such employees as it deems necessary in the performance of its duties and the exercise of its powers. The 12 members of the commission are appointed by the Governor of the State and receive no compensation for their services. The commission is financed by certain excise taxes, inspection fees, and license fees imposed by the State citrus code which are paid into the State treasury and are appropriated and made available for defraying the expenses incurred by the commission. The commission is required to make an annual report of its work to the Governor of the State and also such special reports upon any phase of its work as may be called for by the Governor, the legislature, or either house thereof.

Section 1426(b) of the Federal Insurance Contributions Act, as amended, contains the following exception from the term `employment,' as that term is defined in the Act:

(8) Service * * * performed in the employ of a State, or any political subdivision thereof, or any instrumentality of any one or more of the foregoing which is wholly owned by one or more States or political subdivisions; * * *.

Paragraph (7) of section 1607(c) of the Federal Unemployment Tax Act contains similar provisions.

It is held that although a common law relationship of employer and employee existed between the State citrus commission and the demonstrators, for Federal Insurance Contributions Act and Federal Unemployment Tax Act purposes, the demonstration services performed for the commission, an instrumentality wholly owned by the State, are excepted from `employment' by reason of the above-mentioned sections of the Acts, and liability for the taxes imposed by the Acts is not incurred by the commission. Provision is made under section 218 of the Social Security Act, as added by the Social Security Act Amendments of 1950, for the coverage of certain State and local employees for purposes of benefits under title II of such Act pursuant to voluntary agreements between the States and the Secretary of Health, Education, and Welfare. Questions relating to such matters should be addressed to that Department.

Section 1621(a) of the Internal Revenue Code defines the term `wages' for purposes of income tax withholding as all remuneration for services performed by an employee for his employer with certain exceptions not here material.

It is further held that the remuneration of the demonstrators for services performed in demonstrating the products of the commission constitute `wages' for purposes of the income tax withholding.

Paragraph (1), section 1621(d) of the Internal Revenue Code, in defining the term `employer' for income tax withholding purposes provides:

(1) if the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services, the term `employer' * * * means the person having control of the payment of such wages; * * *.

Under the arrangements cited, the agency had control of the payment of the wages for such services to the extent contemplated by paragraph (1), supra . Accordingly, as the `employer' of the demonstrators for income tax withholding purposes, the agency is responsible for the withholding of Federal income tax from the `wages' of each demonstrator.