Rev. Rul. 69-316

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in S.S.T. 154, C.B. 1937-1, 391.

The question presented is who is the employer, for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954), of employees performing services under the conditions outlined below.

Group (1). Certain individuals are engaged by a subsidiary of Y corporation to perform services solely for the subsidiary under its direction and control. The wages of these employees are paid initially by Y and the amounts thereof are billed to the subsidiary.

Group (2). Certain individuals are engaged by Y to handle such matters as accounting, auditing, purchasing, etc., for Y and also for a number of its subsidiaries. The individuals in this group perform their services under the direction and control of Y and are paid by Y. The premises on which they work and the equipment used by them are furnished by Y.

Group (3). Certain executives, in addition to being officers of Y, are also officers of one or more of the subsidiaries. They perform substantial services as officers for each corporation and are paid for those services by Y. In some cases Y charges the subsidiaries a flat rate for services rendered to them by the officers and in other cases a charge for those services is based on the normal production of the subsidiaries. In still other cases Y makes no charge for the services.

For purposes of the Federal employment taxes the usual common law rules ordinarily apply in determining whether the employer-employee relationship exists and, if so, who is the employer. The regulations generally identifying who are employers speak of them as persons who employ employees (sections 31.3121(d)-2 and 31.3306(a)-1 of the Employment Tax Regulations) and as any person for whom services are performed as an employee (section 31.3401(d)-1 of the regulations). Except for special situations under section 3401(d) of the Code which will be specifically dealt with later in this ruling, the regulations require the finding of a legal relationship of a contractual nature that may be examined to determine whether it comprises an employer-employee relationship in accordance with the more detailed provisions appearing subsequently in the same regulations. See, for example, section 31.3121(d)-1(c)(1) and the succeeding paragraph, section 31-3121(d)-1(c)(2) of the regulations. The term "employee," as defined in sections 3131(d), 3306(i), and 3401(c) of the Code, includes an officer of a corporation. Guides for determining the employer-employee relationship are found in three substantially similar sections of the regulations, namely, sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1.

Section 31.3121(d)-1(c) of the regulations provides, in part, as follows with respect to the relationship of employer and employee:

(1) 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.

(2) 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. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. * * *

Section 31.3121(d)-1(b) of the regulations provides, in part, as follows with respect to the status of an officer of a corporation:

Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation. * * *

Under the common law rules, it is held that the individuals in group (1), who are engaged by and perform services solely for a subsidiary of Y under the direction and control of the subsidiary are employees of the subsidiary for which they render services even though the wages are paid initially by Y, the particular subsidiary involved being billed by Y for the amount thereof. Although Y pays the wages of such an employee, the subsidiary is responsible for the reporting and payment of the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act.

The individuals in group (2) who perform services for both Y and its subsidiaries, who are engaged and paid by Y, and who are subject to the direction and control of Y in the performance of their services are employees only of Y and are not employees of a subsidiary. Y alone is responsible for reporting and paying the Federal employment taxes with respect to their wages.

The executives in group (3), who are officers of Y and of one or more of its subsidiary corporations, perform substantial services in their official capacities for each such corporation and are remunerated for their services. Accordingly, the officers of each corporation are employees thereof. This relationship is not affected by the fact that in some cases the subsidiaries are not charged with any portion of the total remuneration paid by Y to the officers. Since each corporation is the employer of the individuals who are its officers, any payment made by Y to an individual that represents remuneration of the individual as an officer of the subsidiary is remuneration paid by the subsidiary for purposes of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act.

However, section 3401(d) of the Code, in defining the term "employer" for purposes of income tax withholding, provides in part that:

(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, * * *.

Thus, when Y has control of the payment of wages for services performed by an employee of a subsidiary, Y is the "employer" of that employee for purposes of income tax withholding even though the subsidiary is the employer with respect to the wages for purposes of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. Compare Rev. Rul. 54-471, C.B. 1954-2, 348.

The conclusions in regard to groups (1) and (2) are distinguishable from the conclusion in Revenue Ruling 66-162, C.B. 1966-1, 234, that sales clerks are employees of both a department store and the concessionaire operating a department in the store. In the instant case the facts only evidence such a relationship between the individuals in group (1) and the subsidiary corporation on one hand and between the individuals in group (2) and the parent corporation on the other hand, payment of remuneration to the individuals in group (1) by the parent corporation not being a determining factor.

Revenue Ruling 66-162, is distinguished.

S.S.T. 154 is superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6 C.B. 1967-1, 576.