1. Under the circumstances detailed in the opinion, the members
of "name bands" which play short-term engagements at public dance
halls are, for purposes of the taxes imposed by the Social Security
Act, employees of the band leaders, and not of the dance hall
operators -- notwithstanding contractual provisions designating the
dance hall operators as their employers. Pp.
332 U. S.
127-132.
2. An interpretive ruling on Treasury Regulations by the
Commissioner of Internal Revenue, whereby the burden of the social
security tax could be shifted by contractual arrangements from the
band leaders to the dance hall operators, was in excess of the
statutory power of the Commissioner, and invalid. Pp.
332 U. S.
130-132.
157 F.2d 295, reversed.
Petitioners brought suits against the Collector of Internal
Revenue for refunds of social security taxes. In one of the suits,
several band leaders were permitted to intervene as defendants.
Judgments for the petitioners in the District Court were reversed
by the Circuit Court of Appeals. 157 F.2d 295. This Court granted
certiorari. 329 U.S. 711.
Reversed, p.
332 U. S.
132.
Page 332 U. S. 127
MR. JUSTICE REED delivered the opinion of the Court.
Petitioners, operators of public dance halls, brought these
actions, which were consolidated for trial, against the respondent
Collector of Internal Revenue to recover taxes paid under the
Social Security Act, Titles VIII and IX, and I.R.C., c. 9,
subchaps. A and C. Recovery depends on whether petitioners'
arrangements for bands to play at the dance halls made the band
leaders and other members of the bands employees of the
petitioners, or whether, despite the arrangements, the leaders were
independent contractors, and therefore themselves the employers of
the other members. Several band leaders were allowed to intervene
in the
Bartels case as defendants to protect their own
interests. After a recovery in the District Court,
59 F. Supp.
84, was reversed by the Circuit Court of Appeals,
Birmingham v. Bartels, 157 F.2d 295, they sought
certiorari, which we granted because of the importance of the issue
to the administration of the Act. 329 U.S. 711.
See United
States v. Silk and
Harrison v. Greyvan Lines,
331 U. S. 704.
These cases are not concerned with musicians hired by
petitioners to play regularly for their dance halls, but with "name
bands" hired to play for limited engagements at their
establishments. These bands are built around a leader whose name,
and distinctive style in the presentation and rendition of dance
music, is intended to give each band a marked individuality. The
leader contracts with different ballroom operators to play at their
establishments for a contract price. Almost all of the engagements
here involved were one-night stands, some few being
Page 332 U. S. 128
for several successive nights. The trial court found, and there
is no real dispute, that the leader exercises complete control over
the orchestra. He fixes the salaries of the musicians, pays them,
and tells them what and how to play. He provides the sheet music
and arrangements, the public address system, and the uniforms. He
employs and discharges the musicians, and he pays agents'
commissions, transportation, and other expenses out of the sum
received from the dance hall operators. Any excess is his profit,
and any deficit his personal loss. The operators of the dance halls
furnish the piano, but not the other instruments.
The American Federation of Musicians, of which the leaders and
the musicians are members, adopted a standard contract known as
"Form B." The terms of this contract create the difficulties in the
determination of this case. As compensation to the bands, some
contracts call for a guaranteed sum, with the privilege to the
bands to take a percentage of the gross. Other contracts are for a
fixed sum only, and others for a percentage of gross, not to exceed
a fixed sum. The contract states that the ballroom operator is the
employer of the musicians and their leader, and "shall have
complete control of the services which the employees will render
under the specifications of this contract." The form paragraph, so
far as pertinent, is set out in the margin. [
Footnote 1] The District
Page 332 U. S. 129
Court found that the contract was adopted by the Union in order
to shift the incidence of the social security taxes from the leader
to the ballroom operator, and that it had no practical effect on
the relations between the musicians, leader, and operator. The
District Court held that the question of employment under the Act
was one of fact, and that the contract was only one factor to be
considered. Since the District Court believed that the contract was
not entered into "by fair negotiation," and that its purpose was to
protect the leaders from taxes as employers, it concluded that the
contract was of no effect, and that the leader was an independent
contractor employing the musicians.
The Circuit Court of Appeals thought otherwise. It concluded
that the test of employment was the common law test of control --
i.e., that one was an employer if he had the "right" to
direct what should be done and how it should be done. It concluded
that the contract between the parties gave the ballroom operators
the "right" to control the musicians and the leader, whether or not
the control was actually exercised. While the majority thought that
such a contract was not binding on the Government, they thought it
was binding on the parties, and would control liability for
employment taxes if the Bureau of Internal Revenue chose to accept
the arrangement as valid.
Birmingham v. Bartels, supra,
157 F.2d at 300.
Page 332 U. S. 130
The Government here relies entirely on the contract, conceding
that, otherwise, the bandleaders are independent contractors
employing the musicians. On the other hand, the bandleaders
involved contend also that, though the contract be thought
inconclusive, the leaders and musicians are employees of the
operators. They rely upon the dependence of the orchestra members
upon the ballroom operators judged in the light of the purposes of
the Act.
In
United States v. Silk, supra, we held that the
relationship of employer employee, which determines the liability
for employment taxes under the Social Security Act, was not to be
determined solely by the idea of control which an alleged employer
may or could exercise over the details of the service rendered to
his business by the worker or workers. Obviously control is
characteristically associated with the employer-employee
relationship, but, in the application of social legislation,
employees are those who, as a matter of economic reality, are
dependent upon the business to which they render service. In
Silk, we pointed out that permanency of the relation, the
skill required, the investment if the facilities for work and
opportunities for profit or loss from the activities, were also
factors that should enter into judicial determination as to the
coverage of the Social Security Act. It is the total situation that
controls. These standards are as important in the entertainment
field as we have just said, in
Silk, that they were in
that of distribution and transportation.
Consideration of the regulations of the Treasury and the Federal
Security Agency, quoted in
Silk at note 8, is necessary
here. I.R.C., chap. 9, ยงยง 1429, 1609. Under those regulations, the
Government successfully resisted the effort of a leader of a "name"
band, like those here involved, to recover social security taxes
paid on the wages of the members of his organization.
Williams
Page 332 U. S. 131
v. United States, 126 F.2d 129. The contract in that
case was not "Form B," and did not contain any corresponding
control clause. Two years later, the Commissioner of Internal
Revenue issued mimeographs 5638, 1944-5-11651, and 5767,
1944-22-11889, C.B.1944, pp. 547-48. They were directed at the
status of musicians and variety entertainers appearing in theaters,
night clubs, restaurants, and similar establishments. Collectors
and others were therein advised that a "Form B" or similar contract
with the entertainers made operators of amusement places liable as
employers under the Social Security Act. In the absence of such a
contract -- that is, in reality, the absence of the control clause
of "Form B" -- the entertainers, "with short-term engagements for a
number of different operators" of amusement places, would be
considered "independent contractors." The argument of respondents
to support the administrative interpretation of the regulations is
that the Government may accept the voluntary contractual
arrangements of the amusement operators and entertainers to shift
the tax burden from the band leaders to the operators. [
Footnote 2] Cases are cited to support
this position. [
Footnote 3] All
of these cases, however, involve the problem of corporate or
association entity. They are not pertinent upon the question of
contracts to shift tax liability from one taxpayer to another
wholly distinct and disconnected corporation
Page 332 U. S. 132
or individual. We do not think that such a contractual shift
authorizes the Commissioner to collect taxes from one not covered
by the taxing statute. The interpretive rulings on the Regulations
referred to in this paragraph do not have the force and effect of
Treasury Decisions. [
Footnote
4] We are of the opinion that such administrative action goes
beyond routine, and exceeds the statutory power of the
Commissioner.
Social Security Board v. Nierotko,
327 U. S. 358,
327 U. S.
369-370.
This brings us, then, to a determination of whether the members
of a "name band," under the circumstances heretofore detailed, are
employees of the operator of the dance hall or of the leader. If
the operator is the employer, the leader is also his employee.
We are of the opinion that the elements of employment mark the
band leader as the employer in these cases. The leader organizes
and trains the band. He selects the members. It is his musical
skill and showmanship that determines the success or failure of the
organization. The relations between him and the other members are
permanent; those between the band and the operator are transient.
Maintenance costs are a charge against the price received for the
performance. He bears the loss or gains the profit after payment of
the members' wages and the other band expenses.
The judgments of the Circuit Court of Appeals are reversed, and
those of the District Court are affirmed.
Reversed.
[
Footnote 1]
"Witnesseth, That the employer employs the personal services of
the employees, as musicians severally, and the employees severally,
through their representative, agree to render collectively to the
employer services as musicians in the orchestra under the
leadership of Griff Williams, according to the following terms and
conditions:"
"
* * * *"
"The employer shall at all times have complete control of the
services which the employees will render under the specifications
of this contract. On behalf of the employer, the Leader will
distribute the amount received from the employer to the employees,
including himself, as indicated on the opposite side of this
contract, or, in place thereof, on separate memorandum supplied to
the employer at or before the commencement of the employment
hereunder, and take and turn over to the employer receipts therefor
from each employee, including himself. The amount paid to the
Leader includes the cost of transportation, which will be reported
by the Leader to the employer. The employer hereby authorizes the
Leader on his behalf to replace any employee who, by illness,
absence, or for any other reason, does not perform any or all of
the services provided for under this contract. . . ."
[
Footnote 2]
There is a contention that the contracts were coerced because
the operators could not secure these musicians under other
arrangements. We do not find it necessary to rely or pass upon that
contention.
[
Footnote 3]
Edwards v. Chile Copper Co., 270 U.
S. 452,
270 U. S. 456;
Burnet v. Commonwealth Improvement Co., 287 U.
S. 415;
New Colonial Ice Co. v. Helvering,
292 U. S. 435;
Helvering v. Coleman-Gilbert Associates, 296 U.
S. 369,
296 U. S. 374;
Higgins v. Smith, 308 U. S. 473,
308 U. S. 477;
Gray v. Powell, 314 U. S. 402;
Moline Properties, Inc. v. Commissioner, 319 U.
S. 436,
319 U. S. 439;
Interstate Transit Lines v. Commissioner, 319 U.
S. 590;
Schenley Distillers Corp. v. United
States, 326 U. S. 432,
326 U. S.
437.
[
Footnote 4]
See Cum.Bull. (1944), notice, p. 1.
MR. JUSTICE DOUGLAS, with whom MR. JUSTICE BLACK and MR. JUSTICE
MURPHY concur, dissenting.
As the opinion of the Court points out, the Form B contract
involved in the present case was adopted, with the approval of the
Commissioner of Internal Revenue,
Page 332 U. S. 133
after it had been held under an earlier form of contract that
members of the orchestra were employees of the band leader. On the
face of the present contract, the dance hall proprietor is the
employer even under traditional concepts of master and servant. For
he has all of the conventional earmarks of the entrepreneur --
ownership, profit, loss, and control -- if the provisions of the
contract alone are considered. Then the requirements of the Social
Security Acts are satisfied. And to hold the dance hall proprietor
liable for the tax is not to contract the coverage contemplated by
the statutory scheme.
I think the tax collector should be entitled to take such
private arrangements at their face. In other situations, a taxpayer
may not escape the tax consequences of the business arrangements
which he makes on the grounds that they are fictional. The
Government may "sustain or disregard the effect of the fiction as
best serves the purposes of the tax statute."
Higgins v.
Smith, 308 U. S. 473,
308 U. S. 477.
That rule is not restricted in its application to the use by
taxpayers of corporate or related devices to obtain tax advantages.
It was applied in
Gray v. Powell, 314 U.
S. 402, where a railroad sought exemption from the
Bituminous Coal Act, by contending that the operations of one who
appeared to be an independent contractor were in fact its
operations. The Court, in rejecting the contention, said that
"[t]he choice of disregarding a deliberately chosen arrangement for
conducting business affairs does not lie with the creator of the
plan."
Id. at
314 U. S. 414.
I see no reason for creating an exception to that rule here. If the
Government chooses to accept the contract on its face, the parties
should be barred from showing that it conceals the real
arrangement. Tax administration should not be so easily
embarrassed.