Internal Revenue Service
Revenue Ruling
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smRev. Rul. 56-69
1956-1 C.B. 458
IRS Headnote
A licensed securities salesman is engaged by an investment firm to sell securities on a commission basis with a guaranteed annual amount of compensation. He is furnished with a private office on the firm's premises and is required to follow its regular office routine and observe its customary working hours. The firm pays for the salesman's license and includes him in several types of insurance which are carried on all its employees. Held , the salesman is an employee of the firm for Federal employment tax purposes, including the withholding of income tax.
Full Text
Rev. Rul. 56-69
The Internal Revenue Service has been requested to determine the status, for purposes of the Federal employment taxes, including the withholding of income tax, of a securities salesman who performs services under the conditions and circumstances set forth below.
A partnership is engaged in the business of buying and selling securities as principal and as agent. It sells securities through a salesman who works under an oral agreement which may be terminated at any time by either party. The salesman is licensed by the state to sell securities and is a registered member of a security dealers' organization. The license and registration fees are paid by the partnership. The salesman is furnished with a private office, stenographic and telephone services, and office supplies. His name appears on the partnership's letterhead and he is required to follow its regular office routine and observe its customary working hours. Generally, the territory covered by the salesman is restricted to the corporate limits of the city, although he occasionally serves customers outside the city. He devises his own methods for locating new customers and uses his own judgment as to the frequency of his calls on regular customers. He makes oral reports on leads occasionally furnished by the partnership, but no reports are required with respect to calls made on regular customers. He is required to adhere to established prices, terms and conditions of sale, and to submit for approval all orders and copies of all letters written by him on behalf of the partnership to any prospect. The salesman has had many years of experience in the business and, therefore, detailed instructions in regard to the performance of his services are unnecessary.
The partnership pays the salesman a percentage of the gross profit on all sales made by him and guarantees him a minimum annual compensation, which is paid in monthly installments. The salesman is covered by workmen's compensation insurance and hospital insurance, and is included in group life insurance carried by the partnership. He performs the services personally, operates under the partnership's name, does not perform services for others, and does not hold himself out to the public as available to do work of a similar or related nature. Orders are solicited by the salesman from individual and institutional investors and the securities are purchased by such customers for investment purposes.
In Dimmitt-Rickhoff-Bayer Real Estate Co. v. Finnegan, Collector of Internal Revenue , 179 Fed.(2d) 882, certiorari denied, 340 U.S. 823, the court held that the real estate salesmen who performed services under the circumstances and conditions present therein were not employees of the company under the applicable common law rules and that the remuneration paid the salesmen was not subject to Federal employment taxes. The facts in that case show that the salesmen were not required to report at the company's office daily, to keep fixed office hours, or to attend the salesmen's meetings held weekly at the office. The company assisted the salesmen by advice and cooperation, made available to them the facilities of its office and its real estate listings, and furnished them copies of a manual explaining the company's business policies. Each salesman purchased the license required of him by state law and paid the dues for his membership in the local real estate exchange. Commissions earned by each salesman were paid to him monthly. The salesmen were not guaranteed any minimum amount of compensation. By Mimeograph 6566, C.B. 1951-1, 108, that decision was made generally applicable to outside securities salesmen remunerated solely by commissions.
Section 3121(d) of the Federal Insurance Contributions Act (chapter 21, subtitle C, of the Internal Revenue Code of 1954) provides, among other things, that the term `employee' means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. The guides for determining whether, under such rules, an employer-employee relationship exists are found in section 408.204(c) of Regulations 128, applicable to the Internal Revenue Code of 1954 by virtue of T.D. 6091, C.B. 1954-2, 47.
The facts in the instant case are distinguishable from the facts in the Dimmitt-Rickhoff-Bayer case and clearly show the existence of an employment relationship under the usual common law rules. The salesman's name appears on the firm's letterhead and he is guaranteed a minimum amount of compensation, is furnished a private office, and is required to follow the partnership's usual office routine. He is required to submit for approval copies of all letters to prospects written by him on behalf of the partnership. The partnership pays the fees for all licenses which the salesman is required to have for the performance of his services. The salesman is covered by several types of insurance which are carried by the partnership on all of its employees and he performs the services on a full-time basis.
Accordingly, it is held that the partnership exercises or has the right to exercise such control over the salesman in the performance of his services as is necessary under the usual common law rules to establish the relationship of employer and employee for Federal employment tax purposes, including the withholding of income tax.