Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-74

1972-1 C.B. 318

IRS Headnote

An individual engaged in the wholesale purchase and sale of used automobiles between licensed automobile dealers for a company that does not retain the right to control his business operations is not an employee of the company.

Full Text

Rev. Rul. 72-74

Advice has been requested whether, under the circumstances described below, an individual who is engaged in the wholesale purchase and sale of used automobiles between licensed automobile dealers and who purchases and resells cars in the name of a company is an employee of that company 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).

The company is a licensed automobile dealer engaged in the wholesale purchase and resale of used automobiles. Operating under an oral agreement with the company, the individual, who is a state-licensed automobile salesman, purchases and sells used automobiles under the company name, using its check or draft to make the purchase.

The salesman gets no leads from the company, has complete discretion regarding purchase and sale of automobiles, and is not required to adhere to prices fixed by the company. The company limits the number and total value of the cars he may carry in his inventory, handles all title transfers, and supplies him with draft and bill of sale forms, registration cards, and dealer tags, as well as related liability insurance coverage. As a licensed salesman, he is not permitted to work for another dealer at the same time he is operating under the company's name and the company may terminate his contract if he does not stay within his limit of purchases. Likewise, the salesman may terminate his contract at any time.

The salesman is not required to observe prescribed working hours or to follow a prescribed routine. He works off the premises of the company, normally conducting his buying and selling activities at automobile auctions and dealers' lots although often using the company office as a place of settlement. He is not guaranteed a minimum amount of profit nor is he allowed a drawing account on possible profits. Upon his furnishing the company a completed bill of sale with drafts signed by the purchaser, he is paid the difference between the purchase price and the selling price on each car after deducting a fee for each car sold. If he sells a car for less than the price he paid for it, he is liable for any loss plus the company's fee. In addition, he must pay any expenses he incurs in transporting, reconditioning, and selling the cars he purchases.

Individuals are employees for Federal employment tax purposes if they have the status of employees under the usual common law rules applicable in determining the employer-employee relationship. Guides for determining that status are found in three substantially similar sections of the Employment Tax Regulations, namely sections 31.3121(d)-1(c), 31.3306(i)-1, and 31.3401(c)-1.

For example, it is pointed out in paragraph (2) of section 31.3121(d)-1(c) of the regulations that an employer-employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs them, not only as to the result to be accomplished, 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. In this connection, it is not necessary that the employer actually direct or control the manner in which services are performed; it is sufficient if he has the right to do so. An individual operating as an independent contractor is not an employee under the common law rules.

In the instant case, the company neither exercises nor does it have the right to exercise control over the salesman as to how he shall conduct himself in the performance in his business operations. The company gives the salesman no leads, and he has complete discretion regarding the purchase and resale of the automobiles, including determining how much time he will spend on the job, how much he will pay for the automobiles, and how much he will charge upon their resale. In addition, he is entitled to whatever profit he can secure on each purchase and resale and he is liable for any loss sustained. Accordingly, it is held that for Federal employment tax purposes the salesman is not an employee of the company.