Ralls Inc. v. United States , 470 F.2d 579 ( 1972 )

Per Curiam;

: This case was referred to then Chief Trial Commissioner Marion T. Bennett (now a Judge of this court) ^* with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Buie 134(h). The report of Judge Bennett, sitting as a commissioner of the court’s trial division (28 TJ.S.C. § 2505), consisting of his opinion, findings of fact and recommended conclusion of law, was filed on August 23,1972. On September 22, 1972, defendant filed a notice of intention to except to the said report but on November 2, 1972, requested leave to withdraw its notice of intention to except and such leave was subsequently granted. On November 6, 1972, plaintiff filed a motion requesting that the court adopt the said report. The case has been submitted to the court for its consideration (with Judge Bennett not participating) without oral argument. Since the court agrees with Judge Bennett’s opinion, findings of fact and recommended conclusion of law, as hereinafter set forth, it hereby grants plaintiff’s motion to adopt and adopts the same as the basis for its judgment in this case. Therefore, it is concluded that plaintiff is entitled to recover for the third quarter of 1963; for 1964; for the first quarter of 1965 but not for the last three quarters of that year; for 1966; and for 1967, with judgment entered accordingly and with the amount thereof to be determined pursuant to Rule 131(c)(2).

OPINION OP JUDGE BENNETT

(sitting as a Trial Commissioner)

Bennett, Judge:^*

This is another of the several tax cases considered by the court in which the sole issue for determination is whether certain mechanics, known in the trade as “applicators,” who rendered home improvement services for the plaintiff, were its “employees” for federal employment tax purposes. The suit seeks recovery of taxes claimed to have been wrongfully paid on the earnings of the applicators under the Federal Insurance Contributions Act (FICA), 26 U.S.C. §§3101 et seq. (1964), and the Federal Unemployment Tax Act (FUTA), 26 U.S.C. §§ 3301 et seg. (1964). By stipulation of the parties, the case is presently limited to the issue of whether or not plaintiff is entitled to recover. The determination of the amount of recovery, if any, is reserved for further proceedings, as permitted by Rule 131(c).

The statutes define both what an employee is and what he is not. An employee is “any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee * * 26 U.S.C. § 3121(d) (2). The term “employee” does not include:

(1) any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an independent contractor, or

(2) any individual (except an officer of a corporation) who is not an employee under such common law rules. [26TJ.S.C.§ 3306 (i) (1964).]

In applying the common law test it must be remembered that different considerations and legislative purposes distinguish these FICA and FUTA cases, where the worker is not a party, from suits under liability and compensation acts where the economic reality test may be applied. Further, these cases turn on their facts. The facts furnish many guidelines to help determine whether or not a common law relationship of employment exists but no one factor is controlling and the relationship must be ascertained by an over-all view of the entire situation. However, the degree of control exercised by the principal over the worker is the most significant single factor. In determining whether or not there was control, it has been held that the principal, plaintiff here, must have had the right, whether exercised or not, to control not only the result to be accomplished but also the manner in which the work was to be performed. If such control existed, the worker has been held to be an employee for tax purposes. The foregoing rules have been laid down in the pertinent Treasury regulations, 26 C.F.B. §§ 31.3121 (d)-1, 31.3306 (i)-1(b)-(d), and by many cases collected most recently in this court by the opinions in William C. McCombs Co. v. United States, 193 Ct. Cl. 644, 436 F. 2d 979 (1971), and Powers v. United States, 191 Ct. Cl. 762, 424 F. 2d 593 (1970). It would serve little useful purpose here to repeat those discussions and the distinctions in the cases for the rules announced are clear and now well established. They were fully developed in the excellent briefs of counsel in the present case.

The particular difficulty with the instant case is that it covers a timespan commencing with the last quarter of the calendar year 1963 and extending through the year 1967. Within that span of time is a period represented by the last three quarters of 1965 in which the relationship between plaintiff and the applicators differed in marked degree from the rest of the period. Defendant would use this fact to color the whole case. Defendant would also seek to establish that the conduct of plaintiff’s predecessors in the business established an employer-employee relationship prior to the period in issue here and that this relationship did not change. These are not found to be the facts, however, upon a careful study of the record. For reasons appearing hereinafter, plaintiff’s claim is allowed except as to the contested three quarters of 1965.

Plaintiff, a Kansas corporation doing business in Wichita and surrounding territory, was engaged in home repairs. As such, it did reroofing and applied siding to residential properties. The work was actually done for plaintiff by men known in the trade as applicators. Plaintiff, incorporated in August 1968, was successor to E. F. Ralls Roofing Co., founded in 1938, and to R. L. Ralls, a proprietorship. E. F. Ralls was the father of R. L. Ralls and the two became partners in 1953. The latter bought out the 'business in 1962 and is now president of plaintiff and the principal owner. Plaintiff was and is a licensed contractor and carries workmen’s compensation and public liability insurance.

Without repeating the detailed facts set forth in the findings, the essential elements of plaintiff’s customary method of business can be summarized. Written contracts for work to be done were obtained from homeowners by commission salesmen working for plaintiff who guaranteed materials and workmanship. The work to be done was then set forth on a work order which specified, also, the materials to be used and the price to be paid the applicator who accepted the work order. Sometimes the starting and completion dates were stated.

Any applicator deemed by plaintiff to be sufficiently experienced could accept the work order. Such applicators were free to accept work from plaintiff’s competitors. They were paid upon completion of the work and were required to correct any faulty work without additional compensation. Plaintiff considered that acceptance of a work order constituted a contract and that the applicator was a subcontractor.

Applicators worked on a piecework basis by which is meant that they were paid on the basis of the number of “squares” of material applied at a rate per square fixed by plaintiff in consideration of prevailing area rates. Unusual jobs were negotiated as to price. Minor repair work which could not be measured by the square was paid for at an hourly rate. Plaintiff did not actively supervise the applicators but depended upon their experience to satisfy the customer and to comply with terms of the work order. The nature of the work also was such as to require no supervision, assuming an applicator was experienced.

Plaintiff drew up a document entitled Work Agreement By and Between Applicators and Sub-Contractors and Ralls, Incorporated. It was posted in plaintiff’s office and applicators were urged to read it. This document stated :

It is understood and agreed by and between Ralls, Inc. and the applicators and sub-contractors that the following work conditions exist by and between the two parties.

There followed a statement that plaintiff was the prime contractor and would pay an agreed contract amount; that no funds would be advanced on incomplete work or paid over until the job was finished; payment would not be as salary or by an hourly rate; amounts paid were to be agreed upon in advance for each job; plaintiff reserved the right to reject work that did not live up to the manufacturer’s specifications; applicators and subcontractors were to furnish all equipment necessary to install the materials; Ralls, Inc., was not responsible for transportation of personnel to and from the jobsite; “[ajpplicators and sub-contractors shall be considered as their own representative of whose time and working hours and conditions are their own”; extra help used by applicators and subcontractors was their own responsibility; Ralls, Inc., would deliver all required materials to the j obsite; no one was guaranteed a minimum amount of work or was to be eligible for bonuses, pensions or sick pay and all “may terminate their services at any time they so desire upon completion of the work they are involved in.” This document concluded by stating:

I have read and do thoroughly understand everything contained in this agreement by and between applicators and sub-contractors and Ralls, Inc. and have indicated so by signing a work acknowledgement record card.

These cards were not offered into evidence.

The Work Agreement posted by Ralls, Inc., differed from the Employee Agreement used earlier by plaintiff’s predecessors and which, signed by 54 applicators, clearly spoke in terms exhibiting an employer-employee relationship. It is found that although many of the practices under the two agreements were similar, the Work Agreement correctly stated plaintiff’s policy and practice toward applicators during the period now in issue. There were minor exceptions to the terms of the so-called Work Agreement in that plaintiff on occasion would make advance payments on incomplete work, loan a tool, or furnish a large truck for cleanup operations. But, applicators did not by their appearance, clothing, insignia or conduct hold out in any way that they were plaintiff’s employees. When, on rare occasions, an applicator’s work was not to plaintiff’s satisfaction, plaintiff considered it a breach of contract and would remove the applicator from the job. Sometimes applicators left of their own accord and without notice.

On occasion, plaintiff’s president would visit a jobsite to see if a job was progressing in accordance with the contract. However, plaintiff did not employ supervisors to observe, instruct or direct applicators how to do their work. Plaintiff relied upon the experience and competence of those selected to do the work and did not visit every job while it was in progress.

The typical applicator was not a licensed contractor such as plaintiff. However, some were licensed. The latter are not in issue here. Unlike licensed applicators, those who were unlicensed did not have offices, advertise for business or carry insurance. Plaintiff withheld taxes on these unlicensed applicators and the four who testified considered themselves plaintiff’s employees partly for this reason but none of them showed any understanding of the technical application of this term in a tax case. They just considered that they were employees of whoever paid them. Tax withholding was not a popular thing with plaintiff’s applicators. Plaintiff experienced difficulty in getting these men to work because plaintiff’s competitors did not withhold.

On March 25,1964, at a time when plaintiff had only three applicators at work, although plaintiff had used as many as 25, plaintiff requested a ruling respecting their status for employment tax purposes. The request was supplemented by affidavits of the three applicators who considered that they were independent contractors because two held licenses, all were the judges of their own time to work, were paid by agreement instead of hourly wages, and furnished their own tools and helpers.

On September 15,1964, the Internal Revenue Service, after investigation, ruled that the applicators were plaintiff’s employees and that this determination was applicable also with respect to the status of other individuals performing services for plaintiff under similar circumstances and conditions. The main basis of the ruling was a conclusion that plaintiff exercised or had the right to exercise over the applicators the control necessary under the usual common law rules to establish the relationship of employer and employee. The facts found by the Internal Revenue Service upon which the ruling was based do not at all support the ruling but are in direct refutation of it. Further, defendant has conceded for the purposes of the instant suit that independent contractors are not involved. Two of the three applicators involved in the request for ruling were independent licensed contractors, as noted above, and the other was not shown to be controlled by plaintiff as to the methods used to do a job. The ruling was clearly erroneous.

Reference is next made to the so-called Hilltop job. Plaintiff obtained a contract to do work for the Hilltop Manor Mutual Housing Corporation in 1965. This property consisted of about 100 multiplex residential units rented to shareholders by the housing corporation. This was plaintiff’s largest contract and the work commenced in April 1965 and was completed in January 1966.

Because of the size of the project and the need to work on several units at the same time, plaintiff required more applicators than usual. Plaintiff had difficulty finding the number needed and advertised for help, offering steady work at $200 per week. The usual method of paying applicators by the square did not prove satisfactory at Hilltop so plaintiff drew up an Employment Agreement establishing set prices per unit. This agreement was signed by 45 applicators. It also provided, among other things, for a forfeit for wasting materials, prohibited advance payments before completion of work or the end of a regular pay period established as of Saturday noon, and the cost of corrections was to be deducted from “wages” due applicators. Plaintiff’s president testified that plaintiff’s relationship under this agreement was the same as under the Work Agreement. The weight of the evidence is to the contrary and the terminology of the employment agreement itself negates such testimony. It is true that there were some similarities. Work orders were used as before; applicators worked on a job-to-job basis; they set their own hours of labor and furnished their own equipment. As to the latter point, however, there were significant exceptions at Hilltop and a few applicators were permitted to use plaintiff’s siding cutters for the duration of their employment at Hilltop.

Perhaps the most serious problem plaintiff encountered at Hilltop was with the tenants who had a very possessive attitude toward the units in which they lived. They complained about the colors of siding selected for their units, about the applicators stepping on their flower beds and interfering with electrical cables, awnings and fences. Some cursed the applicators and turned the garden hose on them. The applicators did not take kindly to this abuse and Hilltop’s official job inspector testified that they came and went “like a revolving door.” In fact, only one applicator continued throughout the course of plaintiff’s contract with Hilltop Corporation. Plaintiff’s difficulty in establishing peace with the tenants, the turnover in the staff of applicators, the incompe-tenca and lack of experience of some of the applicators and the necessity to have some of their botched work redone, all required that plaintiff’s president and his father give close, diligent supervision to the large Hilltop job. Plaintiff promised the Hilltop Corporation that he would “personally see that my employees conduct themselves as gentlemen or they will be discharged,” and that he would devote his “personal attention to the job.” Mr. Ealls kept his promises and by careful daily inspections made sure that sloppy work, missing rifl.ilbroken materials, misaligned siding and other deficiencies were taken care of and that inexperienced applicators were shown how to proceed properly.

Upon careful consideration of the entire record, it is concluded that while plaintiff retained the right at aE times to control the result of work contracted for, and on which applicators were used, plaintiff did not exercise direction and control over the manner and method of the appEcators’ performance nor retain the right to do so except for the last three quarters of the calendar year 1965 of the total period involved in this case commencing with the third quarter of 1963 and extending to the first quarter of 1967. Upon these facts and the authority of McCombs and Powers, supra, and the cases and regulations collected there, plaintiff is entitled to recover except for the last three quarters of 1965 during which time the applicators working for plaintiff were common law employees for purposes of the taxes here at issue.

Findings of Fact

1. Plaintiff is a Kansas corporation with its place of business located in Wichita. Since its incorporation on August 5, 1968, the plaintiff has engaged largely in the business of modernizing and repairing residential properties by the appEcation of roofing and siding materials under contracts with the owners. This work has been done largely within Wichita or a 100-mile radius of that city. Eichard L. Ealls owns at least 80 percent of the company stock and as president has over-aE responsibiEty of running the business.

2. Plaintiff is successor to the same business, a proprietorship, E. L. Ealls, t/a E. F. EaEs Eoofing Co. The E. F. Ea-Hs Boofing Co. was started by E. F. Balls in 1938. Bichará L. Balls, son of E. F. Balls, was a salesman for his father. In 1953 he became a partner and by 1962 acquired his father’s interest and operated as a sole proprietor until incorporation in 1963.

3. Plaintiff paid federal employment taxes on the income of persons who rendered certain home improvement services under its direction. Timely claims for refund of these taxes were filed on the grounds that such persons were not “employees” for purposes of federal employment taxation but were “applicators” or “subcontractors.” The claims were denied and this suit followed. The amended petition seeks recovery of employment taxes paid with respect to the “applicators” during the period January 1, 1962 througjh December 31,1967. However, at trial, plaintiff withdrew that portion of the claim prior to the beginning of the third quarter of 1963. Plaintiff further agrees that it here seeks to recover only the taxes paid on the income of those mechanics who were applicators and not on any who were hot or cold tar roofers who, it concedes, were common law employees. Some persons, however, did both hot tar work and were applicators of siding and shingle roofing. They, too, are excluded from this claim. Also excluded are certain mechanics conceded to be subcontractors, and plaintiff’s salesmen and office help. Applicators who were paid by the square or by the unit for roofing or siding work, but paid by the hour or upon a negotiated price for minor repair work, are not excluded.

4. It is stipulated by the parties that the present case is limited to the issue of whether plaintiff is entitled to recover, reserving the determination of the amount of recovery, if necessary, for further proceedings. By this suit, plaintiff seeks a refund of the excise portion of the Federal Insurance Contributions Act (FICA) taxes contributed by it and the excise taxes comprising the Federal Unemployment Tax Act (FUTA) tax paid solely by plaintiff. No claim is made for the income tax portion of the FICA taxes paid by the applicators.

5. In Wichita it is necessary for a contractor to have a license which is obtained after passing a written test. The holder of such a license is eligible to pay a fee to obtain building permits. Plaintiff is licensed to do contract roofing and siding. Plaintiff also carried workmen’s compensation insurance required by the State of Kansas, and had public liability insurance.

6. Plaintiff’s customary method of operation was in the following general manner:

(a) Contracts were obtained from homeowners by salesmen acting on behalf of plaintiff. These salesmen were conceded to be independent contractors working on a commission basis. Plaintiff guaranteed the workmanship and materials on each job. These contracts were on a printed form supplied by plaintiff and contained the price and specifications as agreed upon between the salesman and homeowner.

(b) Thereafter plaintiff prepared a work order describing the work to be done, the material to be used, the cost of the job, and sometimes the starting and finishing dates for the work to be accomplished. This information was filled in on a printed form.

(c) Richard Ralls then would offer the work order to an available applicator who had the option to accept or to reject the proffered job without prejudice to his future opportunities to do work for plaintiff. If the applicator accepted the work order plaintiff considered it a contract and the applicator a subcontractor.

(d) The applicator then went to the customer’s home to apply the roofing or siding material which the plaintiff supplied and delivered to the jobsite.

(e) The applicator was paid upon completion of the work and generally after the customer had signed a completion statement agreeing that the contract had been performed satisfactorily. Applicators were required to correct any faulty work without additional compensation. If an applicator was not available for corrective work, plaintiff had someone else do it and would not charge the first applicator for the cost of such work even though he returned at a later time to do another job for plaintiff.

7. Payment to applicators was generally on a piecework basis by the number of squares of material actually applied at a rate per square fixed by plaintiff in consideration of the prevailing rate in the area. If the job presented unusual difficulties the price was negotiated. For minor repair work not covered by the work order but desired by the customer and which work could not be measured by the square, the applicators were paid by plaintiff at an hourly rate for the time spent or the price was negotiated. They were also free to contract directly with plaintiff’s customer for minor repair work and to be paid for it by such customer. Plaintiff did not actively supervise repair jobs, which were done by its experienced applicators upon whom plaintiff relied to do such work. Where work of a major nature not covered by the work order was desired by a customer, or where the applicator found a lead for a job in plaintiff’s line of work while working for plaintiff, the matter was customarily turned over to plaintiff to deal with the customer. Plaintiff did not solicit competitive bidding on any of the work done by applicators.

8. The foregoing work arrangements and practices, and others relating to helpers working for applicators, transportation, tools, equipment, working hours, expenses, continuity of employment, and other considerations entering into the relationship between plaintiff and applicators, are set forth more fully in a document entitled Work Agreement By and Between Applicators and Sub-Contractors and Balls, Incorporated. This Work Agreement was posted in plaintiff’s office and applicators and subcontractors were instructed to read it. Some did so and some didn’t. If an applicator was illiterate, Mr. Balls read the agreement to him. There was no documentary evidence that the agreement was read or signed by applicators involved in the instant claim. The agreement read as follows:

WORK AGREEMENT BY AND BETWEEN APPLICATORS AND SUB-CONTRACTORS AND RALLS, INCORPORATED

It is understood and agreed by and between Balls, Inc. and the applicators and sub-contractors that the following work conditions exist by and between the two parties.

I. Balls, Inc. agrees to pay an agreed contract amount at a pre-determined rate for the application of roofing and siding materials applied to all residential properties in which Ralls, Inc. shall act as prime contractor.

A. At no time will Ralls, Inc. advance money on any work that is incomplete, or in advance to the commencement of such work.

B. No applicator or sub-contractor will be paid in the form of salary or hourly pay rate for any of his labor expended. All amounts shall be agreed upon prior to commencing any work. Ralls, Inc. reserves the right to reject any work that does not live up to manufacturer’s specifications and recommendations on application of roofing and siding materials. All work must meet the local building codes and pass city inspection.

II. Applicators and sub-contractors agree to furnish, at no charge, all hand tools, ladders, scaffolding, etc., that may be required to install any materials called for.

A. Ralls, Inc. shall not be responsible for the transportation (trucking) of any applicators or subcontractors to or from the job sights [sic].

III. There shall be no meetings held in groups with applicators and sub-contractors with Ralls, Inc. Any questions regarding amounts paid or material installation may be obtained by direct contact of the office manager.

A. Applicators and sub-contracts [sic] shall be considered as their own representative of whose time and working hours and conditions are their own.

B. Applicators and sub-contractors will report to the office only when the contract they are working on is complete, with full information as to number of material squares (100 square feet) applied, and to pick up their next job address.

C. Amounts to be paid to applicators and subcontractors shall always be agreed upon each job individually before starting.

D. Ralls, Inc. shall not dictate in any manner any working hours or time stipulations for the completion of any contracts in which agreements are made.

IV. Ralls, Inc. does not and will not reimburse any applicator or sub-contractor for any expense they might incur regarding labor.

A. No travel allowance is made for applicators and sub-contractors working in or out of the Wichita Area. All expenses of travel are the applicators and sub-contractors.

B. Applicators and sub-contractors may use their own extra help as they may choose. Balls, Inc. does not furnish extra labor, nor does the company assume any responsibility for the earnings of any extra labor which the applicators or sub-contractors may use.

C. Any work that is done by an applicator or subcontractor in which he has used any helpers or extra labor shall be considered his responsibility as to the correct performance and acceptance of their work.

V. Balls, Inc. agrees to have all materials required on each job delivered prior to the starting time of work that may be indicated by the applicator or subcontractor.

A. Any shortages of material will be delivered by Balls, Inc. upon notice from the applicator or subcontractor.

VI. All work that is started must be completed entirely prior to applicators or sub-contractors presenting completion certificates for amounts due. No partial work will be accepted.

VII. Applicators and sub-contractors are not guaranteed a minimum amount of work and are not eligible for bonuses, pensions, or sick pay, and will pay all expenses incurred in connection with their work.

VIII. Applicators and sub-contractors may terminate their services at any time they so desire upon completion of the work they are involved in.

I have read and do thoroughly understand everything contained in this agreement by and between applicators and sub-contractors and Balls, Inc. and have indicated so by signing a work acknowledgement record card.

TO BE POSTED IN CLEAR SIGHT EOR ALL APPLICATORS AND SUB-CONTRACTORS ON THE OEEICE BULLETIN BOARD

9. There is in evidence a document on the stationery of E. F. Balls Company, plaintiff’s predecessor, entitled Employee Agreement By and Between Boofing Applicators and E. F. Balls Company. This document was prepared in late 1962 or early 1968 before the period involved in this suit. Because Bichard Balls testified that the relationship between the applicators and E. F. Balls Company and that between the applicators and plaintiff was generally the same (a comparison he later qualified), defendant insists that this vitiates plaintiff’s case because the E. F. Balls Employee Agreement clearly speaks in such terms as to make it clear that the relationship between said company and the applicators was that of an employer with common law employees. The agreement was accepted and signed by 54 applicators. The agreement specifies exactly how they shall do their work. However, it was also the testimony of Richard Ralls that this form of agreement was abandoned by him when he took over the business because it was quite unworkable, which he explained in some detail. It is found that while the testimony of Richard Ralls was mistaken as to the relationship of applicators to the two companies being the same, considering the differences between the two agreements and the facts in evidence, Mr. Ralls admitted that he couldn’t give specifics about the earlier agreement, couldn’t speak for what his father did, and he was not in the management end of the E. F. Ralls Company. The weight of the evidence is that the E. F. Ralls Company Employee Agreement did not govern the relationship between applicators and the plaintiff, Ralls, Incorporated, but that it was the intent of Richard Ralls that the later Work Agreement should do so. The E. F. Ralls Employee Agreement was removed from plaintiff’s bulletin board and the 1963 Work Agreement was substituted thereon and called-to the attention of the applicators, as noted above.

10. When plaintiff required the services of applicators to accept work orders he proceeded to find them in several ways. He would telephone applicators known to him to see if they were available for work. He borrowed applicators from friendly competitors, advertised for them in the newspaper, and used others who came by the office seeking work. In order to eliminate any need for close supervision and control of the manner and method of the work of applicators, it was plaintiff’s intention, and usual practice, to use only experienced applicators with 5 years of experience. If an applicator did not do a good job plaintiff did not thereafter offer him another work order. If unknown to plaintiff, an applicator’s references were checked. The typical applicator employed by plaintiff was not a member of a labor union and did not advertise in newspapers or maintain business listings in the telephone directory or have an office or shop. These applicators typically did not have a contractor’s license, or carry workmen’s compensation or public liability insurance.

11. Plaintiff used applicators on a job-to-job basis. There was no understanding between plaintiff and the applicators that they would get any definite number of jobs. Plaintiff did not have enough work to keep applicators busy on a continuing basis. Three weeks was a normal period for continuous work. Plaintiff and the applicators felt no obligation to one another regarding employment beyond the particular job being performed. Applicators felt free to come and go and to work for plaintiff’s competitors before, after or while working for plaintiff. Plaintiff had no preferred call on any applicator. It was plaintiff’s desire, however, to keep good applicators available as much as possible and to do so he gave them preferences in work orders and extra work. At no time, however, did the applicators by their appearance, work clothing, insignia, advertising on their persons or vehicles, hold out that they were performing work for Ralls, Inc.

12. The typical applicator owned a pickup track which he used for transportation of himself and his tools and equipment to and from the jobsite. Plaintiff owned a larger truck. When it was necessary to use the larger track for an applicator to clean up the jobsite after completion of a work order, plaintiff would loan his for this purpose.

13. Plaintiff expected and required applicators to furnish their own tools and equipment. This equipment cost several hundred dollars and consisted of such items as ladders, planks, hand tools, power tools, metal cutters, pumps, jacks, snips, levels and scaffolds. On occasion, when an applicator broke a tool or did not own an extra long ladder or particular tool such as a cutter, he would borrow one from plaintiff if plaintiff had it. This was the exception rather than the rule during the period in issue.

14. Although work orders sometimes gave the dates on which a job was to be started and completed, an applicator had no specified working hours. He decided when and whether he would work although it was understood that once having started a job he would complete it within a reasonable time and that he would not be paid until the work was done. The evidence does establish that plaintiff made advance payments to a few applicators on occasion. It would take approximately 4 days to install siding on a typical one-family house. Sometimes this period would be extended because an applicator would have another job for another firm and intersperse work on it with work for plaintiff.

15. Applicators hired their own associates and helpers as required and determined their hours, pay and working conditions. These individuals were paid directly by plaintiff who was advised by the applicator of the wages due them and which remuneration was taken from the amount of compensation due the applicator from plaintiff on the specific job for which the associate or helper was employed. Plaintiff required those paid by him in this maimer to fill out employment tax information for his records.

16. Plaintiff would consider the contract breached and remove the applicator from the job if dissatisfied with an applicator’s work because it was not according to the requirements of the contract with the customer or the specifications on the work order or where he was doing sloppy work or butchering and wasting material. This happened infrequently under the usual conditions of plaintiff’s business. Applicators themselves sometimes terminated their relations with plaintiff by leaving a job without notice.

17. In the customary conduct of its business plaintiff did not employ supervisors or other personnel to observe, instruct or direct the applicators how to do their work. Having been satisfied that they were experienced applicators, plaintiff relied upon them to perform the work properly and in accordance with the requirements of the work orders although on occasion it might be necessary to give oral instructions to supplement the work order if the order itself was unclear. On occasion, Richard Ralls, president of plaintiff corporation, would visit a jobsite at a customer’s request or to observe whether a job was progressing in accordance with the contract. Not every job was so visited. Apart from being expected to follow the requirements contained in the work orders, the applicators received no instructions or directions from plaintiff as to the manner or method to accomplish the work. In the usual, customary conduct of its business plaintiff did not attempt to control or to direct the manner in which the applicators performed the work. Plaintiff was, however, most interested in instructing applicators, via the work orders or orally in some situations, just what result they were expected to accomplish.

18. Some applicators who accepted plaintiff’s work orders took the required examination and were themselves licensed contractors, such as plaintiff. They had their own offices, advertised for business, sometimes used several crews, carried their own insurance and paid self employment taxes. Such applicators considered themselves to be independent contractors but as independent subcontractors in their relationship with plaintiff while doing work for plaintiff. As such they performed work for plaintiff under the same circumstances and conditions as applicators who did not have licenses. However, plaintiff did not always withhold employment taxes from such licensed contractors. Plaintiff did always withhold such taxes, however, from unlicensed applicators, assuming that applicators were not licensed subcontractors unless they advised it otherwise. Four of the five applicators testifying as witnesses in this case, including one for plaintiff, were unlicensed and considered themselves to be employees of plaintiff. Plaintiff withheld taxes from their compensation. The withholding was only one consideration that caused them to consider themselves employees. The status of licensed subcontractors is not here in issue, defendant conceding that they are not common law employees for purposes of federal employment taxation.

19. On March 25, 1964, plaintiff wrote a letter to the District Director, Internal Revenue Service, Wichita, seeking a ruling respecting the applicators’ status for employment tax purposes. Plaintiff outlined its relationship with the applicators and stated that the withholding of taxes from applicators’ earnings, as plaintiff was doing, was contrary to the custom and practice of plaintiff’s competitors in the area who viewed all applicators as independent contractors. Plaintiff stated that this view was shared by the applicators themselves who objected to the withholding to such an extent that plaintiff was having trouble getting applicators to work. Plaintiff stated that it had employed as many as 25 applicators but presently was down to three and unable to meet the competition.

20. The request for ruling was supplemented by signed statements from the three applicators and completion of IRS forms. One applicator, Elvie E. Yanderford, stated that he had worked for several contractors none of whom withheld tax. He further stated that he was a licensed general contractor himself. Jack Stubbs stated that he had done work for other contractors similar to plaintiff and that they did not withhold tax. He further stated that since Ralls did not control his time and the work was by agreement instead of hourly wages, he felt that he was an independent contractor. Charles W. Mcllvaine, who held his own license, stated that since Ralls did not furnish him with any tools or helpers, and he worked for Ralls under contract and not by the hour, he considered himself an independent contractor.

21. Plaintiff’s application for a ruling was investigated by the Internal Revenue Service. Based upon the information submitted and the Service’s independent investigation, the Service on September 15,1964, concluded that the applicators were plaintiff’s employees. This suit challenges the validity of the ruling, based upon the facts found by the Service itself to be material to the question whether the applicators were employees or independent contractors under applicable provisions of the Internal Revenue Code. Pertinent portions of the ruling provided:

The information furnished discloses that the nature of your business is the selling of roofing and siding and applying them on dwellings. The application of the roofing and siding is done by applicators or installers, who are subcontractors and the Corporation is the prime contractor. The applicators sign an agreement with the Corporation in which they agree to apply roofing and siding for an amount agreed upon prior to commencing any work. At no time is any amount advanced on work that is incomplete and no payment is made until the work is completed and the applicators and subcontractors present work orders for amounts due. There are no set hours that the applicators must work and no stipulation when tbe contract is to be completed. The applicators report to the office only when the contract is completed and present statements showing the amount of money due. At that time, they pick up their next job address and work order, if there are other jobs to be done. , . ;

The agreement further states that the Corporation will not reimburse the applicators and subcontractors for any labor expense incurred. The applicators will furnish all their equipment and will pay all travel expense in going to and from the jobs. The Corporation agrees to have all materials required on a job delivered prior to the starting time of work that may be indicated by the applicators and subcontractors. Applicators and subcontractors are not guaranteed a minimum of work and are not eligible for bonuses, pensions, or sick pay and pay all expenses incurred in connection with their work. Either party may terminate the services upon the completion of the job upon which the applicators are working.

The applicators perform services for competitive contractors of the Corporation and also for individuals with whom the applicators have drawn up their own contracts and agreements. Each applicator may be working on several j obs at a time.

The Corporation does not supervise any of the work done by the workers as it deals only with experienced applicators and subcontractors with recommendations as to their reliability and performance of work. Occasionally, a check may be made as to the progress of the work and an inspection is made on completion of the work to see that it meets the building codes and manufacturer’s specifications.

The evidence presented establishes that the individuals here involved perform personal services at frequent intervals pursuant to continuing informal agreements; that their services are both necessary and incident to the business conducted by the Corporation; that the individuals do not assume contractual responsibility for the execution of completed projects; and that they are not engaged in independent enterprises requiring capital outlay or the assumption of business risks. The Corporation may dispense with their services at any time and it appears that the Corporation retains the control over them as is necessary for the satisfactory conduct of its business.

We have concluded, upon the basis of the information furnished, that the Corporation exercises or has the right to exercise oyer Mr. Mcllvaine, Mr. Vanderford and Mr. Stubbs, in the pez-foimance of their services, the control necessary under the usual common law rules to establish the relationship of employer and employee for Federal employment tax purposes, including income tax withholding from “wages” under the Internal Revenue Code. Liability for these taxes therefore is incurred by the Corporation with respect to “wages” paid to the individuals for their services.

This determination is applicable also with respect to the status of other individuals who perform services for the Corporation under circumstances and conditions which do not differ in any material respect from those contained herein.

22. Upon the evidence adduced at trial concerning plaintiff’s method of operation of its business, and upon the facts found as set forth in the ruling of the Internal Revenue Service on September 15, 1964, it is found that the ruling was clearly erroneous and contrary to the weight of the credible evidence as it pertained to Messrs. Vanderford, Stubbs and Mcllvaine, and any other individuals who performed services for plaintiff under similar circumstances and conditions during the period covered by this suit, except as hereinafter shown as to the year 1965.

23. The major portion of the evidence received at trial consisted of that relating to plaintiff’s relationship with its applicators at the Hilltop Manor Mutual Housing Corporation project in 1965. Plaintiff’s president testified that the relationship of plaintiff and the applicators was no different at Hilltop than it was elsewhere. The evidence establishes, however, that while there were similarities, there were also important differences.

24. Hilltop Manor Mutual Housing Corporation is located in Wichita. The corporation owns approximately 100 multiplex residential units consisting of duplexes, 4-plexes, and 6-plexes, which it rents to its shareholders who tend to regard them as their own. In July 1963 plaintiff’s predecessors contracted to reroof this project which had been a war housing development at one time.

25. Plaintiff entered into a contract to apply siding to the units at Hilltop, the work to commence in April 1965 and to be finished by Thanksgiving of the same year, for a consideration of $80,000. This project provided the substantial part of plaintiff’s income in that year. It was completed in January 1966.

26. Plaintiff worked on as many as eight of the Hilltop units at the same time. Because of the size of the project, plaintiff needed many applicators and used the services of both those who had worked for it before and those who had not. Plaintiff advertised for applicators. One typical advertisement read: “Siding applicator, experienced only, steady work, $200 per week.”

Plaintiff did not advertise that work was to be done on a subcontract basis.

27. There was no competitive bidding for the work at Hilltop. At the start of the project plaintiff paid applicators a flat rate per square (100 square feet) of siding allegedly applied. This did not prove a satisfactory arrangement on this job so plaintiff drew up an agreement establishing set prices for each type of unit. Applicators were required to enter into and sign the document entitled Employment Agreement With Ralls, Inc. The agreement, in addition to fixing a maximum amount of compensation per type of unit, provided for a forfeit of $5 per bundle of material in excess of the number of bundles specified in the agreement for use per unit. This was to stop some applicators from stealing and wasting materials in order to increase their compensation when previously paid “by the square.” The agreement further provided against advances or draws on compensation before completion of work or before the end of a regular pay period established as Saturday noon. Applicators agreed to proceed in a workmanlike manner. If they quit a job before finishing it they forfeited “wages” due. If an applicator was terminated by plaintiff, payment for incomplete work was not to be paid until the job had been completed by another applicator. On defective work the cost to make corrections was to be deducted from wages due to applicators. All materials were to be applied according to manufacturer’s specifications. Forty-five applicators signed this agreement.

28. Plaintiff prepared work orders for the units in similar form to orders used by plaintiff on other jobs. Applicators as usual worked on a job-to-job basis. They set their own hours of labor. They supplied their own tools and equipment for the most part but at least three applicators who worked at Hilltop borrowed plaintiff’s cutters. Two were permitted to use plaintiff’s siding cutters without charge for the duration of their employment. Plaintiff infrequently loaned tools and equipment.

29. Shortly after the work started at Hilltop in April 1965, various tenants living in the housing units upon which the siding was being applied disrupted the applicators’ progress with complaints and demands relating to the necessity for removing electrical cables, awnings, fences, flower trellises, stepping on the flower beds next to foundations, and strong objections were made to some of the colors of siding being applied, although the Hilltop Corporation and not plaintiff had selected the colors. The tenants cursed the applicators and some had the garden hose turned on them. The Hilltop Corporation also had a man, H. D. Arnold, charged with the responsibility to inspect the jobs in progress, which he did daily. Plaintiff instructed the applicators to exercise care about the flower beds, not to drink or curse on the job, and to be sure to clean up the jobsite each evening. Notwithstanding plaintiff’s admonitions to the applicators the situation remained tense and some workmen quit their jobs rather than have to stand the verbal abuse, ridicule and criticism of the tenants. Only one applicator who started the project remained to its conclusion on January 17,1966, and he was used to correct defective work. Mr. Arnold testified that applicators came and went “like a revolving door.” It was extremely difficult; to induce them to stay on the job even with offers of a bonus or extra pay.

30. Plaintiff’s president, Bichard L. Balls, sent a memorandum to the Hilltop Corporation board of directors in which he outlined the foregoing difficulties and stated that they had slowed down performance of the contract due to no fault of plaintiff. Plaintiff stated that it would of necessity have to fall back on the letter of the contract and henceforward would take no responsibility for replacement of electrical outlets, air conditioners, telephone lines and the like and that no responsibility would be assumed for replacement of awnings, fences, flower trellises, railings and other privately owned items of this nature. The board was asked to take measures to see that peace on the jobsites prevailed and that tenant harassment ceased. Mr. Balls stated: “I will personally see that my employees conduct themselves as gentlemen or they will be discharged.” Mr. Balls stated further, in part:

It would appear that the entire population of Hilltop has appointed him or herself your project inspector and it cannot be over-emphasized the amount of ill will, work stoppage delay, lost man hours and resentment that has resulted on both sides. * * * I can state with certainty of knowledge that this situation is causing the quality of work to fall off on occasion. I simply cannot be in twelve places at once. * * *

I have not at this time placed a job foreman over the work because of my sincere interest and desire to please and the feeling that I wanted to devote my personal attention to the job to satisfy both you and myself. I do not, however, intend to subject myself to additional treatment as the past few weeks have brought about. A job foreman will be assigned in the near future if pressures are not eleviated [sic] * * *.

31. Plaintiff did not appoint a job foreman but Bichard L. Balls, assisted by his father, E. F. Balls, continued to make careful daily inspections of the work at Hilltop. When these inspections revealed sloppy work, missing nails, broken materials, misaligned siding and other deficiencies, the workmen would be told to correct them, and in some cases were shown how to do it. Such deficiencies were not so frequent on the work of experienced applicators but a few of those working at Hilltop were either inexperienced or incompetent or both. Mr. Balls had to show some applicators how to do their work. He had to use qualified applicators to correct some mistakes of the unqualified. It was sometimes necessary to let an applicator go because of faulty work.

Ultimate Findings

32. Based on the total situation concerning the activities at Hilltop for the last three quarters of the calendar year 1965, plaintiff retained both the right to control the manner and method of the work performance of applicators as well as the result accomplished by them on that project. The Hilltop applicators were common law employees.

33. Based upon the total record of evidence, it is found that plaintiff retained the right to control the result of the work contracted for and on which applicators were used but plaintiff did not exercise direction and control over the manner and method of the applicator’s performance nor retain the right to do so for the balance of the period involved in this case: the third quarter of 1963; 1964; the first quarter of 1965; 1966; and 1967.

Conclusión oe Law

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover for the third quarter of 1963; for 1964; for the first quarter of 1965 but not for the last three quarters of that year; for 1966; and for 1967. The amount of recovery is reserved for further proceedings under Rule 131(c) (2).

* See fn. following.

* This case -was referred to Chief Commissioner Marlon T. Bennett for trial proceedings and report pursuant to Buie 134(h). After trial, but before his findings of fact and recommendation for conclusion of law could be submitted to the court, he was nominated by the President, confirmed by the United States Senate, and toot the oath of office as an. associate Judge of the Court of Claims. This report, therefore, Is submitted to the court by Judge Bennett sitting as a commissioner of the court’s trial division. 28 U.S.C. S 2505.