The opinion of the court was delivered by: KNIGHT
Plaintiff brings this action for refund of taxes in the amount of $20,744.80 and interest assessed against plaintiff under subdivision C of Chapter 9 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code § 1600 et seq. (the Federal Unemployment Tax Act); the Collector having levied the assessment on the basis that some 4,000 individuals (called "corsetieres") throughout this country engaged in selling plaintiff's garments were "employees" under the Act and having computed the tax on the basis that the "total wages" paid to each equalled a fixed percentage of the price charged by the plaintiff to the corsetieres for each garment. This figure (60%) was determined by computing the percentage mark-up of the plaintiff's "recommended retail price" over the price charged to the corsetieres.
The issues presented are, first, whether or not the corsetieres are "employees", and, second, if they are so, whether or not the method of computing the tax was proper.
The evidence shows that over a long period of years the plaintiff has been manufacturing women's underclothing, referred to as "foundation garments", which to some extent are made to the measure of the individual customer, throughout the country. Plaintiff's garments reached the consumer via the corsetieres with whose status our concern is at present. The corsetiere is a woman who sells plaintiff's garments in her own community by individual solicitation.
The evidence is undisputed that during the year in question, 1941, there were three types of written contracts in existence between the plaintiff and the various corsetieres. These are designated as "old", "intermediate" and "current" contracts. The first-mentioned was the form used prior to 1940; the second, in 1940 and 1941; and the last, in 1941. In 1941, 4,341 contracts were in force. Of these, 93 were of the "old" form; 360 of the "intermediate"; and 3,888 of the "current" form. Out of the total sales in 1941, amounting to $1,089,413, only $2,702, or approximately one-fourth of one percent, was received from sales made under the "old" contract.
Under each of these several types of contracts, the company grants the right to the corsetiere to sell its product, agrees to protect her sole rights in a definite territory, to provide her with the use of special designated patented modeling garments for use in the making of measurements. The corsetiere on her part agrees not to sell plaintiff's garments outside of specified territory, to pay promptly for all garments received and to deliver up the modeling garment or garments on the termination of the contract. The time and condition of termination are fixed.
The "old" type of contract in addition required the corsetiere to take and practice certain training furnished by the plaintiff, to keep on hand complete modeling garments and representative assortment of models, to furnish the names and addresses of consumers, to sell no competitors' products, and to keep within a certain territory.
A great deal of testimony was given by officers of the company and numerous corsetieres as to the practices and methods of the company and the corsetieres in carrying out the business of sales. There is little material contradiction in this testimony. The company has no dealings with the consumer. Its garments in different styles are entirely sold by the corsetieres. These corsetieres are mostly, if not entirely, women in the homes wishing to engage in remunerative work in hours and times at their own election and at own convenience. The company furnishes certain descriptive matter and offers means for some instruction in the work. Training through means provided by the company is now optional, but, as seen, it was once required. The corsetiere is furnished with a modeling garment for use in taking measurements, and she makes a deposit for the value of this. It is quite obvious that these women require some instruction in some way, especially as to the methods of sale, and to some extent as to the taking of measurements. The modeling garment is specially adapted to show her how to make necessary measurements. The corsetiere procures sales at her own expense and through the methods usually employed in retail sales outside of retail stores. The approach to the customer is reached by house to house canvass, through personal acquaintance, by indirect contact through others, through acquaintance and other ways. The company recommends a minimum sales price but she is not required to observe this, and the evidence discloses that sales are frequently made for less or more than the recommended price. Whether or not the purchaser pays the purchase price at time of sale, the corsetiere must take care of the purchase and pay for garment by order when delivered or else provide a guarantee of payment. Some times the purchase price accompanies the order; at times the garment is paid for on delivery; and at times the payment is made from a deposit theretofore provided by the corsetiere. Approximately 95% of all the sales in 1941 were paid for in full at wholesale price upon or before the delivery of the garments to the corsetieres. The company has never required any report of the price for which any garment was sold. The garments are shipped in all cases to the corsetiere, except on the corsetiere's request they may be shipped to the consumer.
The corsetiere is liable for misfits caused by her own fault; the company is liable for defect in quality or error in making. Expenses of sales are borne by the corsetieres. Prior to 1940 the practice was to invite the filing of business analysis cards by the corsetiere with the company. These cards showed what contacts had been made and what results were obtained. They also contained a blank to provide information for advertising by the company. The purpose of this was that the company could study the cards in order to be of assistance and advice to the corsetiere. It appears that only about 25% of these cards were turned in, and this practice was abandoned. Changes in the contract since 1939 are claimed to have been made because of decisions in earlier cases, and the desire to lean over backwards in order to express the true relation between the company and the corsetiere and the operation to the retailer.
The testimony discloses that there is no such a thing as a Spirella method of salesmanship, as distinguished from other methods of salesmanship used in house to house or nonstore selling. Spirella literature as to these methods shows it to be in common use in a comparable type of business. It is some times called personal selling method or direct selling method. The modeling garments are an invention of the Spirella Company. They have been in use since 1929. The so-called Spirella method of corsetry is the means for the use of these modeling garments to obtain measurements and specifications.
With respect to the "intermediate" and "current" type of contract, the terms and performances under them both show that the plaintiff had the right to exercise less control over the corsetieres than under the other contract. For this reason this opinion deals specifically only with the "old" contract though necessarily it applies to the later types.
On the issue of employment, the pertinent statute and regulation are as follows:
Internal Revenue Code, § 1607, 26 U.S.C.A. Int.Rev.Code, § 1607:
"Definitions. * * * (c) Employment. The term 'employment' means any service performed prior to January 1, 1940, which was employment as defined in this section prior to such date, and any service, of whatever nature, performed after December 31, 1939, within the United States by an employee for the person employing him, irrespective of ...