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Peterson v. Comm'r

United States Court of Appeals for the Eleventh Circuit

May 24, 2016, Decided; July 8, 2016, Filed

Nos. 14-15773, 14-15774

Opinion

 [*970]  FAY, Circuit Judge:

Christine C. Peterson2 and Roger V. Peterson1 appeal the decision of the United States Tax Court, determining deferred compensation payments under corporate plans made after Peterson's retirement [**2]  from Mary Kay, Inc. ("Mary Kay"), in tax year 2009 were derived from her former Mary Kay association, making them subject to self-employment tax. We affirm in part and dismiss in part.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Mary Kay Sales Structure and Commission Compensation

Mary Kay is a manufacturer and seller of cosmetics, toiletries, skin care, and related products. Mary Kay has prospered in the United States and internationally, because of its indigenous, highly incentivized levels of independent sellers, who are commission compensated. A Mary Kay seller can progress rapidly according to her sales and commissions; each advancement is more lucrative to the seller and financially beneficial to Mary Kay. Unique to Mary Kay are its post-retirement, deferred-compensation programs, the ultimate financial incentive [**3]  for Mary Kay sellers, who have risen through the seller ranks to earn the opportunity to participate in them.

All of Mary Kay's sellers are independent contractors. The entry level is an independent Beauty Consultant ("BC"), each of whom enters into a written agreement with Mary Kay and commits to develop a customer base to whom they sell Mary Kay products. BCs buy Mary Kay products wholesale and sell them retail to public customers. BCs have two responsibilities: (1) to build a customer base and (2) to recruit new BCs, from whom a BC earns commissions on purchases made by their recruited BCs.

When a BC has recruited 24 independent BCs, she can become a Sales Director ("SD"), which involves signing a SD Agreement with Mary Kay. Her 24 BCs constitute a personal sales unit, from all of whom she earns commissions. A SD has additional responsibilities: she oversees the BCs under her by educating and inspiring them to excel in selling Mary Kay products. She also continues to acquire additional personal units, from which she earns  [*971]  a percentage of their sales commissions. BCs within a SD's sales unit may become SDs, resulting in an offspring sales unit, from which the SD continues to earn a [**4]  percentage of their sales commissions.

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827 F.3d 968 *; 2016 U.S. App. LEXIS 9473 **; 2016-1 U.S. Tax Cas. (CCH) P50,289; 117 A.F.T.R.2d (RIA) 2016-1815; 26 Fla. L. Weekly Fed. C 325

CHRISTINE C. PETERSON, ROGER V. PETERSON, Petitioners - Appellants, versus COMMISSIONER OF IRS, Respondent - Appellee.

Subsequent History: As Amended July 8, 2016.

Prior History:  [**1] Petitions for Review of a Decision of the U.S. Tax Court. Agency Nos. 16263-11, 2068-12.

Disposition: AFFIRMED IN PART, DISMISSED IN PART.

CORE TERMS

retirement, sales, self-employment, commissions, network, deferred compensation, tax court, characterization, taxpayer, Programs, termination, parties, earnings, products, training, cases, nexus, unilateral, agrees, Wholesale, covenant, whipsaw, eligible, sellers, independent contractor, post-retirement, nonqualified, quantity, tax year, distributions

Civil Procedure, Appeals, Notice of Appeal, Tax Law, Tax Court, Appeals From Tax Court, Jurisdiction, Standards of Review, Clearly Erroneous Standard of Review, De Novo Standard of Review, Federal Tax Administration & Procedures, Burdens of Proof, Appellate Court Powers, Federal Taxpayer Groups, Individuals, Self Employment Activities & Income, Tax Credits & Liabilities, Estimates & Withholding, Self Employment Contributions Act, Business & Corporate Compliance, Federal Income Tax Computation, Tax Accounting, Retirement Plans, Compensation & Welfare Benefits, Tips, Wages & Other Compensation, Compensation for Services, Allocations of Deductions & Income, Substance Over Form Doctrine, Contracts Law, Defenses, Ambiguities & Mistakes, Audits & Investigations, Examinations, Affirmative Defenses, Fraud & Misrepresentation, Coercion & Duress, Federal Income Tax Computation, Governments, Courts, Judicial Precedent, Contract Interpretation, Ambiguities & Contra Proferentem, Intent, Contracts Law, Types of Commercial Transactions, Sales of Goods, Legislation, Interpretation