The distinction between employee and independent contractor status remains a cornerstone of tax practice, impacting everything from payroll tax obligations to the deductibility of business expenses. A recent U.S. District Court case, Francisco J. Gil, et al. v. United States, provides a valuable application of the long-standing common-law tests used to determine worker classification. The court’s memorandum offers a clear, factor-by-factor analysis that reinforces foundational principles for tax professionals advising clients on this critical issue.

Factual Background

The taxpayer, Francisco Gil, worked as a financial advisor for 35 years, beginning at Prudential Securities and continuing through a series of corporate acquisitions that culminated with his employer becoming Wells Fargo. Throughout this entire period, Mr. Gil performed the same work at the same physical office location. His primary responsibilities included recruiting his own clients, creating financial plans, and helping them with investments. He sold financial instruments from a variety of companies and maintained the requisite professional licenses for his role.

Mr. Gil’s position afforded him significant autonomy. His compensation was entirely commission-based, with no ceiling on his potential earnings. He set his own work hours and, particularly after the COVID-19 pandemic, worked primarily from home. However, Wells Fargo exercised considerable supervision. A Branch Manager oversaw Mr. Gil’s work, conducted annual performance reviews, set performance goals, and required periodic progress reports. The firm had continuous access to his work calendar and mandated annual continuing education, which it selected and paid for. Wells Fargo retained the right to terminate Mr. Gil at any time without notice, and upon his departure, his client list was considered company property.

Wells Fargo provided Mr. Gil with substantial support and benefits. He was offered firm-sponsored health insurance and could participate in a 401(k) retirement plan. The company covered the lease and bills for the physical office, supplied his computer and printer, employed office assistants who supported his work, and hosted a website with his contact information. While Mr. Gil was not eligible for paid sick leave or vacation time, Wells Fargo did have a sponsored expense reimbursement program for high-revenue advisors. Mr. Gil did not meet the revenue threshold for this program and thus personally paid for expenses like client entertainment, advertising, and some market research.

Critically, Wells Fargo consistently classified Mr. Gil as an "exempt employee". It issued him a Form W-2, not a Form 1099-NEC, and withheld federal and state income taxes, as well as Social Security and Medicare taxes. On several occasions, Mr. Gil requested to be reclassified as a statutory employee, but these requests were consistently denied by Wells Fargo.

The Tax Dispute and Taxpayer’s Position

For the 2020 and 2021 tax years, Mr. Gil and his wife filed joint returns reporting his W-2 income on Schedule C, Profit or Loss from Business. Using Schedule C, which is generally reserved for independent contractors and statutory employees, they claimed business expense deductions of $87,782 for 2020 and $98,222 for 2021. Based on these filings, they sought tax refunds of $36,896 and $36,679, respectively.

The IRS rejected this treatment, assessing a (later conceded) $5,000 frivolous filing penalty under 26 U.S.C. § 6702(a). The Gils filed suit in U.S. District Court seeking the refunds and abatement of the penalty. The central issue before the court was Mr. Gil’s correct worker classification. Mr. Gil argued that he was either an independent contractor or, alternatively, a statutory employee as a "full-time life insurance salesman" under 26 U.S.C. § 3121(d)(3)(B), and was therefore entitled to use Schedule C to deduct his business expenses. The government contended he was a common-law employee for whom Schedule C deductions were unavailable.

The Court’s Analysis of the Law

The court began by establishing the controlling legal standard. It rejected Mr. Gil’s proposal to use a three-pronged test from an IRS publication, noting that the Internal Revenue Code itself, at 26 U.S.C. § 3121(d)(2), explicitly invokes "the usual common law rules" to define an employee. The court also cited the Supreme Court’s directive in Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992), to look to common law when a federal statute does not provide an operational definition of "employee".

To apply the common-law rules, the court chose to adopt the multi-factor test used by the U.S. Tax Court, citing the Tax Court’s specialized expertise and the goal of promoting uniformity in tax law jurisprudence. The court laid out a seven-factor test derived from cases such as Weber v. C.I.R., 103 T.C. 378 (1994) and Ewens & Miller, Inc. v. C.I.R., 117 T.C. 263 (2001). It also added the provision of benefits as an eighth key factor, a consideration often included in Tax Court opinions. The court emphasized that while no single factor is dispositive, the degree of control exercised by the principal is the "crucial" consideration.

Application of the Common-Law Factors to the Facts

The court methodically applied the eight factors to the undisputed facts of Mr. Gil’s employment:

Degree of Control: While Mr. Gil had flexibility in his schedule and client acquisition, the court found this was outweighed by Wells Fargo’s supervision. The requirements for regular reports, annual performance reviews, mandatory training, and the firm’s access to his calendar all pointed toward an employer-employee relationship. The court noted that the right to control is key, even if not exercised daily.
Investment in Work Facilities: The court determined this factor weighed in favor of employee status. Wells Fargo provided nearly all substantial and essential resources, including office space, a computer, printers, support staff salaries, and a website. Mr. Gil’s personal expenditures on client entertainment were deemed discretionary and not essential to his role, distinguishing them from the substantial costs necessary for the work, which Wells Fargo covered.
Opportunity for Profit or Loss: This was the only factor the court found to favor independent contractor status. Because Mr. Gil was paid exclusively through commissions, he had direct control over his earning potential.
Right to Discharge: Wells Fargo could terminate Mr. Gil at any time without notice, a classic indicator of an at-will employment relationship.
Integral Part of Regular Business: As a financial advisor, Mr. Gil’s work was central to Wells Fargo’s business as a major commercial bank, supporting employee status.
Permanency of Relationship: Mr. Gil’s 35-year continuous tenure with Wells Fargo and its predecessors was a long-term relationship, weighing heavily in favor of employee status.
Relationship the Parties Believed They Created: The court found that despite Mr. Gil’s desire to be a non-employee, the objective evidence showed both parties understood he was an employee. Wells Fargo’s issuance of a Form W-2, its withholding of taxes, and its denial of his reclassification requests demonstrated its intent. Mr. Gil’s repeated requests to be reclassified confirmed his own awareness of his status as a standard employee.
Provision of Employee Benefits: Mr. Gil’s participation in Wells Fargo’s health insurance and 401(k) plans, along with the existence of a formal expense reimbursement program (even if he didn’ t qualify), strongly supported his classification as an employee.

With seven of the eight factors pointing toward an employment relationship, the court concluded that Mr. Gil was a common-law employee.

Rejection of Statutory Employee Status

The court also swiftly dismissed Mr. Gil’s alternative argument that he qualified as a "full-time life insurance salesman" under 26 U.S.C. § 3121(d)(3)(B). First, the statutory text itself excludes individuals who are already common-law employees under § 3121(d)(2). Second, based on the regulatory definition at 26 C.F.R. § 31.3121(d)-1(d)(3)(ii), Mr. Gil did not qualify because his "principal business activity" was not the solicitation of life insurance or annuity contracts for a single company. His role was that of a comprehensive financial advisor who sold a variety of instruments from multiple companies.

Conclusion and Holding

Because Mr. Gil was determined to be a common-law employee, his use of Schedule C to deduct unreimbursed business expenses was improper for the 2020 and 2021 tax years. The court granted summary judgment in favor of the government, ordering refunds based on the IRS’s recalculation, which did not allow for the Schedule C deductions. This case serves as a critical reminder that a taxpayer’s desire for a certain classification or the existence of superficial indicia of independence (like a home office or commission-based pay) cannot overcome the weight of evidence establishing an employer’s right to control and the overall economic reality of the relationship.

Prepared with assistance from NotebookLM.