McCaughan v. Mitchell: Broker Properly Withheld from Salesperson's Commission

A Washington court has considered whether a broker could partially withhold part of a salesperson's commission because the salesperson had refused to provide the broker with his social security number.

Michael J. McCaughan ("Licensee") is a real estate licensee who was affiliated with TJC, Inc. ("Brokerage"), which operated a "Home Realty" office. The Licensee entered into a contract with the Brokerage which stated he was an independent contractor and would receive commissions from homes that he sold. The Brokerage was owned by Thero Mitchell ("Owner").

The Licensee sold a home, but refused to give the Owner his social security number, claiming that he was an independent contractor. The Owner followed IRS Publication 1679, which states that if an independent contractor refuses to provide his or her social security number to the taxpayer, then the taxpayer must withhold a certain portion of payments being made to the independent contractor. The Licensee sued the Owner for breach of contract because the Owner did not pay him the commission amount specified in their agreement. The trial court ruled in favor of the Owner, and the Licensee appealed.

The Court of Appeals of Washington, Division 1, affirmed the ruling of the trial court. The Owner's appellate brief contained a thorough explanation of why he had withheld from the Licensee's commission check, including citing the sources underlying IRS Publication 1679 such as the Tax Code sections which require such withholding. The Licensee argued that by citing the sources of Publication 1679 for the first time on appeal, the Owner had impermissibly raised new arguments on appeal. The court rejected this argument, finding that the Owner referenced Publication 1679 at the trial court and so the Owner was permitted to cite authority in support of his earlier arguments on appeal.

Next, the Licensee argued that because he was an independent contractor and not an employee, the Owner could not withhold from his pay. The court also rejected this argument, finding that federal law required such withholding when the independent contractor refused to give the taxpayer his or her social security number. The relevant section of the Tax Code states the manner in which such withholding must take place. The court further stated that performance of a contract is excused when the performance would violate the law, and so the Owner was excused from not following the exact terms of his agreement with the Licensee because it would violate the law. Thus, the court ruled that federal tax law required the Owner to withhold from the Licensee's pay when the Licensee did not provide his social security number to the Owner and such withholding did not violate the agreement between the parties.

Finally, the court considered the Owner's argument that he was entitled to attorney's fees because the Licensee's lawsuit was frivolous. A lawsuit is frivolous when the lawsuit is brought without legal support or factual proof. The court found that the Owner had not fully briefed the withholding issue before the trial court because he had only cited the IRS Publication, and so the court determined that the trial court had properly determined that the lawsuit was not frivolous. Thus, the court affirmed the trial court's ruling declining to award the Owner attorney's fees.

McCaughan v. Mitchell, 128 Wash. App. 1005 (Wash. Ct. App. 2005).
TO COMPLY WITH CERTAIN U.S. TREASURY REGULATIONS, WE INFORM YOU THAT, UNLESS EXPRESSLY STATED OTHERWISE, ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THE TEXT OF THIS COMMUNICATION, IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER THE

Notice: The information on this page may not be current. The archive is a collection of content previously published on one or more NAR web properties. Archive pages are not updated and may no longer be accurate. Users must independently verify the accuracy and currency of the information found here. The National Association of REALTORS® disclaims all liability for any loss or injury resulting from the use of the information or data found on this page.

Advertisement