Rev. Rul. 54-253

Advice is requested relative to the status, for Federal employment tax purposes, of visually handicapped individuals who perform services in connection with activities conducted by the Arizona Industries for the Blind.

Section 1, chapter 109 of the State of Arizona Laws of 1953, authorizes the State Department of Public Welfare to establish and maintain a program of industries for the blind to be known as the Arizona Industries for the Blind. Under the State statutes, the Department is empowered to equip and operate training centers and workshops, establish business enterprise and home industries programs for training and employing suitable blind individuals and for devising ways and means for the sale, distribution and marketing of the finished products.

The Arizona Industries for the Blind was established with State appropriated funds and continued operation is maintained by the use of State funds and the proceeds from the sales of finished articles. In the event of its dissolution, all of the assets of the Arizona Industries for the Blind would revert to the General Fund of the State of Arizona.

The visually handicapped individuals are employed on premises leased by the Department of Public Welfare and are engaged in the production of rugs, rubber mats and brooms and in the maintenance of the workshops and equipment used in such production.

The individuals are employed without written agreements in the same manner that sighted employees are generally hired by manufacturing plants. They perform their services under the direction of a supervisor employed by the Arizona Industries for the Blind and they are subject to rules, regulations and restrictions established by the Business Enterprise Program of the Arizona State Department of Public Welfare. The individuals are required to perform services during specified hours on Monday through Friday of each week. If their services are unsatisfactory, the individuals are subject to discharge. Wage and salary scales are established by the Arizona Department of Public Welfare and the wages of the individuals are paid from a special fund established and known as the non-reverting, revolving account for industries for the blind.

Section 1426(d)(2) of the Internal Revenue Code provides that the term `employee' means any individual who under the usual common law rules applicable in determining the employer-employee relationship has the status of an employee. Whether the relationship of employer and employee exists under the usual common law rules is largely a question of fact to be determined upon the particular facts of each case. Generally, such relationship exists when the person from whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.

In the instant case, it is concluded that the Arizona Industries for the Blind has the right to exercise, and does exercise, the control over the visually handicapped individuals in the performance of their services which is necessary to establish the relationship of employer and employee for Federal employment tax purposes.

Since the Arizona Industries for the Blind is a wholly owned instrumentality of the State, the services performed by its employees are excepted from `employment' by reason of section 1426(b)(8) of the Federal Insurance Contributions Act, as amended, and section 1607(c)(7) of the Federal Unemployment Tax Act. It follows that the instrumentality is not required to report and pay the taxes imposed under the above-mentioned Acts with respect to the remuneration paid for such services. However, the Arizona Industries for the Blind, as employer, is required to withhold income tax under section 1622 of the Internal Revenue Code from the wages of its employees.

Although the services here involved are excepted from employment for Federal employment tax purposes, section 218 of the Social Security Act, as amended, extends coverage to State employees pursuant to agreement between the State and the Department of Health, Education and Welfare. Questions related to such matters should be addressed to that Department.