¹ The need for classifying income arises from the special structure of the Ordinance, and from the existence of the tax source system in Israel. It will be stressed that this article does not reflect any approval of that system, or of the division of income into its various sources as found in the Ordinance. I will mention only that this matter is somewhat unclear. See, e.g. inter alia, Lapidoth, A., “On the Metamorphosis of the Sources Doctrine” (1966) 22 HaPraklit 53Google Scholar; on the reservations about the significance of the classification, sec e.g. the words of the Supreme Court in Mark Bros. v. Assessing Officer (1976) 8 P.D.E. 121, particularly at p. 123, and see below, near n. 164 ff. I will further mention that in my opinion, the ideal law would seek to abolish the sources doctrine and to eradicate the inequity between an employed and an independent assessee, see Edrey, J., “A Comprehensive Tax Base in Israel” (1982) 12 MishpatimGoogle Scholar; Edrey, J., “Deductability of Employee's Expenses in the Law of Income Tax” (1977) 8 Mishpatim 195Google Scholar; and see my Doctoral Thesis, pp. 148–54, 177–81, 306–39. This article is written as a modest response to the direction of development of the existing law as it finds expression in the cases.

² Income Tax Ordinance (New Version) (1 L.S.I. [N.V.] 145). The reform in 1975 was introduced following the submission of the recommendations of the Ben Shahar Commission, Report of the Commission for Tax Reform—Recom mendations for Changes in Direct Taxation (March, 1975).Google Scholar See the Income Tax Ordinance (Amendment No. 22) Law, 1975, (29 L.S.I. 215).

³ A flat rate of 61% of its taxable income if the company retains its profit, and 67% if it distributes dividends as compared to the individual marginal tax brackets of 25% up to 60%!

⁴ E.g. the low starting rate of taxation on earned income—see sec. 121(b) of the Ordinance; separate accounts for married couples—sec. 66 of the Ordinance; special exemptions on the income of the blind or the handicapped—sec. 9(5) of the Ordinance. For a discussion on the subject, see, inter alia, Gross, Y., “Taxing Company and its Shareholders after the Tax Reform” (1975) 30 HaPraklit 118Google Scholar; Yoran, A., “Tax Planning in Taxation of Company Profits in 1976” (1977) 27 Accountant 255Google Scholar, and see also my Doctoral Thesis, pp. 21, 185–86.

⁵ E.g. levies imposed on the employer for the income he pays his employees—see Employers’ Tax Law, 1975 (29 L.S.I. 152); Savings Loan Law, 1979 (S.H. 90); Services Tax (Banking Institutions and Insurance Companies) Law, 1973, (27 L.S.I. 162); Value Added Tax Law, 1975 (30 L.S.I. 46) sec. 4(a) and 4(b). Also, we know that the payments made by a self-employed person to the National Insurance Institute is less than the total payable by employer-employee: see Schedule 10 of the National Insurance Law (Consolidated Version) 1968, (22 L.S.I. 114) and its regular amendments; see also my Doctoral Thesis, pp. 86–101, 217–8. In addition, a self-employed person is entitled to deduct from his income 75% of the National Insurance premiums that he paid: see sec. 47A of the Ordinance. It must be recalled that the employed assessee is limited, by virtue of the Regulations, in deduction of expenses in relation to a self-employed assessee: see Income Tax (Deduction of Certain Expenses) Regulations, 1972, and amendments (K.T., 1979, pp. 436, 1037, 4848)—particularly regulation 4: Income Tax (Deduction of Expenses for Maintaining Vehicles) Regulations, 1975 (K.T., 3337, p. 2402), and particularly regs. 2 and 5. The Ordinance, too, is strict with the employed assessee: the replacement section, sec. 27 of the Ordinance, mentions only a person with a business or a vocation: see Doctoral Thesis, p. 144. Sec. 28, according to its regular interpretation, permits only the independent assessee to set off losses, and the same is true of sec. 17(4), which discusses deduction of bad debts. On the proposal to extend the application of these sections to employees as well, see Edrey, “Deductability of Employee's Expenses…” supra n. 1; see also Gross and Yoran, supra n. 4, and in the Doctoral Thesis, particularly pp. 177–218. And see part VII below.

⁶ Circular (Income Tax Commission Ruling) no. 6/43 of 23.11.76 on the subject of management fees for shareholders in a minority company.

⁷ For details of the idea, see Yoran, supra n. 4.

⁸ Katz v. Katzif (1966) (III) 20 P.D. 533.

⁹ Gross v. Assessing Officer, Nethanya (I960) 14 P.D. 689.

¹⁰ In England, special rules apply, by virtue both of company law and the provisions of the Income Tax Act, see e.g. McMillan v. Guest (1940) 24 T.C. 190, and see infra n. 18.

¹¹ (1959) 13 P.D. 104.

¹² Id., 109.

¹³ Shertok & Gofer v. A.O. Haifa (1977) 9 P.D.E. 75. On the nature of management fees in the relations between companies see Abnael v. A.O. (1977) 9 P.D.E. 160.

¹⁴ Shertok & Gofer, supra n. 13.

¹⁵ (1977) 9 P.D.E. 272.

¹⁶ See above n. 7.

¹⁷ From India: Kanga, & Palkihale, , Income Tax (5th ed.) Vol. 1Google Scholar, and from England: C.I.T. v. Armstrong Smith (1946) I.T.R. 606.

^17a Except an insignificant difference dealing with the issue of setting off losses; see n. 173 infra.

^17b As we see from the evidence given by the director of Arzi Knits: “Each of the directors has the right of signature, and may draw monies, and in fact, they did so, and each drew money according to his needs; thus the witness withdrew less money for his needs than his brother, who has a large family… the witness explained: “This is a family matter and each can do what he wants and does not need to give a report of what he does”. (See supra n. 15 at 276). From this we may conclude that management fees paid to the directors did not constitute payment for any services, but rather, they constituted distribution of profits, plain and simple, and therefore, they should be viewed as dividends. See Varok v. A.O. (1966) (II) 20 P.D. 351.

^17c It is interesting that the legislative attitude to the classification of “management fees” is reserved and limited. In Amendment no. 32 to the Ordinance, (32 L.S.I. 277) sec. 18(b) was amended and widened to include the term “management fees”. This amendment relates, in my opinion, to the technical difference discussed below: the legislative intention was to eliminate the possibility of the Treasury losing tax revenue, (as in the commentary to the Draft Law (1978) H.H. 1337, p. 162), since under the amendment, a minority company can deduct the management fees paid to the controlling body only if the fees were paid out in that tax year, or they were included in the tax return of the controlling body for that year, or the tax on them was deducted under the Regulations of Deduction from Wages no later than three months after the end of the tax year. In any case, an answer cannot be found in this Amendment, nor is there specific reference to the nature and essence of management fees as income of the director, and as such, it would seem that it is still up to the courts to answer this question.

¹⁸ From a study of other legal systems we learn of the difficulties in defining the term “employee”. For a short comparative survey, see Appendix p. 328.

¹⁹ Barki Yehuda v. Assessing Officer Tel Aviv (1972) 4 P.D.E. 64.

²⁰ See the definition of “employee” in sec. 2 of the Civil Wrongs Ordinance (New Version) (2 L.S.I. [N.V.] 5).

²¹ National Insurance Institute v. Zinger (1964) (II) 18 P.D. 299, 302; Zabari v. Amidar (1961) (I) 15 P.D. 281, 285.

²² An untrained employer who owns the business is not capable of “controlling” i.e. of telling the employee how to work and which alternative to choose when a number of alternatives are available, and therefore, according to the test of absolute control, he is not the “employer” of the employee.

²³ Stevenson, Jordan & Harrison v. MacDonald 1 T.L.R. 101.

²⁴ Tedeschi, G. (ed.), General Doctrine of Torts (Jerusalem, 2nd ed., 1977)Google Scholar (hereinafter: Tedeschi), 445.

²⁵ Tedeschi, 445, and see n. 98.

²⁶ Tedeschi, 446.

²⁷ Barak, , Vicarious Liability in the Law of Tort (Kiryat Sepher, Jerusalem, 1965, in Hebrew).Google Scholar

²⁸ See e.g. Aikin, Olga & Reid, Judith, Employment, Welfare and Safety at Work (Great Britain, 1971)Google Scholar, which questions the notion that protective laws must apply only to employees; see also State of Israel v. Berman et al. (1977) 8 P.D.A. 368, which discusses the question of whether there is justification today for the Night Baking (Prohibition) Law, and whether the protective laws ought to be revoked in view of the fact that workers organizations provide suitable protection for the individual worker.

²⁹ The main protective laws in Israel are the following: Hours of Work and Rest Law, 1951 (5 L.S.I. 125); Annual Leave Law, 1951 (5 L.S.I. 155); Night Baking (Prohibition) Law, 1951 (5 L.S.I. 53); Employment of Women Law, 1954 (8 L.S.I. 128); Youth Labour Law, 1953 (7 L.S.I. 94); Wages Protection Law, 1958 (12 L.S.I. 100); Severance Pay Law, 1963 (17 L.S.I. 161); and see inter alia the Index to P.D.A.—a classification made by the President of the National Labour Court—and see Niv, Z. Bar, “Labour Law” in Administration and Law, Zadok, H. and Naftali, A. Ben (eds.), (Tel Aviv, 1971) 488.Google Scholar See also Gutman, N., Conditions of Labour in Practice (Herzliya, 1977) 9.Google Scholar

³⁰ The exceptions are the Night Baking (Prohibition) Law, which prohibits employing a person during the night; sec. 9A of the Hours of Work and Rest Law, which lays down a prohibition against working on days of rest, even for a tradesman, the owner of a business, and a merchant in his store, or a member of a cooperative society, and sec. 3 of the Youth Labour Law, which prohibits a youth from peddling without a permit.

³¹ Z. Bar Niv, supra n. 29 at 488.

³² On the extent of legislative intervention in other contracts which are not necessarily contracts of employment see e.g. Shalev, G., Exemption Clauses in Contracts (Jerusalem, 1974)Google Scholar; Procaccia, U., “Standard Contracts as a Function of the Structure of the Market” (1979) 9 Mishpatim 25.Google Scholar

³³ Bar Niv, supra n. 29, at 498–9.

³⁴ See sec. 32 of the Employment Service Law, 1959 (13 L.S.I. 29), and the second Appendix to the Law. It must, however, be mentioned that this Law is not counted amongst the protective laws.

³⁵ Secs. 32, 34, 77, 78 of the Employment Service Law, 1959.

³⁶ Bar Niv, supra n. 29.

³⁷ But, see an alternative opinion and the development that stemmed therefrom: Histadrut v. Labour Court (1978) (I) 32 P.D. 825.

³⁸ Bar Niv, supra n. 29; see also sec. 3(2) of Contracts (Remedies for Breach of Contract) Law, 1970 (25 L.S.I. 11).

³⁹ Even in the case in which the legislator intervened and specified, in the Released Soldiers (Return to Employment) Law, 1945, that the employer must resume employment of the released soldier, the path chosen was not to make re-employment compulsory, but rather, to impose a fine on the employer who remains “rebellious”, and to obligate the employer to pay the released soldier compensation, as specified in sec. 27 of the said Law.

⁴⁰ See e.g. sec. 1 of the National Insurance Law (Consolidated Version) 1961.

⁴¹ See inter alia Egoshovich v. Potterman (1951) 5 P.D. 4: National Insurance Institute v. Zinger (1964) (II) 18 P.D. 299; Hayman v. Ilka (1961) (I) 15 P.D. 7. For a historical survey of the development of the term, see Hausman, , “On the Concept of an Employee” (1970) 26 HaPraklit 389Google Scholar; Goldberg, M., “The Nature of the Employment Relation” (1978) 31 HaPraklit 81Google Scholar; and see also N. Gutman, supra n. 29, at 96–100. And see: Tuito v. Magen David Adom(1978) 9 P.D.A. 238; Brommer v. State of Israel (1978) 9 P.D.A. 176; Municipality of Nethanya v. Birger (1972) 3 P.D.A. 177; and in particular Wolf v. Shemcn Industries Ltd. “(1978) 9 P.D.A. 315, in which it was ruled that a distributor of Shemen products is an employee, inter alia because distribution of the products is part of the organization of the enterprise, and a person who fits into the distribution framework, fits into the enterprise itself, but see n. 45 below.

⁴² See e.g. Lord Denning in Stevenson, Jordan & Harrison, supra n. 23. For a summary of the law in Israel, see inter alia, Hausman-Goldberg, , Labour Law (Seren, Tel Aviv, 1977) 61–5Google Scholar; Zamir, I., Labour Law—Sources, Comments, Problems, part 1 (Academon, Jerusalem, 3rd ed., 1976) 16–9Google Scholar; and see also the decisions in Tuito, Brommer and Wolf, supra n. 41. And recently, see Shemen v. Labour Court et al., (1980) (II) 34 P.D. 75 and in its wake, Rosner v. Electra (1981) 12 P.D.A. 108.

⁴³ Shemen v. Labour Court, supra n. 42.

⁴⁴ Thus in the case of the Publishers Union (1980) 11 P.D.A. 144, the court points out that “the organization test, even though it is no panacea and it does not obviate the need for discussion of the questions and of the factual circumstances of each and every case, is nevertheless the best for the purposes of labour law and social security.

⁴⁵ With all due respect, it seems to us that the decision of the National Labour Court is not problem-free: in the final analysis, the negative facet is only a word game, intended to give backing to the organization test, and this is so even after the High Court of Justice exposed its weakness in the Shemen case, for if indeed we can agree that the positive facet is insufficient, and that what must ultimately be examined is whether the employed person “is not independent”—a question which is only another formulation of the key question of whether the employed person is not an employee—then the negative facet does not help. At this point, we will only mention that the whole Electra case, including the decision of the High Court of Justice, requires fundamental clarification, but that is beyond the scope of this paper.

⁴⁶ Shaviki v. Hannuka Cohen (1972) 3 P.D.A. 281.

⁴⁷ National Insurance Institute v. Abba Cohen et. al (1973) 4 P.D.A. 393.

⁴⁸ Valenci v. Pioneer Concrete Israel Ltd. (1972) (II) 26 P.D. 322; Agabria Works et al v. Solel Boneh (1978) 9 P.D.A. 86.

⁴⁹ On the criterion of risk, see also n. 42 supra, and n. 50 below.

⁵⁰ Firer v. Stempler (1974) 5 P.D.A. 108; Moskowicz v. National Insurance Institute and Ha'aretz Ltd. (1974) 5 P.D.A. 79; and see the Publishers Union case, supra n. 44.

⁵¹ See the decisions in the case of Rosner v. Electra supra n. 42, and Publishers Union, supra n. 44.

⁵² Municipality of Netanya v. Birger, supra n. 41; Sabag v. State of Israel, (1970) (II) 24 P.D. 70; Maccabi Israel v. Dr. Blechner (1977) 8 P.D.A. 113; Halprin v. Hadassah (1973) 4 P.D.A. 281.

⁵³ See inter alia cases listed above, n. 52; see e.g. Schreiber, H., “Waiver of Statutory Rights in Israel Labour Law: A Comparative Analysis in Light of English and American Law” (1978) 13 Is.L.R. 41.Google Scholar

⁵⁴ Haimovich v. State of Israel (1977) 8 P.D.A. 472.

⁵⁵ Albinger et. al v. State of Israel (1975) 6 P.D.A. 415, 420.

⁵⁶ Id.

⁵⁷ Shuki Kativ v. Central Prison Director Ramle (1962) 16 P.D. 2412.

⁵⁸ Estate of Bella and R. v. Laorway Ltd. (1975) 6 P.D.A. 10.

⁵⁹ Halprin v. Hadassah, supra n. 52 at 281.

⁶⁰ (1972) (II) 26 P.D. 66; 72.

⁶¹ (1980) (I) 34 P.D. 75.

⁶² “On the assumption, therefore, that the respondent's [the plaintiff's — J.E.] work fitted well into all the business of the petitioner — just as, in order that the business should be efficient, the work of all the distributors and suppliers must fit in (emphasis added) the question of whether the respondent was employee or independent must be decided according to the provisions of the contract between the litigants.”

⁶³ The facts are as follows: 1. The plaintiff was not allowed to extend his business activities beyond what the defendant permitted, and was not allowed to compete with the defendant; 2. The plaintiff ran an “office” for which he had to bear all the costs; 3. The respondent's payment was fixed at a percentage of the sales of the defendant's products; 4. The plaintiff was personal guarantor vis-à-vis the respondent for the payments of the buyers; 5. The plaintiff bore the risk with respect to bad debts.

⁶⁴ See supra, nn. 43 and 44.

⁶⁵ The rules are as follows: a) The labour court is the expert on labour matters; b) The High Court of Justice does not sit as a court of appeal over the labour court; c) The High Court of Justice reserves for itself the right of review over the labour court; d) The High Court of Justice will intervene only in cases of mistaken interpretation of legislation or of a legal document, and the error is blatant and obvious and it is contrary to general, accepted legal principles.

⁶⁶ O. Aiken & J. Reid, supra n. 28 at 15, 16.

⁶⁷ State of Israel v. Graphoplast Ltd. (1970) 1 P.D.A. 93; and see the comments of the Minister of Labour when she submitted the Hours of Work and Rest ‘Bill, 1951, in Divrei HaKnesset, vol. 6. p. 2588.

⁶⁸ See e.g. State of Israel v. Berman, supra n. 28 and see also the comments of the Minister of Labour when she submitted the Night Baking (Prohibition) Bill, 1951, to the Knesset, , Divrei HaKnesset, vol. 6, p. 2590.Google Scholar

⁶⁹ And see Shulman v. Mekorot (1956) (II) 10 P.D. 958, 960.

⁷⁰ Mizrahi v. Weinstock (1963) 17 P.D. 1364.

⁷¹ Hannah Cohen v. Zarewski (1962) 16 P.D. 2753.

⁷² See Israel, R. Ben, A New Dimension for the Collective Agreement (Jerusalem, 1977).Google Scholar

⁷³ State of Israel v. Berman, supra n. 28.

⁷⁴ Israel Agricultural Engineering Co. Ltd. v. Nagi (1964) (III) 18 P.D. 290.

⁷⁵ Bar Niv, supra n. 29.

⁷⁶ Hacohen v. Yossef Cohen Ltd. (1972) 3 P.D.A. 481.

⁷⁷ Even though protection of the individual employee manifests itself in the fact that the fine imposed on him is smaller than that imposed on the employer. See secs. 77, 78 of the Employment Service Law, 1959.

⁷⁸ State of Israel v. Graphoplast, supra n. 67.

⁷⁹ Meir Mizrahi v. A.G. (1960) 14 P.D. 1882, 1890.

⁸⁰ See e.g. Maccabi Israel v. Dr. Blechner, supra n. 52; Haifa Refineries v. Hillel (1971) 2 P.D.A. 155.

⁸¹ See, inter alia, Haifa Refineries, above; sec. 21 of the Collective Agreements Law 1957, (11 L.S.I. 58) and see Shulman v. Mekorot (1956) 10 P.D. 58; and see a summary of the situation in H. Schreiber, op. cit., supra n. 53.

⁸² Jacobs v. Cartoz (1955) 9 P.D. 1401.

⁸³ id., but see secs. 30 and 31 of the Contracts (General Part) Law, 1973 (27 L.S.I. 117).

⁸⁴ See Mizrahi v. Weinstock, supra n. 70.

⁸⁵ See supra, nn. 78 and 79.

⁸⁶ Except for those cases in which the legislative intention of protecting the employee finds expression in the tax system by means of special tax incentives: e.g., sec. 9(7a) in the Ordinance which exempts severance pay from income tax under certain provisions. See also see. 9(20).

⁸⁷ See supra n. 2 and n. 5.

⁸⁸ See, for example, the very broad definition of employment income in sec. 2(2) and see as well, sec. 3(i) of the Ordinance which includes ihe realization of stock-options purchased at a low price as well as low rates of interest on loans from an employer in the worker's tax base.

⁸⁹ See, in this respect, the severe limitations imposed on an employee in respect to expenses and offset of losses. For a summary of this topic see Y. Edrey, “Deductability of Employee's Expenses…”, supra n. 1. For special exemptions allowed employees alone, see secs. 9(7A); 9(20) (D) and 3(E) of the Ordinance.

⁹⁰ For example, a severe limitation regarding deductions for contributions to provident funds, see sec. 47 of the Ordinance; special exemption for pension funds, sec. 9A; special exemption for gifts received by employees from employers, see sec. 9(20); special exemption for compensation see sec. 9(21); and see also secs. 9(16) and 9(17).

⁹¹ See sec. 164 of the Ordinance.

⁹² See supra n. 2 and n. 5 regarding Employers' Tax Law, 1975 and Value Added Tax Law, 1975.

⁹³ See e.g. Barki Yehuda v. Assessing Officer Tel Aviv, supra n. 19 at 66; on the criteria of the Labour Court see M. Goldberg, supra n. 41.

⁹⁴ Lavi & Mashinski Bros. v. A.O. (1957) 11 P.D. 526.

⁹⁵ (1951) 5 P.D. 4.

⁹⁶ See e.g. Menauter v. A.O. (1974) 6 P.D.E. 225.

⁹⁷ Yannai v. Mansfield (1969) (I) 23 P.D. 501.

⁹⁸ The data which helped the Court reach its decision was as follows: (a) Payment was made in accordance with the hours of work, (b) It was the work manager who reported on the hours of work, (c) The hours of work were set by the body paying the wages, (d) At the place of work, there were supervisors on behalf of the body paying the wages, (e) The body paying the wages dismissed ineffi cient workers. And see Menauter, supra n. 96.

⁹⁹ E.g. Stevenson, Jordan & Harrison v. MacDonald, supra n. 23. On this criterion which was adopted by the Labour Court, see Wolf v. Shemen Industries Ltd., supra n. 41.

¹⁰⁰ Menahemni v. A.O. Tel Aviv 5 (1971) 3 P.D.E. 228.

¹⁰¹ But see e.g. Shafrir v. A.O. Tel Aviv 1 (1975) 7 P.D.E. 151, in which the Court rejected the argument that an assessee who gets paid according to the results of his work is not an employee.

¹⁰² Cohen v. Kabillo (1954) (III) 8 P.D. 1401.

¹⁰³ Confita Sabag v. State of Israel (1970) (II) 24 P.D. 70.

¹⁰⁴ Davidson v. A.O. (1962) 16 P.D. 1145, 1148.

¹⁰⁵ It should be stressed that in that case, the assessee asked that the person employed by him be considered an employee for the purpose of separate assessment. It is inconceivable that the fact that tax is not deducted at source should serve as any type of proof in favour of the assessee when the problem arises in a case in which the assessment officer argues that the assessee must be classified as an employee for the purposes of the provisions of the Ordinance.

¹⁰⁶ Unregistered Partnership v. A.O. (1952) 7 P.M. 260, 263. See also Reznik v. A.O. Tel Aviv (1966) (II) 20 P.D. 837.

¹⁰⁷ It should be emphasized that according to the law in force in Israel, a partnership, whether registered or not, is not considered a separate legal person for tax purposes; the rule is that the profits are allocated to the partners in accordance with their share in the partnership, see sec. 63 of the Ordinance and Sterenzis v. Assessing Officer, Tel Aviv 4 (1971) 3 P.D.E. 327.

¹⁰⁸ Porath v. A.O. Netanya (1969) 1 P.D.E. 282.

¹⁰⁹ The question of the rule pertaining to a soldier in the regular army has not yet been raised in court for tax purposes. In practice, he is regarded as an employee even though his status and rights are fixed by statute and not by contract, see Defence Army of Israel (Permanent Service) (Benefits) Law, 1954 (8 L.S.I. 149).

¹¹⁰ Rott v. A.O. (1974) 6 P.D.E. 201. But see n. 109 above.

¹¹¹ If the legislator chooses, for political, monetary, fiscal or social reasons, to be lenient or strict with a particular type of assessee, this is not a legal rationale, but purely a tax incentive, and we are not concerned with such an incentive at present. On the question of terminology of tax incentives, see e.g. Survey, S.S. & Sunley, E. M., General Report from Congress. I.F.A. — 1976 — Tax Incentive as Instrument for Achievement of Governmental Goals (Jerusalem, 1976) 16–19, 22–28.Google Scholar

¹¹² See above.

¹¹³ On the economic effect of the interpretation of fiscal laws, see inter alia, Witkon, A., “On Rules of Interpretation in Tax Law” (1971) 3 Mishpatim 10.Google Scholar

¹¹⁴ See e.g. Moshyov v. Pazgaz (1972) (I) 26 P.D. 360, in which the Supreme Court ruled that it is inconceivable that an employee would be required to pay sums of money in order to acquire the right to work for the employer.

¹¹⁵ See inter alia Miller, P., “Capital Gains Taxation of the Fruits of Personal Effort Before and Under the 1954 Code” (1954) 64 Yale L.J. 1–88.CrossRefGoogle Scholar And see Wolf v. Shemen, supra n. 41.

¹¹⁶ See e.g. Bar Niv, supra n. 29.

¹¹⁷ Id.

¹¹⁸ See “Part I: General” of this article.

¹¹⁹ An extensive survey of all the differences between the employed and the self-employed assessee may be found in my Doctoral Thesis, pp. 29–176, 177–207.

¹²⁰ Lauffer v. National Insurance Institute (1973) 78 P.M. 114.

¹²¹ Lauffer v. A.O. [Income Tax Appeal No. 243/66 (1967) 1st edition, issue no. 5(1) 66].

¹²² Globe Travel Service Ltd. v. Eliahu Levi (1972) 3 P.D.A. 246.

¹²³ Lavi & Mashinski Bros. v, A.O., supra n. 94.

¹²⁴ Menauter v. A.O., supra n. 96.

¹²⁵ Menauter v. A.O., supra n. 98 at 198.

¹²⁶ Dr. Israel Peled v. A.O. (1974) 6 P.D.E. 108.

¹²⁷ See supra n. 126 at 108–109.

¹²⁸ Larson, A., The Law of Workmen's Compensation (New York, 1973) vol. 1AGoogle Scholar, sec. 43.41.

¹²⁹ National Labour Relations Bd. v. Hearst Publications, 322 U.S. 111, 64 S. Ct. 851, 88 L.Ed. 1170 (1944), per Rutledge J.

¹³⁰ United States v. Silk, 331 U.S. 704, 67 S. Ct. 1463, 91 L.Ed. 1757 (1947), per Reed J.

¹³¹ Flo v. General Elec. Co. 7 N.Y. 2d 96, 195 N.Y.S. 2d 652, 163 N.E. 2d 876 (1959). While on a compulsory maternity leave of absence, the employee underwent surgery not related to the pregnancy. The court stated that the (non-occupational) Disability Benefits Statute required an employment status, but that the purpose of the statute was to bridge the gap between the Unemployment and Compensation Acts. Held, disability benefits awarded. Treatise cited.

¹³² por support of this view, see Barak, , “The Independence of the New Civil Codification” (1976) 7 Mishpatim 15Google Scholar and the sources cited therein; on the requirement for functional criteria in labour law with respect to determination of the status of an employed person, see M. Goldberg, supra n. 41 and Larson, supra n. 128.

¹³³ See e.g. the Barki case, supra n. 19. In that case, the Court, which was called upon to rule on the status of the assesses, ignored the decision of an arbitrator who operated by virtue of the law. See also the Lauffer case, supra n. 120, and see the decision of the District Court in the Menauter case, supra n. 96. With respect to the development of a special legal criterion for the purposes of income tax see also Arison Zvi v. A.O. (1974) (I) 28 P.D. 789; on the special importance. attributed by the court hearing a tax appeal to the articles and regulations of a company, see e.g. Stock Exchange v. A.O. Tel Aviv (1976) 8 P.D.E. 169, 170, and the sources therein.

¹³⁴ Publishers Union, supra n. 44, and Electra, supra n. 42.

¹³⁵ (1973) (II) 27 P.D. 66, 72.

¹³⁶ Severance Pay Fund v. Shimshon Tyre and Rubber Co. Ltd. (1966) (III) 20 P.D. 613.

¹³⁷ Rapac Electronics Ltd. v. A.O. for Large Enterprises (1977) (I) 31 P.D. 681.

¹³⁸ [1972] 2 All. E.R. 492.

¹³⁹ Rapac v. A.O., supra n. 137 at 691.

¹⁴⁰ This is trae since we are dealing with the “third error” mentioned above at p. 296 and n. 17c. There is no difficulty in finding faults with regard to the first and second errors mentioned therein.

¹⁴¹ On the rationales for instituting such vicarious liability see in particular Barak, supra n. 27 at 25–33, and see Doctoral Thesis, 295–7.

¹⁴² It will again be stressed that what we have said does not constitute any expression of opinion on the question of the ideal criteria in labour law: that question is beyond the scope of this paper. On the nature of labour law, see e.g. Bar Niv, supra n. 29 at 488; Goldberg, supra n. 41 and see Doctoral Thesis, 298–304.

¹⁴³ For a discussion of the desirable tax basis, and of questions concerning the ability to pay and principles of good tax, see J. Edrey, “A Comprehensive Tax Base in Israel”, supra n. 1, and sources cited there.

¹⁴⁴ See Bental J., text near n. 124 above.

¹⁴⁵ See in particular the amendments to sec. 164 of the Ordinance: Amendment no. 13, (22 L.S.I. 193); no. 21, (29 L.S.I. 49) and Amendment no. 32 (32 L.S.I. 277) which extended the duty of deduction at source to persons paying grants in the case of retirement or death, capitalized pensions, payments made by a minority company to the holders of the controlling shares, and any other income which the Minister of Finance, with the approval of the Finance Committee of the Knesset, specifies in an Order.

¹⁴⁶ Supra n. 119.

¹⁴⁷ On my criticism of the fixing of income from employment as a special source of income, see my Doctoral Thesis, and in particular pp. 148–71; 311–30.

¹⁴⁸ On the criterion of risk see e.g. Firer v. Stempler, supra n. 50, and see Market Investigation Ltd. v. Ministry of Social Security [1969] 2 Q.B. 173, 183; and see especially Wolf, supra n. 41.

¹⁴⁹ On the special nature of tax laws, see A. Witkon, supra n. 113, and see in particular the comment of Y. Kahan J. in Soe'er v. Director of Property Tax (1976) (I) 30 P.D. 271 with respect to the validity of artificial activity in taxation matters, even in the absence of any “anti-tax planning” clauses.

¹⁵⁰ Albinger v. State of Israel (1979) 10 P.D.A. 415; and see the Fisher case from the U.S.A., n. 197 below.

^150a See Holders of Public Office (Benefits) Law, 1969 (23 L.S.I. 107).

¹⁵¹ An arrangement whereby an assessee is entitled to deduct 7% of his “entitling income” which is not income from employment, and if he paid only for a pension, he will be allowed another deduction of 4%. The total tax benefits—if we take into account the fixed credit in sec. 45A of the Ordinance—relate to payments of up to 16% of the “entitling” income of the assessee. As opposed to this, as regards an assessee with an income from employment, whose employer did not make any arrangements for the time of his retirement, i.e. the employee is not entitled to a pension or benefits—such an employee, who from an economic point of view is in a position identical to that of a self-employed person with the same income, is entitled to tax benefits on only 10% of the entitling income (5% as deduction and 5% as a fixed credit). If the employer makes arrangements for pension, the employee is entitled only to the 5% fixed credit. It is difficult to understand the reason for such a distinction. For a more detailed discussion see my Doctoral Thesis, 73–86, 154–62.

¹⁵² 23 L.S.I. 107.

¹⁵³ On the legislative purpose behind the enactment of secs. 45A and 47 of the Ordinance, see my Doctoral Thesis, supra n. 151, and the sources there.

¹⁵⁴ On the situation in England whereby the courts categorize incomes derived by people in the liberal professions from ongoing contracts with their clients, see text near n. 178.

¹⁵⁵ On the principles of horizontal and vertical justice, see e.g. Musgrave, R. & Musgrave, P., Public Finance (3rd ed., 1974) 113–124Google Scholar, and see J. Edrey, “Comprehensive Tax Base…” supra n. 1, and notes there.

¹⁵⁶ On the adoption of this rule in our legal system see e.g. Electra (Israel) Ltd. v. Minister of Trade and Industry (1968) (II) 22 P.D. 552.

¹⁵⁷ See the text of secs. 17(4) and 28 of the Ordinance.

¹⁵⁸ E.g. when he worked for a small part of the tax year and went for expensive courses, which are tax deductable under the regular rules in our system, see inter alia, Lily Wolf Block v. A.O. Jerusalem (1956) 10 P.D. 441, and see Witkon, A. and Neeman, Y., Tax Law (Tel Aviv, 4th ed., 1968), 148–51Google Scholar (when a box-office clerk losses the money in the cashbox, etc.).

¹⁵⁹ E.g., when an employer pays a supplier sums of money in order that the latter supply employees with a certain product. Possibly, the employee is liable to tax as early as the time of payment to the supplier (see sec. 2(2) of the Ordinance) but it may be that the supplier cannot fulfil his commitments. This is also the case if the employer paid out the employee's wages to a third party, who later goes bankrupt, or when an employee who is responsible for the money loses a large sum thereof for some reason.

¹⁶⁰ see e.g. Yehayeynu Ltd. v. A.O. Petah Tikva (1959) 13 P.D. 2066; Maayan Esther Ltd. v. A.O. Tel Aviv (1966) (II) 20 P.D. 279; Yefet Levi v. A.O. Nazareth (1977) 9 P.D.E. 77.

¹⁶¹ See Mark Bros. v. A.O. Petah Tikva (1976) 8 P.D.E. 121.

¹⁶² For expansion, see J. Edrey, “Deductability of Employee's Expenses…” supra n. 1, and see my Doctoral Thesis, in particular at 142–54.

¹⁶³ supra n. 161 at 123.

¹⁶⁴ Cf. supra nn. 120, 124, 136, 137, 142. And see also Derby Chemicals v. A.O. Tel Aviv 5 (1971) 3 P.D.E. 242, 243, in which the Supreme Court allowed an employed assessee to deduct depreciation for his car, even though sec. 21 of the Ordinance, as it was then formulated, dealt only with “income from a business or vocation”.

¹⁶⁵ On the need for classifying income according to source, and for the distinction between income from a business and income from rental, see e.g. Ir David v. A.O. Jerusalem (1977) 9 P.D.E. 223. The Court there ruled that for the purpose of the Encouragement of Industry (Taxes) Law, income received from rental is not income from a business for the purpose of entitlement to a reduced tax rate applicable to the regular income of an industrial firm which derives from its industrial activities.

¹⁶⁶ Supra n. 162.

¹⁶⁷ See reg. 4 of the Income Tax (Deduction of Certain Expenses) Regulations 1972, (1972) K.T. 2865 at 1337, as amended from time to time. It must, of course, be remembered that the regulation itself is limited in its formation, since it refers only to the expenses specified in those regulations. The Tax Commission claims that the regulation also applied to expenses for courses abroad, circular no. 13/30 of 18.12.75. On this, see Edrey, supra n. 162 and Doctoral Thesis, 140–4.

¹⁶⁸ See supra n. 1.

¹⁶⁹ Even though both the American Constitution and the Internal Revenue Code 1954, sec. 61, use the word “source” explicitly, we find that the courts almost com pletely ignored the term. In the case of Eisner v. McComber 252 U.S. 189 (1920), the Supreme Court spoke of three main sources of income, but in a later decision, Commissioner v. Glenshaw Glass Co. 348 U.S. (1955), the American Supreme Court paid heed to the source doctrine and in fact adopted the “accretion” approach as the basis for income tax in the United States. In other words, every increment to wealth is taxable income as long as it has not been specially exempted, and the source of the said increment is irrelevant. This approach was received with great satisfaction by American scholars. See e.g. Chirelstein, M.A., Federal Income Taxation (N.Y.2nd ed., 1979) 6–10.Google Scholar

¹⁷⁰ See e.g. Witkon, supra n. 113.

¹⁷¹ For this purpose see, inter alia, Whiteman, & Wheatrof, , Income Tax (London, 2nd ed., 1976) chap. 1Google Scholar, particularly ss. 1–28. Pinson, B., Revenue Law (London, 13th ed., 1980), chap. 1Google Scholar; Tiley, Y., Revenue Law (London, 3rd ed., 1981) chap. 5.Google Scholar

¹⁷² Except for one difference relating to setting off losses. Under sec. 169 of I.C.T.A. 1970, only an employee, and not an office holder, is entitled to set off losses, under certain conditions, against his earning. Whiteman (supra n. 171) claims (at ss. 11–12, p. 530 n. 10) that the legislator's original intention was not to allow every employed person to offset his losses against his earnings, but that a technical error perpetuated this strange position. The reasons for the parallel existence of the categories “office” and “employment” lie in the historical development of tax sources of public officers. See e.g. Simon's Taxes (3rd ed) vol. V, Chap. 101 C.4, p. 303.

¹⁷³ Great Western Rail Co. v. Bater [1920] K.B. 266.

¹⁷⁴ McMillan v. Guest [1942] A.C. 561 at p. 566.

¹⁷⁵ Mitchell & Edom v. Ross [1960] Ch. 498.

¹⁷⁶ A.G. v. Eyres [1909] 1 K.B. 723.

¹⁷⁷ Ellis v. Lucan [1967] Ch. 868.

¹⁷⁸ I.R.C. v. Brander & Cruickshank (1971) 46 T.C. 574 H.L.

¹⁷⁹ But see also Edwards v. Clinch [1980] S.T.C. 438 (CA.).

¹⁸⁰ Supra n. 178.

¹⁸¹ Sec. 187 of I.C.T.A. 1970, which prescribes the amount for which a person in office or employment may, after terminating his employment, be exempt from tax up to a ceiling of £ 10,000, see inter alia Pinson, supra n. 171 at 3–25; White-man, supra n. 170, at 12–15.

¹⁸² As stated by Lord Denning in Brander & Cruickshank, supra n. 178 at 595.

¹⁸³ Whiteman, supra n. 172, para. 14–30, p. 590.

¹⁸⁴ Davis v. Braithwaite [1931] 2 K.B. 628.

¹⁸⁵ Id.

¹⁸⁶ See text near n. 178.

¹⁸⁷ Fall v. Hitchin (1972) 49 C.T. 433.

¹⁸⁸ Market Investigation Ltd. v. Minister of Social Security [1969] 2 Q.B. 173, 184: this criterion was cited with approval in Fall v. Hitchin, supra n. 187, and see Whiteman, para. 14–07, p. 395.

¹⁸⁹ Thus, for example, the income from extra classes that a teacher has agreed to teach is also considered income from employment; Fuge v. Mollalland (1956) 36 T.C. 571, and the added income of a doctor from lectures delivered in the hospital in which he works is considered income from employment: Lindsay v. I.R.C. [1964] T.R. 167.

¹⁹⁰ Berry v. Farrow [1914] 1 K.B. 632; McMillan v. Guest, supra n. 174.

¹⁹¹ Lee v. Lee's Air Farming [1960] All E.R. 42C.

¹⁹² Road Transport Industry Training Board v. Reeders Grade Ltd. (1969) 6 T.I.R., and at 4.113, p. 325.

¹⁹³ See supra n. 178.

¹⁹⁴ See e.g. Kreshner v. Comrs 14 T.C. 168 (U.S.) (1950); Dowell v. Forrestal 13 T.C. 845 (1949), and see a summary of the law in Collins, A.A., Federal Income Taation of Employment Benefits (N.Y. 1978, Rev.) pp. Intro., 112–3.Google Scholar

¹⁹⁵ Harris v. Comrs 22 T.C. 1118 (U.S.) (1954).

¹⁹⁶ Incidentally, this reasoning is not unassailable, and for criticism see my Doctoral Thesis, 310–9.

¹⁹⁷ Fisher v. Comrs 24 T.C. 269 (U.S.) (1955).

¹⁹⁸ See Collins, supra n. 194, and see also American Jurisprudence, vol. 33, ss. 3696–8. And see also the definition of the term in sec. 3122 of the Code of 1954.

¹⁹⁹ On the distinctions between an employed and an independent person, see my Doctoral Thesis, 245–72, and see also sec. 62(2) of the Code after its amendment in 1978.

²⁰⁰ World Tax Series, Taxation in West Germany (Boston, Harvard Law School, 1969) ss. 8/1.2, 8/1.3.

²⁰¹ World Tax Series, Taxation in France (Boston, Harvard Law School, 1966) s.8/2.1, and see also Halpern, , Taxes in France (London, 2nd ed., 1976).Google Scholar

²⁰² Taxation in France, supra n. 201, s.8/l.a.

²⁰³ Id., s.7/2.3; 8/1. See also Halpern, supra n. 201.