DeFelice v. Employment Security Department

In 1990, Dr. Armand DeFelice’s daughter, Dr. Loretta, joined his dental practice and entered into an association agreement. The agreement stated that Loretta was not joining the practice as a partner. In 1994, DeFelice registered the practice with the Employment Security Department (department) (defendant) and the Washington Department of Revenue. DeFelice registered the practice as a sole proprietorship. In 2004, DeFelice’s other daughter, Dr. Louise, joined the practice. Louise also signed the association agreement. Although the association agreements had never been terminated in writing and the practice was never reregistered as a partnership, DeFelice began perceiving the practice as a partnership. However, when the department’s tax specialist performed an audit, she conducted the audit as if the practice was a sole proprietorship. Following the results of the audit, DeFelice argued that the association agreement was no longer in effect and that the practice had become a partnership. An administrative law judge (ALJ) held a hearing on the matter. DeFelice introduced evidence that the equipment was co-owned; that his daughters exercised control over the practice, belonged to the company that owned the building, and were given 40 percent of the practice’s profits; and that the auditor failed to consider whether the practice was a partnership. The ALJ concluded that, based on circumstantial evidence, the association agreement had not been terminated and no partnership existed. The ALJ found that DeFelice continued to have control over the practice, the percentage of profits the daughters received was calculated differently from the percentage of profits that DeFelice received and could have been a modification to the association agreement, and the daughters did not equally share the practice’s loses. Additionally, the ALJ relied on the fact that the sole proprietorship registration was never changed and DeFelice’s daughters never registered with the department as partners, which was required by law. The conclusion that no partnership existed was adopted by the department commissioner. DeFelice appealed. The superior court affirmed. The matter was appealed to the appellate division.