Commissioner of Internal Revenue v. Stilwell

• Decision Date: 12 January 1939
• Docket Number: No. 6620.,6620.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. STILWELL.
• Court: U.S. Court of Appeals — Seventh Circuit

101 F.2d 588 (1939)

COMMISSIONER OF INTERNAL REVENUE v. STILWELL.

No. 6620.

Circuit Court of Appeals, Seventh Circuit.

January 12, 1939.

James W. Morris, Asst. Atty. Gen., and Sewall Key and Howard P. Locke, Sp. Assts. to the Atty. Gen., for petitioner.

Herbert Pope and Benjamin M. Price, both of Chicago, Ill., for respondent.

Before EVANS and MAJOR, Circuit Judges, and LINDLEY, District Judge.

MAJOR, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals entered November 20, 1936, involving a deficiency in respondent's income tax for the year 1934 in the amount of $680.80. The facts, as found by the Board, are not in dispute, and may be summarized as follows: Respondent, a resident of the City of Chicago, Illinois, was, during the taxable year in question, a Master-in-Chancery of the Superior Court of Cook County. He was first appointed to that office by that court in December, 1911 for the statutory term of two years, and was reappointed by the court for successive statutory terms of two years each, the last of which commenced in December, 1935. In accordance with state statutes, he took and subscribed an oath of office and furnished bond under each appointment. A Master-in-Chancery is empowered by statute inter alia with authority to take depositions, both in law and equity, to administer oaths, to compel the attendance of witnesses, and in the absence of the judge, to order the issuing of writs of habeas corpus, ne exeat, and injunction, and to allow writs of certiorari to remove causes from the courts of Justices of the Peace into the proper court. The Master also has authority to hear cases referred to him by the court, to make findings and conclusions thereon and report the same to the court. These various duties authorized by statute, were performed by the respondent.

During the year in question, respondent received fees as Master-in-Chancery in the sum of $15,886.02, as compensation for services rendered in connection with such duties. These fees were determined and allowed by the court against the losing party as part of the costs in the various matters of litigation. All of the fees received by respondent as Master-in-Chancery during the year in question were paid by the litigants in such cases and no part of the same was paid or chargeable to the state or any municipality or political subdivision thereof.

This compensation was not included by respondent in his income tax return for the year, 1934, on the ground that he was exempt from such tax. The Commissioner of Internal Revenue ruled to the contrary and after allowing certain deductions for rents and other office expenses, determined a deficiency against the respondent in the amount of $680.80. Upon appeal, the Board of Tax Appeals found that respondent, as Master-in-Chancery, was an officer of the State of Illinois engaged in the performance of essential Governmental functions and held in his favor. It is here contended by petitioner that such action by the Board was erroneous.

There is no question but what the respondent was a statutory officer of the state, engaged in essential Governmental functions. This much is conceded by petitioner, or, at any rate, is not disputed, but it is contended that inasmuch as respondent was not paid out of state funds that the implied rule of immunity is inapplicable. This is the sole question here presented. It is argued that inasmuch as the compensation received by respondent was in the form of fees received by him from private parties for duties performed as Master-in-Chancery, no burden was imposed upon the state by the tax and that the normal and orderly process of the state's judicial function was not thereby disturbed; that the burden of the tax, if any there be beyond that borne by respondent himself, passed to private persons.

Perhaps there has been no constitutional question concerning which there has been greater controversy than the extent to which the Federal Government may extend its taxing powers against the instrumentalities and agencies employed by a state, and, conversely the extent to which the State Governments may extend their powers of taxation against instrumentalities and agencies utilized by the Federal Government. The controversy has raged from the time of McCulloch v. Maryland, 4 Wheat. 316, 4 L.Ed. 579, decided in 1819. Inasmuch, however, as the petitioner relies principally upon the recent case of Helvering v. Therrell, 303 U.S. 218, 58 S.Ct. 539, 82 L.Ed. 758, decided February 28, 1938, and Helvering v. Gerhardt, 304 U.S. 405, 58 S.Ct. 969, 82 L.Ed. 1427, decided May 23, 1938, it would serve no useful purpose for us to undertake to discuss or analyze the many opinions of the Supreme and other courts where the question, under a great variety of circumstances, has been discussed and decided.

It is respondent's contention that the case of Collector v. Day, 11 Wall. 113, 20 L.Ed. 122, decided in 1868, is controlling. There it was held that the taxing power of the Federal Government is subject to an implied restriction when applied to state instrumentalities and that the salary of a state officer, a probate judge, was immune from Federal income tax. In discussing the relationship existing between the Federal and State Governments, the court, among other things, on page 125, of 11 Wall. said: "Such being the separate and independent condition of the States in our complex system, as recognized by the Constitution, and the existence of which is so indispensable, that, without them, the general government itself would disappear from the family of nations, it would seem to follow, as a reasonable, if not a necessary consequence, that the means and instrumentalities employed for carrying on the operations of their governments, for preserving their existence, and fulfilling the high and responsible duties assigned to them in the Constitution, should be left free and unimpaired, should not be liable to be crippled, much less defeated by the taxing power of another government, which power acknowledges no limits but the will of the legislative body imposing the tax. And, more especially, those means and instrumentalities which are the creation of their sovereign and reserved rights, one of which is the establishment of the judicial department, and the appointment of officers to administer their laws. Without this power, and the exercise of it, we risk nothing in saying that no one of the States under the form of government guaranteed by the Constitution could long preserve its existence. * * * It is, therefore, one of the sovereign powers vested in the States by their constitutions, which remained unaltered and unimpaired, and in respect to which the State is as independent of the general government as that government is independent of the States."

It will be noted that nothing was said by the court in this case regarding the source from which the tax payer received his income, but we are convinced from the language of the court that such a question at that time would have been regarded as immaterial. The principle established in Collector v. Day, supra, has been cited with approval in many cases including that of Indian Motocycle Co. v. United States, 283 U.S. 570, 51 S.Ct. 601, 75 L.Ed. 1277, where the court on page 575, 51 S.Ct. on page 603, after reaffirming the lack of authority in the Federal Government to tax the instrumentalities, means and operations whereby the states exert the Governmental powers belonging to them, said: "Where the principle applies it is not affected by the amount of the particular tax or the extent of the resulting interference, but is absolute. Citing cases."

Another case where Collector v. Day, supra, is cited is that of Helvering v. Gerhardt, supra, relied upon by petitioner, which we shall hereinafter discuss. A study of the cases, however, convinces us that the rule as announced in Collector v. Day, supra, has neither been modified nor changed, and is yet the law.

That the precise question here presented, that is, where the taxpayer, though he be an officer of the State Government, receives his compensation from sources other than the State, or the political subdivision of which he is an officer, is immune from Federal taxation, has not been decided by the Supreme Court, is conceded. We are urged, however, to adopt what is claimed to be the more modern theory that, immunity from Federal tax is allowable only where there is a resultant burden upon the state instrumentality, and where, as here, the compensation of the taxpower is payable from a source other than the state itself, there can be no such burden upon the state, and consequently, no immunity.

We shall now consider the recent cases of Helvering v. Therrell, supra, and Helvering v. Gerhardt, supra, relied upon by petitioner in support of its contention. Petitioner, in its brief, with reference to the former of these cases, says: "In the Therrell Case, supra, the Supreme Court held that the compensation paid to a liquidator of state banks, appointed by the State Comptroller, under statutory authority, was not immune from Federal income tax because such compensation `was paid from corporate assets — not from funds belonging to the State.' It is true that the Court there said that the liquidation of banks was not the discharge by a state of one of its essential governmental duties, but the decision turned upon the absence of burden upon the state. The burden, if any beyond that falling upon the liquidator himself, fell upon the liquidated corporations, out of whose assets the compensation was paid."

If we correctly understand the opinion of the court in this case, petitioner's conclusion as to what the court held, is erroneous. There the court had before it claims for immunity by four taxpayers, two of which were state liquidators of insolvent banks, and two, who by appointment of the State Government, were serving as attorneys for insurance companies and...