Burnet v. McDonough

• Citation: 46 F.2d 944
• Decision Date: 02 February 1931
• Docket Number: No. 8977.,8977.
• Parties: BURNET, Commissioner of Internal Revenue, v. McDONOUGH.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

46 F.2d 944 (1931)

BURNET, Commissioner of Internal Revenue, v. McDONOUGH.

No. 8977.

Circuit Court of Appeals, Eighth Circuit.

February 2, 1931.

G. A. Youngquist, Asst. Atty. Gen., J. Louis Monarch and John G. Remey, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Allin H. Pierce, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for petitioner.

Joseph R. Brown, of Ft. Smith, Ark., for respondent.

Before KENYON and GARDNER, Circuit Judges, and MUNGER, District Judge.

KENYON, Circuit Judge.

Respondent, a practicing attorney at Ft. Smith, Ark., was engaged to act as its counsel by the Ft. Smith-Van Buren bridge district, which was created by an act of the General Assembly of Arkansas in 1909, for the purpose of constructing and operating a bridge across the Arkansas river between Ft. Smith and Van Buren. His salary was by oral agreement fixed at $500 per year. It was also provided that he should look after the district's cases in court, and for such service he was to have additional compensation, to be fixed by the board, which carried on the affairs of the district.

In 1921 and 1922 the district became involved in litigation, and respondent appeared for it in some important cases, for which he was paid in 1922 the sum of $2,500, in addition to his annual compensation of $500, making $3,000 received by him from the district for that year. This he did not include in his income tax returns for 1922, claiming it to be exempt from federal taxation. The Commissioner of Internal Revenue held that it should be included, and that there was a deficiency in the tax paid for 1922 of $359.40.

Respondent instituted proceedings for a redetermination under the law by the Board of Tax Appeals, and upon hearing said board determined that he was an employee of the Ft. Smith-Van Buren district, and that the compensation received for his services was exempt from the federal income tax.

Petitioner asks review of the Tax Board's decision.

The question for determination is whether respondent is exempt from the federal income tax on the compensation received by him during the year 1922 for acting as attorney for the Ft. Smith-Van Buren district, on the theory that such compensation was paid to him as an officer or employee of a political subdivision of the state within the meaning of section 1211 of the Revenue Act of 1926, c. 27, 44 Stat. 130 (26 USCA § 1065b).

The Revenue Act of 1921, c. 136, 42 Stat. 237, provides:

"Sec. 213. That for the purposes of this title * * * the term `gross income' —

"(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses * * * or gains or profits and income derived from any source whatever. * * *"

The Revenue Act of 1926, c. 27, § 1211, 44 Stat. 130 (section 1065b, c. 19, title 26, USCA), provides:

"Any taxes imposed by the Revenue Act of 1924 or prior Revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any state or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded."

The Arkansas Legislature, in creating the bridge district, provided it should be a public agency and a body politic under the name of the Ft. Smith and Van Buren district, and could appoint all officers and agents which it deemed necessary and suitable for the conduct of its business.

Section 1211 of the Revenue Act of 1926, which we have heretofore quoted and which is retroactively applicable to the taxable year 1922, exempts from taxation compensation received from a state or a political subdivision thereof when the person receiving the same is an officer or employee thereof. If, therefore, respondent was an officer or employee of the state of Arkansas or a political subdivision thereof, he was not compelled to pay the tax in question. It is not urged in the brief of respondent that he was an officer of the district or of the state, and it could not well be under the authority of Metcalf & Eddy v. Mitchell, 269 U. S. 514, 520, 46 S. Ct. 172, 173, 70 L. Ed. 384, where the Supreme Court said, referring to the claim that plaintiffs in error were officers of the state or a subdivision of the state: "An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation. United States v. Hartwell, 6 Wall. 385, 18 L. Ed. 830; Hall v. Wisconsin, 103 U. S. 5, 26 L. Ed. 302. The term `officer' is one inseparably connected with an office. * * * There were lacking in each instance the essential elements of a public station, permanent in character, created by law, whose incidents and duties were prescribed by law."

The Board of Tax Appeals did not find him to be an officer.

The proposition relied on is that respondent was an employee of the district, and that the district was a political subdivision of the state.

The facts as found by the Board of Tax Appeals are: That respondent was selected as counsel for the district at a compensation of $500 per year, with the right in the Board to call upon him for any and all necessary legal services, and that, if he were required to go into court in the interest of the district, he should be allowed additional compensation, to be fixed by the Board; that he did serve the district as counsel, his duties including consultations and advice, the writing of contracts, and routine legal services, such as the Board might require; that he attended meetings of the Board, and represented it in hearings before assessors concerning assessments on property; that during all the time he was counsel he maintained his own offices and had a general law practice, but took no cases in conflict with the interests of the district; that his own employees performed the clerical and stenographic work incident to the bridge district's business.

Respondent in his evidence before the Board of Tax Appeals stated he was not employed to do a specific service, but was subject at all times to the direction and control of the board. Of course, respondent was not giving his entire time to the board for a salary of $500 per year. Copies of his income tax returns are in the record and show that respondent was receiving large fees and salaries from other sources. His income tax return for the year 1922 indicated his income from his profession for that year to be $11,796, so that the amount of work represented by the $500 could not have been large.

It is clear to us that, under the decisions of the Supreme Court and of this court, respondent was not an employee as that term is used in the statute, but that he was an independent contractor. The board reserved no right to direct him as to how his work should be done. He was engaged in the general practice of law. It placed its legal matters in his hands for him to take care of by his own means and methods, relieving it from responsibility therefor. It exercised no such control over him as characterizes the relation of employer and employee. The board would not assume to know how a lawyer should carry on his work. He was engaged to render legal services just as he would have been engaged by a private individual. There was no difference in his relationship with this board from that with any private client who may have paid him $500 a year to draw his contracts and look after some of his legal work, and agreed to pay him additional compensation if he had to go into court. The Board of Tax Appeals did not find that the district in any way controlled the manner in which respondent carried on his work as attorney for them, or what degree of control, if any, it exercised over him.

In Metcalf & Eddy v. Mitchell, 269 U. S. 514, 46 S. Ct. 172, 70 L. Ed. 384, the facts were that Metcalf & Eddy were professional consulting engineers employed to advise states or subdivisions with reference to proposed water supply and sewage disposal systems. They claimed to be employees of a local subdivision of a state within the meaning of the statute. The Supreme Court held they were independent contractors, and said: "Nor do the facts stated in the bill of exceptions establish that the plaintiffs were `employees' within the meaning of the statute. So far as appears, they were in the position of independent contractors. The record does not reveal to what extent, if at all, their services were subject to the direction or control of the public boards or officers engaging them. In each instance the performance of their contract involved the use of judgment and discretion on their part and they were required to use their best professional skill to bring about the desired result. This permitted to them liberty of action which excludes the idea of that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor." Pages 520-521 of 269 U. S., 46 S. Ct. 172, 173.

We see little difference in the situation of these consulting engineers who were rendering professional services from that of an attorney who is advising a district, as is respondent here. In both situations...