Childers v. Commissioner of Internal Revenue

• Decision Date: 04 November 1935
• Docket Number: No. 7464.,7464.
• Parties: CHILDERS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

80 F.2d 27 (1935)

CHILDERS v. COMMISSIONER OF INTERNAL REVENUE.

No. 7464.

Circuit Court of Appeals, Ninth Circuit.

November 4, 1935.

Charles L. Childers, of Los Angeles, Cal., John C. Ristine, of Washington, D. C., and A. L. Cowell, of Stockton, Cal., for petitioner.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, John MacHudson, and Louise Foster, Sp. Assts. to the Atty. Gen., for respondent.

Before WILBUR, GARRECHT, and DENMAN, Circuit Judges.

PER CURIAM.

This is a petition to review simultaneous decisions of the United States Board of Tax Appeals entered January 11, 1934, and involves the federal income tax liability of the petitioner, formerly a resident of El Centro, Cal., and now residing in Los Angeles, Cal.

The petitioner claims that the respondent has erroneously included in the petitioner's taxable income the amounts of $11,588.23 and $10,055 for the years 1927 and 1928, respectively, representing compensation received by the petitioner "for services as an officer or employee" of the Imperial Irrigation District of the state of California. The taxpayer contends that the irrigation district is a public agency of the state, exercising "essential Governmental Functions," and that he devoted "practically all of his business hours to the business of said District."

It is the petitioner's contention that the amounts received by him from the district are not subject to federal income taxes under the general principle of law that the federal government cannot tax the means and instrumentalities of the states. He also invokes the revenue laws of the United States and Treasury Regulations issued pursuant thereto.

The board held in effect that the Imperial Irrigation District could not be classified as an essential governmental function of the state of California, and that therefore the petitioner's income derived therefrom was not exempted from federal income taxation.

The matter in dispute was submitted upon an agreed statement of facts, from which the board found the following:

In 1923, the petitioner was engaged as attorney and chief counsel of the irrigation district, and was so engaged during the years in controversy, namely, 1927 and 1928.

The authority for the petitioner's connection with the district is contained in the following resolution adopted by the board of directors of the district:

"Resolved, that Chas. L. Childers, of El Centro, California, be employed as attorney for Imperial Irrigation District, at a retainer of $350.00, which retainer shall include all services rendered by him, excepting the trial of cases and any services requiring his absence from the County of Imperial, and when engaged in the trial of cases on behalf of the District or absent from Imperial County on behalf of the District in addition to said retainer he shall receive the sum of $25.00 per day."

The petitioner maintained his own law office and during the years 1927 and 1928 "he was free to and did accept some other minor concurrent work." He also operated a farm for profit, which operation resulted in a net loss for the year 1927 of $66.06, and net profit of $439.13 for the year 1928.

Practically all of his ordinary business hours were devoted to the affairs of the said Imperial Irrigation District. Because of the volume of district work, it was necessary for the petitioner to employ an assistant, whose compensation was paid by the petitioner.

The expenses incurred by the petitioner in connection with earning the compensation received from the district, which have been allowed by the respondent as deductions from gross income, included office rent, supplies, the salary of the assistant, taxes, and depreciation.

The letterhead of the Imperial Irrigation District lists the petitioner as attorney, under the heading of officers.

The Imperial Irrigation District was formed and exists under the California Irrigation District Act, and the acts amendatory thereof and supplementary thereto (Deering's Gen. Laws, Act 3854).

The petitioner asks this court to review the decision of the board approving deficiencies in federal income taxes of $145.96 and $73.22 for the years 1927 and 1928, respectively.

The primary question here presented is whether the compensation received by the petitioner as attorney for the irrigation district is exempt from the federal income tax. This depends upon the question as to whether the petitioner was an officer or employee of the state of California.

Article 37 of Regulations 69, promulgated under the Revenue Act of 1926, reads in part as follows:

"State contracts. — The profit of an independent contractor from a contract with a State or political subdivision thereof must be included in gross income * * *"

Article 88 of the same Regulations is in part as follows:

"Compensation of State officers and employees. — Compensation paid to its officers and employees by a State or political subdivision thereof for services rendered in connection with the exercise of an essential governmental function of the State or political subdivision, including fees received by notaries public commissioned by States and the commissions of receivers appointed by State courts, is not taxable. Compensation received for services rendered to a State or political subdivision thereof is included in gross income unless (a) the person receives such compensation as an officer or employee of a State or political subdivision, and (b) the services are rendered in connection with the exercise of an essential governmental function * * * "An officer is a person who occupies a position in the service of the State or political subdivision, the tenure of which is continuous and not temporary and the duties of which are established by law or regulations and not by agreement. An employee is one whose duties consist in the rendition of prescribed services and not the accomplishment of specific objects, and whose services are continuous, not occasional or temporary. * * *"

Articles 56 and 643 of Regulations 74, promulgated under the Revenue Act of 1928, contain provisions identical, in all material respects, with those quoted above.

The petitioner contends that, "From the probative facts found by the Board, the ultimate fact must necessarily be that the petitioner is an officer or an employee" of the irrigation district. The respondent insists that the petitioner was an independent contractor in his relationship to the district.

Under this heading, the petitioner asserts that "Since the Board did not find that the petitioner was not an officer or employee, but based its decision wholly upon other grounds, the decision of the Board of Tax Appeals cannot be sustained on the ground that the Board might have found that the petitioner was not an officer or an employee."

Though the board's findings do not contain a statement of the ultimate fact that the petitioner was not an employee or an officer, the findings contain sufficient facts to enable us to determine that question as a matter of law. It is well settled that an appellate court may base an affirmance upon grounds other than those relied upon below.

In support of his contention that he was an "employee" of the irrigation district, the petitioner quotes section 1965 of the Civil Code of California, which reads as follows:

"The contract of employment is a contract by which one, who is called the employer, engages another, who is called the employee, to do something for the benefit of the employer, or of a third person."

This section, however, must be read in connection with section 2009, which provides:

"A servant is one who is employed to render personal service to his employer, otherwise than in the pursuit of an independent calling, and who in such service remains entirely under the control and direction of the latter, who is called his master."

The Supreme Court of California has held that "The word `servant' is generally synonymous with the word `employee.'" Western Indemnity Co. v. Pillsbury, 172 Cal. 807, 810, 811, 159 P. 721, 723.

The petitioner also lays considerable stress upon the fact that the Board expressly found that he had been "engaged" as attorney and chief counsel, and upon the fact that the board of directors of the district, in its resolution, stated that he be "employed" as attorney, etc.

Again the Supreme Court of California has ruled against the petitioner's contention, and with specific reference to contracts between attorney and client. In Fidelity & C. Co. v. Industrial Acc. Commission, 191 Cal. 404, 410, 216 P. 578, 581, 43 A. L. R. 1304, the court said:

"The circumstance that under the contract decedent was to render nondelegable personal services may be persuasive, but it is in no sense conclusive or determinative. Contracts for the rendition of nondelegable personal services are of common occurrence, which do not constitute the contractor an employee; for example, the ordinary contracts between attorney and client. The same may be said of the use of the phrase `engages and employs.'"

Indeed, it has been held that even when the word "employee" is used in a statute, such usage is not conclusive in establishing the relationship of employer and employee. Burnet v. Livezey (C. C. A. 4) 48 F.(2d) 159, 161.

The books are replete with instances where the term "employer" or "employ" is used in connection with the hiring of an independent contractor. We need cite only a few such decisions: Western Indemnity Co. v. Pillsbury, supra, 172 Cal. 807, at page 813, 159 P. 721; Fidelity & C. Co. v. Industrial Acc. Commission, supra, 191 Cal. 404, at page 410, 216 P. 578, 43 A. L. R. 1304; quoting Shearman & Redfield on Negligence (6th Ed.) § 164; Metcalf & Eddy v. Mitchell, supra, 269 U. S. 514, at pages 518 and 520, 46 S. Ct. 172, 70 L. Ed. 384; Register v. Commissioner of Internal Revenue (C. C. A. 6) 69 F.(2d) 607, 608, 93 A. L. R. 186.

In California, as elsewhere, "The chief consideration which determines one to be an independent...