Davie v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 48980

• Decision Date: 16 September 1932
• Docket Number: Docket No. 48980,48982,51460,48983,62995.
• Citation: 26 BTA 1007
• Parties: CARL NEWMAN DAVIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ORVILLE A. PARK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CHARLES SIMPSON REID, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

26 B.T.A. 1007 (1932)

CARL NEWMAN DAVIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ORVILLE A. PARK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

CHARLES SIMPSON REID, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 48980, 48982, 48983, 51460, 62995.

Board of Tax Appeals.

Promulgated September 16, 1932.

Orville A. Park, Esq., and C. N. Davie, Esq., for the petitioners.

C. A. Ray, Esq., for the respondent.

Deficiencies determined by the respondent against Carl Newman Davie of $1,693.78 for the year 1927, and $680.81 for 1928, are involved in Docket No. 48980, and $309.95 for 1929 in Docket No. 51460. Deficiencies against Orville A. Park are $145.99 for 1927 in Docket No. 48982, and $262 for 1929 in Docket No. 62995. Charles Simpson Reid, in Docket No. 48983, is charged with a deficiency of $121.54 and penalty of $30.39 for the year 1927.

Petitioners allege that they were employed during the years involved in this proceeding by the State of Georgia, acting through its superintendent of banks, to represent the Department of Banking of that state as attorneys at law, and as special counsel in matters connected with insolvent banks, and that their compensation for such services was exempt from income tax, which respondent disallowed, and that this disallowance was error. The cases were consolidated for hearing.

FINDINGS OF FACT.

Petitioners are all attorneys at law practicing in the State of Georgia.

The Georgia Banking Act of 1919 created the office of superintendent of banks (hereinafter referred to as the superintendent), and vested in the superintendent the administration of the banking laws. He is charged with the examination, supervision and regulation of the active banks and is also the official liquidator of all insolvent banks.

In 1923 the superintendent employed Carl N. Davie (one of the petitioners) to assist him as legal adviser. Davie at the time was practicing his profession at Gainesville, Georgia, in partnership with Charles S. Reid, another of the petitioners herein. He gave up this practice, leaving to Reid the winding up of all the pending business in which he retained an interest. Davie went to Atlanta and was assigned to a desk in the office of the superintendent in the State Capitol. He was given the title of special counsel. His entire time was devoted to the work of the Department of Banking under the immediate direction and control of the superintendent of banks. He performed any and all service required of him, whether in connection with the active banks or those in liquidation, but there was no fund from which he could be paid except that derived from the assets of the insolvent banks. His compensation was taxed against these banks and was paid by the superintendent with his check when approved by the judge of the superior court.

Much of the service rendered was of a routine character, the preparation of applications and the securing of orders from the proper courts for the sale of assets, the compromise of claims, and the payment of expenses; the examination of audits and advising the superintendent as to assessments to be made against stockholders; the liability of directors for misfeasance or nonfeasance; and the liability of officers and employees on their bonds as such. He did not have charge of the receivables of the insolvent banks or undertake their collection by suit or otherwise, or the ordinary routine litigation, but when suits were brought against the superintendent, and occasionally under special circumstances when suits were brought by the superintendent, he represented the superintendent in the litigation. None of the years in which petitioner rendered services as described above are before us in this proceeding.

The relationship of petitioner Davie to the Department of Banking continued as above outlined until July, 1926. Then the Bankers Trust Company failed, carrying with it a large part of its chain of banks, known as the Manley chain, and precipitating a serious situation in Georgia's banking system. In a single week 80 banks closed and were taken in charge by the superintendent. Some 40 other banks belonging to the chain were more or less involved and required immediate attention. As a result of these failures, some 26 corporations, firms and individuals affiliated with the Bankers Trust Company or with W. D. Manley, its president, were adjudged bankrupt or placed in the hands of receivers. The Department of Banking found itself with greatly enlarged duties. In this emergency, petitioner Orville A. Park was sent for and his services were engaged to help out petitioner Davie in the work. At this particular time, T. R. Bennett was superintendent of banks, and at the hearing a letter from him to petitioner Davie was introduced in evidence, by agreement. This letter briefly states the terms of employment of petitioners Park and Davie, to handle these insolvent banks, as follows:

You maintained this office in the Capitol until 1926 when on account of the limited space available the liquidating department, as well as your office, was removed to other quarters. While you were at liberty to accept other employment, you were subject to the requirements of the Department at all times.

In 1926 I entered into written contracts with you and Honorable Orville A. Park of Macon to represent me in the general supervision of banks in liquidation. By the terms of these contracts the retainers were fixed at from $50 to $250 and in addition a percentage of the amount recovered on assets which you collected, which percentage was as a rule from 5% to 10%.

On January 1, 1927, T. R. Bennett was succeeded as superintendent by A. B. Mobley. Petitioners Park and Davie continued their employment as special counsel to the superintendent. The terms and conditions of their employment were evidenced by correspondence as follows:

February 16, 1927. Hon. A. B. Mobley Superintendent of Banks, Atlanta, Georgia.

Dear Mr. Mobley:

Complying with your request that we give you the terms upon which we would handle the legal phases of the liquidation of the banks which have closed since you assumed the office as Superintendent on January 1st, we beg to say:

We agreed with Mr. Bennett that we would represent him in the liquidation of the banks which closed incident to the failure of the Bankers Trust Company for a retainer of from $100 to $300 for each bank, depending on the amount of assets to be liquidated. This retainer was expected to cover advice, the securing of administrative orders, and the routine liquidation.

In addition to this, for such papers of the bank as were turned over to us for collection we were to be paid from 5% to 10% of the amount realized. Where litigation was brought either by or against the Superintendent, we were to charge reasonable fees to be fixed at the time, the amount depending on the amount in controversy, the time required and difficulty of the question. In other words, the usual fees for similar services such as would be charged to other clients.

It was expected that local attorneys would be employed who would handle collections and would assist in the more important litigation. Where these attorneys handled collections, we would not share in their fees nor would we share in any litigated matter unless we assisted in the preparation and trial of the case. Where we had actual charge of the litigation, such division of fees between us and local counsel as might be equitable would be arranged.

As we were handling a large volume of business for Mr. Bennett we told him that we expected him to feel perfectly free to call on us for advice and assistance in any matter affecting the Department, whether it pertained to an open or a closed bank, and for such advice and assistance no charge was made.

Contracts on the basis above outlined were made and we furnished you copies some time ago.

If you desire us to take charge of the legal phases of liquidation of the banks which have come into your hands since January 1st, or any others which may hereafter come into your hands, we will be glad to do this on the same terms as were agreed on with Mr. Bennett. We, of course, would not be able to do this but for the fact that we have quite a large volume of work for the banks closed prior to January 1st which is still pending.

You have suggested that you would like to arrange to have someone from this office, probably Mr. Roberts, to spend at least a part of each day at the liquidation office in the capitol. This can be arranged without difficulty. Not only will Mr. Roberts be available, but all of the legal organization will be at your command and we will expect you to call on us whenever necessary.

If you prefer, formal contracts can be drawn up covering each particular bank, or the matter can be closed by your accepting the proposition above outlined and advising us as to which particular banks you will retain us.

We believe it would be more satisfactory to you, as well as to us, to have all of the banks handled in the same way.

With highest esteem, I beg to remain,

Sincerely yours ORVILLE A. PARK.

To the above letter, the superintendent replied under date of April 5, 1927, as follows:

Gentlemen:

I have considered very carefully your letter of February 16th outlining the terms upon which your firm would handle the legal phases of the liquidation of banks which have closed since January 1st, the date I assumed the office as Superintendent of Banks. I have delayed replying to the letter for the reason that I wanted to give the matter some thought.

As I understood your proposition, it is similar to the contract you had with my predecessor. Your proposition to me is different in that the fees on assets turned over to you are to range from 5% and not to exceed 10%. By this I understand that you are to charge not exceeding 5% on collections made without court procedure and 10% where suit is filed. I...