Helvering v. Powers 12 8212 15, 1934

• Decision Date: 03 December 1934
• Docket Number: No. 17,17
• Parties: HELVERING, Commissioner of Internal Revenue, v. POWERS et al. Argued Oct. 12—15, 1934
• Court: U.S. Supreme Court

293 U.S. 214

55 S.Ct. 171

79 L.Ed. 291

HELVERING, Commissioner of Internal Revenue,

v POWERS et al.

No. 17.

Argued Oct. 12—15, 1934.

Decided Dec. 3, 1934.

[Syllabus from pages 215-216 intentionally omitted] Mr. J. Crawford Biggs, Sol. Gen'l, of Washington, D.C., and The Attorney General, for petitioner.

[Argument of Counsel from pages 215-217 intentionally omitted] Messrs. Melville F. Weston and J. Colby Bassett, both of Boston, Mass., for respondents.

[Argument of Counsel from pages 217-220 intentionally omitted] Mr. Chief Justice HUGHES delivered the opinion of the Court.

The question presented is whether the compensation of the members of the board of trustees of the Boston Elevated Railway Company is constitutionally exempt from the imposition of a federal income tax. Immunity is sought upon the ground that the trustees are officers of the commonwealth of Massachusetts and instrumentalities of its government. The Circuit Court of Appeals, reversing the decision of the Board of Tax Appeals, held in favor of the exemption. 26 B.T.A. 1381; 68 F.(2d) 634. We granted a writ of certiorari. 292 U.S. 620, 54 S.Ct. 777, 78 L.Ed. 1476.

Chapter 159 of the Massachusetts Special Acts, 1918, provides for the public operation of the Boston Elevated Railway Company. The act creates a board of five trustees, to be appointed by the Governor, with the advice and consent of the council, for the term of ten years. The act provides that the trustees shall be sworn before entering upon their duties; they shall own no stock or other securities of the company and shall each receive from the company $5,000 annually as compensation for his services. They are subject to removal by the Governor with the advice and consent of the council.

The trustees are charged with the duty of managing and operating the company and its properties for the period, as stated or extended, of public operation, and to that end are to have 'possession of said properties in be- half of the commonwealth.' Except as otherwise stated, they are to exercise all the powers of the company, being empowered in their discretion to appoint and remove the president and other officers of the company, except the directors. The trustees are authorized 'to regulate and fix fares' and to 'determine the character and extent of the service and facilities to be furnished.' Their authority for this purpose is made 'exclusive' and is not 'subject to the approval, control or direction of any other state board or commission.' The act provides that the trustees and their employees shall be deemed to be acting as agents of the company and not of the commonwealth, and that the company shall be liable for their acts and negligence to the same extent as if they were in the immediate employ of the company, but that the trustees shall not be personally liable.

The company was required, on or before its acceptance of the act, to raise a stated amount by the issue of preferred stock in order to provide for the improvement of the property of the company and the establishment of a reserve fund. The trustees are to fix such rates of fare as will reasonably insure sufficient income to meet the cost of service, as defined, which, in addition to operating expenditures, outlays for the required upkeep of the properties, and other amounts chargeable against income and surplus, includes fixed dividends on the preferred stock and dividends on the common stock at specified rates. Surplus income is to be transferred to the reserve fund and that fund is to be used to meet deficiencies. If it is insufficient for that purpose, the trustees are required to notify the treasurer and receiver general of the commonwealth, and the commonwealth is to pay the amount of the deficit ascertained according to the act. Amounts thus paid are to be assessed upon the several cities and towns in which the company operates. Provision is made for reimbursement out of subsequent surplus income. The act contemplates the maintenance of the property in good operating condition and the restoration of the reserve fund, if depleted, to its original amount on the expiration of the period of public management. At that time the control of the property is to revert to the company. It may then collect such reasonable fares as will produce an income sufficient to pay the reasonable cost of the service as defined in the act, including specified dividends on the common stock, and the company is then to be subject to public regulation in such manner as may be determined by the general court, but not so as to reduce the income below the cost of the service as stated.

The tax in question was on the compensation received by the trustees for the years 1926 to 1929. It appears that in 1919 the commonwealth paid to the company nearly $4,000,000 as a deficiency resulting from the public operation, and that in subsequent years, up to and including 1929, the income received was not sufficient for full reimbursement.

The validity of the statute has been sustained as one enacted for a public purpose and providing for the management of the enterprise by the commonwealth. Boston v. Treasurer and Receiver General, 237 Mass. 403, 413, 420, 130 N.E. 390, 392; Boston v. Jackson, 260 U.S. 309, 314, 316, 43 S.Ct. 129, 67 L.Ed. 274. The Supreme Judicial Court of Massachusetts has characterized the 'public operation' as 'undertaken by the commonwealth, not as a source of profit, but solely for the general welfare.' Boston v. Treasurer and Receiver General, supra. The trustees are the administrative agents of the commonwealth in this enterprise, and we may assume, as the Circuit Court of Appeals has held, that the trustees come within the general category of 'public officers' by virtue of their appointment by the Governor, with the advice and consent of the council, and their tenure and duties fixed by law.¹ United States v. Hartwell, 6 Wall. 385, 393, 18 L.Ed. 830; Metcalf & Eddy v. Mitchell, 269 U.S. 514, 520, 46 St.Ct. 172, 70 L.Ed. 384. See Opinion of the Justices, 261 Mass. pages 542, 543, 550, 159 N.E. 55.

While the undertaking is for the public benefit, it is still a particular business enterprise—the operation of a street railway and the functions of the trustees are limited accordingly. The property remains in private ownership. The act, accepted by the company, constitutes in substance an agreement between the company and the commonwealth that the latter shall temporarily take over the management and operation and pay specified amounts by way of compensation. While the commonwealth may be called upon to bear losses that may occur, if the fares as fixed prove to be insufficient, the operation by the trustees is intended to be self-sustaining. The transportation service is to be rendered, as respondents' counsel say, 'under such a flexible system of rate-making as would allow the fixing of fares equal, as nearly as might be, to the cost of service.' The compensation of the trustees is undoubtedly a part of that cost. 'The main design of the act,' as stated by the Supreme Judicial Court, 'is public operation of the railway company at such rates of fare to be fixed by the trustees from time to time as shall afford revenue sufficient to defray all charges and the dividends established by the act.' Boston v. Treasurer and Receiver General, supra. The authority given to the trustees 'to regulate and fix fares,' and the further authority to ascertain such losses as may be incurred, which are to be borne by the commonwealth, are both incident to that main purpose.

The immunity sought by the trustees from payment of the federal income tax has not been granted by the Congress. The definitions of income in the federal income tax acts cover income derived from 'compensation for personal service * * * of whatever kind and in whatever form paid.' Revenue Act of 1926, §§ 212(a), 213(a), 26 USCA §§ 953(a), 954(a); Revenue Act 1928, §§ 21, 22(a), 26 USCA §§ 2021, 2022(a). This language is certainly broad enough to embrace the compensation of the trustees, and the immunity, if it exists, must rest upon constitutional limitation. The Treasury Regulations, manifestly in an effort to interpret and apply that limitation, provide for exemption from taxation of compensation paid by a state or political subdivision to its officers and employees only in case their services are rendered 'in connection with the exercise of an essential governmental function.' Treas. Reg. No. 69, Art. 88; No. 74, Art. 643; No. 77, Art. 643. But the Treasury Department could not by its regulation either limit the provisions of the statute or define the...