Lohman v. Commissioner of Internal Revenue

• Decision Date: 01 April 1943
• Docket Number: No. 12356.,12356.
• Citation: 133 F.2d 977
• Parties: LOHMAN et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

133 F.2d 977 (1943)

LOHMAN et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 12356.

Circuit Court of Appeals, Eighth Circuit.

March 3, 1943.

Rehearing Denied April 1, 1943.

John T. Barker, of Kansas City, Mo. (John F. Rhodes, Robert B. Fizzell, and Justin D. Bowersock, all of Kansas City, Mo., Ira H. Lohman, of Jefferson City, Mo., and Floyd E. Jacobs, Glenn C. Weatherby, and Frank Brockus, all of Kansas City, Mo., on the brief), for petitioners.

Paul S. McMahon, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Earl C. Crouter, Sp. Assts. to the Atty. Gen., on the brief), for respondent.

Before GARDNER, JOHNSEN, and RIDDICK, Circuit Judges.

RIDDICK, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals affirming the Internal Revenue Commissioner's determination of a deficiency in petitioner's income tax for the year 1936. Petitioner is one of five lawyers who represented the Insurance Department of the State of Missouri as counsel in protracted litigation with fire insurance companies. In 1936, the attorneys received compensation for their services. Believing the income thus realized exempt from federal taxation, none of the attorneys reported it. The Commissioner of Internal Revenue took the opposite view and assessed deficiencies which the Board of Tax Appeals has approved. The matter is brought before us on the petition of one of the counsel, but all of them and the Commissioner have joined in a stipulation that the proof in this case shall, so far as applicable, be controlling in the cases of the other counsel, not parties on this record. It is also stipulated that the Insurance Department of the State of Missouri is engaged in an essential governmental function and that the counsel employed by it in the litigation mentioned were not officers of the State. The question presented is whether the compensation received by the petitioner is subject to federal income tax, or is tax exempt as compensation received by a state employee, under § 116(d) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 871, and the Public Salary Tax Act of 1939, 26 U.S.C.A. Int.Rev.Code §§ 22, 116.

The Revenue Act of 1936 exempts from taxation income derived from the exercise of any essential governmental function. The administrative interpretation of the Act provides that compensation received for services rendered to the State or to any political subdivision thereof shall be included in gross income unless such compensation was received as an officer or employee of the State, or political subdivision thereof, and unless the services were rendered in connection with the exercise of an essential governmental function; and also, that persons employed by a State or a political subdivision thereof, under contract for services of a special nature, and whose work is not of a permanent or continuous character, are neither officers nor employees of the State within the meaning of the revenue act in question. See Regulations 94, Article 116-2. The validity of this administrative interpretation of the Revenue Act of 1936 is not questioned, and cannot be, in view of the holding in Metcalf & Eddy v. Mitchell, 269 U.S. 514, 46 S.Ct. 172, 70 L.Ed. 384, and in later decisions of the Supreme Court and of other federal courts. Lucas v. Howard, 280 U. S. 526, 50 S.Ct. 87, 74 L.Ed. 593; Lucas v. Reed, 281 U.S. 699, 50 S.Ct. 352, 74 L.Ed. 1125; Blair v. Byers, 8 Cir., 35 F.2d 326; Burnet v. Jones, 8 Cir., 50 F.2d 14; Burnet v. McDonough, 8 Cir., 46 F.2d 944; Pickett v. United States, 8 Cir., 100 F.2d 909; Ewart v. Commissioner, 3 Cir., 98 F.2d 649; McLoughlin v. Commissioner, 2 Cir., 89 F.2d 699; Devlin v. Commissioner, 9 Cir., 82 F.2d 731; Watson v. Commissioner, 3 Cir., 81 F.2d 626; Medalie v. Commissioner, 2 Cir., 77 F.2d 300; Coates v. United States, 2 Cir., 111 F.2d 609; La Rochelle v. Commissioner, 7 Cir., 115 F.2d 878.

Metcalf & Eddy v. Mitchell, supra, established the proposition that not all income received in the service of a state or its political subdivisions was exempt from federal income taxation, and that not every person employed in the service of a state or in the service of its political subdivisions was an employee or an officer of the state within the meaning of the federal revenue act there under consideration, exempting the salaries of state officers and employees from taxation. The rule established by that case has been applied in the cases cited above to many situations in which the courts have held that compensation received in the service of a state or its political subdivisions was subject to federal income tax, on the ground that the person receiving it was neither an officer nor an employee within the meaning of applicable federal revenue statutes. It is not always possible to draw a sharp and definite line of distinction between those who are state employees or officers and those who are not. In final analysis the decision in each case must be made upon its own facts. But, in general, the courts have held one receiving compensation for services to a State or its political subdivisions, not an officer or employee, where no oath of office was taken or required, no bond was given for the faithful discharge of the employment, where the employment was not for a definite or continuous term or for the performance of duties fixed by law, and where the services were not under the direct control of the public agency receiving them, both as to results to be obtained and the method of obtaining them; and also where the party claiming exemption as an employee was free, while engaged in the service in question, to accept other and concurrent employment. Later cases held that one claiming exemption from federal income taxation on the ground that his income was received as a state employee or officer must show that his services to the State were in the discharge of an essential governmental function and that taxation of the income received for those services imposed a real and not merely a conjectural burden upon the exercise of that function by the State. Accordingly it was held that where the compensation of one claiming exemption on the ground stated was not paid by the State, it was subject to taxation. The immunity from federal taxation of compensation received in the service of the State, being implied for the protection of the State, was held to be narrowly limited. Helvering v. Therrell, 303 U. S. 218, 58 S.Ct. 539, 82 L.Ed. 758; Helvering v. Gerhardt, 304 U.S. 405, 58 S.Ct. 969, 82 L.Ed. 1427.

The doctrine of exemption from federal income taxation of salaries of officers and employees of States and their political subdivisions was based upon a supposed immunity of such salaries from taxation under the Federal Constitution. The decisions in Helvering v. Therrell, supra; Helvering v. Gerhardt, supra; and Graves v. New York ex rel. O'Keefe, 306 U.S. 466, 59 S.Ct. 595, 83 L.Ed. 927, 120 A.L.R. 1466, marked the end of this constitutional interpretation. The Graves case was decided on March 27, 1939. On April 12, 1939, Congress passed the Public Salary Tax Act, relied on by petitioner here, 26 U.S.C.A. Int.Rev.Code § 22. In conformity with the Graves case, the Act subjected to federal income taxation, compensation received by officers and employees of states and their political subdivisions. But it contained a provision to relieve those state officers and employees from a retroactive application of its provisions as to income received by them as such state officers and employees prior to 1938, in all cases in which, under the law as it stood before the decision of the Graves case, their compensation as such had been immune from taxation under constitutional interpretations then prevailing. But the Act went no further. It did not broaden the prior existing immunity, nor extend immunity from federal income taxation to compensation received from states and their political subdivisions which formerly had been held subject to federal taxation. The Act did not create an immunity from federal taxation, but merely protected one which had existed under abandoned interpretations of the law. Coates v. United States, supra; Meigs v. United States, 1 Cir., 115 F.2d 13; La Rochelle v. Commissioner, supra.

The Board was of the opinion that under the evidence in the case the petitioner was not an employee of the State. It found that petitioner's employment was special and not general, and that the petitioner was not paid from state funds. Accordingly, it sustained the Commissioner's determination of a deficiency in petitioner's income tax. The taxpayer contends that his employment was distinguishable from that held subject to federal income taxation prior to the decision in the Graves case and other cases mentioned, and that since his compensation from the State was received prior to 1938, it is still exempt from taxation under the provisions of the Public Salary Tax Act of 1939. We cannot agree.

The record discloses that in 1930, fire insurance companies doing business in Missouri announced a substantial increase in the rates and premiums charged by them for insurance written for policy holders within the State. The proposed increase was disapproved by the State Insurance Department. As a result of the ensuing dispute as to the legality of the proposed rates, a number of insurance companies instituted suits in the state and federal courts in Missouri to enjoin the interference by state officials with the collection of the increased premium rates. In this litigation an arrangement was reached by which the excess of the rates proposed by the insurance companies, over those approved by the state officials, was impounded in the hands of the courts as collected from the policyholders, pending the termination of the litigation. The amount of money so impounded was large, eventually approximating $10,000,000 in the federal courts and nearly $2,000,000 in the state...