Murphy v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 108003.
| Decision Date | 06 May 1942 |
| Docket Number | Docket No. 108003. |
| Citation | 46 BTA 1058 |
| Parties | MATTHEW H. MURPHY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Frontis H. Moore, Esq., for the petitioner.
Frank M. Thompson, Jr., Esq., for the respondent.
Deficiencies have been determined in income tax for the calendar years 1935, 1937, 1938, and 1939 in the respective amounts of $47.24, $1,018.90, $5,813.10, and $69.12. This proceeding was initiated to test the correctness of the determination in so far as income received from the State of Alabama has been included in the gross income of petitioner. The issue is whether or not petitioner was an officer and employee of the State of Alabama during the taxable years. The deficiency for the year 1939 has been conceded.
FINDINGS OF FACT.
Petitioner resides in Alabama and made his returns for the periods in question with the collector for the district of Alabama.
At all times here material petitioner was a member of a law partnership practicing in Birmingham, Alabama.
On November 13, 1931, a contract of employment was entered into between the then Attorney General of the State of Alabama, Thomas E. Knight, Jr., as party of the first part, and petitioner, as party of the second part. The contract was approved by the then Governor, B. M. Miller, on November 14, 1931, and carried on its face the notation The contract provided in part as follows:
That the party of the first part does hereby employ the party of the second part as a special Assistant Attorney General for a period of term beginning with the date of this instrument and ending at the time when the present term of office of Attorney General shall end, and such employment shall be limited to the specific purpose of representing the State of Alabama in prosecuting misdemeanants, in collecting, compromising and adjusting the delinquent taxes and licenses, charter fees and other taxes due the State of Alabama hereinafter set out, and the party of the second part does hereby accept said employment for the consideration hereinafter named and agrees to discharge his duties under this agreement promptly with all his skill and diligence, to wit:
* * * * * * *
It is understood that this agreement shall apply to the preceding years as the present and succeeding years covered by this agreement and that the party of the first part reserves the right and authority to terminate this contract at any time the party of the first part, through its Attorney General, may see fit, and the Governor reserves the right to withdraw his approval of this contract at any time, and in case such approval is withdrawn thereupon this contract shall be null and void; provided, however, that where approval is withdrawn or contract terminated the party of the second part shall be given thirty days notice in advance of the date when contract is to become null and void. This contract is subject to whatever laws may be hereafter enacted relating to any matter herein contained.
On November 14, 1931, petitioner was commissioned a "Special Assistant Attorney General", the commission being signed by the Governor and Secretary of State of Alabama. Petitioner thereafter executed an oath of office. The contract provided in general for petitioner to collect, on behalf of the State of Alabama, delinquent taxes and fixed petitioner's compensation.
Immediately thereafter petitioner conferred with his partners and it was agreed that petitioner would devote his entire time to the state work and would not be called upon for the general work of the law firm. Petitioner was to remain a partner in the firm and, as his contribution, was to pay into the firm $500 a month out of the proceeds he would receive from the state in payment for the work he was about to perform. Thereafter, petitioner devoted his entire time to state duties.
From 1931 to 1935 Knight was Attorney General of Alabama, and petitioner usually received his information and instructions from Knight relative to the cases he was to handle during this period.
From 1935 to 1939 Albert Carmichael was Attorney General of Alabama, and petitioner continued to perform substantially the same services under Carmichael as he had heretofore performed under Knight. No new commission was issued and no new written contract was entered into between petitioner and Carmichael, although the contract with Knight expired by its terms "when the present term of office of Attorney General shall end." Carmichael exercised a greater degree of supervision over petitioner's activities than had his predecessor and advised petitioner, both verbally and in writing, that he must be subject to the Attorney General's control and direction in the performance of his services in collecting delinquent taxes. He particularly gave advice and instructions with reference to the filing of suits and dismissal or compromise of suits, and required that no compromise be entered into without his specific approval.
The method of handling tax collections was substantially as follows: The tax commission prepared and submitted to the Attorney General a form showing the amount of tax, penalties, and interest, which the Attorney General forwarded to petitioner, with or without special instructions. If a claim were in a distant county the petitioner would forward it to associate counsel in such county, who would proceed to take the necessary steps for the collection of the amount due. Such associate counsel did not have a commission, but if suit was filed it was filed in the Attorney General's name and in petitioner's name as Special Assistant Attorney General. During the administration of Carmichael from 1935 to 1939, it was the practice of that official to designate the name of the persons who would act as associate counsel and it was necessary that petitioner deal with the counsel that the Attorney General had designated. Where collections were made by an associate counsel, the entire collection would be forwarded to petitioner and he would pay such associate counsel for his services. Petitioner handled personally many claims and suits over the state and most of those in Birmingham and Jefferson Counties.
Under the contract of employment petitioner received a fee equal to 20 percent of the tax collected and out of this fee he was required to pay the operating costs. If he collected nothing in a given case he received nothing. Where associated counsel were used the associate received two-thirds of the fee of 20 percent and the petitioner received one-third. In a large number of cases checks covering the tax were made payable to petitioner and he would take out his fee of 20 percent and remit the balance to the state authorities. Where checks in payment of taxes were received through associate counsel the same practice was followed, petitioner taking out the fee of 20 percent and remitting to the associate counsel two-thirds thereof, and the balance of the amount recovered was sent to the proper authorities of the State of Alabama. Occasionally the tax was paid directly to the State of Alabama, in which case petitioner would put in a claim and would receive his fee of 20 percent.
Petitioner was appointed under authority of section 861 of the Code of Alabama, 1923.1 A similar provision of law had appeared as early as 1915. As far back as 1919 other attorneys had performed, under similar arrangements, services of the character performed by petitioner.
Some 2,000 claims were forwarded to petitioner and successfully collected by him, many of which were collected without suit, but many required suit. Suits were instituted by petitioner against various counties and municipalities within the State of Alabama for collection of the state gasoline tax, two or three of which went to the Supreme Court of Alabama. There were thousands of claims on which petitioner was unable to make collections, all of which required effort and expense, and the expense of which was paid out of the 20 percent received by petitioner from claims actually collected. Roughly, there were pending in Jefferson County during the years 1931 to 1939 about 6,000 ad valorem tax appeals, and during the period 1935 to 1939 about 3,000 were still pending, all of which were handled personally by petitioner.
The amounts involved in this proceeding were from the 20 percent compensation on delinquent taxes, with the exception of $2,500 which was paid in 1937 as compensation for the ad valorem work.
During the taxable years 1935 to 1939, petitioner's income from the partnership was as follows:
1935 _________________________________________ $4,826.68
1936 _________________________________________ 4,478.92
1937 _________________________________________ 3,816.93
1938 _________________________________________ 6,135.31
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