Underwood v. Commissioner of Internal Revenue

• Citation: 56 F.2d 67
• Decision Date: 07 March 1932
• Docket Number: No. 3208.,3208.
• Parties: UNDERWOOD v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

56 F.2d 67 (1932)

UNDERWOOD v. COMMISSIONER OF INTERNAL REVENUE.

No. 3208.

Circuit Court of Appeals, Fourth Circuit.

January 12, 1932.

Rehearing Denied March 7, 1932.

J. G. Korner, Jr., of Washington, D. C., for petitioner.

Wm. Cutler Thompson, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Harold Allen and L. H. Rushbrook, Sp. Attys., Bureau of Internal Revenue, all of Washington, D. C., on the brief), for respondent.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

Harry A. Underwood, a resident of North Carolina, appealed to the United States Board of Tax Appeals from a determination and order of the Commissioner of Internal Revenue in which deficiencies in income taxes of $4,112.49 and $1,199.46, for the fiscal years ending February 29, 1924, and February 28, 1925, respectively, were assessed. The determination required the taxpayer to include in his taxable income the sum of $68,080.60, received by him in the first, and the sum of $44,666.15, received by him in the second of these years, for services rendered and supplied by him as engineer and supervising architect in connection with the construction of state buildings for hospitals, schools, and other public institutions of North Carolina. His contention and complaint was that the moneys in question were received by him as compensation for personal services as an employee of the state, and as such, were exempt from federal income taxes. The Board of Tax Appeals affirmed the Commissioner's action, holding that Underwood was not an employee but an independent contractor; and the case was brought to this court by a petition for review.

The Revenue Act of 1926 by section 1211, 44 Stat. 9, 130 (26 USCA § 1065b), provides retroactively for the exemption from income taxes of compensation received by state officers and employees in the following terms: "Any taxes imposed by the Revenue Act of 1924 or prior Revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any state or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded."

Formerly the laws of North Carolina provided for a state building commission to co-ordinate and carry on the public building work of the state, and also for a state architect, to be appointed by the state building commission. See Public Laws of North Carolina of 1919, ch. 303; Consolidated Statutes of North Carolina, §§ 7487 to 7494. In 1919 Underwood was employed as an assistant state architect on a salary and served in that capacity until March 9, 1921, when changes were made in the law by the Legislature. The statutes providing for the state building commission and the state architect were repealed; and it was provided that each of certain state institutions should come under the control and management of a board of directors or trustees, to be appointed by the Governor; that each board should be held responsible for the management of the institution committed to its care, and for the disbursements of appropriations for the maintenance and permanent enlargement and repair thereof; and that each board should select and appoint from its members a building committee, specially charged with the duty of the supervision of the buildings to be built or repaired from appropriations made to the institution by the General Assembly of the state. See Public Laws of North Carolina of 1921, chs. 183 and 213; North Carolina Code of 1931, §§ 6159 (a) to 6159 (c), and sections 7487-7494.

As the result of these legislative provisions, the several boards appointed from their membership a joint building committee, and on April 26, 1921, this body entered into a contract with Underwood, as engineer and architect, to superintend and direct the construction work at certain state institutions, devoting his entire time to the employment, for a salary of $500 per month together with traveling, office, and clerical expenses. The contract provided that either party might abrogate it upon giving the other party sixty days' notice. The findings of the Board of Tax Appeals show that Underwood entered into the performance of the contract of employment as agreed, devoted his entire time to the job, and did the work for four or five institutions under the direction, control, and supervision of the building committee. He employed and discharged the members of his office force; their number and identity was left to his discretion. He kept accounts of his expenses, and at regular intervals submitted statements for his salary and expenses, and received warrants upon the state treasurer therefor, which were paid out of the legislative appropriations. The payments to him were charged by the state authorities in equal amounts against the appropriations for the institutions concerned.

Early in 1923, this plan was changed because it was thought unfair to the institutions whose building programs were comparatively small. It was therefore agreed that thereafter the cost and expenses of the architect's employment should be divided among the various institutions served in the proportions that their several legislative appropriations bore to the sum total of the appropriations. Another change, and one more important to the decision of this case, was brought about by the fact that a larger building program was undertaken by the state, which entailed more onerous services than formerly on the part of the architect. The number of institutions served was increased to twelve. It was agreed that in lieu of the salary of $500, and expenses, he should be paid a percentage on the moneys expended, ranging from 1½ to 6 per cent., depending upon the character and amount of the architectural and engineering services to be performed.

Under the new arrangement, the architect continued to devote his entire time to the work of the state, under the direction of the joint building committee, but he maintained an office at his own expense and continued to employ and discharge his assistants and employees at will as the necessities of the work required. He testified at the trial that he met with the boards of the various institutions, discussed plans with them, and prepared preliminary drawings for their final approval. He also said: "I received in 1924 $68,080.60; I received in 1925, $44,666.15. Out of those amounts I was to pay office rent, all expenses, including clerk hire, and stationery and office supplies, and all expenses covering the running of an architect's office. In 1924 and 1925 I would say I had ten or twelve employees. They were architects, draftsmen, engineers, inspectors and superintendents."

It is obvious that whether his assistants were his employees, or employees of the state, before 1923, they were his employees after the new arrangement was made. The chairman of the joint building committee testified that the architect was subject at all times to the orders and directions of the joint building committee, not only as to what should be done, but also as to the manner in which it should be done. Passing upon the testimony, the Board of Tax Appeals found that the architect's full time and services were at all times subject to the orders and directions of the joint building committee, but they reached the conclusion that he was nevertheless an independent contractor and not an employee whose compensation was exempt from income taxes. The Board said:

"Although the petitioner under his contract was required to devote and did devote his entire time and attention to the performance of his contracts with the State of North Carolina, those services were such as are performed ordinarily by an architect and engineer. He drew his plans in accordance with the requirements or suggestions of his employers and he complied with their wishes with respect to the planning of the buildings and the erection of them. He did, however, maintain his own office, employ his own assistants, and bore the expense of their employment. * * *

"The building program of the state was extensive and the state required the petitioner to devote his entire time to this work until the same was completed. In the performance of the work he was to comply with the instructions and directions of his employers. But he was to bring about these results through his own methods and instrumentalities. This, we think, stamps the petitioner as an independent contractor with the State of North Carolina, rather than as an employee."

These findings of the Board are attacked on behalf of the taxpayer as at variance with the express testimony of the committee's chairman that the committee directed not only the result to be obtained but the method to be employed by the architect. He himself did not go so far in his testimony; and it is not likely that the chairman intended his statement to be taken literally as the equivalent of the language so often used by the courts in discussing the question of independent contractors, as for instance, in Singer Manufacturing Co. v. Rahn, 132 U. S. 518, where the court said, page 523, 10 S. Ct. 175, 176, 33 L. Ed. 440: "The relation of master and servant exists whenever the employer retains the right to direct the manner in which the business shall be done, as well as the result to be accomplished, or, in other words, `not only what shall be done, but how it shall be done.' Railroad Co. v. Hanning, 15 Wall. 649, 656 21 L. Ed. 220."

There is no testimony in the record to indicate that the members of the committee were possessed of technical architectural and engineering skill; and it is a fair inference under the circumstances that the work which the architect was...