author: Moeeis :

text:
    D. Frederick Burnett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55032, 58768.
    Promulgated January 18, 1935.

      Charles 0. Trelease, Esq., for the petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

Moeeis :

These duly consolidated proceedings are for the redeter-mination of deficiencies in income tax of $2,114.88 and $234 for the taxable years 1928 and 1929, respectively, presenting for consideration the sole question whether income received by the petitioner in the said years from the State of New Jersey for services performed by him for the joint legislative commission created under a joint resolution of the legislature of that state for the investigation of the department of banking and insurance, et cetera, is exempt from taxation, it having been received as an employee of the State of New Jersey for services rendered in connection with the exercise of an essential governmental function of that state.

In February 1928, the petitioner, a resident and member of the bar of the State of New Jersey, at that time engaged in the practice of the law in partnership with certain other individuals, was informally offered and accepted the appointment as general counsel to a joint legislative commission created pursuant to Joint Resolution No. 1, Laws of 1928, to conduct an investigation of the department of banking and insurance concerning the issuance or rejection by the commissioner of charters to trust companies, state banks, and building and loan associations and into any and all other matters relating to that department. Joint Resolution No. 16 of said laws conferred additional authority upon the commission to investigate all matters pertaining to mergers and consolidation of banks and trust companies and the purchase of control thereof, and to investigate the subject of investment trusts and all matters appertaining thereto. The commission, composed of six members, three being state senators, all of whom were lawyers, was empowered to employ necessary legal, clerical, and other assistants. The sums of $15,000 and $25,000 were appropriated by the respective resolutions for carrying out their purposes.

Petitioner’s duties as general counsel to the commission involved interviewing people, drafting subpoenas, rendering oral opinions to the commission, occasional seizures of records, examination of books and accounts in preparation for public hearings, which were held by the commission at the State House once or twice weekly, at which witnesses were called and interrogated by the commissioners or by the petitioner for the commission upon the subject matter of the investigation, also the preparation of proposed corrective legislation, and drafting the report of the commission at the conclusion of such hearings. The petitioner attended all public hearings. The commission terminated its existence about April 1, 1929, and rendered a report of its activities showing that besides executive sessions it had held 33 public hearings and had taken about 5,500 pages of testimony, in which report it made certain recommendations affecting the matters investigated. The petitioner discovered shortly after the investigation started that the work could not be conducted in his office, so he selected certain assistants, an executive secretary, who' was assisted by his regular secretary and a public accountant, who were, as was the petitioner, paid from the state treasury. The foregoing comprised the permanent staff of the commission. Other temporary employees — another public accountant, detectives, and minor investigators — were employed from time to time.

Neither the term of the petitioner’s engagement with the commission nor his compensation were fixed. There was no restraint placed upon the acceptance of other concurrent employment nor was any mention made of the time that he was required to devote to the investigation — that was left to his discretion — it being contemplated, however, that the work of the investigation should be given the “ first order of the day.” Actually, however, he devoted more than 95 percent of his time to the work.

Generally, with few exceptions, the matter of subpoenaing witnesses before the commission was left to the discretion of the petitioner, without interference. The commission directed that the different investigations be conducted and the petitioner would proceed accordingly. When differences of opinion arose the judgment of the commission controlled.

Though the law partnership of which the petitioner was a member continued during the time the petitioner was engaged in these investigations, he turned over nearly all of his private practice to his partners. His distributive shares of its income from that source were:

1927-$10, 734. 20
1928- 261. 53
1929 - 7, 543.73

Petitioner personally received all of the compensation for services rendered the commission.

At the time of becoming general counsel for the commission the petitioner occupied the Chair of Corporations at the New1 York University Law School, from which he was granted a leave of absence until the conclusion of his appointment, at which time he resumed his activities. He reported net income from this source in his tax return for 1928 of $3,909.92.

The respondent held that the petitioner was not an employee of the State of New Jersey and increased his taxable income by the amount of compensation received by him therefrom.

The petitioner contends that the compensation received by him from the State of New Jersey was for services rendered in connection with the exercise of an essential governmental function of the state, that he was an employee of the state and that such compensation is exempt from tax. The conclusion which we feel constrained to reach, in any event, renders it unnecessary to determine whether the joint legislative commission was an essential governmental function of the State of New Jersey, so that we shall confine ourselves to the question whether he was an employee of the state within the meaning of that word as defined in the many decisions of this Board and of the courts.

The petitioner' lays considerable stress upon the “ right of control ” vested in and retained by the commission, which he regards as the “ true determining factor ” of whether or not he was an “ employee ” as distinguished from an independent contractor. He quotes from that .part of the decision in Metcalf & Eddy v. Mitchell, 269 U. S. 514, where the Court says, “ The record does not reveal to what extent, if at all, their services were subject to the direction or control of the public boards or officers engaging them ” and where it says, “ control or right of control by the employer * * * characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor.” He also refers to Singer Manufacturing Co. v. Rahn, 132 U. S. 518, where the Court says, “ and 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.’ ”

The petitioner in comparing tbe facts of bis own case with those of Metcalf & Eddy v. Mitchell, supra, alludes to that reference by the Court to the fact that the taxpayers there were “ free to accept any other concurrent employment ” and to the fact that he, the petitioner, was required to devote his entire time, if necessary, to the work of the commission. The fact that he may or may not have been required to devote his entire time to the work of the commission is by no means dispositive. Respecting this phase of the argument we said in Edwin J. Raber, 20 B. T. A. 975, that:

* * * We think that neither the amount of time devoted to performing legal services, nor the place where they are performed, is a controlling point in determining whether an attorney is an employee or an independent contractor. An independent contractor may devote his entire time for a period to a special job and still fall short of being an officer or employee of a State or political subdivision thereof. In other words, it is possible for an officer or employee to accept outside employment without changing the character of the services rendered by him, but it does not follow that one who is engaged to render service in a particular transaction and who must devote his entire time to such employment for the duration thereof, becomes an officer or employee within the meaning of the statute.

As a matter of fact we are not convinced that his arrangement with the commission even compelled him to devote his entire time to its work. It was more, as the petitioner himself testified, a question “ of getting the work through.”

The petitioner also lays great stress upon his testimony that where a difference of opinion between him and the commission arose the decision of the commission was final, as evidencing the fact that control was reserved whether actually exercised by the commission or not. Quite naturally the commission did not surrender all of its power of ultimate decision to the petitioner, for otherwise there would have been little or no justification for its existence. It was established by the legislature as an inquisitorial body performing a quasi-judicial function, therefore, conclusions to be drawn from the matters presented to it or decisions to be rendered based thereon were basically the responsibility of the commission and could not have been delegated to another. We do not construe this testimony to mean, nor does the petitioner in fact say, that his actions in the preparation of matters to be presented to the commission were controlled by it. What the petitioner actually meant, as we construe his testimony, was that after a matter had been prepared by him and presented to the commission the construction to be placed upon that testimony or ultimate decisions to be rendered respecting it rested with the commission. This construction is borne out by the petitioner’s own testimony where, in testifying upon the subject of the degree of control exercised by the commission over his work, he said, but to say that they knew what I was doing, of course they did not.”

Among the other arguments advanced, all of which we need not attempt to answer, the petitioner refers to the language of the court in Underwood v. Commissioner, 56 Fed. (2d) 67, that “ 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 employed to do was beyond their capacity to direct, either in method or in detail ”, and the fact, in the instant case, that the members of the commission were experienced in public matters, whereas the petitioner here had had no previous experience at all in such matters, from which he would have us infer, as in that case, the retention of control by the commission. The force of this argument is immediately spent when we consider that the petitioner was a lawyer, that the proceedings before the commission were, as the record shows, similar to a trial in court, that the bulk of his work was gathering evidence for submission to the commissioners at those proceedings, work with which any lawyer should be perfectly familiar, and that such investigations were into the affairs of corporations, a subject in which he was no doubt an outstanding authority, having occupied the Chair of Corporations at the New York University Law School for over twenty years.

The petitioner was engaged by the commission to accomplish certain objects specified and limited by the joint resolutions of the legislature creating the commission. While no doubt the commissioners insisted that the investigation be given the right of way, so to speak, there was no restriction upon the amount of time to be devoted thereto by the petitioner. True he was told what to do, that is, that he should proceed to investigate certain institutions named by the commission, but ws do not understand that he was' told how those investigations should be made. Indeed we are reasonably convinced that he was permitted to proceed without any substantial interference. The duration of his employment was limited by the objects specified. It so, happened that the investigation consumed approximately thirteen months. There was no fixed compensation for his services as would normally be found where the relation of master and servant exists. In fact the petitioner had worked for nearly two or three months when he inquired “ if the ghost ever walked ” and as a result he then received something like $10,000 and other sums from time to time thereafter. The fact that he entered into no written contract makes him none the less a.n independent contractor.

To attempt to answer all of the arguments advanced by the petitioner or to discuss all of the cases cited by him would unduly prolong our discussion but would not change our conclusion. Suffice to say that upon the facts of record, set forth hereinabove, we are satisfied that the petitioner was an independent contractor as distinguished from an employee and that, therefore, the compensation received by him was not exempt from taxation, within the principle enunciated in Metcalf & Eddy v. Mitchell, supra, and the many decided cases to the same effect.

Judgment will he entered for the respondent.


source: Caselaw Access Project

author: Seawell :

license: Public Domain

text:
    Russell E. Watson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60627.
    Promulgated January 18, 1935.

      John B. Molineux, Esq., for the petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

Seawell :

Petitioner and respondent are in disagreement as to the inclusion of $18,000 in petitioner’s income for 1929, which inclusion results in a deficiency in income tax of $1,907.48. Petitioner alleges that said $18,000 was paid to him as an officer or employee of the State of New Jersey and is not taxable. Respondent traverses these allegations.

Petitioner at all times herein material was a lawyer, engaged in general practice at Brunswick, New Jersey. In 1928 the Legislature of New Jersey created a committee charged with the duty “ to make a survey of all questions of public interest; to investigate violations of law and the conduct of any State, county or municipal official * * * department * * * board or body; to ascertain what departments or activities of the State may be curtailed or eliminated; to make a general survey of the finances of the State, counties and municipalities (except the Department of Banking and Insurance) ; and to report its findings and recommendations as a basis for legislative action.” The committee was given power to determine its own rules and procedure; and to employ necessary legal (and other) assistants; to compel the attendance of witnesses and the production of books, papers, and records; to administer oaths and examine witnesses. The members of the committee were allowed necessary expenses, but no salary. For the purpose of the investigation $25,000 was appropriated. Petitioner attended the lirst and subsequent meetings of the committee and took and subscribed an oath of office. The committee was organized June 14, 1928, and, except when on vacation as it was during August and until after Labor Day and during the Christmas holidays, served till April 1929, with some minor services thereafter. It had offices at Jersey City and Trenton, furnished by the state. Petitioner acted as general counsel during said time, with four other lawyers as assistant counsel. Petitioner kept in touch with his own private office and engaged, to an unknown extent, in his private practice. He did not use his own office or his office force in his work for the committee. He was usually told by the chairman subj ects for investigation, and personally, and through his assistants, made various investigations, interviewed persons supposed to possess knowledge of importance, and reported the results of his investigations to the chairman and furnished him with lists of witnesses; and petitioner conducted examinations of the witnesses before the committee, the members of which also asked questions. About 350 witnesses were so examined and some 400 other persons were interviewed but not subpoenaed.

For the services rendered the committee petitioner was paid $18,-000 by the State of New Jersey in 1929, which he did not include in his income tax return for the reason that he considered it exempt from income tax.

If petitioner was an officer or an employee of the state and his services related to a governmental function and were rendered in that capacity, the $18,000 paid him for his services would not be subject to income tax. See Helvering v. Powers, 293 U. S. 214. He does not now press his claim that he was an officer, and we think correctly so, but he does contend that he was an employee. The burden, of course, is upon him to establish this claim. Reinecke v. Spalding, 280 U. S. 227, 233. There was no resolution of the committee or other writing to show his employment by the committee. The only evidence of any contract or of his previous engagement in any way to serve the committee was embraced in a conversation he had with Senator Case, a member of the committee, before the committee was organized, in which Senator Case outlined in a general way the scope of the committee’s authority and its anticipated activities, and asked petitioner if he would serve the committee as counsel, to which petitioner assented. There was no definite time fixed for beginning his service; or the kind of service, if any other than as counselor, to be performed; or whether the whole or only a part of his time was to be given; or whether he would serve for specified hours or be in control of his own time and serve at his convenience, or only when specially requested; or whether his service should be continuous, or for a definite particular transaction; or how or when his compensation would be fixed or paid; and other usual details of employment were absent. It is true petitioner testified that he considered his employment was for the life of the committee, but that the committee could dismiss him at its pleasure; and that he also considered the committee entitled to his entire time if required, but that he was at liberty to use his own time as he saw fit when not so required. Contracts are not made by unilateral understandings. The committee contained in its members some excellent lawyers, one of whom has since been promoted to the supreme court of the state. We allow ourselves to presume nothing from the absence of a definite resolution of the committee or other writing showing the employment of petitioner as counsel or because the report of the committee to the state senate and general assembly mentions the subject only by saying “ The committee has been attended by Russell E. Watson as counsel * * Cases must be decided upon facts shown, having regard to the burden of proof.

The distinction between an employee and an independent contractor is not precise and it has often been the subject of sharp contest. B. F. Martin, 12 B. T. A. 267. One who receives income is normally taxable on it, and if he claims that by reason of some exception in the statute, or otherwise, he is exempt from the tax, he must by strict proof bring himself within the exception or his claim fails. Charles A. Collin, 1 B. T. A. 305; Register v. Commissioner, 69 Fed. (2d) 607; Botany Worsted Mills v. United States, 278 U. S. 282, 289, 290. The committee for which petitioner served as counsel had for its task and duty a special, definite service to perform. It embraced many angles, but the whole object was the ascertainment of designated information in reference to certain matters in New Jersey to be used as a basis for legislative action. So employed, petitioner was not an employee but an independent contractor. Louisville, etc., Railroad Co. v. Wilson, 138 U. S. 501. A lawyer employed to prosecute a class of individuals charged with offenses in reference to certain designated public matters has been held not an employee of the state which he served, but an independent contractor. Commissioner v. Murphy, 70 Fed. (2d) 790, which follows the decision of the Supreme Court in Metcalf & Eddy v. Mitchell, 269 U. S. 514. Cf. George Z. Medalie, 30 B. T. A. 1284. A lawyer performing similar service to that which petitioner performed has been held “ a free professional agent as to the nature of his services and the advice he would give.” Blair v. Byers, 35 Fed. (2d) 326. Cf. Burnet v. McDonough, 46 Fed. (2d) 944.

Without undertaking to review the cases cited by petitioner and to point out the distinctions to be noted in the facts, we are of opinion, upon the state of the record, and so hold, that petitioner in the services rendered the legislative committee was not an employee but an independent contractor, and the sum paid him for his services is taxable as income to him.

Judgment will be entered for the respondent.


author: ¡¡Smith :

text:
    Edward S. Harkness, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary S. Harkness, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65169, 71310, 71311.
    Promulgated January 22, 1935.

      William E. /Sims, Esq., for the petitioners.

      Mason B. Leming, Esq., for the respondent.
   OPINION.

¡¡Smith :

These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in petitioners’ income taxes for 1929 and 1930 in amounts as follows:

The issues involved in the several proceedings are as follows:

(1) Whether in computing the deduction for charitable contributions capital net gains are to be included in the net income upon which the statutory 15 percent limitation is based. (This issue is common to all three proceedings and is the only issue in Docket No. 71311.)

(2) Whether dividends declared and payable in 1929, but not received by the petitioner Edward S. Harkness who made his returns on the cash basis, until 1930, are taxable to him in 1929 or 1930. (This issue is common to Docket Nos. 65169 and 71310.)

(3) Whether the petitioner Edward S. Harkness is taxable upon the receipt of rights to subscribe to convertible debenture bonds of the American Telephone & Telegraph Co. and the Atchison, Topeka & Santa Ee Nail way Co., which rights were received and exercised by him in 1929, and, if so, the value of such rights.

(4) Whether the capital net gain of the petitioner Edward S. Harkness for 1929 was erroneously increased by the respondent by the amount of $90,000. (Issues (3) and (4) are involved in Docket No. 65169 only.)

(5) Whether the profit derived by the petitioner Edward S. Harkness upon the liquidation of the Atheneum Co., was taxable to him in 1930, and, if so, whether the petitioner is entitled to be taxed upon such income at the capital net gain rate.

(6) Whether the petitioner Edward S. Harkness is taxable upon the amount of $190,948.24 received by him in 1930 as executor and residuary legatee under the will of his mother Anna M. Harkness which amount represented a refund of a portion of the estate tax and interest thereon paid by the estate. (Issues (5) and (6) are involved in Docket No. 71310 only.)

The petitioners are husband and wife. They filed separate income tax returns for each of the years involved and their returns were made on the cash receipts and disbursements basis and for a calendar year. The several issues will be discussed in the order stated above. The essential facts pertaining to each issue have been stipulated.

Issue (1). During each of the years 1929 and 1930 the petitioner Edward S. Harkness made charitable contributions of not less than $5,000,000 and during 1929 the petitioner Mary S. Harkness made such contributions in an amount of not less than $250,000. In each of the years mentioned the respondent, in determining the amounts deductible by the petitioners on account of charitable contributions under section 23 (n) of the Revenue Act of 1928, excluded capital net gains from the income upon which the statutory 15 percent limitation was applied. The petitioners’ contention that the amounts deductible on account of charitable contributions should be computed without excluding from income the capital net gains is sustained upon authority of Helvering v. Bliss, 293 U. S. 144.

It is stipulated that the petitioner Mary S. Harkness had a capital net gain of $819,245.76 in 1930. The amount of the capital net gain of the petitioner Edward S. Harkness is in dispute for both the years 1929 and 1930 and is the subject of issues hereinafter discussed.

Issue (2). In his income tax return for 1930 the petitioner Edward S. Harkness reported the receipt of dividends from the Prairie Pipe Line Co. in the amount of $243,987.50 and from the Standard Oil Co. of Kentucky in the amount of $114,224.80. The dividend of the Prairie Pipe Line Co. was declared on November 5, 1929, was payable to the stockholders of record on November 30, 1929, and the secretary of the company was directed to make the distribution on or before December 31, 1929. The Standard Oil Co. of Kentucky dividend was declared on November 22,1929, was payable to the stockholders of record as of December 15, 1929, and was distributable on December 31, 1929. Checks for the amounts of both the dividends were mailed to the petitioner on December 31, 1929, but were not received by him until on or after January 2, 1930. In computing the petitioner’s tax liability for 1929 the respondent included both dividends in his income for that year. The petitioner contends that the dividends in question are taxable to him in 1930, the year of their receipt.

A case on all fours with the present one was before the Supreme Court in Avery v. Commissioner, 292 U.S. 210. Those facts are stated by the Supreme Court as follows:

The petitioner was a large stockholder and president of the United States Gypsum Company. In November, 1924, the company declared a dividend payable on or before the 31st day of December following. Its check, dated December 31st for the amount attributable to his stock, payable to him, was received by petitioner, January 2, 1925. In November, 1929, another dividend was declared payable on or before the following December 31st, and the company’s check for petitioner’s portion was received by him January 2, 1930.

There, as here, the taxpayer kept his accounts and made his tax returns on the cash receipts and disbursements basis and for the calendar year. One of the questions before the Court was whether the dividend payable on or before December 31, 1929, but actually received by the petitioner on January 2, 1930, was taxable income of the year 1929, or of 1930. The Court, after referring to the various provisions of the taxing statutes, and especially to sections 41, 42, and 43 of the Revenue Act of 1928, which require in part that net income shall be computed upon the basis of the taxpayer’s annual accounting period in accordance with the method of accounting regularly employed in keeping the books of the taxpayer, observed:

li we give the words of the statutes their ordinary meaning, clearly the dividends under consideration were not actually received by the taxpayer during 1924 and 1929. Certainly they were not received when declared. They did not come into the taxpayer’s hands on December 31st simply because payable on that day. And, unless Congress has definitely indicated an intention that the words should be construed otherwise, we must apply them according to their usual acceptation.
*******
* * * rphg faets here disclose a situation substantially like that in Adams Case [Commissioner v. Adams (C. C. A. 1931), 54 Fed. (2d) 228, 230] ; and we agree with the conclusion of the court therein, stated as follows: “We are also of the opinion that, on the facts found, the dividends were not ‘unqualifiedly made subject to the demand of the stockholder ’, in the year 1924, if article 5-2 of the Departmental Regulations can be said to be valid and not in conflict with the express language of section 213 (a).”

The respondent’s construction of the decision of the Supreme Court in Avery v. Commissioner, supra, is disclosed in I. T. 2833, published in Internal Revenue Bulletin, December 3, 1934, headed “ Effect of the decision of the Supreme Court of the United States in Avery v. Commissioner.” In this I. T. it is stated in part:

The above-mentioned decision considered the application of the rule contained in the various regulations to the effect that a dividend is subject to income tax when unqualifiedly made subject to the demand of the shareholder, as set forth in articles 333 and 621 of Regulations 77 and the corresponding provisions of the regulations covering prior years. Application of such rule is found in the decision rendered by the United States Board of Tax Appeals in Frederick S. Peck v. Commissioner (29 B. T. A. 872), which involved dividends payable on December 31, 1929, where the checks in payment thereof were not received until January 1930. It was held that the payment by check through the mails was not mandatory, that there was no restriction to prevent the shareholder from receiving the dividends in 1929, and that the dividends were taxable for that year.
* * * The decision is to be regarded as an application of the rule long '■ followed by the Bureau of treating a dividend as taxable income for the year in which it first becomes subject to the unqualified demand of the stockholder. Consideration of the particular facts and circumstances governing the payment is of course required in applying the rule.

Inasmuch as the above cited comment of the respondent is predicated in large part upon the opinion of the Board in Frederick S. Peck, 29 B. T. A. 812, it should be noted that the report published in 29 B. T. A. 872, carries a footnote as follows: “ This opinion was recalled in conformity with Avery v. Commissioner, - U. S. - (April 30, 1934)The explanation of this footnote is that the Board reached the conclusion before entering its decision that the first published opinion was in error and accordingly the decision of the Board entered thereafter was in accordance with the decision of the Court in Avery v. Commissioner, supra.

It seems to us that the Supreme Court, in deciding the Avery case, has not relied upon the facts in that case which, like the facts in the Adams case, might serve to distinguish it from such cases as Commissioner v. Bingham, 35 Fed. (2d) 503, and has decided that where dividends are declared prior to the end of the year but are to be and are paid by checks mailed by the corporation so late in the year that they are not received by the stockholder until the following year, such dividends are taxable to a stockholder on the cash receipts and disbursements basis in the year when the check is received. Thus, as we interpret the decision of the Supreme, Court in the Avery case, it is dispositive of the present issue and upon the authority of it the petitioner’s contention that the dividends in question are taxable to him for 1930 and not for 1929 is sustained.

Issue (3). In 1929 the petitioner Edward. S. Harkness was a stockholder of record of the American Telephone & Telegraph Co. and of the Atchison, Topeka & Santa Fe Railway Co. As a stockholder of the first named company he received, in’ 1929, 29,216 rights to subscribe to $486,933.33 par amount of 4% percent convertible 10-year debenture bonds of the company at par. In 1929 the petitioner sold one of such rights for $4 which he reported in his income for that year. The remaining 29,215'rights the petitioner exercised on June 28,1929, by the purchase of $486,900 par value of the bonds, paying therefor the amount of $486,900. The fair market value of the 29,216 rights at the date of issuance- to the petitioner on May 10, 1929, was $166,160.31.

In his income tax return for 1929 the petitioner reported the amount of $164,334.38 representing the 'fair market value of the 29,216 rights as a dividend distribution. In determining the deficiency herein the respondent increased the reported fair market value of the rights to $166,160.31, which amount he included in the petitioner’s income as a dividend distribution. The fair market value of the bonds as of the date of the issuance of the rights and at the time of the exercise of the rights was- $134.75 and $139,875, respectively, for each $100 par value of bonds.

As a stockholder of the Atchison, Topeka & Santa Fe Railway Co., the petitioner, in 1929, received 110 rights to subscribe to 4% percent debenture convertible bonds of the company at par at the rate of $1,000 par value of bonds for each 80 rights. The fair market value of the bonds, at the date of the authorization of the rights and bonds, was $124.50 for each $100 par value of bonds. The petitioner, on February 2, 1929, exercised 80 of the rights by purchasing $1,000 par value of bonds and paying therefor $1,000. He sold the remaining 30 rights for $58.50. In his income tax return for 1929 the petitioner reported as a dividend $330 on account of his receipt of 110 rights and the amount of $58.50 received upon the sale of the 30 rights. In his determination of the deficiency herein the respondent increased the reported value of the 110 rights, resulting in an addition to income of $75.63. The fair market value of the 110 rights at the times in question was $323.12, or $2.9375 per right.

With respect to this issue the only question now in dispute is whether the rights issued to the petitioner' in 1929 to subscribe to bonds of the American Telephone & Telegraph Co. and the Atchison Topeka & Santa Fe Railway Co., which rights were not sold by him in that year but were exercised, constituted taxable income to the extent of their agreed fair market value. This identical question has been decided in the negative in T. I. Hare Powel, 27 B. T. A. 55, and Robert C. Cooley, 27 B. T. A. 986. We held in those cases, both of which also involved the rights issued by the American Telephone & Telegraph Co., that the receipt of rights to subscribe for convertible bonds is not the receipt of income to the extent of the fair market value of such rights. In accordance with our decisions in those cases this issue is determined in favor of the petitioner.

Issue (4). This issue has been settled by stipulation, the respondent now conceding that the capital net gain of the petitioner, Edward S. Harkness, as determined by him in the notice of deficiency for 1929, should be decreased by the amount of $90,000.

Issue (5). On May 29, 1917, the petitioner, Edward S. Harkness, acquired all the stock of the Atheneum Co., consisting of 3,000 shares and there was no change in ownership of the stock during the times here in question. On July 16,1930, the stockholders of the company entered into an agreement that the corporate existence of the company should be terminated. The preliminary certificate of dissolution was filed in the office of the Secretary of State of Connecticut on August 4, 1930. Thereafter, a notice of the proposed dissolution was duly published as provided by the laws of the State of Connecticut. The final certificate of dissolution, dated January 5, 1931, was filed with the Secretary of State of Connecticut on January 7, 1931. Prior to December 31, 1930, the petitioner received a final liquidating dividend from the company in the amount of $17,325.90. On March 14, 1931, the petitioner paid Federal income tax of the company for 1930 in the amount of $2,181.15. In his income tax return for 1931 the petitioner reported the amount of $17,325.90 less $2,181.15 as an ordinary dividend, subject only to surtax. In his determination of the deficiency herein for 1930 the respondent included in the petitioner’s income the amount of $17,325.90 representing the amount of his profit from the liquidation of the Athe-neum Co., which amount he held subject to both normal and surtax. In such determination the respondent did not allow the deduction of the amount of $2,181.15 Federal income tax of the Atheneum Co., for 1930 which the petitioner paid in March 1931. In the respondent’s deficiency notice the item of $17,325.90 appears under the caption “ Interest on foreign bonds.” It is now conceded that this was error and that the amount should have been designated a liquidating dividend or profit derived upon liquidation of the Atheneum Co. It is further agreed that the petitioner’s profit from the liquidation of the Atheneum Co. was $17,325.90 less $2,181.15, or $15,143.75.

The questions for our determination are whether the profit received by the petitioner upon the liquidation of the Atheneum Co. in the agreed amount of $15,143.75 was income to him in 1930 or 1931, and, if it was income in 1930, which is the only one of those years before us, whether the petitioner is entitled to have the tax thereon computed at the net capital gain rate.

In our opinion the respondent has correctly determined that the petitioner is taxable in 1930 upon his profits from the liquidation of the company. The Atheneum Co. was completely liquidated in 1930 except that the final certificate of dissolution was not filed with the Secretary of State of Connecticut until the following January 7, 1931. This fact, we think, is immaterial. In Harry A. Dockum,, 11 B. T. A. 39, we said:

On January 2, 1919, notice of the dissolution was mailed to the Secretary of State and he entered it of record on January 6, 1919'.
The fact that the corporation did not go out of existence until notice was given has no bearing upon the case. The corporation could not have transferred its assets after it ceased to exist.
We find that the petitioner. acquired the assets of the corporation before January 1, 1919, and any income which the petitioner may have realized as a result of that transaction accrued in 1918.

An information return, Form 1099, attached to the income tax return of the Atheneum Co. for 1930, shows the payment to Edward S. Harkness in that year of a dissolution dividend in the amount of $17,325.90. As the parties have agreed, that amount should be reduced, in determining the petitioner’s taxable gain, by the amount of tbe taxes of the corporation which the petitioner paid in the following year. O. B. Barker, 3 B. T. A. 1180; E. F. Cremin, 5 B. T. A. 1164; E. M. F. Leflang, 6 B. T. A. 4; Takamine Laboratory, Inc., 7 B. T. A. 963.

Is the petitioner entitled to have the profits in question taxed to him at the capital net gain rates under the provisions of sections 115 (c) and 101 of the Revenue Act of 1928, and article 625 of Regulations 74? The petitioner admittedly held the stock of the Atheneum Co. for more than two years and was therefore entitled to report the gain from its. disposal, in the final liquidation of the company, as a capital net gain. The petitioner reported all his capital gains in 1930 as capital net gains. The $15,143.75 gain from the liquidation of the Atheneum Co. falls in the same category and the petitioner is entitled to have this amount also taxed as capital net gain.

Issue (6). The petitioner, Edward S. Harkness, was the executor and sole residuary legatee under the will of his mother, Anna M. Harkness, who died March 27, 1926. During 1926 to 1928, inclusive, Federal estate taxes in the aggregate amount of $12,051,463.26 and interest in the aggregate amount of $140,582.88 were paid by the estate. On March 11, 1930, a refund of such taxes and interest in the respective amounts of $185,914.82 and $5,033.42 was made, together with interest thereon in the amount of $21,789.02. These amounts the petitioner, as executor and sole residuary legatee, received and deposited to his own account. In his income tax return for 1930 the petitioner reported as income the interest item of $21,789.02 and the balance of the refund, amounting to $190,-948.24, he deducted from the gross amount of taxes which he was entitled to claim as a deduction in his return for that year. The result of the petitioner’s treatment of the $190,948.24 item was to include that amount in his income for that year. In his determination of the deficiency herein the respondent has made no change in the treatment accorded these items in the petitioner’s return. The income tax returns of the estate of Anna M. Harkness for the years 1926,1927, and 1928, after the deduction of Federal estate taxes paid in those years, disclosed an excess of deductions over income for each year in the following amounts:

1926_ $45,230. 08
1927_ 1, 076,057.37
1928_ 3,478, 022.92

In our opinion the item of $190,948.24 was not taxable income to the petitioner. The estate taxes paid by the Anna M. Harkness estate were a charge against the corpus of the estate. United States v. Woodward, 256 U. S. 632; Everett J. Esselstyn, Executor, 26 B. T. A. 181. A part of such taxes when refunded to the petitioner as the sole residuary legatee served merely to increase the amount of his legacy from the estate and was in no sense income of the year when refunded. Iten Biscuit Co., 25 B. T. A. 870; Mente & Co., 29 B. T. A. 804. See also Mary W. Leach, 16 B. T. A. 781; affd., 50 Fed. (2d) 371; and Bettie Matthews, 21 B. T. A. 96.

It was therefore error for the respondent to include the item of $190,948.24 in the petitioner’s income for 1930.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: MoRRis:

text:
    Omega Chemical Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52557.
    Promulgated January 24, 1935.

      Marie Eisner, Esq., and F. Tannenbaum, Esq., for the petitioner.

      Warren F. Wattles, Esq., for the respondent.
   OPINION.

MoRRis:

The fundamental inquiry is whether there are two separate and distinct credits provided for in section 238 of the Revenue Acts of 1924 and 1926 to be computed and determined according to their separate limitations as therein prescribed, that is, a credit under subdivision (a) for any income, war profits, and excess profits taxes paid in the instant case to the Republic of France and to the Kingdom of Great Britain, the amount thereof being' limited by the provisions of that subdivision, and another credit under subdivision (e) of that section for such income, war profits, or excess profits taxes “ deemed ” to have been paid by the petitioner’s foreign subsidiaries to those countries upon accumulated profits from which dividends were declared and received by this petitioner, said credit to be separately computed and limited only by the provisions of that subdivision, and the sum of the two to be allowed as credits against the income taxes found to be due the United States, as the petitioner contends, or, whether the total allowance in any event is governed by the limitation prescribed in subdivision (a) of that section, as the respondent contends.

The pertinent provisions of the Acts of 192é and 1926, which are the same for our purposes, are as follows:

Sec. 238. (a) In the case of a domestic corporation the tax Imposed by this title shall be credited with the amount of any income, war-profits, and excess-profits taxes paid or accrued during the same taxable year to any foreign country, or to any possession of the United States: Provided, That the amount of such credit shall in no case exceed the same proportion of the tax (computed on the basis of the taxpayer’s net income without the deduction of any income, war-profits, or excess-profits taxes imposed by any foreign country or possession of the United States), against which such credit is taken, which the taxpayer’s net income (computed without the deduction of any such income, war-profits, or excess-profits tax) from sources without the United States bears to its entire net income (computed without such deduction) for the same taxable year. * * *
# * í¡s tfr $ ' $ a $
(e) For the purposes of this section a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends (not deductible under section 234) in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country or to any possession of tile United States, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the credit allowed to any domestic corporation under this subdivision shall in no case exceed the same proportion of the taxes against which it is credited, which the amount of such dividends bears to the amount of the entire net income of the domestic - corporation in which such dividends are included. * * *

Prior to tbe enactment of the Revenue Act of 1918 a taxpayer who had paid income, war profits, and excess profits taxes to a foreign country was only permitted to deduct such taxes from gross income in arriving at the net income upon which the United States income tax was imposed. The Congress, recognizing the manifest unfairness in the prevailing method of treatment and in order to mitigate the evils of double taxation, provided, in section 238 of that act, for an unlimited credit for taxes paid to such foreign countries or possessions of the United States against taxes found to be due the United States. Rept. 767, p. 31, accompanying H. R. 12863. See also Burnet v. Chicago Portrait Co., 50 Fed. (2d) 683; affd., 285 U. S. 1. Thus, we see that subdivision (a) of section 238 of the acts under consideration originated with the enactment of the Revenue Act of 1918, when the complexities of income taxation were little appreciated, particularly as it pertained to those corporations enjoying an affiliated status and entitled to file consolidated returns under the acts. So that it was not at all surprising that the Congress, in the enactment of the Revenue Act of 1921, should find it necessary to place a limitation upon the credit theretofore allowed. This it did by inserting a limitation clause in section 238 (a) of the Revenue Act of 1921 and, as so amended, that subdivision was carried into the Revenue Acts of 1924 and 1926 in substantially the same language as there used. Subdivision (e) of section 238 found its origin in section 240 (c) of the Revenue Act of 1918, which section pertained to and provided for the filing of consolidated returns by coi’porate taxpayers. That subdivision then read as follows:

For the purposes of section 238 a domestic corporation which owns a majority of the voting stock of a foreign corporation shall he deemed to have paid the same proportion of any income, war-profits and excess-profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States, which the amount of any dividends (not deductible under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid: Provided, That in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not deductible under section 234) received by such domestic corporation during the taxable year.

That subdivision was likewise modified by the Revenue Act of 1921 and was incorporated in the act as subdivision (e) of section 238, the language of which has remained as therein found.

The right of individual citizens of the United States to claim, credits for war profits and excess profits taxes paid to foreign countries or possessions of the United States upon income derived from sources therein was granted in section 222 of the Revenue Act of 1918 and that right has been perpetuated throughout the succeeding revenue acts except that, and an interesting historical parallel exists here between the individual right and the corporate right to such credits, the Congress found it necessary to place a limitation upon the credit allowed to individuals as it did in that same act in the case of corporations.

In commenting upon section 238 of the Revenue Act of 1921 the Finance Committee, at page 19 of its Report No. 275 accompanying H. R. 8245, said:

Section 238 grants to corporations substantially the same credits for income and profits taxes paid to foreign countries or possessions of the United States as are granted to individuals by section 222.

The limitation clauses in section 238 (a) and section 222 referred to in the foregoing Committee Report are the same in principle.

The foregoing brief, but substantially complete, historical sketch of the subdivisions of the acts now under consideration brings us to consideration of the issue presented and the contentions advanced. Our fundamental guide in this quest is to determine, as far as possible, from the language used, what the intention of the Congress was. In re Matthews, 109 Fed. 603.

One thing of which we are certain is that the Congress did not intend to grant full credit in all cases for all taxes paid to foreign countries, by reason of the fact that it placed a definite limitation thereon under the Revenue Act of 1921 after it had doubtless learned that the unlimited credit enjoyed under the Revenue Act of 1918 worked a hardship upon the United States and deprived it of taxes upon substantial incomes derived from sources within the United States. It is believed that the Congress intended to allow only what it regarded as a reasonable credit consistent with the best interests of this Government. Therefore, the language which it added to the 1921 Act must be construed in the direction of limitation of the privilege rather than in the extension thereof.

It must also be borne in mind, in the construction of these acts, that they were designed for the production of revenues to the United States. Credits and exemptions were mere incidents in this design. Therefore, the disputed provisions of the acts must be viewed in such a manner that the production of revenue will result except where the act expressly indicates otherwise. In other words, we must impute to the Congress no intention to permit domestic corporations having foreign affiliates to completely deprive the United States of taxes upon income otherwise taxable, by reason of the fact that foreign countries in which they operate have imposed a .heavier tax levy upon income than the tax found to be due the United States upon income derived from its sources, a result that would be accomplished in a vast number of such cases.

It will be observed that subdivision (a) of section 238, supra, is mandatory in its terms. It states at the very outset that domestic corporations “ shall be credited ” with a certain proportion of “ any income, war profits, and excess profits taxes paid or accrued ” to any foreign countries or to any possessions of the United States. We find nothing of the sort in subdivision (e), however. In fact, except for that portion of the limitation clause provided in that subdivision where it says “ the credit allowed to any domestic corporation under this subdivision ”, we find nothing therein even authorizing a credit at all apart from the grant made in subdivision (a). True, subdivision (e) says that a domestic corporation owning the majority of the voting stock of a foreign corporation “ shall be deemed to have paid ” a certain proportion of income, war profits, or excess profits taxes paid by its foreign subsidiary, but it does not say, as was said in subdivision (a), that the amounts shall be credited ” to the taxpayer. What subdivision (e) does say, and this we believe to be the keynote to its intention, is that “ For purposes of this section ” it would be so deemed. What is meant by these words ? The only logical meaning that may be attached to them, it would seem, in the light of all of the other attendant circumstances, particularly in view of the failure of subdivision (e) to expressly grant a credit under that subdivision, is that it refers to subdivision (a), the only granting clause to be found in section 238. This we believe inescapable.

The petitioner contends that articles 611 and 612 of the regulations promulgated under the Revenue Acts of 1924 and 1926 construed subdivisions (a) and (e) of section 238 of those acts as providing for two separate credits and, in effect, that since that construction has stood without change during the reenactment of the same provisions in the later revenue acts until the respondent, in September 1931, issued T. D. 4324, published at page 256 of C. B. X-2, definitely construing the acts otherwise, full force and effect should be given thereto. The first criticism to be made of this contention is that the articles referred to do not, in our opinion, amount to interpretations, indeed, they amount to little more than a restatement of the terms of the statute. Furthermore, admitting the rule that the construction of an ambiguous statute by those charged with the duty of the execution thereof will be given great weight (United States v. Hill, 120 U. S. 169), such rule is inapplicable where there is no ambiguity or where the interpretation placed upon it by the executive officers is incorrect. Swift Co. v. United States, 105 U. S. 691. In this connection it is interesting to note the language of Mr. Chief Justice Hughes in Burnet v. Chicago Portrait Co., supra, wherein the construction of certain words used in these same two subdivisions of the act was involved. He said:

The present controversy has arisen under the Treasury Regulations adopted with respect to the Revenue Acts of 1918 and 1921 as to credits. The familiar principle is invoked that great weight is attached to the construction consistently given to a statute by the executive department charged with its administration. United States v. Jackson, 280 U. S. 183, 193, 50 S. Ct. 143, 74 L. Ed. 361. But the qualification of that principle is as well established as the principle itself. The court is not hound hy an administrative construction, and if that construction is not uniform and consistent, it will be taken into account only to the extent that it is supported by valid reasons. [Citations.] Moreover, ambiguous regulations are of little value in resolving statutory ambiguities. * * *

We are of the opinion, therefore, that the credit provided for in subdivision (e)- of section 238, supra, is merely an enlargement of the basic credit allowed in subdivision (a) of that section and is not a separate credit as the petitioner contends.

The petitioner contends, in the alternative, that if both of the credits determined under the provisions of subdivisions (a) and (e) are not separately allowed, then the excess should be apportioned between the taxes paid or accrued as defined by subdivision (a) and a credit for taxes deemed to have been paid as defined by subdivision (e) in proportion to their respective amounts and that portion of the disallowed credit which is apportioned' to the taxes paid or accrued under subdivision (a) should be allowed as a deduction- from gross income under section 234 (a) (3) of the Revenue Acts of 1924 and 1926. We have already had occasion to consider the deductibility of that portion of the excess arising under subdivision (e) of section 238 in W. M. Ritter Lumber Co., 30 B. T. A. 231, where we held that such excess was not deductible. The reasons for the conclusion there reached respecting the excess under subdivision (e) are inapplicable to the excess arising under subdivision (a) of that section and for the reason indicated in that case we are of the opinion that to this extent the petitioner’s contentions should be sustained. This conclusion coincides with the respondent’s T. D. 4324, supra, and with what we understand he is now willing to concede.

Reviewed by the Board.

Judgment will be entered under Bule 60.


author: Leech: Seawell,

text:
    Berkeley Hall School, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47415.
    Promulgated January 24, 1935.

      Ralph W. Smith, Esq., Girard F. Balcer, Esq., and L. A. Luce, Esq., for the petitioner.

      C. E. Gurl, Esq., for the respondent.
   OPINION.

Leech:

The petitioner is a corporation which owned and operated a school for children of persons in Los Angeles, California, who were interested in Christian Science. It was about to discontinue this school in 1923 because of a lack of necessary facilities. When the parents of some of the students of the school learned of its proposed discontinuance they discussed the situation among themselves and finally adopted a plan to secure necessary real estate and a sufficient sum of money to provide and perpetuate in Los Angeles a school for children of persons interested in Christian Science. In order to obtain the real estate and the necessary cash this group of parents planned to obtain a tract of land, retain a plot for the school, and subdivide and sell the remaining lots at a sufficient profit to create the fund desired. The Bank of America was named as trustee to purchase the property, subdivide it, sell and convey the lots, and finally to transfer to the petitioner the plot retained for the school and the fund realized from the profit in the sale of the lots. The petitioner understood this plan and was party to it. The petitioner was called a “ beneficiary ” of the trust of which the bank was trustee. But it was thoroughly understood by all intersted parties that when the petitioner should receive the plot of ground and the net proceeds from the sale of the lots it would receive these things, not for its own use and benefit, but in a fiduciary capacity only. These net proceeds were turned over to the petitioner by the bank in 1925. The Commissioner has determined the present deficiency in the income tax of this petitioner on the theory that these net proceeds received by the petitioner in 1925 represent income to the petitioner in its ordinary corporate capacity.

Petitioner contends that it is personally exempt from income tax under section 231 (6) of the Revenue Act of 1924 as a corporation “ organized and operated exclusively for educational purposes no part of the net earnings of which inures to the benefit of any private shareholder or individual.” This position is untenable. Petitioner is a private corporation, organized for profit. The mere fact that it has not distributed its earnings to its stockholders is not controlling. It has such right and there is nothing which precludes its exercise. Consequently it is not entitled to the exemption provided. James Sprunt Benevolent Trust, 20 B. T. A. 19; Journal of Accountancy, Inc., 16 B. T. A. 1260. Cf. Bowers v. Slocum, 20 Fed. (2d) 350; Sand Springs Home, 6 B. T. A. 198; Young Men's Christian Association Retirement Fund, Inc., 18 B. T. A. 139; The Jockey Club, 30 B. T. A. 670.

But the taxability of this fund in .petitioner’s hands, on the facts here disclosed, must be resolved by the application of other principles. Respondent has proposed and is insisting upon the pending deficiency against petitioner, not as trustee, but in its individual capacity. Cf. Mary M. Shea, 31 B. T. A. 513. Thus, none of the fund in dispute is taxable here, unless received by this petitioner for its “ separate use, benefit and disposal ”, Eisner v. Macomber, 252 U. S. 189, and subject to its “ unfettered command.” Corliss v. Bowers, 281 U. S. 376. Obviously, the funds supporting the present deficiency had no such character in petitioner’s hands.

It appears clear upon careful consideration of the record that the fund in question represents the voluntary contribution of the organization of parents of the students at petitioner’s school, and the result of the labors of these parents in effecting sales of lots under a plan conceived and carried out by them. The purpose of this plan was the establishment and maintenance, in perpetuity, of a school for children under the influence of the Christian Science faith. This purpose and plan of the parents was definitely understood by petitioner. Petitioner paid no money. The petitioner was used only as a convenience in carrying out the plan. The only consideration passing from it for its receipt of the disputed funds and the real estate was petitioner’s agreement to accept them in accordance with that plan and purpose. That this property and presently disputed proceeds were so received by petitioner is further supported by the evidence of the action taken by petitioner immediately thereafter. These proceeds, always kept in a separate account from petitioner’s individual funds, were, from the time of their receipt, administered by a committee representing the organization of parents interested in the plan. The petitioner and the parents’ organization attempted to effect the charitable object through the appointment of the Christian Science Church as a permanent trustee of the property and fund, as soon as received. Following failure in that effort, they continued to perfect the necessary arrangements to secure the use of the property and fund in perpetuity for the purpose specified.

Respondent proposes the present deficiency against petitioner as “ beneficiary ” of such a trust as is described in the Revenue Act of 1928, section 704 (b), supra, which is said to conclude us here because of its retroactive application. But “ beneficiary ”, as there used, has its ordinary and generally understood meaning in the law of trusts, which does not include- petitioner on the present record. See Theodore P. Grosvenor, 31 B. T. A. 574; Percy H. Clark, 31 B. T. A. 1082; Franklin Miller Handly, 30 B. T. A. 1271. Petitioner has never treated this fund or property as its own. It did not receive either of them for use in its individual corporate purposes. All of petitioner’s disclosed actions indicate an' understanding on its part that its receipt and holding was, not in its individual corporate capacity, but as trustee of a trust created for the purpose of providing and perpetuating a school for the children of students and friends of Christian Science. This was a juristic, charitable trust of which indefiniteness of the beneficiaries is characteristic. Russell v. Allen, 107 U. S. 163; In re Graham's Estate, 63 Cal. App. 41; 218 Pac. 84. If and when petitioner receives compensation from this trust for the operation of the trust’s school, another and different tax question arises.

It is true that the title as taken by this petitioner to the .real estate was by an absolute transfer and not one expressing a trust. However, the rule appears clear in California that in the case of such a transfer, whether of real or personal property, if made with the understanding on the part of the grantee of the property that it will be held in trust for definite private purposes, and such understanding or agreement is the consideration for the transfer, its use for any purpose other than that agreed upon will be restrained by a court of equity under a constructive trust declared. Cooney v. Glynn, 157 Cal. 583; 108 Pac. 506; Lauricella v. Lauricella, 118 Pac. 430; Hayne v. Hermann, 97 Cal. 259; 32 Pac. 171; Simons v. Bedell, 122 Cal. 341; 55 Pac. 3; Brison v. Brison, 75 Cal. 525; 17 Pac. 689; Adam v. Lombard, 80 Cal. 426; 22 Pac. 180; Alaniz v. Casenave, 91 Cal. 43; 27 Pac. 521; Hays v. Gloster, 88 Cal. 560; 26 Pac. 367; Butler v. Hyland, 89 Cal. 575; 26 Pac. 1108. The same result would follow here where such agreement was to hold in trust for a public or charitable purpose. Political Code of California 1923, art. 8, secs. 470, 472; General Laws of California 1931, Acts 8698, 8699, 8700, 8701; Long v. Union Trust Co., 272 Fed. 699; affd., 280 Fed. 686. Thus, even if respondent were proceeding against this petitioner, as trustee, the fund, the subject of the pending deficiency, would probably be exempt under the Revenue Act of 1924, section 231 (6), supra.

Consequently, if petitioner attempted to distribute this property or fund to its stockholders or to devote it to any other purpose than that intended and clearly understood, it could have been restrained from doing so. A fortiori, it can not be held here that receipt of any part of this fund or property represented income to petitioner. Freuler v. Helvering, 291 U. S. 35.

Eeviewed by the Board.

Decision will be entered .for the .petitioner.

Seawell,

dissenting: I am unable to agree with the conclusion reached by the Board under what appears to me to be the plain undisputed facts of this case. ' • ' • '

In'1923 petitioner was a private corporation conducting a school for profit. What other powers and privileges it had do not appear, as its charter was not offered in evidence. It needed for the school more space and added facilities. The Eodeo Land & Water Co. owned 77.3 acres of land which it wished to sell. Petitioner did not need all of the' land for the school and it did not have the capita] to buy the whole tract. Some of its friends agreed to guarantee to a bank payment of certain loans it needed for money with which to make certain advance payments on petitioner’s contract to purchase the land. The Eodeo Land & Water Co. agreed to sell the land to petitioner. The loans from the bank were never made and the guarantors were never liable for any sum on account of their agreement. A scheme was worked out whereby petitioner was enabled to purchase the land without outside aid. A Mr. Gilchrist, a friend of the school, a realtor, surveyed, platted, and subdivided the land. 'A contract was entered into by the Bank of America, designated as trustee, the Eodeo Land & Water Co., designated trustor, and petitioner, designated beneficiary, in which it was recited that the trustor had agreed to sell to the beneficiary said land for $462,180, and that $100,000 thereof had already been paid by the petitioner from advanced sales of lots. Petitioner was to pay the remainder of the purchase price from the sale of other portions of the land, and petitioner was to bear the expense of laying out and grading the streets, the installation of water mains, telephone and electric poles, and other development costs. The trustee itself made no payments and none of the guarantors or the trustee at that time or any time thereafter made any payment on the purchase price of the land. The land was placed in the hands of the trustee in order to secure the payment by the beneficiary to the trustor and to facilitate the transfer of title to lots sold by the beneficiary. The scheme was carried out. The trustee held the funds received from the sale of lots; paid the expenses of Gilchrist for making, the subdivision; paid itself for the acceptance - of the trust $250 and certain percentages on the sale price of lots executed by it. and a closing fee of $250 and paid and discharged the obligations of the petitioner, the beneficiary, to the Rodeo Land & Water Co., the trustor; then the trustee quitclaimed the schoolhouse lot and other portions of the 77.3 acres and paid the profits on the sales, more than $100,000, to the petitioner.

The property turned over to petitioner was not a gift and therefore is includable in gross income and section 213 (b) (3) of the Revenue Act of 1924, relied on by petitioner, is not applicable. The further provision of law, section 231 (6), relied on by petitioner, also is not applicable because the net earnings of petitioner inure to the benefit of the private shareholders of petitioner.

       Sec. 231. (6) Corporations, and any community chest, fund, or foundation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual.


author: VaN FossaN :

text:
    K. R. Kingsbury, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56382, 62510, 62676, 62718, 62784, 62813.
    Promulgated January 29, 1935.

      V. K. Butler, Jr., Esq., for the petitioners.

      Allin H. Fierce, Esq., and Irving M. Tulltitr, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Ralph C. Warner ; Virginia W. Hanna, Executrix of the Estate of R. J. Hanna, Deceased; H. T. Harper; H. M. Storey; and Judson McClintock Hillman and The Farmers and Merchants National Bank of Los Angeles, Administrators of the Estate of E. H. Hillman.

   OPINION.

VaN FossaN :

The major issue before us is whether or not the fair market value in-January and February 1927 of the Standard Oil Co. stock delivered to the petitioners at such time constituted taxable income. If the respondent be not sustained in full'in this contention but it be held that income in some amount accrued, the petitioners concede that the value of the remainders passed to them in that year is income under section 219 (f) of the Revenue Act of 1926. They further agree to forego their right to refunds in case the value of those remainders is found to be less than the income reported by them in the taxable year on account of the transaction.

The facts involved in this issue may be summarized briefly. On March 10, 1921, the stockholders of the Standard Oil Co. of California became convinced that it was for the best interests of the corporation to be assured of the continuous service of its officers for a period of five years and that in order to do so the officers should be offered a bonus, or special or additional compensation. Negotiations to that end resulted in the execution of the agreements of April 18, 1921, set forth in the findings of fact.

The salient provisions of that agreement were that the officer should continue his services for a period of five years from March 28, 1921, and that the company would create a trust by paying a definite amount of money to the trustee, who should purchase with it Standard Oil Co. stock. That stock, together with any securities received in liquidation or reorganization and any stock dividends thereon, was to be held by the trustee for the period of five years, provided the officer remained with the company, and, subject to the condition of his remaining with the company for the five-year period, the income from the trust fund was to be paid to him for life. At his death the trust was to terminate and the trust fund was to be delivered to snch heirs of the officer as he might have appointed by his will. The agreement was subject to modification by the written consent of the officer and the company. If the officer should leave the service of the company the trust was to end, the payments of the income should cease, and the corpus was to revert to the company. During the five-year period the disability of the officer while in the company’s service did not abrogate the contract and, upon his death, under such conditions, the trust fund was to' be delivered to the designated remaindermen.

The funds so provided for were paid to the trustee and the trustee proceeded to purchase the stock for the benefit of the several trusts, as directed in the trust instruments, and to pay the officers the income therefrom currently. All of the officers remained with the company during the entire five-year period which expired March 28, 1926. Some time after it expired, the company, through its stockholders and a special committee named for the purpose, and the officers, modified the agreements of April 18, 1921, by providing that the corpus of the trust should be transferred to the officers as their “ free and unrestricted property ” and the trust be terminated. The modifying agreements were dated September 8,1926, but were not executed fully until January 28,1927 (February 12, 1927, as to E. J. Hanna), on which dates the stock was delivered to the petitioners.

On examination of the agreements it is obvious that during the five-year period the officers owned nothing but a right to receive the income from the trust fund from day to day as it currently accrued, subject at all times to the condition precedent of their continuing in the service of the company. Cessation of that service for any cause except disability or death defeated all right to income and corpus and nullified the power to designate the remaindermen. Conversely, the company held the potential' right of repossession during the entire term and only at its expiration and after the officers had remained in its service throughout that period did it relinquish that right. In 1926, however, the right of the petitioners to receive the income from the trust fund for life matured completely and unconditionally. The condition being fully performed, the life estate and the power of appointment vested.

It is clear that the underlying and motivating reason for paying the “ bonus ”, or additional compensation, to the officers was to induce them to remain with the company for five years. At the moment that condition was fulfilled the officers became possessed of a valuable right which unquestionably was property. Eetention of the title by the trustee did not affect the rights so acquired or prevent their vesting. Henry v. United States, 251 U. S. 393; Schneider v. Duffy, 43 Fed. (2d) 642. The value oí the right so acquired became income in that year. Schaefer v. Bowers, 50 Fed. (2d) 689, and cases there cited.

In the application of the income and estate tax laws to given sets of facts, we are often met by situations in which absolute accuracy or mathematical certainty can not be established. In such situations resort must be had to those methods of determination most likely to represent substantial, or probable, accuracy. In this category of cases would fall the valuation of life estates, or remainders. Necessarily, any value assigned to a life estate or a remainder must be predicated on certain assumptions. But the problem is not for that reason insoluble. The Supreme Court has said that the value of a life estate is “ to be determined by ascertaining in terms of money what the property constituting that interest would bring.in the market, subject to such uncertainty as ordinarily attaches to such an inquiry. United States v. Provident Trust Co., 291 U. S. 272. Similar observations apply as to remainders.

In the instant cases we may start with the assumption that the. value of the life estate, plus the value of the-remainder, represents the total value of the stock. Likewise, it seems reasonable to conclude that a power of appointment as to the remainder of property subject to a life estate, limited only in that appointment may be exercised only on behalf of one’s heirs, is a property right of substantial value. Though less than the entire value of the remainder, in that ownership of the remainder includes, inter alia, the present power of disposition, it is, nevertheless, a valuable property right. The life estate and the power of appointment having vested in the officers in 1926, it follows that the value of the property that passed in 1927 under the supplemental agreements must be the residuum, after deducting the value of the property theretofore vested.

Respondent’s contention is based on the erroneous assumption that there was no taxable event in 1926 and overlooks the fact that’, under the original contract, upon the expiration of the five-year period, the life estate in the income and the limited power of appointment as to the remainder both vested in the officers. If respondent’s position, that the first taxable event occurred in 1927 when title to the corpus was transferred, be sound, it would seem to be a simple matter for recipients of income under circumstances such' as these to avoid tax. Assume that the parties had not elected to enter into the second contract but the matter rested on the first agreement-alone. If respondent’s contention be adopted and it be held there was no taxable event in 1926, no tax would ever be collected from the parties-who received and enjoyed such life estate and power of appointment. • Neither would there seem to be any basis for collecting the'income tax from the heirs who might take under the wills of the several officers. Thus the income would never be taxed.

Eespondent cites Commissioner v. Olson, 24 B. T. A. 702; affd., 67 Fed. (2d) 726, and Schaefer v. Bowers, supra. In our-judgment these cases clearly support the conclusion that a taxable event occurred in 1926.

■ Applying the above premises to the facts before us, we have found (1) the reasonable values of the life estates in 1926, (2) the reasonable values in 1927 of the remainders without deduction of any value for the power of appointment, and (3) the amount determined by each petitioner as the value of property received in 1927, the figures used being the cost to the company in 1921 of the stock placed in the respective trust funds. On analysis of these figures it will be seen that as to petitioners Kingsbury, Warner, Harper, and Storey the value of the remainder is less than the value returned by them, respectively, in their 1927 tax returns. Obviously, therefore, no additional tax is due from these petitioners on account of the receipt of the stock in that year. As hereinbefore noted, petitioners, by their counsel, have waived all rights as to any refunds that might be due consequent on the determination by the Board of the value of the property received in 1927.

As to petitioners Hanna -and Hillman, the amount returned is less than the value of the remainder — in the case of Hanna in the amount of $26,264 and-in that of Hillman in the amount of $13,626. Though we have indicated that the power of appointment which vested in 1926 was a valuable right and if such value were proven would reduce the value of the remainder which passed in 1927, we have no evidence of such value and are, consequently, unable to find that any figure less than the value of the entire remainder should be used in computing the tax due.

Though the above stated conclusions are dispositive of the major issue, a passing word may be in point as to petitioners’ contention that the portion of the stock dividends declared and issued on December 30, 1922, attributable to the earned and undistributed surplus of the company accumulated by it between April 18,1921, and December 31,1922, or 18.17 percent thereof, became their property upon issuance and was distributable and taxable to them at that time. They contend that the value of the shares of stock so issued to the trustee was income to the officers in 1922; that such stock was constructively received by the trustee for their benefit; that the amount of such surplus was definitely determined; that they could have forced the trustee to deliver the stock to them at the time; and that, hence, such stock became their property, distributable and taxable to them in 1922. In support of this position they assert that under California law a stock dividend which represents earned surplus accumulated after the creation of the trust belongs to the life tenant or beneficiary and is lawfully distributable to him immediately upon its issuance. They cite Estate of Duffill, 180 Cal. 748; 183 Pac. 337; Estate of Gartenlaub, 185 Cal. 375; 197 Pac. 90; Estate of Schnur, 25 Pac. (2d) 462.

The fallacy in petitioners’ argument lies in their assumption that in 1922 their interest in the trust amounted to a life estate. The petitioners acquired no vested rights in either the income or the corpus of the trust until 1926, when the five-year period expired. At that time they acquired a life estate in the income and a power of appointment as to the remainder. This being the situation, it can not be held that the accretion to the trust by way of a stock dividend in 1922 became vested in the officers at that time. The cases cited, which presuppose an existing life estate, are not in point.

Moreover, it is to be remembered that we are dealing with income arising under Federal taxing acts. The Supreme Court has held that under such laws stock dividends are not income. Eisner v. Macomber, 252 U. S. 189. In this case the stock dividend was not income per se. The stock arising from the dividend gives rise to income only by virtue of being transferred to petitioners as additional compensation, a very different and wholly unrelated concept. For this reason the California statute against accumulation of trust income can have no application. Nor does it matter that the California courts take a different view of the character of a stock dividend and hold it to be income in some instances.

On brief respondent raises the question of estoppel against petitioners .because they did not return the values of the life estates and the powers of appointment in 1926. It is perhaps sufficient to observe that estoppel must be both pleaded and proved. In the instant cases it was neither pleaded nor does the record reveal the facts necessary to establish the same.

In Docket No. 56382 K. It. Kingsbury, the petitioner, asserts that because of the refusal of the collector of internal revenue for the first district of California, in which he resided, to permit him and his wife to file separate returns on a community property basis, he was compelled to file his own return on a single form, including therein the community property of them both. He claims that his intent to file separate returns is deducible from the protest attached to his return and that, therefore, he must be deemed to have elected to file separate returns. Consequently, he asserts, the community income received subsequent to July 29, 1927, should be taxed equally to himself and his wife..

The record contains no evidence that the collector refused to accept the returns of the petitioner and his wife on a community property basis, nor that the petitioner tendered such returns either before or after March 15, 1928. The return filed states that it is a joint return. So far as we are advised no amended returns were ever offered or filed. No segregations of income into individual and community sources were made. The facts presented do not warrant the conclusion that Kingsbury and his wife elected to file separate returns or that one half of the petitioner’s income received from July 29 to December 31, 192-7, is taxable to his wife. . Cf. L. B. Foster, 26 B. T. A. 1328; Garland C. Kent, 27 B. T. A. 1055.

All other issues raised by the pleadings and not abandoned by the petitioners may be settled in accordance with the stipulations of record.

Reviewed by the Board.

Decision, will be entered under Rule 50.

       Sec. 219. (f) A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, bo which contributions are made by suebl employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under this section, but the amount actually distributed or made available bo any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in‘by him. Such distributees shall for the purpose of the normal tax be allowed as credits such part of the amount so distributed or made available as represents the items specified in subdivisions (a) and (b) of section 216.

         Secs. 722, 723, 724, 726, Civil Code of California.

       See United States v. Malcolm, 282 U. S. 792.


author: Smiti-i:

text:
    Jeremiah Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74090, 74688.
    Promulgated January 29, 1935.

      John W. Townsend, Esq., for the petitioner.

      O. A. Ray, Esq., and R. 8. Garnett, Esq., for the respondent.
   OPINION.

Smiti-i:

These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for 1930 and 1931 of $547.91 and $713.46, respectively.

These proceedings involve a single issue common to both appeals, namely, whether the annual salary of $6,000 received by the petitioner from the town of Hempstead as “ Counsellor to the Town Board ” is subject to income tax.

The town of Hempstead, New York, is a municipal corporation and a political subdivision of the State of New York. It is not just a town in the sense of being a village, but is a township with over 200,000 inhabitants, with property assessed at a value of approximately $500,000,000 and with an annual budget of about $1,500,-000 during the years in question. The town is subject to the New York Town Law. The governing body of the town of Hempstead is the town board which, during the years in question, consisted of seven members elected by the people.

Section 135-A of the New York Town Law as originally passed in 1923 (ch. 138, Laws of 1923) read:

The town board may, when in its judgment the interest of the town demands, employ an attorney, who shall be entitled to receive a reasonable compensation for his services to be fixed by the town board, which shall be a town charge.

In 1924 the attorney general of the State of New York held (1924 Report of Attorney General, p. 254) that under this law the town board might employ an attorney but could not appoint one for a definite term. His opinion states:

But from a reading of this section, it is clear that the Legislature did not intend to permit the appointment by the town board of any attorney at an annual salary. The language of the statute points directly to the contrary. In the first place, the phrase “ employ an attorney ” is used (and not “ appoint an attorney”). The terms “employ” and “appoint” are differentiated. Black’s Law Dictionary defines employ as meaning “to engage one’s service” while it defines appointment as “ the selection or designation of a person or persons having authority therefor to fill an office or public function and discharge the duties of the same.” In the next place, the words receive a reasonable compensation for his services ” are used instead of the term “ salary.” Compensation is defined by Black as the “ remuneration or wages given to an employee or officer, but it is not exactly synonymous with salary.” People v. Wemple, 115 N. Y. 302.
While Black defines salary as being “ a fixed periodical compensation, amounting to so much by the year, month or other fixed periods to be paid to public officers, etc.”
It is therefore, my opinion that a reasonable construction of this section would compel the conclusion that the town board is empowered to employ an attorney and that his pay shall be determined by the actual service performed; the value of such service or services to be fixed after the rendition of the same and by audit of the town board. He shall not be appointed for a fixed term or at an annual or monthly salary.

Thereafter, in 1926, section 135-A of .the New York Town Law was amended (ch. 488, Laws of 1926), effective April 17, 1926, to read:

Attorney. The Town Board may, when in its judgment the interest of the town demands, employ or appoint an attorney, who shall be entitled to receive a reasonable compensation or salary for his services to be fixed by the Town Board, which shall be a town charge.

Pursuant to the above provision of law the town board of the town of Hempstead on May 4, 1926, passed the following resolution:

Resolved that the resolution heretofore adopted by this Board on the 30th day of March 1926, appointing Town Counsel be and the same hereby is rescinded and it is further
Resolved that Whereas in the judgment of the members of the Town Board of the Town of Hempstead, the Public interest of the Town demands the appointment of Town Counsel, Now Therefore, pursuant to tlie authority granted in Section 135-A of the Town Law, lie it
Resolved that the position of Counsellor to the Town Board of the Town of Hempstead, be and the same hereby is created and established and that Jeremiah Wood be and he hereby is retained as Counsel to the Town Board of the Town of Hempstead, at an annual salary of Six Thousand ($6,000.00) Hollars, beginning April 19th, 1926, payable semi-monthly, and be it further
Resolved that tlie Presiding Supervisor be and he hereby is authorized to transfer the sum of Forty five hundred ($4500.00) Dollars from surplus funds to Supervisors funds to meet the salary as fixed above.

The petitioner accepted appointment pursuant to the resolution of the town board in 1926 and has continuously since that date acted as “ Counsellor to the Town Board ” of the town of Hempstead. In entering upon his duties the petitioner did not take any oath of office, as the town law did not then, require an oath; nor did the petitioner take any oath of office until after 1931.

The petitioner, as “ Counsellor to the Town Board ”, was under the direction and control of the town board. .His duties were prescribed by the town board by resolution or other action.

Petitioner is an attorney, residing at 250 Fulton Avenue, Hemp-stead, Nassau County, New York, and is a member of the law partnership of Wood & Gehrig of that town, receiving one half of -the profits thereof.

The petitioner entered into no contract, oral or written, with the town board respecting his compensation or respecting his duty as counsel. He was not employed on any particular matter or to do any specific legal work, but in general to do the legal work of the town. The duties which attached to his position and which he fulfilled were to attend the town meetings, to prepare resolutions and ordinances, to represent the town in connection with all claims made against it, to interpret the laws appertaining to various divisions and departments of the town, to give advice to the officials of the town, to enforce the town’s ordinances in the courts, and generally to perform all the legal services which a town of that size and nature might require of its principal legal officer. He was at the beck and call at any time of any town official. During the tax years in question the petitioner was the only counsel for the town except that there was one particular matter in which the town employed special counsel. If litigation went beyond the justice of the peace and the petitioner was employed to represent the town’s interest in such legal matter, the petitioner received additional compensation.

Matters involving litigation, usually growing out of highway accidents, were not handled by the petitioner as counsellor to the town board, but were handled by the petitioner’s law firm, his partner, Gehrig, having charge of trial work. Fees received in such litigated cases were included in the income of the partnership and no exemption is claimed with respect thereto. The amount of such fees was not large.

The petitioner’s services were continuous and regular, and of a routine and recurrent character. He held his position at the pleasure of the town board and could have been removed by such board at any time. His salary was included in the regular town budget, along with the salaries of other officials and employees of the town. He received his pay check semimonthly at the same time as other town officials and employees. His salary was subject to the retirement deductions of the New York State Retirement Act and between $70 and $80 was withheld from his salary each month as his contribution to the retirement fund.

Under his appointment he was free, subject to the call of the town board, to engage in private practice. During the year 1931 his gross receipts from the practice of law, received as a part of his share of the net income of the firm of Wood & Gehrig, were $73,000. It was approximately the same for the year 1930. This sum was exclusive of the $6,000 received as compensation from the town board. Junior members of the petitioner’s firm were frequently engaged in the preparation of opinions on legal questions involving the town and its various districts. These employees were paid by the firm of Wood & Gehrig and under their supervision. All of the work done by the petitioner for the town was done in the petitioner’s law offices, the town providing no offices or assistants of any kind for the petitioner.

Petitioner gave about one third of his time to the legal work of the town.

In his income tax returns for 1930 and 1931 the petitioner did not include his salary of $6,000 per annum received from the town of Hempstead. He claimed that it was not subject to income tax. The respondent has added to the net income reported by the petitioner for each of the years 1930 and 1931 the $6,000 salary received by him as counsellor to the town board.

There is no provision of the Revenue Act of 1928 specifically exempting from income tax the salary received by the petitioner. If the salary is not subject to income tax, that fact must rest upon constitutional limitation. Helvering v. Powers, 293 U. S. 214.

Article 643 of Regulations 74, issued under the provisions of the Revenue Act of 1928, provides in part:

Abt. 643. Compensation of State officers ancl employees. — Compensation paid to its officers and employees by a State or political subdivision thereof for services rendered in connection with the exercise of an essential governmental function of the State or political subdivision, including fees received by notaries public commissioned by States, is not taxable. Compensation received for services rendered to a State or political subdivision thereof is included in gross income unless (a) the person receives such compensation as an officer or employee of a State or political subdivision, and (5) tbe services are rendered in connection with the exercise of an essential governmental function. The commissions of receivers appointed by State courts are subject to tax for 1928 and subsequent taxable years.
An officer is a person who occupies a position in the service of the State or political subdivision, the tenure of which is continuous and not temporary and the duties of which are established by law or regulations and not by agreement. An employee is one whose duties consist in the rendition of prescribed services and not the accomplishment of specific objects, and whose services are continuous, not occasional or temporary. * * *

With respect to this regulation the Supreme Court, in Helvering v. Powers, supra, said:

* * * But the Treasury Department could not by its regulation either limit the provisions of the statute or define the boundaries of their constitutional application. * * *

In the above cited case the Court stated that the question whether the Congress has the constitutional power to impose an income tax upon the compensation of public officers is not to be answered “ by mere terminology.” Instead of using the test laid down in the above cited Treasury regulations of “ essential governmental function ”, the Court used the test of the usual governmental functions that are immune from federal taxation in order to safeguard the necessary independence of the State.”

In Powers v. Commissioner, 68 Fed. (2d) 634, it was stated:

* * * It has long been established that, in our curious, dual government, neither sovereign could tax the pay of officers of the other. Dobbins v. Commissioner, 16 Peters 435; Buffington v. Day, 11 Wall. 113; Metcalf & Eddy v. Mitchell, Adm'x., 269 U. S. 514. In the case last cited, it was said, “It is on this principle that, as we have seen, any taxation by one government of the salary of an officer of the other * * * is prohibited.” * * *

If the petitioner during the tax years in question was an officer of the town of Hempstead and the $6,000 annual compensation to him was the salary received as such officer, we think that no question could be raised but that such salary was not subject to income tax. The petitioner argues that he was an officer of the town of Hemp-stead.

In Metcalf & Eddy v. Mitchell, 269 U. S. 514, it was said:

An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its terms, its duties and its compensation. [Citing cases.] * * *

In Helvering v. Powers, supra, it was said:

* * * The term “public office” undoubtedly implies a definite assignment of public activity, fixed by appointment, tenure and duties. * * *

Whether the petitioner held a “ public office ” with the town of Hempstead during the tax years in question is, we think, unnecessary to determine. He was at least an employee of the town within the meaning of the Commissioner’s regulations and was engaged in performing “ usual governmental functions.”

We think that this case is sharply differentiated from that of Commissioner v. Muryhy, 70 Fed. (2d) 790, in which the court stated:

* * * If the respondent [Murphy] was an officer or employee of the State, his pay as such was immune from federal taxation; but if he was merely employed as a legal counsel in a special case, the compensation paid for his services must be included in taxable income. * * *

The court held that Murphy was essentially an independent contractor, since he was employed as legal counsel in a special case. Such is not the situation which obtains in these proceedings. The petitioner’s duties were multifarious and continuous. The town board might have required' all of this time. The fact that his duties as counsellor to the town board took only a portion of his time is immaterial.

On its material facts this case is not distinguishable from Blair v. Mathews, 29 Fed. (2d) 892, and United States v. Butler, 49 Fed. (2d) 52.

We sustain the contentions of the petitioner.

Reviewed by the Board.

Judgment will he entered wider Rule 50.