Respondent determined a deficiency in petitioner’s 1980 Federal income tax in the amount of $1,529. The sole issue for decision is whether compensation earned by petitioner while she was a member of a religious order is includable in her gross income.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference.
Petitioner resided in Red Bud, Illinois, when she filed her petition in this case. She timely filed her 1980 Federal income tax return with the Kansas City Service Center.
During all relevant times, petitioner was a member, or Sister, in a religious order of the Roman Catholic Church called the Order of the Adorers of the Blood of Christ (the Order). The Order was incorporated under the laws of the State of Illinois on July 24, 1886, as the Convent of the Sisters of the Precious Blood, and is a religious organization exempt from Federal income tax. The Order’s corporate objective is stated to be "to conduct schools and places of learning and to promote education, to advance the cause of religious and social work, to conduct hospitals and institutions for the care and treatment of suffering humanity and to do all and everything necessary or convenient for the accomplishment of any of the purposes or objects and powers mentioned or incidental thereto.”
Each member of the Order is required to make vows of chastity, obedience, and poverty as a precondition of membership. Petitioner therefore executed a "Declaration Concerning Remuneration” in which she agreed "never [to] claim or demand, directly or indirectly, any wages, compensation, remuneration, or reward * * * for the time or for the services or work that I devote for * * * [the Order] during the time I may remain there or elsewhere in the name of or upon commission from said [Order].”
A member who wishes to withdraw from the Order may receive official dispensation from her vows by application through her provincial superior to the general superior of the Order. In addition, some members have withdrawn from the Order without obtaining dispensation from the Church. Members who withdraw from the Order are entitled to receive the personal property they owned before joining the Order, as well as property received by gift or inheritance. In addition, withdrawing members are entitled to the return of their dowries, if they had them. The procedures set forth in the Order’s constitution for the return of property to withdrawing members do not vary for members who fail to obtain official dispensation from their vows.
Members of the Order are allowed to secure employment (called missions) in occupations that relate to the Order’s general purposes, subject to approval by a Provincial Superior of the Order. The Provincial Superior’s approval turns upon whether the proposed mission is in accordance with the Order’s interpretation of the Gospel of Jesus Christ; that is, whether the mission relates to religious and charitable works that promote education, relieve suffering, and otherwise provide assistance to those in need.
When a member takes a vow of obedience as a precondition to her membership in the Order, she expressly promises to subjugate her will to that of the Order. Pursuant to that vow, no member may accept a mission without the approval of the Order. Each member who receives a missioning order is under a duty to obey that order and cannot voluntarily terminate the mission without the Order’s prior approval. In addition, each member promises to abide by any direction of the Provincial Superior, even if such direction relates to the performance of the mission itself, or requires the member’s withdrawal from the mission. The Order has at times required members to terminate their assigned missions.
Pursuant to their vows, members of the Order are not entitled to retain any funds generated by their mission work; rather, the Order is entitled to all such funds. Thus, the Order requires its members to submit any payments made to a member in respect of a mission. After the member transfers the funds to the Mother House, the member maintains no control over the Order’s disposition of the funds. If a member who has engaged in mission work subsequently leaves the Order, the constitution of the Order provides that "A sister who withdraws may not demand remuneration for her work as a member of the community, since, like all the Adorers of the Blood of Christ, she freely chose to serve the Lord and His people in a life of poverty, without personal gain. The community, however, in charity will help her provide for her immediate needs when she leaves.”
When a member of the Order is missioned in a location that is not impracticably far away from the Mother House of the Order, the member generally lives in the convent. When, on the other hand, a mission is not located near a convent, the Order rents a residence for the member. Any house rented by the Order for these purposes is considered within the Order to constitute a convent. Each member living away from the Mother House of the Order is required to submit to the Order a monthly budget statement setting forth her living expenses. The Order then either approves or revises the proposed budget, and pays the member’s monthly living expenses, as approved. In addition, the Order provides its members with a maximum allowance for personal expenses which, during the year at issue, was $35 per month. There is no relationship between the amount of a member’s monthly allowance and the amount of funds, if any, generated by her mission work.
Petitioner made her perpetual vows of poverty, chastity, and obedience in 1970 and became a perpetual member of the Order at that time. She has never requested dispensation from her vows, and at all relevant times was an active member of the Order.
In June, 1968, petitioner received her bachelor of science degree in nursing. On October 18, 1978, petitioner was awarded a traineeship for Nurse Practitioner training under section 882(b) of the Public Health Services Act. This award covered the cost of petitioner’s tuition, living and moving expenses, books and fees in the nurse midwife program at the University of Mississippi’s medical center. In order to receive the trainee-ship award, petitioner agreed that upon completion of her traineeship she would reside and practice in a "health manpower shortage area” (as defined by section 332 of the Public Health Services Act) for a 12-month period for each academic year for which the traineeship award was made. Petitioner agreed that if she failed to fulfill her "practice commitment” she would "pay back within 12 months of the date of completing the training, the amount of all traineeship assistance received, plus interest set by the Treasury.”
From February 28, 1978, through May 12, 1979, petitioner attended the University of Mississippi’s nurse midwife program. Upon her graduation in May 1979, petitioner applied and was interviewed for several positions in health manpower shortage areas. Prior to being interviewed for these positions, petitioner sought and obtained authority from the Order to do so. One position petitioner applied for was a position with Su Clinica Familiar (the clinic). The clinic conducts a family health services program in Raymondville, Texas.
During the year in issue, a portion of the clinic’s staff was employed through the National Health Services Corps (nhsc). The nhsc is a Federal program within the U.S. Public Health Service that assigns health professionals in its employ to deliver health care services in health manpower shortage areas. The NHSC provided the clinic with necessary professional staff, such as physicians, mid-level practitioners, and nurse-midwives. The professionals provided by the nhsc were employed and compensated by the Federal Government, and not by the clinic.
Although the details are not entirely clear, the record reveals that petitioner filed an application for employment with the nhsc in conjunction with her application to the clinic. Her application was made on a Federal Government Standard Form 171 on which she stated that she would not accept a salary of less than $16,000 per year. She applied for the job "in order to fulfill my 12-month commitment to practice as a Nurse Practitioner in a primary care health shortage area designated under Section 822(b) of the * * * [Public Health Services] Act.” She stated on her application to the nhsc that she would accept a position only if she were assigned to work at the clinic in Raymondville, Texas. Subsequently, petitioner was interviewed over the telephone by an employee of the nhsc. Neither the nhsc nor the clinic is affiliated with petitioner’s Order in any way.
The NHSC paid for petitioner to travel to the clinic in late May, 1979, "for the purpose of visiting the community as a prospective National Health Service Corps assignee.” On June 27, the Clinic informed the NHSC of "the clinic’s intention of employing Sister Francine Schuster as a staff nurse-midwife. She will begin on July 23, 1979.”
After petitioner was informed that a position was available to her at the clinic, she requested permission from her Order to accept. Her Order determined that the position at the clinic would further the purposes of the Order by helping to relieve the suffering of humankind, and by promoting life, and thus informed petitioner that her mission was acceptable.
On July 1, 1979, the Acting Provincial Administrator of petitioner’s Order addressed a letter to the director of the nurse-midwifery service at the clinic. That letter stated the following:
Sister Francine Schuster [petitioner] had informed us of your recent phone notification of a current job opening in nurse midwifery at Su Clinica Familiar, Raymondville-Harlingen, Texas.
The Community of Adorers of the Blood of Christ [the Order] would like to contract with you for the services of Sister Francine Schuster, ASC for the position of nurse-midwife for one year at Su Clinica Familiar.
If our offer is acceptable, we request that payment for her services be made to the Adorers of the Blood of Christ.
Also on July 1, petitioner addressed a letter to the NHSC which "confirms that I have agreed to an NHSC assignment at * * * [the clinic]. My starting date will be 7/29/79.” In addition, the Acting Provincial Administrator of petitioner’s Order addressed a letter to the NHSC in which she stated the following:
Sister Francine Schuster has informed us of your recent phone notification of a current job opening in nurse midwifery at Su Clinica Familiar, Raymondville - Harlingen, Texas.
The Community of Adorers of the Blood of Christ would like to contract with you for the services of Sister Francine Schuster, ASC for the position of nurse-midwife for one year at Su Clinica Familiar.
If our offer is acceptable, we request that payment for her services be made to the Adorers of the Blood of Christ.
In addition, the Order informed the NHSC that:
petitioner is a member in good standing of [the Order] * * * and is, therefore * * * under a vow of poverty; * * * her services are performed as part of the duties required to be performed by the member for/ or on behalf of the order as its agent; and that all salaries or grants received by her accrue to the * * * [Order] because of her vow of poverty.
In response to the letter that the Order addressed to the clinic, the director of the nurse-midwifery service at the clinic sent a letter dated July 9, 1979, to the Acting Provincial Administrator of the Order which provided as follows:
Consider this letter as formal acceptance of Sister Francine Schuster on our nurse-midwifery staff. She will be beginning on the pay period that starts July 23. Sister Francine’s checks will be paid to her and she can endorse them and send them to you. I endorse my checks "paid to the order of the Sisters of St. Mary. Sister Angela Murdaugh.” There is no problem with them going through the mail like that.
The record contains no evidence that the nhsc ever responded to the Order’s letter. Contrary to the Order’s request, petitioner’s paychecks were issued only in her name.
Petitioner began to work at the clinic on July 25, 1979, even though her nhsc appointment was not effective until July 29. As a result, the clinic paid petitioner for July 25, 26, and 27, and terminated payments effective July 27.
Petitioner’s appointment by the nhsc was effective as of July 29, 1979. She was employed at the GS-9 level as an "excepted appointment” pursuant to normal Federal Government personnel policies. As a GS-9 employee, her salary was $15,920 per year. She accumulated annual leave and sick leave, and she qualified for Federal Health benefits. During the course of her appointment, petitioner received a within-grade increase in salary, and a salary increase for Federal employees made pursuant to Executive order. While employed by the NHSC, petitioner was entitled to, and received, continuing professional education classes paid for by the Federal Government.
On the effective date of her nhsc employment, petitioner signed a standard Government Form 61, on which she swore to support and defend the U.S. Constitution, and promised that she would not participate in any strike against the U.S. Government while employed by it or "any agency thereof.”
As a member of the NHSC, petitioner was a civil service employee subject to the Department of Health, Education, and Welfare standards of conduct. NHSC assignees are evaluated on a yearly basis through an employee performance appraisal system. Petitioner’s performance as a midwife was evaluated on forms provided by the Federal Government.
The clinic and NHSC signed an agreement effective February 15, 1980, which provided that:
The Assignee(s) [petitioner] shall remain at all times under the direct supervision and control of the DHEW [Department of Health, Education & Welfare] Regional Health Administrator or his designee. Observance of institutional rules and regulations by Assignee(s) are mere incidents of the performance of their Federal functions and do not alter their direct professional responsibility to the Secretary. * * * Day to day administrative direction will be given by the Project Director [an employee of the clinic].
The clinic, NHSC, and petitioner operated in accordance with this agreement.
The NHSC, pursuant to section 224 of the Public Service Health Act (42 U.S.C. sec. 223) provides all assignees with defense against all malpractice suits resulting from injuries occurring during the course of the assignee’s employment.
While employed by the NHSC, petitioner was paid from the U.S. Treasury. Petitioner’s wages were paid directly to her. Neither the clinic nor the NHSC imposed any restriction on petitioner’s use of payroll checks. Petitioner endorsed to her Order each check tendered to her, and she sent each check to a lockbox maintained by the Order in St. Louis.
The Order did not provide the NHSC or the clinic with a replacement when petitioner used sick leave.
Petitioner terminated her association with the clinic in 1982, when the Federal funding for her position was terminated. Upon her separation from NHSC, petitioner was paid for 128 hours of accrued annual leave.
On petitioner’s 1980 Federal income tax return, petitioner reported that she had received $18,771.20 in wages, but that the compensation was not subject to taxation "by reason of taxpayer being agent of religious order pursuant to Rev. Rul. 77-290.” Respondent issued a notice of deficiency in which he determined that petitioner’s wages were taxable because she was not working as an agent of a religious order when she earned her wages.
OPINION
At issue is whether petitioner’s wages were paid to her in her individual capacity or as an agent for the Order. If the wages were paid to satisfy an obligation to pay petitioner individually, they are subject to taxation regardless of their ultimate transferral to the Order. E.g. Lucas v. Earl, 281 U.S. 111 (1930). If, on the other hand, the checks were delivered to petitioner in order to satisfy a debt owed to the Order, then petitioner received the checks as a mere agent of her Order, and is not subject to taxation individually. Maryland Casualty Co. v. United States, 251 U.S. 342 (1920).
Petitioner applied for employment as a Federal civil servant, and accepted a job as a National Health Service Corps employee. The nhsc assigned her to work at Su Clinica Familiar. Neither the nhsc nor the clinic is affiliated with or related to petitioner’s Order in any way.
Petitioner filed a Standard Form 171 with the Federal Government on which she stated that she would not accept a salary of less than $16,000 per year. She stated that she had applied for the job "in order to fulfill my 12-month commitment to practice as a Nurse Practitioner in a primary care health shortage area” pursuant to Federal law, in exchange for having received Federal assistance to pay for her nursing education.
Petitioner was employed by the Federal agency pursuant to normal personnel policies. She accumulated annual leave and sick leave, and she qualified for Federal health benefits. She received all the benefits of a Federal employee employed at the GS-9 level, including a within-grade increase in salary, and a salary increase for Federal employees made pursuant to Executive order.
Petitioner received paychecks in her own name, and, pursuant to her private vows with the Church, endorsed her checks over to her Order. She personally handled all aspects of her relationship with the clinic and with the Federal Government; indeed, the only contact that those two institutions appear to have had with her Order occurred when the Order sent them letters stating that the Order wished to contract with them for petitioner’s services, and that it would like her wages to be issued payable directly to the Order. The Federal Government ignored the letter, and issued checks made payable to, petitioner. The clinic responded with a letter informing the Order that the checks would be made payable to petitioner, and that petitioner could endorse them over to the Order. These facts are clearly insufficient to support a finding that petitioner’s paychecks were issued to satisfy an express or implied legal obligation to her Order, and we therefore hold for respondent.
The instant case is unlike many of the so-called "vow of poverty” cases decided recently by this Court1 in that Sister Francine Schuster at all times acted strictly in accordance with her vows of poverty and obedience, and at no time after endorsing the checks did she exercise any sort of control over the funds. Petitioner is part of a long tradition that is respected in our society, and these private arrangements with her Order arise from deeply held convictions. The fact that we feel her life is a sincere and worthwhile example should not, however, alter the tax results. In the final analysis, apart from petitioner’s vow of poverty arising from her personal religious convictions and way of life, this case is not different from any other assignment of income case.
The hornbook law on assignment of income was set out by Justice Holmes in Lucas v. Earl, 281 U.S. 111 (1930), when he stated:
But this case is not to be decided by attenuated subtleties. It turns on the import and reasonable construction of the taxing act. There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew. [281 U.S. at 114-115.]
During the last half century since Lucas v. Earl, we have been advised repeatedly of the fundamental rule that income must be taxed to him who earns it; indeed, the Supreme Court has referred to the rule as "the first principle of income taxation.” Commissioner v. Culbertson, 337 U.S. 733, 739 (1949); United States v. Basye, 410 U.S. 441 (1973). See Lyon & Eustice, "Assignment of Income: Fruit and Tree as Irrigated by the P.G. Lake Case,” 17 Tax L. Rev. 295 (1962).
Petitioner urges that this "first principle of taxation” does not apply because she received the paychecks merely as an agent of the Order, and cites to Maryland Casualty Co. v. United States, 251 U.S. 342 (1920). In that case, the Supreme Court held that paying insurance premiums to an insurance agent is equivalent to paying the insurance company directly, and that the insurance company must therefore take into its gross income those premiums held by its agents.
Petitioner asserts that her case falls within this rule because she agreed with her Order that she would act on its behalf and subject to its control, and because she subsequently remitted all the funds generated by her work to her Order. She states that "Only two parties are required to create the relationship.”
What petitioner has failed to recognize is that, in the legal sense, one can perform services for a third party on someone’s "behalf’ only if some sort of obligation to perform the services rests initially with the person on whose behalf one wishes to act. If the "principal” is under no duty to perform the services itself, or to ensure that the services be performed, but merely approves of the performance as an irrelevant bystander, then, in the legal sense of the word, one cannot act on the other’s "behalf.” To this extent, the participation of three parties is required to create an agency relationship.
This analysis implicitly underlies the Supreme Court’s decision in Maryland Casualty Co. v. United States, supra. In that case, the agent did not escape taxation because he was obliged to transmit the funds to his principal, nor did he escape taxation because his principal approved of his conduct. Rather, the Supreme Court reached its conclusion because "payment of the premium to the agent discharged the obligation of the insured and called into effect the obligation of the insurer as fully as payment to the treasurer of the claimant could have done.” Maryland Casualty Co. v. United States, supra at 347. The premiums were the consideration for the risk underwritten by the insurance company, and payment to the agent was made to satisfy the obligation to pay the insurer. It was for this reason that the Court held that the principal, and not the agent, should be taxed.
Thus, the notion established in Maryland Casualty Co., that an agent should not be taxed on amounts it receives as its principal’s legal representative, depends upon the existence of some form of legal relationship between the principal and a third party. This Court and other courts have consistently required such a relationship. E.g. Johnson v. United States, 698 F.2d 372 (9th Cir. 1982); Johnson v. Commissioner, 78 T.C. 882, 891 (1982), affd. without published opinion 734 F.2d 20 (9th Cir. 1984); Pacella v. Commissioner, 78 T.C. 604, 619 (1982); Keller v. Commissioner, 77 T.C. 1014, 1027 (1981), affd. 723 F.2d 58 (10th Cir. 1983). In Johnson v. Commissioner, supra at 891, we stated that "there must exist between the corporation [the 'principal’] and the person or entity using the services a contract or similar indicium recognizing the corporation’s controlling position.”
The issue, then, is not whether the Order and petitioner agreed between themselves that petitioner would act as the Order’s "agent.” Rather, the issue is whether petitioner performed her services as an employee of the Federal Government, or whether the Federal Government contracted to receive the services from the Order, with petitioner performing the services as an agent of the Order. The facts in this case show that petitioner acted to affect only her own legal relationship with the Federal agency.2 She expressly accepted the employment in order to satisfy her personal obligation to work in a health manpower shortage area. If her rights as a Federal employee had been violated, petitioner could have brought suit only in her individual capacity, and the Order could have become involved, if at all, only as an assignee of petitioner’s contract rights.
It was the Federal Government, and not the Order, who assumed responsibility for any malpractice liability petitioner might incur, and thus it seems clear that both parties assumed that the Federal Government as employer, rather than petitioner’s Order, would have been held responsible under the doctrine of respondeat superior if petitioner had injured someone during the course of her employment. It was petitioner, and not the Order, whom the Federal Government advised that "the NHSC professional is required to place official responsibilities above any conflicting interests or associations. He/she must avoid conflicts of private interests with public duties and responsibilities,” and petitioner was bound in her individual capacity by this requirement. If petitioner had violated her vows with the Church by retaining the checks for her personal use, her Order would have had no legal claim against the clinic or the Federal Government, and petitioner’s relationship with her employers would have been unaffected.
In determining whether earnings from personal services are taxed to an individual or to an affiliated corporation, courts have examined two factors. First, as discussed above, courts have looked for some indicium of an agreement between the corporation and third parties. Second, they have required that the service-performer employee "be just that — an employee of the corporation whom the corporation has the right to direct or control in some meaningful sense.” Johnson v. Commissioner, supra at 891; see Vnuk v. Commissioner, 621 F.2d 1318, 1320-1321 (8th Cir. 1980), affg. a Memorandum Opinion of this Court; Vercio v. Commissioner, 73 T.C. 1246-1255 (1980).
Although the entity here is a religious order, no different criteria should apply, and clearly the Order does not control the earning of the income as that term has been used in the decided cases.
Facing similar facts and an analogous legal issue, the U.S. Claims Court recently held that wages received by a Catholic nun as an employee of a county hospital were subject to the fica tax. Samson v. United States, 4 Cl. Ct. 325 (1984), affd. 743 F.2d 884 (Fed. Cir. 1984). The plaintiff in that case argued that, as a member of a religious order who was subject to vows of poverty and obedience, she was "directed or required” by her superiors to perform services at the hospital in pursuit of the mission of her Order. This argument is analogous to petitioner’s argument in the instant case that her Order controlled the earning of the income. The following response by the Claims Court applies equally here:
The plaintiffs argument is superficially appealing until it is realized that, from the standpoint of reality, the Order could not require or direct the plaintiff to perform the duties of the civil service position of Speech Therapist, job classification No. 1390, for the St. Louis County Department of Community Health and Medical Care. Actually, the Order did not have any authority or responsibility in connection with the selection of the person who was to fill and perform the duties of that position. Standing alone, a purported requirement or directive by the Order that the plaintiff take over and perform the duties of the civil service Speech Therapist position with the St. Louis County Department of Community Health and Medical Care would have been absolutely meaningless.
The authority and responsibility with respect to determining who would fill and perform the duties of the Speech Therapist position were vested in an appointing official of the St. Louis County Department of Community Health and Medical Care, acting on the recommendations of other county officials and in accordance with the regulations of the St. Louis County Civil Service Commission. The extent of the Order’s participation in the matter was merely to determine whether the plaintiff should apply and compete for the position and, later, to determine whether the plaintiff should accept the position when it was offered to her by the appointing official of the county, after her application had been considered and she had undergone successful interviews with county officials.
In essence, the Order’s role was to grant (or deny) authorizations to the plaintiff with respect to her desire to participate in the county’s appointing process. The Order could not — and did not — issue any mandatory requirement or directive controlling the appointing process.
[Samson v. United States, 4 Cl. Ct. at 329.]
It is one thing for a member of a religious order to work in the schools, hospitals, and other facilities of the Order. It is an entirely different matter for a member of that Order to enter the secular world as an employee of the Federal Government, or of a private corporation. In the former case, the individual deals with third parties (for example, students and patients) on behalf of the Order, as the Order’s legal representative and subject to the Order’s daily control over whether, and how, the services are performed. Third parties have chosen to form a relationship with the Order, and the individual represents the Order in the relationship. Whatever amounts are paid by these third parties are paid to satisfy a legal obligation to the Order. In the latter case, the Federal Government or corporation pays the individual in satisfaction of its legal obligation to her as an employee. The Order is not involved at all, except as the recipient of petitioner’s earnings when she endorses her check over to the Order.
We therefore conclude that petitioner earned the income at issue in her individual capacity, and is properly subject to taxation upon it. Lucas v. Earl, 281 U.S. 111 (1930).
Decision will be entered for the respondent.
Reviewed by the Court.
Dawson, Simpson, Sterrett, Chabot, Parker, Hamblen, Cohen, Clapp, Jacobs, and Wright, JJ., agree with the majority opinion. Gerber, J., did not paricipate in the consideration of this case.E.g., McGathen v. Commissioner, 76 T.C. 468 (1981), affd. without published opinion 720 F.2d 664 (3d Cir. 1983); Ford v. Commissioner, T.C. Memo. 1984-501; Brennan v. Commissioner, T.C. Memo. 1984-500; Wert v. Commissioner T.C. Memo. 1984-499.
Indeed, the U.S. Claims Court recently reached the same conclusion in a very similar case. Fogarty v. United States, 6 Cl. Ct. 612 (1984), on appeal (Fed. Cir., Jan. 16,1985). Fogarty involved a Roman Catholic priest who worked as an associate professor at the University of Virginia’s Department of Religious Studies. The court found that teaching is an essential and traditional religious mission of the priest’s religious order, that the priest had accepted the position upon instruction from his superior, and that he had acted strictly in accordance with his vow of poverty at all relevant times. The Claims Court nevertheless determined that the wages paid were taxable to the priest, stating as follows:
"if the income generated from plaintiffs employment is to be treated as that of the Order, it must first be established that the contract under which the income was earned was that of the Order. * * * Simply put, the question is to whom did the third party look for the accomplishment of the services it bargained for — to the plaintiff or to his Order?”
The court based its conclusion that the university looked directly to the priest for performance on facts indistinguishable from those involved in the instant case.