I must respectfully dissent from the majority opinion in this case.
The majority seems to be overwhelmed by the fact that petitioner was carried on the rolls as a Federal Government employee, was paid by a Federal Government check, and had all the protections and benefits that other Federal employees get, e.g., paid sick leave and vacations, retirement benefits and the like, all of which the majority discusses in great detail. Under the apparent spell of these conceded facts, the majority then only feels it necessary to invoke Lucas v. Earl, 281 U.S. 111 (1930), and that is the end of the matter: respondent prevails.
Why this relationship to the Federal Government is so important to the majority in deciding the case escapes me. Presumably, petitioner would have had some or comparable benefits if she had been employed in private industry. Is the majority intimating that there would be a different result in such case? I do not see how this could be so. To me, it is entirely unimportant whether petitioner is to be considered an employee of the Federal Government or an employee of the clinic, which supervised and directed her day-to-day work and was the place where she was employed. It is not even in dispute in this case that petitioner worked for an employer outside her own Order; both sides agree that it is so. The real question in the case is this: when compensation was paid to petitioner for her services at the clinic, did petitioner receive that paycheck under her own claim of right as a person who had independently contracted her services, or did petitioner receive such paycheck as the agent of the Order, under a preexisting and enforceable contract obligation to serve as such agent? In my opinion, the latter is the correct answer, and requires that the case be decided in favor of petitioner.
Section 61 provides the general rule that gross income includes all income, from whatever source derived, except as otherwise provided by law. Section 61(a)(1) specifically includes compensation for services within the definition of gross income. Moreover, it is a fundamental rule of Federal tax law that attempts by a taxpayer to shift the incidence of taxation, by anticipatorily assigning income earned in his individual capacity, will be ineffectual. See sec. 1.62-2(c), Income Tax Regs. This basic rule derives from Lucas v. Earl, supra, where the Supreme Court said:
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 [sec. 61] before us * * * [281 U.S. at 114-115.]
The frequently referenced "first principle of income taxation: That income must be taxed to hirn who earns it,” Commissioner v. Culbertson, 337 U.S. 733, 739-740 (1949), finds its genesis in the above quote from Lucas v. Earl, supra, and is the bedrock of the majority’s position in this case.
However, almost from the announcement of the assignment of income doctrine in Lucas v. Earl, supra, the Supreme Court acknowledged that practical realities dictate against an overly simplistic application of the rule which would always allow identification of the taxable party merely by pointing to the individual whose efforts generated the payments in question. Recognition must be given to the fact that, because of various fiduciary, business, and other legal relationships and restrictions encountered in the real world, an individual’s personal labors may generate income which, although passing through his hands, never in fact becomes property subject to his actual control or disposition. Such recognition militates against carrying the "first principle of taxation” to a dryly logical extreme. Thus, in Poe v. Seaborn, 282 U.S. 101 (1930), decided only 8 months after Lucas v. Earl, supra, the Supreme Court held that the earnings of couples living in community property States must be reported one-half by each, irrespective of the fact that one spouse’s personal efforts generated all of the income of the marital community. The Court reasoned that, in a community property State, the husband was the agent of the marital community, and "the earnings [of the husband] are never the property of the husband, but that of the [marital] community.” Poe v. Seaborn, supra at 117.
For similar reasons, it has long been the rule that where an agent, within the scope of his agency, earns income on behalf of a separate and distinct principal and, in accordance with his fiduciary duty, turns such income over to his principal, it is the income of the principal and not the agent. Maryland Casualty Co. v. United States, 251 U.S. 342 (1920). This basic rule recognizes that, under the law of agency, an agent who labors within the scope of his agency, and thereby generates income, is, by law, duty-bound to transmit such income to the principal. 2 Restatement, Agency 2d, sec. 388 (1957) (hereinafter cited as "Restatement Agency”). The assignment of income doctrine of Lucas v. Earl, supra, simply has no application in such a case, since the agent never receives or contemplates receiving income which he is in a position to assign in his own right.1
The issue presented in this case — whether petitioner is taxable upon income paid with respect to her services as a midwife — therefore requires a determination of whether the income was earned by petitioner in her individual capacity, or in her capacity as an agent of the Order. If the income was earned by petitioner in her individual capacity, her transfer of such income to the Order will not relieve her of tax liability thereon. Lucas v. Earl, supra; sec. 1.61-2(c), Income Tax Regs. If, on the other hand, petitioner earned such income only in her capacity as agent for the Order, it is income to the Order and not to petitioner. Cf. McGahen v. Commissioner, 76 T.C. 468, 478-479 (1981), affd. 720 F.2d 664 (3d Cir. 1983).
In resolving this question, we must bear in mind that in cases such as this, where a taxpayer alleges that income generated by his personal labor was earned not on his own behalf but on behalf of a third party, the "choice of the proper taxpayer revolves around the question of which person or entity * * * controls the earning of the income rather than the question of who ultimately receives the income.” Vercio v. Commissioner, 73 T.C. 1246, 1253 (1980); Vnuk v. Commissioner, 621 F.2d 1318, 1320 (8th Cir. 1980), affg. a Memorandum Opinion of this Court; Johnson v. United States, 698 F.2d 372, 374 (9th Cir. 1982); Johnson v. Commissioner, 78 T.C. 882, 891, (1982), affd. without published opinion 734 F.2d 20 (9th Cir. 1983), cert. denied 469 U.S. __(1984); Pacella v. Commissioner, 78 T.C. 604, 622 (1982).
After reviewing all of the facts in this case, I would hold that: (1) Upon her admission to the Order, petitioner, by enforceable agreement, became an agent of the Order, a separate and distinct principal, for purposes of furthering the expressed goals of the Order; (2) petitioner’s acceptance and conduct of her duties at the clinic was within the scope of her agency relationship; (3) because of the nature of petitioner’s agency relationship with the Order, as well as her relationship with the clinic and nhsc, the Order, and not petitioner, in every real sense, controlled the earning of the income at issue; (4) accordingly, the income at issue is not properly taxable to petitioner.
An agency relationship is defined as ”the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” Restatement Agency, sec. 1(1). Generally, the scope of an agent’s authority to act "can be created by written or spoken words or other conduct which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account.” Restatement Agency, sec. 26. Whether the requisite consent and control for the creation of an agency relationship are present in any given case must be resolved by an examination of all the facts and circumstances. Restatement Agency, sec. 15.
The facts in this case reveal that, as a precondition to her admission to the Order, petitioner was required to undertake a vow of obedience whereby petitioner, inter alia, agreed to:
embrace the Father’s will as it is expressed in the constitution [of the Order] and as it is mediated through those who exercise authority in our congregation.
The purposes of the Order, as expressed in its articles, included, inter alia:
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 purposes or objects and powers above mentioned or incidental thereto.
In addition to expressly agreeing to act under the direction of the Order in furtherance of the purposes of the Order, and as a further precondition to her admission to the Order, petitioner agreed that she would give over to the Order everything she earned in pursuit of the purposes of the Order, and accept from the Order only that which is necessary to satisfy her basic needs. As a corollary to her vow of poverty, petitioner agreed never to claim or demand, directly or indirectly, any wages, compensation, or other remuneration for services she performed in furtherance of the purposes of the Order. The majority correctly so finds.
Having satisfied these requisites, petitioner was admitted to the Order, and having been admitted, petitioner’s vows of obedience and poverty became valid and enforceable contract obligations. Order of St. Benedict of New Jersey v. Steinhauser, 234 U.S. 640 (1914).
Taken together, the admission of petitioner into the Order and the agreements of petitioner outlined above, manifest the consent of the Order that petitioner act on its behalf, subject to its direction and control, in furtherance of the purposes of the Order, as well as petitioner’s consent to so act, on the Order’s account, and for its benefit. A principal-agent relationship between the Order and petitioner was therefore, by definition, created upon petitioner’s admission to the Order. Restatement Agency, sec. 1.
It is clear on this record that the agency relationship, thus created in form, was abided by in practice and substance by both petitioner and the Order with respect to petitioner’s employment at the clinic. The Provincial Superior, in conjunction with the placement board of the Order, is vested with sole authority to approve or disapprove a proposed mission. Pursuant to her vow of obedience, petitioner could neither apply for nor accept a position of employment without express approval of and direction by the Order, and such approval would be granted by the Order only upon its determination that the proposed mission work would further the purposes of the Order. In accordance with these requirements, prior to interviewing for the position with the clinic, petitioner sought permission from the Order to do so, and, after the Order determined that the nature of the employment at the clinic would be in keeping with the goals of the Order, such permission was granted.
After petitioner was interviewed for a position at the clinic and was informed that a position was available to her, she relayed this information to her superiors at the Order and requested permission to accept the position. The Order then contacted the clinic and offered to contract with the clinic for the services of petitioner. As set out in our findings, the clinic, by letter to the Order, formally accepted petitioner on their nurse-midwifery staff, and was fully aware of petitioner’s relationship with the Order. Moreover, when petitioner applied for the position with NHSC so that NHSC, rather than the clinic, would assume financial responsibility for petitioner’s services, petitioner specifically stated in her application that she would accept an offer with NHSC only if she would be assigned to perform services at the clinic. Petitioner’s personnel folder from NHSC contains a letter from the Order dated June 26, 1979, calling attention to the fact that petitioner was a member of the Order and that her services would be performed for NHSC "on behalf of the Order as its agent.” Moreover, petitioner’s personnel folder contains another letter from the Acting Provincial Administrator of the Order, to the Department of Health and Human Services, wherein the Order proposed to contract with NHSC for petitioner’s services. Although no formal contract was entered into between the Order and NHSC for petitioner’s services, it is nevertheless clear that NHSC was fully informed of petitioner’s relationship with the Order, and that it did not object to her status. Petitioner’s agency status was thus explicitly disclosed by the Order and accepted by the clinic, and implicitly accepted by NHSC.
Although petitioner’s day-to-day activities as a midwife were directed by her supervisors at the clinic, petitioner nevertheless remained subject to the ultimate control of the Order during her tenure there. The Order conducted an annual review of each mission to determine whether it was in conformity with the purposes of the Order, and from time to time visited each Sister at the mission site to verify the mission, in practice, furthered the objectives of the Order. Moreover, if at any time the Order determined that petitioner’s mission failed to conform to the objectives of the Order, the Order possessed authority to require petitioner to withdraw from the mission, and petitioner, pursuant to her vow of obedience, was under a duty to follow any such command, and would have done so. It is clear that at all times during her employment at the clinic, petitioner remained under the ultimate control of the Order.
It is also clear that petitioner’s work at the clinic was within the scope of the agency relationship. As indicated supra, one of the purposes of the Order was to provide medical care for those in need. Clearly petitioner’s services as a midwife at a health clinic which provides services to the poor further such purposes.
Finally, all proceeds generated by petitioner’s work at the clinic on the Order’s behalf, pursuant to petitioner’s obligation, were paid over to the Order. The Order provided petitioner with only the minimum basic necessities of life that all Sisters of the Order received, and there was a complete absence of any device whereby petitioner derived any benefit, directly or indirectly, through a rebate determined by reference to her salary.
On these facts, I would hold that the income generated by petitioner’s services as a midwife was earned by her as an agent of the Order, and not in her individual capacity.
The primary theory respondent advances, and which the majority regrettably embraces, is styled by respondent as a "triangle theory.” Under this theory, where, as here, an individual’s personal labors generate income, a finding that such income was earned on behalf of a separate and distinct principal is preconditioned upon a subsidiary finding that a contract or other express agreement existed between the payor of the income and the alleged principal, wherein the alleged principal expressly grants the payor the right to use the individual’s services on the principal’s behalf. It is not enough, the majority holds, that a relationship exist solely between petitioner and her Order; in addition, they say, nhsc must have expressly contracted with the Order for petitioner’s services before the Order is to be considered the true earner of income. Otherwise, it is said, petitioner may properly be viewed only as an "employee” of NHSC, and such status is inconsistent with the proposition that the income at issue was earned by petitioner as an agent for the Order. This is the broad position asserted by respondent in a recent revenue ruling. See Rev. Rul. 83-127, 1983-2 C.B. 25. The majority primarily relies upon Johnson v. United States, supra, and Johnson v. Commissioner, supra, as support for its conclusion that an express contract for petitioner’s services between the Order and NHSC is an absolute prerequisite to a finding that petitioner was acting as an agent of the Order in rendering services to the clinic.
The "triangle” theory applied here is premised upon an inaccurate appraisal of the law of agency as well as the facts of this case.
First, as discussed above, an agency relationship is, by definition, created when one individual or entity grants consent to another that the other shall act on his or its behalf, and the other consents to so act. Restatement Agency, sec. 1. Thus, only two parties are required to create an agency relationship. The majority — erroneously, in my opinion— rejects this proposition.
Second, it is equally clear that an individual may simultaneously act as an agent for two principals with respect to the same activities so long as the services rendered on behalf of one principal do not constitute an abandonment of the relation with the other. Restatement Agency, sec. 226. Thus, contrary to the clear implications of the majority opinion, even if petitioner qualified as an "employee” (which is merely one type of agent) of nhsc under technical agency rules, see Restatement Agency, sec. 2, such status is not inconsistent with a finding that the income earned in that capacity was earned on behalf of and as an agent for the Order, so long as her assumption of her position at the clinic did not constitute an abandonment of her relation with the Order.2
Petitioner, in assuming the position at the clinic, did not in any manner abandon her relationship with the Order. To the contrary, petitioner was authorized and directed by the Order to accept the position, remained subject to the ultimate direction and control of the Order at all times, and the position itself was in furtherance of the purposes of the Order. Moreover, although the Order did not expressly contract with NHSC for petitioner’s services, petitioner’s status as agent of the Order was expressly disclosed to NHSC, and implicitly accepted by it. Under these circumstances, petitioner’s status as an "employee” (as that term is defined under general rules of agency law) of NHSC does not negate the fact that the income at issue was earned by her in her capacity as agent of the Order.
The majority’s reliance on Johnson v. United States, supra, and Johnson v. Commissioner, supra, is misplaced. In these cases, the taxpayer, a professional basketball player, executed a contract with an unrelated corporation whereby he granted the corporation the right to his services in professional sports for a limited time in return for payment by the corporation of a monthly sum. During the years in issue, the taxpayer played for a professional basketball club with which he signed player contracts. However, the basketball club "adamantly refused” to recognize the corporation’s controlling position over the taxpayer and expressly refused to sign any contract or agreement' with the corporation for petitioner’s services. Johnson v. Commissioner, 78 T.C. at 893. This Court and the Ninth Circuit Court of Appeals held that, under these circumstances, the basketball player, and not the corporation, was to be considered the true earner of the income generated by the basketball player’s activities with the club, despite the fact that all such amounts were paid over to the corporation.
Johnson v. United States, supra, and Johnson v. Commissioner, supra, thus present a completely different situation than that presented here. The payor of the income in those cases expressly and "adamantly” refused to recognize the corporation’s controlling status and the taxpayer nevertheless assumed a position with the basketball club. Under these circumstances it can reasonably be said that the taxpayer, by accepting a position with the basketball club, had abandoned his agency relationship with the corporation. In the present case, however, no such conclusion is warranted since petitioner’s status as agent of the Order was disclosed and accepted by the clinic and NHSC. Although the presence of an executed contract between the Order and NHSC may have been advisable from a taxplanning viewpoint, in light of respondent’s current ruling position, the absence of such a written contract is not fatal to petitioner’s case. Indeed, we have held that the presence of such a contract is not an absolute prerequisite to a finding that income generated by an individual’s efforts is earned on behalf of a separate and distinct entity. Pacella v. Commissioner, 78 T.C. at 618-619, 622.
In elevating the "triangle theory” into a rule of the law of agency, I think the majority goes too far. The most that can be said for it is that where the facts of a given case show that the outside employer has refused to deal with the prospective employee as the agent for another, but only in his individual capacity, the consummation of an employment agreement between the parties may fairly be viewed as an abandonment of the employee’s prior ongoing relationship with his principal, or at least as an employment outside the scope of the agency. Johnson v. United States, supra; Johnson v. Commissioner, supra.3 That was clearly not the case here.
The majority relies upon Samson v. United States, 4 Cl. Ct. 325 (1984), affd. 743 F.2d 884 (Fed. Cir. 1984). However, in Samson, the issue presented to the Court was whether services performed by a member of a religious order for a State governmental unit constituted "employment” within the intendment of the Federal Insurance Contributions Act (fica), not whether the income generated by the member’s activities was properly taxable to her under section 61. I express no opinion on the correctness of the result reached in Samson. Suffice it to say, that the case is simply inapposite here. Whether income generated by an individual’s activities is subject to fica is an entirely separate question from whether the individual is properly subject to income tax thereon. Cf. McGahen v. Commissioner, supra at 480-481.4
The majority also relies on the recent case of Fogarty v. United States, 6 Cl. Ct. 612 (1984), on appeal (Fed. Cir., Jan. 16, 1985), in which a Roman Catholic priest, with the same essential relationship to his order as the petitioner has in this case, who accepted a teaching position with a secular university with the consent and direction of his order, and turned over all his salary to his order pursuant to his vows, was held to be personally taxable on such salary. I agree that the controlling facts in Fogarty are indistinguishable from the facts in the present case; with respect, I think that Fogarty is wrong.
In Order of St. Benedict of New Jersey v. Steinhauser, supra, the decedent, a member of a teaching order with vows of poverty, chastity, and obedience, had a distinguished career as an author of learned works and a teacher at various institutions during his lifetime. In these pursuits, he earned royalties and other emoluments which he failed to turn over to his order, as he was required, to do. Upon his death, therefore, he left an estate of some value, a situation inconsistent with the vows he had professed to his order. Litigation then ensued between the decedent’s administrator and the order, as to who was entitled to decedent’s estate. The Supreme Court held that the vows made by decedent to his order were a condition to his admission to the order, and when he was admitted, a binding and enforceable contract was created between them. As the result, the order was held to be the true owner of the assets of decedent’s estate.
Steinhauser, although not a tax case, is instructive. It teaches us that the relationship between petitioner here and her Order was founded in a mutual, valid, and enforceable contract, and that she was the servant and agent of her Order. Had petitioner kept her paychecks for herself, I would have no difficulty in finding her taxable thereon, as having taken them under claim of right and converted them to her own use. Kelley v. Commissioner, 62 T.C. 131 (1974). On the other hand, the contract here between this petitioner and the Order was scrupulously observed by both sides. Petitioner clearly did not receive her paychecks under claim of right for herself, but only on behalf of, and as agent for, her Order, and she derived no personal benefit therefrom.
I do not think that Lucas v. Earl has overruled Steinhauser, nor has it repealed the law of agency as it applies to income tax cases. Petitioner at all times relevant, acting strictly in accordance with her vows, transmitted all funds generated by her labors to the Order. Petitioner did not have authority to exert dominion and control over the income at issue, and in fact, did not. The agency relationship created between petitioner and the Order was legal, binding, and was respected in substance.
I think that a blind and indiscriminating application of Lucas v. Earl to the facts of this case is neither required nor appropriate. I therefore conclude that the income at issue was received by petitioner in her capacity as agent of the Order; accordingly, she is not properly taxable thereon. Maryland Casualty Co. v. United States, supra.
Fay, Goffe, Nims, Whitaker, Shields, and Swift, JJ., agree with this dissent.See 2 J. Mertens, Law of Federal Income Taxation, sec. 17.11 (1982 rev.).
The majority lays great stress on the fact that petitioner was carried as an "employee” on the rolls of NHSC, which actually issued her pay checks. The facts show, however, that petitioner was actually employed at the clinic, with funds provided by NHSC. Except for its own bureaucratic reasons, it appears that NHSC could just as well have provided the funds to the clinic, which in turn could have issued its pay check to petitioner. It is clear that it was the clinic, a Catholic charity, which directed petitioner’s day-to-day nursing activities, and not NHSC. Cf. Rev. Rul. 68-123, 1968-1 C.B. 35; Rev. Rul. 77-290, 1977-2 C.B. 26.
We are not called upon here to consider the tax implications of an employment arrangement where an agent is working for an undisclosed principal. I note, however, that respondent’s position in the present case appears to be at odds with his earlier published position in Rev. Ru. 58-515, 1958-2 C.B. 28, and see Restatement Agency, sec. 186.
For similar reasons, I would reject the analysis adopted by respondent in Rev. Rul. 77-290, 1977-2 C.B. 26, wherein he relies upon secs. 3121(b)(8)(A) and 3401(a)(9) (defining "wages” for withholding purposes) and the regulations promulgated thereunder, in concluding that payments to a member of a religious order are income under sec. 61.