*1209 EXEMPT INCOME - EMPLOYEES OF A STATE OR POLITICAL SUBDIVISION. Attorneys representing the superintendent of banks of the State of Georgia in legal matters pertaining to insolvent banks, under a contract prescribing minimum and maximum retainer fees for each insolvent bank handled plus commissions paid for collecting debts due the banks, were not employees within the law exempting compensation paid to an officer or employee of the state or political subdivision thereof.
*1007 Deficiencies determined by the respondent against Carl Newman Davie of $1,693.78 for the year 1927, and $680.81 for 1928, are involved in Docket No. 48980, and $309.95 for 1929 in Docket No. 51460. Deficiencies against Orville A. Park are $145.99 for 1927 in Docket No. 48982, and $262 for 1929 in Docket No. 62995. Charles Simpson Reid, in Docket No. 48983, is charged with a deficiency of $121.54 and penalty of $30.39 for the year 1927.
Petitioners allege that they were employed during the years involved in this proceeding by the State of Georgia, acting*1210 through its superintendent of banks, to represent the Department of Banking *1008 of that state as attorneys at law, and as special counsel in matters connected with insolvent banks, and that their compensation for such services was exempt from income tax, which respondent disallowed, and that this disallowance was error. The cases were consolidated for hearing.
FINDINGS OF FACT.
Petitioners are all attorneys at law practicing in the State of Georgia.
The Georgia Banking Act of 1919 created the office of superintendent of banks (hereinafter referred to as the superintendent), and vested in the superintendent the administration of the banking laws. He is charged with the examination, supervision and regulation of the active banks and is also the official liquidator of all insolvent banks.
In 1923 the superintendent employed Carl N. Davie (one of the petitioners) to assist him as legal adviser. Davie at the time was practicing his profession at Gainesville, Georgia, in partnership with Charles S. Reid, another of the petitioners herein. He gave up this practice, leaving to Reid the winding up of all the pending business in which he retained an interest. Davie*1211 went to Atlanta and was assigned to a desk in the office of the superintendent in the State Capitol. He was given the title of special counsel. His entire time was devoted to the work of the Department of Banking under the immediate direction and control of the superintendent of banks. He performed any and all service required of him, whether in connection with the active banks or those in liquidation, but there was no fund from which he could be paid except that derived from the assets of the insolvent banks. His compensation was taxed against these banks and was paid by the superintendent with his check when approved by the judge of the superior court.
Much of the service rendered was of a routine character, the preparation of applications and the securing of orders from the proper courts for the sale of assets, the compromise of claims, and the payment of expenses; the examination of audits and advising the superintendent as to assessments to be made against stockholders; the liability of directors for misfeasance or nonfeasance; and the liability of officers and employees on their bonds as such. He did not have charge of the receivables of the insolvent banks or undertake*1212 their collection by suit or otherwise, or the ordinary routine litigation, but when suits were brought against the superintendent, and occasionally under special circumstances when suits were brought by the superintendent, he represented the superintendent in the litigation. None of the years in which petitioner rendered services as described above are before us in this proceeding.
*1009 The relationship of petitioner Davie to the Department of Banking continued as above outlined until July, 1926. Then the Bankers Trust Company failed, carrying with it a large part of its chain of banks, known as the Manley chain, and precipitating a serious situation in Georgia's banking system. In a single week 80 banks closed and were taken in charge by the superintendent. Some 40 other banks belonging to the chain were more or less involved and required immediate attention. As a result of these failures, some 26 corporations, firms and individuals affiliated with the Bankers Trust Company or with W. D. Manley, its president, were adjudged bankrupt or placed in the hands of receivers. The Department of Banking found itself with greatly enlarged duties. In this emergency, petitioner*1213 Orville A. Park was sent for and his services were engaged to help out petitioner Davie in the work. At this particular time, T. R. Bennett was superintendent of banks, and at the hearing a letter from him to petitioner Davie was introduced in evidence, by agreement. This letter briefly states the terms of employment of petitioners Park and Davie, to handle these insolvent banks, as follows:
You maintained this office in the Capitol until 1926 when on account of the limited space available the liquidating department, as well as your office, was removed to other quarters. While you were at liberty to accept other employment, you were subject to the requirements of the Department at all times.
In 1926 I entered into written contracts with you and Honorable Orville A. Park of Macon to represent me in the general supervision of banks in liquidation. By the terms of these contracts the retainers were fixed at from $50 to $250 and in addition a percentage of the amount recovered on assets which you collected, which percentage was as a rule from 5% to 10%.
On January 1, 1927, T. R. Bennett was succeeded as superintendent by A. B. Mobley. Petitioners Park and Davie continued their*1214 employment as special counsel to the superintendent. The terms and conditions of their employment were evidenced by correspondence as follows:
February 16, 1927.
Hon. A. B. Mobley,
Superintendent of Banks, Atlanta, Georgia.
Dear Mr. Mobley:
Complying with your request that we give you the terms upon which we would handle the legal phases of the liquidation of the banks which have closed since you assumed the office as Superintendent on January 1st, we beg to say:
We agreed with Mr. Bennett that we would represent him in the liquidation of the banks which closed incident to the failure of the Bankers Trust Company for a retainer of from $100 to $300 for each bank, depending on the amount of assets to be liquidated. This retainer was expected to cover advice, the securing of administrative orders, and the routine liquidation.
In addition to this, for such papers of the bank as were turned over to us for collection we were to be paid from 5% to 10% of the amount realized. Where litigation was brought either by or against the Superintendent, we were *1010 to charge reasonable fees to be fixed at the time, the amount depending on the amount in controversy, the*1215 time required and difficulty of the question. In other words, the usual fees for similar services such as would be charged to other clients.
It was expected that local attorneys would be employed who would handle collections and would assist in the more important litigation. Where these attorneys handled collections, we would not share in their fees nor would we share in any litigated matter unless we assisted in the preparation and trial of the case. Where we had actual charge of the litigation, such division of fees between us and local counsel as might be equitable would be arranged.
As we were handling a large volume of business for Mr. Bennett we told him that we expected him to feel perfectly free to call on us for advice and assistance in any matter affecting the Department, whether it pertained to an open or a closed bank, and for such advice and assistance no charge was made.
Contracts on the basis above outlined were made and we furnished you copies some time ago.
If you desire us to take charge of the legal phases of liquidation of the banks which have come into your hands since January 1st, or any others which may hereafter come into your hands, we will be*1216 glad to do this on the same terms as were agreed on with Mr. Bennett. We, of course, would not be able to do this but for the fact that we have quite a large volume of work for the banks closed prior to January 1st which is still pending.
You have suggested that you would like to arrange to have someone from this office, probably Mr. Roberts, to spend at least a part of each day at the liquidation office in the capitol. This can be arranged without difficulty. Not only will Mr. Roberts be available, but all of the legal organization will be at your command and we will expect you to call on us whenever necessary.
If you prefer, formal contracts can be drawn up covering each particular bank, or the matter can be closed by your accepting the proposition above outlined and advising us as to which particular banks you will retain us.
We believe it would be more satisfactory to you, as well as to us, to have all of the banks handled in the same way.
With highest esteem, I beg to remain,
Sincerely yours,
ORVILLE A. PARK.
To the above letter, the superintendent replied under date of April 5, 1927, as follows:
Gentlemen:
I have considered very carefully your letter*1217 of February 16th outlining the terms upon which your firm would handle the legal phases of the liquidation of banks which have closed since January 1st, the date I assumed the office as Superintendent of Banks. I have delayed replying to the letter for the reason that I wanted to give the matter some thought.
As I understood your proposition, it is similar to the contract you had with my predecessor. Your proposition to me is different in that the fees on assets turned over to you are to range from 5% and not to exceed 10%. By this I understand that you are to charge not exceeding 5% on collections made without court procedure and 10% where suit is filed. I understand that the retainer fee covering each bank is to be not less than $100.00. This retainer to cover advice in securing of administration orders and routine liquidation. If this retainer is to exceed $100.00 for a bank, the amount of such retainer to be *1011 agreed upon at the time the bank is turned over to you under the contract. It is understood that none of the assets are to be turned over to you for collection except by my order. Whatever expense is incurred not embraced in this contract, agreement*1218 as to fees will be entered into before services are begun.
In matters of suit on bonds of liquidating agents, and the collecting of money for which I am responsible, I do not think you should charge any fee. I have in mind the case recently where it was necessary for us to proceed against a liquidating agent for recovery of certain funds which were in his hands as liquidating agent.
I understand that your entire organization is to be available at all times and for that reason I am sending a copy of this letter to Mr. C. S. Reid, who is a member of your firm.
It is also understood that the acceptance of your proposition as above outlined, is a contract which may be terminated at will by either of the parties. It is also understood that the total pay to your firm as retainer fees shall not exceed $6,000 per annum.
It is also understood that this employment will be retroactive - that is, will date from January 1, 1927.
The reason I want to be able to terminate the contract at will is due to the fact that there is some question as to when my term of office might expire and I do not want to make a contract which might in any way embarrass my successor.
Very truly yours,
*1219 A. B. MOBLEY,Superintendent of Banks.
On April 7, 1927, the following letter was written to Mobley by petitioner Davie:
Your letter dated the 5th instant with reference to a contract with us as to representing you in banks which closed since January 1st.
You refer to Mr. Park, Mr. Roberts, Mr. Reid and myself as being a firm. There is no firm, but we have been associated together in representing the Department of Banking and have agreed up to this time upon disposition of the fees earned. I have discussed the contract with each of them, and it is satisfactory with the following exceptions, viz.:
We understand that we are entitled to 10% wherever we take any legal procedure to collect the claim and to 15% of a recovery in such litigation as may be determined by the appellate courts. That is the only question at issue. * * *
On April 8, 1927, the Superintendent accepted the change suggested and stated in part in his letter as follows:
The letters of February 16, April 5 and April 7 cover my understanding of the contract I have with the members of your firm to represent the Department of Banking effective January 1, 1927.
The arrangement evidenced by this*1220 contract continued through 1927 and 1928. It was also continued for the year 1929 as to all pending business. Banks closing during that year were handled separately. Petitioner Davie represented the superintendent in some of them, while petitioner Park was employed to assist in the liquidation of others.
*1012 There were no such partnerships as Davie & Park or Davie, Park & Reid. Petitioner Davie and petitioner Park were employed as individuals and for a time petitioner Reid was associated with them. On account of the volume of work they were compelled to employ other professional associates as well as a clerical force, who were paid out of the compensation received from the Department of Banking, and from fees received for representing receivers in state courts and trustees in bankruptcy. For convenience, partnership returns for income taxes were filed under the name of "Davie, Park and Reid." Each petitioner reported his share of the compensation received separately on his own individual return.
Representing the superintendent, or certain banks in his official charge, petitioners instituted various proceedings in bankruptcy and filed certain bills for the appointment*1221 of receivers, and they were employed to represent some of these receivers and trustees in bankruptcy, for which service they were allowed fees by the court out of the insolvent estates being administered. The so-called partnership returns reported and separated these fees from the compensation paid by the superintendent of banks. The expenses were prorated between the two classes of income. No exemption was claimed or is now claimed, except on the income received directly from the superintendent for services rendered to him in connection with the liquidation of insolvent banks, this income being reduced by a proportionate part of the expenses incurred.
During the period covered by the returns under consideration in these consolidated proceedings, petitioner Davie continued to be a member of the firm of Davie & Reid, afterwards changed to Jones, Davie & Reid, at Gainesville, Georgia, but had no active connection with the firm, his interest being confined to business pending when he went to Atlanta and accepted employment from the superintendent of banks. He continued to bear a part of the expense of the Gainesville office.
Petitioner Park at the time he was called to the service*1222 of the superintendent of banks was a member of the firm of Jones, Park & Johnston, Attorneys, at Macon, Georgia. He continued to be a member of that firm until April 15, 1927. While so connected he turned over all amounts received from the superintendent of banks to the firm and drew each month his share of the net income of the firm. No exemption is claimed for any income received from the superintendent while this arrangement continued.
He withdrew from the firm of Jones, Park & Johnston about April 15, 1927, and formed a nominal partnership with Harry S. Strozier, Esq., of Macon. He received no income from Park & Strozier, paid no part of the expenses of the firm, and retained as his own all income *1013 received from the superintendent. It is this income which is claimed to be exempt.
From July, 1926, to December 31, 1929, both petitioners Davie and Park were continuously engaged in the service above enumerated and devoted practically all their time to the work. Petitioner Reid was not so continuously engaged and devoted only a part of his time to the work.
The control, direction and final decision of all matters being attended to by either of the petitioners*1223 was with the superintendent, either directly or through the chief of the liquidating division. He determined all matters of policy, such as when suits should be brought, when litigation should be compromised and when cases should be appealed, but the details were left to the judgment and discretion of petitioners in their capacity of attorneys and special counsel.
The return filed as the partnership return of "Davie, Park and Reid" for 1927 showed gross income of $83,159.02, and attached to this is a statement as follows: "$83,159.02 represents the gross earnings - of this amount $39,145.38 was paid by the Department of Banking, State of Georgia, for services as Special Counsel for this Department. The balance, $44,013.64, represents earnings from general practice." From this gross income of $83,159.02 was attached a schedule of deductions as follows:
| Paid assistant attorneys in office | $12,586.31 |
| Audit Company of the South | 300.00 |
| Office Rent | 3,575.50 |
| Supplies, Stationery & Printing | 1,216.71 |
| Telephone & Telegraph | 1,046.83 |
| Stenographers & Bookkeeper | 7,468.98 |
| Postage | 195.95 |
| Paid out of town attorneys for services rendered | 512.65 |
| Dues, Subscriptions & Court Costs | 407.06 |
| Total | $27,309.99 |
*1224 Partners' shares of income and credits were reported on the return to be the following:
| Net income | ||
| Per cent | Amount | |
| Orville A. Park, Macon, Ga | 40 | $22,339.63 |
| Carl N. Davie, Atlanta, Ga | 40 | 22,339.55 |
| Chas. S. Reid, Gainesville, Ga | 20 | 11,169.85 |
| Total | 100 | 55,849.03 |
*1014 Of the above sums petitioner Davie claimed $17,161.51 as exempt income on his 1927 return. Petitioner Park claimed $10,515.90 as exempt on his 1927 return, and petitioner Reid claimed $5,257.95 as exempt on his 1927 return.
There is no controversy in this proceeding concerning the accuracy of the figures as to gross income or as to the amount of the ordinary allowable deductions for any of the taxable years. The only controversy is as to what part of the income, if any, is exempt.
OPINION.
BLACK: It is not the contention of the respondent that the Department of Banking of the State of Georgia is not an agency or instrumentality of the state engaged in an essential governmental function or that the compensation for personal services of its officers and employees is subject to Federal income tax. But the respondent contends that petitioners were neither officers*1225 nor employees of the Department of Banking of the State of Georgia, but were independent contractors, and hence their compensation is not exempt from Federal taxation. In this contention we think respondent's holding on the facts is correct.
Under the laws of Georgia, the superintendent of banking has supervisory power over all state banking institutions, and in cases of insolvency is authorized to take charge of such insolvent banks in the character of a quasi receiver, and liquidate the same under the supervision of the proper court. He is expressly empowered to employ such agents and attorneys as may be necessary. Parks Code, supp. 1922-6, section 2268, provides as follows:
The Superintendent may employ such attorneys * * * as may be necessary in the liquidation and distribution of the assets of such bank.
The compensation of the attorneys, all expenses of liquidation and distribution of a bank whose assets and business shall be taken possession of by the Superintendent, shall be fixed by the Superintendent but subject to be approved by the judge of the Superior Court of the county in which the bank is located, on notice to the bank. When compensation shall have been*1226 so fixed and approved and the service rendered the same shall be paid out of the funds of such bank in the hands of the Superintendent and shall be a proper charge and lien on the assets of such bank.
Petitioners do not contend that they were officers of the State of Georgia, but do contend that they were employees of the state and that they were "instrumentalities" of the state engaged in a governmental function and that their incomes derived from that source are exempt from tax.
Petitioners rely on section 1211 of the Revenue Act of 1926, which is as follows:
*1015 Any taxes imposed by the Revenue Act of 1924 or prior Revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded.
No hard and fast rule can be laid down defining employees of a state or a political subdivision thereof. The question has been frequently passed*1227 on by this Board and by the courts, and each case must depend on its own facts. Many cases have been cited by counsel on both sides, which have been carefully considered, but it will serve no useful purpose to undertake to review them all. We think the facts of the instant case bring it within the rule laid down in ; ; ; affd., ; ; affd. on this point, .
These cases hold on the facts that the taxpayer claiming the exemption was not entitled to it because he was not an employee of the state or political subdivision thereof, but was an independent contractor.
Petitioners urge, among other cases, in support of their contention, , and . In the Livezey case the Governor of West Virginia appointed Livezey as counsel for the Public Service Commission of West Virginia, without specifying his term of office, but*1228 providing that his salary should be $5,000 a year payable monthly. In the Butler case, Butler was employed by the board of commissioners of Duval County, Florida, to represent it as its legal advisor. His salary was fixed by resolutions of the board and covered compensation for attendance at all meetings of the board, preparation of resolutions and contracts, and legal advice and services in litigated matters of an ordinary nature. He was carried on the pay roll of the board and was paid his salary monthly. On the facts in both of the foregoing cases the court held that the taxpayer was an employee of the state.
In , Judge Hutcheson, in a concurring opinion, gave an illuminating discussion of the distinction between an employee and an independent contractor, in which he said:
Nor does the question whether one is an employee or a contractor depend upon the nature of the work performed, or the character of the person performing it; rather it is determined by the conditions under which the work is performed; that is, whether it has regularity and continuity, and is performed under the control and direction, though general, *1229 of the employer. If the employment is for a single act, or for a series of isolated acts the employment being specific as to each act, the person employed, whether an attorney in legal matters or a layman in others, is not an employee, but an independent*1016 contractor. ; ; .
Perhaps the best statement of the distinction is found in the Wilson case, supra, where it is said: "The terms 'officers' and 'employees' both alike refer to those in regular and continual service. Within the ordinary acceptation of the terms, one who is engaged to render service in a particular transaction is neither an officer nor an employee. They imply continuity of service, and exclude those employed for a special and single transaction." [Italics supplied.]
In the instant case, the petitioners were employed for a series of isolated acts, the employment being specific as to each act. "Each isolated act" as above referred to was the legal work*1230 in connection with the liquidation of a particular insolvent bank. The compensation was to be not less than $100 nor more than $300 for each particular bank, and in addition to this they were to receive commissions for collections of the banks' receivables - 5 per cent if collection was made without suit, 10 per cent if suit had to be brought, and 15 per cent if collection was made after appeal taken. These commissions, it seems to us, are not very different in character from those we had before us in ; affd. . In the Roberts case the petitioner had a contract with the tax commissioner of the State of Georgia and boards of commissioners of several counties of Georgia for the collection of delinquent state and county taxes on commission. The taxpayer claimed exemption on the commissions paid him and we denied it and were affirmed by the Circuit Court of Appeals for the Fifth Circuit.
We see no distinction in principle in that case and in the instant case. It is true that in the instant case the petitioners rendered services for the superintendent of banking of the State of Georgia other than those rendered*1231 in connection with insolvent banks and collecting the receivables due such insolvent banks, but for the other services they received no compensation. The contracts as evidenced by the letters show that fact. The compensation which they claim to be exempt is that which was paid them as retainers for looking after the legal work in connection with the liquidation of each particular insolvent bank and for making collections of paper due such banks. The only part of this which they claim to be exempt is that which remained after they had paid their assistant attorneys in office, office rent, and other office expenses.
But, for reasons which we have already stated, we hold that none of the income was exempt. Inasmuch as there is no issue relating to allowance of office expenses incurred in connection with the earning of the income, respondent having allowed all that petitioners claim on that score, and the only issue is as to whether or not a certain part of the net income was exempt from taxation,
Decision will be entered for the respondent.