*873 The compensation of officers and employees of the Board of State Harbor Commissioners of the State of Californiaheld immune from Federal income tax.
*473 These proceedings are for the redetermination of deficiencies in petitioners' income taxes for 1931 and 1932 as follows:
| Petitioner | Docket No. | Year | Deficiency |
| Jamima Platt | 78930 | 1932 | $92.53 |
| Dora M. Meherin | 80422 | 1931 | 149.16 |
| Do | 1932 | 270.73 | |
| P. W. Meherin | 81035 | 1931 | 866.52 |
| Do | 1932 | 191.81 |
In Docket No. 81035 the petitioner protests only a part of the deficiency determined by the respondent. All three proceedings involve one common issue, viz, whether the salaries received in 1932 by Ora Platt, husband of petitioner Jamima Platt, and by petitioner P. W. Meherin in 1931 and 1932, from the Board of State Harbor Commissioners of the State of California are immune from Federal income*874 tax.
A further issue is presented in Docket No. 81035 as to whether a certain portion of a cash dividend distribution made to petitioner P. W. Meherin in 1931 by a corporation of which he was a stockholder was an ordinary dividend as claimed by the petitioner, or a liquidating dividend as determined by the respondent.
The proceedings were consolidated for hearing and opinion.
Relative to the first issue the parties have submitted a written stipulation of facts describing in considerable detail the organization and operation of the Board of State Harbor Commissioners. These facts will be summarized below.
FINDINGS OF FACT.
The Port of San Francisco is owned and operated by the State of California, under the management of the Board of State Harbor Commissioners, hereinafter referred to as the Harbor Commission, consisting of three members who are appointed by the governor and who serve at his pleasure.
The petitioner, P. W. Meherin, is, and at all times material to these proceedings was, a duly appointed member and president of the Harbor Commission.
Ora Platt, husband of petitioner Jamima Platt, is, and at all times material to these proceedings was, employed by*875 the Harbor Commission as assistant yardmaster for the State Belt Railroad, one of the facilities under the management of the Harbor Commission.
*474 For the taxable years 1931 and 1932 the petitioners, P. W. Meherin, and his wife, Dora M. Meherin, filed separate income tax returns on a community basis. For the taxable year 1932 the petitioner, Jamima Platt, filed a joint return on behalf of herself and her husband, Ora Platt.
The Harbor Commission, in its present form, was created in 1863 by an act of the Legislature of the State of California for the purpose of developing and operating the Port of San Francisco. Its powers and duties are defined by statute (see part 3, title 6, ch. 1, art. IX of the Political Code of the State of California, secs. 2520-2554).
The prescribed functions of the Harbor Commission are directed generally towards the development, maintenance, and operation of the port and terminal facilities of the City and County of San Francisco. There are three regular members who are appointed by the governor of the state by and with the consent of the State Senate. The governor of the state nd the mayor of San Francisco are ex-officio members for*876 certain limited purposes. The salaries of the commissioners are fixed at $5,000 per annum for the president and $3,000 per annum for each of the other two members.
The territorial jurisdiction of the Harbor Commission, as defined by law, extends generally over all of that portion of the Bay of San Francisco lying along the easterly and northerly harbor lines of the City and County of San Francisco, except for certain small areas owned and controlled by the United States Government and by the city and county.
The Port of San Francisco provides approximately 17 miles of berthing space and 188 acres of cargo area, with a capacity of over two million cargo tons. There are approximately 5 miles of water front and 430 acres of water front land, owned and controlled by the state, still available for piers, wharves, channels, and terminals.
The Harbor Commission facilities in 1932 consisted of 43 piers, 15 passenger and automobile ferry slips, 6 car ferry slips, 5 terminals, the State Belt Railroad, and numerous small wharves and bulkhead wharves connecting all of the piers. In addition to these there were other "special" facilities, including a shipside refrigeration terminal, *877 a grain terminal, a banana terminal, pipe lines and tanks for handling oils and molasses, a fumigation plant, two shipside terminals for the concentration of general cargo, and facilities for the accommodation of approximately 300 fishing boats. These facilities, exclusive of the land, were valued in 1932 at $50,000,000.
Among the powers and activities of the Harbor Commission, as prescribed by law, are the following: Possession and control of the premises within its territorial jurisdiction; appointment and supervision of employees; assignment of berths and slips for steamers and *475 ferry boats; loading and landing of merchandise; construction and maintenance of wharves, piers, quays, landings, streets, and thoroughfares, and other necessary facilities for merchandise and passenger service; construction of sea wall and dredging; assignment and location of space for the harbor police of the City and County of San Francisco, and for the quarantine officers; assignment of space for drydocks and marine railways, for airports, for tanks, and other oil facilities, for loading and unloading grain, and for a public market. Some of the above mentioned facilities, such as oil*878 tanks and grain elevators, and some of the land under the control of the Harbor Commission were leased to outside interests.
The Harbor Commission also operates the State Belt Railroad, referred to above, which is used principally for transferring freight cars and other loading stock to and from its piers and wharves and the main line carriers. For these services it makes a flat charge for each unit transferred. The railroad is not an incorporated company or a separate agency of the state, but is one of the regular facilities of the Harbor Commission. It stands on the same footing as all of the other facilities. It is located wholly within the City and County of San Francisco and extends practically the entire length of the Embarcadero, a distance of approximately 5 miles. It has a total trackage, including the spur lines to the piers and wharves, of about 60 miles. Its rolling stock consists of locomotives, a locomotive crane, and flat cars. The fees for its services are charged to and paid by the carriers. It is not a common carrier.
Under authority granted by law the Harbor Commission makes appropriate charges against shippers and carriers for all of the services which*879 it performs. These fees and all other moneys collected are first deposited in the San Francisco banks and at the close of each month the total deposits are sent to the state treasurer at Sacramento, California. The state treasurer then deposits the funds in a special account to the credit of the "San Francisco Harbor Improvement Fund", where they are held for the use of the Harbor Commission only and can not be used lawfully for any other purpose. The salaries of the officers and employees of the Harbor Commission are paid from these funds on warrants issued by the state treasurer.
The Harbor Commission is said to operate on a nonprofit basis. Charges for its services supposedly are fixed at a minimum cost, plus a necessary reserve for development and depreciation on facilities. The biennial reports submitted to the governor of the state by the Harbor Commission show net income for the fiscal years ended June 30, 1931, 1932, and 1933, in the respective amounts of $684,534.82, $484,933.84, and $441,194.02. A total surplus of $5,603,171.77 is shown at June 30, 1933. The reports show gross income from operations, consisting of rentals, dockage, tolls, and wharf demurrage, *476 *880 in the amounts of $2,598,140.47 for 1931 and $2,433,282.36 for 1932. The rentals from sea wall lots amounted to $219,493.25 in 1931 and $219,853.44 in 1932.
The Port of San Francisco is the only state owned and controlled port in the State of California.
The petitioner, P. W. Meherin, was the owner in 1931 of 333 shares of corporate stock of the Barrymore Concrete Mixer Co., hereinafter referred to as the Barrymore Co. There were six other stockholders. The Barrymore Co. owned a patent for a concrete mixer, which in prior years had been licensed to another corporation, the Barrymore Sales Corporation, hereinafter referred to as the Sales Corporation, under a royalty contract. The Sales Corporation was dissolved in 1929. The Barrymore Co. did not conduct any manufacturing or industrial operations of its own.
About 1927 or 1928 the Barrymore Co. organized a corporation known as Transit Mixers, Inc., and retained 51 percent of its common stock. It later acquired 240 shares of the company's preferred stock as a dividend on the common shares. Transit Mixers, Inc., engaged in manufacturing and selling concrete mixers of a different type from that manufactured under the Barrymore*881 Co.'s patent.
In April 1931 the Barrymore Co. sold all of its shares of Transit Mixers, Inc., common stock for $50,236.20 cash and debenture bonds of the Ransome Concrete Machinery Co. of a face value of $63,000. These bonds had a value at that time of about $22,000. The 240 shares of preferred stock of Transit Mixers, Inc., which were retained by the Barrymore Co. had a value of about $24,000.
The assets of the Barrymore Co. at the time of the above described sale consisted of the 1,512 shares of common and 240 shares of preferred stock of Transit Mixers, Inc., about $700 cash, and its original patent. It had no liabilities except its capital stock liability of $20,000.
On May 6, 1931, the Barrymore Co. declared a cash dividend of $46,000, out of which the petitioner, P. W. Meherin, received $7,659. On May 8, 1931, the company declared another cash dividend of $2,000. Its only other dividend prior to that time was a cash dividend of $15,900 in 1930. The bonds of the Ransome Concrete Machinery Co. and the preferred stock of Transit Mixers, Inc., were distributed to the stockholders of the Barrymore Co. in final liquidation in November 1931.
At the time of the cash*882 dividend distribution by the Barrymore Co. on May 6, 1931, no plans had been made to liquidate the company and the liquidation had not been discussed by the directors and stockholders. The dividend was not made in liquidation or partial liquidation of the company.
*477 OPINION.
SMITH: The principal issue in these proceedings is whether the salaries received by the petitioner, P. W. Meherin, in 1931 and 1932, and by the husband of petitioner Jamima Platt in 1932, are exempt from Federal income tax by reason of the constitutional limitations on the powers of the Federal Government to levy taxes on instrumentalities of the states. Primarily, our question here is whether the Board of State Harbor Commissioners of the State of California falls within that class of state instrumentalities which has been judicially recognized as lying beyond the taxing powers of the Federal Government. If this immunity from taxation exists, it necessarily extends to the compensation paid to the employees of the instrumentality. Collector v. Day,11 Wall. 113">11 Wall. 113; *883 Dobbins v. Commissioners of Erie County,16 Pet. 435; Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514.
We have had occasion to consider this question in substantially the same form as it is presented here in several prior cases. The most closely related of these, as to facts, is Peter G. Ten Eyck,29 B.T.A. 1113">29 B.T.A. 1113, in which we held that the Albany Port District Commission was engaged in performing a governmental function of the State of New York and that the salaries which it paid to its employees were immune from Federal income tax. On appeal to the Circuit Court of Appeals for the Second Circuit the Board's decision was affirmed in Commissioner v. Ten Eyck, 76 Fed.(2d) 515. In its opinion the court said:
* * * Subsection 15 of section 5, as amended by Laws 1929, c. 293, § 2 [Laws of New York], provided that "'facilities,' 'port facilities,' 'terminals,' and 'terminal work'" should include "wharves, docks, piers, terminals, railroad tracks on terminals, cold storage and refrigerating plants, warehouses, elevators, and such property real or personal," as would be used in connection therewith. The Commission*884 did not operate the grain elevator erected thereon but leased it, as it did a molasses mill. It did operate the railroad, and charged rates authorized by the Interstate Commerce Commission. But we think that this terminal was intended as an instrument of government rather than of commerce only. In providing it and operating it, the state of New York was engaged in a usual governmental function as distinguished from a proprietary function.
Montgomery B. Case,34 B.T.A. 1229">34 B.T.A. 1229, also involved facts similar to those in the instant proceedings. We there held, citing our earlier decisions in Leon S. Moisseiff,21 B.T.A. 515">21 B.T.A. 515, and Robert Carey,31 B.T.A. 839">31 B.T.A. 839, that the compensation of officers and employees of the Port of New York Authority was immune from Federal income tax. In our opinion we said:
We are bound, were the Circuit Court of Appeals has held, in affirmance of our own earlier decision, that the Port Authority and other organizations similarly engaged are performing a traditionally sovereign function, to apply *478 the doctrine and hold the pay of its employees to be exempt from Federal tax. *885 Commissioner v. Ten Eyck, supra;Leon Moisseiff, supra;Robert Carey, supra;Commissioner v. Harlan, supra, [80 Fed.(2d) 660]. That the Ten Eyck case is regarded by the court as a holding that port development is a traditionally sovereign function is fortified by its more recent opinion Brush v. Commissioner, Fed.(2d) (C.C.A., 2nd Cir., July 13, 1936).
In George H. Harlan,30 B.T.A. 804">30 B.T.A. 804; affirmed by the Circuit Court of Appeals for the Ninth Circuit in Commissioner v. Harlan, 80 Fed.(2d) 660, we held that immunity from Federal income tax extended to the compensation of an officer of the Golden Gate Bridge and Highway District of California. In its affirming opinion the court distinguished Helvering v. Powers,293 U.S. 214">293 U.S. 214, in which the Supreme Court held that in operating the Boston Elevated Railway Co. the State of Massachusetts was not exercising a "usual" governmental function and that the compensation paid to officers and employees so engaged was not immune from Federal income tax.
*886 In Helvering v. Powers, supra, it was said that the "immunity from federal taxation is a question which compels consideration of the nature of the activity." In United States v. California,297 U.S. 175">297 U.S. 175, the Court said:
* * * Hence we look to the activities in which the states have traditionally engaged as marking the boundary of the restriction upon the federal taxing power. * * *
The courts have held that the development and maintenance by a state of port and harbor facilities within its boundaries is a traditional and essential governmental activity. Commissioner v. Ten Eyck, supra;Commissioner v. Harlan, supra;Bush Terminal Co. v. City of New York,152 N.Y.Misc. 144; 273 N.Y.S. 331">273 N.Y.S. 331. The Supreme Court of California so ruled with respect to the Board of State Harbor Commissioners in Denning v. State,123 Cal. 316">123 Cal. 316; 55 Pac. 1000, where it said:
* * * The fact that the board is authorized or required to collect tolls and charges for dockage and wharfage to such extent "as will enable the commissioners to discharge the duties*887 required of them by the act" does not affect its character as a governmental agency. * * *
It is argued that some of the functions of the various units of the Harbor Commission partook of a business or proprietary character. This angle of the question also was discussed in Montgomery B. Case, supra, where we said:
Relying upon Commissioner v. Powers, 68 Fed.(2d) 634, the argument is made that the Port Authority is engaged in proprietary functions for profit with the effect of withdrawing sources of revenue from the Federal taxing power. This is said in respect of the rents from the Inland Terminal Building, more particularly the upper stories privately occupied; of the tolls from the bridges and tunnels; and of the destruction of private ferry competition. If these were independent profit-making ends in themselves, the argument *479 would be more engaging. But these several operations, even though the revenues produced are substantial, are but incidental to the great and comprehensive sovereign project of improving the port and terminal facilities of the port district. *888 Bush Terminal Co. v. City of New York,152 N.Y.Misc. 144. The Inland Terminal Building was not constructed to produce rent as a profit on investment, but to provide a more efficient terminal and thus expedite traffic and relieve highway congestion. The bridge and tunnel tolls and the reduction of traffic on the private ferries were incidental to the governmental project of providing highways to facilitate traffic and reduce port and harbor congestion in the common public interest. * * *
Further discussion of the question as presented on the facts here could add nothing to what has been said in the cases referred to above. At least until the courts have established a ruling at variance with those cases, the question is foreclosed to the Board.
We hold that the Board of State Harbor Commissioners of the State of California is an instrumentality of the state engaged in a governmental function and that the compensation paid to its officers and employees is immune from Federal income tax.
As to the remaining issue the question raised is whether the cash dividend distribution in the amount of $7,659 which the petitioner, P. W. Meherin, received from the Barrymore*889 Concrete Mixer Co. on May 6, 1931, was an ordinary dividend and therefore subject to credit against net income for the purpose of the normal tax, as contended by the petitioner, or was a liquidating dividend, as contended by the respondent.
The evidence clearly indicates, and we have found as a fact, that the dividend in question was not a liquidating dividend. In his brief the respondent states:
In view of the evidence adduced at the hearing the respondent does not desire to submit an argument in connection with the petitioners' second assignment of error.
We regard the statement made by the respondent in his brief as conceding that this is the import of the evidence of record. We are of the same opinion.
Judgments will be entered under Rule 50.