*1944 Compensation of petitioner under a construction contract with the State Hospital at Raleigh, N.C., is not exempt from tax.
*1387 The respondent determined deficiencies in income taxes and penalties as follows:
| Calendar year | Tax | Penalty |
| 1922 | $19,342.29 | $967.11 |
| 1923 | 100.77 | 25.20 |
*1388 While the petition alleges that the taxes for both years are in controversy, there is no issue raised as to 1923 nor as to the 5 per cent penalty asserted for 1922.
The deficiency in tax for 1922 is contested on two grounds. First, that income from trading is more than offset by net losses in 1921, and, second, that income received from the State of North Carolina is not subject to tax, petitioner claiming to be an employee of the State.
FINDINGS OF FACT.
The facts as to the alleged net loss were stipulated as follows:
In the returns filed for the years 1921 and 1922 the petitioner reported no profit or loss on stock and cotton transactions. Upon investigation it was disclosed that during the year*1945 1921 the petitioner suffered a loss on cotton and stock transactions amounting to $58,665.85, and proper allowance was made therefor in the determination of the income for that year. It was further disclosed by the revenue agent's investigation that during the year 1922 the petitioner derived a profit of $55,667.77 on similar transactions, which amount was included in income by the Commissioner.
The following facts relate to the income claimed to be exempt from taxation.
Petitioner is a licensed architect. About 1914 or 1915 he began the construction of buildings for owners on a cost-plus basis. On these construction jobs he furnished plans, labor, and materials.
On 1921 or prior thereto he performed some construction or remodeling work at the State Hospital at Raleigh, N.C., as a result of which petitioner became favorably known to the hospital building committee. In 1921 some new construction at the hospital was contemplated and the building committee advertised for bids. Petitioner's contact with the committee led him to believe that he would be awarded the contract because of his demonstrated ability on previous construction work and his expressed willingness to devote*1946 his entire time to the work, which other bidders did not agree to do. His bid was accepted and on July 14, 1921, a contract was entered into between petitioner, designated therein as the Contractor, and the State Hospital, designated as the Owner, the material parts of which were as follows:
WITNESSETH, that Whereas, the Owner desires and contemplates the construction, repairs, alterations, additions, and fire proofing of buildings as yet undetermined of a total estimated expenditure of approximately $600,000.00. Said work to be performed and constructed on the grounds of the State Hospital in the City of Raleigh, north Carolina, as hereinafter described, and in consideration of the mutual promises herein contained and of One Dollar ($1.00) by each party to the other in hand paid, the receipt whereof is acknowledged, it is agreed as follows:
*1389 ARTICLE 1. The Contractor agrees to provide all the labor and material and to do all things necessary for the proper construction and completion of the buildings, alterations, repairs and fire-proofing, in conformity with the plans and specifications prepared, and to be prepared by the Building Committee, H. A. Underwood, Engineer, *1947 said plans and specifications to be identified by the signature of the parties hereto and made part of this contract. If anything in the specifications is inconsistent with this agreement, the agreement shall govern.
ARTICLE 3. After the approval of the plans and specifications by the Owner, the Contractor shall obtain competitive bids for material, for labor and subcontracts from such responsible parties as are willing to make bids, and shall submit such bids to the Owner and Engineer and shall co-operate in securing good competition and the best prices obtainable for labor, material, and all subcontracts shall be subject to the approval of the Owner and Engineer and duplicates thereof filed with the Owner and,
ARTICLE 4. He covenants with the Owner to furnish his best skill and judgment and to co-operate with the Engineer in forwarding the interest of the Owner. He agrees to furnish efficient business administration and superintendence and to use every effort to keep upon the work at all times an adequate supply of competent workmen and materials, and to secure its execution in the best and soundest way and in the most expeditious and economical manner consistent with the*1948 interest of the Owner.
* * *
ARTICLE 6. The Contractor agrees to furnish all necessary plant machinery and equipment for use in and about the performance of said contract, and to bear all costs of depreciation, and interest, not including shovels, wheelbarrows, steel-cutters, cables, and such tools and plant accessories as are being constantly broken or worn out, but the cost of moving said equipment to and from the operation shall be charged to the cost of the building. All of this expense to be included in the Contractor's fee, except that for trucks which may be furnished by the Contractor, for which a charge of Twenty ($20,00) Dollars per day will be made by the Contractor for use of each three and one-half ton truck, same to cover expenses of depreciation, repairs, tires, interest, and all expense in the operation of said truck, except the driver, gasoline and oil, which expense will be charged against the cost of the building.
ARTICLE 7. In the consideration of the Contractor furnishing to the building operations his entire time and ability, also of construction machinery, equipment and small tools and the performance by said Contractor of all the covernants and conditions*1949 herein contained, the Owner agrees to pay to the Contractor the sum of FORTY THOUSAND DOLLARS ($40,000.00), based on the "cost of work" of $600,000.00.
The Contractor further agrees that for increases of $50,000.00 in the "cost of the work" he will accept as full compensation as described in the contract the additional lump sum fee of THREE THOUSAND DOLLARS ($3,000.00), as full compensation for such additional work. Payment on the fee to be made by the Owner to the Contractor monthly in proportion to the amount of work performed, less 15% retained, which with the remainder of the fee to be paid when the contract is completed and accepted.
ARTICLE 8. (a) The Contractor will include in his fee the salary for his services, the accounting and Contract Department at his Main Office, but the salary of his resident superintendent, auditor, foreman, clerk, etc., who may be located at the building for this contract, shall be included in the cost of the building. (b) The Contractor will not include in his fee the cost of preparation, delivery *1390 and removal of materials, tools and equipment: all expenditures for superintendence and payroll all expenditures for transportation*1950 and travelling expense of employees of the contractor for expediting the work under the contract; expense of temporary office supplies at the building; the cost of liability and compensation insurance. All perishable materials and supplies delivered to the building by the Contractor for temporary purposes shall be charged to the cost of the work, not exceeding standard market prices, subject to the approval of the Owner or his authorized agent. The lumber furnished shall be charged as part cost of the work. All lumber and other materials and supplies left over after completion shall be sold on the premises for the best price obtainable after five days notice in writing by the Contractor, and credited as a reduction in the cost of his fee.
ARTICLE 9. And cost due to the negligence of the Contractor or anyone directly employed by him either for the making good of defective work, disposal of material wrongly supplied, making good of damage to property, or excess costs for material or labor, or otherwise, shall be borne by the Contractor, and the Owner may withhold money due the Contractor to cover any such cost already paid by him as part of the cost of the work.
ARTICLE 10. *1951 (a) The Contractor and Owner especially agree that the Owner will provide funds at all times in sufficient amounts for the payment of all payrolls, bills for materials, and expenditures of the work included in this contract, and to provide funds for discounting all bills for materials and supplies of every kind for the benefit of the Owner as far as discounts may be obtained. All payments by the Owner to the Contractor under this contract (except payments on account of the Contractor's fee), shall be deposited in a special bank account established by the Contractor for this contract. The Contractor will furnish bond as required by the Building Committee to cover the handling of such funds and material.
ARTICLE 11. (a) The Contractor shall procure for the Owner and Contractor and deliver to the Owner, policies for bonds, workmens liability, public liability in such amounts as may be desirable at the Owner's option, and Owner's contingent liability insurance in the sum of TEN THOUSAND DOLLARS ($10,000.00) casualty insurance for each claim limit; the sum of Fifty Thousand Dollars ($50,000.00) Contractor's bond for construction; the sum of Twenty Five Thousand Dollars ($25,000.00) *1952 as Fidelity bond and the net premiums for the same shall be charged as part of the cost of the building. And the said Contractor hereby agrees to save and to hold harmless the said Owner of, from and against all suits, claims and demands based upon any alleged injury to persons which may occur or be alleged to have occurred by or on account of any act or omission on the part of said Contractor, the subcontractors or any of their servants or agents.
(b) The Owner agrees to carry fire and tornado insurance covering all materials, equipment, construction work, etc. in and around the building, protecting the parties hereto as their interest may appear. It is especially agreed that the Contractor shall not be held responsible or liable for any loss, damage, detention or delay caused by fire, cyclone, strikes, lockouts, civil or military authority, insurrection or riot, or other causes beyond the control of the Contractor.
* * *
ARTICLE 15. Time being the essence of this contract it is agreed that shall the contractor delay the completion of the work herein provided for beyond the time fixed herein, then the Owner is authorized to retain from the amount due the Contractor the*1953 sum of Fifty Dollars ($50.00) per day, time to be *1391 computed from the expiration of the 18 months until the final completion and acceptance of the work herein provided. This right to be exercised under the provisions of this contract, and the Engineer shall have the right to extend in writing the time for the completion of this contract for any of the causes mentioned in Article No. 11, Section B, and the judgment of the said Engineer as to extension of time for any cause enumerated in Article No. 11, Section B, shall be evidenced only by the written certificate of the Engineer.
IN WITNESS WHEREOF, the parties of these presents have hereto set their hands and seals, this 15th day of July, 1921.
(Signed) J. E. BEAMAN, Contractor.
STATE HOSPITAL, RALEIGH,
ALBERT ANDERSON, Supt.
Approved:
(Signed) JAMES S. MANNING,
Attorney General.
Approved: L. R. VARSER
Approved: BUILDING COMMITTEE,
(Signed) J. H. BRIDGERS, Chairman.
Attest:
(Signed) H. B. UNDERWOOD, Engineer.
After the execution of the above contract petitioner devoted his entire time to the construction work provide for therein. He gave up the office he then occupied and*1954 moved into a room connected with the building committee offices. His office staff, consisting of two people, a stenographer and an auditor, were carried on the pay roll which was met out of funds provided for the construction work. His construction equipment was used on the work without charge therefor, except his trucks, for the use of which he was paid out of construction funds. Petitioner engaged carpenters, bricklayers, and other workmen on a time basis and none were employed on salaries.
Petitioner attended all meetings of the building committee at which the proposed construction was discussed and plans agreed upon. At these meetings petitioner offered various suggestions, which, if found practical, were incorporated in the plans. Petitioner's duties included the securing of prices of materials and bids on subcontracts. The information he obtained was presented to the building committee, and the committee after agreeing on plans, costs, etc., authorized the petitioner to proceed with construction.
As the work progressed the building committee called on the State treasurer from time to time for funds to meet anticipated needs for 30-day periods. Such funds were deposited*1955 to petitioner's account and were paid out by him to meet bills submitted to and approved by the building committee.
Petitioner's compensation under the contract was paid to him in installments. When work to the extent of $50,000 or $75,000 was completed he would include a bill for his fee with other bills submitted to the building committee and upon approval by the committee *1392 he would issue a check payable to himself against the building fund that stood to his credit. The highest amount received by petitioner at any one time was $3,000. His total compensation amounted to $43,000, of which he received $16,000 in 1921 and $27,000 in 1922.
OPINION.
ARUNDELL: The parties stipulated the amount of the loss sustained by the petitioner in 1921 on cotton and stock transactions and the amount of profit realized in 1922 on similar transactions. No evidence whatsoever was offered to show that dealing in cotton and stocks was a trade or business of the petitioner regularly carried on by him. Such a showing is a necessary prerequisite to the allowance of a loss as a net loss under section 204 of the Revenue Act of 1921. The respondent is accordingly sustained on the first*1956 issue.
The second issue presents a question which has been before us many times. We have had a number of cases in which the facts were closely analogous in that architects, engineers, and contractors were engaged under contract to perform services for States or political subdivisions thereof, and municipalities. Architect cases: ; ; . Engineer cases: ; . Contractor cases: ; . In all of these cases it was held that the relation of the taxpayers to the State or municipality was that of independent contractor rather than that of officer or employee. The leading case on this subject is , in which the material facts appear in the following excerpts from the opinion:
All of the items of income were received by the taxpayers as compensation for their services as consulting engineers under contracts*1957 with states or municipalities, or water or sewage districts created by state statute. In each case the service was rendered in connection with a particular project for water supply or sewage disposal, and the compensation was paid in some instances on an annual basis, in others on a monthly or daily basis, and in still others on the basis of a gross sum for the whole service.
* * *
* * * They took no oath of office; they were free to accept any other concurrent employment; none of their engagements was for work of a permanent or continuous character; some were of brief duration and some from year to year, others for the duration of the particular work undertaken. Their duties were prescribed by their contracts and it does not appear to what extent, if at all, they were defined or prescribed by statute.
Petitioner seeks to distinguish his case from that of Metcalf & Eddy by showing that he gave his entire time to the work for the State. The amount of time devoted is only one of the several elements *1393 to be considered in determining the question involved in these cases, and it alone is not decisive of the question.
We are of the opinion that the present case*1958 falls within those above cited and that petitioner's compensation under his contract with the State hospital is not exempt from tax.
Decision will be entered for the respondent.