*1423 Income received by petitioner from school districts in the State of Washington for transporting school children is not exempt from Federal income tax.
*1106 In these proceedings the respondent determined deficiencies in income tax for the years and in the amounts as follows:
| Docket No. | Year | Amount |
| 62384 | 1929 | $152.69 |
| 68633 | 1930 | 265.64 |
| 72387 | 1931 | 493.82 |
There are two issues for each year - a claim of exemption from tax on income received from school districts, and depreciation on busses used in rendering services for the school districts. Alleged erroneous disallowance of depreciation of a bus used in earning taxable income for the year 1931 is conceded by the respondent.
FINDINGS OF FACT.
Petitioner, a Washington corporation, is engaged in operating a bus transportation system in territory adjacent to Seattle. In the years before us it used some of its busses in transporting children to and from public schools in Snohomish and King Counties. These services were performed pursuant to bids made by petitioner*1424 to boards of directors of the school districts, and acceptance thereof by such boards. No formal contracts were entered into, except in the case of school district No. 15 of Snohomish County for the year 1931. In that one case petitioner and the school district entered into a lease agreement whereby petitioner leased certain of its busses to the school district for a specified annual sum. The purpose of this arrangement was to permit the operation of the busses under so-called "exempt licenses" which the school district could obtain for $1 each. Licenses secured by petitioner cost it about $150 per bus. As a result of the saving thus effected the petitioner reduced the price it charged the school district for transportation of school children.
In some districts busses were provided for the exclusive use of school children; in others the children were carried in busses operated *1107 for public transportation. Drivers of busses were employees of petitioner, but they were required to observe certain general rules issued by the public school authorities for the safety and welfare of the children. In one district where there had formerly been ten schools, six were abandoned*1425 following the inauguration of transportation service.
Under petitioner's agreements with some school districts it received a flat sum monthly for transportation services rendered. In other cases school authorities requisitioned commutation tickets from petitioner and distributed them to the children entitled to use them. In all cases the money received by petitioner from the school districts for transportation of school children came from public school funds.
OPINION.
ARUNDELL: Petitioner's thesis is that the operation of the public schools is an essential governmental function and that the transportation of the pupils to and from school is a necessary incident thereto, citing ; ; and . Thus it is urged that petitioner is engaged in carrying on an essential governmental function by reason of its agreements with Snohomish and King Counties, Washington, to transport children to and from school, and the income derived from this source it is claimed is immune from Federal Taxation under the principles of law*1426 underlying our dual system of government, which prohibits the interference, by taxation or otherwise, of one government with the means, instrumentalities, and agencies of the other in the performance of its essential governmental functions.
The fundamental considerations underlying this subject have been so exhaustively considered by the Supreme Court of the United States, as well as by the other courts of the land and this Board, that it is believed little purpose would served to again go over the ground in detail. The principle is well understood, but it is in determining the extent of its limits that there is difficulty.
As suggested in , there is hardly a step that either the Federal Government or the states take that it is believed little purpose would be served to again go over the other. For example, the Federal Government may so occupy a field of taxation that in a highly practical way the states are excluded, but that may not be regarded as such a direct interference as will make unconstitutional the levy.
The facts in the instant, case, as recited in our findings, so nearly fit the facts as they appear*1427 in ,*1108 that we have no doubt that our decision must be controlled by that case. We quote briefly from the Court:
* * * any taxation by one government of the salary of an officer of the other, or the public securities of the other, or an agency created and controlled by the other, exclusively to enable it to perform a governmental function (Gillespie v.Oklahoma, supra), is prohibited. But here the tax is imposed on the income of one who is neither an officer nor an employee of government and whose only relation to it is that of contract, under which there is an obligation to furnish service, for practical purposes not unlike a contract to sell and deliver a commodity. In such a situation it cannot be said that the tax is imposed upon an agency of government in any technical sense, and the tax itself cannot be deemed to be an interference with government, or an impairment of the efficiency of its agencies in any substantial way. * * *
* * *
But we do decide that one who is not an officer or employee of a state, does not establish exemption from federal income tax merely by showing that his income was*1428 received as compensation for services rendered under a contract with the state; and when we take the next step necessary to a complete disposition of the question, and inquire into the effect of the particular tax, on the functioning of the state government, we do not find that it impairs in any substantial manner the ability of plaintiffs in error to discharge their obligations to the state or the ability of a state or its subdivision to procure the services of private individuals to aid them in their undertakings.
The services rendered by petitioner are those of a private contractor; it is neither an officer nor an employee of the State of Washington or any of its political subdivisions; it has neither attempted to show nor does it claim that to tax it would in any manner interfere with or impair its ability to discharge its obligation to the school districts or the ability of the school districts to procure the services of private individuals to transport the children back and forth between the schools and their homes.
We regard as of no significance in deciding the issue before us the fact that in the year 1931 certain of the petitioner's busses were leased by the school*1429 districts to avoid payment of a state automobile license. The busses were still owned and operated by petitioner.
As the income received by the petitioner from the school districts of Snohomish and King Counties, Washington, is properly subject to income tax, it follows petitioner is entitled to deductions for ordinary and necessary expenses and depreciation of its busses. The parties are in agreement upon the amount of permissible deductions, except depreciation. No evidence was offered on the question of depreciation; consequently, the respondent's determination, allowing only part of the amount claimed, must be sustained.
Decision will be entered under Rule 50.