1931 BTA LEXIS 1524">*1524 Pursuant to statute, petitioner was appointed by the Superior Court of Massachusetts as auditor in certain proceedings therein pending. Held, that he was not an independent contractor, but was an officer or employee of the Commonwealth, or a political subdivision thereof, an instrumentality of the Commonwealth, engaged in administering or executing its governmental functions and that his compensation as such is exempt from Federal taxation.
24 B.T.A. 1239">*1239 This proceeding involves the redetermination of petitioner's income-tax liability for the year 1923, wherein respondent has asserted a deficiency of $723.71. It is alleged that respondent erred (a) in determining that an auditor appointed by a court under the 24 B.T.A. 1239">*1240 laws and practices of the Commonwealth of Massachusetts is not an officer of the Commonwealth or of a political subdivision thereof; (b) in determining that the compensation of an auditor appointed by a court under the laws and practices of Massachusetts is subject to taxation by the United States.
FINDINGS OF FACT.
Petitioner is a1931 BTA LEXIS 1524">*1525 resident of Brookline, Mass., an attorney at law and engaged in the practice of his profession, with offices in Boston. At various times between January and July, 1920, he was appointed by a judge of the Superior Court of Massachusetts, acting under the statutes of that Commonwealth, as auditor in 118 lawsuits, known locally as the "molasses cases." These suits were brought in Middlesex, Norfolk, and Suffolk Counties, for the purpose of recovering damages for death, personal injuries and injuries to property resulting from the collapse in Boston on January 15, 1919, of a huge steel tank used for storage of molasses. The suits, pending in the Superior Court, involved claims aggregating some $3,000,000 and, as each came successively at issue, it was referred by a judge of said court to petitioner as auditor. Petitioner's appointments were separate in each case and were made by a written order known as a "rule," one of which is as follows:
COMMONWEALTH OF MASSACHUSETTS SUPERIOR COURT
RULE TO AUDITOR
July Sitting, A.D. 1920.
SUFFOLK, SS.
City of Boston vs. U.S. Industrial Alcohol Co.
And now it is ordered by the court that Hugh W. Ogden, Esquire, be, and he hereby1931 BTA LEXIS 1524">*1526 is, appointed auditor in the above-mentioned action, to hear the parties, to examine their vouchers and evidence, to state the accounts (this case to be tried with all companion cases, arising out of the same accident), and file his report thereof to the court in each case within thirty days after the final hearing unless within such thirty days further time is granted by the court. Hearings before said auditor shall be begun on the twenty-seventh day of July, 1920, and close on or before the first day of October, 1920, unless the court shall for cause shown extend the time for the completion of the hearings.
The said auditor shall give seven days' notice of the first hearing to the parties. Unless the auditor shall otherwise direct the hearings shall be held at the court house.
At the time and place appointed for the first hearing, if either party does not appear or show good cause for not appearing, the auditor shall proceed ex parte. Thereafter, if at any hearing any party fails to appear, without good cause shown, the auditor shall proceed ex parte on motion of the party appearing.
24 B.T.A. 1239">*1241 The auditor may adjourn the hearings from time to time, but no adjournment1931 BTA LEXIS 1524">*1527 except by consent of both parties shall be for a longer period than fourteen days, except upon order of the court, which order shall fix the date to which the adjournment shall be taken.
On filing his report the auditor shall notify the parties of that fact and shall furnish counsel on each side with a copy.
If during the progress of said trial it becomes necessary for any further orders by the court, the auditor shall report to the court what action, if any, he deems necessary, and the court will make such further orders as the case may require.
The auditor shall take up the cases in their numerical order with the understanding that cases of a higher numerical order may be tried with cases reached in their numerical order, by consent of parties.
[Signed] FRANCIS A. CAMPBELL, Clerk.
EDMUND S. PHINNEY, Asst. Clerk.
July 27, 1920.
Copy. Attest:
By virtue of these orders petitioner, occupying the bench, started holding hearings August 10, 1920, in one of the court rooms in Suffolk County CourtHouse. His duties were to hear the parties, swear the witnesses, rule on all questions of evidence, and questions of law which were presented to him, keep order and1931 BTA LEXIS 1524">*1528 decorum in the court room, and decide controverted questions of fact. After the evidence was completed arguments were made before him and briefs filed. He then examined the testimony in the cases which covered 20,672 pages and the arguments covering 4,614 pages. He was required to prepare and file a report to the court on each of the 118 cases. In making his report the auditor determines the question of liability, fixes the amount of damages, and sets forth his decision on these matters. The petitioner's determination of liability was the same in each of the 118 cases, but his award of damages differed in each case. The length of the reports varied from a few pages to as much as 200 pages. By April 29, 1921, petitioner had held 82 sessions amounting to 55 days of 6 hours each (6 hours constitutes a day for an auditor in Massachusetts). Between June 9, 1921, and April 28, 1922, he held 57 sessions amounting to 44.6 days. From May 8, 1922, to April 30, 1923, he held 136 sessions amounting to 78 full days. Owing to the fact that more than 30 members of the local bar were engaged in these hearings before petitioner, the regular trial lists were blocked and, therefore, on February 2, 1923, the1931 BTA LEXIS 1524">*1529 court directed petitioner to sit continuously, which he did from February 5, 1923, until September 29, 1923, frequently holding his hearings for as long as 10 hours a day, and completed the evidence on the latter date. Thereafter, he undertook the preparation of his reports in these cases. On December 16, 1924, petitioner was ordered by the court to file reports in all cases on or before January 24 B.T.A. 1239">*1242 5, 1925. By working continuously, including Saturdays, sundays, and holidays, he complied with the order except in three of the cases and filed these three reports later by leave of the court. Some of the cases were reopened and additional evidence offered and arguments heard on them. All stenographic services in these cases were paid for by the counties. None of petitioner's employees rendered any services in these matters.
The damages awarded by petitioner as auditor in these cases amounted to approximately half a million dollars. The court denied a motion by the losing parties to recommit the reports and the damages were paid substantially on the basis found by petitioner.
During 1923, and until the completion of his report in January, 1925, petitioner's duties1931 BTA LEXIS 1524">*1530 as auditor took up substantially all of his ordinary working hours. By special permission of the court he was allowed to try one case in the Federal court in Philadelphia in April and one in the Supreme Court of Massachusetts in May and was permitted to attend his Army division reunion for three days in July. Owing to the technical nature of the testimony, these "molasses cases" required a great deal of time. They involved disputes between scientists of the highest ability and standing on such questions as the strength of steel, the bursting power of gases, the results of hydraulic pressure, and other scientific questions.
When not occupied with his duties as auditor, petitioner was free to use his time as he pleased and during the period engaged by these cases he maintained his private law office and took care of his practice as best he could. He employed a secretary and a young assistant and his net income from his private practice during the year 1923, exclusive of amounts received in liquidation of his interest in a partnership of which he had been a member, was $31,461.80.
Petitioner took no oath of office as auditor and there was none prescribed by the statute under1931 BTA LEXIS 1524">*1531 which he was appointed.
Petitioner's compensation for his services as auditor was paid by the counties in which the suits arose. It was first fixed by the chief justice of the Superior Court at the rate of $50 per diem. Subsequently, the chief justice issued an order fixing his compensation at $75 per diem and he was finally paid at that rate for all his time devoted to these cases. During 1923 he received $3,900, which was the amount paid to him in that year and not the amount earned.
This compensation he did not report in his income-tax return for the year 1923. Respondent has now included it in petitioner's income for that year, contending it is not exempt from Federal taxation, for the reason that petitioner was not an officer or employee of the Commonwealth of Massachusetts, or a political subdivision thereof.
24 B.T.A. 1239">*1243 OPINION.
GOODRICH: In view of the many cases heretofore decided by this Board and the courts involving the taxability by the Federal Government of compensation received by an individual from a State or a political subdivision thereof, it is deemed unnecessary to include herein either an extensive review of the problem or an extensive discussion1931 BTA LEXIS 1524">*1532 of the decisions. The principles are well established. It is clear that the exemption from taxation, retroactively afforded by section 1211 of the Revenue Act of 1926, is not available to petitioner and that the sum of $3,900, received by him in 1923 from the counties of Norfolk, Middlesex, and Suffolk as compensation for his services rendered as auditor in lawsuits arising in said counties, is to be included in the computation of his gross income for purposes of taxation under the provisions of section 213(a) of the Revenue Act of 1921, unless while rendering said services he was an officer or employee of the Commonwealth of Massachusetts, or a political subdivision thereof, engaged as an instrumentality or agent of the Government in administering or executing Governmental functions of the Commonwealth, or, if an independent contractor, unless it further appears that a Federal tax upon his compensation substantially impairs his ability to discharge his duties and obligations to the Commonwealth, or the ability of the Commonwealth, or its subdivisions, to procure the services of private individuals to aid them in their undertakings. 1931 BTA LEXIS 1524">*1533 Collector v. Day,11 Wall. 133; Auffnorat v. Hedden,137 U.S. 310">137 U.S. 310; United States v. Weitzel,246 U.S. 533">246 U.S. 533; Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514; Lucas v. Howard,280 U.S. 526">280 U.S. 526; Lucas v. Reed,281 U.S. 699">281 U.S. 699; Miller v. McCaughn, 27 Fed.(2d) 128; Blair v. Matthews, 29 Fed.(2d) 892; Blair v. Byers, 35 Fed.(2d) 326; Burnet v. Livezey, 48 Fed.(2d) 159; Elam v. Commissioner, 45 Fed.(2d) 337.
Our task, then, in deciding the case at bar, is to determine whether petitioner, in relation to the Commonwealth, or the aforementioned counties thereof, in his capacity of auditor of the Superior Court, was an officer, an employee, or an independent contractor; whether he was engaged, as an instrumentality of government, in performing proper governmental duties; and, if we hold him to be an independent contractor, what impairment, if any, would result from levying a tax upon his compensation.
Upon consideration, we conclude that petitioner was not an independent contractor. 1931 BTA LEXIS 1524">*1534 Under the Massachusetts practice the position of "auditor" in law is analogous to that of "master" in chancery. The position is created by statute (General Laws of Massachusetts, ch. 221, entitled "Clerks, Attorneys, and other officers of Judicial Courts" in section 56 et seq., under the title, "Masters, Auditors, 24 B.T.A. 1239">*1244 Referees, Assessors, etc.," 1) which also outlines the duties, and authorizes the appointing court to fix the compensation which is to be paid by the county. Cf. Miller v. McCaughn, supra.In his capacity as auditor, petitioner was not performing the ordinary duties of a lawyer, nor did he merely take on another client. He was not giving advice, nor engaging in trial as counsel, nor otherwise rendering the legal services customary from attorney to client. Cf. 281 U.S. 699">Lucas v. Reed, supra;280 U.S. 526">Lucas v. Howard, supra;Blair v. Byers, supra.True, he took no oath, but none was prescribed by statute, and the mere absence of an oath does not of itself make him an independent contractor. True 24 B.T.A. 1239">*1245 also, his appointment as auditor was for an indefinite period, but that matter was1931 BTA LEXIS 1524">*1535 within the discretion of the appointing court. It is conceivable that by means of successive appointments he could occupy the position for the rest of his life, although, on the other hand, he might have it for but a few days. The fact that his tenure was indeterminate in time does not of itself make him an independent contractor. Cf. Frederick A. Brown,22 B.T.A. 581">22 B.T.A. 581, 246 U.S. 533">United States v. Weitzel, supra.As auditor, petitioner was an arm of the court, acting as a judge of fact, with power to swear witnesses, take testimony, and consider the evidence, making therefrom findings of law and fact. The position, created by law and permanent, was designed to lighten the burden of the courts and promote the administration of justice within the Commonwealth. It is recognized as a part of the judicial system of Massachusetts. Petitioner's duties as auditor were to be performed as required by the statutes and the practice, and subject to the control of the appointing court. The manner and time of performance were not left solely to his discretion; on the contrary, he was controlled, not only as to what he should do, but as to when and how he should do1931 BTA LEXIS 1524">*1536 it. Cf. Kriepke v. Commissioner, 32 Fed.(2d) 594; Burnet v. McDonough, 46 Fed.(2d) 944; Mesce v. United States,64 Ct.Cls. 481; certiorari denied, 278 U.S. 612">278 U.S. 612. While he was free to seek outside employment during the time he served as auditor, and did so, yet he was, in his official capacity, always under the control of the appointing court, which supervised his activities and from time to time directed him in the performance of his duties. Under these circumstances we think the fact that he engaged in some professional activity outside his official duties does not of itself make him an independent contractor. Cf. Burnet v. Livezey, supra;United States v. Butler, 49 Fed.(2d) 252; Mescc v. United States, supra.His compensation, while not fixed in amount by statute, was not a matter of agreement, but the determination thereof lay exclusively within the discretion of the appointing court, and it was paid by the counties in which the cases arose, as were all expenses incident to these cases incurred by petitioner. Cf. 1931 BTA LEXIS 1524">*1537 Miller v. McCaughn, supra.We conclude therefore that petitioner, while engaged in his duties as auditor of the Superior Court, was not an independent contractor in his relation to the Commonwealth of Massachusetts or its subdivisions. 14 R.C.L. 67. We believe it unnecessary here to decide whether his status is that of an officer or that of an employee of the Commonwealth within the meaning of the statute. Cf. 269 U.S. 514">Metcalf & Eddy v. Mitchell, supra;137 U.S. 310">Auffnorat v. Hedden, supra;United States v. Hartwell,6 Wall. 385; Haight v. Commissioner,14 B.T.A. 844">14 B.T.A. 844; affd., 52 Fed.(2d) 779.
1931 BTA LEXIS 1524">*1538 24 B.T.A. 1239">*1246 And we think it clear that petitioner, in his official capacity, was an instrumentality or agent of the government, administering or executing governmental functions. His services were judicial in their nature and rendered to the judicial department of the government in the administration of justice. There is no question but that this instrumentality is one through which the State government exercises its sovereign powers; such a necessary function of government as to fall within the established exemption from Federal taxation. Cf. 269 U.S. 514">Metcalf & Eddy v. Mitchell, supra;Flint v. Stone Tracy Co.,220 U.S. 107">220 U.S. 107; Blair v. Matthews, supra.
Reviewed by the Board.
Judgment will be entered under Rule 50.
LANSDON and SMITH dissent.
Footnotes
1. MASTERS, AUDITORS, REFEREES, ASSESSORS, ETC.
SEC. 56. When a civil action is at issue, the supreme judicial or superior court, in its discretion, and a district court, if both parties assent thereto in writing, may appoint one or more auditors to hear the parties, examine their vouchers and evidence, state accounts and report upon such matters therein as may be ordered by the court. The auditor's findings of fact shall be prima facie evidence upon such matters only as are embraced in the order; but the court at the trial shall exclude any finding of fact which appears in the report to be based upon an erroneous opinion of law, or upon inadmissible evidence. Whenever the auditor makes a ruling as to the admissibility of evidence and objection is taken thereto he shall, if requested so to do, make a statement of such ruling in his report. The auditor shall not make any finding of fact which depends upon the decision of a question of law, unless he makes alternative findings or states in his report the view of the law upon which his finding depends, together with such subsidiary facts as will enable the court to pass upon the question.
SEC. 57. After any account of an executor, administrator, guardian, conservator, trustee, or other person required by law to render an account in the probate court has been filed therein, the judge of said court may, before approving it, appoint one or more auditors to hear the parties, examine vouchers and evidence and report upon the same to the court. The report shall be prima facie evidence upon such matters as are expressly referred to such auditors.
SEC. 58. Auditors shall give notice to the parties of the time and place appointed for their meeting, and may adjourn from time to time as may be necessary. If there is more than one auditor, all shall meet and hear the cause, but a report may be made by a majority. If either party neglects to appear at the time appointed for such hearing, or at any adjournment thereof, without just cause, or if at any such hearing either party refuses to produce in good faith the testimony relied on by him, the auditors may close the hearings and make a report recommending that judgment be entered for the adverse party. Judgment shall be entered accordingly at the first judgment day after the expiration of ten days from the filing of the report, unless the court, for cause shown, otherwise orders.
SEC. 59. The court may for cause discharge the auditors and appoint others and may recommit the report for revision or further examination to the same or to other auditors.
SEC. 60. The court in which a cause is pending may, upon application of either party, appoint a day certain for the hearing thereof before the auditor. The hearing shall be had upon the day appointed, and shall proceed, unless the parties otherwise agree or the auditor otherwise orders, from day to day until the conclusion thereof.
SEC. 61. The court shall award reasonable compensation and allow actual expenses of travel in attending hearings, if said expenses be approved by the court as reasonable, to auditors, and the same shall be paid by the county if they are appointed by the supreme judicial court, the superior court or the probate court. If they are appointed by any other court, the compensation awarded and expenses of travel allowed may be paid by either party and taxed in his bill of costs if he prevails; but the plaintiff shall be liable for such payment, and the court may make all orders and decrees, and issue process to enforce the same. No allowance for the expenses of travel shall be allowed by the court, unless the auditor shall file a true and correct account of such expenses, signed and sworn to by him.
SEC. 62. Auditors, masters in chancery, and special masters shall file their final report in the office of the clerk of the court by which they are appointed within ninety days after the hearing before them has been closed or within such time as the court may allow, and, in default thereof, shall not be entitled to any fees. ↩