*560 1. Petitioner, employed by the Board of Transportation of New York City as its chief engineer, was engaged principally in planning and supervising the construction of the subway system of the city. Held that the activities of the board were proprietary, rather than governmental and that the compensation received by the petitioner was not exempt from the Federal income tax.
2. Petitioner was paid for services rendered to a board of the city of Chicago under a contract specifying, in a general way, his duties as a consulting engineer and his compensation. Held that he was an independent contractor and that the compensation received by him was not exempt from the Federal income tax.
3. Deduction for loss on Kreuger & Toll American certificates allowed for taxable year 1932, the securities having become worthless during that year.
*122 This case involves deficiencies in income tax for the years 1931 and 1932 in the respective amounts of $3,611.42 and $2,420.62. Respondent included in petitioner's gross income for said years compensation*561 received by him from the cities of New York and Chicago aggregating $50,078.75. Of this amount $18,945.40 was received by petitioner in 1931 and $16,666.60 in 1932, as salary for services rendered as chief engineer of the Board of Transportation of New York City. The balance, or $14,466.75, was received by him from the city of Chicago for services rendered as a consulting engineer for the Committee on Local Improvements of that city.
Petitioner, since filing his original petition herein, paid under protest the entire amount of the deficiencies. He now seeks a redetermination of such deficiencies and also a finding that he is entitled to deduct from his gross income in 1932, $2,040.15 of an investment of $2,399.63 in Kreuger & Toll American certificates. *123 Epitomized, his contentions are: (1) That the compensation received by him from the cities is exempt as he was an officer or employee of political subdivisions of the states engaged in essential governmental functions; and (2) that his investment in the Kreuger & Toll certificates became worthless and was charged off during the taxable year.
The essential facts are shown in our findings of fact.
FINDINGS OF*562 FACT.
New York Employment.
The petitioner is a civil engineer by profession and was in the continuous employ of New York City in some engineering capacity from 1884 to 1933, when he retired. His services were mainly with such boards or departments of the city as had control or supervision over transit and transportation matters. In 1921 he became chief engineer of the Transit Commission, and when this was superseded by the Board of Transportation he became chief engineer of the latter body and so continued until his retirement in 1933.
The Board of Transportation was created by the Legislature of the State of New York under laws enacted in 1891 providing for rapid transit railways, and Laws 1924, chapter 573, with various amendments up to 1932, providing for the Board of Transportation.
The functions of the Board of Transportation and its predecessor, the Transit Commission, consisted chiefly in planning and providing for rapid transit facilities for New York City, its inhabitants and visitors by the construction of subway systems, vehicular tunnels, and supervision over proposed new surface bus lines. It was empowered to construct, to have constructed by others, *563 and to lease or operate its own subway systems.
The present system of subways in New York City is the growth of many years. It has been the policy of the city to construct and own the subways and lease them to operating companies. Three extensive systems have been constructed by the city and are now in operation. One system, known as the I.R.T., is operated by the Interborough Rapid Transit Co., a private corporation, under a lease from the city. The system known as the B.M.T. is operated by the New York Rapid Transit Corporation, a private corporation, under a lease from the city. The system known as the Independent Subway System was constructed by the city and is operated by it through its Board of Transportation. The latter was the last constructed, was under construction during the taxable years and was opened for traffic on September 10, 1932. These subways are for the transportation of people for a nominal fare, from one section of the city, or its suburbs, to another. They are relied upon and used *124 for transportation by the 7,000,000 population of the city and its environs as well as the 500,000 commuters, who come into the city daily.
As chief engineer*564 of the Board of Transportation, the duties of the petitioner were quite similar to those of a chief engineer of any public utility, viz., general supervision of plans, designing, and laying out routes for subways; designing buildings, cars, and subway structures, making estimates as to costs and proposing financial set-ups; drafting and letting of contracts for construction of subways and supervising such construction. Petitioner took an oath of office and was paid at the rate of $20,000 per year. He devoted all of his time to his duties under the Board of Transportation, except when, by its permission he was engaged for short periods of time in special work for the United States and the city of Chicago. For such time as he was absent his salary was reduced proportionately, and he actually received from the city of New York compensation of the amount of $18,945.40 in 1931 and $16,666.60 in 1932. These amounts were not included by him as income in his income tax returns for said years.
Petitioner at all times was subject to the orders and control of the Board of Transportation. He did not maintain a personal business office and had no other business. The funds for the construction*565 of the various subways, and particularly for the construction of the Independent System, were furnished by the city from the general tax levy, or from bonds or city stocks, which were in turn taken up from the tax levy. When the Independent Subway System was finished in 1932 efforts were made by the board to lease it to a private operating company, but these efforts were unsuccessful and its operation was undertaken by the city through the Board of Transportation and has continued since.
The Board of Transportation consists of three members appointed by the mayor pursuant to the statutes of New York State. It had three principal departments, viz., engineering department, legal department, and real estate department. After its failure to lease the Independent System in 1932 an operating division or department was organized by and in the Board of Transportation for the operation of this system. It was headed by a superintendent of operations, with necessary assistants in charge of power, maintenance of way, cars, structures, shops, yards, etc., and a force of motormen, conductors, and such other employees as were necessary in its operation. It had its own engineering section. *566 The operating division had a force of 3,381 employees with an annual pay roll of $5,370,703, which was paid from the receipts of the operation of the Independent System. The other departments of the Board of Transportation, including petitioner and the engineering department had 936 employees *125 with an annual pay roll of $2,403,307, which was paid from city taxes. The petitioner had nothing to do with the operating department, but was in charge as chief engineer of the construction of the Independent System from 1924 to 1933, and of additions and improvements on the I.R.T. and B.M.T. lines. During this period the board spent for construction, salaries, and overhead $752,866,814 of which $679,000,000 was spent on the Independent System and $71,000,000 on extensions and improvements on the I.R.T. and B.M.T. systems.
Petitioner was an employee of New York City, but was not engaged in an essential governmental function.
Chicago Employment.
In 1930 the petitioner was given permission by the New York Board of Transportation to devote a portion of his time, efforts, and skill, as a consulting engineer, to a board of local improvements and to a committee of the City*567 Council of Chicago known as a Committee on Local Improvements. Chicago at that time was planning and designing municipal improvements in connection with transportation which included proposed subways, an underground street for pedestrians, and extension and consolidation of its elevated roads, which were privately owned and operated.
The special counsel of the committee prepared, on behalf of the committee or board, a contract or agreement fixing petitioner's rate of pay and outlining in a general way his duties. This contract with the board was signed by petitioner prior to taking up his duties as a consulting engineer. The contract provided for monthly payments to be made to petitioner at the rate of $2,500 per month, irrespective of the number of days he worked or was on duty in Chicago. He was paid by check of the comptroller of Chicago but the evidence does not show out of what fund payment was made. Petitioner, however, stated that he thought "it was the so-called Rapid Transit Fund which had accumulated from receipts received from the surface lines." The contract was for no definite period of time and could be terminated at any time by the board or committee upon giving*568 petitioner 20 days notice. Petitioner's services under this contract terminated about the middle of 1931.
Petitioner took an oath before entering on his Chicago duties but he was not under the civil service system of Chicago or Illinois. His duties were those of a consulting engineer, giving advice, submitting and passing on plans relative to the city's proposed unification of transit facilities, its proposed subways, construction of an underground street, and for a company to operate the subway, which would belong to the city.
*126 Petitioner received from the city of Chicago during the year 1931 $15,000. It was his custom to travel back and forth between New York and Chicago, usually spending several days in Chicago at a time and his traveling expenses during the year amounted to $533.25. In his Federal income tax return for the year 1931 he did not include any portion of the amount received by him from the city of Chicago. The respondent, in determining the deficiency, included the entire amount less traveling expenses, or $14,466.75.
Petitioner was not an employee of the city of Chicago but was an independent contractor.
Kreuger & Toll Certificates.
*569 The Kreuger & Toll Co. was a Swedish match company, which engaged in extensive commercial and financial transactions in this country. It issued in Sweden participation debentures of the par value of 20 kronor each. They represented in part a loan and in part an interest in profits. In the event of liquidation of the issuing company, they were to be redeemed out of the assets of the company before any distribution of assets should be made to shareholders, but after all other debts of the company had been paid. Certain of these debentures were deposited in this country with Lee, Higginson Trust Co., as depositary, under a deposit agreement dated the 1st day of September 1928. It issued and sold certificates known as "American Certificates", each American certificate representing 20 Swedish crowns par value of the participating debentures.
In 1929 petitioner purchased sixty-seven of the "American Certificates" of the aggregate par value of $359.48, for which he paid $2,399.63. A final adjudication of the bankruptcy of the Kreuger & Toll Co. was rendered on August 6, 1932, following the filing of a petition on June 4, 1932. The Lee, Higginson Trust Co. filed blanket proof of*570 claim on behalf of the holders of the "American Certificates", but petitioner has never received any part of the sum invested by him in such certificates.
Petitioner learned of the bankruptcy of the Kreuger & Toll Co. in 1932 through newspaper reports and conversations with friends, whereupon he consulted with the brokers through whom his purchases had been made. In that year he concluded that his certificates were worthless, and charged them off as a loss in a memorandum book which he kept, and which was his only method of bookkeeping. Through oversight or inadvertence he failed to claim any loss in his Federal income tax return for the year 1932.
Petitioner, in making his return for 1934, followed the advice of the accountant who prepared his return and deducted the par value of his certificates, or $359.48, from his gross income for that year. *127 The balance of his investment in such certificates, or $2,040.15, has never been deducted by, or allowed to petitioner in his Federal income tax returns, either as a loss or a bad debt.
The Kreuger & Toll American certificates were worthless in 1932.
OPINION.
*571 MELLOTT: Petitioner contends that the compensation received by him from the cities of New York and Chicago is exempt from the Federal income tax, under the well settled rule, often enunciated by the courts and applied by this board, that the Federal Government may not interfere with the exercise of essential governmental functions of the states through taxing the instrumentalities or agencies by which their traditional acts of sovereignty are exercised. McCulloch v. Maryland,4 Wheat. 316">4 Wheat. 316; Collector v. Day,11 Wall. 113">11 Wall. 113; Pollock v. Farmers' Loan & Trust Co.,157 U.S. 429">157 U.S. 429; Ambrosini v. United States,187 U.S. 1">187 U.S. 1; Flint v. Stone-Tracy Co.,220 U.S. 107">220 U.S. 107; Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514; and Helvering v. Powers,293 U.S. 214">293 U.S. 214.
It is earnestly argued that the Board of Transportation of New York City, in planning, constructing, and operating its subways, was engaged in a governmental, rather than a proprietary, activity, because of the "peculiar conditions" existing in that city. Some of the conditions referred to are the immense population*572 and congestion, restricted physical facilities, magnitude of the task and inability to induce private capital to undertake it. It is said that the "exigencies of the situation created by the immensity of the task * * * actually forced" the city to undertake it. Upon brief it is stated:
It certainly was not a desire to go into the transportation business; or any expectation of earning the ordinary expense of maintaining a transportation system, to say nothing of profits; nor was it a grand gesture. It was caused by primary and pressing concerns of health, safety, and the well-being of its citizens; the relocation of industries out of joint with and retarding the development or destroying the value of neighborhoods and properties; the shifting of population to avoid intolerable housing and living conditions inimical to the welfare of the City from any governmental angle; the proper planning and development of the City as a whole; the articulation of the immense masses of traveling and working population and to give to the poor sections of the City, the same type of transportation and at the same rate furnished to the more favorable portions of the City. These are governmental*573 functions and duties which a government necessarily owes to its citizens.
Petitioner also contends that inasmuch as he had nothing whatever to do with the operation of the subways, he can not be said to have been engaged in a business of a proprietary nature. He claims that the engineering department was entirely separate and apart from the operating department, and that, while the latter may have been a business activity, the construction of the subways under his *128 supervision was a governmental function. The distinction made by petitioner between the construction of a subway and its operation is not sound. Both are part of the same activity, viz., providing rapid transit for New York City; and both were performed by the city acting through the same agency, the Board of Transportation.
The powers of a municipal corporation are divided into two parts, one governmental, in the exercise of which it represents the sovereign or state; and the other proprietary. Harris v. District of Columbia,256 U.S. 650">256 U.S. 650. The question as to which capacity New York City was acting in when it constructed and operated its subways was directly before the Court of Appeals*574 of New York in In re Board of Rapid Transit Commissioners,197 N.Y. 81">197 N.Y. 81; 90 N.E. 456">90 N.E. 456. The issue was whether the city was liable in damages resulting from the construction and operation of its subways. In holding that it was, the court said in part:
Was the action of the city in building the subway governmental or proprietary in character? The city owns the subway, and it is a railroad corporation so far as the construction, operation, and leasing thereof is concerned. It was not required but simply permitted, to build and operate the road. It is authorized to lease its railroad, either for "a specified sum of money or a specified proportion of income, earnings or profits," or it may operate the road itself, and charge such rates of fare for the transportation of persons and property as may be fixed by its own boards and officers. Laws 1909, c. 498, Sections 27 and 30. In other words, the subway is a business enterprise of the city, through which money may be made or lost, the same as if it were owned by an ordinary railroad corporation. It was built by and belongs to the city as a proprietor, not as a sovereign. *575 MaxMilian v. Mayor, etc., of New York,62 N.Y. 160">62 N.Y. 160, 20 Am. Rep. 468">20 Am.Rep. 468; Missano v. Mayor, etc. of New York,160 N.Y. 123">160 N.Y. 123, 54 N.E. 744">54 N.E. 744; South Carolina v. United States,199 U.S. 437">199 U.S. 437, 26 Supt.Ct. 110, 50 L. Ed. 261">50 L.Ed. 261. [Italics supplied.]
In Flint v. Stone-Tracy Co., supra, the Supreme Court considered the taxability of the Interborough Rapid Transit Co., the operating company of one of New York City's subways. It claimed to be exempt from an excise tax laid upon corporations. The Court, denying the exemption, stated: "It is no part of the essential governmental functions of a state to provide means of transportation, supply artificial light, water and the like."
The Circuit Court of Appeals for the Second Circuit recently had before it a case analogous to the case at bar, Brush v. Commissioner, 85 Fed.(2d) 32. The petitioner had been employed by the city of New York for many years as engineer in charge of its water supply. His duties required him to make surveys, plans, and reports relative to the improvements and enlargements of the system, and to maintain in good condition the*576 reservoirs and mains. He held a statutory office for which he had duly qualified. The court denied the contention that his salary was exempt from the Federal income tax, holding *129 that it "was not part of the expense attendant upon the exercise of what may be said to be usual governmental powers * * * or in the doing of what the states have traditionally engaged", citing Helvering v. Powers, supra, and United States v. State of California,297 U.S. 175">297 U.S. 175.
In Helvering v. Powers, supra, the Supreme Court stated it saw "no reason for putting the operation of a street railway in a different category from the sale of liquors." The same may be said of a subway. Nor can it make any difference that the construction and operation of the subway were undertaken because of the state's or city's "conception of public advantage." The fact remains that the enterprise undertaken is "of a sort that is normally within the reach of the Federal taxing power and is distinct from the usual governmental functions." Such an activity on the part of the city is not exempt from the Federal tax and the compensation received by this petitioner*577 is taxable.
The cited cases compel the same conclusion with reference to the compensation received by petitioner from the city of Chicago. In addition, the compensation received by petitioner from this city was received by him as an independent contractor. His duties and compensation were fixed by contract, and even though the board or committee employing him were engaged in a governmental function, his compensation is not exempt. Commissioner v. Modjeski, 75 Fed.(2d) 468; Metcalf & Eddy v. Mitchell, supra;John R. Spelman,18 B.T.A. 313">18 B.T.A. 313; Edward M. Lynch,30 B.T.A. 727">30 B.T.A. 727; Donald Francis Compbell,33 B.T.A. 101">33 B.T.A. 101; Harry Goldstine,33 B.T.A. 173">33 B.T.A. 173.
We sustain petitioner's contention with reference to the deduction of the loss of his investment in the Kreuger & Toll American certificates. We are satisfied that such certificates were worthless in 1932. They had for their basis the debentures issued by the Swedish company. This company became bankrupt in 1932. Four years thereafter, at the time of the hearing before us, petitioner, as an investor in such certificates, had*578 received no part of his investment and the evidence tended to establish the fact that he never would receive any part of it. He concluded in 1932 that his investment was worthless, listed the securities in his memorandum book "at zero", and testified before us that in that year he "had no hope of recovering" any part of his investment.
It is settled that if an investment becomes wholly worthless, its cost or other applicable basis may be deducted by a taxpayer from his gross income in the year in which it actually became so; and it is not necessary that there be a sale, or an attempted sale, within such taxable year. DeLoss v. Commissioner, 28 Fed.(2d) 803; certiorari denied, 279 U.S. 840">279 U.S. 840; Royal Packing Co. v. Commissioner, 22 Fed.(2d) 536; *130 Dalton v. Bowers, 56 Fed.(2d) 16; affd., 287 U.S. 404">287 U.S. 404; Burns Manufacturing Co. v. Commissioner, 59 Fed.(2d) 504; Forbes v. Commissioner, 62 Fed.(2d) 571; *579 Paul Pryibil,31 B.T.A. 164">31 B.T.A. 164; Alfred Hafner,31 B.T.A. 338">31 B.T.A. 338; Alfred K. Nippert et al., Executors,32 B.T.A. 892">32 B.T.A. 892; article 174 of Regulations 77 (1932) and Regulations 74 (1928).
Reviewed by the Board.
Judgment will be entered under Rule 50.