*1055 Petitioner was employed by the state public service commissions of New Hampshire and Pennsylvania and by various municipalities in New York, Illinois, and Kentucky as an expert on public utilities to carry on investigations and to perform other services relating to public utility rates and franchise matters. He and his staff were paid on the per diem basis, their work was directed in general by the commission chairman or city corporation counsel, and was terminable at the will of the employer. The terms of his employment, including compensation, were agreed upon ordinarily by an exchange of letters or in some other informal way, the petitioner naming the amount of pay which would be acceptable to him. Petitioner used his own offices and the city's, according to his convenience. During the taxable years involved herein he was not exclusively engaged in any one particular investigation and he did work for others while he was employed by the various commissions and cities.
Held, under the facts of this case, petitioner is not entitled to exemption from Federal income tax on account of the compensation received by him for services rendered to the several states and cities. *1056 Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514, followed.
*614 These proceedings, which have been consolidated, are for the redetermination of deficiencies in income tax determined by respondent as follows:
| 1925 | $4,367.49 |
| 1926 | 3,785.35 |
| 1927 | 5,791.30 |
A single issue is presented, whether there should be excluded from the petitioner's taxable income, on the ground that it is exempt from the Federal income tax, the compensation received by him in the taxable years for services rendered to state public service commissions and to certain municipalities in connection with investigations, litigation, or other proceedings relating to public utility rates and franchise matters.
*615 FINDINGS OF FACT.
Petitioner, a resident of New York, is a Doctor or Philosophy, and a student of mathematics and of economics, in relation especially to public utilities. He has been engaged in public utilities work in various parts of this country and England for 30 years and since 1930 has been chairman of the Public Service*1057 Commission of New York State. From 1921 to 1930 about 95 percent of his time was devoted to franchise and rate matters. He is a high authority and expert in this field and was employed by various municipalities throughout this period to make investigations of conditions affecting rates and to report on them, to analyze testimony given before public service commissions and law courts in rate cases, and to assist counsel as a technical expert, not as a lawyer, in the conduct of the cases, including the cross-examination of witnesses.
During one or more of the years in question, petitioner was employed by the public service commissions of the states of New Hampshire and Pennsylvania for the investigation of public utility rates; by the cities of New York, Auburn, Buffalo, Utica, Oswego, Saratoga Springs, Syracuse, Rochester, New Rochelle, Mt. Vernon, Port Chester, and Harrison, all in New York State, for investigations arising out of court litigation and other proceedings regulatory of public utilities; and by Lexington, Kentucky, and Chicago, Illinois, in connection with granting new franchises to public utility companies. In each instance he was employed as an expert on public*1058 utility matters.
Petitioner's employment by the New Hampshire Public Service Commission was in connection with the New England Telephone & Telegraph Co. rate case. In 1925 the New Hampshire Legislature appropriated $5,000 to be used for "employment of experts, engineers and assistants" in the investigation of the reasonableness of any proposed increase of rates by the company. The petitioner was employed on terms orally agreed upon between himself and the commission and confirmed by an exchange of letters in which petitioner stated the compensation to be paid himself and his principal assistants and the commission accepted these terms and employed him as its expert. The basis of compensation was per diem, the work terminable at the will of the commission on two weeks' notice and the commission to have complete control. The commission suggested to petitioner certain specific lines of investigation which he should follow up. He also attended the case hearings, analyzed testimony, testified, and suggested cross-examination. His staff assisted him.
Petitioner's employment by the Public Service Commission of Pennsylvania was in relation to the application of the Philadelphia*1059 Rapid Transit Co. for increased rates. His employment was arranged *616 by conference and by letter. The basis of compensation was per diem for petitioner and his staff. There were frequent conferences between petitioner and the commission, at which the petitioner was instructed as to what they wanted him to do. The line of inquiry was directed by the commission and as the investigation proceeded new tasks were assigned to petitioner. Petitioner analyzed the testimony put in at the hearings and gave technical advice. He was also called upon to make an analysis of the Transit Co.'s capital additions and retirements and of its operating expenses.
The nature of the work done by petitioner for the various municipalities and the terms of employment were substantially the same. Generally one person was in charge, who decided on the part of the city, what steps were to be taken in any given case, what investigations were to be made, and what proceedings, if any, instituted. Usually this was the city corporation counsel and the petitioner's investigations were conducted under his general direction. Petitioner was employed by an exchange of letters in which petitioner*1060 stated the terms of compensation per diem which he and his chief assistants would expect and the city corporation counsel accepted them. In some instances the arrangements were oral. The contract was thus always informal and terminable at the will of the employer. In many instances he had done work of the same kind, or even on the same cases, for these cities before the years here in question. Ptitioner was never authorized to make a complete investigation and in no case was the work outlined at petitioner's first conference with the city officials. Certain original lines of investigation were determined on by corporation counsel and petitioner started on such investigations, but the course of development would generally depend on the facts disclosed as the investigation proceeded. Corporation counsel would sometimes adopt a new line and abandon an old one. Petitioner made periodical reports, both oral and written, to the corporation counsel or other official in charge. Besides making investigations, petitioner's services consisted of attendance at hearings, preparing data for briefs and for cross-examination, and giving expert testimony. His expert advice on various matters*1061 was constantly asked for by the corporation counsel. He received more or less detailed directions of the corporation counsel in each instance as to the institution, continuance, abandonment, or completion of any particular line of investigation.
Petitioner maintained his own office organization and his own assistants, expert and routine. In all cases petitioner's organization, as well as himself, was employed, although the number of his assistants necessarily varied. Expert assistants were paid, like petitioner, on a per diem basis, routine assistants by the hour, payment of petitioner's *617 staff being made through the petitioner. Petitioner received $100 a day, his assistants less, proportionately to their training and experience. The number of men at work on a particular matter varied, according to its size, from two or three to thirty or forty.
As already stated, petitioner and his staff were under the general direction of the commission chairman or corporation counsel, who selected the subjects of investigation. Within these limitations, petitioner was allowed to use his own judgment and directed the work of his assistants, who procured all the data for*1062 his consideration. When asked whether a rate could reasonably be raised or lowered, petitioner gave his fair opinion, independently arrived at, but save in the case of the Lexington, Kentucky, franchise, he never was asked in the years in question to determine a rate in advance. Petitioner was not employed for any definite length of time. His employment was in connection with some particular public utility matter and while this matter was pending he was available as and when needed. He did not have to work on any certain days of the week or month. He did not take any oath of office, nor give any bond, nor sign any pay roll, in the cases here involved. He publicly styled himself "Public Utility Consultant" and offered his services to the public during the years in question. He never looked to a statute to ascertain the definition of his duties.
Sometimes persons on the regular city staff would assist petitioner. Such regular employees were on the city pay roll. Petitioner kept time slips of his own work and of that of his assistants, who were paid only for actual time spent. Petitioner submitted bills, monthly or for a longer term, for his services and for those of his*1063 assistants, and also for any disbursements made by himself or by them. Petitioner's gross receipts, expenses, and net receipts from public utility commissions and cities were for the taxable years as follows:
| 1925 | 1926 | 1927 | |
| Gross receipts | $51,779.60 | $52,838.19 | $69,876.29 |
| Expenses | 23,995.36 | 26,532.61 | 34,317.50 |
| Net income | 27,784.24 | 26,305.58 | 35,558.79 |
Petitioner's gross receipts included amounts received by him from the several commissions and cities as compensation for his staff, and reimbursements for expenses. The "expenses" deducted in arriving at net income included amounts actually disbursed by him and the amounts paid to his staff.
The above amounts were not reported by petitioner as income, on the ground that they were tax-exempt, but the amounts are agreed upon by counsel.
*618 Petitioner also received for professional services rendered to others than cities for public service commissions, the following amounts which were reported by him in his income tax returns:
| 1925 | 1926 | 1927 | |
| Gross receipts | $10,516.71 | $12,435.22 | $9,565.13 |
| Expenses | 4,269.63 | 7,665.99 | 949.17 |
| Net profit | 6,247.08 | 4,769.23 | 8,615.96 |
*1064 Petitioner made his reports and filed his income tax returns on a cash basis.
On November 9, 1931, petitioner applied for membership in the Employees' Retirement System of the State of New York. He was admitted to membership and on November 16, 1931, he paid to the state comptroller the sum of $9,546.94. Petitioner has since made further payments of $45.25 a month to the retirement fund.
OPINION.
MATTHEWS: Petitioner seeks exemption from Federal tax of income received by him as a public utility consultant from various states and municipalities in the years in question. He does not claim to have been an officer, but does contend that the facts show him to have been an employee, that he was employed in the performance of essential governmental functions, and that a tax on his income would be a direct interference with the exercise of these functions by the several states and cities involved.
The petitioner is a man well trained as an expert in public utility matters, has had a large experience in such matters, and is a high authority in the field. His testimony was full, exact, and candidly given. He has served as a public official and was at the time of the hearing*1065 chairman of the New York Public Service Commission. He was able, consequently, to appreciate the attitude of mind of the hiring state official as well as that of the hired expert. Few cities, he testified, not even the largest like New York and Chicago, are able to maintain permanent staffs adequate to cope with the work arising out of rate regulation proceedings and franchise matters. One reason is that rate cases irregularly and franchise grants at long intervals, around twenty years. The mayor, corporation counsel, or other city official, or the public service commission, is accustomed, therefore, to augment its staff on such occasions, to deal with the problem in hand. Often the work that may be done is strictly limited, as in the New Hampshire case here, by the amount of the legislative grant, and the officials in charge must see that the money spent will go as far as possible.
*619 There are various methods of compensation used in hiring the experts needed. Some are hired on a contractual basis to do a certain piece of work for a fixed sum, and often, where the case is concluded before all the work planned has been finished, a certain minimum sum is guaranteed. *1066 The per diem basis is the method most frequently used by public utilities officials, since it insures elasticity in the conduct of investigations and does not required work which the corporation counsel has initiated but has since decided to abandon, to be completed and paid for. On the per diem basis only work actually wanted is done and the employment is terminable at the will of the commission or city.
Petitioner took no oath of office, gave no bond, held no statutorily defined position with incidents of tenure, and had no fixed salary. He was hired, or "employed", by the state public service commissions of New Hampshire and Pennsylvania, for the investigation of public utility rates; by the cities of Lexington, Kentucky, and Chicago, Illinois, in connection with the granting of new franchises to public utility companies; and by various cities in New York, including New York City, for investigations arising out of court litigation and other proceedings regulatory of public utilities. Petitioner ordinarily entered into a very simple and elastic form of agreement and the terms of his employment were almost identical in each instance. Petitioner wrote a letter to the*1067 city or state official in charge of the matter to be investigated and informed him that he, petitioner, would work for $100 a day, plus necessary expenses, and that his staff, including engineers, accountants, and routine assistants, would also work for so much a day, generally much less than petitioner got. The contract was to be terminable at will of the officer, and all investigations were to be under his direction. This agreement was generally accepted by letter, or endorsement on the offering letter, and petitioner's work proceeded. Sometimes the contract was even more informal, being simply an oral understanding. All of petitioner's work here in question was done on a per diem basis. Petitioner's counsel laid great stress on the fact that petitioner received more or less detailed directions from the corporation counsel or the public service commission in each instance, as to the institution, continuance, abandonment, or completion of any particular line of investigation. There is no doubt on the record that the work of petitioner and his staff was wholly under the commission or city officer in charge, subjected, that is, as much as that of any expert employee can reasonably*1068 be, to supervision. Petitioner was expected to make reports on his investigations, to comb the record in court or commission hearings and analyze the testimony, and to assist by giving testimony himself or by cross-examination. He did all these things.
*620 This, in substance, was the nature and scope of petitioner's employment. He used his own staff all the time. He throughout maintained his own office, did work for others than public service commissions or cities, and received income from such work. That income is not claimed here as exempt, but the fact goes to show petitioner's methods. All his staff were paid through him, and sometimes the city's employees also, when the city was anxious to keep tab on particular project expenditures. Finally, he was simultaneously working for two state public utility commissions and about a dozen municipalities.
The question is, Was petitioner in such circumstances a state or city employee? In no case did he make any final decision as to the rate to be applied. This was done by the city officer or by the commission. In only one, the Lexington, Kentucky, franchise case, was he called upon to establish such a rate. In that*1069 case he was drafting a new franchise, and the positive formulation of policy on the basis of his investigations was necessary to complete the work assigned him. He was obviously a technical expert of a high order, whose professional knowledge and opinion were valuable and for which various cities were willing to pay well. Does this make him an "employee" of a state or a political subdivision thereof, within even the vague contours of that word, for purposes of Federal taxation? We think not.
No useful purpose would be served by an extended review of the numerous cases dealing with this problem. The Supreme Court has spoken in , the inferior Federal courts and this Board in many other cases. "Employee" is not susceptible of exact definition and can be interpreted intelligently only by keeping in mind the underlying reason for the exemption. The line must be drawn in each case, therefore, according to the peculiar circumstances present. The situation here is so like that in the Metcalf case that a recital of the facts of that case is pertinent:
All of the items of income were received by the taxpayers as compensation*1070 for their services as consulting engineers under contracts 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.
The Supreme Court held these engineers neither officers nor employees, but independent contractors. Touching on the question of Federal interference with state governmental functions by imposing on these engineers an income tax, the Court said:
*621 And as was said in Fidelity & Deposit Company v.Pennsylvania, supra, in holding valid a state tax on premiums collected by bonding insurance companies on surety bonds required by United States officials:
"But mere contracts between private corporations and the United States do not necessarily render the former essential government agencies and confer freedom from state control."
These statements we deem to be equally applicable to private citizens engaged in the general practice of*1071 a profession or the conduct of a business in the course of which they enter into contracts with government from which they derive a profit. * * *
The petitioner here was a "public utility consultant" who performed all his services for state subdivisions on the basis of per diem contracts for himself and his staff, which often numbered a score or more experts and routine assistants. We can not find any satisfactory basis of distinction between this and the Metcalf case. Certainly a technical expert temporarily employed by a state does not thereby clothe himself with state immunity.
In , the Supreme Court reversed the Circuit Court, , in a per curiam decision, on the authority of the Metcalf case. The Attorney General of Pennsylvania, under statutory authority to "employ" additional counsel to aid the state in the Frick inheritance tax case, hired Reed. The collection of a state's revenue and the maintenance of its constitutional authority to levy and collect taxes is unquestionably a governmental function, but Reed's relation to the state government was deemed too remote to affect materially*1072 this vital interest of a state. See also , the case of an attorney hired by a city to conduct cases involving railroad grade crossings, and the like. A more recent case following the Reed case is , in which the Circuit Court reversed this Board; certiorari denied, , and held taxable the fee paid a lawyer hired by the State of New York as "deputy attorney general" to defend its interests in the Cayuga Indians case before the American-British Arbitral Tribunal. Cf. .
In the brief filed on behalf of petitioner it is strongly urged that the instant case is in many respects upon all fours with the case of Donald R. Richberg, Docket No. 38723, in which case this Board rendered an unreported decision dated December 17, 1932. To state the facts of that case will suffice to show its variance. We said:
Petitioner herein was employed in an official position by the City of Chicago during the taxable years in controversy, under and by virtue of an Ordinance enacted May 27, 1918, creating the office of*1073 "Special Counsel for the City of Chicago in Gas Matters". * * *
The duties of the petitioner herein were prescribed in Section 2 of the aforesaid Ordinance and constituted work of a permanent and continuing nature *622 and character involving a representation of the City of Chicago in all legal proceedings then pending between the City of Chicago and the People's Gas Light & Coke Company, the sole manufacturer and distributor of gas in the City of Chicago and extended to representation "in charge of the City's interests" with regard to all gas matters "past, present and future rates, standards or service for the supply of gas in the City of Chicago."
We held the petitioner therein to be an officer of the city of Chicago and decided that the income derived by him from such office was tax-exempt. The differences between the two cases are apparent and we should not refer to them here except for the petitioner's insistence on their similarity. The prescribed duties, the permanence and continuity of the petitioner's position in the Richberg case, his representative character, all distinguish that case.
We do not regard the petitioner's admission in 1931 to the benefits*1074 of the New York State Employees' Retirement System as in any way determinative of the issue presented herein, although we have considered it as evidence. The retirement of officers and employees under the civil service is provided for by articles 4 and 5 of the Civil Service Law of New York, being ch. 741, Laws 1920, and ch. 591, Laws 1922, with subsequent amendments in 1932. We find nothing in the provisions of this law which would indicate that the petitioner was entitled to membership in the Employees' Retirement System by reason of the service he rendered to municipalities of the state during the taxable years involved herein. It was in 1931 that he applied for and was admitted to membership and at that time he was Chairman of the Public Service Commission of New York. He was, therefore, engaged in state service, which is defined in subdivision 8 of section 50 of article 4 of the Civil Service Law as "service, whether appointive or elective, as an official, clerk, or employee of the state of New York, or municipality participating in the system." The fact that he was permitted to, and did, pay to the state comptroller a percentage of the compensation received by him in prior*1075 years for services rendered to certain municipalities in the state, in order to receive prior service credit, does not furnish any basis for holding that he was an employee of the state of New York, or a political subdivision thereof, during those prior years.
After a careful consideration of all the evidence introduced herein we are of the opinion that the petitioner is not entitled to exemption from Federal income tax on account of the compensation received by him for services rendered to the several state public service commissions and municipalities, and we hold that such compensation is includable in his gross income for the taxable years.
No question as to the amount of income involved is raised.
Judgment will be entered for the respondent.