1933 BTA LEXIS 1106">*1106 Compensation paid to a law firm by a municipality for legal services is subject to Federal taxation.
28 B.T.A. 556">*556 These proceedings, duly consolidated, are for the redetermination of deficiencies in income tax for the year 1929 as follows:
| Docket No. | Deficiency |
| 62015 | $32.10 |
| 62016 | 19.08 |
The only issue is whether the Commissioner erred in including in taxable income of the petitioners, income received by E. A. Simpson "from the city of Amarillo, a municipal corporation, and a political subdivision of the State of Texas." The facts were stipulated.
FINDINGS OF FACT.
The petitioners are husband and wife, residents of Amarillo, Texas.
During the calendar year 1929, petitioner E. A. Simpson was a member of the law firm of Underwood, Johnson, Dooley & Simpson, engaged in the general practice of law in Amarillo.
On August 20, 1929, the law firm of Underwood, Johnson, Dooley & Simpson was appointed to act as corporation counsel for the city of Amarillo, which is a duly incorporated city and municipality under the laws of the State1933 BTA LEXIS 1106">*1107 of Texas, having been chartered on November 18, 1913. The appointment was made at a regular meeting of the city commission, as shown by the following excerpt of the minutes of that meeting:
THE FOLLOWING LETTER WAS READ:
August 20th, 1929.
Col. E. O. Thompson,
Mayor, City of Amarillo,
Amarillo, Texas.
Dear Sir:
Confirming our conversation and referring to our previous letter to you, we will accept the position of corporation counsel for the City of Amarillo, for a retainer of $300.00 per month, this to cover all consultations and office matters, but shall not include compensation for litigation in the various courts.
28 B.T.A. 556">*557 Also, we are to be paid a reasonable fee for all services rendered in any litigation in which the City is a party, during the term of our employment.
It this basis of employment is satisfactory you will please advise us.
Yours very truly.
UNDERWOOD, JOHNSON, DOOLEY & SIMPSON.
By R. C. JOHNSON
IT WAS THEN MOVED by Commissioner Stone, seconded by Commissioner Vernon and unanimously carried, that the above offer be accepted, and that Underwood, Johnson, Dooley & Simpson be appointed to act in the capacity of Corporation Counsel1933 BTA LEXIS 1106">*1108 for the City.
Ordinance No. 298 of the city of Amarillo, adopted in 1916, provided "FOR CITY ATTORNEY OR CORPORATION COUNSEL" and proscribed "THE POWERS AND DUTIES TO SUCH OFFICE." The ordinance authorized the discharge of the duties by "a firm of attorneys, as the Commission may elect." The term of office was "at the will of the City Manager." The compensation was to be "by salary, payable monthly, fixed by the Commission." The oath prescribed by the state constitution for county officials was prescribed for the city attorney or corporation counsel. Section 7 of the ordinance is as follows:
The City Attorney or Corporation Counsel, or assistants, shall conduct all prosecutions in the Corporation Court, shall represent the City in all its litigations; shall inspect and pass upon all papers, documents, contracts and other instruments, to which the City is a party, or in which it may be interested; shall prepare or approve all proposed ordinances; shall on the request of the Commission or City Manager furnish a written opinion upon any question of law pertaining to the City Government, or involving the powers and duties of any officer, board or department, of the City Government; 1933 BTA LEXIS 1106">*1109 attend all meetings of the Commission when requested and perform such other duties as the Commission or City Manager may direct.
During the year 1929, none of the members of the firm of Underwood, Johnson, Dooley & Simpson took the oath of office as corporation counsel, due to an oversight, but on April 2, 1931, each member of the firm of Underwood, Johnson, Dooley & Simpson took an oath of office under the same kind of appointment as was made on August 20, 1929, as follows:
I, E. A. SIMPSON, do solemnly swear that I will faithfully and impartially discharge and perform all the duties incumbent upon me as Corporation Counsel and City Attorney of the City of Amarillo, Potter County, Texas, according to the best of my skill and ability, agreeably to the constitution and laws of the United States and of this State, and the ordinances of this City; and I do further solemnly swear that, since the adoption of the constitution and of this State, I being a citizen of this State, have not fought a duel with deadly weapons, within State nor out of it, nor have I sent or accepted a challenge to fight a duel with deadly weapons, nor have I acted as second in carrying a challenge, or aided, 1933 BTA LEXIS 1106">*1110 advised or assisted any person thus offending; and I furthermore solemnly swear, that I have not, directly nor indirectly, paid, offered or promised to pay, contributed nor promised to contribute, any 28 B.T.A. 556">*558 money or valuable thing, or promised any public office or employment, as a reward for giving or withholding a vote at the appointment at which I was appointed. So help me God.
Under the appointment as corporation counsel different members of the firm of Underwood, Johnson, Dooley & Simpson attended to the city's legal business, and they were obligated to and did give to the city's legal business as much time as was necessary.
During the period from August 20, 1929, to December 31, 1929, the members of the firm of Underwood, Johnson, Dooley & Simpson devoted approximately 7 percent of their time to the affairs of the city of Amarillo. This time includes both the services rendered in cases for which fees were received and the time necessary to perform the routine duties for which the retainer was received. During the period in question, E. A. Simpson personally devoted approximately 20 percent of his time to the affairs of the city.
During the year 1929, the firm1933 BTA LEXIS 1106">*1111 of Underwood, Johnson, Dooley & Simpson received as compensation and fees from the city of Amarillo, under the above mentioned appointment, $3,350, and petitioner E. A. Simpson received his pro rata portion of this amount, which was $753.75.
The law firm of Underwood, Johnson, Dooley & Simpson had a gross income from fees of $88,201.14, excluding the income in question, in the year 1929, and expenses of $12,970.01, including salaries of $6,795.77 paid for clerical services.
OPINION.
SMITH: The petitioners contend that:
* * * E. A. Simpson, was an employe, or an officer, of the City of Amarillo; that the compensation paid to him and his law partners was paid by the City of Amarillo in the exercise of essential governmental functions.
There is no provision in the Revenue Act of 1928 comparable to section 1211 of the Revenue Act of 1926, which exempted from the tax imposed by the Revenue Act of 1924 and prior revenue acts the compensation of an officer or employee of a state or political subdivision thereof. See .
The law firm of which Simpson was a member offered, and the city commission accepted the offer of, its1933 BTA LEXIS 1106">*1112 services "for a retainer of $300.00 per month, this to cover all consultations and office matters, but shall not include compensation for litigation in the various courts." The term of the services of the petitioner's law firm was at the pleasure of the city commission, and although an oath of office was prescribed, none was taken by a member of the firm until April 1931. No effort has been made to show the extent to which the compensation received by the law firm related to the exercise of essential governmental functions by the city of Amarillo. The 28 B.T.A. 556">*559 conduct of the city's legal business was left to the discretion of the members of the law firm. The city of Amarillo procured and retained at the pleasure of the city commission the professional services of the petitioner and his associates, paying therefor the fees charged in addition to the retainer agreed upon for routine services. We are of the opinion that the relationship of attorney and client existed between the law firm and the municipality, and that the compensation for the services rendered by the firm to the municipality is not exempt from Federal taxation. 1933 BTA LEXIS 1106">*1113 . See also ; .
Reviewed by the Board.
Judgment will be entered for the respondent.
VAN FOSSAN concurs in the result.
LANSDON dissents.
ADAMS, dissenting: I dissent from the views of the majority in this case. I believe that petitioner was engaged in an essential governmental function and that such income was properly excluded.