*3102 Certain compensation received by the petitioner during 1923 held to be for personal services as an employee of a political subdivision of a State and therefore exempt from taxation under section 1211 of the Revenue Act of 1926.
*1133 In this proceeding the petitioner seeks a redetermination of his income-tax liability for the calendar year 1923, for which the respondent *1134 determined a deficiency of $1,310.19. The error alleged is that the respondent erroneously included as a part of the petitioner's net income the salary of $12,000 paid to him as Special Counsel for the Department of Public Service of the City of Los Angeles.
FINDINGS OF FACT.
The petitioner is an individual and resides at Los Angeles, Calif.
The City of Los Angeles is a municipal corporation of the State of California, authorized by law (section 54 of the Charter of the City of Los Angeles) -
* * * To provide for utilizing or controlling waters within or without, or partly within and partly without, the state of California, and for*3103 the conservation, development, storage and distribution of water, and the generation, transmission and distribution of electrical energy, for the purpose of supplying said city and its inhabitants with water and electric energy, or either of them, and, to that end, to * * * (c) Acquire, establish, construct, own, maintain and operate * * * any works, plants or structures * * * necessary or convenient for any such purpose.
The "Department of Public Service" is (section 192 of the Charter of the City of Los Angeles) "a department of the government of said city" and is "under the management and control of a Board of Public ServiceCommissioners" which is empowered by law -
* * * To manage and control all waters, water rights, * * * water works * * * and all electric plants, works, systems and equipments, and all electric power, belonging to the city; to construct, operate, maintain and extend water works * * * and other means for supplying the city and its inhabitants with water; also electric plants * * * and other means of supplying the city and its inhabitants with electricity for light, power, heat and other purposes; to acquire and take * * * and in its own name to hold, as*3104 special trustee for the city, any and all property * * * that may be necessary or convenient for such construction, operation, maintenance or extension; * * * to regulate and control the use, sale and distribution of water and electricity belonging to the city, * * *
and
* * * The collection of water and electric power and light rates; * * * to appoint, employ, and * * * remove a chief engineer of water works, * * * and electrical engineer, and such assistants, employees and laborers as the board may deem necessary; to fix their compensations and prescribe their duties; * * * to sue and be sued, and to require the services of the City Attorney, free of charge, in all cases to which the board is a party.
Prior to the year 1923 the City of Los Angeles exercised its aforesaid powers, acquired property necessary for supplying itself and its citizens with water and electric current, and during the year 1923 and at all other times mentioned herein was actively engaged (through the aforesaid Board of Public ServiceCommissioners and Department *1135 of Public Service) in supplying water and electric current to itself and to its citizens.
A part of the electric current generated*3105 by the aforesaid Department of Public Service in the year 1923 was sold to the public, and the remainder was used by the City of Los Angeles for lighting streets and parks of said city, for lighting the public schools, for lighting the public library, for lighting and power in the city hall, for lighting and power in the police department, for lighting and power in the city jail, for lighting and power in the fire department, and for sundry other public purposes of said city.
A part of the water distributed by the aforesaid Department of Public Service in the year 1923 was sold to the public, and the remainder was used by the City of Los Angeles for fighting fire in said city, for flushing public sewers, for sprinkling streets, for the public schools, for the city hall, for the city jail, for fire engine houses, for the public parks, for the public playgrounds, and for sundry other public purposes.
Section 49 of the Charter of the City of Los Angeles provides:
The powers and duty of the City attorney shall be as follows:
(1) The City Attorney must prosecute and defend for the city all actions at law or in equity and special proceedings, for or against the city, or in which*3106 it may be legally interested or for any officer of the city in any action or proceeding, when directed so to do by the council.
(2) * * * He shall give his advice or opinion in writing, to any officer, Board or Commission of the city, when requested so to do by such officer, Board or Commission; PROVIDED, that the council shall have control of all litigation of the city, and may employ other attorneys to assist the City Attorney herein * * *.
* * *
(5) The City Attorney may appoint such assistants, deputies, clerks, stenographers, and other persons as the council, by ordinance, shall prescribe. * * *
Section 12 of the Charter of the City of Los Angeles provides:
All legislative power of the City, except as hereinafter otherwise provided, is vested in the council, subject to the power of veto and approval by the Mayor, as hereinafter given and shall be exercised by ordinance; other action of the council may be ordered upon motion.
On May 15, 1912, the following resolution was adopted unanimously by the aforesaid Board of Public ServiceCommissioners:
WHEREAS the construction work of the Los Angeles Aqueduct is nearing completion and the work of installing the electrical*3107 plants of the city is well under way and the time is rapidly approaching when this Board will take over the operation of the Aqueduct and the electrical plants and systems of the city and have charge of the distribution of water from the Aqueduct supply and of electricity from the city's electrical plants; and,
WHEREAS in connection with the preliminary plans for the distribution of such water and electricity many legal questions and other legal matters are *1136 constantly arising and demanding attention, making it necessary and advisable that this Board have an attorney immediately at hand to render counsel and give attention to such questions and matters; and,
WHEREAS the work of Mr. W. B. Mathews, as special counsel for the Los Angeles Aqueduct, has been and is intimately related to the legal questions now arising in this department and this Board desires the advice and counsel of Mr. Mathews in connection with this work and the City Attorney has consented thereto and advises that this step be taken;
NOW, THEREFORE BE IT RESOLVED that the City Council and the Board of Public Works be requested to consent that Mr. W. B. Mathews act as special counsel for the Board of*3108 Public ServiceCommissioners and in conjunction with the City Attorney attend to the legal matters arising in connection with the work of this Board.
On May 23, 1912, the council of the City of Los Angeles unanimously adopted the following resolution:
RESOLVED that the report of the Board of Public ServiceCommissioners, recommending and requesting the counsel to consent that Mr. W. B. Mathews act as Special Counsel for the Board of Public ServiceCommissioners, be adopted and that the said Board of Public ServiceCommissioners and the Board of Public Works be, and they are hereby authorized to employ or contract for the services of Mr. W. B. Mathews, either by original contract or contracts with said W. B. Mathews, or by modification of the existing contract between the City and W. B. Mathews or otherwise, as in the judgment of said Boards, or either of them, may be desirable.
On December 13, 1912, pursuant to the foregoing authority, there was executed a written contract between the aforesaid Board of Public ServiceCommissioners of the City of Los Angeles, as first party and the petitioner as second party, wherein it was agreed:
That the first party hereby employs said*3109 second party as agent and attorney, to do and perform, in conjunction with the City Attorney of said city, such services of a legal character as may be required of said second party in connection with the construction and operation of the Los Angeles Aqueduct and power projects of said city and the sale and distribution of the water and electricity therefrom, including services as attorney in connection with litigation and legal controversies and other matters requiring the attention and service of an attorney and advisor in connection with said work and in connection with the business of conducting the Department of Public Services of said city. Such employment shall continue from year to year beginning with the first day of January 1913; provided that upon sixty (60) days' notice in writing * * * said employment hereunder may be terminated on the 31st day of December of any year hereafter.
As compensation for all services to be rendered by said second party hereunder, said first party promises and agrees to pay to said second party the sum of Five Hundred ( $500) dollars, per month payable monthly.
From January 1, 1913, to the present the petitioner has continuously served*3110 said Board of Public ServiceCommissioners and the said Department of Public Service of the City of Los Angeles as Special Counsel.
*1137 On June 17, 1922, it was unanimously resolved by the Board of Public ServiceCommissioners of the City of Los Angeles "that the City Council be requested to take the necessary steps to have the salary of W. B. Mathews, Special Counsel in the Department of Public Service, increased to One thousand dollars per month."
On August 1, 1922, the council of the City of Los Angeles adopted the following resolution:
RESOLVED that the report of the Board of Public ServiceCommissioners recommending and requesting that the City Council take the necessary steps to have the salary of W. B. Mathews, Special Counsel in the Department of Public Service, increased to One Thousand Dollars per month be adopted and that said Board of Public ServiceCommissioners be authorized to enter into a new contract with Mr. W. B. Mathews in lien of the existing contract for his services, said new contract to contract for the services of Mr. Mathews at a salary of $1,000 per month.
On August 4, 1922, pursuant to the authority aforesaid, the Board of Public Service*3111 Commissioners of the City of Los Angeles, as first party, and the petitioner, as second party, entered into a written agreement whereby it was agreed that:
The first party hereby employs the second party as attorney and counsellor at law to do, perform and render legal assistance to the City Attorney of the City of Los Angeles, in relation to litigation now pending or which may hereafter be brought, either for or against the Board of Public ServiceCommissioners, of said City, or both, in connection with matters under the jurisdiction of the Public Service Commission of said City and incidentally to render such advice to the City Attorney and said Commission which his long association with the City's legal department peculiarly qualifies him to give.
Said second party accepts said employment and promises and agrees well and faithfully and to the best of his ability to do, perform and render said services during the continuance of this agreement.
It is mutually agreed that as compensation in full for all services to be rendered by said second party herein, the first party shall pay to the second party for his said services the sum of One Thousand Dollars ($1,000.00) per*3112 month, beginning August first, 1922, payable on the last day of each month thereafter.
This contract may be terminated at any time after August first, 1922, upon sixty (60) days notice in writing from either party to the other party that said employment hereunder is to be so terminated. (Italics supplied.)
During the year 1923, and at all other times since his aforesaid first employment, the petitioner has occupied and used for his office, without any charge being made to him therefor, a suite of rooms in the office building owned and occupied by the Department of Public Service of the City of Los Angeles, known as the "Public Service Building"; all clerical and professional assistants needed and used by him in connection with the work of the aforesaid Department of Public Service have been paid by the said Department; all office fixtures and supplies necessary for the maintenance and operation of *1138 said office have been furnished by the said Department of Public Service without expense to the petitioner and all other necessary expenses incurred by him in connection with his duties as Special Counsel in the Department of Public Service have been paid by the said Department.
*3113 The Department of Public Service is responsible for a large and permanent public enterprise. The gross revenues of the Department, for water and power, in the year 1923 in question, were approximately $15,000,000. In the year 1923, upwards of $100,000,000 was invested by the city in the property under the jurisdiction of the Department and approximately 3,000 persons were employed.
During the year 1923, the petitioner devoted at least 90 to 95 per cent of his time to the fulfillment of his duties as Special Counsel. While he had connection with a private law firm, he gave practically no attention to it. He visited his private law office infrequently and would be away from it sometimes for several months, although he might be in the City of Los Angeles all during that time.
During the year 1923, the services rendered by the petitioner to the Department were subject to control of the Board of Public Commissioners and the City Attorney. The petitioner always followed the wishes and policies of the Board where they were ascertainable or expressed. He understood, or tried to understand, what the policies of the Board would be.
The petitioner's activities in litigation*3114 affecting the Department of Public Service were under the control of the City Attorney, the chief legal officer of the city. The petitioner appeared in litigation, the City Attorney also appearing, if not in person, as an attorney named in the pleadings. This was only a part of petitioner's work as Special Counsel. His work has been of a miscellaneous character for a great many years. He looked after the interests of the Department before legislative bodies. He had a great deal to do with the general financial policies of the Department. He had much to do with the proceedings incident to the issuance and sale of bonds, and advised with the Department on questions of policy. He made appearances of a general nature in behalf of the Department before public and civic bodies. He generally attended meetings of the Board of Public ServiceCommissioners. In conjunction with the purchasing agent, he had a very active part in the consummation of land purchases and in the condemnation of land to enlarge, support and protect the water supply. He was chairman of a purchasing committee consisting of an engineer, an assistant engineer and himself. A great deal of the land the city has*3115 bought during the last few years, amounting to $10,000,000 or $12,000,000, has been purchased through his department.
*1139 During the year 1923 the City of Los Angeles paid to petitioner the aforesaid salary of $1,000 per month, or a total of $12,000.
The petitioner was of the opinion that the salary was exempt from Federal income tax and did not report the same in his 1923 return. The respondent has included the salary in 1923 gross income and has determined that a deficiency results therefrom.
OPINION
GREEN: The question here is whether the salary of $12,000 paid the petitioner by the Department of Public Service of the City of Los Angeles was exempt or taxable income. Section 1211 of the Revenue Act of 1926 provides:
SEC. 1211. Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, *3116 credited, or refunded.
The history of and reasons for the preceding section are set out and discussed in our opinion in the Appeal of George W. Fuller,9 B.T.A. 708">9 B.T.A. 708, and need not be repeated here. Suffice it to say that the statute is clear that if the compensation in question was "for personal services as an officer or employee of any State or political subdivision thereof," such compensation is exempt from Federal taxation. The services rendered by the petitioner were "personal" in their nature and were rendered to and for a "political subdivision" of the State of California. The greater portion of the respondent's brief has been devoted to the argument that the petitioner was not an "officer" of the Department of Public Service of the City of Los Angeles. The petitioner concedes that he was not an "officer" but contends that the facts show that he was, however, an "employee." The question thus narrows itself to whether the petitioner was or was not an "employee" of the city. The respondent contends he was an independent contractor.
In *3117 B. F. Martin v. Commissioner,12 B.T.A. 267">12 B.T.A. 267, in which case we reviewed many of the decisions bearing upon the question, we said:
The line of demarcation between an employee and an independent contractor is not precise. Several tests have been adopted from time to time by the Courts, but as the Supreme Court had occasion to observe in Standard Oil Co. v. Anderson,212 U.S. 215">212 U.S. 215, these are only more or less useful in "determining whose is the work and whose is the power of control."
In Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514; 46 Sup.Ct. 172, Metcalf and Eddy were in 1917 consulting engineers who, either *1140 individually or as copartners, were professionally employed to advise States or subdivisions of States with reference to proposed watersupply and sewage-disposal systems. 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 fees received by them for these*3118 services were paid over to the partnership and became a part of its gross income, upon which an income tax was collected. The district court held that such compensation was not exempt from taxation, either by the provisions of the statute or under the Constitution. The Supreme Court, in affirming the decision of the district court, said in part:
Nor do the facts stated in the bill of exceptions establish that the plaintiffs were "employees" within the meaning of the statute. So far as appears, they were in the position of independent contractors. The record does not reveal to what extent, if at all, their services were subject to the direction or control of the public boards or officers engaging them. In each instance the performance of their contract involved the use of judgment and discretion on their part and they were required to use their best professional skill to bring about the desired result. This permitted to them liberty of action which excludes the idea that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor. *3119 Chicago, Rock Island & Pacific Ry. Co. v. Bond,240 U.S. 449">240 U.S. 449, 456, 36 S.Ct 403, 60 L. Ed. 735">60 L.Ed. 735; Standard Oil Co. v. Anderson,212 U.S. 215">212 U.S. 215, 227, 29 S. Ct. 252">29 S.Ct. 252, 53 L. Ed. 480">53 L.Ed. 480. And see Casement v. Brown,148 U.S. 615">148 U.S. 615, 13 S. Ct. 672">13 S.Ct. 672, 37 L. Ed. 582">37 L.Ed. 582; Singer Mfg. Co. v. Rahn,132 U.S. 518">132 U.S. 518, 523, 10 S. Ct. 175">10 S.Ct. 175, 33 L. Ed. 440">33 L.Ed. 440.
The facts in the instant case are substantially different from those in the Metcalf & Eddy case, supra. Here the services rendered by the petitioner for the Department of Public Service were at all times subject to the control of the Board of Public Commissioners and the City Attorney. The latter's name appeared on all the pleadings filed by the petitioner on behalf of the city and its subdivisions. The petitioner's employment was continuous and his compensation was on a definite monthly basis. He devoted practically no time to other matters. His office space, supplies and necessary help were all furnished him by the city. In John E. Mathews v. Commissioner,8 B.T.A. 209">8 B.T.A. 209, after quoting the above paragraph from *3120 Metcalf & Eddy v. Mitchell, supra, we said:
We do not understand it to be the ruling of the Supreme Court that the relationship of employer and employee obtains only whenever the employer retains the right to direct the manner in which the business shall be done as well as the results to be accomplished, in other words, not only what shall be done, but how it shall be done. See Vane v. Newcombe,132 U.S. 220">132 U.S. 220. If this were so a physician who might be employed by a railroad company to devote his entire activities to the company could not be an employee of the company because clearly in such a case the employer would not expect to tell *1141 the physician how his work should be done. A skilled laborer is no less an employee because he uses his skill in the performance of his work. The term "employee" should not in our opinion be restricted only to menials. The petitioner was in our opinion an employee of the Board of County Commissioners of Duval County, Florida, during the year 1923, within the meaning of section 1211 of the Revenue Act of 1926.
The facts in the instant case clearly point to the conclusion that the petitioner was*3121 in all respects an employee of a political subdivision of the State of California within the meaning of that term as used in section 1211 of the Revenue Act of 1926. It follows that the salary of $12,000 received by the petitioner for the calendar year 1923 is exempt from Federal income taxation, and that the deficiency determined by the respondent for that year should be disallowed. Cf. Byers v. Commissioner,8 B.T.A. 1191">8 B.T.A. 1191; Appeal of P. Frank Durkin,4 B.T.A. 743">4 B.T.A. 743; and Louisville, Evansville & St. Louis R.R. Co. v. Wilson,138 U.S. 501">138 U.S. 501.
Reviewed by the Board.
Judgment will be entered for the petitioner.