*1067 1. The petitioner entered into a contract with a revenue agent of the State of Kentucky, for a definite period, to investigate back taxes and prosecute suits on behalf of the state for their recovery, for a compensation payable by the revenue agent out of part of the penalties actually recovered, which were allowable to the latter by law. He devoted the greater part of his time to such work and exercised his own discretion as to the work to be performed and the time and manner of performing it, but to some extent (not fully explained) his work was supervised, directed, and controlled by the revenue agent and the state tax commission. He maintained his own office, employed his own office force, and paid his own expenses. Held, the petitioner was an independent contractor and not an employee of the state, and the compensation for such services was subject to the Federal income tax.
2. Held, also, that the petitioner's employment under contracts with a county and city of Kentucky to prosecute, under the control of local administrative officers, particular actions for the recovery of taxes due the county and city, for a fixed percentage of the amounts recovered, which*1068 required only a part of his time and the use of his own judgment and professional skill, was that of an independent contractor and not that of an employee.
3. The control to which the petitioner was subject by both the state, county, and city officers was not inconsistent with the relation of attorney and client.
4. Where no return is filed, the penalty upon income found to be subject to tax will be sustained, irrespective of the reason for the taxpayer's failure to file a return.
*566 The Commissioner determined that the petitioner owed deficiencies and penalties as follows:
| Year | Deficiency | Penalty |
| 1922 | $1.31 | $0.33 |
| 1924 | 78.66 | 19.67 |
| 1925 | 60.84 | 15.21 |
| 1926 | 427.88 | 106.97 |
| 1927 | 20.11 | 5.03 |
The assignments of error are: (1) The Commissioner erroneously determined the deficiencies upon income not subject to tax because received as compensation for personal services rendered as an officer or employee of the State of Kentucky and its political subdivisions in connection with the exercise of essential governmental functions, *567 *1069 and (2) the determination of the penalties was erroneous even though the taxes were due, because the taxpayer had been informed by the collector of internal revenue for Kentucky and his deputies that the income was not taxable.
FINDINGS OF FACT.
The petitioner is a lawyer residing in Lexington, Kentucky. Practically all of his time since 1920 has been spent in assisting the State of Kentucky, certain counties in Kentucky, and the city of Louisville, to collect taxes which the tax collectors have failed to collect. There was in Kentucky during all of this period a state tax commission which appointed a revenue agent at large for a four-year period. The appointment, supervision, control, and direction of revenue agents was vested by statute in the state tax commission. The revenue agents were not lawyers. The petitioner agreed with the revenue agent at large in 1920 to act as attorney for the latter and, from time to time, as new revenue agents at large were appointed, he agreed with them to act as attorney for them. His work has been continuous. The first agreement was like the others except that it was oral. Thereafter a letter was written to the petitioner by the revenue*1070 agent evidencing their arrangement. A typical letter is the first one, dated January 7, 1924, as follows:
You are hereby designated as my attorney as Revenue Agent for the State at Large, your territory to include the counties embraced in the Seventh, Eighth, Tenth and Eleventh Congressional Districts of Kentucky, and you are authorized to represent me in these counties for the purpose of collecting back taxes or money due the State, County, School or taxing districts thereof, and delinquent license fees, franchise and corporation license fees and omitted or delinquent taxes, and you are directed to recover in the territory indicated, any money which may be due the Commonwealth or any inheritance tax due the Commonwealth or any County, School or District School taxes, and you are authorized to proceed in my name under an order dated January 7, 1924, signed by John B. Lewis, Chairman of the Kentucky State Tax Commission, appointing me Revenue Agent for the State at Large for a term beginning January 7, 1924, and extending four years from that date.
Your appointment will cover the same period unless removed by me in writing for cause. Your fee shall be 1/2 of the 15% allowed the*1071 State Revenue Agent under the law, except that in case of license taxes, your fee shall be 2/3 of the 15% allowed, and you are to pay your own expenses and pay all cost of litigation. The right of attorney D. O. Myott or his agent Chas. E. Wright to close up unfinished settlements in your territory shall not be abridged by this contract and the right of attorney B. W. Gilfillan to close all pending tax settlements in counties embraced in your territory shall not be abridged by this contract. In the matter of the collection of back taxes on liquor in bonded warehouses or elsewhere, your territory is to include the entire State of Kentucky. As Revenue Agent for the State at Large I reserve the right to appoint attorneys to represent me in your territory at my pleasure.
You will be required to execute bond to me in the sum of $2,000.00 for the faithful performance of your duties.
*568 The petitioner was not engaged by the revenue agent in connection with any one case or isolated group of cases nor on account of any special knowledge concerning such a case or group of cases which he might have had. He has handled about seven thousand cases for the revenue agents and his*1072 efforts have resulted in the collection of about $3,000,000 in taxes, interest, and penalties during the period from 1920 to 1934.
His usual method of procedure was to discover by his own investigation a taxpayer or a class of taxpayers who had failed to pay taxes lawfully due to the State or its subdivisions. He then assembled the information necessary to support a lawsuit for the unpaid taxes discovered, submitted the matter to the revenue agent and the state tax commission for approval, discussed the case with each agency, filed suit on behalf of the State of Kentucky or a political subdivision thereof, if the state tax commission and the revenue agent authorized it, prepared for trial, tried the case, briefed it, and followed it to final judgment. He was at all times subject to the control and direction of the state tax commission and the revenue agent at large. They frequently directed him to do certain work. Every important step taken by him in an important case was taken only after his proposed action had been approved by the revenue agent at large and the state tax commission, but in cases of lesser importance they allowed the petitioner to proceed on his own plans.
*1073 After a successful suit to collect tax, the sheriff collected the tax and a penalty of 20 percent of the tax. The state treasurer paid three fourths of this penalty to the revenue agent and the latter paid, in the case of ad valorem tax, one half of what he received, and in the case of license tax, two thirds of what he received, to the petitioner as full payment for his services and expenses.
Other attorneys served the same revenue agent at the same time the petitioner served him, but they handled different work or different territory.
The petitioner never took an oath of office in connection with his work for the revenue agent.
The petitioner, at various times, has litigated tax cases for counties in Kentucky. Usually these suits resulted from investigations he had made while working for the revenue agent at large. He entered into an agreement with Kenton County, Kentucky, on May 28, 1925, to "undertake the recovery of the delinquent Pike taxes and interest, owing * * * by the franchise paying corporations doing business in the County" for 15 percent of all taxes and interest recovered. The contract further provided that the petitioner could not settle any case for*1074 less than the full amount owing without the consent of the county attorney. The contract was executed on behalf of the county by the county judge.
*569 The petitioner entered into a similar contract on September 2, 1926, with Kenton County, which recited that he had been employed by the county commissioners to recover taxes and interest owing by banks recently located in the county on assessments made prior to 1924. He agreed to undertake the work for 20 percent of all moneys recovered. Settlements for less than the full amount owing could only be made with the consent of the county attorney.
The petitioner was appointed assistant attorney by the county attorney of Fayette County, Kentucky, at some time not disclosed in the record, to prosecute all omitted tax cases for the assessment of property omitted from assessment and was to be paid by the sheriff "one-half of the fees allowed by law to the County Attorney, as compensation for such services." This appointment and method of payment was approved by the fiscal court of the county.
In his work for counties he was always appointed assistant to the county attorney and this appointment was then approved by the fiscal*1075 court. The county attorney supervised, directed, and controlled the litigation which he handled for them and approved all judgments entered. The cases were prosecuted in the name of the county. No penalty was imposed. Cases prosecuted for the counties were usually the result of work done for the revenue agent. The state tax commission and the revenue agent at large also exercised control over the work done by the petitioner for counties.
The petitioner, as party of the second part, entered into a contract on June 18, 1925, with the city of Louisville, Kentucky, which was as follows:
WHEREAS the City Council of the City of Louisville passed the following ordinance and the same was approved by the Mayor of said city, to-wit:
"No. 184, Series 1925.
"AN ORDINANCE authorizing the Mayor to enter into a contract with Harry D. Kremer for the collection of delinquent taxes and interest owing to the City of Louisville on distilled spirits, and fixing the compensation for such services to be rendered.
"WHEREAS it is claimed that there are large sums of money due the City of Louisville for delinquent taxes and interest on distilled spirits which have either been omitted from*1076 assessment or which have been withdrawn or removed from bonded warehouses without knowledge thereof on the part of the City or without notice to it, and
"WHEREAS Harry D. Kremer, Attorney for the State Revenue Agent, has in his possession valuable information concerning the location of distilled spirits which have not been assessed, and withdrawals and removals of distilled spirits which have not been reported to the City, and
"WHEREAS such information cannot be secured by the City Assessing authorities or its Legal Department, with the result that the City is losing large sums of money in taxes which are lawfully due it, and
"WHEREAS the employment of said Harry D. Kremer to represent the City in the collection of such delinquent taxes will enable the City to secure such *570 information as will result in the collection of delinquent taxes which are due it,
"NOW, THEREFORE, BE IT ORDAINED BY THE GENERAL COUNCIL OF THE CITY OF LOUISVILLE:
"Section 1. That the Mayor be and he is hereby authorized on behalf of the City to enter into a contract with said Harry D. Kremer employing him as attorney to represent the City in securing the proper assessment of distilled spirits*1077 which have been omitted from assessment, and the collection of any or all delinquent taxes and interest which may be due or owing the City of Louisville by reason of withdrawals or removals of distilled spirits which have not been reported to the assessing or collecting authorities of said City.
"Section 2. The compensation to be fixed for said Harry D. Kremer and the services to be rendered as herein enumerated, shall not exceed a sum equal to ten per cent (10%) of the taxes and interest which shall be recovered and paid into the Treasury of the City.
"Section 3. All settlements of taxes made by said Harry D. Kremer shall be subject to the approval of the City Attorney and all sums collected shall be paid directly to the City Tax Receiver or the City Treasurer.
"Section 4. The Mayor is authorized and directed to embrace in said contract all provisions necessary to carry out the intent and purposes of this ordinance, and to fully protect the City in the premises.
"Section 5. This ordinance shall take effect from and after its passage.
(Signed) F. E. THOMPSON C.B.C.
(Signed) D. B. EDIMSTON C.B.A.
"APPROVED June 18, 1925.
(Signed) JACOB L. ISAACS P.B.C.
*1078 (Signed) ARTHUR A. WILL P.B.A.
(Signed) HUSTON QUIN, Mayor."
Now, therefore, by authority of and in conformity with said ordinance the following agreement is hereby made and entered into by and between the parties hereto;
The party of the second part does hereby agree with the party of the first part that he will undertake to recover the delinquent taxes and interest owing to the City of Louisville and to cause the distilled spirits which have been omitted from assessment for taxation, by the City of Louisville, to be listed for taxation, and he, the said second party, agrees to do all things necessary in the premises, including the gathering of facts and data and in the preparation and filing of whatever suits are necessary and shall prosecute the suits brought to final judgment, and as compensation for his services under this contract the party of the second part shall receive ten per centum (10%) of any and all sums of money recovered for the City of Louisville under this contract.
It is understood and agreed by and between the parties hereto that said second party shall only receive said compensation of 10% on the taxes and interest owing on distilled spirits, which*1079 are now delinquent under the law, or on such distilled spirits which have been omitted from assessment.
It is further agreed that should any delinquent taxes and interest on distilled spirits be paid to first party, after the making of this contract, the said second party shall receive ten per centum (10%) thereof, even though he has not yet instituted suit against such delinquent taxpayer.
All sums recovered shall be paid directly to the Tax Receiver or Treasurer of the City of Louisville.
The party of the first part shall pay second party ten per centum (10%) of any sum recovered by him under this contract as soon after the recovery *571 thereof as such disbursement can be made with conformity to law and the ordinance.
No settlement of any taxes and interest, or suits therefor, shall be made without the consent of the City Attorney of Louisville.
The administrative officers and the city attorney of Louisville controlled, directed, and supervised the petitioner's legal work in the cases handled under the above contract. The cases were prosecuted in the name of the city. No penalty was imposed. The city allowed him the use of an office in the city hall.
*1080 The petitioner derived his information relating to taxes owed to the city by the distilleries from his work for the revenue agent. He instituted 11 suits, some of which resulted in the collection of taxes in 1926.
The compensation of the petitioner in all of the above work was a percentage of what he recovered. During the period involved he devoted all of his time to this work. The petitioner maintained a private office and hired a number of employees at his own expense. His employees usually consisted of an assistant, who was not a lawyer, a transcriber, a bookkeeper, and one or two stenographers. All of the investigating, traveling, and collecting of data done by the petitioner or his employees was at his own expense.
The petitioner never filed an income tax return for any of the years here involved. All of his income for the years 1924, 1925, and 1927 was received for his work for the revenue agent at large for the State of Kentucky. For 1922, $4,910.66 of his income was for his services to the revenue agent at large for the State of Kentucky and $2,122 of his income was received for work for a county or counties of the State of Kentucky. For 1926, $6,779.07 was received*1081 for his services to the revenue agent at large, $4,833.96 was received for his services to the county, and $12,671.95 was received for his services to the city of Louisville.
OPINION.
MURDOCK: The petitioner's services to the state, county, and city were rendered in connection with the exercise by each of an essential governmental function peculiar to sovereignty. The Commissioner does not contend to the contrary. There was no statutory provision for the employment of an attorney by the revenue agents. The petitioner, on his part, has conceded that he was not an officer of the state or any political subdivision thereof. Cf. ; affd., ; , in effect affirming . The question presented and argued is whether the petitioner was an independent contractor with *572 the state, county, and city, or whether he was an employee whose compensation could not be subjected to tax without imposing a burden upon his sovereign employer and interfering with the exercise of an essential function. No general rule has ever been laid down for the*1082 solution of such questions. Recourse must be had to the reason upon which the rule rests and the decision of each case must then be reached upon the facts in that particular case. ; . It will not be necessary in this case to enter into an extended discussion of underlying principles or to review the many cases on the subject. The Commissioner has held that this petitioner's income from these three sources was subject to tax. The petitioner has offered proof for the purpose, not only of overcoming the presumption of correctness attaching to the Commissioner's determination, but of showing further that he was in each instance an employee rather than an independent contractor.
It seems pretty clear that the petitioner was not an employee of Kenton County or of the city of Louisville and that the compensation received by him from these two political subdivisions was properly subjected to tax by the Commissioner. He entered into two contracts with the county. His services were sought in each instance for the purpose of accomplishing a particular result. *1083 ; . He was engaged only temporarily and, apparently, because of some special knowledge which he had relating to a certain group of taxpayers. Cf. . He was required to use his judgment and professional skill to bring about a desired result. The same was true of his relations with the city of Louisville. He did not devote all or even the principal part of his time to the work of the county or city and neither had first call upon his services. Cf. . He maintained his own office, employed his own office force, and paid his own expenses. Cf. He chose the time and manner in which the work was performed, and the control to which he was subject was not inconsistent with the relation of attorney and client. The facts of record indicate that the petitioner was an independent contractor with Kenton County and the city of Louisville. *1084 Cf. ; ;
The question of the taxability of the amounts which he received from the revenue agent for services performed for the state is somewhat closer. The state had first call upon his services, and the larger part of his time was devoted to state work. He was required to give bond. He was engaged for a definite period and could only be *573 removed during that period by the revenue agent for cause. His work has been continuous. He was not engaged to handle an isolated case or group of cases. He was not left entirely to his own devices to accomplish a desired result. Cf. . Instead, he was required to submit his work at times for approval by the revenue agent and the state tax commission. He testified that the revenue agent and the state tax commission supervised, directed, and controlled his work. But the extent of this supervision, direction, and control was not explained as fully as it might have been. Cf. *1085 However, his general statement was not contradicted. The above facts and other facts which might have some tendency to show that he was an employee of the state have not been overlooked. Nevertheless the evidence as a whole tends to support the Commissioner's determination. There was no statutory provision authorizing the revenue agent at large to employ an attorney. Yet he needed attorneys and he entered into a contract with the petitioner. Thus the terms under which the petitioner was engaged to render services were fixed by contract and not by law. Cf. . The revenue agent engaged him and paid him. His compensation for each case which he handled successfully was computed separately. He received nothing for work which did not result in the collection of taxes. The petitioner maintained his own office, employed his own office force, and paid his own expenses. Cf. He usually selected the work which he was to do and chose his own time for doing it. His training, skill, and judgment determined the way in which the work was*1086 done. The revenue agents were not attorneys. It does not appear that the state tax commissioners were attorneys, neither does it appear that the supervision, direction, and control exercised by these agencies over the petitioner was inconsistent with the relationship of attorney and client.
The petitioner also argued that his income from these three sources would not be taxable because in each instance he acted as an agency of a political subdivision of a state through which it exercised an essential governmental function and to tax his income would impose a burden upon the state. His case, however, is no stronger on this contention than was the case of The evidence does not show that the imposition of this tax would impair in any substantial manner the taxpayer's ability to discharge his obligations to the political subdivisions or the ability of the latter to procure the aid of private services.
The petitioner is liable for the penalty computed upon his income subject to tax, since he filed no return reporting this income. *1087 It does not matter why he failed to file a return. Section 3176, Revised *574 Statutes as amended by section 1003, Revenue Act of 1924, and section 1103, Revenue Act of 1926. ; ; ; ; .
Reviewed by the Board.
Decision will be entered for the respondent.