*559 1. Petitioner, an attorney, was chosen by a county trustee (collector) of a county in Tennessee to prepare and file suits in the state courts for the collection of delinquent land taxes. He gave no bond, took no oath, handled no tax money, was compensated solely by receiving the 10 percent additional assessed against the delinquent taxpayer, employed his own assistants, and paid them out of his funds. Held that notwithstanding the fact that he was permitted to use an office in the court house and devoted all of his time to the institution and prosecution of such suits, he was not an officer or employee of a state or political subdivision and the compensation received by him was not exempt from the Federal income tax.
2. Penalty prescribed by the revenue act for failure to file an income tax return or to report the receipt of income, held properly imposed.
*111 This is a proceeding for the redetermination of deficiencies in income tax and penalties as follows:
| Year | Deficiency | Penalty |
| 1924 | $1.44 | $0.36 |
| 1925 | 9.93 | 2.48 |
| 1926 | 124.42 | 31.10 |
| 1927 | 286.72 | 71.68 |
| 1928 | 438.40 | 109.60 |
| 1929 | $401.49 | $100.37 |
| 1930 | 889.99 | 222.50 |
| 1931 | 542.80 | 135.70 |
| 1932 | 3,824.32 | |
| 1933 | 1,581.59 |
*560 The issue raised by the pleadings are, (1) whether or not the income, upon which the above deficiencies and penalties are predicated, is exempt from Federal income tax as compensation received by petitioner as an officer or employee of the State of Tennessee and certain political subdivisions thereof, or in any event as an essential *112 part of the agency set up by the state for the collection of delinquent taxes; and (2) whether or not respondent erred in asserting penalties for failure to file returns.
FINDINGS OF FACT.
Petitioner is, and for about thirty years has been, a licensed attorney at law, practicing his profession at Memphis, Tennessee. Memphis is the county seat of Shelby County.
The statutes of Tennessee provide that all taxes, state, county, and municipal, shall be collected by the county trustees. He is the person who is primarily charged with the tax aggregate from the county assessor. Before exercising any of the rights or privileges of a collector of taxes, he is required to give bond and, in open court, at the time of executing his bond, to subscribe to an official oath. The tax aggregate, with which he is charged, is due and payable on the*561 first Monday in October - except certain municipal taxes - and becomes delinquent, subject to interest and penalties, on the first day of May following.
After taxes become delinquent the county trustee has power to appoint such deputies or constables as may be necessary for their collection, and in such cases he is required to furnish the deputy or constable with a list of the delinquent taxpayers, a description of the property assessed, and the amount of taxes due. The deputy or constable executes and files with the trustee his bond, with sureties, and is charged with the aggregate amount of taxes in his hands for collection. On the first day of June he makes a settlement with the county trustee.
Ten days before taxes become delinquent the county trustee is required to publish a warning to taxpayers, and all taxes remaining delinquent for 30 days "shall immediately be collected by the county trustee by distress and sale of any personal property liable therefor; and the tax books in the hands of said trustee and the delinquent lists to be furnished by him to deputy trustees * * * shall have the force and effect of a judgment and execution from a court of record * * *." Provision*562 is made for the sale of personalty, for garnishment proceedings against the delinquent taxpayer, and for compensation to the officer making the collection.
On or before the first day of January following the receipt by the deputy of the delinquent tax lists, he is required to make final settlement with the trustee, returning the lists and showing in his return "what disposition was made of each item of taxes therein set out and the reason for not collecting items remaining unpaid." The deputy is allowed no credit, by way of releases, until the delinquent lists have been returned. From the first day of January until the first day of February and until the bill is filed to collect delinquent *113 taxes, delinquent taxes may be received at the office of the county trustee.
As a preliminary step towrad enforcing the lien for uncollected land taxes charged to him on the tax books, the trustee is required to publish in one or more newspapers of the county for two consective weeks in the month of January, a notice, advising the delinquent taxpayers - "After February 1, additional penalties and costs will be imposed in consequence of suits to be filed for enforcement of the lien*563 for taxes against land; until the filing of such suits, taxes may be paid at my office. County Trustee."
After the publication of the aforesaid notice, and between the dates of February 1 and March 1, the trsutee is required to deliver the delinquent lists showing all unpaid land taxes to an attorney chosen by him with the approval of the county judge, or chairman of the county court, and it is the duty of the county trustee and the county judge, or chairman "to cause said attorney to prepare and file suits in the chancery or circuit courts for the collection of all delinquent land taxes, and all arrears of taxes due the state, county and municipality; and, so that delinquent and municipal taxes may be collected at the same time as other taxes, it shall be the duty of the proper municipal officers to furnish the county trustee or his attorney, certified lists of delinquent municipal taxes, unless otherwise provided."
"After the filing of said suits, the county trustee shall submit to the county court a list of delinquent taxes reported uncollected, as the insolvent list, the said court shall allow credit for such uncollected taxes when the trustee has caused suits to be instituted*564 for their collection as provided in this law, but not otherwise." (Sec. 1589, Michies Tennessee Code of 1932.)
"Upon the filing of suits to enforce the tax lien, an additional penalty of ten percent upon all delinquent land taxes shall accrue and the same is imposed upon the amount due from any defendant to the state, county, or municipality, which penalty shall be devoted to the expense of prosecuting said suits and shall be allowed to the attorney filing the suits as compensation for his services * * *." (Sec. 1590, Michies Tennessee Code of 1932.)
The attorney was required to file suits in the circuit or chancery courts of the county after February 1 and not later than March 1. The act authorized including in one bill "the names of all the delinquent taxpayers in the county." It authorized pro confesso being taken and entered against any one or more defendants included in the bill and the cause proceeded with, against any one or more, to a final judgment and a sale of the property without affecting the rights of the other parties to the suit; authorized any one or more of the defendants to appeal, without affecting the standing of the cause as to other parties; and provided*565 that any defendant, after the filing *114 of the suit, might have it dismissed as to his property by paying into court the amount of taxes due from him, together with interest and penalty and such costs as had accrued against him.
The money paid into court was received by the clerk and paid out by him in the same manner as other public revenue.
On or about the first of February 1924 petitioner was appointed by the county trustee of Shelby County, Tennessee, as the attorney to institute suits or suits for the collection of delinquent taxes in that county, under the statutory provisions summarized above. His appointment was properly approved by the chairman of the county court. Thereafter petitioner was duly reappointed for each of the taxable years involved in this proceeding, and, since his initial appointment, has done no legal work in any of the courts or otherwise, for which he received a fee or compensation, except in connection with the filing of the suits for the delinquent taxes. Since 1924 he has not maintained a private law office of any kind.
In the Shelby County court house, but separate and apart from the office of the county trustee, is a large room*566 in which the delinquent tax records are maintained. The county court, the administrative agency of the county, employed some clerks, paid them from the general fund, and, during the period of time that petitioner served as attorney for the collection of delinquent taxes, said employees worked, to some extent, under petitioner. Their duties were, chiefly, computing the taxes, interest, and penalties due and preparing statements therefor, when a delinquent taxpayer, desiring to pay the tax and to have the bill dismissed as to him, called in person at the office. Petitioner spent most of his time at this office, which was commonly referred to as the "Delinquent Tax Office", and, after the clerks had made out a statement, showing the description, valuation, tax, interest, penalty, attorney's fee, commission, court costs, etc., in connection with the delinquent taxpayer's - defendant's - property, he would "O.K.", the statement, which was then taken to the clerk's office and paid. When the statement was stamped "Paid" and returned to the office, petitioner then prepared and signed a stipulation of dismissal of the action as to the paying defendant, caused it to be filed in the pending*567 action, entered by the clerk upon the minutes of the chancery court and authenticated by the presiding chancellor.
The clerk of the court periodically distributed the moneys collected by him, paying over to petitioner the 10 percent of the tax allowed ot him. Petitioner and his employees handled no tax money, the statutes requiring that, after suit had been filed, payment should be made into court.
During the taxable years in question petitioner received, as fees in the tax suits, amounts ranging from $3,268.32 in 1924 to $37,312.39 *115 in 1932. Inasmuch as the petitioner concedes that the tax, if any is due, has been correctly computed, it is unnecessary to set out herein the exact amount received by him in each year.
Petitioner employed typists and stenographers to assist him in preparing the bills in chancery and paid them from the commissions or fees which he received. Such employees, however, made no entries in the tax books of the county and had no authority to do so. Petitioner could remove such employees at will and they were answerable only to him. The county furnished and paid for all stationery, printed forms, typewriters, and furniture used in the*568 office.
In 1933 the Legislature of Tennessee passed an act known as chapter 22 of the acts of that year, providing that no further suits should be brought and that pending suits for the collection of delinquent taxes should not be prosecuted until a subsequent date. Thereafter petitioner took no further steps to file such suits or to prosecute the pending actions. In 1933 and 1934 the county court of Shelby County, by resolution, removed all penalties and interest from delinquent taxes. In 1935 the legislature provided that the further prosecution of all suits for taxes from 1920 to 1933 should be suspended until January 1, 1936, and by the same act, reduced the compensation of the attorney from 10 percent to 3 percent.
Petitioner took no oath of office and furnished no bond, neither being required. He was neither an officer nor an employee of Shelby County, of the city of Memphis or of the State of Tennessee.
Petitioner filed no Federal income tax returns for the years 1924 to 1931, inclusive. In his returns for 1932 and 1933 he reported the amounts received as fees for instituting and prosecuting the delinquent tax suits, but claimed that they were exempt in their entirety. *569 The respondent denied the claim for exemption and determined the deficiencies shown above.
OPINION.
MELLOTT: Petitioner contends that the compensation received by him is exempt from the Federal income tax under the rule, often enunciated by the courts, many times applied by this Board, and implicit in our dual system of government, that neither sovereign may tax the means or instrumentalities through which the other exercises usual, traditional, or essential governmental functions. For "the power to tax involves the power to destroy." ; ; ; ; ; ; .
*116 Just what instrumentalities or agencies of a state are exempt from the Federal tax "cannot be stated in terms of universal application" but each case must be determined upon its own facts. *570 ; . While it is true, as stated by petitioner upon brief, that courts do not attempt to limit or define the precise line of demarcation between those activities having some relation to government, "which are nevertheless subject to taxation, from those which are immune", , and while it is also true that the Treasury Department can not do so by regulation ( ), nevertheless the Supreme Court has held specifically that "one who is not an officer or employee of a state, does not establish exemption from Federal income tax merely by showing that his income was received as compensation for service rendered under a contract with the state."
Finding has been made that petitioner was not an officer. Such finding is a mixed finding of fact and conclusion of law, premised upon the failure of the petitioner to show that an office, as defined by the Supreme Court, embracing the idea of tenure, duration, emoluments, and duties fixed by law, had been created by legislative enactment*571 of the State of Tennessee. The statutes merely authorize the county trustee to appoint an attorney to institute and prosecute suits for the collection of delinquent taxes or the foreclosure of the tax liens. While it is true that petitioner served for one year under each appointment, he was not appointed for any definite period. For aught that is contained in the law, the county trustee could have superseded him at any time, with or without cause. He took no oath of office and furnished no bond, neither being required. He was free to engage in other activities if he had seen fit to do so. These circumstances indicate, and seem to require the finding or conclusion, that he was not an officer.
Upon brief petitioner argues that he is - or was - an agency or instrumentality through which the state exercises one of its fundamental acts of sovereignty, the collection of taxes; that he was "a collector of state and county revenue", and "simply the third step in the collection of revenue." Manifestly he was not a true tax collector. He was charged with no taxes, handled no money, gave no bond, maintained no official records and filed no report. He was merely the "attorney chosen*572 by the county trustee with the approval of the county judge" to institute and prosecute suits against delinquent taxpayers and to foreclose the tax liens. His activities were stated by him as follows: "I physically handle no money. I prepare the statement * * * which is in turn sent to the clerk of the chancery court, who receipts for the money shown by the statement. * * * I *117 issue the formal dismissal." These are activities of an attorney rather than of a collector of taxes. For such activities he was paid a fee, contingent upon the amount recovered - an arrangement quite commonly made between an attorney and his client.
In , the petitioner, an attorney employed as chief counsel under the back tax law of Arkansas to prosecute suits in the state courts for the collection of back taxes, claimed that his compensation was exempt from the Federal income tax. He, like petitioner, was permitted to occupy an office in a publicly owned building, in that case the Statehouse, and to use, without charge, clerical and stenographic assistants paid by the state. He was paid a commission out of the collections made, his appointment*573 had no fixed term, he took no oath of office, gave no official bond, devoted his entire time to such work, engaged in no other law practice and had no other professional engagements or associations. It was held, following ; ; ;; and ; affd., , that compensation so received was not exempt from the Federal income tax. A similar holding was made in , where the taxpayer had been employed by the revenue agent of Kentucky, his compensation being paid out of the statutory fee allowed for making the collections.
It is apparent that petitioner was not an employee of the state or a political subdivision thereof. He had the "liberty of action" and freedom from detailed control or right of control possessed by an independent contractor but not by a mere employee. He was free to come and go as he pleased, to exercise his best professional skill and judgment in the*574 preparation and prosecution of the bills in chancery, to select, employ, and discharge his own assistants, and to employ means and instrumentalities of his own selection for the completion of the task undertaken. These are indicia of an independent contractor and the conclusion is inescapable that such was the relationship between petitioner and the political subdivisions of the state. It follows that the compensation received by petitioner was income, taxable to him under the revenue acts in force when it was received.
There remains for consideration the question whether or not the penalty should be assessed. Upon brief petitioner states that "the imposition of a penalty upon him would be the punishment of an innocent person who has acted throughout in the utmost good faith." He testified that at one time he had discussed with the collector of internal revenue whether or not he was liable for the tax and quoted him as stating, in effect, that he had "never heard of anyone occupying *118 your position" who ever paid the tax. He did not, however, ask for nor receive, an official ruling upon the subject.
*575 The statute is specific - section 3176 of the Revised Statutes as amended by section 1003 of the Revenue Act of 1924 and by section 1103 of the Revenue Act of 1926, and section 291, Revenue Act of 1928; and inasmuch as the petitioner filed no return reporting the receipt of the income the penalty must be imposed. "It does not matter why he failed to file a return." , and cases cited; ; (on appeal to the 9th Circuit); .
Reviewed by the Board.
Judgment will be entered for the respondent.
HILL, dissenting: Petitioner was appointed annually during a period of 10 years as attorney to file and prosecute suits for the collection of delinquent land taxes. He was appointed by the county trustee of Shelby County, Tennessee, with the approval of the chairman of the county court, pursuant to a statute enacted by the General Assembly of the State of Tennessee. The majority opinion holds that petitioner was neither an officer nor an employee of the state or of its*576 political subdivisions, nor an instrumentality for the exercise of a governmental function, and concludes that his compensation received as such attorney is subject to the Federal income tax. The conclusion reached, I think, is erroneous.
In the majority opinion it is stated that "The statutes merely authorize the county trustee to appoint an attorney to institute and prosecute suits for the collection of delinquent taxes or the foreclosure of the tax liens." I am constrained to disagree with the correctness of this statement.
Section 1588 of Michie's Tennessee Code (1932) provides that, between the dates of February 1 and March 1 of each year, the county trustee shall deliver the delinquent lists showing all unpaid land taxes to an attorney chosen by him, with the approval of the county judge or chairman of the county court; and section 1598 provides that if the county trustee and county judge fail to employ an attorney as required of them by the statute, and within the time provided for the filing of suits, the Commissioner of Finance and Taxation shall employ an attorney and file such suits, and for such failure of the trustee and county judge or chairman, *577 they shall pay to the State of Tennessee a penalty of 10 percent of all delinquent taxes shown by the delinquent lists in the office of the trustee. The appointment of the attorney appears, therefore, to be mandatory upon and not discretionary with the county trustee.
*119 Petitioner does not contend that he was an "officer" and the record establishes, in my opinion, that he was not. The statute created no "office" of attorney, and petitioner took no oath of office, nor gave any bond. But the question whether petitioner was an "employee" presents a more perplexing problem.
Petitioner had very limited, if any, independence of control in the mode, manner, and means of carrying on his work, which is said to differentiate the independent contractors from an employee or servant. ; . He was appointed pursuant to statutory authority, and the character and extent of his duties were specified by the statute, as well as to a very large extent the mode and manner of performing his duties. He was required to file all suits between February 1 and March 1 of*578 each year; the form of action and the court in which it should be brought were specified; he was required to file against all delinquents, even though in some cases the amount involved was not more than 25 cents; he could not dismiss any action or settle with the taxpayer for less than the full amount of tax, penalty and interest shown by the delinquent lists, except when specially authorized by the state and county officials to do so. Even petitioner's compensation was subject to regulation by the state legislature without his consent, and it was in fact so changed several times. His functions could be and were suspended by the legislature on occasion. He did not operate under a contract, but by virtue of appointment, and his functions involved matters in which the public was directly interested. He did not select and furnish his own office at his own expense, nor pay the salaries of his assistants, except only to the minor and incidental extent of typing the bills filed in court. He was not free to use his own efforts and instrumentalities and do the work as his judgment dictated. *579
On the other hand, petitioner was furnished an office in the county court house designated "Delinquent Tax Office." All furniture and supplies, printed forms and regularly employed assistants were furnished and paid for by the county. He was the head of the office, and the clerks furnished by the county worked under his direction. He devoted his full time to the performance of his duties. He was appointed annually, the tenure under each appointment being for one year.
All of these are qualifications of an "employee", and in my opinion, taken together, serve to bring petitioner well within such classification and exempt his compensation from the Federal tax.
However, in addition to the status of the petitioner as an employee, I am impelled for another reason and on a different ground to reach the same conclusion respecting the exemption from taxation of his compensation. The record establishes, in my opinion, that he was *120 an integral and essential part of the machinery or agency set up by the state legislature for the collection of delinquent taxes.
*580 It is now settled law that the income of even an independent contractor is immune to Federal taxation where such income arises out of an instrumentality through which a state immediately and directly exercises its sovereign power. ; .
In , the Supreme Court stated this principle as follows:
* * * this court has repeatedly held that those agencies through which either government immediately and directly exercises its sovereign powers, are immune from the taxing power of the other. Thus the employment of officers who are agents to administer its laws * * * its obligations sold to raise public funds * * * its investments of public funds in the securities of private corporations, for public purposes * * * surety bonds exacted by it in the exercise of its police power * * * are all so intimately connected with the necessary functions of government, as to fall within the established exemption; and when the instrumentality is of that character, the immunity extends not only to the instrumentality*581 itself but to income derived from it * * *.
The General Assembly of the State of Tennessee, by the statutes hereinabove referred to, created a definite plan for the collection of taxes and provided therein the machinery for the operation of such plan. It consisted of three separate and distinct steps or divisions.
First, the county trustee was charged with the collection of taxes until they become delinquent.
Second, within 30 days after the taxes became delinquent, it was the duty of the county trustee to prepare delinquent lists and deliver to deputy trustees, sheriffs, or constables appointed by him, who, in turn, were charged with the collection of such taxes by distress and sale of personal property until the first day of the following January, when the lists of any taxes then remaining uncollected were returned by the officers to the county trustee.
Third, the county trustee was then required under penalty to deliver the lists to an attorney selected and appointed by him, with the approval of the county judge or chairman of the county court, to file suits for the collection of all delinquent land taxes. After the filing of suits the county trustee was relieved*582 of all responsibility and had no further connection with the collection of the taxes. From that time on, petitioner was the sole agency or instrumentality through which the taxes could be collected.
Certainly, the chancery court, in which the suits were filed, could not properly be called a tax collecting agency. It could take no initiative in the filing and prosecution of suits; its function was that of a judicial tribunal. Nor was the clerk of the court, to whom the *121 taxes were paid as a result of suits instituted by petitioner, a collector of taxes. It was not his duty to take any steps to file or prosecute suits or otherwise enforce collection. He merely received the money and administered the general fund into which it was paid, as a result of the activities carried on by the petitioner. It was through the efforts of the petitioner and petitioner alone that collection of the taxes was enforced. After the suits were filed there was no other officer, agent or instrumentality provided by the legislature whose business or duty it was to take any action to enforce collection of delinquent taxes. The county trustee could not even receive the money and give*583 a valid receipt therefor, if payment of the taxes had been tendered at his office.
From these considerations, I can not escape the conclusion that petitioner was an indispensible part of the machinery created and set up by the state legislature for the collection of taxes, and the sole agency for collection of delinquent land taxes by suit; and being an essential part of the "instrumentalities, means and operations" whereby the State exercised a governmental power appropriately belonging to it, his compensation is exempt from taxation by the United States.
The majority opinion cites and relies, among others, upon the decision in , which in turn cited , affd., . All of the cases so cited are, in my opinion, clearly distinguishable on principle from the instant case.
Johnson was employed under the provisions of the so-called back tax law of Arkansasto assist the attorney general in connection with the filing of suits for the collection of certain delinquent corporation taxes. The primary duty devolved upon the attorney general, and the statute provided*584 only that "the Governor is authorized to employ any attorneys that may be necessary to assist the Attorney General in such suits." It seems plain to me that attorneys so appointed did not constitute the exclusive machinery or agency set up by the legislature for the collection of delinquent taxes. Appointment was not required but merely authorized when necessary. Such attorneys were merely incidental when appointed, and were not an integral or essential part of the tax collecting instrumentality. If such attorneys were not appointed, there still remained responsible officers or agencies for the collection of the taxes.
Roberts was appointed pursuant to an act of the Legislature of the State of Georgia, which authorized the state tax commissioner, under certain specified conditions, to employ "competent men" to investigate tax matters in the several counties of the state, with a view to assisting the local authorities in securing proper returns of ad valorem taxes. Here again the appointee was not an essential *122 part of the tax collecting agency, but merely incidental or supplemental. He was not only not an integral part of the tax collecting machinery, *585 but his appointment was authorized only under certain special circumstances.
On the first issue, the decision, in my opinion, should be for the petitioner. On the second issue, it would follow that, since there is no taxable income, no penalties are due for failure to file returns.
TYSON agrees with this dissent.