Lohman v. Commissioner , 45 B.T.A. 495 ( 1941 )

IRA H. LOHMAN AND IDA MAY LOHMAN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Lohman v. Commissioner

Docket No. 98604.

United States Board of Tax Appeals

45 B.T.A. 495; 1941 BTA LEXIS 1110;

October 28, 1941, Promulgated

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">*1110 Petitioner and several other attorneys were engaged by the State of Missouri to defend the interests of the state and of the policyholders in fire insurance rate litigation cases. In May 1935 an agreement of settlement was entered into between the state and the insurance companies in which the latter agreed to pay $500,000 to the attorneys for the services which they had rendered the state in the litigation. Petitioner received $63,540 in 1936 as his portion of the amount paid in that year by the fire insurance companies in accordance with the settlement. Under the evidence it is held:

(1) Petitioner was not an employee of the State of Missouri.

(2) The taxation of the fee received by petitioner does not impose any substantial burden on the state; and

(3) The compensation received by petitioner is not exempt from Federal income tax.

John F. Rhodes, Esq., for the petitioner.

R. P. Hertzog, Esq., for the respondent.

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MELLOTT

">*495 Respondent determined a deficiency in the income tax of petitioners in the amount of $16,235.31 for the calendar year 1936. The sole ">*496 issue is whether compensation received by Ira H. Lohman for">*1111 legal services rendered to the State of Missouri is exempt from Federal income tax.

FINDINGS OF FACT.

Petitioners, husband and wife, are residents of Jefferson City, Missouri. Their joint income tax return for 1936 was filed with the collector of internal revenue for the sixth collection district of Missouri. Ira H. Lohman will hereinafter be referred to as the petitioner.

On December 30, 1929, all of the stock fire insurance companies doing business in the State of Missouri increased their premium rates 16 2/3 percent. The Superintendent of Insurance for the State of Missouri refused to sanction and approve this increase, and on May 28, 1930, the insurance companies instituted actions against him and the Attorney General of Missouri for injunctions and to secure a review of the order refusing approval of the proposed increase in the insurance rates. Approximately 157 suits were brought by the companies in the District Court of the United States for the Western District of Missouri, most of the arguments being made before, and most of the orders being issued by, a three-judge court. Seventy-five companies joined in the filing of a similar suit in the Circuit Court of">*1112 Cole County, Missouri. These proceedings will hereinafter be referred to as the insurance rate litigation cases. The 16 2/3 percent increase in rates was collected from policyholders in Missouri from June 1, 1930, to May 1, 1935, and impounded pending the outcome of the litigation, approximately $10,000,000 being impounded in connection with the proceedings pending in the Federal court and approximately one and three quarter millions being impounded in connection with the action in Cole County.

In May 1930 the insurance department of the State of Missouri had only one regular monthly salaried attorney on its staff. Under the statutes of Missouri the attorney general is the legal adviser of the superintendent of insurance, but the superintendent may, with the approval of the governor, employ other counsel for the purpose of enforcing the insurance laws, except in criminal prosecutions. Due to the broad scope and importance of the insurance rate litigation cases, it became necessary and desirable to obtain the best legal talent available to defend the actions brought by the insurance companies. The attorneys selected and the dates of their appointments were as follows:

June 7, 1930, Ira">*1113 H. Lohman.

June 27, 1930, Justin D. Bowersock.

Nov. 22, 1930, John T. Barker.

Dec. 1, 1930, G. C. Weatherby.

Sept. 1933, Floyd E. Jacobs.

">*497 No attorney was consulted about employing any other attorney, nor was the consent of any of the attorneys asked by the superintendent of insurance, the attorney general, or the governor to the employment of other attorneys. None of the attorneys named above had the right to say what other attorney, if any, should be employed or discharged.

Petitioner's appointment, signed by the superintendent of insurance and approved by the governor, reads as follows:

State of MissouriCounty of Cole ss:

I, Joseph B. Thompson, Superintendent of the Insurance Department of the State of Missouri, by virtue of the power and authority conferred upon me by Section 6089 of the Revised Statutes of Missouri, 1919, do hereby appoint

Ira H. Lohman

of Jefferson City, Missouri, as Counsel for the Department for the purpose of enforcing the Insurance Laws of the State.

Witness my hand and the seal of the Insurance Department of the State of Missouri, this 7th day of June, A.D. 1930.

[Signature.]

On July 3, 1930, an agreement">*1114 was entered into between the then attorney general of the state and the superintendent of insurance, parties of the first part, and petitioner and Justin D. Bowersock, parties of the second part. The agreement, after reciting that parties of the second part had been designated as "special counsel" to represent the parties of the first part in the insurance rate litigation cases, and that the parties of the first part desired to bind themselves and their successors in office "on the point of compensation of the second parties hereto for such services so to be rendered as special counsel in said causes", provided: (1) That the parties of the second part should be paid from time to time out of appropriations made by the General Assembly of the State of Missouri for the conduct of the defense of the suits, as agreed from time to time by the parties; (2) that, upon conclusion of the litigation by final decision, settlement or compromise, the parties of the second part should be paid "by allowance of court out of any fund or funds representing excess of premium charges" resting in the hands or under the supervision of the courts, an amount to be fixed by the court or courts; (3) that any">*1115 payments to the parties of the second part out of moneys appropriated by the general assembly for the purposes of defraying expenses of the litigation were not to be construed as a limitation upon the right of the second parties to be paid out of any funds in the hands of the courts representing excess premium charges, but such payments from funds appropriated should be taken into account in determining the amount finally to be allowed to the second parties; and (4) that if at the conclusion of the litigation no funds should be in the hands or under the supervision of ">*498 the courts, the parties of the first part would urge the general assembly to make an appropriation of an adquate sum for the purpose, commensurate with the character of the services rendered.

Under the Statutes of Missouri the superintendent of insurance has complete charge of all matters relating to the conduct of all kinds of insurance in the state. The supervision of insurance and insurance companies is an essential governmental function.

From 1930 to July 1933, the superintendent of insurance was Joseph B. Thompson. Thompson was succeeded in office by R. E. O'Malley on July 1, 1933. Neither of">*1116 these officials was an attorney. Practically all of petitioner's services were rendered during the incumbency of Thompson. Thompson did not consider petitioner and the other attorneys engaged in the insurance rate litigation to be regular employees required for carrying on the normal affairs of his department. Regular employees of the department were carried on the pay roll on a monthly pay basis. In preparing the list of employees of the insurance department for the "Blue Book" published by the secretary of state's office, which contained a list of employees employed in various departments of the state government, Thompson did not include therein the names of petitioner and the other attorneys engaged in the insurance rate litigation, and their names did not appear in this publication as employees of the insurance department during the years 1930 to 1936, inclusive. Two other attorneys, designated counsel and assistant counsel of the department, were, however, listed in some of the issues of the "Blue Book."

Prior to 1933, the petitioner and the other special attorneys who were employed to handle the insurance rate litigation engaged in preparing pleadings joining the issues">*1117 in the cases, taking testimony and conducting hearings, and assembling the evidence. Thereafter, the work of the attorneys who were not discharged when the state administration changed consisted principally of writing and filing briefs and making oral arguments in court. There were no arguments of importance before July 1, 1933.

During his term of office Thompson passed upon all questions of policy arising in connection with the insurance rate litigation. He told petitioner and the other special attorneys what he wanted done, but did not presume to tell them how they should conduct hearings or defend the litigation. In the beginning of the litigation, he ordered that his theory of rate making be preserved in the answers and pleadings. How this should be done was left to the discretion of the attorneys. On one occasion, when the attorneys were considering stipulating the experience of about fifteen small companies on the West Coast and in Texas, Thompson directed that this not be done and that testimony on this point be taken.

">*499 In the latter part of 1930, Thompson decided he needed an attorney "to keep track of what was going on", to correlate the activities of">*1118 the special attorneys, and to be available at all times to advise with him concerning these activities. With this in view he designated G. C. Weatherby to serve as chief of counsel in December 1930. In order to accept this assignment Weatherby resigned as assistant attorney general. Thereafter he kept the superintendent and governor informed as to the progress of the litigation, and often asked for their opinions before taking a decisive step. As chief of counsel, Weatherby did not attempt to tell petitioner how he should do the work assigned to him, and petitioner understood that he was to elicit such facts as he could to support the defense they were making. Petitioner and the other special attorneys consulted with Weatherby at frequent intervals, and discussed many times the issues in the cases and the things the state wanted to prove. Weatherby informed them at these meetings of any instructions he had received from the superintendent of insurance. At times Thompson told Weatherby he desired certain attorneys to conduct the examinations of witnesses in a particular case and upon one or two occasions he designated the place where hearings were to be held. Sometimes he directed">*1119 the number of attorneys to be sent to a particular hearing and upon several occasions urged that all counsel join in the preparation of briefs. He was usually advised by Weatherby as to the contents of the briefs before they were forwarded to the printer. In one instance he directed Weatherby not to oppose a motion made by certain banks of Jefferson City in the Circuit Court of Cole County to have impounded funds shifted from his possession to the custody of the court so that they might be deposited in the banks, and in another warned him that no steps should be taken toward a settlement of the rate litigation during his administration.

At the time Weatherby was appointed as special attorney, Thompson had an agreement with him that he should devote all of his time to the work of the insurance department and he was furnished an office and stenographer in the department. Thompson did not have such an agreement with petitioner and the other special attorneys, and did not furnish them office space or stenographic assistance. They were employed primarily for the purpose of handling the fire insurance rate litigation, and with a few exceptions, their work for the department was confined">*1120 to this litigation and related matters. Weatherby sometimes called upon the other special attorneys for, and received, advice from them on other matters assigned to him by the superintendent, but no formal opinions were rendered by them on such matters.

">*500 At the time petitioner was appointed, he was told that expenses incurred in traveling would be paid, and he was given a receipt book, used by employees of the state. Petitioner paid his expenses and took a receipt for every item over $1. He filed expense accounts with the receipts attached, and, after approval by the head of the department and auditor, he received warrants from the state treasurer for the amounts expended.

Petitioner took no oath of office and furnished no bond, neither being required by the state statutes. During the time he rendered services to the state in connection with the insurance rate litigation cases, he engaged in private practice and maintained a law office in Jefferson City, Missouri. Any office work required in the insurance cases was done in this office. From July 1931 until July 1933, 75 to 90 percent of petitioner's time was actually used by the insurance department, which had">*1121 frst call upon his services. On several occasions he had to employ other counsel to look after cases connected with his private practice. The income realized from his private practice, and reported in his income tax returns for 1931 to 1936, inclusive, was as follows:

Year	Gross income	Expenses	Net income
1931	$11,285.53	$2,985.32	$8,300.21
1932	8,215.31	2,604.13	5,611.18
1933	7,319.93	2,630.30	4,689.63
1934	6,357.79	2,268.63	4,089.16
1935	5,349.58	2,160.72	3,188.86
1936	3,315.57	3,647.59	(332.02)

For services rendered to the insurance department, petitioner was paid from time to time out of appropriations that were made available to that department by the state legislature. The superintendent of insurance determined the amount petitioner was to receive and paid him and the other attorneys as much as he thought they should receive and the appropriations would stand. The first payment received by petitioner was in 1930. The amount of this payment was not shown. In 1931 he received approximately $8,000, and in 1932, $7,500. These payments were not made in a lump sum but varied in amount from $1,500 to $2,500 or $3,500, the larger">*1122 amounts usually being paid in the latter part of the year, when the superintendent knew how much he had left in the appropriation for that year. Payments thus made to petitioner and the other attorneys were not considered or understood to represent the total amount of their compensation. The special attorneys, including petitioner, did not receive any compensation during 1933, the appropriation received by the insurance department for that year being small and all being required for other purposes.

">*501 On or about July 8, 1933, petitioner received a letter signed by O'Malley and the Attorney General of Missouri advising him of the termination of the contract of July 3, 1930, and that he was not thereafter "to represent the State of Missouri under and by virtue of said purported contract."

The superintendent of insurance did not request petitioner to perform any services during the period from July 8, 1933, to the date settlement was effected, as hereinafter set out, in 1935. Barker, Weatherby, and Jacobs, however, who handled the rate litigation after July 8, 1933, consulted with him on a few occasions about matters connected with the litigation.

Early in 1935 the">*1123 attorneys handling the litigation were advised by the governor that the superintendent of insurance and a representative of the insurance companies had practically arrived at the terms of a settlement of the rate litigation, but that some negotiations would have to be had with reference to putting them in form. Barker and an attorney for the insurance companies were requested to prepare the necessary orders, stipulations, and contracts embodying the terms of the settlement for the signatures of the respective parties.

The settlement agreement, as ultimately prepared, was not introduced in evidence before us. It appears to have provided that O'Malley should make an order retroactive to June 1, 1930, approving four-fifths of the proposed increase and disapproving one-fifth thereof; that 80 percent of the impounded fund should be paid to the insurance companies and 20 percent to the policyholders; and that the companies should reimburse the state for its expenditures of $200,000 and pay the special attorneys engaged by the state $500,000 for their services in connection with the rate litigation. This amount was determined by the governor and the superintendent of insurance to be">*1124 reasonable compensation for the services of the special attorneys prior to the time that Barker and the other attorneys were advised as to the terms of the settlement. At the request of the governor and the superintendent, petitioner, as one of the attorneys who had been active in the litigation, signed the stipulations, and during 1935 and 1936 rendered some assistance to Barker in the preparation of briefs and other matters incident to securing approval of the settlement by the Federal court. The settlement agreement was signed on or about May 20, 1935, and was approved by the Federal court in February 1936.

On May 23, 1935, the Circuit Court of Cole County entered a final decree, dismissing the bill filed by the 75 companies and ordering that the funds impounded in the registry of the court be disbursed among the policyholders lawfully entitled thereto. Upon appeal by ">*502 the companies to the Supreme Court of Missouri, the proposed settlement, dividing the impounded funds one-fifth to the policyholders and four-fifths to the insurance companies, together with a joint motion and stipulation for decree, was filed with the court. The court refused to approve the proposed">*1125 settlement and affirmed the order of the circuit court that the impounded funds be disbursed to the policyholders.

Approximately 85 percent of the impounded funds had been impounded in the Federal court and, since the settlement resulted in the release of only the funds which had been impounded in that court, the insurance companies took the position that they should pay only the same percentage of the $200,000 which was to be paid to reimburse the state and of the $500,000 which was to be paid to special counsel. In 1936 a representative of the insurance companies called at the office of the superintendent of insurance with a check in the amount of $423,600 to be applied upon the compensation of the attorneys. The check is not in evidence. It appears to have been payable to Barker as trustee for all of the attorneys. The superintendent of insurance phoned Barker and, following conversation with him, the check was delivered by the representative of the insurance company to Barker in Kansas City on the day following the telephone conversation. The attorneys concluded that there was nothing they could do except to accept that amount and receipt for it. Subsequently, and after">*1126 it was determined that the companies were not to receive any part of the funds impounded in Cole County, a check for the balance of the fee or $76,400 was delivered to Barker in 1938.

Pursuant to agreement among the special attorneys, petitioner received in 1936, as his share of the payment made in that year, the sum of $63,540. He did not include this amount in the taxable income reported by him in his income tax return for 1936. The deficiency here involved results from the respondent's determination that the $63,540 constituted taxable income.

OPINION.

MELLOTT: The parties agree that petitioner was not an officer of the State of Missouri, and that the insurance department of the state is an instrumentality thereof, engaged in the exercise of an essential governmental function. Petitioner contends that the amount which he received was compensation for personal services rendered as an employee of the state and therefore exempt from Federal income tax.

In Graves v. New York ex rel O'Keefe (1939), 306 U.S. 466">306 U.S. 466, the Supreme Court held that salaries of employees or officials of Federal ">*503 instrumentalities are not immune under the Federal Constitution">*1127 from taxation by the states. The principle enunciated in the Graves case, supra, and State Tax Commission v. Van Cott (1939), 306 U.S. 511">306 U.S. 511, that a state may impose an income tax on Federal employees is applicable to taxation by the Federal Government upon the income of state employees. See Helvering v. Gerhardt,304 U.S. 405">304 U.S. 405; J. E. Huckabay,40 B.T.A. 9">40 B.T.A. 9; John T. Rowland,40 B.T.A. 11">40 B.T.A. 11; affd., 115 Fed.(2d) 504.

In order to relieve state officers and employees from any hardship which might result from the retroactive application of a Federal income tax on their salaries, which, prior to the Graves decision, had been considered to be immune from such tax, Congress enacted the "Public Salary Tax Act of 1939." This act provides for the abatement, credit, or refund of income tax upon "compensation for personal service as an officer or employee of a state, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing" for all years prior to 1938, with certain exceptions not here material; but "the term 'officer or employee' has a meaning no broader">*1128 than that formerly given to the same words in exemptive provisions of income tax statutes and regulations," Coates v. United States, 111 Fed.(2d) 609, affirming 28 Fed.Supp. 320, and "the immunity was to be no broader and no narrower" than it was prior to the Graves case. Meigs v. United States, 115 Fed.(2d) 13.

Upon brief the parties cite and discuss at length a large number of cases decided by the courts and this Board determining whether certain individuals were, or were not, employees of a state. The leading case on the question is Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514. In that case the taxpayers received compensation for personal services rendered as consulting engineers for various municipalities in connection with water supply and sewage assessments. In determining that they were independent contractors, rather than employees of the state, the Supreme Court said:

* * * 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">*1129 them liberty of action which excludes the idea of 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.

In David A. Reed,13 B.T.A. 513">13 B.T.A. 513, this Board held that the petitioner, who was engaged as a special attorney by the Attorney General of Pennsylvania to handle certain litigation, was not an employee of the Commonwealth of Pennsylvania and that the compensation ">*504 received by him for such services constituted taxable income, stating: "By the weight of authority, it appears that the crucial test lies in the right of control, or lack of it, which the employer may exercise respecting th manner in which the service is to be performed and the means to be employed in its accomplishment, as well as the result to be attained." In support of the conclusion reached the Board quoted from Singer Manufacturing Co. v. Rahn,132 U.S. 518">132 U.S. 518, in which the Supreme Court said: "The relation of master and servant exists whenever the employer retains the right to direct the manner in which the business shall be done, as well as">*1130 the result to be accomplished, or, in other words, 'not only what shall be done, but how it shall be done,'"

The Circuit Court of Appeals for the Third Circuit (34 Fed.(2d) 263) reversed, on the ground that the taxpayer "was in constant communication with the Attorney General", and the latter had stated that "no important questions of policy were decided without his previous consultation with and authority from me." The Supreme Court (281 U.S. 669">281 U.S. 669), on the authority of 269 U.S. 514">Metcalf & Eddy v. Mitchell, supra, reversed the Circuit Court and affirmed the decision of this Board, holding that Reed was not an employee of the state.

It would serve no useful purpose to discuss or attempt to distinguish all of the cases cited by the respective parties upon brief. The conclusions reached may not always have been consistent. (Compare, for example, Burnet v. Livezey, 48 Fed.(2d) 159, strongly relied upon by petitioner, and Haight v. Commissioner, 52 Fed.(2d) 779, relied upon by respondent.) We have referred specifically to the Reed case because of the many points of similarity between the facts in it">*1131 and the facts in the instant proceeding. In each, eminent attorneys had been employed as "special counsel" for the purpose of protecting the interests of the state. The designation or employment was made by a state officer in conformity with the state law. The attorneys were in frequent communication with the state officers and "no important questions of policy were decided" without first consulting them. The responsibility for the litigation in each instance rested primarily upon the state officers who made the designation or appointment. In the Reed case the taxpayer was paid out of moneys appropriated by the state. In the instant proceeding the method of payment will be discussed later; but the payment was not made out of funds appropriated by the state. The Reed case, therefore, is respectable authority for denying the claimed exemption from tax in the instant proceeding unless there is a substantial difference in the facts. Petitioner contends that there is.

Petitioner argues that if the evidence of the "power to employ and discharge, to add to and subtract from the lawyers, without the consent ">*505 of any of them", and "the manifold evidences of control">*1132 and power of control" shown by this record, had been present in the Reed case the Supreme Court undoubtedly would have sustained the Circuit Court's holding that the compensation was exempt from tax. That, of course, is speculation. It may be pointed out, however, that for aught which appears in the findings of fact in the Reed case the State of Pennsylvania apparently had as much power to employ, discharge, add to, and subtract from its special counsel as the State of Missouri or its officers had in the instant proceeding. The latter part of petitioner's argument has more merit; so the evidence upon which petitioner relies to show control and power of control will now be considered.

Petitioner and the other attorneys testified that Thompson kept in touch with their activities and at times directed what he wished to have done, who should conduct certain examinations, or where they should be held. This was corroborated by Thompson. On one occasion, as shown in the findings, he directed that testimony be taken to show the experience of certain companies rather than stipulating that as a fact, and on another he ordered that his theory of rate making be preserved in the">*1133 pleadings. Thompson stated, however, that he did not "presume" to tell learned counsel how they should conduct the hearings or defend the litigation. This was left to their discretion. O'Malley testified to substantially the same effect, stating that he relied entirely upon the ability and professional skill of the attorneys to represent the state properly in the rate litigation. Practically all of petitioner's services were performed during the administration of Thompson, O'Malley having advised him, almost immediately after becoming superintendent, that he was not thereafter to represent the state in the litigation. This is the substance of the evidence relating to control of petitioner. There is evidence, however, indicating that the governor and the superintendent of insurance did exercise additional control over the litigation. They, or at least O'Malley, conferred with representatives of the insurance companies and, independent of the attorneys, agreed upon the terms of a settlement, including the amount to be paid to the attorneys for their services. Petitioner, because of his previous connection with the litigation and his rights under his contract, was required to">*1134 sign the stipulation of settlement. When this was done the $10,000,000 impounded in the Federal court was released and the check for $423,600 was delivered to Barker as trustee. But the funds which had been impounded in the Circuit Court of Cole County could not be released to the companies until and unless the Supreme Court of Missouri should either reverse the holding of that court to the effect that the funds must be returned to the policyholders, ">*506 or approve the settlement, releasing to the companies 80 percent of the impounded fund. In connection with the proceeding in the Supreme Court of Missouri it appears that the governor and the superintendent did give some of the attorneys additional instructions. O'Malley ordered Barker, Weatherby, and Jacobs to present the matter to the Supreme Court solely upon the stipulation. The Governor ordered O'Malley to direct that it be presented to the court upon the merits and such directions were given. Apparently the settlement was before the Supreme Court, however; for the court, after passing upon the merits, declined to approve it.

It may be that more control was actually exercised by the Missouri officers in the instant">*1135 proceeding than was exercised by the Pennsylvania officers in the Reed case; but the responsibility for the proper presentation of the state's case in each instance rested upon the officers, and such control as was exercised seems to have been entirely compatible with the relation normally existing between public officials charged with the responsibility of protecting the rights of the state and attorneys, who, for a fee, undertake the actual, necessary legal work.

Petitioner urges that he was engaged for general services and not to accomplish any specific purpose. Thompson testified that the attorneys "were employed to handle that fire insurance case"; that he "hired them for that job"; that nothing was said to petitioner at the time of his appointment about performing any other work; and that he had a regular monthly salaried employee who handled the ordinary legal work of the department. The contract of July 3, 1930, specifically stated that the attorney general and the superintendent had, according to law, designated petitioner and Bowersock "to represent them as special counsel" in the fire insurance rate litigation cases and specifically referred to the cases pending">*1136 in the Federal court and in the Circuit Court of Cole County. Weatherby testified that the 16 2/3 percent cases were "the only litigation Lohman was in" and petitioner testified that the length of his employment depended primarily on how long the rate litigation lasted. It is true that petitioner testified he was consulted by Thompson and Weatherby at times upon matters not involved in the fire insurance rate litigation. It appears from his testimony, however, that such instances were few; and the evidence does not indicate that they required any appreciable amount of his time or labor. The conclusion is inescapable that petitioner was employed for the specific purpose of assisting in protecting the interest of the state and the policyholders in the fire insurance rate litigation; that his employment was for a limited rather than for a general purpose; and that the compensation was paid to him solely for the services rendered in connection with the rate litigation.

">*507 But, it is contended, the question whether petitioner and the other attorneys were employees of the state has been set at rest by the decisions of the Supreme Court of Missouri in ">*1137 Aetna Insurance Co. v. O'Malley,343 Mo. 1232">343 Mo. 1232; 124 S.W.(2d) 1164; State ex rel Garwood Realty Co. v. Dinwiddie,343 Mo. 592">343 Mo. 592; 122 S.W.(2d) 912; and State ex rel Lucas v. Blair,144 S.W.(2d) 106. 343 Mo. 1232">Aetna Insurance Co. v. O'Malley, supra, involved the allowance of attorney fees to Barker, Jacobs, and Weatherby in the so-called "Restitution Cases." The superintendent of insurance, in November 1922, had made an order for a reduction of 10 percent in insurance rates. This reduction was resisted by the companies in court for a period of years, during which premiums were collected at the old rate. In August 1929 the Supreme Court of Missouri upheld the order of the superintendent and the insurance companies began refunding to the policyholders the excess premiums collected during the pendency of the litigation. When, in 1930, it became apparent to the superintendent that only a portion of the excess premiums had been refunded, he employed the three attorneys to recover the balance of the excess premiums collected by the companies and agreed that, if successful, they should be paid">*1138 from the fund for their services such an amount as the court deemed adequate, but if they were unsuccessful they were to receive no pay. After recovery of the fund, the trial court made an allowance to the attorneys. The Supreme Court of Missouri held that although the superintendent, with the approval of the governor, had statutory power to employ attorneys, he did not have the power to contract that their compensation should be paid out of the fund to be collected. In its opinion, the court stated that "the only way such attorneys can be paid is like any other expense of the insurance department, that is, by an appropriation of the legislature", and that they "must look to the legislature for the payment of their fees." Similar holdings were made in State ex rel Garwood Realty Co.v. Dinwiddie and State ex rel Lucas v. Blair, supra, with reference to the funds impounded in the Cole County court during the pendency of the 16 2/3 percent rate litigation. The court was not required to determine whether the attorneys were employees of Missouri and did not do so. Such cases as ">*1139 Bacon & Sons v. Martin,305 U.S. 380">305 U.S. 380, enunciating the principle that the construction of a state statute by a state court is binding upon a Federal court, are therefore inapplicable.

The question whether petitioner was an employee of the State of Missouri is essentially a question of law. Most of the basic facts are not seriously in dispute. Reference has been made to some of the circumstances relied upon especially by petitioner to show that he was an employee. In our opinion the evidence does not justify such finding or conclusion; but even if petitioner were an employee ">*508 of the State of Missouri, his claim for exemption could not be sustained. He has not shown that any part of the compensation which he received in 1936 was paid to him by the State of Missouri. Obviously it was paid by the insurance companies, either out of the portion of the impounded funds recovered or from other funds in their possession. The Constitution of Missouri requires that all moneys received by the state from any source shall go into the treasury and that none shall be paid out except in pursuance of an appropriation by law. Sec. 43, Art. IV; ^{1941 BTA LEXIS 1110">*1140}

1941 BTA LEXIS 1110">*1141 Upon brief petitioner argues that the source of the fee is immaterial. He relies particularly upon Commissioner v. Stilwell, 101 Fed.(2d) 558 (certiorari dismissed on motion of petitioner, 307 U.S. 648">307 U.S. 648), in which it was held by the Circuit Court of Appeals for the Seventh Circuit that the compensation, received by a master in chancery in Illinois in the nature of fees assessed against the losing party as part of the costs of litigation, was exempt from the Federal income tax. Judge Evans filed a vigorous dissenting opinion, espousing the view that Helvering v. Therrell,303 U.S. 218">303 U.S. 218, and 304 U.S. 405">Helvering v. Gerhardt, supra, required the denial of the claimed immunity from tax "when the interference with the state governmental functions, through the imposition of the Federal income tax, is so uncertain as to be conjectural, theoretical or speculative."

In 304 U.S. 405">Helvering v. Gerhardt, supra, the Supreme Court stated that judicial pronouncements "establish, two guiding principles of limitation for holding the tax immunity of state instrumentalities to its proper function. The one, dependent upon">*1142 the nature of the function being performed by the state or in its behalf, excludes from the immunity activities thought not to be essential to the preservation of ">*509 state governments even though the tax be collected from the state treasury. * * * The other principle, exemplified by those cases where the tax laid upon individuals affects the state only as the burden is passed on to it by the taxpayer, forbids recognition of the immunity when the burden on the state is so speculative and uncertain that if allowed it would restrict the Federal taxing power without affording any corresponding tangible protection to the state government; even though the function be thought important enough to demand immunity from a tax upon the state itself, it is not necessarily protected from a tax which well may be substantially or entirely absorbed by private persons." The Court pointed out that "During the present term we have held that the compensation of a state employee paid from the state treasury for his service in liquidating an insolvent corporation, where the state was reimbursed from the corporate assets, was subject to income tax. ">*1143 Helvering v. Therrell, McLoughlin v. Commissioner,303 U.S. 218">303 U.S. 218."

In Saxe v. Shea, 98 Fed.(2d) 83 (certiorari dismissed on motion of petitioner, 305 U.S. 665">305 U.S. 665), the Circuit Court of Appeals for the Second Circuit applied the second principle mentioned in the Gerhardt case and held that an individual appointed by New York courts as referee or special guardian to act in the specific cases was not exempt from Federal income taxation on compensation paid him by parties to guardianship proceedings or from funds under the courts' control, and not from the state treasury, since imposition of the tax could not increase to the state the cost of administering justice. The court said: "In the light of the Gerhardt opinion we believe that the source of appellants' compensation is alone enough to defeat his claim of constitutional immunity from Federal income taxes * * *." This language was quoted with approval by the Circuit Court of Appeals for the Third Circuit in Commissioner v. Church, 103 Fed.(2d) 254, which said: "The important consideration is the source of the compensation. ">*1144 When it comes from the litigants and not the state, the taxation thereof can not possibly impose a substantial burden upon the state." The Circuit Court of Appeals for the Eighth Circuit seems to have adopted the same view in Pickett v. United States, 100 Fed.(2d) 909, though it did not discuss the question at any length. It, however, quoted from the opinion in the Gerhardt case to the effect that "When immunity is claimed from a tax laid on private persons, it must clearly appear that the burden upon the state function is actual and substantial, not conjectural", and denied the immunity claimed. This Board has similarly applied the Supreme Court opinions in the Therrell and Gerhardt cases in Mercer McCall Tharpe,37 B.T.A. 1128">37 B.T.A. 1128; Frank Aranow,38 B.T.A. 1089">38 B.T.A. 1089, and James F. Curtis,39 B.T.A. 366">39 B.T.A. 366; affd., 110 Fed.(2d) 1014.

">*510 We are of the opinion and hold that petitioner has failed to show that the compensation in issue was received by him as an employee of the State of Missouri; that he has failed to show it was paid to him by the state or resulted in any actual or substantial">*1145 burden upon it; and that he has failed to prove that the Commissioner committed any error in determining the deficiency in tax.

Reviewed by the Board.

Decision will be entered for the respondent.

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Footnotes

• 1. ART. IV -

  SEC. 43. Appropriations, order of, must be by law - revenue to go into treasury.↩ - All revenue collected and moneys received by the State from any source whatsoever shall go into the treasury, and the General Assembly shall have no power to divert the same, or to permit money to be drawn from the treasury, except in pursuance of regular appropriations made by law. * * *

• 2. ART. X -

  SEC. 19. Money to be paid as appropriated - limit - how continued - receipts and expenditures.↩ - No moneys shall ever be paid out of the treasury of this State, or any of the funds under its management, except in pursuance of an appropriation by law; nor unless such payment be made, or a warrant shall have issued therefor, within two years after the passage of such appropriation act; and every such law, making a new appropriation, or continuing or reviving an appropriation, shall distinctly specify the sum appropriated, and the object to which it is to be applied; and it shall not be sufficient to refer to any other law to fix such sum or object. A regular statement and account of the receipts and expenditures of all public money shall be published from time to time.