Haight v. Commissioner , 14 B.T.A. 844 ( 1928 )

GEORGE I. HAIGHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

EDMUND D. ADCOCK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Haight v. Commissioner

Dockets Nos. 9475, 9476, 23739, 23740.

United States Board of Tax Appeals

14 B.T.A. 844; 1928 BTA LEXIS 2895;

December 20, 1928, Promulgated

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Held that petitioner was not an employee of a political subdivision of the State of Illinois and his compensation was not exempt.

Irvin H. Fathchild, Esq., for the petitioners.

H. L. Jones, Esq., for the respondent.

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TRAMMELL

These are proceedings for the redetermination of deficiencies in income taxes. For 1920 the deficiency asserted against George I. Haight, Docket No. 9475, is $1,372.99. For 1920 the deficiency asserted against Edmund D. Adcock, Docket No. 9476, is $932.63. For 1922 and 1923 deficiencies were asserted against George I. Haight, Docket No. 23739, in the amounts of $747.59 and $563.29, respectively. For 1922 and 1923 deficiencies were asserted against Edmund D. Adcock, Docket No. 23740, in the amounts of $416.39 and $311.12, respectively.

The questions involved are whether the compensation received by Adcock as special attorney for the Sanitary District of Chicago is exempt from taxation, and whether the proportion of such compensation received by Adcock, which Haight received by virtue of his partnership with Adcock, was taxable to Haight.

All four of the proceedings were consolidated for the purpose of hearing and decision.

FINDINGS OF FACT.

The petitioner, Edmund D. Adcock, held the office of attorney for the Sanitary District of Chicago continuously from December 5, 1912 to January 2, 1919.

During the years involved in these proceedings he was special attorney for the sanitary district, having resigned from the office of attorney as will be more particularly set out below.

Said sanitary district is a political subdivision of the State of Illinois, organized under an act of the legislature of said State approved May 29, 1889, and in force July 1, 1889. It is engaged in an essential governmental function, that of sanitation.

Said district is managed by a board of trustees elected by popular vote. Said board is directed to exercise all of the powers and manage and control all of the affairs of said district. They are empowered "to elect from their own number a president, and from without their own number a clerk, treasurer, chief engineer and attorney for such municipality who shall hold their respective offices during the pleasure of the Board."

Said board is specifically empowered by the aforesaid Act to "prescribe the duties and fix the compensation of all the officers and employees of said Sanitary District."

Said board is further empowered "to pass all necessary ordinances, orders, rules, resolutions and regulations for the proper management and conduct of the business of said board of trustees and of said corporation and for the carrying into effect the object for which such Sanitary District is formed."

Adcock's appointment to the office of attorney for said sanitary district was on the recommendation of the committee on employment of the board of trustees of said district. His selection was approved by the board of trustees as provided by section 4 of the act aforesaid. He took no oath of office. His compensation was not fixed by statute but under the approval of the board. There is no provision for taking oath of office either by said general attorney or by any of his assistant attorneys.

Shortly after Adcock took office as attorney aforesaid, proceedings were commenced (October 6, 1913) in the Federal court by the United States Government contesting the withdrawal of a water flow from Lake Michigan in excess of a stated flowage. This controversy went to the fundamental purpose, powers and plan of said sanitary district. The threatened curtailment of the water flow from Lake Michigan through the channels of said district would necessitate the partial abandonment of the existing method of sewage disposal and the adoption of other methods requiring millions of dollars of acpital expenditures. And, in 1922, the State of Wisconsin and, shortly thereafter, the State of New York, commenced additional proceedings in the Supreme Court of the United States involving the same subject matter and these proceedings were joined in by a number of other States bordering on the Great Lakes as parties plaintiff, and by some of the Mississippi Valley States as parties defendant. Said subject matter was taken up also with congressional committees and the United States Secretary of War and Chief of Engineers looking toward a solution of the matter by legislation. The Canadian Government also was involved in the subject matter.

The proceedings commenced in 1913, as aforesaid, continued with the taking of testimony, the preparation and submission of briefs and arguments, conferences with United States and sanitary district engineers, congressional committee sessions, and related services - all during Adcock's incumbency of the office of attorney aforesaid. The questions involved were most complicated and technical and required Adcock to go into the study of hydraulic engineering questions and sanitary engineering questions of a very complicated nature. By reason of his detailed contact with and work in the subject matter during his incumbency of the office of attorney aforesaid, Adcock became specially qualified and vitally essential in carrying on the representation and protection of the interests of the State of Illinois acting through this government subdivision.

In January, 1919, following a change in the political complexion of the board of trustees, Adcock tendered his resignation from the office of attorney, but simultaneous with the acceptance of his resignation he was made "Special Attorney" to continue in the matters aforesaid as provided for by an ordinance set forth in the printed and bound record of the proceedings of the board of trustees of said sanitary district for the year 1919, and shown in the following excerpt from such published proceedings:

Employment.

Mr. Paullin presented the following report from the Committee on Employment:

Chicago, January 2, 1919.

To the Honorable, the President and the Board of Trustees of The Sanitary

District of Chicago.

Gentlemen:

Your Committee on Employment reports that it has received the resignation of Mr. Edmund D. Adcock, Attorney for The Sanitary District of Chicago, which is hereby transmitted to the Board.

Your Committee further reports that it has considered said resignation, and recommends its acceptance.

Your Committee at this time desires to record its deep appreciation of the capable service that Mr. Adcock has rendered the Sanitary District during the entire term of his office extending for a period of about six years, and congratulates him upon the many victories he has won in important litigation in which the Sanitary District was concerned.

Your Committee further reports that there is now pending in the United States District Court for the Northern District of Illinois a suit brought by the United States of American against The Sanitary District of Chicago to determine the amount of water which can legally be withdrawn by the Sanitary District from Lake Michigan. This litigation vitally affects the activities and future policy of the Sanitary District with reference to its care of the sewage and drainage embraced within its territorial limits. It is apparent that an adverse decision in this case will make necessary the partial abandonment by the Sanitary District of its present method of sewage disposal, and the adoption of new methods of sewage treatment which can only be inaugurated at the cost of millions of dollars, and which in the present state of the art of sewage disposal might be of doubtful value in fully protecting the lives and health of the inhabitants of the Sanitary District. The record of the testimony taken in said case comprises seven large printed volumes and exhaustive printed arguments have also been filed in connection therewith. In addition to the suit in question, the Congress has under consideration a Bill, by the terms of which this entire controversy may be amicably settled by the construction of compensating works which will preserve the level of Lake Michigan and settle for all time the question of the amount of water which the Sanitary District can legally withdraw from Lake Michigan. Numerous negotiations have been had between representatives of the Government and the Board of Trustees of the Sanitary District with reference to said bill, and the subject matter is likely to be brought to a conclusion during the next session of the Congress. Mr. Adcock has given a large part of his time to the trial of said case and the consideration of the matters mentioned, and is thoroughly familiar with every phase of the questions involved. There are also other legal matters pending in the law Department of the Sanitary District with which he is intimately acquainted. In view of the importance of the matters which have been in Mr. Adcock's charge, it is the opinion of your committee that it will be for the best interest of the Sanitary District that he be especially employed to take care of said matters.

Your Committee, having considered the foregoing report, recommends the passage of the following order:

Ordered, that the resignation of Mr. Edmund D. Adcock, Attorney for The Sanitary District of Chicago, be, and the same is hereby accepted; and it is further

Ordered, That Mr. Edmund D. Adcock be employed as a Special Attorney to take care of the matters specified in the foregoing report for such a period of time as your Committee may consider necessary; and it is further

Ordered, That the Committee on Employment be, and it is hereby authorized to fix his compensation at such a sum as is fair and reasonable.

Respectfully submitted.

GEORGE W. PAULLIN,

Chairman.

WALLACE G. CLARK,

JAS, H. LAWLEY,

MATT A. MUELLER,

H. E. LITTLER,

Committee on Employment.

Mr. Paullin moved that the report be adopted and the accompanying orders passed.

On roll call the motion was carried by the following vote:

Year - Messrs. Carr, Clark, Healy, Lawley, Littler, Mueller, Nance and Paullin - Eight.

Nays - None.

This official employment as special attorney finds its origin and existence only in the foregoing ordinance construed in the light of the rules and regulations of the board of trustees. There was no contract or agreement or other instrument. It was not an arrangement with the general attorney but directly upon said ordinance adopted by the board.

Adcock's compensation under the aforesaid ordinance and pursuant thereto was fixed by the committee on employment at $100 per day. There is no controversy as to the amount of compensation.

In considering what should be the fair and reasonable compensation for Adcock's services pursuant to the aforesaid ordinance, inquiry was made as to the Federal tax status of such compensation. The matter was investigated by the succeeding attorney for the board and also by Adcock himself, and the concurrence of opinion given said committee on employment was that such compensation would not be subject to Federal income tax. On the basis of such opinion, said compensation was fixed by said committee on employment at the sum above stated, and would have been fixed at a larger amount had such compensation been considered subject to Federal income tax.

From and after the proceedings of January 2, 1919, aforesaid, Adcock continued to serve said sanitary district as "Special Attorney" aforesaid in all matters pertaining to the water-flow controversy and in several other matters which had originated during his incumbency of the office of attorney and with which he had become intimately acquainted during such insumbency of that office. Specifically, during the calendar years 1920 to 1923, both inclusive, Adcock's services to said sanitary district consisted of the preparation for argument, dictation of briefs, conferences with the attorneys for the United States, and attendance in court - all pertaining to the suit brought by the United States in the Federal court as above stated; also examining the bill of complaint filed by the State of Wisconsin in the Supreme Court of the United States against the State of Illinois and the Sanitary District of Chicago and joined in by several lake States as parties plaintiff and several Mississippi Valley States as parties defendant as aforesaid, and preparing the pleadings and the testimony in said cause for the defendants; numerous conferences with the attorneys generals of the various States plaintiff and defendant in said Supreme Court proceedings, looking toward the adjustments of the respective rights and interests of the various States involved; the preparation and prosecution of proceedings before the United States Secretary of War and Chief of Engineers relative to the amount of water flow from Lake Michigan through said sanitary district channels; appearance and participation in proceedings before the Rivers & Harbors Committee of the United States House of Representatives, and the assistance in the drafting of prospective legislation looking toward the settlement of the various rights and interests of the States and the Governments involved in said matter; also various conferences in Canadian cities with representatives of the Canadian Government relative to lake level matters, including conferences with representatives of the Toronto-Canada Harbor Commission and the Hydro-Electric Power Commission; also numerous conferences with the local United States Government engineer relative to the water flow through the sanitary district channels; also preparation for and participation in hearing before Committee of the Senate of the United States relative to waterways; also examination and investigation of Canadian treaties relative to commerce and waterways; also preparing numerous communications for the said sanitary district to be submitted to the Secretary of War and Chief of Engineers of the United States. In addition to the foregoing, Adcock carried to conclusion certain other matters of litigation and controversy involving the said sanitary district which had originated during his incumbency of the office of attorney aforesaid and with which he had become intimately acquainted during his incumbency of said office, such additional services being rendered pursuant to the ordinance appointing him special attorney as aforesaid.

The water-flow controversy was fundamentally vital to the basis purpose and plans of the State of Illinois operating through said governmental agency and the Commissioner's representative appropriately recognized that the nature of this controversy was different from that of ordinary litigation. It had to be given precedence over any and all other activity of Adcock. It required long periods of continuous work.

In rendering all of the above described services, Adcock was under the general direction and supervision of the general attorney for said sanitary district. This was required by the rules and regulations of the board of trustees. Adcock was also under the board's statutory power of control and direction.

A great deal of Adcock's work under the aforesaid appointment was done at the offices of the sanitary district and not in his own professional offices which he maintained for his general law practice.

Adcock's services under the aforesaid ordinance continued through the later six years, including recently the hearings before Special Master Charles Evans Hughes.

When not in the performance of services under the above appointment, Adcock was engaged in the general practice of law under a partnership arrangement with the other petitioner, George I. Haight, of Chicago, Ill., a practicing attorney, in accordance with which their professional earnings and expenses were shared equally between them; and it was agreed that the compensation received by Adcock from the Sanitary District of Chicago under the aforesaid appointment should be accounted for in computing the net earnings and the respective equal shares. Adcock accordingly deposited the amounts received by him from the aforesaid sanitary district with the general partnership funds and the net receipts were shared equally in accordance with the partnership agreement.

In computing their Federal income-tax liability and filing their returns, said petitioners excluded the amounts received by Adcock from the aforesaid sanitary district and one-half of the net balance was taken as the taxable income of each partner from the sources covered by the partnership agreement.

For services rendered by the petitioner, Adcock, during the calendar year 1920 he received $12,150.92; for 1921, $100; for 1922, $4,900; and for 1923, $6,541.63.

For 1920 Adcock received from the partnership of Adcock, Haight & Harris, the law partnership of which he was a member, the sum of $17,697.82. For 1922 he received $26,737.79. For 1923 he received $17,725.43 from that source. These amounts include the compensation from the sanitary district.

OPINION.

TRAMMELL: There are two questions involved in these proceedings. First, whether the compensation received by Adcock is exempt from taxation upon the ground that it was paid to him as an officer, employee or governmental agency of a political subdivision of the State of Illinois. Second, if such compensation is exempt in so far as Adcock is concerned, whether it is also exempt in so far as Haight is concerned who received a portion thereof as his share of the partnership income, it having been paid in to the partnership by Adcock as any other partnership income.

We think that Adcock clearly was not an officer of a political subdivision of the State of Illinois. The so-called ordinance passed by the board of trustees of the sanitary district did not create an office but merely provided for the employment of Adcock to take care of certain matters for the board. The employment did not embrace the idea of tenure, duration, emolument or duties fixed by law but by special agreement.

Where an office is created the law usually fixed its incidents, including its term, its duties and its compensation and the term fixed does not embrace contracts or agreements with individuals although they are entered into by authority of law. We do not think, therefore, that Adcock was an officer of a political subdivision of the State of Illinois within the meaning of that term laid down in the case of .

The next question is do the facts establish that Adcock was an employee of a political subdivision of Illinois.

Adcock was, previous to the taxable years involved, general attorney for the Sanitary District of Chicago. He resigned that position and accepted employment in accordance with the terms of the "Committee on Employment," and his compensation was fixed by agreement between himself and the committee, the committee being authorized to fix his compensation at a sum which was considered fair and reasonable. His services were in connection with the matters pertaining to the water-flow controversy in connection with the amount of water that could be legally withdrawn by the sanitary district from Lake Michigan, with the legislation pending in Congress in connection with said matter and numerous other legal matters which were pending in the law department of the sanitary district. Adcock as general attorney had handled these various matters and was familiar therewith. He, in effect, carried on to a large extent as special attorney the matters which he had had charge of as general attorney. He, however, was acting in an entirely different capacity as special attorney from that in which he had acted as general attorney. The general attorney had a general supervision over legal matters and litigation. The sanitary district also, by virtue of law, had control over all matters within its jurisdiction. The ordinance under which Adcock was appointed contained no provision subjecting him to the control of any one. It set forth that the petitioner be employed to take care of the matters set out therein. No other ordinance was presented or called to our attention which provided that the general attorney should direct the petitioner in the performance of his work.

It is clear that the services of Adcock were secured on account of his familiarity with the questions and matters involved, and his special qualifications to handle them. The proper performance of his duties required the exercise of that judgment and professional skill. In fact the evidence indicates that the benefit of the petitioner's judgment, discretion and skill was what the sanitary district sought to obtain. If he were not left free to use such judgment and discretion, professional experience and specialized knowledge as to the means to be used and the manner in which the matters should be handled, he would not have performed his proper function. In our opinion the control, or the right of control, exercised over the petitioner was no greater here than in the case of , and , or in the case of , where certiorari was denied by the United States Supreme Court, . In that case the court said:

He was under the control of the Board as to whether plans or detailed estimates of cost should or should not be made, the number, and in some instances the plans of reconstruction; as to the amount of work done, but not as to the time within which it was to be done; as to the order in which the work in the various improvements was to be performed * * *.

We do not mean to say that a professional man can not be an employee or that the mere fact that judgment and skill are required of an individual deprives him of the classification of an employee. The relationship between the individual and the State or political subdivision thereof is the question to be determined and the extent to which a person is left free to use this judgment and discretion as to the mode, manner and means of performing his undertaking is a material factor to be considered.

It appears in this case that the control exercised over the petitioner was not substantially greater than the control a client might ordinarily exercise over his attorney or over litigation.

In our opinion the petitioner's relation to the sanitary district was more similar to that of attorney and client than that of master and servant or employer and employee. He maintained his own law office and had his own office assistants. He was free to take any other business from other clients if it did not conflict with his duties to the district. He apparently gave up his practice as general attorney for the purpose of carrying on his own business and in carrying on his business at attorney he represented the sanitary district. Nor do we think that the petitioner's compensation is exempt on the ground that he was an agency or instrumentality of the State or a political subdivision thereof. .

Having reached this conclusion, it is not necessary to discuss the second issue raised, that is, the status with respect to exemption of the partnership income, consisting of the petitioner's compensation from the sanitary district.

Reviewed by the Board.

Judgment will be entered under Rule 50.

STERNHAGEN and SIEFKIN concur in the result only.