Frank v. Commissioner ( 1929 )

ALFRED S. FRANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Frank v. Commissioner

Docket No. 27870.

United States Board of Tax Appeals

16 B.T.A. 771; 1929 BTA LEXIS 2530;

May 28, 1929, Promulgated

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The principle of law that the Federal Government may not tax the means, agencies or instrumentalities by which a State exercises its governmental functions does not exempt from the Federal income tax the distributive share, or any part thereof, of a member of a partnership who was not himself an employee of the State but whose partner was such an employee and paid his entire salary into the partnership treasury.

Alfred S. Frank, Esq., pro se.

J. L. Backstrom, Esq., for the respondent.

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VAN FOSSAN

The deficiency in this proceeding of which redetermination is asked is for income taxes for the calendar year 1925 in the amount of $38,76. Two errors are alleged: (1) The holding by the respondent that certain income received by petitioner from a partnership of which he was a member was not exempt from taxation, and (2) the addition to income of $37.29 on account of expense deductions disallowed. Error was conceded by respondent as to the second issue.

FINDINGS OF FACT.

Petitioner is an attorney at law and a member of a partnership consisting of O. B. Brown and himself, engaged in the practice of law in Dayton, Ohio. During the taxable year 1925 the agreement between the partners provided for an equal division of all fees and other proceeds with the single exception of directors' fees.

After the disastrous floods of the Miami River in 1913, which resulted in the loss of several hundred lives and millions of dollars in property, there was passed by the Ohio Legislature a law known as The Conservancy Act of Ohio. (104 Ohio Laws, pp. 13 to 64, inclusive.) The Conservancy Act indicated the procedure to be followed in the creation of Conservancy Districts and granted to a Conservancy District, once established, power to proceed with the erection of such a district and all incidental powers necessary and essential to the carrying out of the general purposes of the act, which were "to prevent floods; to protect cities, villages, farms and highways from inundation and to authorize the organization of drainage and conservancy districts." Among the powers granted were those to borrow money, to assess benefits against property owners, to police said district, to condemn land, and to exercise the right of eminent domain, superior to the general right of eminent domain exercised by railraods, telegraphs and other agencies.

Among other things it was provided that "the board may also employ a chief engineer, who may be an individual, copartnership or corporation, an attorney and such other engineers, attorneys and other agents and assistants as may be needful and may provide for their compensation, which, with all other necessary expenditures, shall be taken as a part of the cost of improvement. The employment of the secretary, treasurer, chief engineer and attorney for the district shall be evidenced by agreements in writing, which, so far as possible, shall specify the amounts to be paid for their services." Pursuant to the above legislation, the Miami Conservancy District was established by decree of court, June 28, 1915. On July 7, 1915, the board of directors passed a resolution in the following tenor: "On motion of Mr. Allen, seconded by Mr. Rentschler, Judge O. B. Brown was unanimously chosen attorney for the district at a salary of $600 per month." On July 25, 1915, an agreement was entered into pursuant to the above resolution, in the following form:

This agreement entered into by and between the Board of Directors of the Miami Conservancy District, party of the first part, and O. B. Brown, party of the second part, WITNESSETH:

That, whereas, on the seventh day of July, 1915, the said Board of Directors appointed the said O. B. Brown attorney for the said district, pursuant to the general code of Ohio, section 6828-11, which is section 11 (eleven) of the law known as the conservancy law of Ohio.

Now, therefore, the said party of the second part, in consideration of the agreement herein contained hereby agrees to serve the said party of the first part as attorney for the said in Miami Conservancy District and that he will devote such time to his duties as attorney for the district as said party of the first part may require.

In consideration of the above, said party of the first part agrees and promises to pay the said party of the second part a salary of six hundred ( $600) dollars per month, payable semi-monthly.

IN WITNESS WHEREOF, the said Board of Directors of the Miami Conservancy District, to-wit: Edward E. Deeds, Henry M. Allen, and Gordon S. Rentschler, has hereto set the name of said district and the individual members thereof have hereunto affixed their signatures, and cause the seal of the district to be here unto attached and unto a duplicate hereof and the said O. B. Brown has hereunto set his hand and unto a duplicate hereof, this 24th day of July, 1915.

Thereafter for some years Brown devoted all of his time to the affairs of the Conservancy District. In 1923 or 1924 the work tapered off and he handled some other legal matters.In 1925 he devoted from 75 per cent to 80 per cent of his time to the work of the Conservancy District. Under authority of the board of directors, he employed such legal assistants as were necessary for special litigation and one local counsel in each of the nine counties covered by the District.During the early days of his service Brown had an office in the office building of the Conservancy District, where he spent considerable time. The officers of the firm of which he was a member during all of this period were in a different building.

During 1925 Brown engaged in consulations with outside clients in the office of the firm, but participated in no court work or litigation outside of that required by his employment by the District. In 1919 he discontinued his office in the offices of the District and thereafter used only his personal office for his work.

Throughout the entire period Brown turned his entire salary, $7,200 each year, into the partnership treasury and it was commingled with other funds coming into the partnership. Brown and the petitioner herein divided the total net funds available for distribution equally between them in each of the years. Petitioner was at no time employed as an attorney for the District.

Respondent ruled that Brown was not an employee of the Miami Conservancy District, a political subdivision of the State of Ohio, and, hence, that the salary of $7,200 received by said partnership through him for the year 1925 was not exempt and that petitioner's share thereof was taxable.

OPINION.

VAN FOSSAN: We do not deem it essential to this decision to decide whether or not Brown was an employee of a political subdivision of the State of Ohio. Brown is not the petitioner. We have before us the partners, Frank, who claims that the mantle of immunity which might shield Brown as to income paid to him also protects the partner in so far as his distributive share of the partnership proceeds represents a division of the salary paid to Brown and turned in by him to the partnership. With this contention we can not agree.

Section 1211 of the Revenue Act of 1926 provides:

Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded.

Though this section deals primarily with refunds, it seems clear that Congress contemplated that the immunity be personal to the person receiving the same "as compensation for personal services as an officer or employee of any State or political subdivision thereof * * *." We believe this section to be merely enunciatory of the general rule of law covering the scope of the immunity afforded the employees of one government from taxation by another. Here Brown's salary was paid into the partnership and indiscriminately mixed with funds received from other sources. A decision as to the legal effect of such a commingling as to Brown's income is not pertinent here, but to extend immunity to the share of the partnership income received by petitioner would be stretching the doctrine beyond reason or precedent. Frank was at no time an employee of the District. He received no income therefrom. It would do violence both to the language and spirit of the Act and to the general rule of law to relieve him from the tax in question.

Reviewed by the Board.

Judgment will be entered under Rule 50.

MARQUETTE, SMITH, and GREEN concur in the result.