McLoughlin v. Commissioner

EDWARD MCLOUGHLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

McLoughlin v. Commissioner

Docket No. 80484.

United States Board of Tax Appeals

34 B.T.A. 963; 1936 BTA LEXIS 622;

August 19, 1936, Promulgated

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Compensation received by petitioner as counsel in the Liquidation Bureau of the Insurance Department of the State of New York, which was paid from the assets of insurance companies, held, not exempt from Federal income tax.

Bernhard Knollenberg, Esq., and Joseph W. Wyatt, Esq., for the petitioner.

James H. Yeatman, Esq., for the respondent.

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ARUNDELL

The taxes in controversy are income taxes for the calendar year 1932 in the amount of $224.09. On his return for the calendar year 1932 the petitioner reported a salary of $5,125 from the New York State Insurance Department, but claimed the amount to be exempt from Federal income tax. The respondent held the salary taxable and determined the deficiency here in controversy. The issue is whether the petitioner is exempt from tax under the implied constitutional immunity of the instrumentalities of a state from taxation by the Federal Government.

FINDINGS OF FACT.

The petitioner is an attorney at law. Prior to 1929 he was associated with a law firm in Brooklyn, New York, and was actively engaged in practice. In 1930 he was appointed by the superintendent of insurance of the State of New York to act as counsel in the liquidation bureau, a branch of the insurance department. He was employed there from the beginning of 1930 until August 2, 1933. During the year 1932 the liquidation bureau maintained three offices in New York City. The main office was in the New York State Building at 80 Center Street, where petitioner was employed during 1932, and there were two branch offices, one at 2 Lafayette Street and the other at 111 John Street, New York, New York. The petitioner gave full time required of employees in the liquidation bureau, and his hours were from 9 a.m. to 5 p.m., the same as attaches of that bureau who were not engaged in legal work.

After severing connections with the law firm with which he was connected in 1929 petitioner received no further salary from the firm. He maintained office space in their offices and did a certain amount of personal legal work there, such as the preparation of wills, et cetera, all of which was accomplished out of his regular hours with the liquidation bureau. The members of the firm cooperated with him in handling his personal work and the fees received were divided according to agreement. Petitioner's personal legal fees in 1932 amounted to $1,410 and his office expenses were $570. The greater part of such sum represented fees from matters commenced in 1929, prior to his association with the insurance department. None of the personal legal work that he obtained after becoming associated with the insurance department was the result, either directly or indirectly, of his connection with that department.

The liquidation bureau was created in 1909 and is now known as the "Bureau of Liquidations, Conservations and Rehabilitations." This change in designation occurred sometime in 1933 and was made to make the name of the bureau conform to the description of the title of article II, chapter 191, of the Insurance Laws of the State of New York, which went into effect on March 15, 1932. It will be hereinafter referred to as the bureau. The bureau was in the year 1932 and now is under the charge of a special deputy superintendent of insurance. Said deputy superintendent is a civil service employee of the State of New York, and his salary is paid directly by the state. The bureau also had in 1932 three assistant special deputy superintendents, attorneys working on legal matters, bookkeepers, stenographers, adjusters, and accountants. At the beginning of 1932 the bureau had approximately 100 employees and at the end of 1932 the number had been increased to approximately 400, none of whom, with the exception of the special deputy superintendent in charge, were civil service employees. The number of employees varied according to the number of insurance companies under the bureau's jurisdiction.

The general functions and duties of the bureau are as follows: Under the Insurance Laws of the State of New York the superintendent of insurance of that state may, on certain grounds, apply to the judicial authorities of the state for an order directing him to take over the assets of insurers doing business or in process of organization for the purpose of doing business in the state, for the purpose of liquidating, rehabilitating or conserving the business of such insurers. Upon an order directing rehabilitation, liquidation, or conservation being granted, all of the work necessary to accomplish any of these results is performed by the bureau. When an order is obtained directing the liquidation of an insurance company its charter is dissolved and no new business is transacted. The work of liquidation consists of adjudicating the claims of the creditors of the company, selling the real estate and the other assets, and attempting to collect premiums due. After all of the assets of a company have been realized upon, dividends are distributed pro rata to the claimants entitled under the laws of the State of New York to participate in the assets of a defunct insurance company. When an order is obtained directing the rehabilitation of an insurance company the bureau actively operates it (but conducts no new business) and takes steps to remove the causes and conditions which made such proceeding necessary in an effort to bring about its rehabilitation and place the company in a sound financial condition. If the bureau succeeds in rehabilitating the insurer, the assets are turned back to it and it resumes operations under its own direction. If and when it is determined that further efforts to rehabilitate a company will be futile, the superintendent of insurance may apply for an order of liquidation. No rehabilitation work was done by the petitioner or the bureau in 1932. Although the superintendent of insurance was authorized to apply for rehabilitation orders, no such order was applied for until the year 1933. Upon taking charge of a company for liquidation purposes, certain of the staff of the company such as underwriters and the so-called "production staff" would be dismissed. The key employees would be retained, and the remainder dismissed as soon as practicable. It was the policy of the bureau to centralize the liquidation work as much as possible in one office. The procedure would necessarily vary according to the size of the companies placed in liquidation, etc. In the case of a very large company its affairs could not be transferred to another office for a long period of time. At the beginning of 1932 the bureau was liquidating 39 insurance companies; at the end of 1932 it was liquidating 11 companies.

In legal matters involving companies in liquidation, the petitioner appeared as the attorney of record. He devoted over 90 percent of his time during 1932 to legal problems and cases involving the companies in liquidation whose affairs were being administered at the 80 Center Street office. The balance of his time was devoted to legal problems of the bureau as a whole, such as the drafting of a new article XI of the Insurance Law.

In the year 1932 the department of insurance had a general bank account with the Bank of New York & Trust Co. at 48 Wall Street, New York City. The expenses of the bureau, including all salaries, were paid by checks drawn on this bank. This account was referred to as the "Wash Account", as simultaneously with the drawing of checks for salaries, etc., other checks were drawn on the bank accounts of the companies in liquidation and deposited with the Bank of New York & Trust Co. to equalize the amount drawn out therefrom to meet the salaries and other overhead expenses of the bureau. In drawing checks against the various companies in liquidation to meet petitioner's compensation and the other expenses of the bureau, checks would be drawn by an assistant special deputy of insurance (as representative of the superintendent of insurance) on the bank accounts in which the deposits of the various companies were maintained. Each company coming under the jurisdiction of the bureau kept its separate bank account, and the superintendent of insurance (having charge of all the assets of such company) was in a position to draw checks on the account.

Petitioner's compensation for 1932 was prorated to the companies in proportion to the time devoted by him in connection with the respective companies on the legal affairs of which he was engaged. Petitioner's time devoted to the affairs of one particular company would be charged against such company. Petitioner's time devoted to the general legal problems of the department would be prorated among the various companies under a formula designed to charge general administration expenses of the department to the companies in liquidation in proportion to the aggregate compensation of those engaged in the specific liquidation of the respective companies.

Petitioner's compensation during 1932 was paid bimonthly by check, but was computed on an annual basis. Petitioner did not receive any additional compensation from the insurance department by way of special fees or otherwise in addition to his fixed compensation. His yearly compensation was determined by the superintendent and the compensation did not vary in accordance with the volume of legal matters handled by him during the year. Petitioner's entire compensation for 1932 was paid from funds of insurance companies being liquidated by the superintendent of insurance.

In the budget of the superintendent of insurance there appeared an item called the reserve fund, for the use of the superintendent in liquidating insurance companies whose assets were not sufficient to pay the costs of liquidation. In the budgets submitted for the fiscal years ending June 30, 1931, 1932, and 1933, the amount of the reserve fund was $5,000. It does not appear that any of the compensation paid to the petitioner during the year 1932 was derived from this fund.

OPINION.

ARUNDELL: This proceeding is in all material respects like that of , decided this day. The arguments of the parties are along the same lines in both cases and it is unnecessary in this case to repeat our views on the several points urged. It is sufficient to say briefly in this case, as we said at length in the other, that we are not satisfied that petitioner can be classified as an employee of the state engaged in carrying on an essential governmental function and that in any event the fact of his compensation being from private funds and not from those of the state precludes the allowance of exemption from Federal income tax.

Decision will be entered for the respondent.