Jones v. Commissioner

HOUSTON JONES, PETITIONER, v.. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Jones v. Commissioner

Docket No. 18761.

United States Board of Tax Appeals

16 B.T.A. 1208; 1929 BTA LEXIS 2425;

June 28, 1929, Promulgated

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Held that petitioner was neither an officer nor an employee of a political subdivision of the State of Texas nor was he such a governmental instrumentality as to render his compensation therefrom for services performed under a contract exempt from tax.

Camden R. McAtee, Esq., for the petitioner.

E. W. Shinn, Esq., and E. M. Niess, Esq., for the respondent.

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TRAMMELL

This is a proceeding for the redetermination of deficiencies in income tax of $223.04 and $591.93 for 1920 and 1921, respectively. The deficiencies result in part, at least, from the action of the respondent in including in the taxable income of the petitioner on the community property basis compensation received by him from the Hidalog County (Texas) Water Improvement District Number Two for services rendered by him during the period from the time the District contracted to purchase the properties of the Louisiana Rio Grande Canal Co. until the transfer of the properties to the District.

FINDINGS OF FACT.

The Hidalgo County Water Improvement District Number Two, a municipal corporation and governmental agency (hereinafter referred to as the District) was organized July 12, 1920, by a vote of the taxpayers of the District under and by virtue of the Revised Statutes of Texas.

Prior to and at the time of the organization of the District, the Louisiana Rio Grande Canal Co., a Texas corporation (hereinafter referred to as the Canal Company) owned and operated an irrigation system in Hidalgo County, Texas.

On July 16, 1920, an instrument was executed, providing in part as follows:

PHARR, TEXAS, July 16, 1920.

The BOARD OF DIRECTORS,

Hidalgo County Water Improvement District No. 2, Pharr, texas.

GENTLEMEN: Confirming our verbal agreement and understanding with reference to the sale of the properties by the Louisiana-Rio Grande Canal Company to Hidalgo County Water Improvement District No. 2 and the payment therefor, it is further agreed between the parties, as follows:

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It is agreed by the parties that all contracts made by First Party between this day and the time that said properties shall be delivered to Second Party, relating to the sale of Water Rights, or which would materially increase First Party's obligations and liabilities, or which would depreciate the assets of First Party, or which would materially change or affect the properties now owned by First Party, save and except the ordinary expenses and contracts for the operation and maintenance of First Party's irrigation system, or the ordinary expenses incident thereto, shall be brought to the attention of Second Party before the same are fully consummated, so that Second Party may be apprised thereof and be given an opportunity to be heard thereon.

It is agreed between the parties that the fees or commissions to be paid by First Party to Mr. Houston Jones, for his services in the matter of the establishment of Hidalgo County Water Improvement District No. 2, the issuance and sale of the bonds thereof and for all other services in relation to the sale and transfer of the properties by First Party to Second Party, shall be Twelve Thousand Five Hundred Dollars ($12,500.00).

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In order to preserve the records and signify your assent to the above terms and conditions, you will please have your President and Secretary to sign this letter.

(SEAL)

(Signed) HOUSTON JONES,

Chairman Executive Committee.

Attest:

(Signed) E. L. GREENE,

Secretary.

Read, approved and signed, this 16th day of July, 1920.

(SEAL.) HIDALGO COUNTY WATER IMPROVEMENT DISTRICT NO. TWO.

(Signed) E. H. GRIFFITH, President.

Attest:

(Signed) C. B. CRAMER,

Secretary.

On July 20, 1920, an agreement was entered into between the Canal Company and the District whereby the Canal Company agreed to sell to the District all of its properties situated in Hidalgo County, Texas. Payment for the properties was to be made by the bonds of the District in the amount of $1,100,000, such amount being necessary for the payment and discharge of the then present obligations of the Canal Company, and in addition thereto a payment in bonds of an amount not to exceed $150,000, for the discharge of the indebtedness and obligations of the Canal Company which should accrue between the date of the agreement and the date that the properties were transferred and delivered and bonds received in payment therefor. It was also agreed that the bonds to be delivered by the District to the Canal Company in payment for the properties should be the duly authorized and executed bonds of the District voted and validated as provided by law, approved by the Attorney General of Texas, and one John C. Thompson of New York, duly registered by the Comptroller of the State of Texas and be delivered on or before December 1, 1920, unless a later date should be agreed upon. On December 31, 1920, a subsequent contract relating to the sale and disposition of the bonds to be delivered in payment for the Canal Company's properties was executed.

On January 1, 1921, the Canal Company, pursuant to contract, deeded its properties to the District. From the time of the making of the contract of sale in July, 1920, until the transfer of the title to the properties on January 1, 1921, they were operated in the name of the Canal Company, with the cooperation and advice of the board of directors of the District.

From some date in 1919 until the properties of the Canal Company were transferred to the District in 1921, the petitioner was chairman of the executive committee of the Canal Company and his duties embraced those of manager. About the time the District executed the two instruments in July, 1920, for the acquisition of the Canal Company's properties, it also entered into a verbal agreement with the petitioner to render service in connection with the establishment of the District, the issuance and sale of its bonds, and the sale and transfer to it of the Canal Company's properties. For his services he was to receive $12,500. The District paid him $2,500 of this amount in 1920 and $10,000 in 1921.

About January 8, 1921, and after title to the Canal Company's properties had been transferred to the District, one Shaw was appointed manager of the District. Jones' services, however, were continued until March 31, 1921, when they were terminated. From January 1, 1921, until March 31, 1921, Jones received compensation from the District at the rate of $500 per month. After the appointment of Shaw, the petitioner's duties were those of an assistant to Shaw, rendering such services as he was called upon to perform either by Shaw or the board of directors, and looking after the settlement of the Canal Company's debts.

In addition to being in the employment of the Canal Company, from which he received compensation which is not here involved, Jones in 1920 was employed by and received compensation from the Louisiana Rio Grande Sugar Co., and was also an officer and employee of the San Juan State Bank. For some time in 1921 he was an officer and employee of the First State Bank of McAllen, from which he received compensation.

For 1920 and 1921 the petitioner and his wife filed income-tax returns reporting taxable net income on a community basis, but did not report as taxable the compensation received by Jones from the District. The respondent determined that the compensation received by the petitioner from the District for services constituted taxable income and thereupon increased the petitioner's taxable income by the amount of his share of the compensation ascertained on the community basis and determined the deficiencies here involved.

OPINION.

TRAMMELL: The petitioner contends that the $2,500 received by him from the District in 1920 and the $10,000 received in 1921 is exempt from tax as compensation received from a political subdivision of the State of Texas for personal services.

The respondent contends that the petitioner did not receive the compensation here involved from the District, but from the canal Company, a private corporation, and that assuming, but not admitting, that the compensation was received from the District, the petitioner was neither an officer nor employee of the State of Texas or a political subdivision thereof, but was an independent contractor.

The instrument of July 16, 1920, indicates that the "fees or commissions" of $12,500 to be paid the petitioner for his services in connection with the establishment of the District, the issunance and sale of its bonds and the sale and the transfer of the properties of the Canal Company to the District were to be paid by the Canal Company. The oral evidence also shows that the District through its board of directors agreed to and did pay Jones for his services the amount of $12,500 mentioned in the instrument of July 16, 1920. In view of this, we think the respondent's contention that Jones did not receive the compensation of $12,500 from the District must be denied.

The District is a municipal corporation and governmental agency of the State of Texas. See Article XVI of the Constitution of Texas; article 7731, Vernon's Revised Civil Statutes of Texas (1925); J. C. Engleman Land Co. v.. Donna Irrigation District No. 1 (Texas), 209 S.W. 428">209 S.W. 428; Peyton Creek Irrigation District v.. White (Texas), 230 S.W. 1060">230 S.W. 1060. This being true, was the petitioner an officer or employee of the District or such a governmental instrumentality as to render the compensation here involved exempt from tax, or was he an independent contractor?

We think that it is clear that Jones was not an officer of the District, and the only real question here is, Was he an employee thereof?

The period involved here is before the District, which is a political subdivision or instrumentality of the State, acquired the properties from the private corporation. During the period before us the properties were operated by a private corporation and the petitioner was in its employ. There is no contention here that the Canal Company was a state instrumentality, and the period after the District actually acquired the properties is not involved. Jones was admittedly an employee of the Canal Company during this period, but his compensation received from such source is not involved.

The only question here is if Jones during the period involved was not only an employee of the Canal Company, but also an employee of the District, which was negotiating for the properties and during the period when final arrangements were being made to close the deal. Jones' services were secured to issue and sell the bonds, and in connection with the establishment of the District and the sale and transfer of the Canal Company's properties to it. The fees or commissions paid him for such services constitute the compensation here involved.

We think that under the facts Jones was merely an independent contractor engaged in the establishment of the District and to handle the bond issue in so far as the District was concerned. Clearly, the District had no part in the management or operation of the properties until it acquired them, which was after the period involved. The limitation by agreement between the District and the Canal Company, as to certain transactions which might be reviewed by the District after its contract to purchase the properties, we think is unimportant. The fact that the Canal Company was somewhat limited in what it could do is no indication whatever that Jones was under the control or direction of the District. The only thing the District was doing was closing up the transaction of acquiring the properties, the issuance and sale of bonds, and matters in connection therewith.

There is no evidence that in performing his undertaking Jones was under the control of any state instrumentality. The period after the state instrumentality, that is, the District, was fully organized and acquired the properties is not here involved.

The record does not show what the District's operations during the period before us consisted of other than getting out an issue of bonds. During this period the properties were owned and operated by the Canal Company. Also, during this time the petitioner was not only in the employment of the Canal Company from which he received a salary, but also was employed by and received compensation from a sugar company, and, in addition to these, was also an officer and employee of a bank. Clearly, the petitioner was not restricted with respect to other employment, nor was he restricted as to the manner or method or means used in doing what his agreement provided for. His responsibility was only for the result to be accomplished.

There is nothing in the record to show that the District ever conferred or communicated with the petitioner or that he received any instructions whatever as to how he was to proceed with his undertaking, from the time he entered into the contract until the time the contract expired when the properties were transferred to the District in January, 1921.

The facts bring this case clearly within the decision of the Supreme Court in the case of Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514, and it is our opinion that the petitioner was not an officer or employee of a state or political subdivision thereof.

In considering this question the court, in Metcalf & Eddy v. Mitchell, supra, said:

But here the tax is imposed on the income of one who is neither an officer nor an employee of government and whose only relation to it is that of contract, under which there is an obligation to furnish service, for practical purposes not unlike a contract to sell and deliver a commodity. The tax is imposed without discrimination upon income whether derived from services rendered to the state or services rendered to private individuals. In such a situation it cannot be said that the tax is imposed upon an agency of government in any technical sense, and the tax itself cannot be deemed to be an interference with government, or an impairment of the efficiency of its agencies in any substantial way. Railroad Co. v. Peniston; Gromer v.Standard Dredging Co.; Baltimore Shipbuilding Co. v. Baltimore; Fidelity & Deposit Co.v.Pennsylvania; Choctaw, O. & G.R.R. Co. v. Mackey, supra.

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But we do decide 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; and when we take the next step necessary to a complete disposition of the question, and inquire into the effect of the particular tax, on the functioning of the state government, we do not find that it impairs in any substantial manner the ability of plaintiffs in error to discharge their obligations to the state or the ability of a state or its subdivisions to procure the services of private individuals to aid them in their undertakings. Cf. Central Pacific Railroad v. California,162 U.S. 91">162 U.S. 91, 126. We therefore conclude that the tax * * * was properly assessed.

We think the foregoing is applicable and controlling here and accordingly are of the opinion that the compensation in question is not exempt from tax.

Judgment will be entered for the respondent.