Strickland v. Commissioner

D. F. STRICKLAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. OLIVE B. STRICKLAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Strickland v. Commissioner Docket Nos. 59749, 59750. United States Board of Tax Appeals 32 B.T.A. 804; 1935 BTA LEXIS 885; June 21, 1935, Promulgated *885 1. The determination in D. F. Strickland,16 B.T.A. 419, that Strickland was an employee of a political subdivision of the State of Texas, and that the compensation received by him from the Hidalgo County Water Improvement District No. Two was exempt from taxation is not res judicata of this proceeding. 2. Fees, as receiver, under appointment by Seventy-ninth Judicial District Court of Hidalgo County, Texas, are not exempt from taxation. C. R. McAtee, Esq., for the petitioners. C. A. Ray, Esq., for the respondent. MORRIS *804 These duly consolidated proceedings are for the redetermination of deficiencies in income tax of $105.39, $139.75, and $105.86 in the case of petitioner D. F. Strickland, and $110.65, $108.73, and $65.27 in the case of petitioner Olive B. Strickland, for the calendar years 1927, 1928, and 1929, respectively. The petitioners, who are husband and wife and residents of the State of Texas, where their property rights are determined by community property laws, allege error upon the part of the respondent (a) in his determination that the amount of compensation received by D. F. Strickland, as an*886 alleged employee of a governmental agency was not exempt from taxation, and (b) in that he erroneously included in the income of each of the petitioners the sums of $1,262.50 and $562.50 for the calendar years 1929 and 1930, respectively, which they allege and contend are exempt from taxation. FINDINGS OF FACT. The petitioners are residents of Mission, Texas, and during all of the time material to these proceedings they were married and living together as husband and wife. Water improvement or irrigation districts, defined as "districts", are established under the water laws of the State of Texas upon petitioner, by a specified number of landowners in a given land area or proposed district, filed in the County Commissioner's Court. Upon hearing before such court, if feasibility, practicability, and public benefit or necessity for such irrigation district be properly shown by such petitioners, it may be created, subject to vote of approval by the district's inhabitants at an election provided for in such laws and *805 subject to the right of review upon appeal from the action of such court, and when so created, such district may make improvements or acquire improvements*887 already made and may issue bonds in payment therefor. Such districts may sue and be sued and may contract and be contracted with in their own names. The district is presided over and controlled by a board of directors of five members, elected by the inhabitants of the district, which, among its other powers, is authorized to make all contracts pertaining to the district and to engage all necessary employees for the proper administration and operation thereof, being especially empowered to engage, among others, "attorneys", and to fix their compensation. The law provides specially for suits against delinquent taxpayers within the district and for the employment of attorneys to prosecute suits against such delinquents and the amount of their compensation therefor. The act under which such districts may be created provides that "No contract shall ever be made with any person or employee for a longer period of time, at any one time, than one year, and the salaries of all such employees, or the compensation to be received by them, shall be fixed by the board of directors at the time of the employment." A petition having been filed as required, at a special term of the County Commissioner's*888 Court in and for Hidalgo County, Texas, on April 3, 1920, for the establishment of an irrigation district in that county, such petition, upon hearing as required by law, was granted on April 26, 1920, and upon election, ordered by that court, and duly held according to law, five directors were elected and the court, on July 12, 1920, declared Hidalgo County Water Improvement District No. Two to be "legally established" and set forth in metes and bounds the lands falling within its jurisdiction. The practical reason for the organization of such districts is to furnish irrigation water to the landowners, where needed, at cost and as economically as possible. In the case of this district irrigation was made necessary because of the semiarid nature of the land therein and the impracticability of growing crops without such irrigation. This district's assets were composed of pumping plants, machinery, an office building and canal rights of way. It embraces 350 miles of canal and serves to irrigate approximately 70,000 acres of land in an area 8 1/2 miles in width and 14 miles in length, and is populated by approximately 25,000 inhabitants. Districts are financed, initially, by*889 bond issues, from the proceeds of which they develop the necessary works for irrigation or they acquire such works already developed, as was done in the instant *806 case when this district acquired the privately owned and operated irrigation plant of the Louisiana Rio Grande Canal Co. In the acquisition of the properties of that company the district used the proceeds of its bond issue to retire the indebtedness of that company in consideration of the transfer of its assets to the district and the surplus proceeds from such issue were used to improve and extend the facilities which had proved inadequate in the past. There are two methods employed for the current financing of the district, (a) flat rate per acre levy - which levy in uniform throughout the entire district whether water is received or not, and (b) an application charge - which is a charge per acre for land actually irrigated. There is, of course, a so-called bond tax levy which is used to retire or to carry the bonded indebtedness of the district. All the funds currently raised, except bond tax levies, are employed in the operation and maintenance of the district's facilities. None of its funds are converted*890 to the use of the state. For instance, if a surplus should arise in any given year it must be carried over and absorbed in the budget of the district for the following year in the reduction of charges for such year. Petitioner D. F. Strickland was in the continuous service of the district from about December 1922 until July 1931. His contract with the district for the period December 9, 1926, to December 8, 1927, providing for an annual salary of $5,000, states as follows: Second: The said D. F. Strickland, for and in consideration of the premises, agrees and obligates himself to faithfully represent the interests of such district as its attorney for said period. Third: It is understood by and between the parties hereto that the nature of the duties of the said D. F. Strickland as attorney for said District shall be that of General Counsel and he shall do and perform any and all legal duties entrusted to him by the Board of Directors of said First Party; but it is understood that no collections will be handled by said attorney unless by special request of the Board and with the special permission of the attorney having charge of such collections, and upon special agreement, *891 as to compensation. Similar contracts were entered into between the district and the copartnership of Strickland & Ewers for the years December 9, 1927, to December 8, 1928, and December 9, 1928, to December 8, 1929, providing for the same compensation and carrying similar provisions to those set forth above except that both Strickland and his partner were obligated thereunder to represent the district as its "attorneys." Such arrangements continued during the remainder of the month of December 1929. Although the services were no longer contractually personal to Strickland and although Ewers *807 performed some of the services under those contracts, under Strickland's direction and supervision, Strickland was regarded as the attorney for the district, and it was only because Ewers had recently been admitted to the bar and had been taken into the firm that his name was included in the latter two contracts. No oath of office was required nor taken under those contracts. Strickland had a separate contract with the district concerning the collection of bond taxes. Although Strickland was subject to call at all times by the district and although he devoted considerable*892 time to its affairs, it was nevertheless understood that he could, and he in fact did, conduct a private law practice, being retained during the years in question by certain other litigants upon an annual basis. As the district's attorney Strickland was charged with the general handling of all the district's legal questions and he was required to meet with its board of directors at its regular weekly and its numerous special meetings and to advise that body upon business as well as upon all of its legal matters affecting the operation of the district. He performed his services under the direction of such board of directors and the general manager of the district, none of which services, aside from the trial of lawsuits, were without their instructions or approval. Whenever it became necessary for him to absent himself from the district he always did so with the approval of such board or manager, whom he always kept informed of his whereabouts. In the performance of his duties he was sometimes required to go beyond the confines of the district without added compensation, being reimbursed, however, for expenses. He was assisted in his district duties by members of his legal staff*893 and his partner, Ewers. The size of his legal and clerical staff and the expenses of maintenance thereof would have been substantially the same, however, without the contract with the district. There were times when the board of directors was requested to authorize additional counsel. His clerical and stenographic work was done by his own employees. Petitioner's partnership interest was 75 percent. Petitioner was appointed receiver by the Seventy-ninth Judicial District Court in and for Hidalgo County, Texas, in the matter of Carroll College et al. v. R. E. Horne et al., on March 31, 1928, and under date of April 23, 1929, that court approved the payment to him of $3,000, as partial compensation for his services as such receiver, which he turned over to the partnership of which he was a member. He paid an income tax upon whatever the net of his distributive share thereof was. Strickland's individual income tax return for the calendar year 1927 showed gross income from his profession of $25,093.58 and a *808 net income therefrom, after the deduction of $12,944.53 for expenses incurred therein, of $12,149.05, one half of which was reported by his wife in her*894 separate return filed for that year. His return for 1928 showed a gross income from his profession of $29,110.97, business expenses of $14,619.25, and a net profit of $14,491.72, one half of which was included in his wife's separate return for that year. The partnership return of Strickland & Ewers for 1929 showed a gross income of $40,407.02, from which was deducted $11,321.51 for expenses, resulting in a net distributive profit to the partners of $29,085.51 One half of Strickland's distributive share of the partnership net income was reported in his individual return for 1929 and one half thereof was reported by his wife in her separate return for that year. The fees included in the foregoing returns represented amounts received from clients other than the district with the exception of those amounts received under contract with the district for the collection of bond taxes, hereinbefore referred to, and the deductions included not only expenses incurred in respect to Strickland's general practice of the law, but also in matters pertaining to the district's affairs, without segregation. In computing Strickland's deficiencies the respondent restored $5,000 to income for the*895 years 1927 and 1928, representing compensation received from the district, not reported in those years, and $3,500 to income for 1929, being his distributive share of the amount received from the district in that year from the partnership of Strickland & Ewers which he did not report. The deficiencies proposed against his wife arise by virtue of their community property status and by reason of the adjustments made by the respondent in Strickland's reported income, just referred to. OPINION. MORRIS: The first question for determination upon the merits is the respondent's refusal to exempt the compensation received under contracts with the Hidalgo County Water Improvement District No. Two. Respecting this issue the petitioner pleads a former proceeding before this Board between the same parties, , involving the same question for the calendar years 1923 to 1926, inclusive, in which it was finally determined that such compensation was not subject to tax and, therefore, since said decision was not appealed the same has become final and is an effective estoppel against any further litigation upon the same subject*896 matter. Consequently our first consideration must be directed to the plea of res judicata. *809 Since different taxable periods are involved in the instant case from those in the former proceedings we are concerned with different causes of action, , and ; therefore, as we said in the latter case, "the earlier judgment is conclusive only as to the precise facts, rights, questions or issues adjudicated in the earlier case that are again the facts, rights, questions or issues presented for adjudication in the second case." The issue presented in the former proceeding as to the years governed by the Revenue Act of 1926 was identical with that involved herein. The contracts under which Strickland rendered services to the district for the years involved in the prior proceeding, however, are not the same contracts now before us. under the law the petitioner was obligated to execute a new contract each year. Although the provisions thereof may have remained substantially the same, there has been no adjudication by the Board of the taxable status of the amounts*897 received under the contracts in force during the taxable years involved in this proceeding. The question must therefore be determined in the light of those new contracts and can not be concluded as res judicata on the basis of a decision involving different contracts. While the facts in the instant case are as favorable to the petitioners' contention as those in the former proceeding and the Board is desirous of adhering to precedent, considering the question in the light of the more recent pronuncements of the Board and the courts, we are satisfied that the former opinion was erroneous. In ; affd., , we held that the salaries of Burges as general counsel for three irrigation districts, two of which were located in texas, were subject to Federal income tax, and specifically overruled , which relied on the earlier Strickland opinion, among others. The material facts in the instant proceeding are not distinguishable from those in the Burges case. We therefore hold that the compensation received in the taxable years in question by the petitioners*898 under contracts with the Hidalgo County Water Improvement District No. Two is not exempt. See also , affirming . Upon the second issue, pertaining to the exemption of fees as receiver under appointment by the Seventy-ninth Judicial District Court of Texas, we find the record here no stronger than in , and , and consequently the conclusion there reached, that such fees are not exempt, must be followed. Reviewed by the Board. Judgment will be entered for the respondent.