Whittemore v. Commissioner

CLARK MCK. WHITTEMORE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Whittemore v. Commissioner Docket No. 77308. United States Board of Tax Appeals 35 B.T.A. 757; 1937 BTA LEXIS 839; March 30, 1937, Promulgated *839 The petitioner and one of his law partners were appointed jointly by municipal ordinance as city solicitor of the city of Linden, New Jersey, purportedly under the authority of a statute authorizing municipality to appoint a single city solicitor. They were compensated by a small annual retainer and fees fixed by themselves for any special services rendered. They continued to carry on their private law practice. Held, the petitioner was not an officer or employee of the city of Linden but the relationship was rather that of attorney and client, and it is not established that any burden on the state would result from Federal taxation of the petitioner's compensation. Sigurd A. Emerson, Esq., for the petitioner. S. L. Young, Esq., for the respondent. HARRON *758 This proceeding involves a deficiency of $704.26 for the year 1930. In addition to a capital gain adjustment which is not contested, the respondent added to the petitioner's taxable income $5,993.52 as petitioner's unreported share of the net earnings of a law partnership. The only part of this amount in issue is the petitioner's net share of a retainer and fees paid to him and*840 one of his partners jointly by the city of Linden, New Jersey, during the taxable year. FINDINGS OF FACT. The petitioner is a lawyer and in 1930 was one of four members of the law partnership of Whittemore & McLean of Elizabeth, New Jersey. Throughout the year 1930 the petitioner and one of his partners, Donald H. McLean, were the city solicitors for the city of Linden, New Jersey, and both rendered legal services to the city. They were originally appointed by an ordinance of the common council for a three-year term beginning January 1, 1925. They were reappointed by ordinance for a second three-year term from January 1, 1928, to December 31, 1930, under the same conditions as the first appointment. The ordinance of January 22, 1925, by which petitioner was designated city solicitor is entitled: "An Ordinance of the City of Linden Prescribing and Defining the Duties of City Solicitors, Fixing Their Compensation; Appointing City Solicitors and Fixing Their Term of Office." After setting forth the duties and compensation the following section appears: Section 6. That Clark McK. Whittemore and Donald H. McLean, partners, conducting a law practice under the firm name of*841 Whittemore & McLean are hereby appointed City Solicitors of the City of Linden, to hold their office for the full term of three years from the first day of January, 1925, and until their successors have been appointed and qualified. [Italics supplied.] A subsequent ordinance approved January 17, 1928, contains the identical provision substituting the date of the three-year term of "their office" as from January 1, 1928. The city of Linden derives its powers of government from a New Jersey statute of March 24, 1897, which is an act relating to the government of cities of a certain class. Provisions of this act establish the city solicitor an appointive officer, with a term of three years, who is required to take and file an oath; who is removable only for cause; and whose general duties are prescribed. This statute authorizes the common council of a city to prescribe duties and determine reasonable compensation by ordinance. The duties, compensation, term of office, and appointment of city solicitors were fixed by an ordinance of the city of Linden approved January 22, 1925. This provided that the city solicitors *759 shall have charge of and conduct the law*842 business of the city and all other law business in which the city is interested when so ordered by the common council; that they shall advise the mayor, council, and other city officers on matters submitted for opinion; that they shall draw up ordinances and all legal instruments relating to city business which may be required by city ordinance or on order of the mayor, council, or any committee of the council; that they shall prosecute and defend actions brought by or against the city or its officers, relating to matters connected with the city government; that they shall institute actions when instructed by the council or mayor and prosecute any action instituted upon the complaint of any other person when in their judgment required in the public interest. Under the terms of the ordinance the solicitors were to receive an annual retainer of $1,200 a year, payable $100 monthly, to be considered as compensation for attending meetings and giving any requested advice. For other services, such as drawing up ordinances, legel instruments, conducting suits, and other services required by ordinance or upon direction of the mayor or council, they were to receive additional compensation. *843 The petitioner subscribed to the oath required by statute of the State of New Jersey for all officers of the municipality. The petitioner and McLean handled all legal matters for the city of Linden. Their services consisted of attending meetings of the common council and committees thereof and of the board of health; preparing all ordinances and resolutions of the common council; contracts and other legal papers required by the city; rendering opinions to the common council and the various city officers; appearing in legal proceedings in which the city was a party or was interested; conducting the proceedings for assessments for municipal improvements, and legal matters relating to the acquisition of real estate for municipal purposes. The city did not own or operate any public utilities. The common council referred legal questions to the petitioner on motion or resolution. The various city officials consulted him and referred questions to him directly without formal autorization by the common council. It was understood by officers and employees of the city that all legal matters were referable to the petitioner or his partner as city solicitors. Citations in legal proceedings*844 against the city were often referred to them directly by the officers on whom they were served. The petitioner would advise the common council as to matters which he thought should be litigated and when the council decided on litigation it would leave the matters to be handled by the petitioner in his own discretion without any detailed instructions. *760 The petitioner and McLean were paid $1,200 in 1930 by the city of Linden as a joint retainer which was compensation only for their attendance at meetings of the common council and its committees. For all other services the petitioner and McLean rendered bills based on the customary fees charged to private clients for services of a similar character, and these bills were always paid without question. In 1930 the additional compensation thus received by petitioner and McLean from the city of Linden totaled $7,682.50. The checks were made payable either to the petitioner or McLean individually or the partnership of Whittemore & McLean. The $8,882.50 received by the petitioner and McLean from the city of Linden in 1930 was all deposited in the partnership bank account. Petitioner carried on a general law practice in*845 addition to his work for the city of Linden. He used the partnership offices and employees in performing some of his duties for the city. He also did a great deal of work in the city hall and other municipal offices. The partnership allocated its office expenses between its public and private work. The petitioner was entitled to one-fourth of the net earnings of the partnership. The amount of $5,993.53 which respondent added to petitioner's taxable income represents petitioner's share in the partnership's net income from public sources. Petitioner claims that approximately $2,478 of the above amount is his net share of the payments from the city of Linden. This is approximately one-half of the amount paid by the city to petitioner and his partner after deducting office expenses. The petitioner was an independent contractor. OPINION. HARRON: In the pleadings petitioner contends that the deficiency assessed by the respondent is barred by the statute of limitations. This contention appears to have been abandoned, but in any case it must fail in the absence of evidence showing the date on which the petitioner's return was filed. *846 ; . The remaining issue is whether petitioner's share of income paid by the city of Linden during the taxable year is exempt from Federal taxation under the constitutional immunity of income of officers of a political subdivision of a state. Petitioner contends that he was an officer of the city of Linden. Respondent denies this and contends that petitioner was an independent contractor. No question is raised regarding the nature of petitioner's work for the city since respondent concedes that it was in the exercise of a governmental function. The essential characteristics of a public office have been set forth in : "An office is a public *761 station conferred by appointment of the Government. The term embraces the idea of tenure, duration, emoluments and duties fixed by law. Where an office is created the law usually fixes its incidents including its term, its duties and its compensation. The term officer is one inseparably connected with an office." Applying this test to this proceeding it is noted that the*847 New Jersey statute governing the municipality of the city of Linden provides for the appointive office of a city solicitor, sets forth the term of office as three years, requires an oath; prescribes general powers and duties and authorizes the city council to enact ordinances prescribing duties not otherwise defined by law and fixing reasonable compensation. The city solicitor, as an officer, can not be removed from office except by prescribed procedure. The appointing of a city solicitor is a permissive provision. (See Compiled Statutes of New Jersey, vol. 1, secs. 10, 11, p. 1299; sec. 18, p. 1304; sec. 33, p. 1308.) The statute refers to the office of a city solicitor in the singular number. The exemption from Federal taxation petitioner claims is not founded upon any statutory provision of the revenue acts such as was provided in the Revenue Act of 1926, section 1211, but he seeks to obtain the exemption by reason of the implied constitutional inhibition against taxation by the Federal Government of sovereign instrumentalities and functions of state governments and political subdivisions thereof. This implied constitutional inhibition is a general one arising out of the*848 nature of our dual system of government. In such proceedings as this one the question is less general and is directed to consideration of whether the imposition of a Federal income tax on compensation paid to an individual rendering services to a political subdivision of a state, under such circumstances as the facts here show, would interfere with the functioning of the local government because such tax would impair in any substantial manner the ability of the petitioner to discharge his obligation or the ability of the local government to procure the services of individuals to aid it in its undertaking. The principle of immunity has inherent limitations. Each case must be decided upon its facts and by consideration of the real relationship of the claimant to the governmental instrumentality involved. See ;. This question has come before this Board in a great many petitions. A review of these shows that many small political subdivisions of state governments obtain legal counsel by retaining attorneys on the basis of a nominal retainer for attending meetings and giving*849 general advice plus the payment of fees fixed by the attorney for such specific services as are required of him. This arrangement may or may not *762 require a major part of the attorney's time. It is to be compared with another method of appointing an individual to an office having prescribed official duties at a fixed annual salary and either permitting or not such individual to engage in any private activities. It has been stated in the two leading decisions on this subject, referred to above, that the term "public office" implies a definite assignment of public activity, fixed by appointment, with tenure, duties, and compensation fixed by law and that to determine whether a person is an officer is not to be done by "mere terminology." The taking of an oath is a fact to show that an officer in fact has complied with a statutory requirement but it is not always proof that a person is an officer. The city of Linden designated two members of a law partnership to handle all its legal business for three years and renewed the arrangement for another three years. It designated these individuals "city solicitors." It also set forth the nature of the work that would be referred*850 to the city solicitors. However, the arrangement was exactly the same as followed when a client retains an attorney, or firm of attorneys, for the attorneys were entirely free to and did engage concurrently in a private law practice. Their partnership of four attorneys conducted a practice that yielded in the year 1930 a gross income of $104,000. This firm had clients who were municipalities from which it received gross receipts of $44,923. The petitioner and his partner were retained (and it is noted that the ordinances filed use the words "annual retainer") for $1,200 per year, plus additional compensation "of whatever cost" for drawing up ordinances and contracts and conducting litigation and for all other services required by the city. The work was done in the offices of the law firm and the city did not provide offices or pay for the clerical assistance or other costs. This arrangement creates the relationship of attorney and client. It is not unlike that used by a private corporation which retains attorneys, or a firm of attorneys, to look after all its legal business, attend meetings of its board of directors, or officers, and conduct its litigation. It is perhaps an*851 incident of the conduct of local government today by small municipalities that this arrangement is resorted to rather generally. It provides an economic means of obtaining competent legal services where the legal business of a small local government is not great in volume. It provides competent attorneys with the most acceptable type of clients and the general practice of this petitioner's firm bears this out. Rather than impair the functioning of local government such arrangement appears to be advantageous to both the municipality and the lawyer. It is doubtful to us whether the city of Linden in fact filled the appointive office of city solicitor. The petitioner and his partner *763 were designated to jointly fill that office. The retainer and fees appear to have been paid to them jointly. Checks were made payable to either the two attorneys, individually, or to the partnership. The petitioner and his partner were designated city solicitors "to hold their office" for a term of three years. The applicable statute does not refer to more than one office of city solicitor. The arrangement followed by the city of Linden, if it were construed as a way of filling an office, *852 could be extended to swearing in all the members of a law firm as city solicitor so that many would jointly hold office. This is perhaps the extreme possibility but makes the point that usually an office is held by only one person. Petitioner relies almost wholly upon the decision of . The opinion in that case states as follows: "The question presented is whether as such officer (of Maplewood, N.J., a township) his income from the office is subject to Federal income tax." The conclusion arrived at was that such income was immune from taxation because the work of petitioner was in the exercise of a governmental function, and the case of Halsey is distinguished from , which was said to control in principle. Upon facts before it, not set forth in the opinion, the Court of Appeals for the District of Columbia held that Halsey was an officer. In this proceeding the issue squarely is to determine whether this petitioner is an officer. In our opinion, the Halsey decision does not help this petitioner to establish his claim. It appears that petitioner also bases his claim*853 for exemption on the contention that the work performed was in the exercise of a governmental function although it is not clear whether this argument is in the alternative of the contention that he was an officer. However, the claim for exemption can not be sustained unless petitioner is either an officer or employee. No claim has been made that petitioner was an employee. In , an attorney under contract with the governing body of a county was engaged to look after all its legal matters for a period of two years for monthly compensation in connection with routine matters plus extra compensation for special services. There the court held that whether or not he was an employee he acted as an instrumentality through which the county government exercised its governmental powers so that his compensation was exempt. The Supreme Court has overruled a decision of the same court () which followed See , followed in *854 . This line of decisions makes it clear that the exemption can not be obtained unless there is a combination of the two factors: One must be an officer or employee engaged in the exercise of essential governmental functions. See . *764 It should be pointed out that this proceeding is distinguishable from the cases of , and , where this Board held the petitioners to be employees of political subdivisions of a state. In each employment in those proceedings the petitioner alone and singly performed the duties of attorney. There was no question of joint holding of a single office or employment although Wood was a member of a law partnership and Coughlin was engaged in a general law practice during the period of employment. It is held that petitioner was not an officer of the city of Linden but an independent contractor and his share of the compensation paid by that city is not immune from Federal taxation. See *855 ; ; affd., ; ; . Cf. ; and ; affd., . Reviewed by the Board. Judgment will be entered for the respondent.