Jeffries v. Commissioner

LILLIAN M. JEFFRIES, ADMINISTRATRIX, ESTATE OF JAMES B. JEFFRIES, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Jeffries v. Commissioner Docket No. 81968. United States Board of Tax Appeals 37 B.T.A. 742; 1938 BTA LEXIS 991; April 22, 1938, Promulgated *991 The South Florida Conservancy District on the facts presented was an instrumentality of the State of Florida, engaged in the exercise of functions essentially governmental in character. Held, that an amount received from the district as salary by an officer thereof was exempt from the Federal income tax. Brush v. Commissioner,300 U.S. 352; Collector v. Day,11 Wall. 113; Commissioner v. Harlan, 80 Fed.(2d) 660; Helvering v. Mountain Producers Corporation,303 U.S. 376, compared and distinguished. Paul E. Shorb, Esq., for the petitioner. S. L. Young, Esq., for the respondent. TURNER *742 This proceeding is for the redetermination of a deficiency in income tax of $91.90 for 1933. The only matter in controversy is whether the decedent's salary as a member of the board of supervisors of the *743 South Florida Conservancy District was subject to the Federal income tax. The proceeding was submitted upon a stipulation of facts. Such facts as are deemed material to the decision of the question presented are set out below as our findings of fact. *992 FINDINGS OF FACT. James B. Jeffries, hereinafter referred to as the decedent, was a resident of Miami, Florida. He filed his income tax return for 1933 with the collector of internal revenue at Jacksonville. In 1936, and subsequent to the filing of the petition in this proceeding, he died and Lillian M. Jeffries, as administratrix of his estate, was duly substituted as petitioner by order of the Board. By an act of Congress approved September 28, 1850 (ch. LXXXIV, Statutes of the United States; 9 Stat. at L. 519, 520; 43 U.S.C.A. 982-984), the United States granted to the State of Florida, hereinafter referred to as the state, a large acreage of swamp and overflowed lands which were unfit for cultivation, to enable the state to drain and reclaim them. The only condition to the grant was that the proceeds received by the state from such lands, whether from sale or by direct appropriation in kind, be applied exclusively, as far as necessary, to the purpose of reclaiming the lands. Pursuant to the act, the state took the steps necessary to have vested in it the fee simple title to such lands and created an agency known as the "Internal Improvement Fund, *993 " administered by trustees, which took and held title to the lands. By legislative enactment approved June 10, 1919, the state established a district then known as the Palm Beach Drainage and Highway District. The provisions of the act were amended, revised, and reenacted by subsequent legislative acts, including the act known as Chap. 13,802, approved June 3, 1929, and sometimes referred to hereinafter as the district act. By amendment of June 6, 1927, the name of the district was changed to South Florida Conservancy District, hereinafter referred to as the district. The lands included in the district are located in the Evergldes of Florida, in Palm Beach and Hendry Counties, and are part of the swamp and overflowed lands conveyed to the state under the Act of Congress of 1850. In 1933 the total acreage of the district was approximately 300,000 acres, or about 470 square miles. As stated in the district act, the district was created for the purpose of reclaiming, draining, and improving the lands and protecting them from the effects of excess water by means of the construction and maintenance of canals, ditches, dikes, and reservoirs, coupled with the incidental construction*994 and maintenance of hard surface highways and other roadways, making the lands within the district *744 sanitary, habitable, and available for settlement, for the public convenience and welfare and for public utility and benefit. By the district act the state granted to the district the necessary lands, easements, rights of way, riparian rights, restrictions, and reservations of lands that might be vested in the state or in the state board of education or the trustees of the internal improvement fund and property rights therein of every description required for the public purpose and powers of the board of supervisors of the district. For the administration of the affairs of the district, the act created a board of supervisors, to consist of three members whose term of office was for three years and whose salary was fixed at $200 a month each, and required each of them before entering upon the performance of his official duties to take and subscribe to an oath that he would honestly, faithfully, and impartially perform the duties devolving upon him in his office and that he would not neglect any of the duties imposed upon him by the act. The act provided for the election*995 of the supervisors by the landowners in the district, one supervisor to be elected each year, and also for the election of one of the members of the board as chairman by the others. By the district act, the board was created with all the powers of a body corporate, including the power of eminent domain and the power to employ agents or employees, to acquire, hold, and dispose of real or personal property, and to issue notes, warrants, and bonds as obligations of the district, the bonds to be exempt from all state, county, and municipal taxation within the State of Florida. The board was also authorized and empowered to construct, maintain, and operate pumping plants and stations, to construct and maintain a system of hard surfaced highways and other roads, including bridges, and to clean out, straighten, or change the course or flow of any ditch, drain, watercourse, or country stream in the district deemed by it necessary and advisable to facilitate drainage, reclamation, and improvements, including navigation and deportation facilities, making the lands within the district available for agricultural purposes, habitation, settlement, and general utilities in a modern, practical, *996 and convenient form, to the benefit of the lands therein. Under the act the board has constructed and maintained a system of canals, drains, ditches, levees, reservoirs, and other improvements in the district. The district board acts independently of outside supervision, except that under the district act and under the general drainage laws of Florida the plans of reclamation and drainage work generally done by the district are under the supervision and subject to the approval of the state drainage engineer and the board of commissioners of the Everglades Drainage District. All of the lands in the district that were owned by corporations or private persons in 1933 had been acquired by purchase from the state *745 and the proceeds therefrom had been used by the state for draining swamp and overflowed lands acquired by it from the United States under the Act of Congress of 1850. For the use of the district board in carrying out the objects and purposes of its creation, the district act imposed an annual charge of 10 cents an acre on all lands within the district, with certain exceptions, among which were lands owned by the state board of education as school lands. On*997 lands in the portion of the district designated by the act for earliest draining and reclamation an annual additional charge of $2.90 an acre was imposed, beginning on some in 1929 and on others in 1930. Both amounts were to be assessed by the assessors and collected by the collectors of taxes of the counties in which the lands were situated. However, they were to be listed by the assessors in a separate column from taxes and when received by the collectors were to be paid over to the district board. During 1933 the state, through the trustees of the internal improvement fund, held title to 42,167 acres of land located in the district which were subject to the assessments or charges imposed by the district act. These assessments were not paid in that year, however, because of lack of funds, the state not having appropriated any funds for that purpose of for any purpose of the district or the district board. The state board of education owned as school lands approximately 7,680 acres within the district which were not subject to the charge. The district did not charge tolls on any of its roadways, nor did it receive any compensation for the use of its canals or drainage and*998 reclamation projects. Its sole income was from assessments collected on lands within the district. Its income during 1933 consisted of cash in the amount of $28,798.92 and notes, bonds, and coupons in the amount of $84,665.17. These funds were used in 1933 for the purposes and objects for which the district was created, including retirement of loans and bonds and payment of interest thereon and the payment of salaries and expenses of the members of the board. Throughout 1933 the decedent was a member of the board of supervisors of the district and acted as chairman, devoting all of his time to the board's affairs. Before entering upon his duties he had taken the oath required by the district act. In 1933 the board maintained an office at Miami, where its meetings were held. As chairman of the board the decedent presided at all such meetings, supervised its financing, and generally directed its affairs. In addition to his general duties as chairman, he was actively engaged in the work of refunding the outstanding indebtedness of the district, amounting to more than $1,000,000, the prosecution of the board's application for a loan from the Reconstruction Finance Corporation, *999 *746 litigation involving the district, adjustment of charges against landowners, and similar duties. During the year the board was constantly engaged in the maintenance of canals, ditches, and levees of the district; the maintenance and operation of eleven pumps; and with the employment and general supervision of the men and crews necessary to carry on the activities described. Due to the lack of funds, the district constructed no canals or levees in 1933 and did less repair and reconstruction work than usual. The following is a statement of the assets of the district and the cost thereof as of December 31, 1933: 61 miles of canals $656,734.95 144 miles of ditches 213,417.38 5 pumping plants, 11 pumps 54" diameter, each driven by 180 horsepower Diesel engines 481,417.52 1,351,569.85 In addition to the above the district has expended small amounts for roads and bridges, but throughout its history the building of roads and bridges has been incidental to the work of drainage and reclamation. For the services rendered by the decedent to the district he received as salary in 1933 the amount of $2,400. Respondent has determined that the salary so*1000 received is subject to the Federal income tax on the ground that the district was not engaged in the performance of an essential governmental function of the State of Florida. OPINION. TURNER: The question presented for determination is whether the decedent's salary is exempt from Federal income tax by reason of the constitutional limitation on the powers of the Federal Government to levy taxes on the salaries of the officers of state agencies or instrumentalities which are engaged in the performance of essential governmental functions. The controversy between the parties is whether the South Florida Conservancy District was engaged in the performance of an essential governmental function. The respondent makes no point that the district was not an instrumentality of the State of Florida, nor that the petitioner was not an official of the district. Petitioner alleges that the State ofFlorida, in accepting from the United States the grant of swamp and overflowed lands, accepted them in trust and under a duty to drain and reclaim them, with the Federal Government recognizing that in so doing the state would be performing an essential governmental function. *1001 We find nothing in the act under which the lands were granted to indicate that they *747 were given in trust to the state. The grant was outright and effective from the date of the act of Congress by which made, and the only proviso was that the proceeds received by the state from the lands be used exclusively, so far as necessary, for the purpose of reclaiming the lands by means of drains and levees. See Wright v. Roseberry,121 U.S. 488. In speaking of the purposes and requirements of the act, the Court there said: The object of the grant, as stated in the act, was to enable the several states to which it was made, to construct the necessary levees and drains to reclaim the land; and the act required the proceeds from them, whether from their sale or other disposition, to be used, so far as necessary, exclusively for that purpose. The early reclamation of the lands was of great importance to the states, not only on account of their extraordinary fertility when once reclaimed, but for the reason that until then they were the cause of malarial fevers and diseases in the neighborhood. *1002 In Leovy v. United States,177 U.S. 621, 623, the Court said respecting the act: * * * This legislation declares a public policy on the part of the government to aid the States in reclaiming swamp and overflowed lands, unfit for cultivation in their natural state, and is a recognition of the right and duty of the respective States, in consideration of such grants, to make and maintain the necessary improvements. From the foregoing statements of the Supreme Court it appears that the state in accepting the grant assumed the duty of using the proceeds received therefrom by it, so far as necessary, for reclaiming the lands. Whether this could be said to be an acceptance in trust, or whether the state was under any further duty to the Federal Government, we do not deem it necessary to decide. In furtherance of the object for which the lands had been granted to it, the State of Florida created the district, which, during the taxable year and for several years theretofore, was engaged in attempting to make the swamp and overflowed lands situated within its boundaries habitable and available for settlement by rendering them sanitary and suitable for agricultural*1003 purposes. For the use of the district in performing this work the state provided funds by means of charges or assessments imposed by it on lands situated in the district. A drainage district created by a state as a political subdivision thereof for the purpose of draining and reclaiming swamp and overflowed lands by rendering them habitable and cultivatable is an instrumentality of the state created for the purpose of performing prescribed functions of government. Houck v. Little River Drainage District,239 U.S. 254. It is a proper matter for judicial notice that the reclamation of swamp and overflowed lands is a most legitimate exercise of the *748 police power. See Leovy v. United States, supra, page 636, where the Supreme Court said: We think that the trial court might well take judicial notice that the public health is deeply concerned in the reclamation of swamp and overflowed lands. If there is any fact which may be supposed to be known by everybody, and, therefore, by courts, it is that swamps and stagnant waters are the cause of malarial and malignant fevers, and that the police power is never more legitimately exercised*1004 than in removing such nuisances. The defendant was not deprived of the defense that the act which he was charged with was performed in order to promote the health of the community, by the fact, if fact it was, that the order under which he acted did not say anything about the subject of health, but simply authorized the erection of the dam, so as to exclude the overflow from the river. Here the state created an agency of its own for the exercise in a particular area of its police power as related to drainage. The police power, however, is and remains a governmental power and its exercise does not extend to the performance of activities that are nongovernmental and proprietary in nature. Ohio v. Helvering,292 U.S. 360. Accordingly we hold that the drainage and reclamation work carried on by the district was the exercise of functions essentially governmental in character and not private or proprietary. This conclusion, we think, is consistent with recent decisions. In Brush v. Commissioner,300 U.S. 352, the Supreme Court, in holding that the acquisition and distribution by the city of New York of a supply of water for its inhabitants*1005 was the exercise of an essential governmental function, stated among other reasons that the health and comfort of the people are dependent upon an adequate water supply. If the furnishing of a supply of water needed for health purposes constituted a governmental function, the removal of excess water from a swamp area also necessary for health purposes would appear to constitute a governmental function. In Hoskins v. Commissioner, 84 Fed.(2d) 627, the court, in holding that the operation of school cafeterias by a public school system was a governmental function, among other reasons relied on the fact that such operation tended to improve the health of the pupils. See Gregg v. United States,22 Fed.Supp. 802 (U.S. Dist. Ct., W. Dist. Pa., Feb. 23, 1938), to the same effect. In Ernest H. Hale,33 B.T.A. 504, the conclusion that the maintenance of municipal play grounds was an essential governmental function was based on the duty of the municipality to preserve the public health. The district also built some roads and bridges in connection with its principal activity of drainage and reclamation. These, being incidental*1006 to its principal work, partook of its nature. Brush v. Commissioner, supra.However, standing alone, they would also be governmental functions. Commissioner v. Harlan, 80 Fed.(2d) 660, *749 affirming 30 B.T.A. 804; Boomer v. Glenn,21 Fed.Supp. 766. Respondent, in support of his contention that the district was not engaged in performing governmental functions, relies on our decision in T. P. Wittschen,25 B.T.A. 46, which was followed in D. G. Wood,29 B.T.A. 919. In the Wittschen case we held that a utility district organized by the vote of the people, with power to own and operate works for supplying the inhabitants of the district with light, water, power, heat, transportation, telephone service and other means of communication, and the means for the disposal of garbage, sewage, and other refuse matter was not organized as a political subdivision of the State of California primarily for governmental purposes and was not engaged in performing essential governmental functions. Clearly the objects and powers of that district are so varied and different from*1007 those of the district involved here that our decision there may not be said to be controlling in the instant case. In the Wood case it was held that the water control and improvement district organized under the laws of Texas as a political subdivision thereof and engaged in furnishing water to the arid and semi-arid area comprised in it was not engaged in the performance of an essential governmental function. In Ashton v. Cameron County District,298 U.S. 513; petition for rehearing denied, 299 U.S. 619, there was in issue the question of whether a similar improvement district organized under the laws of Texas to furnish water for irrigation and domestic uses was created for the exercise of governmental or mere corporate functions. Relying upon its former decisions with respect to the immunity of states and municipalities from Federal taxation as being applicable, the Supreme Court concluded that the district was created to exercise governmental functions. Our decision in the Wood case, therefore, is not in harmony with the conclusion reached by the Court. Nor is it in harmony with the later decision of the Court in *1008 Brush v. Commissioner, supra, where the Ashton case was considered at length. In view of the foregoing, the decision in the Wood case can not be applied here. More in the nature of a suggestion than a contention, the respondent states on brief that petitioner has failed to show affirmatively the manner and to what extent the imposition of the tax here involved would be a burden on the district in the conduct of its activities. In such cases the officers and employees are the means through which a state agency must necessarily exercise its powers and, as such, are not subject to tax by the Federal Government. Collector v. Day,11 Wall. 113; Brush v. Commissioner, supra;Commissioner v. Sherman, 69 Fed.(2d) 755; and Commissioner v. Harlan, supra.Cf. *750 Joseph B. Strauss,35 B.T.A. 673. In Indian Motocycle Co. v. United States,283 U.S. 570, the Supreme Court said: "Where the principle applies it is not affected by the amount of the particular tax or the extent of the resulting interference, but is absolute." Recently, in*1009 Helvering v. Mountain Producers Corporation,303 U.S. 376, the Supreme Court overruled its prior decisions in Gillespie v. Oklahoma,257 U.S. 501, and Burnet v. Coronado Oil & Gas Co.,285 U.S. 393, and held that income derived by private agencies or individuals from state owned lands was subject to Federal income tax, but there is nothing in that decision which in any way indicates that the Court modified or in any way intended to modify or change its position as taken in Brush v. Commissioner, supra, and other cases cited to the effect that the salary of an officer of an instrumentality of a state, which instrumentality is engaged in activities essentially governmental in character, is not subject to Federal income tax. Reviewed by the Board. Decision will be entered for petitioner.