Strauss v. Commissioner , 35 B.T.A. 673 ( 1937 )

JOSEPH B. STRAUSS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ANNETTE STRAUSS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Strauss v. Commissioner

Docket Nos. 81902, 82498.

United States Board of Tax Appeals

35 B.T.A. 673; 1937 BTA LEXIS 846;

March 12, 1937, Promulgated

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">*846 The petitioner, Joseph B. Strauss, was employed in 1933 and 1934 as engineer for the Golden Gate Bridge and Highway District of California under an employment contract, receiving as compensation for his services a fee based on the cost of construction of the Golden Gate Bridge. Held, that the petitioner was an independent contractor and that such compensation is not immune from Federal income tax.

Henry C. Clausen, Esq., and Kenneth N. Logan, C.P.A., for the petitioners.

Chester A. Gwinn, Esq., and John D. Kiley, Esq., for the respondent.

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SMITH

">*673 These proceedings, which were consolidated for hearing and opinion, are for the redetermination of deficiencies in petitioners' income tax for 1933 and 1934 as follows:

Petitioner	Year	Docket No.	Deficiency
Joseph B. Strauss	1933	81902	$30,298.25
Do	1934	81902	25,307.30
Annette Strauss	1933	82498	3,080.05
Do	1934	82498	8,027.71

The issues involved are whether the compensation received by the petitioner, Joseph B. Strauss, in 1933 and 1934 as engineer for the Golden Gate Bridge and Highway District is immune from Federal income tax, and, if">*847 taxable, what part of such compensation is taxable to him and what part to his wife, Annette Strauss. There is a further question as to the amount of the personal exemption to which the petitioner, Joseph B. Strauss, is entitled in 1933.

FINDINGS OF FACT.

Joseph B. Strauss, hereinafter referred to as the petitioner, is an engineer specializing in the designing of bridges. He has designed and supervised the construction of four or five hundred bridges in the United States and foreign countries and is considered one of the world's foremost authorities in this field. Since about 1905 he has been president and the principal stockholder of the Strauss Engineering ">*674 Co., of Chicago, Illinois, a corporation engaged in bridge designing and construction.

On August 15, 1929, the petitioner was appointed engineer for the Golden Gate Bridge and Highway District of California, hereinafter referred to as the Bridge District. The Bridge District was organized in January 1929, pursuant to the laws of the State of California, primarily for the purpose of building the Golden Gate Bridge over San Francisco Bay connecting the city of San Francisco and Marin County. It was governed">*848 by a board of directors who were chosen by the board of supervisors of each of the counties comprising the district. Material provisions of the California statutes, as found in the General Laws of the State of California (1931) Deering, Act 936, are as follows:

§ 6. General manager, auditor and secretary.The board of directors shall at its first meeting or as soon thereafter as practicable, appoint by a majority vote a general manager, an auditor and a secretary, * * * The general manager, auditor, secretary and subordinary officers shall receive such compensation as the board of directors shall determine, and shall serve during the pleasure of the board.

§ 7. General manager's powers and duties. The general manager shall have full power and authority to employ and discharge all subordinate officers, employees and assistants at pleasure, prescribe their duties, and shall, subject to the board of directors, fix their compensation. He shall have full charge and control of the construction, maintenance and operation of all works of the district, and shall be the executive officer thereof. * * *

§ 8. Attorneys and other officers.The board of directors shall">*849 appoint an attorney and all subordinate officers not provided to be appointed by the general manager, and shall fix their salaries; such subordinate officers to serve at the pleasure of the board.

* * *

§ 12. Duties of officers. Official bonds. * * *

* * *

The engineer shall have, under the direction of the general manager, full charge of the constructions and of the works of the district, * * *

* * *

Official bonds. The general manager, secretary, auditor and engineer, and attorney, and all other officers or assistants of said district who may be required to do so by the board of directors, shall give such bonds to the district, conditioned for the faithful performance of their duties, as the board of directors from time to time may provide.

§ 13. Plans, data, etc. After the organization of the district it shall be the duty of the board of directors, the general manager, and all of the officers thereof, to prepare plans, both engineering and financial, for the purpose of putting into operation the project for which the district has been organized, and to secure the necessary data, contracts, agreements, plans and specifications for the prosecution">*850 of such work as will enable them to put the matter before the voters at an election held for the purpose of authorizing the bonds of the district.

The petitioner was appointed as engineer for the Bridge District pursuant to a resolution passed by the board of directors on August 15, 1929. The resolution provides that:

">*675 RESOLVED, that Joseph B. Strauss be, and he hereby is appointed the Engineer of the Golden Gate Bridge and Highway District, provided that suitable arrangements can be made with the said Joseph B. Strauss for his compensation and services as such Engineer.

On October 7, 1929, a written agreement was entered into by the petitioner and the board of directors of the Bridge District, setting forth the terms and conditions of the petitioner's appointment and defining his duties. This agreement provided:

That for and in consideration of the fees hereinafter agreed to be paid by the District to the Engineer, and the naming of said Joseph B. Strauss as Engineer of the Golden Gate Bridge and Highway District, the said Joseph B. Strauss does hereby agree to act as such Engineer of the Golden Gate Bridge and Highway District in charge of all engineering work">*851 embraced within the project of building a bridge across the Golden Gate between the City and County of San Francisco and the County of Marin in the State of ,California, conducting the necessary investigation of conditions, including foundation conditions, making surveys, preparing plans and specifications, preparing the material for the advertising for bids and the awarding of contracts, and supervising the construction and placing of the bridge in operation, should the bonds necessary to finance the project be voted by the electors of the District. The Engineer further agrees to furnish all the necessary engineering talent and material required for this purpose (except as hereinafter specified), including his personal advices and the services of such of his subordinates as may be necessary to properly plan, design, execute, supervise, inspect, and complete the construction of all engineering features and work contemplated by the District, and will furnish the necessary architectural services to make the structure one of a beautiful and pleasing appearance to harmonize with its setting and surroundings.

The agreement further provided that the petitioner should work in cooperation">*852 and conjunction with "an engineering board" consisting of other engineers to be appointed by the board of directors; that he should direct the inspection of all bridge materials and plans at the Bridge District's expense; that he should provide at his own expense sufficient engineering talent to complete the necessary roadways and approaches leading up to the bridge, the tunnels, toll houses, lighting, and other appurtenances, and should provide a competent resident engineer and assistants who should be on the ground at all times during the construction of the bridge.

Under further provisions of the agreement the petitioner was to make monthly reports to the board of directors. He was to receive as compensation a basic fee of 4 percent of the estimated construction cost of the bridge, $27,000,000, or a gross fee of $1,080,000. This amount was to be reduced by $115,000, plus railroad fare and other incidental expenses, representing the compensation which the Bridge District had agreed to pay to other consulting engineers. The petitioner's fees were to be paid to him at intervals as the work progressed out of funds obtained from the sale of Bridge District bonds. The agreement">*853 contemplated that the petitioner's appointment should ">*676 continue until the bridge was completed. Upon termination of the petitioner's services by reason of his death or inability to continue or by reason of the failure or abandonment of the project the petitioner was to be paid "the reasonable value of his services performed up to that time."

The petitioner received his appointment as engineer for the Bridge District because of his outstanding qualifications and his familiarity with this particular project. As early as 1917 he had discussed with the authorities the matter of constructing a bridge across San Francisco Bay and had made preliminary investigations and plans showing the feasibility of such an undertaking from an engineering standpoint.

On being selected the petitioner took an oath of office and furnished bond in the amount of $5,000.

Some time after beginning his services the petitioner prepared and submitted a complete design for the proposed bridge which was accepted by the board of directors. The petitioner himself designed the complicated structural details of the bridge plan and supervised all of the preliminary work. He employed the Strauss Engineering">*854 Co. to assist him in making the detailed plans and estimates, for which he paid the company out of his own fees approximately $419,500. The petitioner did not do any of the actual construction work on the bridge. This was all done by other parties under contracts with the Bridge District.

The petitioner had an office adjoining that of the Bridge District and also an office at the site of the construction. He paid all of his office expenses.

The petitioner devoted all of his working time during the years 1933 and 1934 to his duties as engineer for the Bridge District.

During September 1934 the petitioner brought a friendly suit against the Bridge District to determine whether he or the Bridge District should pay certain inspection costs and other expenses not specifically covered by the agreement. This suit was decided favorably to the petitioner.

Prior to his appointment as engineer for the Bridge District the petitioner entered into an agreement with one H. Harry Meyers of San Francisco, whereby Meyers was to act as his promotional agent, or "contact man", in securing the appointment for him, and for such services, if the selection should be made, the petitioner was">*855 to pay him a certain sum of money out of the fees received from the Bridge District. Relative to this agreement the petitioner wrote Meyers on March 11, 1929, as follows:

Referring to our various conversations, and in consideration of your services in acting for me in connection with the Golden Gate Bridge, and conditioned upon my appointment in the near future as Engineer of said bridge, in sole ">*677 charge of all the engineering work of the District, upon a fee basis of four per cent (4%) of the total cost of the work, I will pay you a total of One Hundred Twenty Thousand Dollars, ($120,000.00) pro rata as and when I receive my payments from the District, said amount to cover all your services and any and all expenses incurred by you in connection with this project.

On April 2, 1929, the petitioner wrote Meyers, in part as follows:

Referring further to the Golden Gate Bridge and supplementing my memorandum of March 11, 1929, we hereby agree to pay you as commission and in consideration of your services in securing for me the appointment as Engineer on the basis of a four percent (4%) fee, the sum of ONE HUNDRED THOUSAND DOLLARS ($100,000.00), it being understood that">*856 this payment is to be made pro rata as I receive my payments, the exact amount of each pro rata payment to be determined when the terms of my payments are fixed.

It is further understood that out of said payment to you, you are to make a settlement with August Fritze of San Francisco and are to secure a full release of my Company and myself from him and are to guarantee me against any and all claims he may make.

A further letter from the petitioner to Meyers dated April 27, 1933, reads in part as follows:

Referring to our two agreements of March 11, 1929 and April 2, 1929, this is to confirm that the total amount due you under these contracts is $220,000 minus $5,650.00 still chargeable to you on the Fritze claim, leaving a net balance due of $214,250.00.

1. The payments made to you to date, deducting certain items charged by agreement to general expense, total $104,250.00, receipt of which you hereby acknowledge.

2. The net balance, therefore, remaining to be paid you under said contracts is $110,000.00, and it is hereby agreed that said balance is to be paid you out of the balance of $720,000.00 still remaining to be paid to me by the Golden Gate Bridge & Highway">*857 District and which is to be paid me in monthly installments, in proportion to the work performed by the contractors.

On October 5, 1934, Meyers brought suit against the petitioner for $5,127.58, being a portion of the amount of $110,000 referred to in the letter of April 27, 1933.

In his income tax returns for 1933 and 1934, which were made on the accrual basis, the petitioner claimed deductions of $47,696.67 and $31,533.08, respectively, representing amounts accrued to H. Harry Meyers "per contract."

The petitioner received compensation under his contract with the Bridge District in the amount of $210,756.83 in 1933 and $183,783.85 in 1934. He did not include those amounts in taxable income in his returns, claiming that they were immune from Federal income tax. However, he did claim as deductions the expenses incident to his employment as engineer for the Bridge District, including the above stated amounts accrued to Meyers, with the result that his returns show net losses of $110,225 for 1933 and $94,712.21 for 1934.

Prior to his appointment as engineer for the Bridge District the petitioner resided at Chicago, Illinois. In 1933 and 1934 he was ">*678 domiciled">*858 in and was a resident of the State of California. From January 1 to April 27, 1933, he was married to May Strauss. He was divorced from her on April 27, 1933, and on June 26, 1933, was married to his present wife, Annette Strauss, petitioner in Docket No. 82498.

OPINION.

SMITH: We have heretofore held, in George H. Harlan,30 B.T.A. 804">30 B.T.A. 804, affirmed by the Circuit Court of Appeals for the Ninth Circuit in Commissioner v. Harlan, 80 Fed.(2d) 660, that the Golden Gate Bridge and Highway District was an instrumentality of the State of California engaged in an essential governmental function and that the regular salary of the attorney for the Bridge District was immune from Federal income tax. The petitioner herein relies strongly on that case in claiming tax immunity on the compensation paid him as engineer for the Bridge District. He undertakes to show that he was an officer of the Bridge District standing essentially in the same relationship to it as the attorney.

Undoubtedly a strong parallel is to be found between the cases, particularly in the statutory authorization for the appointments and in the character of some of the services">*859 which the attorney and the engineer rendered to the Bridge District. We are of the opinion, however, that the parallel is not so close as to be compelling and that under necessity of distinguishing facts the petitioner must be classified as an independent contractor rather than as an officer or employee of the Bridge District.

First, the petitioner undertook his services for the Bridge District under a separate and distinct employment contract, the terms of which he himself either suggested or agreed to. He was bound only by the terms of this contract. Thus, in a very real sense, he was an independent contractor. His compensation was fixed by the contract strictly on a fee basis. In the Harlan case there was no contract of employment with the attorney. His duties were fixed by statute or by the board of directors. The compensation which the Board and the court held to be immune from Federal tax consisted only of the attorney's regular salary from the Bridge District.

The facts here bring the instant case directly in line with ">*860 Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514. There, as here, the taxpayers were engineers employed under contract with the states or state instrumentalities. Their employment was for one or more particular projects and their compensation was fixed, in some instances at a gross sum for the completed job. The Court there said:

We think it clear that neither of the plaintiffs in error occupied any official position in any of the undertakings to which their writ of error in No. 183 relates. They took no oath of office; they were free to accept any other concurrent ">*679 employment; none of their engagements was for work of a permanent or continuous character; some were of brief duration, and some from year to year, others for the duration of the particular work undertaken. Their duties were prescribed by their contracts and it does not appear to what extent, if at all, they were defined or prescribed by statute. We therefore conclude that plaintiffs in error have failed to sustain the burden cast upon them of establishing that they were officers of a state or a subdivision of a state within the exception of section 201(a).

">*861 An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation. United States v. Hartwell,6 Wall. 385, 18 L. Ed. 830; Hall v. Wisconsin,103 U.S. 26">103 U.S. 26 L.Ed. 302. The term "officer" is one inseparably connected with an office; but there was no office of sewage or water supply expert or sanitary engineer, to which either of the plaintiffs was appointed. The contracts with them, although entered into by authority of law and prescribing their duties, could not operate to create an office or give to plaintiffs the status of officers. 103 U.S. 26">Hall v. Wisconsin, supra; Auffmordt v. Hedden,137 U.S. 310">137 U.S. 310, 11 S. Ct. 103, 34 L. Ed. 674. There were lacking in each instance the essential elements of a public station, permanent in character, created by law, whose incidents and duties were prescribed by law. See ">*862 United States v. Maurice,Fed. Cas. No. 15,747, 2 Brock. 96">2 Brock. 96, 2 Brock. 96">102, 2 Brock. 96">103; United States v. Germaine,99 U.S. 508">99 U.S. 508, 99 U.S. 508">511, 99 U.S. 508">512, 25 L. Ed. 482; Adams v. Murphy,165 F. 304">165 F. 304, 91 C.C.A. 272.

The petitioner here took the usual oath of office but it does not appear that he was required to do so by law or that taking the oath of office was of any special significance in determining his duties or relationship to the Bridge District or the state. See Edward M. Lynch,30 B.T.A. 727">30 B.T.A. 727; Eric E. Hall,33 B.T.A. 953">33 B.T.A. 953; Commissioner v. Murphy (C.C.A., 2d Cir.), 70 Fed.(2d) 790. The petitioner was appointed not for a term of years, but for the duration of a particular project. His duties were only briefly referred to in the statute (see section 12, supra ) but were fully defined in his contract with the Bridge District. His compensation also was fixed by the contract and not by statute.

Neither can it be said that the petitioner was an employee of the state or the Bridge District. We quote further from the Court's opinion in ">*863 269 U.S. 514">Metcalf & Eddy v. Mitchell, supra:

* * * In each instance the performance of their contract involved the use of judgment and discretion on their part and they were required to use their best professional skill to bring about the desired result. This permitted to them liberty of action which excludes the idea that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor. * * *

See also Commissioner v. Modjeski (C.C.A., 2d Cir.), 75 Fed.(2d) 468, where the court held, reversing the Board, that a consulting engineer, employed by the Delaware Rever Joint Commission, created by the Legislatures of Pennsylvania and New Jersey for the purpose ">*680 of building a bridge over the Delaware River, was an independent contractor.

In 30 B.T.A. 727">Edward M. Lynch, supra, we held that the compensation paid to the city engineer for several cities of the State of California was not exempt from Federal income tax. The facts there were not materially different from those in the instant case. In holding the taxpayer's compensation">*864 subject to tax we said:

The petitioner insists that his compensation as city engineer of the cities of Compton, Fillmore, Lynwood, Taft, Southgate, and Tujunga, is exempt from Federal income taxation on the ground that he was an officer of each city. In support of this he points to his appointment by each of the boards of trustees and to the fact that he qualified in each case by taking an oath of office. On the other hand the length of his employment, when such period was fixed, his duties, and his compensation were prescribed in each case by his contract and not by law. He agreed to do the work for a compensation measured always by a percentage of the total contract price. All help on the jobs was to be furnished by him free of cost to the cities. He was to maintain at his own expense in each city, except Compton, a resident engineer and the necessary assistants. Each contract, except that with the city of Compton, recites that its purpose is to obligate the petitioner to perform in a thorough and workmanlike manner all engineering and inspection services. These are words of contract and do not import duty imposed by law. * * *

">*865 To the same effect is F. A. Pease,30 B.T.A. 17">30 B.T.A. 17; affd., 83 Fed.(2d) 122. In its affirming opinion the court said:

Here the petitioner's employment in some instances was for brief periods, in others from year to year, and others for the duration of a particular work undertaken. He was paid on a commission basis according to agreement negotiated with the city council or with the city manager, and employed his assistants and helpers and paid them out of his own earnings. He was engaged in practicing his profession of engineering and was employed by each of the municipalities as he might or could have been employed by any other client. In our opinion he was an independent contractor, and the income which he received from his employment was taxable.

See also Consoer, Older & Quinlan, Inc. v. Commissioner (C.C.A., 7th Cir.), 85 Fed.(2d) 461, affirming the Board's memorandum opinion. In Joseph Milton Howe,19 B.T.A. 849">19 B.T.A. 849, where we held that the compensation received by a civil engineer for Harris County, Texas, was subject to tax, we said:

In our opinion that enactment (Harris County Road System law, section 24) ">*866 does not create the office of county engineer. It provides for the selection of an engineer who is to be employed by contract, which is incompatible with the idea of a public office. In 22 Ruling Case Law, p. 379, we find the general rule that "A public office is not the same thing as a contract, and one contracting with the government is in no just and proper sense an officer of the government." Again, on page 380 of the same volume it is stated; "The fact that the duties of a particular position or governmental function do not depend on contract is itself one of the criteria that it is a public office." And to similar effect is the holding in Hall v. Wisconsin,103 U.S. 5">103 U.S. 5.

">*681 In 33 B.T.A. 953">Eric E. Hall, supra, which involved facts quite similar to those in the instant proceedings, we held that the county architect for Cook County, Illinois, was an independent contractor and that his compensation was not immune from Federal income tax. Cf. Underwood v. Commissioner, 56 Fed.(2d) 67.

The evidence here unmistakable shows that the petitioner served the Bridge District in the capacity of an independent contractor and not as">*867 an officer or employee. He maintained his own office, hired his own assistants, paid his own office expenses, was at liberty to perform other engineering services, and as compensation received fees based upon the cost of the work to be done. Our conclusion is that under the facts here presented and by the great weight of authority the petitioner's compensation is not immune from tax.

The respondent now concedes in his brief that the income in dispute should be allocated to the petitioners on a community property basis. This issue, as well as the remaining issue relative to the amounts of petitioner's personal exemptions, will be settled under Rule 50 in accordance with the above findings of fact.

Reviewed by the Board.

Judgment will be entered under Rule 50.