#### FRANK H. MESCE v. THE UNITED STATES

[No. E-558.

Decided January 16, 1928]

*On the Proofs*

*Federal income tax; municipal contractor; exemption from Federal taxation.*— A building expert, whose services are engaged by a municipality in connection with valuation of certain buildings affected by local improvements, under a policy of having other than city employees do such work, who occupies no public office, selects his own quarters, equipment, and employees, pays for the same at his own expense, and uses his own methods in arriving at the required results, is an independent contractor and not a public instrumentality, and his compensation for such services is subject to the federal income tax.

*The Reporter's*statement of the case:

*Mr. John L. Melnerney*for the plaintiff.

*Mr. Fred K. Dyar,*with whom was *Mr. Assistant Attorney General Kerman J.*Galloway, for the defendant.

The court made special findings of fact, as follows:

*482I. During all the times hereinafter mentioned the plaintiff was and now is a resident of the city of Chicago, Illinois.

II. The sum of $26,931.34 was paid by the plaintiff under protest, on July 12, 1923, to the Collector of Internal Revenue for the First District of Illinois, at Chicago. Prior to the said date the plaintiff had received, written notice from the collector of internal revenue that, unless the said sum was paid on or before the said date, a warrant of distraint would issue against the plaintiff’s property. The said sum was for income taxes assessed by the Commissioner of Internal Revenue of the United States for the year ending December 31, 1920.

III. On the 14th of August, 1923, the plaintiff duty filed with said Collector of Internal Revenue for the First District of Illinois, at Chicago, a claim for refund of the said sum of $26,931.34, and on the 8th of November, 1923, the said claim was rejected in full by the Commissioner of Internal Revenue.

IY. On the 12th of January, 1924, the plaintiff paid the sum of $105,932.33, under written protest, to the Collector of Internal Revenue for the First District of Illinois, at Chicago. Prior to the said date the plaintiff had received written notice from the collector of internal revenue that unless the said sum was paid on or before the said date a warrant of distraint would issue against the plaintiff’s jar op-.erty. The said sum was for income taxes assessed by the Commissioner of Internal Revenue of the United States for the year ending December 31, 1921.

Y. On the 18th of January, 1924, the plaintiff duty filed with the said Collector of Internal Revenue for the First District of Illinois, at Chicago, a claim for refund of said sum of $105,932.33, and on the 30th of July, 1924, the said claim was rejected in full by the Commissioner of Internal Revenue.

VI. On the 14th day of August, 1926, the plaintiff filed a petition with the Commissioner of Internal Revenue praying that a rehearing be granted with respect to his claim for refund for taxes assessed for 'the years 1920 and 1921, and, as the ground for such rehearing, set forth section 1211 of *483the revenue act of 1926. On September 13, 1926, the petition for rehearing was denied.

VII. The city of Chicago is a municipal corporation incorporated under an act of the General Assembly of the State of Illinois, entitled “An act to provide for the incorporation of cities and villages,” in force July 1st, 1872, and acts amendatory thereof and supplementary thereto. The board of local improvements of the city of Chicago existed during all the times hereinafter mentioned under a statute of the State of Illinois, entitled “An act concerning local improvements,” and amendments thereto. Paragraph 6 of Part I of the act created a board of local improvements consisting of a superintendent of special assessments and five other members. During the years of 1915 to 1923, inclusive, M. J. Faherty was the president of the board of local improvements of the city of Chicago. Paragraph 7 of Part I of the act provided that “ all ordinances for local improvements to be paid for wholly or in part by special assessment or special taxation shall originate with the board of local improvements.”

YIII. The plaintiff from time to time during the years of 1918 to 1921, inclusive, performed certain services for the city of Chicago, which services consisted largely of the valuation of buildings which were to be taken in whole or in part along the line of street improvements; the valuing' of the part taken; the figuring of the effect of the improvements on the remainder not taken; and the assisting in the preparation of the cases for trial; the preparation incident to giving testimony in cases pending;'and the assisting in negotiations for settlement of cases; and in testifying in court for the city of Chicago as to value,s and damages. Those services were rendered in proceedings brought by the city of Chicago for the widening and/or extension of certain streets and highways in the city of Chicago, including, among others, Ogden Avenue, Western Avenue, South Water Street, Eobey Street, and Ashland Avenue. In each of the' last-mentioned cases petitions were filed by the city of Chicago in courts of competent jurisdiction praying that just compensation be awarded for property or damages and that *484special assessments be levied against the property benefited by the improvements.

IX. In December, 1918, M. J. Faherty, the president of the board of local improvements, requested the plaintiff to make valuations, plans, reconstruction plans, and detailed estimates when required of all buildings to be taken in whole or in part by the extension of Ogden Avenue, and on December 30, 1918, an order was passed by the city council of the city of Chicago,, which is as follows:

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The plaintiff accepted the employment offered to him by the president of the board of local improvements, pursuant to the order of December 30,1918, and proceeded to perform the services which he had undertaken. The work was practically completed in the year of 1919, and in the year of 1920 the plaintiff received as compensation for the work performed on Ogden Avenue the sum of $15,491.06.

X. During the progress of the work on Ogden Avenue the plaintiff was directed by the said president of the board of local improvements to set apart the morning of each day for the purpose of consulting with property owners or their representatives in connection with the figures placed on their buildings by the plaintiff, and to make recommendations in connection with increase in the valuation of said buildings and report the same to said president of the board of local improvements, with which order the plaintiff complied.

XI. On July 21st, 1919, certain ordinances were passed by the city of Chicago providing for the issuing of bonds known .as “Chicago Street Improvement Bonds,” for the purpose *485of defraying the city’s share of the cost of widening of North and South Western Avenue, Ogden Avenue, East and West South Water Street, North and South Eobey Street, North and South Ashland Avenue, and the completion of Michigan Avenue, in the aggregate amount of $28,600,000.00, and in the year 1919 the question of ,the issuance of said bonds was submitted to the people of the city of Chicago at an election and the bonds were duly approved by the voters of the city of Chicago.

XII. In November, 1919, after the approval of the bond issues by the people, M. J. Faherty, president of the board of local improvements, and the plaintiff had several conversations on the general subject of the contemplated improvements, the widening and extension of Ogden Avenue, North and South Western Avenue, East and West South Water Street, North and South Eobey Street, and North and South Ashland Avenue, which conversations, in substance, were that said Faherty proposed to the plaintiff that, if the plaintiff would give his exclusive time to the board of local improvements and make valuations, plans, reconstruction plans, detailed estimates when and as required, and do all other necessary work for the purpose of ascertaining the just compensation to be paid to the owners of all buildings to be taken in whole or in part by the widening of South Water Street, Ashland Avenue, Eobey Street, and Western Avenue, in like manner as the work had been done on Ogden Avenue, under the direction of the said president of the board of local improvements, and in the manner he wanted it accomplished, and take orders from him alone and accept no other, work from any other department of the city of Chicago, or from any person, or any private corporation, he would employ the plaintiff for a five-year term, beginning January 1st, 1920, and ending December 31st, 1924, but that, if the work was not done in the manner as outlined by said Faherty, he would terminate the employment; and that said Faherty would agree that plaintiff should receive as compensation one and one-quarter per cent of the value as fixed by plaintiff of buildings without plans and at the rate of two per cent of the yalue as fixed by plaintiff of buildings with plans or *486diagrams furnished, but that he did not desire detailed itemized estimates of cost unless specifically required by him as to all buildings. Said Faherty at that time also said that he would procure the approval of the city council of the city of Chicago, if plaintiff would accept his proposition, and later on would reduce the agreement to writing. The plaintiff accepted the proposition offered by Mr. Faherty, and in January, 1920, started to work on the north end of the Western Avenue improvement.

XIII. The president of the board of local improvements directed plaintiff, in connection with figures to be made by him on Western Avenue, to use 1916 unit prices of building materials as a basis for his cost of construction and reconstruction, in like manner as he had done on Ogden Avenue, which plaintiff did; and on or about the first of January, 1920, plaintiff proceeded to work on the north section of Western Avenue, in which case the plaintiff testified in court as to values and aided in the settlement of the case involving said north section of Western Avenue, as directed by said president of the board of local improvements, and while so engaged was ordered by the said Faherty to proceed to the south portion of said Western Avenue. Certain work was also done on the north end of Ashland Avenue and South Water Street early in 1920, pursuant to directions of said Faherty. Similar work was done by the plaintiff on Randolph Street pursuant to the order of Faherty, although not covered by the conversation'above set forth and not provided for in the bond issue ordinances. On or about February 17th, 1920, plaintiff received for work done on Ogden Avenue $15,491.06, and for work done on Western Avenue prior to March 5th, 1920, he received $26,962.50, which payments were made on the basis of two per cent of the value, as fixed by the plaintiff, of the buildings.

XIV. On February 5th, 1920, an order was passed by the city council of the city of Chicago, which is as follows:

“ Oedeeed, That the board of local improvements be, and it is hereby, authorized, in accordance with its request of January 8, 1920, to employ the following for such period of time during 1920 as may be necessary:

“ Special counsel, 6, at $50.00 per day for each day employed;

*487“ Eeal-estate experts, 4, on the basis of 1% of the value of property and $50.00 per day for testifying in court on behalf of the -city;

“ Eent experts, 2, at $50.00 per day for each day employed;

“ Building experts, 3, on the basis of 1% of the value of property and $50.00 per day for testifying in court on behalf of the city; at the rate of 1%% of the value of building for detailed, itemized estimate of cost of building without plans; and at the rate of 2% of the value of building when plans, diagrams, and details are furnished;

“Law clerks and stenographers, 2, at $125.00 per month;

“ Investigators, 2, at $125.00 per month;

“ For mechanical-engineering services, $25,000.00;

“For court reporting $25,000.00; ancl to charge the cost of same to such appropriations as may be hereafter made; and the city comptroller and city treasurer are hereby authorized and directed to pass pay roll for same when properly approved by the president of the board of local improvements; .

“ Provided, however, that before retaining the services of any special counsel, real-estate expert, building expert, rent expert, or engineer under this order the board of local improvements shall secure the approval of the committee on finance on the sum and the rate of compensation to be paid; and be it further

“ OedeRed, That the employment by the board of local improvements of Eugene H. Dupee, Joseph J. Sullivan, William H. Dillon, and Eoger Faherty as special counsel at $50.00 per day; Edward C. Walker, jr., Ernest H. Lyons, and Arthur S. Merigofd, real-estate experts at $50.00 per day; and Frank H. Mesce and Austin J. Lynch, building experts at the rates above set forth, be, and the same is hereby, approved.”

It will be observed that the order authorized the employment “ only for such period of time during 1920 as may be necessary.”

XV. On or about March 2nd, 1920, plaintiff received a letter bearing said date, signed by M. J. Faherty, which letter is as follows:

Board oe Local Improvement,

Michael J. Faherty, President,

*March2nd, 1920.*

Mr. Frank H. Mesce,

*111 West Monroe*Street, Chicago, *Illinois.*

Dear Sir: On February 5th, 1920, on unanimous recommendation of its finance committee, the city council of the *488city of Chicago passed an ordinance giving the board of local improvements authority to employ yon on the following street improvements: Western Avenue, Ashland Avenue, Robey Street j South Water Street, and Ogden Avenue, and fixed your pay in the ordinance. I am enclosing herewith a copy of said ordinance.

In compliance with this ordinance, and as president of the board of local improvements, I am now instructing you to report to this department for work at the rate fixed by the city council, with the understanding that you will remain in the employ of the city of Chicago during the years 1920, 1921, 1922, 1928, and 1924.

As a regular employee of this department, you will be expected to give your exclusive time to the work above mentioned, and to perform this work in the manner directed by the board of local improvements. As an employee of the city of Chicago you will refrain from leaving the city or absenting yourself from the work in hand without first obtaining the consent of this department. All reports, maps, plats, estimates, and figures compiled by you shall be submitted to me and copies of all work done filed with this office from time to time. You will accept no private work of any character unless especially authorized by this department and confine your services to other departments of the city of Chicago to such activities as I shall consent to.

All of the information obtained through this employment is confidential and will be so treated by you. The commencement of your activities in the city employment will be deemed as acceptance of the conditions named in this letter.

Yours very truly,

(Signed) M. J. Fahertt, *President.*

And on or about March 5, 1920, plaintiff received a letter bearing said date from said M. J. Faherty, which letter is as follows:

Board of Local Improvements,

Michael J. Fahertt, President,

*March 5,1920.*

Mr. Frank H. Mesce,

*111 W. Monroe*Street, *Chicago.*

Dear Sir: In confirmation of previous letters and orders relative to the employment of Frank H. Mesce and Austin Lynch by this department, will you please, in your reply covering the acceptance of such employment, set forth your understanding of the character of work to be done ?

You will understand that this department will expect you to be constantly on call to perform the work designated in the manner as directed by me as president of the board of *489local improvements, to accept no private- work of any character unless especially authorized by mentad to confine your .services to other departments of the city of Chicago to such activities as I shall consent to.

It also must be distinctly understood that as an employee of the city of Chicago and of this department you are not to leave the city or absent yourself from the work in hand without first obtaining the consent of the department.

Very respectfully yours,

(Signed) M. J. Fahertt, *President.*

Thereafter a letter was addressed to said Faherty by the plaintiff, under date of March 6th, 1920, and sent to the said Faherty, which letter is as follows:

Honorable M. J. FaheRtt,

*President Board of Local*Improvements,

*Gity*Hall, Chicago, *Illinois.*

Deae SiR: I beg to acknowledge receipt of your communications of March 2nd and March 5th, covering the matter of my employment by the city of Chicago for a period of five years as stated by you, namely, 1920, 1921, 1922, 1923, 1924, and at the rate of pay established by the city council of the city of Chicago as published on pages 1916 and 1911 of the official journal of the proceedings of the city council of the city of Chicago under date of February 5th, 1920.

It is my understanding that my employment is continuous for the entire five years stated above, and that I am to give my exclusive time and services as an employee of the city of Chicago to the. work which covers the preparation of plans, diagrams, details, estimates, and valuations and my services in the courts of record for Ogden Avenue, South Water Street, Western Avenue, Ashland Avenue, and Eobey Street, all of which is outlined and covered by the bond issues and city ordinances for each as stated above.

It is also understood and agreed that monthly pay vouchers covering my work at the rate of pay agreed upon are to be promptly approved and paid.

Eespectfully submitted.

Frank H. Mesoe.

XVI. The plaintiff, in the year 1920, received from the city of Chicago the sum of $181,084.62. All of said sum except the sums of $14,998.3? received from the commissioner of public works and $2,223.68 from the board of education wa,s received from said city of Chicago for services performed for the board of local improvements pursuant to and *490in accordance with agreement, and on the basis of two per cent of the value oí the buildings appraised, and the assessment of $26,931.34 for income taxes for 1920 was arrived at by the inclusion of the said sum in the gross income of the plaintiff.

XVII. In the year 1921 the plaintiff received from the city of Chicago for services performed for the board of local improvements the ,sum of $311,740.54, which said sum was paid to him on the basis authorized for 1920 by the order of the city council of Chicago of February 5, 1920, and the sum of $105,932.33 for income taxes for 1921 was arrived at by the inclusion of the said sum in the gross! income of the plaintiff.

XVIII. During the years 1919, 1920, and 1921, while the plaintiff was in the performance of his duties in connection with his services, he followed the instructions and directions of the board of local improvements in the following particulars :

1. Whether plans or detailed estimates of cost should or should not be made, the number, and in some instances the designs of plans of reconstruction.

• 2. The amount of work done but not the time within which it was done.

3. The order in which work on various improvements was to be performed.

4. As to the general method adopted in tlie valuation of buildings and the figuring of damages to remainders, and when changes were to be made from the general rules laid down and the nature of such changes.

5. As to the preparation and return of reports of work performed by the plaintiff.

6. In doing over again work which had been performed, owing to subsequent changed conditions, or to comply with legal or engineering theories adopted by the board.

7. In negotiating for settlements with property owners.

8. As to the manner in which cases were to be prepared for trial, and whether plaintiff should or should not testify, and the plan or theory as to building values or building damages upon which the case would be tried, and in preparing for the defense of any particular case along such theories *491as might be evolved by the attorneys for the board of local improvements.

9. As to the performance of special work on the Randolph Street improvement.

XIX. In the year 1920 plaintiff requested permission of the .said president of the board of local improvements to do certain work for the board of education, and was granted such permission on the condition that he would not use any of his organization at work on the street improvements. In the same year plaintiff asked permission of said president to perform certain work for attorneys representing the city of Aurora, which consisted of determining the effect on buildings of certain changes in the grades of streets in "that city. That permission was refused. In the same year the corporation counsel of the city ef Chicago requested plaintiff to perform certain services for him in connection with the valuing of physical property of the Chicago Surface Lines, operating the street railways in Chicago. Plaintiff asked permission of the said president to do ^aid work and was refused. Plaintiff performed the work for the board of education without using any of his organization and did not perform the services for the city of Aurora or for the corporation counsel.

XX. The plaintiff has delivered to the city of Chicago and to the board of local improvements the maps, plats, documents, and other evidence of figures prepared by him and under his direction in connection with his work.

XXI. Although it was seemingly contemplated that five years would be required for the completion of the work which the plaintiff was engaged to do, the work was completed in the years of 1920 and 1921. At no time during that period did the plaintiff have a civil-service status or was he on the pay roll of the city of Chicago or was he under the supervision and control of the city council of the city of Chicago. The plaintiff did not receive any increase in compensation when, on March 24, 1920, the salaries of the city employees were raised 10 per cent. He supplied his own working quarters and furnished his own office supplies and engaged and paid the persons he employed to assist him in doing the work which he had undertaken for the board of *492local improvements of the city of Chicago. In the amended 1921 return filed in the office of the Commissioner of Internal Xevenue in April, 1923, the plaintiff states that during the calendar year 1921 he received $311,740.54 and expended $101,071.67 in the performance of his services for the city of Chicago. Those expenditures include $38,120.00 paid by the plaintiff to his brother, Anthony Mesce, and $32,530.00 paid to his brother, James Mesce, both of whom were contractors and who assisted him in his work, and $4,000.00 for counsel fees and various other sums for general office expenses, contributions, draftsmen, clerks, etc. The board of • local improvements did nothing with respect to the plaintiff’s organization other than that the president of the board requested him to maintain his office in the vicinity of the city hall, and also requested him to be careful about the class of draftsmen who were employed and to let the draftsmen understand that they were practically employees of the board of local improvements and subject to its rulings, and that if he, Faherty, heard of any misconduct on the part of the men he would demand their discharge.

XXII. The plaintiff was engaged by the board of local improvements of the city of Chicago as a building expert. His availability as an independent expert witness for the city of Chicago in anticipated suits against the city was an •important factor in engaging his services. The desirability of having witnesses who were not regular city employees was considered and agreed to by the city authorities.

XXIII. The total sum of $132,863.67 paid by the plaintiff as income tax for the years 1920 and 1921 has been turned over by the collector of internal revenue and deposited into the Treasury of the United States of America as in the usual course of his official business.

The court decided that plaintiff was not entitled to recover.

Gbaham, Judge,

delivered the opinion of the court:

The services of the plaintiff were engaged by the Board of Local Improvements, an adjunct of the municipal government of the city of Chicago, as a building expert in connection with the valuation of buildings affected by certain local improvements in widening and opening streets.

*493The said board was created by an act of the legislature of the State of Illinois to deal with questions connected with said improvement of streets which involved the valuation of land and buildings to be taken in whole or in part along the line of improvements, and the effect of the improvements upon the value of property which would be benefited thereby. The board consisted of a president and five other members named by the mayor and subject to confirmation by the council of the city of Chicago. The board was given authority to submit ordinances to the city for the aforesaid improvements, which ordinances the council' had only the right to accept or reject, but no authority to modify. After the creation of the board the city council passed an ordinance authorizing the board to retain the services of building experts and other persons, the building experts to be paid at the rate of 1 per cent of the value of the property appraised and $50.00 a day for testifying in court in proceedings growing out of the improvements, and at the rate of 1*4 per cent of the value of the buildings for detailed estimates of cost of buildings without plans, and at rate of 2 per cent of the value of the buildings when plans, diagrams, knd details were furnished.

Under authority of this ordinance the board retained the-plaintiff as a building expert for five years; his employment,, however, continued for only about two years. The details of this are fully set forth in the findings. Plaintiff was paid for his service as building expert during the years 1920 and 1921, $475,603.11, and was assessed by the Commissioner of Internal Kevenue on this sum as income in the amount of $132,863.67. Plaintiff filed a claim for a refund upon the ground that he had been illegally assessed because the sums received for his services as a building expert were exempt from taxation as they were earned by him as an employee of a political division of the city of Chicago.

First, as to the character of the plaintiff’s service: Under his contract with said board he was engaged for a period of five years, was not to accept any other employment without the consent of the board, and' was to be paid monthly one per cent on the value of the property and $50.00 for each day he served as a witness, together with a certain per*494centage for plans, etc. There was no regular compensation. He was under the control of the board as to whether plans or detailed estimates of cost should or should not be made, the number, and in some instances the designs, of plans of reconstruction; as to the amount of work to be done, but not the time within which it was to be done; as to the order in which the work on the various improvements was to be performed, and otherwise as set out in Finding XVIII.

The board refused two requests of plaintiff to accept other employment and' allowed one. Plaintiff occupied no public office and transacted no business in which the public generally was interested. He selected his own office, paid the • rent and for its equipment, and employed at his own expense his assistants. He paid to these assistants a sum approximating $100,000 out of what he received for his service.

The retention of his services was dictated by a policy of having some one other than a city employee do this work, of having available an independent expert in cases of suits' against the city, and of having witnesses who were not regular city employees. He used his own methods and instrumentalities and did the work of appraising values in his own way and as his judgment dictated, and in so doing he was free, and for such work he received his pay. As to how, with what assistance, and in what time he should perform it he was judge and master. That the plaintiff was not a public instrumentality has been passed upon by this court. *New York Trust Co.*v. *United States,*63 C. Cls. 100. In this case the Supreme Court refused a certiorari June 6, 1921, 274 U. S. 156.

Clearly, from the foregoing, the relation of master and servant did not exist. It is not possible, in the twilight that exists between the boundaries of what constitutes the relation of master and servant and an independent contractor, to draw a fixed line. The constantly increasing varieties of human employment under present-day conditions necessarily render it so, and each case must of necessity, to a great degree, be decided upon its own facts. In the most recent case on this subject, *Metcalf & Eddy*v. *Mitchell,*269 U. S. 514, 521, plaintiffs were employed as consulting engineers *495either individually or as copartners to advise States or subdivisions of States with reference to water-supply and sewage-disposal systems, and it was held that they were neither officers nor employees. The court said:

“ 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 of 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. *Chicago,*Ro*ck Island*& *Pacific Ry. Co.*v. *Bond,*240 U. S. 449, 456; *Standard Oil Co.*v. Anderson, 212 U. S. 215, 227; and see *Casement*v. Brown, 148 U. S. 615; *Singer Mfg. Co.*v. *Rahn,*132 U. S. 518, 523.”

Nor was the plaintiff’s service regular and continuous. It was for a particular transaction or transactions. See *Louisville, Evansville & St. Louis Railroad Co.*v. *Wilson,*138 U. S. 501, 505. In addition to this the very purpose of his service, to have other than city employees available as witnesses, further negatives the idea of his being an employee.

Another person, Ernest H. Lyons, engaged as a real estate expert under the same ordinance of .the council of the city of Chicago, brought a suit *(Lyons*v. *Reinecke,*10 Fed. (2d) 3) similar to this in the District Court for the Northern District of Illinois at Chicago. The court on demurrer held that the income received in that capacity was taxable under the circumstances, and on appeal'to the Circuit Court of Appeals for the Seventh Circuit, sitting in the same city, the judgment of the lower court was affirmed.

The plaintiff’s relation was that of an independent contractor, very similar in character to what is known as a cost-plus contractor.

The plaintiff is claiming the benefit of an exemption from taxation and has failed to sustain the burden cast upon him of establishing that his service was that of an officer or employee of a State or a subdivision thereof. *Metcalf & Eddy*v. *Mitchell, sufra,*520; *New York Trust Co.*v. *United States, supra.*

*496We are of opinion that the plaintiff is not entitled to recover, and the petition should be dismissed. It is so ordered.

Moss, Judge, and Booth, Judge, concur.

Campbell, *Chief*Justice, concurs in the result.