Source: https://supreme.justia.com/cases/federal/us/269/514/
Timestamp: 2019-04-22 06:03:13+00:00

Document:
1. Upon a writ of error to the district court based on a constitutional question, the jurisdiction of this Court is not limited to that question, but extends to the whole case. P. 269 U. S. 518.
2. A consulting engineer engaged as such by a state or local subdivision for work not permanent or continuous in character on public water supply and sewage disposal projects, whose duties are prescribed by his contract and who takes no oath of office and is free to accept other, concurrent employment, is neither an officer nor an employee within the meaning of § 201(a) of the War Revenue Act of 1917, exempting from income tax the compensation or fees of officers and employees under any state or local subdivision thereof. P. 269 U. S. 519.
construction permitting each government to function with the minimum of interference from the other. P. 269 U. S. 523.
4. One who is not an officer or employee of a state does not establish exemption from federal income tax merely by showing that his income was received as compensation for service rendered under contract with the state when it does not appear that the tax impairs in any substantial manner his ability to discharge his obligations to the state or the ability of the state or its subdivisions to procure the services of private individuals to aid them in their undertakings. P. 269 U. S. 524.
Error to review a judgment of the district court in a suit brought against a former collector to recover money paid under protest as income tax. The judgment allowed some of the items claimed and rejected others. Both sides sued out writs of error. That of the collector (No. 376) was not pressed at the argument in this Court, and was dismissed.
Metcalf & Eddy, the plaintiffs below, were consulting engineers who, either individually or as copartners, were professionally employed to advise states or subdivisions of states with reference to proposed water supply and sewage disposal systems. During 1917, the fees received by them for these services were paid over to the firm, and became a part of its gross income. Upon this portion of their net income, they paid, under protest, the tax assessed on the net income of co-partnerships under the War Revenue Act of 1917. Act Oct. 3, 1917, c. 63, § 209, 40 Stat. 300, 307. They then brought suit in the United States District Court for Massachusetts to recover the tax paid on the items in question on the ground that they were expressly exempted from the tax by the Act itself, and on the further ground that Congress had no power under the Constitution to tax the income in question.
The district court found that two of the items were within the statutory exemption; that the remaining eighteen were not exempt from taxation, either by the provisions of the statute or under the Constitution, and entered judgment accordingly. 299 F. 812.
The former collector sued out the writ of error in No. 376 as to the two items on which a recovery was allowed. In No. 183 the writ of error is prosecuted by the plaintiffs below as to the remaining items. Judicial Code, § 238, before amendment of 1925.
of this Court is not limited to that question alone, but extends to the whole case. Horner v. United States, No. 2, 143 U. S. 570; Greene v. Louisville, etc., R. Co., 244 U. S. 499.
All of the items of income were received by the taxpayers as compensation for their services as consulting engineers under contracts with states or municipalities, or water or sewage districts created by state statute. In each case, the service was rendered in connection with a particular project for water supply or sewage disposal, and the compensation was paid in some instances on an annual basis, in others on a monthly or daily basis, and in still others on the basis of a gross sum for the whole service.
"This title shall apply to all trades or businesses of whatever description, whether continuously carried on or not, except --"
"(a) In the case of officers and employees under the United States, or any state, territory, or the District of Columbia, or any local subdivision thereof, the compensation or fees received by them as such officers or employees. . . ."
The court found that the two items of income involved in No. 376 were received by one of the plaintiffs in error as compensation for his services as the incumbent of an office created by statute -- in one case as chief engineer of the Kennebec Water District, a political subdivision of the State of Maine, and in the other as a member of the Board of Engineers of the North Shore Sanitary District, a political subdivision of the State of Illinois. The collector does not press his writ of error in this case, and we therefore dismiss the writ.
to which their writ of error in No. 183 relates. They took no oath of office; they were free to accept any other concurrent 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 § 201(a).
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 terms, its duties and its compensation. United States v. Hartwell, 6 Wall. 385; Hall v. Wisconsin, 103 U. S. 5. 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. Hall v. Wisconsin, supra; Auffmordt v. Hedden, 137 U. S. 310. 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 United States v. Maurice, 2 Brock. 96, 102, 103; United States v. Germaine, 99 U. S. 508, 99 U. S. 511-512; Adams v. Murphy, 165 F. 304,.
not reveal to what extent, if at all, their services were subject to the direction or control of the public boards or officers engaging them. 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. Chicago, Rock Island & Pacific Ry. Co. v. Bond, 240 U. S. 449, 240 U. S. 456; Standard Oil Co. v. Anderson, 212 U. S. 215, 212 U. S. 227. And see Casement v. Brown, 148 U. S. 615; Singer Mfg. Co. v. Rahn, 132 U. S. 518, 132 U. S. 523.
4 Wheat. 316; Dobbins v. Commissioners of Erie County, 16 Pet. 435; The Banks v. The Mayor, 7 Wall. 16; Weston v. City Council of Charleston, 2 Pet. 449, 27 U. S. 467; Farmers' Bank v. Minnesota, 232 U. S. 516; Choctaw, O. & G. R. Co. v. Harrison, 235 U. S. 292; Indian Oil Co. v. Oklahoma, 240 U. S. 522; Gillespie v. Oklahoma, 257 U. S. 501.
Just what instrumentalities of either a state or the federal government are exempt from taxation by the other cannot be stated in terms of universal application. But this Court has repeatedly held that those agencies through which either government immediately and directly exercises its sovereign powers are immune from the taxing power of the other. Thus, the employment of officers who are agents to administer its laws (Collector v. Day; Dobbins v. Commissioners of Erie County, supra), its obligations sold to raise public funds (Weston v. City Council of Charleston, supra; Pollock v. Farmers' Loan & Trust Co., supra), its investments of public funds in the securities of private corporations, for public purposes (United States v. Railroad Co., supra), surety bonds exacted by it in the exercise of its police power (Ambrosini v. United States, supra), are all so intimately connected with the necessary functions of government as to fall within the established exemption, and when the instrumentality is of that character, the immunity extends not only to the instrumentality itself, but to income derived from it (Pollock v. Farmers' Loan & Trust Co., Gillespie v. Oklahoma, supra), and forbids an occupation tax imposed on its use (Choctaw, O. & Gulf R. Co. v. Harrison, supra). And see Dobbins v. Commissioners of Erie County, supra.
property is an instrumentality of government within the meaning of the rule. Thompson v. Pacific Railroad, 9 Wall. 579; Railroad Co. v. Peniston, 18 Wall. 5; Baltimore Shipbuilding Co. v. Baltimore, 195 U. S. 375; Gromer v. Standard Dredging Co., 224 U. S. 362, 224 U. S. 371; Fidelity & Deposit Co. v. Pennsylvania, 240 U. S. 319; Choctaw, O. & G. R. Co. v. Mackey, 256 U. S. 531.
As cases arise lying between the two extremes, it becomes necessary to draw the line which separates those activities having some relation to government, which are nevertheless subject to taxation, from those which are immune. Experience has shown that there is no formula by which that line may be plotted with precision in advance. But recourse may be had to the reason upon which the rule rests, and which must be the guiding principle to control its operation. Its origin was due to the essential requirement of our constitutional system that the federal government must exercise its authority within the territorial limits of the states, and it rests on the conviction that each government, in order that it may administer its affairs within its own sphere, must be left free from undue interference by the other. McCulloch v. Maryland, supra; Collector v. Day, supra; Dobbins v. Commissioners of Erie County, supra.
In a broad sense, the taxing power of either government, even when exercised in a manner admittedly necessary and proper, unavoidably has some effect upon the other. The burden of federal taxation necessarily sets an economic limit to the practical operation of the taxing power of the states, and vice-versa. Taxation by either the state or the federal government affects in some measure the cost of operation of the other.
construction which permits both to function with the minimum of interference each with the other, and that limitation cannot be so varied or extended as seriously to impair either the taxing power of the government imposing the tax (South Carolina v. United States, 199 U. S. 437, 199 U. S. 461; Flint v. Stone Tracy Co., supra, at 220 U. S. 172) or the appropriate exercise of the functions of the government affected by it (Railroad Co. v. Peniston, supra, 85 U. S. 31).
While it is evident that, in one aspect, the extent of the exemption must finally depend upon the effect of the tax upon the functions of the government alleged to be effected by it, still the nature of the governmental agencies or the mode of their constitution may not be disregarded in passing on the question of tax exemption, for it is obvious that an agency may be of such a character, or so intimately connected with the exercise of a power of the performance of a duty by the one government, that any taxation of it by the other would be such a direct interference with the functions of government itself as to be plainly beyond the taxing power.
to be an interference with government or an impairment of the efficiency of its agencies in any substantial way. Railroad Co. v. Peniston; Gromer v. Standard Dredging Co.; Baltimore Shipbuilding Co. v. Baltimore; Fidelity & Deposit Co. v. Pennsylvania; Choctaw, O. & G. R. Co. v. Mackey, supra.
"It seems to us extravagant to say that an independent private corporation for gain, created by a state, is exempt from state taxation, either in its corporate person or its property, because it is employed by the United States, even if the work for which it is employed is important and takes much of its time."
"But mere contracts between private corporations and the United States do not necessarily render the former essential government agencies and confer freedom from state control."
P. 240 U. S. 323.
functions of government, and thus be held to be void. See Railroad v. Peniston, supra, at 85 U. S. 36; Farmers' Bank v. Minnesota, supra, at 232 U. S. 522; Choctaw, O & Gulf Railway Co. v. Harrison, supra, at 235 U. S. 272.
But we do decide that one who is not an officer or employee of a state does not establish exemption from federal income tax merely by showing that his income was received as compensation for service rendered under a contract with the state, and when we take the next step necessary to a complete disposition of the question, and inquire into the effect of the particular tax, on the functioning of the state government, we do not find that it impairs in any substantial manner the ability of plaintiffs in error to discharge their obligations to the state or the ability of a state or its subdivisions to procure the services of private individuals to aid them in their undertakings. Cf. Central Pacific Railroad v. California, 162 U. S. 91, 162 U. S. 126. We therefore conclude that the tax in No. 183 was properly assessed.
No. 376, writ of error dismissed.

References: § 201
 § 209
 § 238
 v. 
 v. 
 § 201
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.