CHARLES J. TOBIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 25922. Promulgated November 6, 1929.

The compensation received by the petitioner during the year 1923 as counsel of the New York State Commission to Examine Laws Relating to Children, in which capacity he was an employee of the State of New York, was not subject to Federal income tax.

Lawrence Graves, Esq., for the petitioner.

R. Ritterbush, Esq., for the respondent.

The Commissioner determined a deficiency of $203.21 in the petitioner's income tax for the calendar year 1923. The petitioner alleges that the Commissioner erroneously included in his taxable income for the year 1923, $2,250 received as compensation for services rendered as counsel of the New York State Commission to Examine Laws Relating to Children.

FINDINGS OF FACT.

The petitioner is an attorney at law residing at Albany, N. Y. In 1920 a bill was enacted in New York State which provided for the creation of the "New York State Commission to Examine Laws Relating to Children." This commission consisted of three senators, appointed by the temporary president of the senate; three members of the assembly, appointed by the speaker of the assembly; five persons to represent the public at large, appointed by the governor; and five persons to represent respectively the following five state departments or commissions, the head of each such department or commission appointing one such person: department of education, department of labor, department of health, state board of charities and state probation commission.

The general purpose of the commission was to study all laws relating to child welfare, investigate the operation and effect of such laws upon children, ascertain any overlapping or duplication of laws and the activities of any public office, department or commission thereunder, and make recommendations to the legislature of remedial legislation which it might deem proper as a result of its investigations.

The act authorized the commission to employ necessary assistants, as a part of its expenses. In February, 1922, the commission appointed the petitioner as its counsel. The appointment was made by the commission itself and was communicated to the petitioner merely by calling him to one of its meetings. There was no written con

tract of employment. The petitioner's appointment was not for any fixed period.

The services rendered by the petitioner during 1923 consistel of attending meetings of the commission which were held in various parts of the State, appearing before legislative committees and the governor in regard to proposed remedial legislation, and drafting bills. In all his work he acted under the direction of this committee. He received aid in the drafting of bills by conferring with the heads of the various departments represented on the commission and with other persons who he thought might be of particular aid to him, including his law partners.

The original act creating the commission called for a report to the state legislature at its next session. In 1921, however, the act was amended so as to read, "The commission shall make reports of its proceedings annually to the legislature." The commission made reports down to and including the year 1926. After that time, the legislature failed to make any further appropriation, although the act under which the commission was created was not repealed.

The petitioner's salary was fixed by the commission at $2,500 per year. During the taxable year in question, 1923, the petitioner's income from the commission was $2,250. The commission's pay roll was first approved by its chairman, then by the state comptroller, and finally was paid by check from the state treasurer.

During 1923 while the petitioner was acting as counsel for the commission, he was free to accept other employment. He was not required by the commission to spend any specific number of days or hours on its work, but merely to perform his required duties in a reasonable time.

The commission did not instruct the petitioner how he should perform his work, but rather they merely assigned him the work and he had the general task of doing it.

OPINION.

MURDOCK: The petitioner contends that he was an employee of the State of New York, and that therefore his salary received as such employee was not subject to Federal income tax. For a history of the provisions of the various revenue acts relating to the taxability of the compensation of state employees, see George W. Fuller, 9 B. T. A. 708. It will be noted that the petitioner was engaged to do certain routine work for the commission. He was not to perform any specific task or to accomplish any definite result. Rather, he was to do whatever work was assigned to him by the commission. His work was continuous and in a sense was permanent. Clearly, he was subject to the control of the commission, and although he

was to use his skill in performing the various duties assigned to him, under the circumstances we hold that he was an employee of the State and not an independent contractor, and therefore, the salary which he received from the State is not subject to Federal income tax because to tax such income would be contrary to the law that the Federal Government may not tax the instrumentalities of a State. John E. Matthews, 8 B. T. A. 209; affirmed in principle, 29 Fed. (2d) 892; B. F. Martin, 12 B. T. A. 267; W. B. Mathews, 13 B. T. A. 1133; F. M. Livezey, 15 B. T. A. 806. There is no deficiency.

Judgment will be entered for the petitioner.

BANK OF LONDON & SOUTH AMERICA, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 22015, 24282. Promulgated November 6, 1929.

Charles Garside, Esq., for the petitioner.

J. L. Backstrom, Esq., and E. M. Niess, Esq., for the respondent. For the fiscal year ended January 31, 1919, the Commissioner notified the petitioner that its claim for abatement had been allowed in a certain amount and was rejected for $2,777.13. The proceeding as to this taxable period is at Docket No. 24282. The petitioner made several allegations of error, but at the hearing waived all issues thus raised. The respondent, however, has alleged that the petitioner in its return for this period deducted $10,000 as a debt ascertained to be worthless and charged off and that the Commissioner in his final determination had erroneously allowed this deduction.

For the fiscal year ended January 31, 1920, the Commissioner determined a deficiency of $8,961.98. The proceeding as to this year is at Docket No. 22015. The petitioner now urges for our consideration but one allegation of error, which is the Commissioner's disallowance of a deduction of $25,000 claimed in the return as a debt ascertained to be worthless and charged off in the taxable year and/or a loss sustained during the taxable year and not compensated for by insurance or otherwise. The cases were consolidated.

FINDINGS OF FACT.

The petitioner is an English corporation which has an agency in New York City. On December 13, 1923, the London & River Plate Bank, Ltd., was merged with the London & Brazilian Bank, Ltd., under the name of Bank of London & South America, Ltd., the petitioner in this case.

Beginning in the early part of 1917 and continuing until some time in 1918, the London & Brazilian Bank, Ltd., was doing business with a firm in New York known as Herman & Herman, Inc. From time to time this firm presented to the bank a number of drafts with shipping documents attached, on which the bank advanced a certain percentage of the face amount of the drafts. These drafts were drawn on persons or firms in the Argentine and in Brazil and were forwarded to the respective cities in those countries where the one on whom the draft was drawn did business. Some of these drafts were paid and the proceeds thereof were received by the bank which then credited the account of Herman & Herman, Inc., with the proceeds.

At some time in 1918 the bank received notice that considerable merchandise shipped in connection with these drafts was not of the character or in the quantity ordered. The bank thereupon ceased to make any further advancement on drafts presented by Herman & Herman, Inc., and endeavored to sell all of the merchandise which it then had as a result of advancing money on these drafts. Herman & Herman, Inc., went into bankruptcy. The bank made a claim in the bankrupt estate, its claim was sustained and at some time it received its first and final dividend of 3 per cent. Thereafter, the last of the goods which it held were sold and the account finally closed on July 31, 1923, at which time the bank made provision for a debit balance not theretofore charged off of $1,747.03.

From October 3, 1917, to and including February 18, 1919, the bank advanced $57,823.39 on certain fraudulent drafts with fraudulent documents attached thereto presented by Herman & Herman, Inc. Due to the necessary delays of shipping, it was some time after a draft was presented before the bank had any notice that there was any irregularity in connection with the draft, the shipping papers or the merchandise covered by the papers. On January 31, 1919, the bank had no knowledge that any of the drafts or papers above mentioned were fraudulent, but on that date it did have information that, due to the inferiority or unsatisfactory quality or quantity of the merchandise shipped, certain drafts would not be paid in full. On its income-tax return for the fiscal year ended January 31, 1919, the bank deducted $10,000 to cover its loss in connection with its dealings with Herman & Herman, Inc., on drafts, the proceeds of which were not sufficient to cover the advances made by the bank. After January 31, 1919, and on or before July 31, 1919, the petitioner learned that drafts on which it had made advances in the amount of $57,823.39 were fraudulent. It first received this information from certain officers of Herman & Herman, Inc., and it later verified the

report by communicating with persons in the countries to which the goods were supposed to be shipped.

The $25,000 which is claimed as a deduction in the fiscal year ending January 31, 1920, represented a part of the amount advanced on fraudulent drafts. On July 31, 1919, an item of $25,000 was entered in an account called replacement fund and was deducted from profit and loss on the books of the bank.

OPINION.

MURDOCK: The respondent and the petitioner must both fail in their respective affirmative contentions in these cases, for the reason that each has failed to offer sufficient proof to show that the Commissioner erred in his final determinations. The respondent contends that if the petitioner sustained losses it sustained those losses when the frauds were committed, and, on the other hand, if a deduction is claimed for a debt ascertained to be worthless and charged off, the debts could not be ascertained to be worthless and charged off until later years when the account was finally wound up. So far as the evidence discloses, the $10,000 might have been either a loss sustained or a debt ascertained to be worthless and charged off in the fiscal year ending January 31, 1919, which fiscal year began on February 1, 1918.

But as to the deduction of $25,000, we must sustain the Commissioner. Here the burden of proof is upon the petitioner and the evidence does not show that this was a loss sustained in the fiscal year. It would not be inconsistent with the evidence to hold that any loss which was sustained in connection with the frauds in question was sustained in years prior to the fiscal year ended January 31, 1920. Parker Wire Goods Co., 8 B. T. A. 448; Peterson Linotyping Co., 10 B. T. A. 542; Southern School-Book Depository, Inc., 10 B. T. A. 930. The deduction is not proper as a debt ascertained to be worthless and charged off in this year, since the evidence does not show that it was ascertained to be worthless and charged off within the year and furthermore, if a debt at all, it appears to be only part of a debt, and the Revenue Act of 1918 did not permit a debt recoverable only in part to be charged off in part. Davidson Grocery Co., 9 B. T. A. 390. The deficiency for each year as determined by the Commisisoner is approved.

Judgment will be entered in accordance with the foregoing opinion, under Rule 50.