269 U.S.

514
46 S.Ct. 172
70 L.Ed. 384

METCALF & EDDY

v.
MITCHELL. MITCHELL v. METCALF & EDDY.
Nos. 183, 376.
Argued Nov. 30, 1925.
Decided Jan. 11, 1926.

Mr. Philip Nichols, of Boston, Mass., for Metcalf and others.

[Argument of Counsel from pages 515-517 intentionally omitted]
Messrs. Assistant Attorney General Letts and Robert P. Reeder, of
Washington, D. C., for Mitchell's administratrix.
Mr. Justice STONE, delivered the opinion of the Court.

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 copartnerships 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 2 of the items were within the statutory
exemption; that the remaining 18 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 (Comp. St.
1215), before amendment of 1925.

As the case comes directly from the District Court to this court on a
constitutional question, the jurisdiction 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, 12 S. Ct. 522, 36 L. Ed. 266; Greene v. Louisville, etc., R. R.
Co., 244 U. S. 499, 37 S. Ct. 673, 61 L. Ed. 1280, Ann. Cas. 1917E, 88.

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.

The War Revenue Act provided for the assessment of a tax on net income; but
section 201(a), being 40 Stat. 303, contains a provision for exemption from the
tax as follows:

'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.

10

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 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).
11

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,
18 L. Ed. 830; Hall v. Wisconsin, 103 U. S. 5, 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. Hall v. Wisconsin, supra; Auffmordt v. Hedden,
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 United
States v. Maurice, Fed. Cas. No. 15,747, 2 Brock. 96, 102, 103; United States v.
Germaine, 99 U. S. 508, 511, 512, 25 L. Ed. 482; Adams v. Murphy, 165 F.
304, 91 C. C. A. 272.

12

Nor do the facts stated in the bill of exceptions establish that the plaintiffs were
'employees' within the meaning of the statute. So far as appears, they were in
the position of independent contractors. The record does 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, 456, 36 S. Ct. 403, 60 L. Ed. 735; Standard Oil Co. v. Anderson, 212
U. S. 215, 227, 29 S. Ct. 252, 53 L. Ed. 480. And see Casement v. Brown, 148
U. S. 615, 13 S. Ct. 672, 37 L. Ed. 582; Singer Mfg. Co. v. Rahn, 132 U. S.
518, 523, 10 S. Ct. 175, 33 L. Ed. 440.

13

We pass to the more difficult question whether Congress had the constitutional
power to impose the tax in question, and this must be answered by ascertaining
whether its effect is such as to bring it within the purview of those decisions
holding that the very nature of our constitutional system of dual sovereign
governments is such as impliedly to prohibit the federal government from
taxing the instrumentalities of a state government, and in a similar manner to
limit the power of the states to tax the instrumentalities of the federal
government. See, as to federal taxation on state instrumentalities, Collector v.
Day, 11 Wall. 113, 20 L. Ed. 122; United States v. Railroad Co., 17 Wall. 322,
21 L. Ed. 597; Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 585, 586,
15 S. Ct. 673, 39 L. Ed. 759; Ambrosini v. United States, 187 U. S. 1, 23 S. Ct.
1, 47 L. Ed. 49; Flint v. Stone Tracy Co., 220 U. S. 107, 31 S. Ct. 342, 55 L.
Ed. 389, Ann. Cas. 1912B, 1312. See, cases holding that the Sixteenth
Amendment did not extend the taxing power to any new class of subjects,
Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 36 S. Ct. 236, 60 L. Ed. 493,
L. R. A. 1917D, 414, Ann. Cas. 1917B, 713; Peck & Co. v. Lowe, 247 U. S.
165, 172, 38 S. Ct. 432, 62 L. Ed. 1049; Eisner v. Macomber, 252 U. S. 189, 40
S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570; Evans v. Gore, 253 U. S. 245, 259,
40 S. Ct. 550, 64 L. Ed. 887, 11 A. L. R. 519. And, as to state taxation on
federal instrumentalities, see McCulloch v. Maryland, 4 Wheat. 316, 4 L. Ed.
579; Dobbins v. Commissioners of Erie County, 16 Pet. 435, 10 L. Ed. 1022;
The Banks v. The Mayor, 7 Wall. 16, 19 L. Ed. 57; Weston v. City Council of
Charleston, 2 Pet. 449, 467, 7 L. Ed. 481; Farmers' Bank v. Minnesota, 232 U.
S. 516, 34 S. Ct. 354, 58 L. Ed. 706; Choctaw, O. & G. R. R. v. Harrison, 235
U. S. 292, 35 S. Ct. 27, 59 L. Ed. 234; Indian Oil Co. v. Oklahoma, 240 U. S.
522, 36 S. Ct. 453, 60 L. Ed. 779; Gillespie v. Oklahoma, 257 U. S. 501, 42 S.
Ct. 171, 66 L. Ed. 338.

14

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. R. Co. v. Harrison, supra). And see
Dobbins v. Commissioners of Erie County, supra.
15

When, however, the question is approached from the other end of the scale, it is
apparent that not every person who uses his property or derives a profit, in his
dealings with the government, may clothe himself with immunity from taxation
on the theory that either he or his property is an instrumentality of government
within the meaning of the rule. Thompson v. Pacific Railroad, 9 Wall. 579, 19
L. Ed. 792; Railroad Co. v. Peniston, 18 Wall. 5, 21 L. Ed. 787; Baltimore
Shippbuilding Co. v. Baltimore, 195 U. S. 375, 25 S. Ct. 50, 49 L. Ed. 242;
Gromer v. Standard Dredging Co., 224 U. S. 362, 371, 32 S. Ct. 499, 56 L. Ed.
801; Fidelity & Deposit Co. v. Pennsylvania, 240 U. S. 319, 36 S. Ct. 298, 60
L. Ed. 664; Choctaw, O. & G. R. R. Co. v. Mackey, 256 U. S. 531, 41 S. Ct.
582, 65 L. Ed. 1076.

16

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.

17

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.

18

But neither government may destroy the other nor curtail in any substantial
manner the exercise of its powers. Hence the limitation upon the taxing power
of each, so far as it affects the other, must receive a practical 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, 461, 26 S. Ct. 110, 50 L. Ed. 261, 4 Ann. Cas.
737; Flint v. Stone Tracy Co., supra, at page 172 (31 S. Ct. 342)) or the
appropriate exercise of the functions of the government affected by it (Railroad
Co. v. Peniston, supra, 31).
19

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.

20

It is on this principle that, as we have see, any taxation by one government of

the salary of an officer of the other, or the public securities of the other, or an
agency created and controlled by the other, exclusively to enable it to perform a
governmental function (Gillespie v. Oklahoma, supra), is prohibited. But here
the tax is imposed on the income of one who is neither an officer nor an
employee of government and whose only relation to it is that of contract, under
which there is an obligation to furnish service, for practical purposes not unlike
a contract to sell and deliver a commodity. The tax is imposed without
discrimination upon income whether derived from services rendered to the state
or services rendered to private individuals. In such a situation it cannot be said
that the tax is imposed upon an agency of government in any technical sense,
and the tax itself cannot be deemed 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. R.
Co. v. Mackey, supra.

21

As was said by this court in Baltimore Shipbuilding Co. v. Baltimore, supra (in
holding that a state might tax the interest of a corporation in a dry dock which
the United States had the right to use under a contract entered into with the
corporation):

22

'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.' Page
382 (25 S. Ct. 52).
23

And as was said in Fidelity & Deposit Co. v. Pennsylvania, supra, in holding
valid a state tax on premiums collected by bonding insurance companies on
surety bonds required by United States officials:

24

'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.' Page 323 (36 S. Ct. 300).

25

These statement we deem to be equally applicable to private citizens engaged in

the general practice of a profession or the conduct of a business in the course of
which they enter into contracts with government from which they derive a
profit. We do not suggest that there may not be interferences with such a
contract relationship by means other than taxation which are prohibited.
Railroad Co. v. Peniston, supra, at page 36, recognizes that there may. Nor are
we to be understood as laying down any rule that taxation might not affect
agencies of this character in such a manner as directly to interfere with the
functions of government and thus be held to be void. See Railroad v. Peniston,
supra, at page 36; Farmers' Bank v. Minnesota, supra, at page 522; Choctaw, O
& Gulf Railway Co. v. Harrison, supra, at page 272.

26

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, 126, 16 S. Ct. 766, 40 L. Ed. 903. We
therefore conclude that the tax in No. 183 was properly assessed.

27

No. 183, judgment affirmed.

28

No. 376, writ of error dismissed.