
    JAMES A. SACKLEY CO. v. THE UNITED STATES
    [No. E-342.
    Decided April 2, 1928]
    
      On the Proofs
    
    
      Federal income taw; municipal contracto)'; exemption from taxation.— A paving contractor, doing work for a municipality under a form of contract generally employed for suck work, is not a public instrumentality or city employee, but an independent contractor whose compensation is subject to the Federal income tax, notwithstanding the control and supervision usually exercised in such cases.
    
      The Reporter’s statement of the case :
    
      Mr. William M. Williams for the plaintiff. Mr. Matthias Goncannon and Williams, Myers, Qxtiggle <& Breeding were on the brief.
    
      Mr. Fred K. Dyar, with whom ivas Mr. Assistant Attorney General Uermcun J. Galloway, for the defendant.
    
      The court made special findings of fact, as follows:
    I. The plaintiff is and at all times hereinafter mentioned was a corporation organized and existing under the laws of the State of Illinois, doing business as a paving contractor, and having its principal office in Chicago, Illinois.
    II. Both the city of Chicago and the village of Oak Park are municipal corporations in the State of Illinois, existing under the provisions of an act of the general assembly of said State, entitled “An act to provide for the incorporation of cities and villages,” approved April 10, 1812, in force July 1, 1812, and the acts amendatory thereof and supplementary thereto.
    III. Section 9 of Article IX of the constitution of Illinois, adopted in 1870, authorizes the general assembly of the State to vest the corporate authorities of cities and villages with power to make local improvements by special assessment or special taxation. This authority was exercised by the general assembly of the State by an act entitled “An act concerning local improvements,” approved June 14, 1897, in force July 1, 1897, and the amendments thereto, hereinafter referred to as the local improvement act, to be found in Hurd’s Bevised Statutes, 1919, page 506. The said board of local improvements of the city of Chicago was created under said act, and was charged by it with the duty of originating schemes for all local improvements within the city of Chicago, which are to be paid wholly or in part by special assessment or special taxation of contiguous property or otherwise.
    IV. Under an act of the General Assembly of the State of Illinois, approved April 10, 1872, in force July 1, 1872, to be found in Hurd’s Revised Statutes, 1919, page 328, the city council of the city of Chicago was authorized to “ lay out, to establish, open, alter, widen, extend, grade, pave, or otherwise improve streets, alleys, avenues, sidewalks, wharves, parks, and public grounds, and vacate the same.” The power so given to the city council to pave streets and alleys, when all or a portion of the cost thereof is to be paid by special assessment, is exercised in the manner provided in the local improvement act.
    V. During the years 1915, 1916, and 1917, plaintiff entered into certain contracts with the city of Chicago, Illinois, through the board of local improvements of said city, providing for the paving by plaintiff of certain public streets and alleys in that city in consideration of the payment to the plaintiff by the city of Chicago of certain sums of money. One of said contracts entered into September 8, 1917, is attached hereto as Appendix A.
    YI. During the year 1916 or 1917, one J. W. Barker entered into two contracts with the village of Oak Park, Mi-no,is, through its board of local improvements, providing for the paving by said J. W. Barker of certain public streets and alleys in the village of Oak Park in consideration of the payment to him by said village of certain sums of money. Said two contracts were assigned by said J. W. Barker to the plaintiff with the consent of the said village and all of the rights and duties thereunder were assumed by the plaintiff, except that said J. W. Barker did part of the grading under one of the contracts.
    VII. All of said contracts were according to the same form and contained, among other provisions, detailed specifications as to the material to be used and the work to be performed thereunder. The contract contained, among others, the following provisions:
    
      “ Such work to be done under the direction and to the satisfaction of the board of local improvements, and in strict compliance with the terms and conditions of this contract, and with the plans and specifications prepared for making this improvement on file in the office of the board of local improvements of the city of Chicago, the original of which specifications is attached hereto and made a part of this contract.
    “ The contractor to whom the work is awarded shall furnish- all, materials, labor, and appurtenances necessary to complete the work in accordance with these specifications, and anything omitted herein that may be reasonably interpreted as necessary to such completion, the board of local improvements being the judge, is to be merged in the price bid for the improvement.
    “All the work shall be executed in the best and most workmanlike manner, and no improper materials shall be used, but all materials of every kind shall fully answer the specifications, or, if not particularly specified, shall be suitable for the place where used and satisfactory to the board of local improvements.
    
      “The board of local improvements shall decide all questions relating to measurements, the materials used, the character of the work performed, and as to whether the rate of progress is such as to comply with these specifications.
    “ The contractor shall notify the board of local improvements forty-eight (48) hours before beginning any work on this contract of his intention to do so, and in case of a temporary suspension of the work he shall give a similar notice before resuming work.
    “ The board of local improvements shall at all times have access for inspection to all branches of the work on the street, at the refineries, or at the plants where material is stored, prepared, or being mixed; and the contractor shall furnish from time to time such samples of each separate ingredient or ingredients in combination of the materials to be used in the improvements as may be requested by the board of local improvements.
    “ The work herein specified shall be prosecuted with such force as the board of local improvements may deem adequate to its completion within the time specified. If the rate at which the work is performed is not, in the judgment of the board of local improvements, such as to insure its progress and completion in the time and manner herein specified, or if at any time the contractor refuses or neglects to prosecute the work with a force sufficient, in the opinion of the board of local improvements, for its completion within the specified time, or if, in any event, the contractor fails to proceed with the work in accordance with the requirements and conditions of these specifications, the board of local improvements shall have full right and authority to take the work out of the ■hands of the contractor and to employ other workmen to complete the unfinished work, or to relet the same to other contractors, and to deduct the expense occasioned by such default from any money that may be due and owing to the contractor.
    “ The contractor shall perform all of the work herein specified under the direction and superintendence of the board of local improvements and to its entire satisfaction, approval, and acceptance.
    “All material to be incorporated in the work, all labor performed, and all appliances, tools, and methods used shall be subject to the inspection and approval or rejection of the board of local improvements.”
    Specifically the board, acting as such or through its employees, had power among other powers of supervision under the said contracts—
    
      
      (a) To require the contractor to furnish and set cast-iron inlet gratings of the form and dimensions prescribed by the board.
    (&) To prescribe the radii for circular stones built at intersections and to prescribe the grades and lines therefor.
    
      (e) To prescribe the size and shape of barrows or appliances used in measuring the parts of cement, sand, limestone screenings, stone, slag, or gravel.
    
      (d) To prescribe the length of time during which the concrete foundation shall lie before being covered with brick.
    
      (e) To approve or reject any cement which is not satisfactory to the board.
    (/) To direct the use of such guides and templets as the engineer may see fit in the work of surfacing the layer of sand upon the concrete foundation.
    
      (g) To direct how the gutters shall be constructed, the angle at which the brick shall be laid on intersections and junctions of lateral streets, and to direct the ramming instead of the rolling of the brick in constructing the wearing surface.
    (h) To prescribe the temperature of the pitch filler used in surfacing.
    (i) To make any alterations deemed necessary which will increase or- diminish the quantity of labor or material or expense of the work.
    
      (j) To order the dismissal of any employee of the contractor upon the work who refuses or neglects to obey any of the instructions of the board relating to the carrying out of the provisions and intent of the specifications or who is incompetent, unfaithful, abusive, threatening, or disorderly in his conduct.
    . (k) To grant or withhold permission for the conduct of work at periods other than during the regular working hours.
    
      (1) To require that the contractor furnish stakes and assistance necessary to give lines and grades where needed for the work.
    VIII. During the year 1917 the plaintiff completed its work of paving the said public streets and alleys in the city of Chicago and in the village of Oak Park, in accordance with the terms and requirements of said contracts and specifications, and derived therefrom during that year certain compensation (in excess of the cost of performance by it of said contracts), being the amount of $20,200.2T, consisting of $18,863.36 from the city of Chicago and $1,336.91 from the village of Oak Park.
    IX. The following is the procedure for the making of a local improvement in the city of Chicago, which was followed during the years involved in this action. The board of local improvements first makes a recommendation to the city council of the city of Chicago for the passage by said council of an ordinance directing the improvement. The ordinance directing the making of the local improvement is then made by said city council, which is the corporate authority possessing power of special taxation under section 9 of Article IX of the constitution of Illinois. Proper proceedings are then instituted in the name of the city of Chicago for the confirmation of the special assessment. After final judgment is rendered in the legal proceeding, confirming the special assessment, the said board of local improvements is authorized under the local improvement act to make and enter into contracts for the making of the improvement and to supervise its completion. Section 83 of said act provides in part:
    “The board is hereby authorized to make or cause to be made, the written contracts, and receive all bonds authorized by this act, and to do any other act, expressed or implied, that pertains to the execution of the work provided for by such ordinance or ordinances, and shall fix the time for the commencement of the work thereunder and for the completion of the work under all contracts entered into by it, which work shall be prosecuted with diligence thereafter to completion and said board may extend the time so fixed from time to time, as they think best for the public good. The work to be done pursuant to such contracts must, in all cases, be done under the direction and to the satisfaction of the board of local improvements, and all contracts made therefor must contain a provision to that effect, and also express notice that in no case, * * * will said board, or municipality, * * * or any officer thereof, be liable for any portion of the expenses, nor for any delinquency of person or property assessed.”
    
      Prior to the letting of the paving contract by the board of local improvements of the city of Chicago, a notice is published in a designated official newspaper that the plans and specifications and other data concerning the proposed improvements are on file at the office of the board for the use and information of interested persons, the same notice fixing a certain subsequent day and hour for the submission of sealed bids by contractors. At the time designated in the notice the bids are opened at a public meeting of the board and the contract is let to the lowest responsible bidder.
    X. The general procedure in the execution of the- work under the paving contracts entered into by the plaintiff with the city of Chicago, under the local improvement act, which was followed in the performance of the work under the said contracts, is in substance as follows:
    The contractor, after signing the contract, applies to the board for permission to proceed with the work, setting out that he has arranged for materials and equipment necessary to do the work. Application is then made to the board for the grades and lines on the improvement, which are established by the engineers of the board. The work then proceeds as follows:
    
      (a) The curb and gutter work; (b) the sewer work; (c) the preparation of the subgrade, either by excavating or filling; (d) the rolling or flooding of the subgrade in preparation for the paving base; {&) the laying of the paving-base ; and (/) the putting on of the wearing surface.
    An inspector who is an employee of the board is continuously present where the work is being conducted. The work is also visited at irregular intervals by the general or traveling inspector, division engineer, and chief engineer of the board, and sometimes one or more members of the board visit the work.
    The inspector in some instances gives instructions to the foreman of the contractor, and in some directly to the men themselves.
    During the course of constructions of the work the inspectors or engineers of the board are constantly directing and supervising the manner of the performance of the work by giving directions which the person doing the work is required to and does obey, particularly witb reference to the following:
    
      (a) The lines and grades which are to be followed.
    
      (b) Whether contractor can proceed with the work, and whether weather conditions are right to go ahead, and whether the suhgrade is too wet to work on.
    
      (c) Whether the mixer is satisfactory and the proportioning of the mix that goes into the concrete mixer, and the length of time materials are to be mixed.
    
      (d) The size of material, the amount of water that goes into the concrete, and whether the concrete foundation or subgrade should be covered to protect it from frost.
    
      (e) When the work must be stopped and resumed on account of weather conditions.
    (/) The ordering of equipment off the job if deemed unsatisfactory.
    
      (g) The stopping of work pending a controversy with the contractor as to any matter involved therein.
    (A) The requiring of the materials to be heated when deemed necessary.
    
      (i) Prescribing temperature of the pitch filler and when the filler shall be poured.
    
      (]) Prescribing the size and quality of sand, stone, and gravel used in the work, and also by prescribing additions to or omissions from the work and by directing character of materials to be used.
    
      (Tc) Directing as to when cast-iron inlet gratings shall be furnished and set by the contractor.
    (,l) The radii at which circular stones are to be built at intersections.
    (to) Prescribing when guides and templets shall be used in surfacing the layer of sand between the paving base and the wearing surface.
    
      (n) Prescribing the angle at which brick shall be laid at intersections in constructing the wearing surface.
    
      (o) Directing the ramming of the brick instead of - rolling them, as provided in the specifications.
    
      (p) Directing as to the building of crosswalks at intersections and the amount of sidewalk patching.
    
      
      (q) The ordering out of certain material used in the sub-grade and the substitution of other material.
    
      (r) Directing as to whether the subgrade shall be rolled or flooded.
    XI. Controversies arose at times between the inspector or engineer of the board and the contractor in connection with the progress of the work. Where they can not be settled on the job they are referred to the chief or division engineer of the board or to the board itself, and the decision of said engineer or of the board itself will govern, and was followed.
    XII. The powers of the village of Oak Park, of its board of trustees, and of its board of local improvements, during the years here involved, were defined by the same statutory provisions as those of the city of Chicago, and the same procedure was had in the making of a local improvement, as above mentioned, except that as the village of Oak Park is a municipality having a population of less than 100,000 inhabitants, certain details connected with the levying of special assessment, etc., which are not material to this case, were required to be done differently from those required for the city of Chicago. The contracts above mentioned with the village of Oak Park were entered into under the said local improvement act and were performed by the plaintiff in accordance with the terms and specifications thereof in similar manner to those above mentioned performed by plaintiff for the city of Chicago.
    XIII. On or about March T, 1918, the plaintiff filed with the collector of internal revenue at Chicago, Illinois, a return of its income for the year 1917 subject to income and profits taxes under the revenue act of 1917, and thereafter paid to said collector an amount of tax based upon said income. Plaintiff did not include in said return the aforesaid amount of $20,200.27 derived by it as compensation from the city of Chicago and the village of Oak Park.
    XIV. The provisions of the contracts under which the plaintiff operated in the instant case are in substance the same as those in the forms which have been Used for contracts entered into under, the special assessment act of the State of Illinois for a great many years. The interest in or the action by the inspector of the board of local improve-mentis in connection with such contracts has been to see that the specifications of the contracts are fully met. The contract and the specifications, which are part of the contracts, are in form and terms practically the same as those generally used for paving contracts by municipalities throughout the country, and the conditions, control, and provisions imposed upon the contractor herein are generally no more drastic than similar provisions in other paving contracts.
    XV. Paving work incident to the repairing, resurfacing, and maintenance of the streets of the city of Chicago, the cost of which has to be paid out of a general fax or the vehicle tax or some special fund, is done under the direction of the department of public works. The work itself is done by a paving organization maintained by the city of Chicago, under the direct supervision of, the department of the superintendent of streets, as a subdivision of the department of public works. The department of public works and the board of public improvements of the city of Chicago are entirely separate entities, and the superintendent of streets, as one of the units of the department of public works, has no control over work being done under contracts entered into with the board of local improvements.
    XVI. By letter from the Bureau of Internal Revenue, dated October 23, 1922, the plaintiff was notified of a proposed additional assessment against it of income and profits taxes in the amount of $9,041.29 for the year 1917. Said proposed additional assessment was based upon the inclusion in taxable income of the plaintiff for the year 1917 of said amount of $20,200.27 derived by it as compensation from the city of Chicago and the village of Oak Park and certain other adjustments not material to this action. After due proceedings in the Bureau of Internal Revenue the Commissioner of Internal Revenue in or about February, 1923, made an assessment against the plaintiff of said amount of $9,041.29 representing alleged additional income and profits taxes due by it for the year 1917.
    XVII. On or about March 15, 1923, the collector of internal revenue at Chicago, Illinois, made demand upon the plaintiff for the payment of said amount of $9,041.29 assessed against it. On April 6, 1923, the plaintiff paid said amount of $9,041.29 to the said collector under protest and duress in order to avoid distraint of its property.
    XVIII. On or about September 20, 1923, plaintiff filed with the collector of internal revenue at Chicago, Illinois, a claim for refund of a portion of said sum of $9,041.29 so paid by it under protest, to wit, $8,517.26, representing the amount that would be refundable to plaintiff if the aforesaid sum of $20,200.27 derived by it as compensation from the city of Chicago and the village of Oak Park should be excluded from the taxable income of the plaintiff for the year 1917. On or about February 9, 1925, the said claim for refund was rejected by the Commissioner of Internal Revenue. .
    XIX. If the aforesaid amount of $20,200.27 derived by the plaintiff during the year 1917 as compensation from the city of Chicago and the village of Oak Park is excluded from the taxable income of the plaintiff, the amount recoverable by it is $8,517.26, with interest thereon from April 6, 1923.
    The court decided that plaintiff was not entitled to recover.
   GRAHAM, Judge,

delivered the opinion of the court:

The plaintiff during the years 1915, 1916, and 1917 entered into contracts with the city of Chicago, Ill., and the village of Oak Park, Ill., for the paving of certain streets. It did not return as income the amount received as compensation for this work, and the Commissioner of Internal Revenue assessed against plaintiff an additional tax of $8,517.26 for the year 1917 based upon the amount of $20,200.27 received by plaintiff as compensation for the work done. This suit is brought to recover the additional assessment, with interest.

The contracts, under which the said work was done were secured by plaintiff as a result of publication of the plans and specifications and the solicitation of sealed bids, contracts being awarded to the lowest bidder. While the contracts imposed certain conditions of control over the contractor, the form was the one which has been used in the State of Illinois for a great many years and does not differ essentially from the forms for paving contracts which are used by municipalities throughout the country. The conditions of control and supervision imposed upon the contractor are no more drastic than are usual in paving contracts.

The plaintiff’s contention is that by reason of the conditions of control imposed by these contracts it was in effect an employee of the municipalities, and therefore that the compensation which it received for the work done is exempt from Federal income tax.

We are of opinion that under the facts the plaintiff was not a public instrumentality or an employee of the city of Chicago or the village of Oak Park, but was an independent contractor. We think the case is controlled by Frank H. Mesce v. United States, No. E-558, 64 C. Cls. 481, decided January 16, 1928, and the authorities therein cited.

The petition should be dismissed, and it is so ordered.

Moss, Judge; Booth, Judge; and Campbell, GMef Justice, concur.  