The opinion
ROBERT MCCARTHY BULLINGTON AND BESSIE B. BULLINGTON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Bullington v. Commissioner
Docket No. 89806.
United States Board of Tax Appeals
38 B.T.A. 754 ; 1938 BTA LEXIS 826 ;
October 7, 1938 , Promulgated
*826 TAX IMMUNITY - SALARY OF STATE OFFICER. - A state liquor board regulated the manufacture, distribution, sale, and use of alcoholic beverages and also conducted a merchandising business through the operation of state stores. Held, the former was an essential traditional governmental function and the latter was not; held, further, that salary of board member was taxable only to extent it could be properly allocated to performance of merchandising duties.
Abram P. Staples, Esq., for the petitioners.
J. W. Smith, Esq., for the respondent.
MURDOCK
*754 The Commissioner determined deficiencies in income tax for 1934 and 1935 of $250.89 and $172.76. The issue is whether all, or at least a part, of the husband's salary, as a member of the Virginia Alcoholic Beverage Control Board, was improperly included in taxable income.
FINDINGS OF FACT.
The petitioners are husband and wife, residing at Richmond, Virginia. The husband, hereafter referred to as the petitioner, became a member of the Virginia Alcoholic Beverage Control Board, hereinafter called A.B.C., on March 22, 1934, and continued in that position throughout the remainder of 1934 *827 and all of 1935. He received, as compensation for services performed by him in that capacity, $4,755.04 in 1934 and $6,750.00 in 1935. The Commissioner, in determining the deficiencies, included the above amounts in income.
The petitioner, as a member of A.B.C., was an officer of the Commonwealth of Virginia. A.B.C. is an agency of the state within the Department of Alcoholic Beverage Control, which was created by state law on March 7, 1934. A.B.C. is composed of three members appointed by the Governor of Virginia. The original terms were for one, three, and five years. All subsequent terms are for five years. The petitioner was appointed for three years. He took an oath *755 of office. The annual salary of board members is fixed by the governor and can not exceed $7,500. A board member may be suspended or removed by the governor, or impeached. The members devote all of their time to their official duties.
A.B.C. administers the provisions of the Alcoholic Beverage Control Act, including the regulation and control of the bottling, sale, distribution, transportation, handling, advertising, possession, dispensing, drinking, and use of all alcoholic beverages in *828 the state. It has charge of the proceedings for granting, suspending, and revoking licenses within the state affecting the trade in alcoholic beverages. Its hearings and decisions in this connection are not subject to court review. It has appropriate powers to enable it to hold hearings. The enforcement of the taxes on the alcoholic beverage trade is within its jurisdiction. It adopts regulations which have the force and effect of law, violations of which are punishable by fine, imprisonment, and loss of license.
A.B.C. operates all state stores throughout the state. The state stores have a monopoly upon the sale of all alcoholic beverages in the state, except that licensees sell beer, licensees sell wine with meals, and druggists may sell on prescriptions. A.B.C. fixes prices in the state stores. It does not advertise its merchandise. The state store system is well organized and does not require much of the time and attention of the board members.
The work of A.B.C. is divided among divisions, each of which specializes in a part of the work. Each division is headed by a director who is responsible to the board or some designated member thereof. There were divisions *829 of license, inspection, and enforcement, merchandising, accounts and stock control, real estate and insurance, and press relations and statistics. Many employees were engaged in the work. The petitioner was designated to have charge of the state stores and he gave particular attention to the merchandising work of A.B.C.
There were over 6,000 licensees in the state. Work incident to applications for, hearings, granting, suspending, and revoking licenses occupied a large part of the time of the members. That and other regulatory duties occupied most of the time and attention of the members. The petitioner devoted about 80 percent of his time to his regulatory duties and about 20 percent of his time to the state stores and merchandising work.
A.B.C. makes annual reports to the governor. Its accounts are audited annually by state auditors. An assistant attorney-general is assigned to A.B.C. to assist it.
A.B.C. operated during each of its first two years at a net profit of more than $3,000,000. The net profit, after deducting a reserve *756 for A.B.C., was transferred to the general funds of the state treasury. The members of A.B.C. are paid from the state treasury *830 funds upon warrants issued by the comptroller of the state.
The stipulated facts are made a part hereof by this reference.
OPINION.
MURDOCK: The parties have stipulated that A.B.C. is an agency of the state. The petitioner was an officer of the state. He concedes that the conduct of the state stores and all activities incidental to the merchandising done by A.B.C. was a proprietary function rather than an essential governmental function. But he contends that all other functions of A.B.C. were essential governmental functions involving an exercise of the police power of the state, including not only important administrative powers but also judicial and legislative powers, the kind of powers which none but the sovereign state could exercise.
It is well settled, as the petitioner concedes, that the sale of liquor by a state is not the exercise of an essential governmental function and does not relieve the salaries of officers engaged in the work from Federal income tax. ; *831 ; ; . The liquor business conducted by A.B.C. was not merely incidental to its regulatory functions, as the petitioner contends. It was an important part of the work of A.B.C. It accounted for a large part of the personnel of the organization and for a large part of the revenue produced. It occupied a substantial part of the time of the board members. If those board members had been employed and paid separately for their work in connection with this proprietary business, their salaries would have been subject to income tax. Their compensation for that work can not escape tax merely because it is an undisclosed part of their total compensation for that work and also for other work in connection with an essential governmental function. The petitioner has not cited any authority to the contrary. The case of , cited by the petitioner, was reversed, *832 , supra.
The Supreme Court has repeatedly held, however, that those agencies through which the states immediately and directly exercise their sovereign powers are indispensable to the continued existence of the state and are of necessity immune from the taxing power of the Federal Government. ; . Furthermore, the immunity seems to extend to the salaries of state officers engaged in *757 the exercise of such essential governmental functions, even though a limitation may arise in the case of compensation of some others where no real direct burden is placed upon the state by the incidence of the tax. ; ; ; Cf. . The exercise of the police power is an essential governmental function. *833 ;
A.B.C. exercised an essential traditional governmental function in regulating and controlling the liquor business as carried on by others in the state. The salary received by the petitioner for his services in that connection is immune from Federal income tax.
Thus a part of the petitioner's salary is subject to the tax, while the remainder is immune. It is important that a part be taxed and it is equally important that a part be left untaxed. The question is, How much is immune? The respondent in his brief concedes that an allocation would be proper, provided the evidence shows how much of the total compensation should be allocated for proprietary and how much for governmental services. It has been said that practical considerations are extremely important in the field of taxation and that the Board must make a reasonable determination where some approximation is necessary. ; *834 . This seems to be such a case. The petitioner made the best approximation within his ability when he said that his time was divided upon about a four to one basis. One-fifth of his salary may therefore be included in his taxable income.
Reviewed by the Board.
Decision will be entered under Rule 50.
DISNEY concurs only in the result.
ARUNDELL, STERNHAGEN, SMITH, BLACK, TURNER, and OPPER, dissent.