Commissioner of Internal Revenue v. Shamberg's Estate

• Decision Date: 24 August 1944
• Docket Number: No. 394.,394.
• Citation: 144 F.2d 998
• Parties: COMMISSIONER OF INTERNAL REVENUE v. SHAMBERG'S ESTATE.
• Court: U.S. Court of Appeals — Second Circuit

144 F.2d 998 (1944)

COMMISSIONER OF INTERNAL REVENUE v. SHAMBERG'S ESTATE.

No. 394.

Circuit Court of Appeals, Second Circuit.

August 24, 1944.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, and Bernard Chertcoff, Sp. Assts. to Atty. Gen., for petitioner, Commissioner of Internal Revenue.

George Wharton Pepper, of Philadelphia, Pa. (George Wharton Pepper, of Philadelphia, Pa., Julius Henry Cohen, of New York City, John D. M. Hamilton, of Philadelphia, Pa., and Leander I. Shelley, Austin J. Tobin, and Daniel B. Goldberg, all of New York City, of counsel), for respondent, Estate of Alexander J. Shamberg, deceased, and Isidor W. Shamberg, as Administrator, and for Port of New York Authority, amicus curiae.

Before AUGUSTUS N. HAND, CHASE, and FRANK, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This proceeding involves deficiencies in income taxes assessed against Alexander J. Shamberg by the Commissioner of Internal Revenue for the years 1937 and 1938. Shamberg died during the pendency of a proceeding in the Tax Court to review the assessment and his administrator was substituted as a party. The Tax Court determined that there were no deficiencies and the Commissioner filed this petition to review its decision which a majority of this court holds should be affirmed.

The question presented is whether the interest received by Shamberg in the years 1937 and 1938 on bonds of the Port of New York Authority (hereinafter called the "Authority") known as Interstate Bridge and Tunnel Bonds — Series E, and General and Refunding Bonds — First Series, is subject to income taxes.

According to the view we take, the income from the above bonds, issued in 1931 and 1935 respectively, was exempt from taxation under the provisions of Section 22 (b) (4) (A) of the Revenue Act of 1936 and the corresponding section, identical in form, of the Revenue Act of 1938, 26 U.S.C.A.Int.Rev.Acts, pages 825 and 1008. These statutory provisions and the Treasury Regulations interpreting them are as follows:

"Sec. 22. Gross Income

"(a) General Definition. `Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *

"(b) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this title:

* * * * * *

"(4) Tax-free interest. Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia."

Treasury Regulations 94, promulgated under the Revenue Act of 1936:

"Art. 22(b) (4)-1. Interest upon State obligations. — Interest upon the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia is exempt from the income tax. Obligations issued by or on behalf of the State or Territory or a duly organized political subdivision acting by constituted authorities empowered to issue such obligations, are the obligations of a State or Territory or a political subdivision thereof. Special tax bills issued for special benefits to property, if such tax bills are legally collectible only from owners of the property benefited, are not the obligations of a State, Territory, or political subdivision. The term `political subdivision,' within the meaning of the exemption, denotes any division of the State or territory which is a municipal corporation, or to which has been delegated the right to exercise part of the sovereign power of the State or Territory. As thus defined, a political subdivision of a State or Territory may, for the purpose of exemption, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of a State or Territory."

The provisions of the foregoing Article of Regulations 94 were amended in Treasury Regulations 101, promulgated under the Revenue Act of 1938 so that the words "or may not" follow the word "may" in the last sentence.

The applicability of the statutory exemption from income taxes which we have referred to depends upon the nature and activities of the Authority which are set forth in a stipulation by the parties.

The Authority is a body politic and corporate created by a compact made between the States of New York, Laws N.Y.1921, c. 154, and New Jersey on April 30, 1921, N.J.S.A. 32:1-1 et seq., and approved by Congress on August 23, 1921, 42 Stat. 174. It is fully owned by the two states and its projects are all operated in the interest of the public without profit to private persons. The compact was induced by the necessity for joint state action in the development of the Port of New York which lies partly within the jurisdiction of each state. It created a district to be known as the "Port of New York District" comprised of areas in both states and the waters between them, in which were included about 200 separate municipalities and a population of over 10,000,000.

Article VI of the compact vested the Authority with "* * * power and authority to purchase, construct, lease and/or operate any terminal or transportation facility within said district; and to make charges for the use thereof; and for any of such purposes to own, hold, lease and/or operate real or personal property, to borrow money and secure the same by bonds or by mortgages upon any property held or to be held by it * * *" except that property held by either state or by any of their municipalities should not be taken without the consent of the state or municipality affected. The Authority was to make plans for the development of the district. It was empowered to make recommendations to the states, to intervene in proceedings affecting the commerce of the port and to petition such bodies as the Interstate Commerce Commission as to matters within its jurisdiction.

Article XVIII authorized the Authority, subject to the exercise of the power of Congress, to make rules and regulations relating to navigation and commerce, which rules, however, were to be effective only when concurred in by the legislatures of both states. The states agreed by Article XIX to provide penalties and means of enforcement of the orders and regulations of the Authority. The Authority has made regulations with respect to its bridges and tunnels which have been concurred in by the legislatures of the states, penalties for their violation having been provided by state law and the inferior criminal courts of the states having been given jurisdiction to enforce these penalties.

The powers of the Authority are vested in a board of twelve Commissioners — six from each state, who take an oath of office and may be removed only upon charges and after a hearing. Their actions are binding only after approval by a majority of the Commissioners from each state and the Governor of each state has a veto power over the acts of the Commissioners from his state.

The plan adopted by the two states, N.J. S.A. 32:1-25 et seq., Laws N.Y.1922, c. 43 and consented to by Congress in 1922, Joint Resolution July 1, 1922, 42 Stat. 822, sets forth the principles upon which the development of the Port should proceed, and provides that (Section 8):

"The Port of New York Authority is hereby authorized and directed to proceed with the development of the port of New York in accordance with said comprehensive plan as rapidly as may be economically practicable and is hereby vested with all necessary and appropriate powers not inconsistent with the constitution of the United States or of either state, to effectuate the same, except the power to levy taxes or assessments. * * * The port authority shall be regarded as the municipal corporate instrumentality of the two states for the purpose of developing the port and effectuating the pledge of the states in the said compact, but it shall have no power to pledge the credit of either state or to impose any obligation upon either state, or upon any municipality, except as and when such power is expressly granted by statute, or the consent by any such municipality is given." N.J.S.A. 32:1-33; Laws 1922, c. 43, § 8.

Up to the present time the Authority has not applied for any grant of power to pledge the credit of either of the states and has never applied to any municipality for the power to impose any obligation upon it. The Authority is not subject to the debt limiting provisions of the constitution of the two states; it was created in order to establish an agency with operating power independent of state and municipal debt limitations.

The Authority has constructed various vehicular crossings. They have been the Arthur Kill Bridges, the George Washington Bridge, the Bayonne Bridge, the Holland Tunnel and the Lincoln Tunnel.

Arthur Kill Bridges.

The two states authorized the Authority to build, operate and maintain these two bridges with the necessary approaches across the Arthur Kill, the first between Perth Amboy, New Jersey, and Tottenville, New York, and the second between Elizabeth, New Jersey, and Howland Hook, New York. Each state appropriated $100,000 for preliminary work, but provided that these sums should be returned to the states after the bridges had been fully paid for and the debts incurred therefor amortized out of revenue. The cost of these bridges exceeded $17,000,000, which was financed by the sale of bonds of the Authority to the extent of $14,000,000 and $4,000,000 advanced in equal portions by the two states under an agreement that the...