Indep. Gravel Co. v. Comm'r of Internal Revenue

• Decision Date: 30 June 1971
• Docket Number: Docket No. 4988-69.
• Citation: 56 T.C. 698
• Parties: INDEPENDENT GRAVEL COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

56 T.C. 698

INDEPENDENT GRAVEL COMPANY, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4988-69.

United States Tax Court

Filed June 30, 1971.

Lloyd E. Roberts, for the petitioner.

Larry K, Hercules, for the respondent.

The City of Joplin, Mo., issued special tax bills to petitioner in payment for street and sewer improvements which petitioner performed under contracts with the City. These bills were assessed against landowners whose properties were benefited by the improvements and became liens against the properties so benefited. Payment of principal and interest on the bills could be made by the landowner directly to petitioner or could be made to the City which would then forward it. In fact, payment was made directly to petitioner. Held, the special tax bills are governmental obligations and the interest thereon received by petitioner is tax-exempt income under sec. 103.

FORRESTER, Judge:

Respondent has determined a deficiency in petitioner's Federal income tax for the year 9162 in the amount of $9,256.55.

Concessions having been made, the only issue remaining for decision is whether interest received on special tax bills of the City of Joplin, Mo., is excludable from gross income under section 103 of the Internal Revenue Code of1964.¹

FINDINGS OF FACT

All facts have been stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference, and those facts necessary to an understanding of the case are set out below.

Petitioner (hereinafter sometimes referred to as Gravel), is a Missouri corporation, with its principal office located in Joplin, Mo., at the time it filed its petition in this proceeding. Its corporate income tax return for the year in issue was filed with the district director of internal revenue for the district of Missouri.

Gravel was principally engaged in the business of paving streets and installing sewer systems for the City of Joplin, Mo. Joplin usually issued special tax bills (hereinafter sometime referred to as bills) in payment for work performed by Gravel. A typical special tax bill issued by the City is set out in the margin.² Such bills, by virtue of article XI of the City Charter of the City of Joplin, became liens against the individual properties benefited from the work performed by Gravel. If they were not paid by the appropriate property owners, Gravel would have incurred the expense of instituting a suit for collection which could be brought in the name of the City as well as its own name. However, as a matter of practice the City would not have offered any assistance in the suit.

Article XI of the City Charter of the City of Joplin provided the following with respect to the procedures involved in making public improvements and payments therefor by means of special tax bills:

Section 11.01. CITY'S POWERS IN MAKING PUBLIC IMPROVEMENTS. The city shall have power to improve the public highways of every character, and parts thereof within the city * * * and to acquire, construct, reconstruct, repair, maintain, enlarge, alter and extend sewers, drains, canals, septic tanks, sewage disposal works and plants, * * * and to pay for such public improvements, or any of them, in whole or in part, * * * special tax bills or securities evidencing special assessments, and to make, levy, assess and collect special assessments to pay therefor, in the manner provided herein, and to issue special tax bills and other evidences of such assessments. * * *

Section 11.02. ORDINANCE SHALL PRESCRIBE METHOD OF PAYING FOR PUBLIC IMPROVEMENTS. All ordinances and contracts for work authorized to be done by this article shall specify how the same is to be paid for, and in case payment is to be made in whole or in part to the contractor in special tax bills or other evidences of special assessments, the city shall in no event, nor in any manner be liable for or on account of the work so to be paid for.

Section 11.04 INSTITUTION OF PROCEEDINGS BY RESOLUTION-ESTIMATE. All proceedings to make any of the public improvements authorized herein shall (unless otherwise expressly provided in this charter) be begun by the adoption and entry of a declaration of necessity (hereinafter referred to as the resolution) by the director of public works. Such resolution shall be entered on the records of the department, and shall state the nature of the improvement, and when the same is to be paid for in special tax bills or other evidences of assessments upon real property (or out of the revolving public improvement fund, to be reimbursed by collection of such assessments), it shall state the method of making assessments to pay therefor. The director shall also have prepared by the city engineer, prior to the introduction and adoption of said resolution, an estimate of the probable cost of such proposed improvement. Such estimate shall be open to inspection and discussion at any hearing held as to such improvement. * * *

Section 11.05 HEARING SET— PUBLICATION OF NOTICE. At or after the adoption and entry of record of any such resolution, the director of public works shall, by order, fix a day upon which a hearing in respect to such improvement shall be had, which day shall be within thirty days after the date when such order is made. * * *

Posting of Notice. He shall also cause a notice of such proposed improvement to be posted in at least five public places along the street or other public property to be improved, or, in case of a district sewer, within such district, or in case of a joint district sewer, in at least ten public places within such joint sewer district. * * *

Section 11.06. HEARING— DECISION OF DIRECTOR. On the date fixed for such hearing any and all property owners interested in such improvement may, by written petition, or otherwise, present their views in respect to the proposed improvement to the said director, and the said director may adjourn the hearing from time to time. After such hearing, if the said director shall determine that it is not for the public interest that the proposed improvement, or a part thereof, be made, and paid for either out of the general fund or by any method of assessment, or otherwise, he shall make an order to that effect, and thereupon the proceedings for the improvement, or part thereof, determined against by such order, shall stop and shall not be begun again until the adoption of a new resolution.

Section 11.09. PLANS AND SPECIFICATIONS. After such hearing, if no such determination against the improvement is made, or if only a part of the proposed improvement be determined against by said director, he shall perfect and adopt plans and specifications for the proposed improvement not determined against, including, as he may deem proper, provisions for the maintenance thereof for a stated period.

Section 11.12 BIDS, CONTRACTS— CONFIRMATION BY COUNCIL. After the entry of such resolution and the adoption of such plans and specifications, the director of public works shall advertise for bids for the doing of the work * * * . Except for such right of rejection the director of public works shall let the contract to the lowest and best bidder therefor, and shall cause the contract so let to be formally executed by the contractor and by said director on behalf of the city. Such contract, before it shall be binding and effective, shall be confirmed by an ordinance of the said council, as hereinafter specified, and when so confirmed shall in all respects be considered and held to have been authorized by the city.

Section 11.13. PAYMENTS TO CONTRACTOR— HOW MADE— CASH OR TAX BILLS. All bids for the doing of public work to be paid for out of the proceeds of special assessments shall, except as herein provided, be upon the basis of being paid for by special tax bills evidencing such assessments. * * *

Section 11.16. METHOD OF PAYMENT TO BE PRESCRIBED BY ORDINANCE. The ordinance confirming the contract shall also provide for and authorize the improvement and shall state the nature of the improvement, and this may be done by a reference to the plans and specifications therefor. Such ordinance shall state how the cost thereof shall be paid; that is, whether the cost thereof is to be paid by special assessments, or by special tax bills or other evidences of such assessments, or out of the general fund, or out of the revolving public improvement fund, or other funds, or whether by one method or the other, in whole or in part, and if in whole or in part by special assessments or special tax bills or other evidences of special assessments, how assessments shall be made and levied. The said director of public works shall endorse his approval on the ordinance.

Section 11.31. ACCEPTANCE OF WORK WHEN COMPLETED. The director of public works is vested with power to determine whether any improvement constructed under a contract with the city has been completed in accordance with the terms of the contract, therefor, and to accept such improvement on the part of the city, and to determine the amount of the liquidated damages, if any, to be paid by the contractor in accordance with the terms of the contract therefor, for failure to comply with the contract; and in all cases the director of public works is invested with power to ascertain in accordance with the provisions of this charter, the amount that each tract of land shall be assessed or charged for the payment of the cost of such work.

Section 11.32. ASSESSMENTS TO COVER AMOUNT DUE CONTRACTOR— TAX BILLS TO ISSUE. The director of public works shall, at the time of accepting any improvement on the part of the city, make an order or orders accepting same and determine the amount to be paid to the contractor. The director of public works shall thereupon also enter on the records of his department an order or orders making and levying an assessment against the tracts of land, exclusive of improvements, to be assessed to pay therefor, in the manner provided for in the...