Pontarelli v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 14 April 1937 |
| Docket Number | Docket No. 83199. |
| Citation | 35 BTA 872 |
| Parties | MICHAEL PONTARELLI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
George K. Bowden, Esq., for the petitioner.
O. W. Swecker, Esq., for the respondent.
Frederic Burnham, Esq., and Harry Thom, Esq., as amicus curiae, The Commissioner determined a deficiency of $375.97 in petitioner's income tax for the taxable year ended February 28, 1933, in part by adding to income reported interest received on the bonds of a municipality which were payable only out of assessments for local improvements. Petitioner contends that the amount is tax-exempt as interest upon the obligation of a political subdivision of a state.
FINDINGS OF FACTS.
Throughout the fiscal year ended February 28, 1933, petitioner, a resident of Chicago, Illinois, owned a 50 percent interest in improvement bonds of the city of Chicago, on which he received $6,338.74 as interest payable pursuant to the terms of the bonds. Prior to March 1, 1932, the city had made local improvements in its sewer system financed by special assessments imposed upon contiguous property, and, in anticipation of its collection of deferred installments of the several assessments, it issued the improvement bonds, promising to pay the principal with 5 percent annual interest "solely out of said installments when collected." The Commissioner included the interest received by petitioner from the bonds in petitioner's gross income for the fiscal year ended February 28, 1933.
Petitioner assails respondent's determination that interest received by him on improvement bonds issued by the city of Chicago is subject to Federal income tax.
The city of Chicago is a municipal corporation and as such is a political subdivision of the State of Illinois, with power and authority to make local improvements and defray the cost thereof by special assessment upon contiguous property, or by general taxation or otherwise as it by ordinance may prescribe. It is authorized, for the purpose of anticipating collection of the second and succeeding installments of any special assessment proposed, to issue bonds payable out of the proceeds of such installments and bearing interest at a rate of not more than 6 percent and not less than 4 percent, payable annually. Prior to March 1, 1932, pursuant to its statutory power and authority in that respect, it made certain local improvements financed by special assessments imposed upon contiguous property and had issued certain bonds in anticipation of its collection of deferred installments of such special assessments, a portion of which bonds were outstanding throughout petitioner's fiscal year ended February 28, 1933.
By section 90 of the Local Improvement Act of Illinois, the city is required to cause a valid special assessment or assessments to be levied and collected and pay bonds from the collections so made until all issued shall be fully paid, and any holder of the bonds is entitled to some right of relief by way of mandamus or injunction to enforce the city's obligation in that regard. The improvement of the municipal sewer system, for payment for which the bonds were issued to anticipate the collection of special assessments levied, is a governmental function. Halsey v. Commissioner, 75 Fed. (2d) 234; (App. D. C.); John B. Hittell, 33 B. T. A. 276; Brush v. Commissioner, 300 U. S. 352. The face amount of the bonds, together with 5 percent annual interest, was payable solely out of the city treasurer's collections of deferred installments of the assessments imposed upon contiguous property. A municipality's issuance of improvement bonds, so payable, is authorized by the Local Improvement Act of Illinois, which expressly limits the city's liability thereunder to a proper payment of the amount collected under the assessments, levy, and collection to be made by the city with all reasonable diligence.1
The interest on petitioner's bonds issued by the city of Chicago and the city's promise to repay borrowed funds fall literally within the terms of section 22 (b) (4) of the Revenue Act of 1932, providing that interest on the obligations of a political subdivision of a state "shall not be included in the gross income and shall be exempt from taxation * * *." The bonds, moreover, are prima facie within the narrowed meaning of the term "obligation", which for the purposes of the subdivision has been restricted to such "as might be `issued' in the exercise of the borrowing power of the state." United States Trust Co. of New York v. Anderson, 65 Fed. (2d) 575; (C. C. A., 2d Cir.); certiorari denied, 290 U. S. 683. See also Kansas City Southern Railway Co., 16 B. T. A. 665, reversed other point, 52 Fed. (2d) 372; (C. C. A., 8th Cir.); certiorari denied, 284 U. S. 676.
But although petitioner's bonds were issued by the city and expressly recite its promise to pay principal and interest, the courts of Illinois have consistently held that the municipality is not obligated under the terms of such instruments, whether denominated bonds, notes, or tax warrants, except in the capacity of trustee for the collection and proper distribution of the proceeds of assessments made applicable to their satisfaction. Hoehamer v. Village of Elmwood Park, 361 Ill. 422; 198 N. E. 345; Rothschild v. Village of Calumet Park, 350 Ill. 330; 183 N. E. 337; Bankers Life Co. v. Village of Elmwood Park, 280 Ill. App. 524; Wells v. Village of Wilmette, 193 Ill. App. 30. In Norfolk & Western Railway Co. v. Board of Education of Chicago, 14 Fed. Supp. 475, the District Court for Northern Illinois so held in respect of tax anticipation warrants, which, like petitioner's bonds, recited the promise of the city and of the board of education to pay the bearer a specified amount at a specified date out of 75 percent of the proceeds of a general school tax levy for 1929. Judge Woodward remarked therein that...
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