Shamberg v. Comm'r of Internal Revenue (In re Estate of Shamberg)
| Decision Date | 28 January 1944 |
| Docket Number | Docket No. 107713. |
| Citation | 3 T.C. 131 |
| Parties | ESTATE OF ALEXANDER J. SHAMBERG, DECEASED, ISIDOR W. SHAMBERG, ADMINISTRATOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Interest received by petitioner's decedent on bonds of the Port of New York Authority held free from tax under Revenue Acts of 1936 and 1938, section 22(b)(4), excluding from gross income interest on obligations of ‘a State, Territory, or any political subdivision thereof.‘ Julius Henry Cohen, Esq., Lewis L. Delafield, Jr., Esq., and Austin J. Tobin, Esq., for the petitioner.
J. P. Wenchel, Esq., Mason B. Leming, Esq., Edwin M. Perkins, Esq., W. T. Plumb, Jr., Esq., and Richard Flesch, Esq., for the respondent.
This proceeding involved deficiencies determined against petitioner's decedent in income tax for the years 1937 and 1938 in the sums of $1,580 and $913.62, respectively. The deficiencies rest upon the failure to include in his taxable income for those years interest received by the decedent on bonds issued by the Port of New York Authority.
The parties have submitted an extensive stipulation of facts, all of which we hereby find accordingly. They may be briefly summarized:1
Efficient handling of freight and passenger traffic, into, out of, and within the geographical territory surrounding New York City, highly important to the many inhabitants of the region, is complicated by various waterways interspersing it. Early efforts to attain unified traffic control were restricted at the outset by the dual jurisdiction of New York and New Jersey.
Mutual endeavor led to a compact approved by the legislatures of the two states2 and Congress,3 designed to assure the cooperation of the two states in the development of the Port of New York. This compact created the Port of New York Authority, a body politic and corporate, which was to develop the port on a self-liquidating financial basis.
The compact created the Port of New York District, required individual and specific legislative approval of the projects of the Port Authority, and made them subject to regulatory laws and regulating commissions as if owned by a private corporation. The District comprises territory in both the States of New York and New Jersey, and the waters between them. Within its limits are located the cities of New York, Yonkers, Jersey City, Newark, Elizabeth, Paterson, and Passaic, and approximately two hundred other separate municipalities. The powers of any municipality to develop or improve port and terminal facilities were left unimpaired.
Pursuant to the compact a comprehensive plan of port development was recommended by the Port Authority, which received the required approval by the legislatures in 1922,4 and to which Congress5 gave its consent, conditioned upon the approval by the War Department of specific projects affecting navigable waters.
Initial costs of the construction by the Port Authority of the Lincoln vehicular tunnel, connecting Manhattan and Jersey City, were financed by the sale in 1933 of ‘Midtown Hudson Tunnel Notes,‘ of which the greater part were taken by the United States through the Federal Emergency Administration of Public Works. In entering into this agreement the Public Works Administration required and received the opinion of the Port Authority's general counsel that its notes were exempt from state and Federal taxation. These notes were retired in 1935 by the sale of a larger bond issue called ‘General and Refunding Bonds First Series.‘ Bonds of this series were held by petitioner's decedent.
Concurrent legislation in 1931 provided that the Port Authority issue its bonds, secured by the tolls from the Holland Tunnel— also running from Manhattan to Jersey City under the Hudson River— to repay New York and New Jersey for their original expenditures in constructing this tunnel. This was done by the sale of an issue known as ‘Interstate Bridge and Tunnel Bonds, Series E.‘ Bonds of this issue were also held by petitioner's decedent during the taxable period in question.
By further concurrent legislation in 19316 the states provided that ‘the construction, maintenance, operation and control of all such bridges and tunnels, heretofore or hereafter authorized by the two States, shall be unified under The Port of New York Authority * * * to the end that the tolls and other revenues shall be applied, so far as practicable, to the costs of the construction, maintenance and operation of said bridges and tunnels as a group and economies in operation effected, it being the policy of the two States that such bridges and tunnels shall as a group be in all respects self-sustaining.‘
The Port Authority has no stock but is wholly owned by the States of New York and New Jersey. Its projects are operated in the interests of the public and no profits inure to the benefit of private persons. Its functions and powers are exercised by twelve commissioners, hald of whom are appointed from the resident voters of each state by the respective governors. Petitioner's decedent was one of the New York commissioners during the years in controversy. It has been the invariable practice of commissioners to take an oath of office and they may not be removed except upon charges and after a formal hearing.
The actions of the commissioners are binding only after approval of the majority of the commissioners from each state. The minutes of every meeting are required to be sent immediately to the governor of each state, who possesses a veto power over the acts of any of the commissioners from his state. Reports on all activities of the Authority are required to be submitted annually to the legislatures and governors.
The Authority fixes the tolls charged for the use of its facilities with a view to meeting operating expenses and interest and amortization obligations. By legislation it has been provided that its revenues be first expended in payment of operating expenses, interest, sinking and reserve fund requirements of bond issues, and amounts currently due to each state for advances; after the payment of these items the states direct that there shall be built up a ‘General Reserve Fund‘ equal to one-tenth of the amount of all outstanding bonds, surplus to be used for such purpose as may be directed by the states.
The revenues from the various facilities during the year 1941 after deduction of operating expenses were as follows:
+-------------------------------------+
¦Arthur Kill Bridges ¦$439,402.44 ¦
+------------------------+------------¦
¦George Washington Bridge¦4,456,548.98¦
+------------------------+------------¦
¦Bayonne Bridge ¦287,364.71 ¦
+------------------------+------------¦
¦Holland Tunnel ¦5,899,480.72¦
+------------------------+------------¦
¦Lincoln Tunnel ¦2,044,348.34¦
+------------------------+------------¦
¦Inland Terminal ¦724,913.23 ¦
+-------------------------------------+
In Helvering v. Gerhardt, 304 U.S. 405, the Supreme Court held that the salaries of certain employees of the Port of New York Authority were subject to Federal taxation. In this proceeding respondent seeks to reach a similar result with respect to interest received by holders of the Port Authority's obligations. The case has been presented to raise both the constitutional issue and the question of statutory construction posed by the following provision of the applicable revenue acts:
SEC. 22. GROSS INCOME.
(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 * * * .
We shall consider the latter question first, for ‘the Congress has the power and may have intended to exempt agencies of the states other than those which would fall within the protection of the constitutional principle.‘ 38 Op. Atty. Gen. (1937), pp. 563, 564, infra. Obviously the controversy arises as to whether the Port Authority is a ‘political subdivision‘ of ‘a State.‘ If it is, the statute stands squarely in the path of respondent's attempt to tax this interest.
On this branch of the case, respondent relies in part upon a single sentence in the Gerhardt opinion in which the Court, referring to a regulation issued under the 1932 Act, expresses the view ‘that employees of the Port Authority are not employees of the state or a political subdivision of it within the meaning of the regulation as originally promulgated— an additional reason why the regulation, even before the 1938 amendment, was ineffectual to exempt the salaries here involved.‘7 Without pausing to consider whether this is decision or dictum, a question much controverted by the parties, we think its meaning is necessarily to be discerned only by reference to the context of the statement and to the regulation which the Court was there construing. The statement comes near the close of the opinion, after an initial reference to a predecessor regulation in the following words:
* * * In Brush v. Commissioner, supra (300 U.S. 352), the applicable treasury regulation upon which the Government relied exempted from income tax the compensation of ‘state officers and employees‘ for ‘services rendered in connection with the exercise of an essential governmental function of the State.‘ The sole contention of the Government was that the maintenance of the New York City water supply system was not an essential governmental function of the state. The Government did not attack the regulation.
This regulation in terms exempts only employees of a state or political subdivision who render ‘services * * * in connection with the exercise of an essential governmental function of the State or political subdivision.‘ That juxtaposition of the terms gives color to the view that in the regulation the concept of an employee of...
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