United States Trust Co. of New York v. Anderson, 191.

• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Writing for the Court: MANTON, SWAN, and AUGUSTUS N. HAND, Circuit
• Citation: 65 F.2d 575
• Parties: UNITED STATES TRUST CO. OF NEW YORK v. ANDERSON, Collector of Internal Revenue.
• Docket Number: No. 191.,191.
• Decision Date: 12 June 1933

65 F.2d 575 (1933)

UNITED STATES TRUST CO. OF NEW YORK
v.
ANDERSON, Collector of Internal Revenue.

No. 191.

Circuit Court of Appeals, Second Circuit.

June 12, 1933.

65 F.2d 576

Stewart & Shearer, of New York City (John W. Davis, George L. Shearer, McCready Sykes, Harry J. Campaign, and Marvin Lyons, all of New York City, of counsel), for appellant.

George Z. Medalie, U. S. Atty., of New York City (Samuel C. Coleman and Murray I. Gurfein, both of New York City, of counsel), for appellee.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge (after stating the facts as above).

The interests in real estate belonging to the decedent, Isham, were condemned by the city of New York under section 976 of the Greater New York Charter. By virtue of that section, title to the interest in the first plot passed to the city on April 1, 1925, and to the second plot on June 2, 1926. Upon the making of the award in the condemnation proceedings, interest at 6 per cent. was allowed to the property owner from the dates when the city took title. In the case of the first plot condemned, the decedent received his award, with interest, in 1927, and in the case of the second plot in 1928.

Section 213 (b) (4) of the Revenue Act of 1926, 26 USCA § 954 (b) (4), providing certain exemptions from income taxes reads as follows:

Section 213 (b) "The term `gross income' does not include the following items, which shall be exempt from taxation under this title: * * *

"(4) Interest upon

"(A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or

65 F.2d 577

"(B) securities issued under the provisions of chapters 7 and 8 of Title 12 (the Federal Farm Loan Act), or under the provisions of such Act as amended; or

"(C) the obligations of the United States or its possessions.

"Every person owning any of the obligations or securities enumerated in clause (A), (B), or (C) shall, in the return required by this chapter, submit a statement showing the number and amount of such obligations and securities owned by him and the income received therefrom, in such form and with such information as the Commissioner may require.

"In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit), the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from income taxes."

The plaintiff-appellant contends that the foregoing section applied to the interest received by the decedent upon his award in the year 1927 and rendered it exempt from taxation.

Section 22 (b) of the Revenue Act of 1928, 26 USCA § 2022 (b), is identical with section 213 (b) of the Revenue Act of 1926, 26 USCA § 954 (b). The plaintiff-appellant contends that it applied to the interest received by the decedent upon his award in 1928 and rendered it similarly exempt.

The questions before us are (1) whether the statutory exemptions from taxation of "the obligations of a State * * * or any political subdivision thereof * * *" covered the interest received by the decedent in 1927 and 1928 upon the condemnation awards; and (2) whether, if they did not, taxation of these interest items under the general provisions of the Revenue Acts of 1926 and 1928 was beyond the constitutional power of Congress because it involved taxing a state instrumentality.

There is no doubt that the clause exempting from taxation "obligations of a State * * * or any political subdivision thereof" may be so interpreted as to embrace almost anything which a state or municipality is bound to pay and may thus exempt income which is within the taxing power of the United States. The question is how broadly the word "obligations" is to be construed and just what income is covered by the exemption.

In determining the scope of the word we must bear in mind the settled rule of construction that "tax exemptions are never lightly to be inferred" (Heiner v. Colonial Trust Co., 275 U. S. at page 235, 48 S. Ct. 65, 66, 72 L. Ed. 256), and will not be applied to a particular case unless granted in the statute in plain terms (Denman v. Slayton, 282 U. S. at page 519, 51 S. Ct. 269, 75 L. Ed. 500; Phœnix Insurance Co. v. Tennessee, 161 U. S. at page 177, 16 S. Ct. 471, 40 L. Ed. 660; Chicago, etc., Railroad v. Guffey, 120 U. S. at page 575, 7 S. Ct. 693, 30 L. Ed. 732; Vicksburg, etc., Railroad Co. v. Dennis, 116 U. S. at page 668, 6 S. Ct. 625, 29 L. Ed. 770; Philadelphia, etc., Railroad v. Maryland, 10 How. at page 393, 13 L. Ed. 461).

The phrase exempting "interest upon * * * the obligations of a state * * * or any political subdivision thereof" has been used in every Revenue Act since the adoption of the Sixteenth Amendment to the Constitution of the United States. At the time that amendment was proposed, it was argued that it would place the borrowing capacity of the states at the mercy of the federal taxing power. On February 8, 1910, Senator Borah submitted to the Senate a resolution No. 175 directing the Judiciary Committee to report whether "the proposed amendment * * * would if adopted authorize Congress to lay a tax upon incomes derived from state bonds and other municipal securities or would authorize Congress to tax the instrumentalities or means and property of the state or the salary of state officers." Cong. Rec. vol. 45, p. 1585.

It is clear from the wording of the foregoing resolution that the author had particularly in mind the question whether the amendment would adversely affect the power of the states and their political subdivisions to borrow money.

In Evans v. Gore, 253 U. S. at page 262, 40 S. Ct....