United States Trust Co. of New York v. Anderson

Decision Date12 June 1933
Docket NumberNo. 191.,191.
Citation65 F.2d 575
PartiesUNITED STATES TRUST CO. OF NEW YORK v. ANDERSON, Collector of Internal Revenue.
CourtU.S. Court of Appeals — Second Circuit

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 "(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. 550, 64 L. Ed. 887, 11 A. L. R. 519, Justice Van Devanter, while discussing the income tax legislation under the Revenue Act of 1918 (40 Stat. 1057) which attempted to tax judicial salaries, said that "Congress refused to treat interest received from bonds issued by a state or any of its counties or municipalities as within the taxing power." This statement (at page 262 of 253 U. S., 40 S. Ct. 550, 556) in the footnote of the opinion in Evans v. Gore, as well as the language of the Congressional Conference Report of February 8, 1919 relating to the Revenue Act of 1918 (volume 57, Cong. Rec. 2988) treated the exemption as designed to safeguard the borrowing power of the states and to prevent taxation which might impair its efficacy or burden the property or instrumentalities of the states. In Denman v. Slayton, 282 U. S. 514, 51 S. Ct. 269, 75 L. Ed. 500, where the deductibility from the gross income of a taxpayer of interest on indebtedness incurred to purchase tax exempt "obligations or securities" was discussed and held not allowable, the Supreme Court plainly had in mind securities issued to borrow money.

The language of section 213 (b) of the Revenue Act of 1926 makes it reasonably clear that the exemptions of interest upon "obligations of a State" and upon "obligations of the United States" relate to "obligations" of the same kinds. Subdivision B exempts "securities issued under the provisions of chapters 7 and 8 of Title 12 (the Federal Farm Loan Act)," and subdivision C provides that "in the case of obligations of the United States issued after September 1, 1917 * * * the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof. * * *" It seems manifest, not only because of the objects sought to be attained by the exemptions, but also from the use of the term "issued" both in subdivisions B and C, that the obligations referred to in subdivision A were only such as might be "issued" in the exercise of the borrowing power of the states.

An award in condemnation, bearing interest, cannot be regarded as "issued" by a municipality, nor can taxation of the interest received upon such an award in any way affect the borrowing power of the state. There is no bargaining by the municipality in connection with the matter. The owner of the property condemned is obliged to sell it because of the exercise of the right of eminent domain. There was no competition between the city and other prospective purchasers, for the city had a prior right to the property and one that was subject only to the requirement that it pay a fair price. On the other hand, state and municipal bonds and securities issued to borrow money, if tax exempt, will command a better price in the market than if they are subject to taxation, because the purchaser is not compelled to buy them and, being a free agent, may be induced by the tax exemption feature to prefer them to private bonds for investment. It disregards the whole purpose of the exemption to apply it to interest upon obligations of a state which it can compel a citizen to take in exchange for the fair value of his property. The rate of interest is fixed by law, and neither it, nor the amount of the award adjudged as of the time of taking, is a matter over which he has any control.

Not only is the meaning which we attribute to "obligations of a state" in accord with the evident purposes of granting the exemption, but this meaning has been given to...

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