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Commissioner of Internal Revenue v. Estate.

August 24, 1944

COMMISSIONER OF INTERNAL REVENUE
v.
SHAMBERG'S ESTATE.



Petition to Review a Decision of the Tax Court of the United States.

Author: Hand

Before AUGUSTUS N. HAND, CHASE, and FRANK, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This proceeding involves deficiencies in income taxes assessed against Alexander J. Shamberg by the Commissioner of Internal Revenue for the years 1937 and 1938. Shamberg died during the pendency of a proceeding in the Tax Court to review the assessment and his administrator was substituted as a party. The Tax Court determined that there were no deficiencies and the Commissioner filed this petition to review its decision which a majority of this court holds should be affirmed.

The question presented is whether the interest received by Shamberg in the years 1937 and 1938 on bonds of the Port of New York Authority (hereinafter called the "Authority") known as Interstate Bridge and Tunnel Bonds - Series E, and General and Refunding Bonds - First Series, is subject to income taxes.

According to the view we take, the income from the above bonds, issued in 1931 and 1935 respectively, was exempt from taxation under the provisions of Section 22 (b) (4) (A) of the Revenue Act of 1936 and the corresponding section, identical in form, of the Revenue Act of 1938, 26 U.S.C.A. Int. Rev. Acts, pages 825 and 1008. These statutory provisions and the Treasury Regulations interpreting them are as follows:

"Sec. 22. Gross Income

"(a) General Definition. 'Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *

"(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, or the District of Columbia."

Treasury Regulations 94, promulgated under the Revenue Act of 1936:

"Art. 22(b) (4)-1. Interest upon State obligations. - Interest upon the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia is exempt from the income tax. Obligations issued by or on behalf of the State or Territory or a duly organized political subdivision acting by constituted authorities empowered to issue such obligations, are the obligations of a State or Territory or a political subdivision thereof. Special tax bills issued for special benefits to property, if such tax bills are legally collectible only from owners of the property benefited, are not the obligations of a State, Territory, or political subdivision. The term 'political subdivision,' within the meaning of the exemption, denotes any division of the State or territory which is a municipal corporation, or to which has been delegated the right to exercise part of the sovereign power of the State or Territory. As thus defined, a political subdivision of a State or Territory may, for the purpose of exemption, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of a State or Territory."

The provisions of the foregoing Article of Regulations 94 were amended in Treasury Regulations 101, promulgated under the Revenue Act of 1938 so that the words "or may not" follow the word "may" in the last sentence.

The applicability of the statutory exemption from income taxes which we have referred to depends upon the nature and activities of the Authority which are set forth in a stipulation by the parties.

The Authority is a body politic and corporate created by a compact made between the States of New York, Laws N.Y. 1921, c. 154, and New Jersey on April 30, 1921, N.J.S.A. 32:1-1 et seq., and approved by Congress on August 23, 1921, 42 Stat. 174. It is fully owned by the two states and its projects are all operated in the interest of the public without profit to private persons. The compact was induced by the necessity for joint state action in the development of the Port of New York which lies partly within the jurisdiction of each state. It created a district to be known as the "Port of New York District" comprised of areas in both states and the waters between them, in which were included about 200 separate municipalities and a population of over 10,000,000.

Article VI of the compact vested the Authority with " * * * power and authority to purchase, construct, lease and/or operate any terminal or transportation facility within said district; and to make charges for the use thereof; and for any of such purposes to own, hold, lease and/or operate real or personal property, to borrow money and secure the same by bonds or by mortgages upon any property held or to be held by it * * * " except that property held by either state or by any of their municipalities should not be taken without the consent of the state or municipality affected. The Authority was to make plans for the development of the district. It was empowered to make recommendations to the states, to intervene in proceedings affecting the commerce of the port and to petition such bodies as the Interstate Commerce Commission as to matters within its jurisdiction.

Article XVIII authorized the Authority, subject to the exercise of the power of Congress, to make rules and regulations relating to navigation and commerce, which rules, however, were to be effective only when concurred in by the legislatures of both states. The states agreed by Article XIX to provide penalties and means of enforcement of the orders and regulations of the Authority. The Authority has made regulations with respect to its bridges and tunnels which have been concurred in by the legislatures of the states, penalties for their violation having been provided by state law and the inferior criminal courts of the states having been given jurisdiction to enforce these penalties.

The powers of the Authority are vested in a board of twelve Commissioners - six from each state, who take an oath of office and may be removed only upon charges and after a hearing. Their actions are binding only after approval by a majority of the Commissioners from each state and the Governor of each state has a veto power over the acts of the Commissioners from his state.

The plan adopted by the two states, N.J.S.A. 32:1-25 et seq., Laws N.Y. 1922, c. 43 and consented to by Congress in 1922, Joint Resolution July 1, 1922, 42 Stat. 822, sets forth the principles upon which the development of the Port should proceed, and provides that (Section 8):

"The Port of New York Authority is hereby authorized and directed to proceed with the development of the port of New York in accordance with said comprehensive plan as rapidly as may be economically practicable and is hereby vested with all necessary and appropriate powers not inconsistent with the constitution of the United States or of either state, to effectuate the same, except the power to levy taxes or assessments. * * * The port authority shall be regarded as the municipal corporate instrumentality of the two states for the purpose of developing the port and effectuating the pledge of the states in the said compact, but it shall have no power to pledge the credit of either state or to impose any obligation upon either state, or upon any municipality, except as and when such power is expressly granted by statute, or the consent by any such municipality is given." N.J.S.A. 32:1-33; Laws 1922, c. 43, ยง 8.

Up to the present time the Authority has not applied for any grant of power to pledge the credit of either of the states and has never applied to any municipality for the power to impose any obligation upon it. The Authority is not subject to the debt limiting provisions of the constitution of the two states; it was created in order to establish an agency with operating power independent of state and municipal debt limitations.

The Authority has constructed various vehicular crossings. They have been the Arthur Kill Bridges, the George Washington Bridge, the Bayonne Bridge, the Holland Tunnel and the Lincoln Tunnel.

Arthur Kill Bridges.

The two states authorized the Authority to build, operate and maintain these two bridges with the necessary approaches across the Arthur Kill, the first between Perth Amboy, New Jersey, and Tottenville, New York, and the second between Elizabeth, New Jersey, and Howland Hook, New York.Each state appropriated $100,000 for preliminary work, but provided that these sums should be returned to the states after the bridges had been fully paid for and the debts incurred therefor amortized out of revenue. The cost of these bridges exceeded $17,000,000, which was financed by the sale of bonds of the Authority to the extent of $14,000,000 and $4,000,000 advanced in equal portions by the two states under an agreement that the state advances should be repaid when the cost of construction of the bridges was paid for and all other debts were amortized. The War Department approved the construction of these bridges in 1925 and they were opened to traffic on June 29, 1928. N.J.S.A. 32:1-36 et seq.; Laws N.Y. 1924, cc. 186, 230.

George Washington Bridge.

In 1925 the Authority was authorized by the two states to construct, operate, maintain and own a bridge across the Hudson between Manhattan and Fort Lee, each state appropriating $150,000 for preliminary studies and providing for the repayment as in the case of the Arthur Kill bridges. Construction of this bridge was approved by the War Department in 1926 and it was opened to traffic on October 25, 1931. The Authority also constructed the system of approcaches to both termini of the bridge. The termini are maintained by the City of New York and the State of New Jersey respectively and are open to local traffic as well as to bridge traffic without charge. The cost of the bridge was financed by the sale of bonds of the Authority in the amount of $50,000,000, a grant by the Public Works Administration of the Federal Works Agency in amount of $1,490,455, and advances by the two states of $9,800,000, provisions being made, as in the case of the Arthur Kill Bridges, for the repayment of the advances by the states. N.J.S.A. 32:1-71 et seq.; Laws N.Y. 1925, c. 211.

Bayonne Bridge.

The states also authorized the Authority to construct, maintain, operate and own a bridge across the Kill van Kull between Bayonne, New Jersey and Staten Island, each state appropriating $50,000 for preliminary studies with provision for repayment of these advances. Construction was approved by the War Department in 1927 and the bridge was completed in 1931 at a cost of over $13,000,000, which was financed by the sale of bonds of the Authority to the extent of $12,000,000 and by advances by the two states in the amount of $4,100,000 with provision for repayment of the advances as in the case of the other bridges.

Congress granted its consent to the construction of the four bridges above mentioned. N.J.S.A. 32:1-94 et seq.; Laws N.Y. 1926, c. 279.

Holland Tunnel.

The Holland Tunnel was constructed by the two states and operated by them until 1930 through Commissions. In that year by concurrent legislation the two states provided that the Holland Tunnel should be conducted and continued as part of the operations of the Authority which are thereby vested with its control, operation and maintenance, the states, however, retaining title. The revenues were to be held by the Authority as agent of the states. The statutes provided that all obligations made or assumed by the Authority in connection with the tunnel should be assumed in its own name and should create no liability of the two states, or either of them. The Authority was authorized to raise funds through the sale of its own bonds, pursuant to which authorization Interstate Bridge and Tunnel Bonds - Series E (one of the two bonds issued involved in this case) were issued in amount of $50,000,000. The proceeds from the sale of these bonds were to repay the states for outlays in connection with the tunnel. The bonds were secured by the tolls from the tunnel. P.L.N.J. 1930, c. 247; N.J.S.A. 32:2-27; Laws N.Y. 1930, c. 421.

Lincoln Tunnel.

By legislation adopted in 1930 the two states authorized the Authority to report as to an additional tunnel under the Hudson and each state appropriated $200,000 for this purpose. Repayment of these appropriations was not required. The southerly tube of this tunnel was open to traffic in December 1937, and the northerly tube was intended to be completed and opened to traffic in 1943. A system of approaches to the tunnel in New York were built at a cost of $9,174,000, and in New Jersey at a cost of $20,034,000. The cost of the Lincoln Tunnel through December 31, 1941, exceeded $72,750,000. The initial cost of constructing the first unit of the tunnel was financed by a loan to the Authority of $12,300,000 made by the United States through the Federal Emergency Administration of Public Works. The loan agreement of September 1, 1933 contained the provision inserted at the request of the United States that the officers of the Administration of Public Works should be furnished with opinions both of bond counsel, satisfactory to the government, and of Port Authority's general counsel, to the effect that the notes to be issued to the government were exempt under the Constitution of the United States from all taxation (except inheritance, estate and gift taxes) then or hereafter imposed by the United States or the States of New York and New Jersey. Such opinions were furnished.In 1935 the Authority sold its General and Refunding Bonds First Series (which is the second of the two bond issues involved herein) in amount of $16,500,000 from the proceeds of which it repaid the loan from the United States. The balance of the cost of the Lincoln Tunnel has been financed by the sale of various issues of General and Refunding Bonds, from accumulated Authority earnings held in its general reserve fund and from a grant of the United States of $5,391,573.50.

Tolls are charged for the use by vehicles of the bridges and tunnels described above. P.L.N.J. 1930, c. 248, N.J.S.A. ...


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