Klein v. Commissioner , 26 B.T.A. 745 ( 1932 )

LEO M. KLEIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

SAMUEL JACKSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Klein v. Commissioner

Docket Nos. 54584, 54585.

United States Board of Tax Appeals

26 B.T.A. 745; 1932 BTA LEXIS 1259;

July 28, 1932, Promulgated

---

INCOME - INTEREST ON CONDEMNATION AWARD NOT EXEMPT. Interest received by the petitioners from New York City on a condemnation award is not exempt from tax under section 22(b)(4) of the Revenue Act of 1928, as such award is not the character of obligation meant in said section. (Kansas City Southern Railway Co.,16 B.T.A. 665; affd., 52 Fed.(2d) 372, followed.)

Lawrence Mattingly, Esq., for the petitioners.

John D. Kiley, Esq., for the respondent.

---

BLACK

These two cases were consolidated for hearing. The respondent determined a deficiency against each petitioner for the year 1928 in the sum of $3,952.02. The deficiencies are based upon adjustments made by the Commissioner in the income of each petitioner for the year 1928, the correctness of which adjustments petitioners now concede.

On appeal, however, each petitioner alleges that he included in his gross income for 1928 his 50 per cent distributive share of $50,274.61 interest received by the partnership of Klein and Jackson and that this inclusion was error, because said interest was received on a condemnation award made to the partnership of Klein and Jackson by the city of New York and that said interest was exempt from taxation because of section 22(b)(4) of the Revenue Act of 1928.

The parties have agreed upon and filed a written stipulation of facts, which we adopt as our findings of fact.

FINDINGS OF FACT.

For several years prior to and during the entire calendar year 1928 petitioners were equal partners in the partnership firm of Leo M. Klein and Samuel Jackson, doing business under the firm name of Klein and Jackson.

During the year 1924 the city of New York instituted appropriate condemnation proceedings and on November 26, 1924, took possession of a certain piece of real property known as Riverside Drive property situated in New York City that had theretofore been owned by the partnership firm of Klein and Jackson.

During the year 1925 the city of New York instituted appropriate condemnation proceedings, and on March 6, 1925, took title to a certain parcel of real property known as Highbridge Park property that had theretofore been owned by the partnership firm of Klein and Jackson.

On June 29, 1928, final decree was entered awarding the partnership firm of Klein and Jackson the sum of $68,433.43 as compensation for the Riverside Drive property together with interest thereon from the date of seizure to the date of award in the amount of $17,538.54. The aforesaid award and interest were paid during the year 1928, together with further interest in the amount of $754.83, being interest accrued from the date of award to the date of payment.

On May 9, 1928, final decree was entered awarding the partnership firm of Klein and Jackson the sum of $147,128.80 as compensation for the Highbridge Park property theretofore taken by the city of New York, together with interest on the award from date of seizure to the date of final decree in the amount of $30,458.48. The aforesaid award and interest thereon were paid during the year 1928, together with further interest in the amount of $1,522.76, being interest accrued from the date of award to the date of actual payment.

On the partnership return of Klein and Jackson for the year 1928 there was shown a profit in amount of $178,222.72 from the disposition of the property involved, which amount included the interest referred to in paragraphs 3 and 4 hereof.

In their individual returns for the year 1928 each of the petitioners reported his proportion [50 per cent] of the result of operations of the partnership of Klein and Jackson, so that there was reflected in said individual returns as income or profit, the interest here under consideration in the amount of $50,274,61, each petitioner's share of said interest being $25,137.31. Other adjustments were made by the Revenue Agent and the Bureau to the income reported by the partnership of Klein and Jackson and these adjustments are not in dispute, but they result in the deficiency shown herein, which deficiency is not due to the item of interest here under consideration, since that interest was included as income on the returns filed by the petitioners. They now contend that the inclusion of this item of interest as income by them was erroneous.

The sole question at issue in the proceedings is whether or not the petitioners' distributive shares of the interest received from the city of New York by the partnership firm of Klein and Jackson are taxable income to the petitioners.

OPINION.

BLACK: It is the contention of petitioners that the Revenue Act of 1928 specifically exempts from income tax interest on obligations of a state or any political subdivision thereof, and that the word "obligations" includes in its meaning the obligation of a political subdivision of a state to make just compensation for property taken under the power of eminent domain. The applicable part of the Revenue Act of 1928 is printed in the margin. ¹

The question involved in the present proceeding is ruled by our decision in Kansas City Southern Railway Co.,16 B.T.A. 665; affd., 52 Fed.(2d) 372. In that case we held that interest paid a railroad company by the United States during the period of Federal control is not interest upon "obligations of the United States" within the meaning of section 213 of the Revenue Act of 1918, and was not exempt from taxation and should be included in gross income. The taking over of the railroads under the act of Congress enacted in 1917 was an exercise of the power of eminent domain and the payment of compensation to the railroads was in pursuance of the constitutional requirement that just compensation shall be paid for private property taken for public use. We see no difference in principle in the question which we had before us for decision in Kansas City Southern Railway Co., supra, and the one which we now have before us to decide.

The case of H. Oliver Thompson,17 B.T.A. 987, involved the inclusion of ground rents from property leased to the city of Baltimore in gross income of the lessor. It was contended that rent was in the nature of interest and was an obligation of the city, but we held that even if rent could be considered as interest, it was not interest upon such an obligation as was meant in section 213(b)(4)(A) of the Revenue Act of 1924, which is the same as section 22(b)(4) of the 1928 Act.

The Board, in American Viscose Corporation,19 B.T.A. 937; affd., 56 Fed.(2d) 1033, again passed on the meaning of the word "obligations," holding that it was restricted to obligations used for the purpose of borrowing money in the nature of bonds or similar securities. In that case we held that interest paid on a refund of taxes by the United States was not tax exempt.

The United States District Court for the Southern District of New York on June 13, 1932, in the case of United States Trust Co. v. Anderson, 60 Fed.(2d) 291, decided the precise question which we now have before us, and decided it against the contention here made by petitioners. The opinion of the court cites with approval our opinions and the opinions of the Circuit Courts of Appeals affirming us in the Kansas City Southern Railway Co. and American Viscose Corporation cases, supra.

Petitioners cite no case in support of their contention, but urge that the repeated reenactment of the statute without substantial change in its language amounts to an implied recognition and approval of prior executive construction of the statute. It is then suggested that Internal Revenue Office Decision No. 591, published in Cumulative Bulletin No. 3, p. 113, ruled that interest received on condemnation awards was exampt from taxation under section 213(b)(4) of the Revenue Act of 1918, and that subsequent revenue acts adopted the same exemption features of the 1918 Act and thus approved its administrative construction. It should be pointed out, however, that the internal revenue office decision referred to above was expressly revoked by I.T. 2608, C.B. X-2, p. 342, following our decision in Kansas City Southern Railway Co., supra, which latter ruling is as follows: "Office Decision 591, C.B. 3, p. 113, holding that interest on an award for property condemned for public purposes by a municipality is exempt from income tax, is revoked, in view of General Counsel's Memorandum 10043 (page 124)."

From the authorities above cited, it follows that petitioners are properly taxable on the interest received by them on the condemnation awards and the determination of the deficiencies was correct.

Decision will be entered for the respondent.

---

Footnotes

• 1. [SEC. 22.] (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 * * *. ↩