Comstock v. Commissioner

CLAUDE NICHOLS COMSTOCK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Comstock v. Commissioner Docket No. 18107. United States Board of Tax Appeals 15 B.T.A. 769; 1929 BTA LEXIS 2796; March 11, 1929, Promulgated *2796 TAXES - LOCAL BENEFITS - INTEREST. - Where taxes are assessed against property for the payment of bonds and interest thereon, the proceeds of which were used for drainage district purposes in the State of Missouri, the amount paid by the taxpayer is not deductible even though interest on the bonds is included therein. W. F. Gibbs, Esq., for the respondent. MILLIKEN *769 The respondent determined a deficiency in income taxes against the petitioner of $367.66 for the calendar year 1923. The petitioner controverts $279.35 of the deficiency and alleges that the respondent erred in restoring to his gross income the sum of $3,077.05, being a deduction that he took in his return and payments made by him to certain drainage districts in Missouri for the payment of interest on bonds issued by said districts, which bonds were issued to raise funds to pay for the drainage improvements. Petitioner admits that so much of the tax as represented payment of or on the principal of the bonds is not deductible because levied against local benefits and was in the nature of a capital expendenture, but contends that so much of the tax as was levied for the purpose of*2797 paying interest on the bonds did not benefit his property, was not levied against benefits and is deductible as an interest payment under section 214(a)(2), Revenue Act of 1921. The remainder of the deficiency is admitted. From the pleadings, we make the following findings of fact. FINDINGS OF FACT. The petitioner, Claude Nichols Comstock, is an individual and resides in Albany, Mo. During the year 1923 petitioner paid the following amounts to drainage districts of Missouri: Albany Drainage District, $2,362.04; Gentry County Drainage District, $174.62; Middle Fork Drainage District, $48.96; Andrew-Nodaway Drainage District, $491.43; making a total of $3,077.05 paid to the drainage districts solely for the purpose of paying interest on bonds issued by said drainage districts, and which represented taxes levied by said districts for the sole purpose of paying the interest on the bonds of such districts and levied and collected under the provisions of the laws of the State of Missouri relative to the creation, powers and duties of drainage districts. The law of the State of Missouri relative to the formation and powers of drainage districts will be found in chapter 28, article*2798 1, sections 4378 to 4438, Revised Statutes of Missouri, 1919. *770 Pertinent sections are as follows: Sec. 4394. Board of supervisors to levy tax - secretary of board to prepare list of taxes levied. - After the list of lands, and other property, with the assessed benefits and the decree and judgment of court, have been filed in the office of the county recorder as provided in section 4392 of this article, then the board of supervisors shall, without any unnecessary delay, levy a tax of such portion of said benefits on all lands, railroad and other property in the district to which benefits have been assessed, as may be found necessary by the board of supervisors to pay the costs of the completion of the proposed works and improvements as shown in said "plan for reclamation" and in carrying out the objects of said district, and plus ten per cent of said total amount for emergencies. The said tax shall be apportioned to and levied on each tract of land or other property in said district in proportion to the benefits assessed and not in excess thereof, and in case bonds are issued as provided herein and hereafter, then the amount of the interest (as estimated by*2799 said board of supervisors) which will accrue on such bonds shall be included and added to the said tax, but the interest to accrue on account of the issuing of said bonds shall not be construed as a part of the costs of construction in determining whether or not the expenses and costs of making said improvements, are or are not equal to or in excess of the benefits assessed. * * * Sec. 4418. Board of supervisors may issue bonds. - The board of supervisors may, if in their judgment it seems best, issue bonds not to exceed ninety per cent of the total amount of the taxes levied under the provisions of section 4394 of this article, in denominations of not less than one hundred dollars, bearing interest from date at a rate not to exceed six per cent per annum, payable semiannually, to mature at annual intervals within twenty years, commencing after a period of years not later than five years, to be determined by the board of supervisors, both principal and interest payable at some convenient banking house or trust company's office to be named in said bonds, which said bonds shall be signed by the president of the board of supervisors, attested with the seal of said district and by*2800 the signature of the secretary of the said board. All of said bonds shall be executed and delivered to the treasurer of said district, who shall sell the same in such quantities and at such dates as the board of supervisors may deem necessary to meet the payments for the works and improvements in the district. Said bonds shall not be sold for less than ninety-five cents on the dollar, with accrued interest, shall show on their face the purpose for which they are issued, and shall be payable out of money derived from the aforesaid taxes. A sufficient amount of the drainage tax shall be appropriated by the board of supervisors for the purpose of paying the principal and interest of the said bonds and the same shall, when collected, be preserved in a separate fund for that purpose and no other. All bonds and coupons not paid at maturity shall bear interest at the rate of six per centum per annum from maturity until paid, or until sufficient funds have been deposited at the place of payment and the said interest shall be appropriated by the board of supervisors out of the penalties and interest collected on delinquent taxes or any other available funds of the district. Any expense*2801 incurred in paying said bonds and interest thereon and a reasonable compensation to the bank or trust company for paying same, shall be paid out of other funds in the hands of the treasurer and collected for the purpose of meeting the expenses of administration. It shall be the duty of said board of supervisors in making the annual tax levy, as heretofore provided, to take into account the maturing bonds and interest on all bonds, and to make ample provisions in advance for the payment thereof. In case the proceeds*771 of the original tax levy made under the provisions of section 4394 of this article are not sufficient to pay the principal and interest of all bonds issued, then the board of supervisors shall make such additional levy or levies upon the benefits assessed as are necessary for this purpose, and under no circumstances shall any tax levies be made that will in any manner or to any extent impair the security of said bonds or the fund available for the payment of the principal and interest of the same. * * * The funds derived from the sale of said bonds or any of them shall be used for the purpose of paying the cost of the drainage works and improvements*2802 and such costs, expenses, fees and salaries as may be authorized by law and used for no other purpose. (R.S. 1909, 5525, amended laws 1913, p. 232.) Sec. 4427. Tax may be paid to treasurer of board of supervisors, when - Any person or corporation, copartnership or other parties owning lands and other property assessed for the construction of any ditch or other improvement under the provisions of this article, shall have the privilege of paying such tax assessment to the treasurer of the board of supervisors at any time on or before a date to be fixed by the board of supervisors and the amount to be paid shall be the full amount of the tax levied, less any amount added thereto to meet interest. When such tax assessment has been paid, the secretary of the board shall enter upon the drainage tax record opposite each tract for which payment is made the words "paid in full", and such tax assessment shall be deemed satisfied, and the secretary of the board of supervisors shall also make or cause to be made the same entry opposite each tract for which payment is made in the table included in the certificate filed in the office of the recorder of deeds, under the provisions of section*2803 4399 of this article. (Laws 1913, p. 232.) (Italics supplied.) OPINION. MILLIKEN: The sole question for decision is whether payments of taxes for payment of interest on local improvement bonds are deductible or not in computing net income. The Revenue Act of 1921 provides as follows: SEC. 214. (a) That in computing net income there shall be allowed as deductions: * * * (2) All interest paid or accrued within the taxable year on indebtedness * * * (3) Taxes paid or accrued within the taxable year except * * * (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed * * *. If the payments under consideration were payments of interest on indebtedness of the taxpayer, they are deductible under clause (2), but if they were taxes assessed against local benefits they are not deductible. The pleadings are not definite and specific as to the organization and actions taken by the several drainage districts, but as they are not questioned we will assume that they were regularly and duly organized under the laws of Missouri and that, in assessing the benefits, levying of taxes, and issuing bonds and interest coupons, the *772 *2804 officials of the several districts complied with the law in such cases made and provided. Special assessments or taxes for local benefits are levied because of the special benefit derived by the property which is assessed, and it is because of this benefit that such taxes are upheld. Sections 4378, 4379, 4380, Missouri Revised Statutes, provide for the formation of drainage districts to protect and reclaim land and other property from the effects of water for sanitary or agricultural purposes, or when it may be conducive to the public health, convenience or benefit. Sections 4381, 4382, 4383, and 4384 provide for the election and qualification of the board of supervisors. Section 4385 provides for the appointment of a chief engineer to make surveys and report a plan for reclamation. Section 4387 empowers the supervisors to levy a uniform tax of not exceeding 50 cents per acre for the payment of organization and preliminary expenses, and section 4388 provides for the appointment of commissioners by the judge of the circuit court "to appraise the lands within and without said district to be acquired for rights of way, holding basins and other drainage works of the district, and*2805 to assess benefits and damages accruing to all lands in the district and other property by reason of the execution of the plan for reclamation." Section 4390 relates to the duties of the Commissioners and requires them to assess the amount of benefits and damages, if any, accruing to each piece of property affected by the plan of reclamation. Section 4393 empowers the supervisors to build, construct, or contract for the works of improvement, and section 4394 authorizes the supervisors "to levy a tax of such portion of said benefits of all lands, railroad and other property in the district to which benefits have been assessed, as may be found necessary by the board of supervisors to pay the costs of the completion of the proposed works and improvements." It is further provided that the tax shall be apportioned to and levied on each tract of land in proportion to the benefits received and assessed and that if bonds are issued, then the amount of the interest on such bonds shall be included in the tax. A number of other sections follow not pertinent to this inquiry, except sections 4418 and 4427, which are copied in our findings of fact. By section 4418 the board of supervisors*2806 is authorized to issue bonds not to exceed 90 per cent of the total amount of the taxes levied and to bear interest not to exceed the rate of 6 per cent per annum. It is further provided that a sufficient amount of the drainage tax shall be appropriated by the board for the purpose of paying the principal and interest of said bonds and that in making the annual tax levy it should be the duty of the supervisors to take into account the maturing bonds and interest on all bonds and to make ample provisions in advance for the payment thereof. Funds derived *773 from the sale of the bonds are to be used for paying the cost of the drainage works and necessary expenses authorized by law. From this examination of the Missouri statutes, it is clear that drainage districts are organized for local purposes and that taxes levied to carry out those purposes are assessed against and levied upon property therein in proportion to the benefit received and not in excess thereof. Provisions directing the commissioners to appraise the lands and assess damages, if any, expressly require them to assess the "benefits" to each tract, and the supervisors in assessing and levying the drainage tax*2807 are expressly restricted to the benefits derived in fixing the amount of the tax. Whatever part of the tax was used in payment of the interest on the bonds was not a separate payment of interest as such, or a separate tax for that purpose. Nor was it a payment of interest on any personal indebtedness of petitioner. He was merely paying the drainage tax assessed against his property. The indebtedness upon which interest was paid was that of the drainage districts and was paid by them and not him. Under section 4418 the supervisors were authorized to include interest on bonds in the drainage tax. The Supreme Court of Missouri in ; , held the Missouri laws relating to drainage districts constitutional and held that an assessment for the construction of improvements in a drainage district does not create an indebtedness in the form of taxes within the constitutional limitation of taxation, since sums assessed against property as benefits are not public taxes. We had practically the same question before us in *2808 , and there held that taxes for drainage district purposes were not deductible, nor was the amount paid to pay interest on bonds issued for such purposes. It was there said: The petitioners contend, first, that the taxes in question are constitutional taxes for a public purpose and as such are deductible under section 214(a)(3) of the Revenue Act of 1921; and, second, that if they are not such taxes, then the amount thereof used for paying interest on the bonds is deductilbe under section 214(a)(2) of the 1921 Act as interest paid. We do not deem it necessary to go into the constitutional and statutory provisions of the law of Texas with reference to the taxes in question. The Supreme Court of Texas has held the payments to be taxes for local improvements or, in other words, assessments. See ; . In *2809 , the Board construed section 234(a)(3)(c) of the Revenue Act of 1918 to mean special or local assessments as a class and as such not deductible. Our reasoning therein applies with equal force to the provision of section 214(a)(3)(c) of the 1921 Act. It is clear, therefore, that petitioners' first contention is unsound and can not be sustained. *774 However, petitioners contend that that part of the assessment paid in 1923 which was used for the purpose of paying interest on the bonds issued by Houston Levee District No. 1 is deductible as interest paid under section 214(a)(2) of the 1921 Act. With this contention we can not agree. The bonds were the obligation of the Levee District and not of the individuals. The assessment of the taxes in question can not be said to constitute a payment of interest on a personal obligation. The Commissioner's action is, therefore, sustained. We think this decisive of the case under consideration and the action of the respondent in disallowing the deductions is approved. This ruling and the case of *2810 , are not in conflict with the case of , where we held that interest on an apportionment warrant for street improvements was deductible although the amount of the warrant was not deductible, but there was a controlling difference. In the instant case and the Smith case, supra, interest-bearing bonds of a drainage district were issued and a tax levied and assessed to pay principal and interest, while in the Evens & Howard case, supra, a street improvement apportionment warrant was issued against taxpayer for its proportionate part of the cost, and because of failure to pay when due interest was added as a penalty. It was no part of the tax, while here the interest is. Compare, also, . Petitioner further suggests that the drainage supervisors were not restricted to benefits in levying tax for interest, but there is no showing that they exceeded the benefits derived. Judgment will be entered for respondent.