Stoner v. Commissioner

T. I. STONER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Stoner v. Commissioner Docket No. 81922. United States Board of Tax Appeals 37 B.T.A. 249; 1938 BTA LEXIS 1064; February 1, 1938, Promulgated *1064 Special tax bills and sewer tax warrants, issued by a city to a contractor in payment for improvements and payable only from collections under assessments against benefited properties, held, not obligations of a political subdivision of a state the interest on which is exempt from tax by section 22(b)(4)(A), Revenue Act of 1932. Standard Investment Co.,36 B.T.A. 156. Arnold F. Schaetzle, Esq., for the petitioner. Harold D. Thomas, Esq., for the respondent. STERNHAGEN *249 The Commissioner determined a deficiency of $783.30 in petitioner's income tax for 1932 in part by including in taxable income the interest on special assessment bills and warrants of Tulsa, Oklahoma. The facts are stipulated. *250 FINDINGS OF FACT. Petitioner, a resident of Des Moines, Iowa, was, in 1932, the owner by purchase of special tax bills and sewer tax warrants issued by the city of Tulsa, Oklahoma, a municipal corporation. Authority for the issuance of such bills and warrants is conferred by article IX of the charter of Tulsa, which empowers a board of commissioners to order municipal improvements on streets and to: * * * provide*1065 what proportionate part, if any, of the costs of such improvement shall be paid by the city, and the proportion of the costs that shall be borne by the owners of the property abutting * * *. The board is further authorized: * * * to fix a lien against such property to secure the payment of the portion of such costs assessed against the owners * * *. * * * * * * abutting property shall be held liable for the payment of such costs so assessed against it, and the city shall not be responsible or liable for any part * * *. The lien is expressly made "in favor of the contractor" and: * * * may be evidenced by assignable certificates or tax bills against abutting property * * * to be issued to the contractor by the City of Tulsa * * *. Petitioner's tax bills were issued pursuant to a municipal ordinance, approved August 6, 1929, for the widening and paving of specified streets. The cost was apportioned and assessed against benefited abutting property and: * * * declared to be a debt against the owners of the land and a lien upon such lots and parcels of land * * *, and the same shall be enforced and collected as other taxes in the City of Tulsa, Oklahoma, are enforced*1066 and collected, or may be recovered and the lien enforced by appropriate judicial proceedings. The mayor and city auditor were directed to issue tax bills payable, with interest, in ten installments at the office of the city's commissioner of finance and revenue. In case of default, the holder of the bill at his option could treat all future installments as matured, so notify the commissioner, who would thereafter be without authority to collect, and then institute suit to foreclose the lien on the property in his own name or in the name of the city of Tulsa. In the alternative the holder of a bill in default could require of the treasurer of Tulsa County that the bill "be enforced and collected as are other delinquent taxes." Petitioner's bills were issued in payment to the contractors who performed the work. The provisions for payment and enforcement appeared on the face of the certificate. Petitioner's sewer tax warrants were issued by the city of Tulsa pursuant to a municipal ordinance approved October 29, 1929, in *251 payment to contractors who had constructed a sewer system. The principal and interest due thereon was likewise secured by a lien against specific*1067 property benefited and specially assessed, and was payable in installments at the office of the treasurer of Tulsa County from the proceeds of assessments when collected. The collections made by the city or county on the bills and warrants are not commingled with the general or any other funds of the city or county, and payments on them to the holders are made only out of such collections. In 1932 petitioner received interest of $4,645.66 on special tax bills for street improvement; interest of $28.48 on special tax bills "for improving property belonging to the city of Tulsa, Oklahoma", and interest of $384.57 on sewer tax warrants. In determining petitioner's income tax for 1932, the Commissioner included these amounts in gross income. OPINION. STERNHAGEN: Petitioner contends that the special tax bills and sewer tax warrants are obligations of a political subdivision of a state, and therefore that the interest is exempt from tax by clause (A), section 22(b)(4), Revenue Act of 1932.1 The bills and warrants were, in accordance with municipal ordinance, issued to contractors in payment for improvements. The special tax bills were payable by the city commissioner of finance*1068 and revenue and the sewer tax warrants by the county treasurer, from collections made under special assessments against the specific properties benefited by the improvements, and were secured by a lien on such properties. In all respects here material they are similar to the special tax bills considered in Standard Investment Co.,36 B.T.A. 156, and, as in that case, the interest on them was properly included in petitioner's taxable income. Petitioner argues that these obligations can not be distinguished from the municipal bonds the interest on which was held exempt in Michael Pontarelli,35 B.T.A. 872 (on review, C.C.A., 7th Cir.) and *1069 Carey-Reed Co.,36 B.T.A. 36 (on review, C.C.A., 6th Cir.). Those decisions were based, however, on the legislative sanction which had attached to the consistent administrative rulings treating the interest on such bonds as tax-exempt and repeated reenactments of the provisions of section 22(b)(4). 2 There was no such consistent *252 and well known practice in regard to special tax bills and warrants.3 While it is true that O.D. 447 and O.D. 491 were revoked and interest on the bonds held taxable in G.C.M. 16961, XV-2 C.B. 179 (1936), this reversal was made after the proceeding of Michael Pontarelli, supra, had been instituted, and was hence of no avail to the Commissioner in that proceeding. Judgment will be entered for the respondent. Footnotes 1. SEC. 22. GROSS INCOME. * * * (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; * * * ↩ 2. O.D. 447, 2 C.B. 93 (1920); O.D. 491, 2 C.B. 93 (1920); I.T. 2074, III-2 C.B. 79 (1924)↩. 3. See O.D. 999, 5 C.B. 102 (1921), and I.T. 1606, II-1 C.B. 69 (1923), revoked by G.C.M. 13469↩ (1934).