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Commissioner of Internal Revenue v. Pontarelli.

June 17, 1938

COMMISSIONER OF INTERNAL REVENUE
v.
PONTARELLI.



On Petition for Review of Decision of the United States Board of Tax Appeals.

Author: Major

Before SPARKS and MAJOR, Circuit Judges, and LINDLEY, District Judge.

MAJOR, Circuit Judge.

This is a petition for review of a decision of the United States Board of Tax Appeals finding interest on special assessment bonds, owned by respondent exempt from income taxes.

The facts as stipulated are briefly as follows: The City of Chicago, Illinois, is a municipal corporation, and as such, a political subdivision of the State of Illinois. It was and is vested by the law of the State, with power and authority to make local improvements and to defray the cost thereof by special assessment upon contiguous property or by general taxes or otherwise as by ordinance it should prescribe. The City is authorized, for the purpose of anticipating the collection of the second and succeeding installments of any special assessment imposed, to issue its bonds, payable out of the proceeds of such installments, bearing interest at a rate of not more than six per centum and not less than four per centum, payable annually.

Prior to March 1, 1932, the City of Chicago had, pursuant to its statutory power and authority, made certain local improvements in a sewer system. To finance this construction, the City had levied special assessments and had issued bonds in anticipation of its collection of the deferred installments on such assessments.

Respondent was the owner of certain of these special assessment bonds and during the fiscal year 1933 received from the City, interest paid pursuant to the terms of the bonds, in the amount of $6,338.74.

It is this interest, received by respondent from the City of Chicago, which petitioner seeks to tax as income, and which the Board of Tax Appeals has ruled is exempt as interest upon the obligations of a political subdivision of the State of Illinois. The form of the bonds owned by respondent is found in the footnote.*fn1

The involved question is whether such bonds are "obligations of a state * * * or any political subdivision thereof." If so, the interest from such bonds is tax free. Otherwise, it is subject to tax. A decision of the controverted question involves a construction of Section 22(b)(4) of the Revenue Act of 1932, which provides:

"(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 * * * " (Title 26, U.S. Code § 22(b)(4), 26 U.S.C.A. § 22(b)(4).)

In the administration of this section, the Treasury Department promulgated Article 84 of Regulation 77.*fn2

This section of the Revenue Act has been repeated in identical terms in every Revenue Act since that of 1918 and its authorized interpretation by the Treasury Department has been in the same language with reference to the Revenue ...


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