Title to real property in the City of New York was taken by the
City, together with the possession and the right to all
after-accruing rents, by a proceeding in condemnation under §
976 of the Greater New York Charter. Several months later, the
final decree awarded the former owners, as just compensation, the
value of the property on the day of taking, with interest thereon
from that date till the date of payment.
Held: that the part of the award designated as
"interest," although it was part of the "just compensation" that
must be paid the owner to justify the taking, was not a part of the
sale price of a capital asset under § 117(a) of the Revenue
Act of 1936, and was taxable as income under § 22 of that Act.
P.
317 U. S.
403.
127 F.2d 359 affirmed.
Page 317 U. S. 400
Certiorari,
post, p. 612, to review a judgment which
reversed a decision of the Board of Tax Appeals, 44 B.T.A. 279,
overruling a deficiency income tax assessment.
MR. JUSTICE REED delivered the opinion of the Court.
This writ of certiorari was granted limited to a single narrow
point in the law of income taxes. 317 U.S. 612. The sum in question
was received as part of the compensation in a condemnation
proceeding instituted by the City of New York. Payment was made
several years after the actual taking. The issue concerns the
nature of that portion of the payment which is called "interest" by
the Greater New York Charter, and which the owner must receive, in
addition to the value of the property fixed as of the time of the
taking, to produce, when actually paid, the full equivalent of that
value. Was this portion a capital gain or ordinary income?
The writ was granted because of conflict upon the point between
this case below,
Commissioner v. Kieselbach, 127 F.2d 359,
and
Seaside Improvement Co. v. Commissioner, 105 F.2d
990.
The taxpayers owned a piece of realty in the City of New York.
In December, 1932, that city's Board of Estimate passed a
resolution which directed that, upon January 3, 1933, the title in
fee to a large part of the parcel would vest in the city. The
condemnation proceeding, of which the resolution was a part, was
pursuant to Sec. 976
Page 317 U. S. 401
of the Greater New York Charter, as amended by Laws 1932, c.
391, § 1, which provides in part as follows:
"Upon the date of the entry of the order granting the
application to condemn, or of the filing of the damage map in the
proceeding, as the case may be, or upon such subsequent date as may
be specified by resolution of said board, the City of New York
shall become and be seized in fee of or of the easement, in, over,
upon, or under the said real property described in the said order
or damage map, as the Board of Estimate and Apportionment may
determine, the same to be held, appropriated, converted, and used
to and for such purpose accordingly. Interest at the legal rate
upon the sum or sums to which the owners are justly entitled upon
the date of the vesting of title in the City of New York, as
aforesaid, from said date to the date of the final decree, shall be
awarded by the court as part of the compensation to which such
owners are entitled."
The city took possession on the date named in the resolution,
and received all rents thereafter accruing. The Supreme Court of
New York entered its final decree in the proceedings on March 31,
1937. It was for $73,246.57, and was stated to be the just
compensation which the owners were entitled to receive. Payment was
made on May 12, 1937. It has been stipulated that:
"The amount of said payment was computed by adding to the
principal amount of $58,000.00, interest thereon as provided by
Section 976 of the Greater New York Charter, in the sum of
$15,246.57, computed at the rate of 6% per annum from January 3,
1933, to May 12, 1937, or a total of $73,246.57. [
Footnote 1] "
Page 317 U. S. 402
We accept as a fact that the $58,000, principal amount just
referred to was, as petitioners allege, an award to them. We assume
it was the value on January 3, 1933, of this property then taken by
the city.
Section 22 of the Revenue Act of 1936, c. 690, 49 Stat. 1648,
1657, contains the general definition of gross income. It reads as
follows:
"(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. . .
."
The taxpayers' basis on the condemned property was around
$42,000. In their original return, the difference between the basis
and the total sum received was treated as capital gain, and only a
percentage was returned as income pursuant to Sec. 117. [
Footnote 2] The Commissioner assessed a
deficiency on the portion of the award computed as interest on the
ground that such portion was ordinary income.
Page 317 U. S. 403
The Board of Tax Appeals, 44 B.T.A. 279, reversed the
Commissioner, and the Circuit Court of Appeals, 127 F.2d 359, in
turn, held with the Commissioner.
We agree with the Court of Appeals. The sum paid these taxpayers
above the award of $58,000 was paid because of the failure to put
the award in the taxpayers' hands on the day, January 3, 1933, when
the property was taken. This additional payment was necessary to
give the owner the full equivalent of the value of the property at
the time it was taken. Whether one calls it interest on the value
or payments to meet the constitutional requirement of just
compensation is immaterial. It is income under Sec. 22, paid to the
taxpayers in lieu of what they might have earned on the sum found
to be the value of the property on the day the property was taken.
It is not a capital gain upon an asset sold under Sec. 117. The
sale price was the $58,000. [
Footnote 3]
The property was turned over in January, 1933, by the
resolution. This was the sale. Title then passed. The subsequent
earnings of the property went to the city. The transaction was as
though a purchase money lien at legal interest was retained upon
the property. Such interest, when paid would, of course, be
ordinary income.
From the premises that the value at time of the taking plus
compensation for delay in payment equals just compensation,
United States v. Klamath Indians, 304 U.
S. 119,
304 U. S. 123,
[
Footnote 4] and that a good
measure of the necessary additional amount is interest "at a proper
rate,"
Seaboard
Air
Page 317 U. S. 404
Line Ry. Co. v. United States, 261 U.
S. 299,
261 U. S. 306,
petitioner contends that, as just compensation requires the payment
of these sums for delay in settlement, they are a part of the
damages awarded for the property. But these payments are
indemnification for delay, not a part of the sale price. While,
without their payment, just compensation would not be received by
the vendor, it does not follow that the additional payments are a
part of the sale price under Sec. 117(a). The just compensation
constitutionally required is not the same thing as the sale price
of a capital asset. [
Footnote
5]
In
Seaside Improvement Co. v. Commissioner, 105 F.2d
990, 994, an opposite conclusion apparently was reached by treating
the additional payments as part of the purchase price as well as
part of "just compensation." [
Footnote 6]
Petitioners urge that the additional sum paid should be
construed as a part of the sale price, in analogy to decisions that
such sums, when paid in condemnation proceedings by a state, are
not interest entitled to exemption under Sec. 22(b)(4), Internal
Revenue Code, as "interest upon . . . the obligations of a State."
[
Footnote 7] The cases cited
construe the quoted phrase as designed to protect
Page 317 U. S. 405
the states' borrowing power. In any event, the question here is
not whether these sums are interest. They may not be interest, and
yet be other than part of the sale price. [
Footnote 8] If not interest, they may be compensation
for the delay in payment.
Other contentions are made by the petitioners. It is said that,
in other situations, interest on delayed payments has been treated
as part of the principal received, and not as normal income.
[
Footnote 9] By analogy, it is
urged that the same principle be applied here. The first three
cases in the preceding note involved payments of awards in
liquidation of claims against Germany allowed by the Mixed Claims
Commission. See Settlement of War Claims Act of 1928, 45 Stat. 254.
As the aggregate payments did not equal the taxpayers' basis, the
decisions refused to consider as income the portions designated as
interest on the ground that, in liquidation, the investment first
must be restored before income is realized.
Koninklijke
Hollandische Lloyd v. Commissioner and
Consorzio
Veneziano, etc. v. Commissioner applied the rule that payment
for deferred compensation was not interest under Sec. 119(a)
[
Footnote 10]
Page 317 U. S. 406
of the Revenue Act of 1932 or 1928. These decisions obviously
are not in point on the question whether the additional payments in
the present case are part of the sale price or other income under
Sec. 22. Nor do we find persuasive the cases refusing to allow an
installment purchaser an interest deduction because of his deferred
payments where the purpose was an arrangement for the payment of
the purchase price. [
Footnote
11] In the present case, the purchase price was settled as of
January 3, 1933, when the property was taken over.
Affirmed.
[
Footnote 1]
No question is raised involving the accuracy of this
computation. While Sec. 976 requires interest only to the date of
the decree, Sec. 981, Greater New York Charter, as amended by Laws
of 1932, c. 391, § 2, requires interest on the decree.
Matter of City of New York (Chrystie St.), 264 N.Y. 319,
190 N.E. 654.
[
Footnote 2]
Section 117 reads as follows:
"(a)
General rule. -- In the case of a taxpayer other
than a corporation, only the following percentages of the gain or
loss recognized upon the sale or exchange of a capital asset shall
be taken into account in computing net income:"
"
* * * *"
"40 percentum if the capital asset has been held for more than 5
years but not for more than 10 years;"
"30 percentum if the capital asset has been held for more than
10 years."
"(b)
Definition of capital assets. -- For the purposes
of this title, 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business). . . ."
49 Stat. 1691.
[
Footnote 3]
The involuntary character of the transaction is not significant.
Helvering v. Hammel, 311 U. S. 504,
311 U. S.
510.
No review is sought of the holding that transfer of property
through condemnation proceedings is a sale within the meaning of
Sec. 117 of the Revenue Act of 1936.
Commissioner v.
Kieselbach, 127 F.2d 359, 360.
[
Footnote 4]
See also Shoshone Tribe v. United States, 299 U.
S. 476,
299 U. S. 496;
Phelps v. United States, 274 U. S. 341;
Brooks-Scanlon Corp. v. United States, 265 U.
S. 106;
Liggett & Myers Tobacco Co. v. United
States, 274 U. S. 215.
[
Footnote 5]
The same principle is applicable to the New York decisions
holding that interest is a part of the condemnation award. Just
compensation requires satisfaction for the delay by payment of the
additional sums.
Matter of City of New York (West 151st
St.), 222 N.Y. 370, 372, 118 N.E. 807;
Minzesheimer v.
Prendergast, 144 App.Div. 576, 579, 129 N.Y.S. 779,
aff'd, 204 N.Y. 272, 97 N.E. 717;
Matter of City of
New York, Bronx River Parkway, 284 N.Y. 48, 54, 29 N.E.2d 465.
The obligation to pay its value arises when the property is taken.
Title then passes.
Kablen v. New York, 223 N.Y. 383, 389,
119 N.E. 883.
Woodward-Brown Realty Co. v. City of New
York, 235 N.Y. 278, 139 N.E. 267, is not to the contrary. It
deals with the unity of a right of action on an award with
interest, holding only one proceeding is authorized against the
condemnor.
[
Footnote 6]
"Such additional sums are not considered normal interest, but
part of the compensation awarded for the property taken." 105 F.2d
at 994.
[
Footnote 7]
Holley v. United States, 124 F.2d 909;
Posselius v.
United States, 90 Ct.Cls. 519, 31 F. Supp. 161;
Williams
Land Co. v. United States, 90 Ct.Cls. 499, 31 F. Supp. 154;
Baltimore & Ohio R. Co. v. Commissioner, 78 F.2d 460;
United States Trust Co. of New York v. Anderson, 65 F.2d
575.
[
Footnote 8]
"Nor is it quite accurate to say that interest as such is added
to value at the time of the taking in order to arrive at just
compensation subsequently ascertained and paid."
United States v. Klamath Indians, 304 U.
S. 119,
304 U. S.
123.
[
Footnote 9]
Helvering v. Drier, 79 F.2d 501;
Commissioner v.
Speyer, 77 F.2d 824;
Drier v. Helvering, 63 App.D.C.
283, 72 F.2d 76;
Consorzio Veneziano di Armamento e Navigazione
v. Commissioner, 21 B.T.A. 984;
N.V. Koninklijke
Hollandische Lloyd (Royal Holland Lloyd) v. Commissioner, 34
B.T.A. 830.
[
Footnote 10]
This section specifies interest on interest-bearing obligations
of residents as one of the items of income from sources within the
United States.
[
Footnote 11]
Hundahl v. Commissioner, 118 F.2d 349;
Henrietta
Mills v. Commissioner, 52 F.2d 931;
Pratt-Mallory Co. v.
United States, 12 F. Supp. 1020;
Daniel Brothers Co. v.
Commissioner, 28 F.2d 761.