Court Opinion

ID: 9651118
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:08:05.41358+00
Date Added: 2024-06-11T18:12:30.305461
License: Public Domain

FRANK, Circuit Judge
(dissenting).
As I said in the companion case of Commissioner v. Estate of Shamberg, 144 F.2d 998, I would not go to the stake to vindicate my position. But I think that my reasons for dissenting in that case, if they are cogent, apply here with somewhat greater force; for there can be even less pretense that the Authority here has been vested with any significant part of the “sovereign power of the State.” This Bridge Authority is engaged in a business of a kind which, while often conducted by state governments, has also often been conducted by privately-owned public utility companies ; I think, therefore, that it cannot be said that the Authority’s activities are “strictly governmental” (or are what my colleagues call “primary state functions”) within the doctrine of State of South Carolina v. United States, 199 U.S. 437, 26 S.Ct. 110, 50 L.Ed. 261, 4 Ann.Cas.737, and Flint v. Stone Tracy Co., 220 U.S. 107, 108, 172, 173, 31 S.Ct. 342, 55 L.Ed. 389, Ann.Cas. 1912B, 1312 — which were authoritative when Congress in 1913 first enacted what is now § 22(b) (4) — or within the doctrine of later Supreme Court decisions (if they are relevant here, which I doubt).1
No one would think of contending that interest on the bonds of a privately-owned utility company, operating a much-needed *1022bridge under a franchise from a city, is tax-exempt on the ground (a) that the state or the city has delegated to the company a “traditionally governmental activity” and that thereby the company became a “political subdivision” of the state or (b) that the company, in issuing its bonds, did so “on behalf of” the city or the state; such a contention would not stand up, despite the fact that the company vicariously performs a “state” or city function for “the public welfare.” My colleagues’ position must, then, rest essentially on the city’s financial investment in the Authority. As, patently, a purchase by a city of some of the stock of such a utility company would not render the interest on its bonds immune from federal tax, the rationale of the majority opinion seems to be that here the city’s investment is such that, when the bonds are fully paid, the city will be sole owner of the property. My colleagues thus seem to hold in effect as follows: If a city owns all the stock of a public utility company which operates a toll bridge, and even if the company’s bonds, as to principal and interest, are payable exclusively out of the cbmpany’s earnings (the bondholders having no lien on the company’s property, as distinguished from its earnings, and there being no liability on the part of the city), the interest paid by the company to its bondholders is not a part of their income subject to the federal income tax. On grounds set forth in detail in my Sham-berg dissent, I think that neither the Constitution, nor the Revenue Act, nor the regulation, justifies such a conclusion.
It is true, as my colleagues say, that, under the Act, the interest would have been exempt — if the city “had issued its bonds for the benefit of the enterprise.” But that is precisely what the city did not do. It took pains not to do so because, if it had, the bonds would have been its obligations within the debt limitation imposed by state law. The city’s precautions prevented the Authority from becoming the city’s “alter ego,” as my colleagues call it; the entire plan was avowedly designed to preclude alter-egoism, for the Authority is exactly not the city’s “double,” “counterpart” or “second self.”2 Accordingly, I do not agree that “to distinguish between such an agency and the city” is “purely technical.”3 Such a distinction seems to me of marked importance when a court is asked so to construe an ambiguous statute as to grant a tax exemption.
I have in my dissent in the Shamberg case discussed the letter of February 17, 1937 from the Commissioner to the Authority’s Chairman. I have there shown that, under the decisions of the Supreme Court, such-a letter, because not issued or approved by the Secretary of the Treasury, has no such effect as a Treasury regulation, especially in the light of the express warning, published for many years in the Internal Revenue Bulletins, that such rulings “have none of the force of Treasury Decisions and do not commit the Department to any interpretation of the law”; that this letter was one of a series in which, over a period of several years, the Commissioner took varying and inconsistent positions concerning the taxability of interest on bonds of such Authorities; and that nothing indicates that the attention of Congress was brought to this letter or similar letters. Respondents do not even pretend that their decedent purchased her bonds with knowledge of, or in reliance on, that letter. It affords no basis for an estoppel. For the reasons stated in my dissent in Shamberg, I think my colleagues are in error when they say that “bonds of this character have always been regarded as exempt * * Even the majority of the Tax Court, when deciding in favor of this taxpayer, spoke of the “ambiguity of numerous administratrive expressions.”4

 I have discussed the cases cited at length in my dissent in the Shamberg case.

 Courts frequently use the words “alter ego” when they hold a parent company liable for the debts or torts of its subsidiary.

 It is generally recognized that “technical” is usually but a pejorative used to defend a conclusion reached on other grounds.
A wag has said that a lawyer always loses, never wins, a ease on a “technicality.”

 In my dissenting opinion in the Sham-berg case, I have called attention to the fact that in February 1940 the bankers who sold to the public an issue of $50,000,-000 of Tri-Borough Bridge Authority bonds warned prospective investors that the bankers had been advised by counsel that it was not clear that the interest on the bonds was exempt from federal income tax, and that similar warnings were published in 1939 and 1940 by bankers selling substantial blocks of bonds of other such Authorities.