## Facts

- William H. Isham owned interests in two New York City real estate plots later taken by the City through condemnation under the Greater New York Charter.
- Title vested in the City for the first plot on April 1, 1925, and for the second plot on June 2, 1926.
- Condemnation awards were later paid to Isham with 6% interest accruing from the respective vesting dates until payment.
- Isham received the first plot’s award with interest in 1927 and the second plot’s award with interest in 1928.
- The executor treated the interest portions as excluded from gross income under § 213(b)(4) of the Revenue Act of 1926, which excluded “interest upon … the obligations of a State … or any political subdivision thereof.”
- The Commissioner treated the interest as taxable, assessed income tax, and the executor paid and sued for a refund.

## Issues

1. Whether 6% interest paid by New York City as part of condemnation awards is excludable from gross income as “interest upon … the obligations” of a political subdivision under § 213(b)(4) of the Revenue Act of 1926.
2. Whether the statutory term “obligations” includes interest liabilities arising by operation of condemnation law, or is limited to borrowing instruments such as municipal securities.

## Decision

- The Second Circuit affirmed judgment for the Collector of Internal Revenue.
- The court held the condemnation-award interest was not “interest upon … obligations” within § 213(b)(4).
- The interest was taxable income, so the estate was not entitled to a refund.

## Legal Principles

- Statutory exemptions for interest on state or municipal “obligations” are construed to cover interest on instruments issued in the exercise of the borrowing power (e.g., bonds and similar securities), not all governmental debts.
- Interest added to a condemnation award is treated as part of the compensation mechanism for the taking (to account for delay between vesting and payment), not as interest paid on a borrowing instrument.
- A governmental entity’s statutory duty to pay interest in condemnation proceedings does not, without more, convert that liability into an exempt “obligation” for federal income tax purposes.

## Conclusion

The court ruled that interest paid by a city on condemnation awards is taxable because it is not interest on an exempt state or municipal borrowing obligation under § 213(b)(4) of the Revenue Act of 1926.


United States Tr. Co. of N.Y. v. Anderson, 65 F.2d 575 (2d Cir. 1933)