Docket No. 10559.
E. W. McManus, Esq., and J. O. Boyd, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent.
Petitioner, a private corporation, made a gift proposal to a city, which was accepted by the latter, wherein it agreed to execute a conveyance for the transfer of its toll bridge to the city; to deposit it with an escrow agent; and to vest title to the property in the city on the final payment on first lien revenue bonds. Until its bonded indebtedness was paid petitioner reserved the right to maintain and operate the bridge, and agreed to apply revenues in excess of maintenance and operating expenses to payment of interest and principal of debt. The parties agreed that if before final payment of debt another bridge was constructed within five miles of the old bridge, or the city failed to comply with all conditions attached to the gift, all of the city's rights under the gift proposal would cease and terminate and all right, title, and interest in the property would ‘revert to or revest in‘ the petitioner. An escrow agreement, to which the petitioner, its sole stockholder, the city, and the escrow agent were parties, contained substantially the same provisions, and authorized the escrow agent to hold deed and other instruments until the performance of the conditions specified therein. Held:
(1) Net income derived by the corporation from operation of the bridge and applied to payment of interest and principal on bonds is ‘income‘ within the meaning of that term as used in the Sixteenth Amendment and the Internal Revenue Code.
(2) The income is not exempt from taxation under the provisions of section 116(d), I.R.C.
(3) Petitioner is not an exempt corporation under the provisions of subdivisions (6), (8), or (14) of section 101, I.R.C.
(4) Petitioner is not entitled to amortization deductions for the cost of the bridge properties in the amount of its net income for each year. E. W. McManus, Esq., and J. O. Boyd, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent.
The respondent determined deficiencies in income and excess profits taxes of petitioner and a 25 per cent delinquency penalty on excess profits taxes for failure to file timely excess profits tax returns, as follows:
+------------------------------------------+ ¦ ¦ ¦Excess profits tax ¦ +----+----------+--------------------------¦ ¦Year¦Income tax¦ ¦ ¦ +----+----------+----------+---------------¦ ¦ ¦deficiency¦ ¦25% delinquency¦ +----+----------+----------+---------------¦ ¦ ¦ ¦Deficiency¦penalty ¦ +----+----------+----------+---------------¦ ¦ ¦ ¦ ¦ ¦ +----+----------+----------+---------------¦ ¦1941¦$9,585.49 ¦$15,670.08¦$3,917.52 ¦ +----+----------+----------+---------------¦ ¦1942¦5,786.91 ¦38,990.57 ¦9,747.64 ¦ +----+----------+----------+---------------¦ ¦1943¦5,037.94 ¦54,629.96 ¦13,657.49 ¦ +----+----------+----------+---------------¦ ¦ ¦ ¦ ¦ ¦ +------------------------------------------+
The sole issue is whether the petitioner is taxable on the net income which it realized from the operation of a toll bridge. Apparently the petitioner concedes that if it is taxable it is liable for the delinquency penalties asserted by the respondent, as no allegation of error is made in its petition with reference to the respondent's determination of the penalties for failure to file timely excess profits tax returns.
FINDINGS OF FACT.
Petitioner is a corporation, organized and incorporated April 28, 1941, under the laws of the State of Delaware. Its charter authorized it to acquire and operate bridges anywhere in the United States and also to engage in a wide range of activities, including ‘the business of exporting, importing, manufacturing, producing, buying and selling and otherwise dealing in and with goods, wares and merchandise of every class and description.‘ The authorized issue of capital stock was 1,000 shares of common stock of a par value of $1 per share, with the right reserved in petitioner to increase or decrease its authorized capital stock. During the year 1941 petitioner was admitted to do business as a foreign corporation in the States of Iowa and Illinois.
About 1870 Keokuk & Hamilton Bridge Co., an Iowa corporation, constructed and completed a toll bridge across the Mississippi River connecting the cities of Keokuk, Iowa, and Hamilton, Illinois. The bridge properties were operated continuously by the Keokuk & Hamilton Bridge Co. until on or about June 18, 1941, and thereafter by petitioner herein.
The toll bridge is used by the Toledo, Peoria & Western Railroad Co. and the Wabash Railroad Co. as a means of crossing the Mississippi River between the cities of Hamilton, Illinois, and Keokuk, Iowa. The upper deck or highway part of the bridge connects with Federal highways on each side of the rover and serves parts of Iowa, Nebraska, Kansas, and Missouri and parts of other states west and northwest in crossing the river in going to points east, and in like manner serves a large section of Illinois, Indiana, Ohio, Kentucky, and other points east and south as a means of crossing the river in going to points west. Throughout its existence the bridge has been operated as a toll bridge and petitioner's income is derived from vehicular, railroad, and pedestrian traffic tolls.
The city of Keokuk, Iowa, was organized as a municipal corporation under a special charter issued by the Legislature of Iowa and it constitutes a municipality duly organized under the laws of Iowa, having a population in excess of 15,000. In general, its people are engaged in manufacturing, construction work, and retail trades, with a substantial farming community adjacent. The city of Hamilton, Illinois, is duly organized as a municipal corporation under the laws of Illinois, having a population in excess of 2,000, engaged in manufacturing and retail trades and serving a large and prosperous farm community.
The communities in and around Hamilton, Illinois, and Keokuk, Iowa, have no means of crossing the river except by the bridge above described, which has a length of approximately 3,200 feet, with an approach on the Illinois side of approximately 4,400 feet. The nearest bridge spanning the Mississippi River is at Fort Madison, Iowa, approximately 25 miles north, and the next nearest is at Quincy, Illinois, approximately 40 miles south. This bridge, since its construction, has accommodated substantial transportation, both local and transcontinental.
For a number of years prior to 1938 there had been agitation by the business people and the chamber of commerce of Keokuk for a free bridge into the city of Keokuk, Iowa. In 1938 the Keokuk city council appointed a bridge committee to investigate the situation. This committee made a written report recommending that the city offer $500,000 to the Keokuk & Hamilton Bridge Co. for its bridge and approaches, and in 1939 the city council authorized the mayor to make such offer. The then owner of the bridge refused this offer and made a counteroffer of approximately $1,350,000. At that price the city could not flat a bond issue to buy the bridge. Thereupon, the city proceeded to have bills introduced in Congress authorizing it to build a new bridge. One such bill passed the House of Representatives.
On February 7, 1941, the Keokuk & Hamilton Bridge Co. made a written proposal of a gift of its encumbered bridge properties to the city of Keokuk. The gift proposal recited the existence of $88,000 of first mortgage bonds and $1,001,000 of second mortgage bonds, together with two coupons unpaid on each of these bond issues, and the company, as donor, proposed that the aforesaid bonds would be acquired by it and the lien thereof removed out of the proceeds of an issue of $775,000 of first lien revenue bonds to be placed upon the bridge property.
The gift proposal provided that the management, until the final payment of the first lien revenue bonds, be designated by the donor; that the management be given the right to make certain specified improvements in the bridge out of the proceeds of said bond issue; that out of said proceeds all fees and expenses of engineers, bankers, and attorneys be paid; that a proper instrument of conveyance for the transfer of the property, including an assignment of all franchise and franchise rights, be deposited with a depositary, ‘to the end that the Donee will be vested with full and complete title to said property on the final payment of the First Lien Revenue bonds‘; that the donor maintain its corporate organization until the final payment of the bonds, for the purpose of protecting the holders thereof and of supplying an instrumentality for the maintenance of a management organization; that all income be deposited with the depositary; that the depositary pay from such funds the operating costs; that any excess be carried in a sinking fund from which interest on the bonds should be paid first, and the remainder used to retire the bonds; that the bonds be secured by a first mortgage or deed of trust; and that on the final payment on the bonds and all interest thereon, together with the payment of all expenses and performance of all conditions, the depositary deliver the title papers to the donee and the management turn over the bridge property to the city.
The gift proposal also contained the following provisions:
If while any of the aforesaid First Lien Revenue Bonds are outstanding and unpaid there shall be constructed, or construction shall commence upon any other bridge across the Mississippi River within five miles above or below the existing bridge, which, in the opinion of the Consulting Engineers, will diminish income from or interfere with traffic on the existing bridge, the same shall constitute a defeasance and reverter, and all rights of the City hereunder shall cease and terminate.
A failure on the part of the Donee to comply with any or all of the conditions herein attached to this gift shall operate as a forfeiture of all the rights of the Donee hereunder and said property shall revert to the Donor, and all the right, title and interest in and to said property and to said franchise or franchises shall revert to and revest in the Donor as fully and completely as if this instrument had not been executed, and no right or rights in and to said property or the proceeds of any of the tolls collected in the operation thereof shall exist in favor of the Donee. The depositary shall thereupon surrender and return to the Donor, its successors or assigns all instruments of transfer or funds so deposited with said depositary under and by virtue of the provisions hereof.
On February 7, 1941, the city council passed a resolution ‘That the city of Keokuk does hereby accept said proposed gift, subject to all the terms and conditions therein expressed * * * .‘
On April 28, 1941, the day that the certificate of incorporation was issued to petitioner, the city of Keokuk, with the approval of the Keokuk Bridge Committee and the Bridge Committee of the Keokuk Chamber of Commerce, executed the following instrument:
The undersigned, City of Keokuk, Iowa, will accept a deposit in escrow of a conveyance from your company (petitioner) of the property described in the gift proposal dated February 7, 1941, between the undersigned and Keokuk and Hamilton Bridge Company, an Iowa corporation as a compliance with the provisions of said gift proposal. Your company, however, to be subject to and to assume and agree to perform all the terms and conditions of said gift proposal.
The Keokuk & Hamilton Bridge Co. executed a deed, as of May 1, 1941, conveying all real estate and bridge property to petitioner, which instrument was recorded on July 18, 1941.
As of May 1, 1941, petitioner executed an indenture of mortgage pledging all of the real estate, bridge structures, machinery, and all other property then owned or thereafter to be acquired, including the revenues from the bridge, for the equal and proportionate benefit and security of all present and future holders of bonds issued under and secured by the indenture and the coupons thereto attached, in favor of the Guaranty Trust Co. of New York and Arthur E. Burke, as trustees, securing an issue of $775,000 par value of bonds.
In article three of the indenture of mortgage it is provided that:
All of the revenue derived from the properties in this indenture mentioned and described, including the said bridge and the operation thereof, shall be collected by the company and the company covenants that it will deposit all such revenues from day to day promptly upon receipt thereof with the State Central Savings Bank of Keokuk, Iowa, * * * Such revenues shall be deposited in a special trust account known as the ‘Keokuk and Hamilton Bridge Inc. Revenue Fund.‘ * * *
And article five of the indenture contains the following provision:
The company covenants that so long as any bonds shall remain outstanding hereunder, it will not declare or pay any dividends on any of its capital stock of any class at any time outstanding or make any distribution to the holders of its capital stock of any class as such or apply any of its funds or assets to the retirement of any of its capital stock of any class at any time outstanding.
The bonds contained the following provision: ‘The faith and credit of the Company are pledged for the payment of this bond and all interest hereon according to the tenor and effect hereof * * * .‘
Petitioner had a meeting of its board of directors on May 16, 1941, attended by all of its directors, at which the president of petitioner stated that:
* * * the corporation (referring to petitioner) had been organized for the purpose of acquiring from Keokuk & Hamilton Bridge Company, an Iowa corporation, the existing bridge extending over the Mississippi River from a point in the city of Keokuk, Iowa, to a point in Hancock County, Illinois, together with its approaches and all real estate, rights in land, licenses, permits and franchises appurtenant thereto * * * .
and that it was:
* * * the intention of the stockholders * * * to transfer and convey the said property to the City of Keokuk, Iowa, as and when $775,000.00 of bonds had been retired; provided that in the meantime no other bridge across the Mississippi River within five miles above or below the said existing bridge shall be constructed or the construction thereof commenced.
On June 18, 1941, the petitioner corporation executed a deed providing for the conveyance of its bridge properties to the city of Keokuk, subject to (a) the indenture of mortgage and deed of trust from petitioner to Guaranty Trust Co. of New York and Arthur E. Burke, as trustees, to secure the $775,000 first mortgage sinking fund 4 per cent bonds of petitioner corporation, and (b) agreement on the part of the city of Keokuk that the bridge should be maintained in perpetuity as a free bridge for vehicular and pedestrian traffic.
On June 18, 1941, an escrow agreement was entered into by Keokuk and Hamilton Bridge, Inc., party of the first part, James M. Fulton, sole stockholder of petitioner, party of the second part, the city of Keokuk, a municipal corporation, party of the third part, and the State Central Savings Bank of Keokuk, as escrow agent and party of the fourth part. Petitioner deposited with the escrow agent the deed conveying the bridge properties to the city, along with an executed copy of the gift proposal of February 7, 1941, and a copy of the indenture dated as of May 1, 1941, executed by petitioner in favor of the Guaranty Trust Co. of New York and Arthur E. Burke, as trustees, to secure the $775,000 of bonds. James M. Fulton deposited a certificate of all the issued and outstanding stock of petitioner, endorsed in blank. The city of Keokuk deposited its executed resolution of acceptance dated February 7, 1941, and its consent to the performance of the gift proposal on the part of petitioner, which was executed April 28, 1941.
The escrow agreement provided that the deed to the bridge property and stock of petitioner held by the escrow agent was to be delivered by it to the petitioner when it received advice from the Guaranty Trust Co. of New York that all of the bonds secured by the mortgage indenture had been paid in full or that funds sufficient to redeem them had been deposited with the trustee. If, however, prior to the receipt of such advice, the consulting engineers advised the escrow agent that construction had commenced upon another bridge across the Mississippi River within five miles above or below the existing bridge which would diminish the income from the existing bridge, the escrow agent was authorized and instructed to deliver the deed to the petitioner and the stock certificate to James M. Fulton. During the time the stock was held by the escrow agent, James M. Fulton reserved to himself and his assigns the right to vote the stock. The petitioner agreed that when the city became entitled to the delivery of the deed, it would pay to the city any funds then in its hands whether derived from revenues from the operation of the bridge or from insurance, less any funds necessary to pay any and all taxes, and less all expenses of dissolution.
In accordance with the indenture of mortgage and deed of trust securing the petitioner's outstanding bond issue, all of petitioner's receipts are deposited daily with the depositary bank and placed in either a revolving fund or a revenue fund. The current operating expenses of petitioner are paid out of the revolving fund, and originally the balance left in this fund was limited to $5,000. The receipts of petitioner deposited with the depositary bank in excess of the sums necessary for the operation of the revolving fund, costs of extraordinary replacements and repairs of the bridge properties, cost of insurance on the bridge properties, etc., are periodically paid to the trustees under the indenture of mortgage and deed of trust and used by the trustees for the payment of interest and retirement of petitioner's outstanding bonds. At no time since the organization of petitioner has there been any declaration of dividends of any kind and no dividends have been paid. The petitioner has its bridge properties insured for $900,000 and it, together with the trustees under the indenture of mortgage, are jointly named beneficiaries under the policy. Petitioner's current expenses consist principally of salaries and wages paid to its officers and employees, state and county property taxes, and repairs. The petitioner had an average of about eleven employees, who were under the control of an paid by it.
The excess of receipts or tolls received by petitioner over its expenses and other charges was entered on petitioner's books as ‘Equity accruing to the city of Keokuk‘ in the amounts of $22,262.10 for the period June 18, to December 31, 1941, $69,815.51 for 1942, and $84,473.84 for 1943. The amounts of petitioner's outstanding bonds retired were, none in 1941, $59,000 in 1942, and $61,000 in 1943, leaving an outstanding bonded indebtedness of $655,000 ($775,000 minus $120,000) at the end of the year 1943. The petitioner continued after 1943 to retire part of this indebtedness each year and at the end of the year 1947 it was reduced to $173,000. At the time of the hearing on February 9, 1948, there was in excess of $75,000 of funds on hand with which to retire bonds at the next period. This would leave approximately $100,000 of bonds outstanding.
Petitioner has no activity other than the operation of the bridge property and has no other source of receipts.
All of the cash proceeds arising from the sale of the bonds were used by petitioner in paying the former owner for the bridge property, franchises, etc., $675,000, the cost of the proceedings and expenses in securing the money evidenced by the issue of bonds, $38,750, plus miscellaneous expenses incident thereto of $1,582.06, plus an improvement fund for the improvements and betterments required by the gift proposal of $59,667.94, which improvements and betterments ultimately cost $54,286.47, leaving an unexpended balance of $5,381.47, which was transferred to the revenue fund on September 25, 1945, and applied toward the retirement of the bonds.
The gift proposal was made under the municipal gift statute of Iowa (section 10,188 of the Code of 1939, now section 365.6 of the Code of Iowa for 1946), which authorizes a city to accept a gift in the public interest and to administer the same in pursuance of the terms of the gift. It also provides that no title shall pass unless and until accepted by the city and when so accepted, the conditions attached to the gift become binding upon the city.
James M. Fulton, secretary of petitioner corporation, was the nominal or record holder of petitioner's 1,000 shares of outstanding capital stock, but Royal D. Edsell, New York, New York, who was president and manager of petitioner from the time of its incorporation until his death in 1945, was the actual owner. Upon the death of Royal D. Edsell in 1945 the 1,000 shares of stock of petitioner went to his surviving wife, Marian M. Edsell, New York, New York. Subsequent to the Commissioner's field examination of petitioner's income and excess profits tax liability for the years here involved, the city of Keokuk purchased the 1,000 shares from Marian M. Edsell for $15,000, title being taken in the name of W. A. Logan, trustee, for the use and benefit of the city of Keokuk. A new stock certificate was substituted for the old stock certificate in escrow at the depositary bank.
Petitioner filed timely income tax returns for the years 1941, 1942, and 1943 with the collector of internal revenue for the district of Iowa. In its returns it claimed income tax deductions under the designation, ‘Non-taxable Income Accruing to Municipality under Contract‘ in the amounts of $41,262.10 for 1941, $69,815.51 for 1942, and $86,473.84 for 1943. The net income reported in each return was none. On December 21, 1944, petitioner filed delinquent excess profits tax returns for the years 1941, 1942, and 1943.
The Commissioner determined that the sums of $41,262.10 for 1941, $69,815.51 for 1942, and $86,473.84 for 1943 which were designated in petitioner's returns as ‘Non-taxable Income Accruing to Municipality under Contract‘ constituted taxable income to petitioner for each respective year.
The respondent contends that the petitioner is a corporation engaged in a business activity, that it is an entity separate and apart from its bondholders and/or the city of Keokuk, and, consequently, is subject to Federal taxation like any other taxable corporation upon the income derived from the operation of its bridge properties. The petitioner contends that it is not subject to tax upon this income, and its arguments in support of this contention will be considered in the order in which they are advanced on brief.
Petitioner urges that the conditions imposed by the gift proposal and the limitations upon the use of the revenues contained in the indenture of mortgage preclude it from having any gains, profits, or income. Citing Eisner v. Macomber, 252 U.S. 189; Helvering v. Edison Brothers Stores, 133 Fed.(2d) 575; Hirsch v. Commissioner, 115 Fed(2d) 656; Crews v. Commissioner, 89 Fed.(2d) 412; Dallas Transfer & Terminal Co. v. Commissioner, 70 Fed.(2d) 95, and others, petitioner urges that, in order to have ‘income‘ as that term is used in the Sixteenth Amendment to the Constitution and in the Internal Revenue Code, it must realize a gain or profit which it can apply to its ‘separate use, benefit and disposal.‘ The cited cases so held. We do not agree, however, that, because petitioner was bound by the terms of the gift proposal and the indenture of mortgage to apply the revenues from the toll bridge first to the payment of maintenance and operating expenses and secondly to interest and principal on its bonds, it did not receive a gain or profit for its separate use and benefit. It is not unusual for a corporation to agree, as did the petitioner, to apply its profits to the payment of a mortgage indebtedness. Action taken pursuant to such an agreement results in a reduction of its liabilities and is an application of profits to its separate use and benefit. And the fact that it had entered into an escrow agreement providing that title to the mortgaged property shall pass to a city when the indebtedness is paid, and that each payment accelerated the time when the city will acquire title, does not detract from the nature of the revenues derived from that property during the period it is owned and operated by petitioner. Any person may decide to give his property to another after it is paid for, and may even enter into a binding agreement to do so, but in the interim any revenue derived from that property is his income, and, unless it falls within the exemption provisions of the statute, is taxable to him. The petitioner received ‘income‘ from the operation of the bridge property within the meaning of that term as used in the Sixteenth Amendment and in the Internal Revenue Code, even though it was bound by the provisions of the gift proposal and the mortgage indenture to apply that part which remained after payment of expenses to the reduction of its bonded indebtedness. Cf. Amalgamated Housing Corporation, 37 B.T.A. 817; affd., 108 Fed.(2d) 1010.
Furthermore, all that has been said concerning the benefit to the petitioner from the reduction of its debt through the application of the toll payments received to said debt becomes even more evident when it is considered that petitioner herein might, in the event some governmental or private organization would build a bridge within five miles of petitioner's bridge, retain the bridge as its own property and never deliver it to the city of Keokuk, in which event all the money received by petitioner during the taxable years would inure to its own enrichment.
Petitioner also urges that the revenues which it collected and applied to the payment of its indebtedness are not income because they replaced the capital procured for the acquisition of the bridge property. That the revenues in excess of expenses were used to replace the capital which petitioner borrowed from the insurance companies is not disputed. But these revenues were not paid to petitioner for the purpose of reimbursing it for a capital expenditure. They represented toll charges received from its patrons for the use of the bridge. In this respect the facts in the instant proceeding differ from Decatur Water Supply Co. v. Commissioner, 88 Fed.(2d) 341; Edwards v. Cuba Railroad co., 268 U.S. 628, and related cases, cited by the petitioner. In the Decatur case, upon which petitioner places strong reliance, the city of Decatur, Illinois, desired to enlarge and extend its water supply system. Due to constitutional debt limit restrictions, it became necessary for the city to organize the Decatur Water Supply Co. for the purpose of having it acquire the land needed for the reservoir basin in connection with a new dam to be constructed by the city. Public spirited citizens subscribed to the new company's capital stock. The charter issued by the city provided for the dissolution of the company and conveyance of its reservoir land to the city upon the retirement of the capital stock. The city operated the water system. The water collections were made by the city and were used to pay the city's expenses of operating its water system, and 90 per cent of the excess was distributed to the company for the payment of dividends and retirement of its capital stock. The company paid a tax upon the sums paid as dividends to its stockholders, but contended that the payments in retirement of its capital stock did not constitute taxable income to it. The Circuit Court of Appeals for the Seventh Circuit agreed with the petitioner's contention on the ground that the payments came to it from the city burdened with the unalterable obligation to return them to the preferred stockholders in retirement of capital, and it held that they were not taxable income. In the course of its opinion the Circuit Court discussed the Cuba Railroad case and stated that the analogy between the facts of that case and those involved in the Decatur case was pronounced. In the Cuba Railroad case the Supreme Court held that subsidy payments made by the Republic of Cuba to a railroad company were reimbursements for capital expenditures and were not income within the meaning of the Sixteenth Amendment. In reaching this conclusion the Court stated that the contributions were not profits or gains from the use or operation of the railroad and were not made for services rendered or to be rendered, and the logical inference is that, if they had been, the court would have held that they represented income when received and not a replacement of capital. The revenues realized by the petitioner from the operation of the bridge are not exempt from tax as amounts received to replace capital or reimburse it for capital expenditures.
Section 116(d) of the Internal Revenue Code provides for the exemption from Federal taxation of income derived from any public utility or the exercise of any essential governmental function and accruing to any political subdivision of a state. Petitioner urges that its income is exempt from tax under this provision of the statute. It argues that a reading of the gift proposal and accompanying documents indicates a delivery of title and intention to vest a present interest in the bridge property in the city of Keokuk, subject, however, to a defeasance or reverter if certain conditions were not performed; that the city thus became the owner of the property; that petitioner is a mere instrumentality created by the city to manage the property and collect and handle the revenues so that the city may acquire the bridge and make it free of tolls; that in maintaining and operating the bridge it acted as an instrumentality of the city engaged in the exercise of an essential governmental function; and that the income accrued to the city.
We are unable to agree with the petitioner. During the taxable years the deed to the bridge property was held by the escrow agent in accordance with the escrow agreement. The ‘distinctive feature of an escrow is the delivery of a deed to a third person to await the performance of some condition whereupon the deed is to be delivered to the grantee and the title is to pass, the depositary being the agent of both parties, and the instrument not being effective as a conveyance until the condition is performed.‘ 8 R.C.L. 994. To the same effect, see Jackson v. Rowley, 88 Iowa 184; 55 N.W. 339, 340. The escrow agreement provides that the escrow agent is to hold the deed until advised, among other things, that ‘all of the bonds secured by said indenture have been paid in full, or that funds have been deposited with the trustee sufficient to redeem and retire all of the outstanding bonds,‘ and, upon receipt of such advice, the escrow agent is authorized and instructed to deliver the deed to the city. The agreement also provides that in the event the escrow agent is advised by the consulting engineers that construction of another bridge has been commenced within five miles of the existing bridge, it is authorized and instructed to deliver the deed and other instruments then in its hands to the petitioner. The gift proposal provides that on ‘the final payment of said First Lien Revenue Bonds and all interest thereon, * * * and on the due performance of all the conditions herein specified, * * * then the depositary shall deliver the title paper to the Donee, and the management shall turn over said property to said City.‘ We think it is clear from these provisions that delivery of the deed to the city was to await the performance of the enumerated conditions, and that the apparent intention was that the city was not to acquire title to or ownership of the bridge property pending such performance.
In support of its contention that the city was the owner of the bridge property during the taxable years, the petitioner points to the provision of the gift proposal that a failure on the part of the city ‘to comply with any or all of the conditions attached to this gift shall operate as a forfeiture of all the rights of the Donee hereunder and said property shall revert to the Donor, and all the right, title and interest in and to said property and to said franchise or franchises shall revert to and revest in the Donor as fully and completely as if this instrument had not been executed * * * .‘ Petitioner urges that the use of the words ‘revert‘ and ‘revest‘ indicates that title to the property was vested in the city during the taxable years, subject to reverter. We do not agree. An examination of the gift proposal shows that the only conditions imposed therein upon the city were that after the payment of the bonds and delivery of the conveyance the bridge should be forever free to vehicular and pedestrian traffic and should be maintained by the city in a state suitable for such traffic. Inasmuch as failure on the part of the city to perform these conditions could occur only after the bonds were paid and ownership of the bridge acquired by it, the use of the words ‘revert‘ and ‘revest‘ in connection with the return of the property to petitioner in the event the city failed to comply with these conditions was proper. They have no bearing, however, upon the ownership of the bridge property during the taxable years, when the bonds were still the outstanding indebtedness of petitioner and the deed had not been delivered to the city by the escrow agent.
Our conclusion from the foregoing is that during the taxable years the ownership of the bridge property remained in the petitioner. It collected the revenues from the operation of the bridge, and these revenues, after paying maintenance and operating expenses, were applied to the payment of principal and interest on its indebtedness to the bondholders. While it was a public utility (cf. Clarksburg-Columbus Short Route Bridge Co. v. Woodring, 89 Fed. (2d) 788), none of its income accrued to the city. The real beneficiaries of its operations during the taxable years were the bondholders. It was not an agency or instrumentality of the city engaged in an essential governmental function. It was a private corporation, organized under the laws of Delaware. It paid property taxes levied on its property by the local taxing authorities. It was managed and controlled by its own officers and directors, and none of its stock was owned by the city. It is not entitled to exemption from taxation on its income under the provisions of section 116(d) of the code. Citizens Water Co., 32 B.T.A. 750; affd., 87 Fed.(2d) 874; City of Burlington v. United States, 248 Fed.(2d) 887; Bear Gulch Water Co., 40 B.T.A. 1281; affd., 116 Fed.(2d) 975; certiorari denied, 314 U.S. 652. Cf. Appeal of City of Dubuque Bridge Commission, 232 Iowa 112; 5 N.W.(2D) 334.
The petitioner also contends that it is a tax exempt corporation under section 101(6), (8), or (14) of the code. Under subdivision (6) petitioner claims exemption as a corporation ‘organized and operated exclusively for * * * charitable * * * purposes * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual * * * .‘ Under subdivision (8) it claims exemption as an organization ‘not organized for profit but operated exclusively for the promotion of social welfare * * * and the net earnings of which are devoted exclusively to charitable * * *purposes.‘”””’ Under subdivision (14) it claims exemption as a corporation ‘organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof less expenses to an organization which itself is exempt from the tax imposed by this chapter.‘
This and other courts have frequently stated that statutes creating an exemption must be strictly construed and that where a taxpayer is claiming an exemption it must meet squarely the tests laid down in the provision of the statute granting exemption. Petitioner does not meet the requirements of either subdivision (6), (8) or (14) of section 101. It was organized as a private business corporation and operated during the taxable years upon a profit basis. Its income after payment of expenses was used to pay interest on its outstanding bonds and for the retirement of bonds. No part of it was turned over to a charitable organization or was devoted to charitable purposes, and no part of it was turned over to an organization, such as the city of Keokuk, which itself is exempt from tax. Petitioner is not a tax exempt corporation under the statutory provisions upon which it relies.
As a final and alternative contention, the petitioner urges that it is entitled to amortization deductions for the cost of its bridge properties in the amount of its net income for each year. The assets acquired by petitioner consisted of real estate, personal property, and intangibles, i.e., franchises and licenses. The petitioner is not here claiming any depreciation deductions based on exhaustion, wear, and tear of its tangible properties, and clearly there is no justification for any amortization allowances based on exhaustion of such assets by passage of time. If the intangible properties of petitioner are exhausted ‘* * * by the passage of time or otherwise the petitioner is entitled to spread the amount paid * * * (therefor) over the determinable period of its life and to deduct an aliquot part thereof in each year. ‘ Dallas Athletic Association, 8 B.T.A. 1036, 1039-1040; Rainbow Gasoline Corporation, 31 B.T.A. 1050, 1056. There is no evidence, however, that the probable useful life of petitioner's intangible properties is limited to a fixed period of time. It follows, therefore, that petitioner is not entitled to amortization deductions for the costs of either its tangible or intangible properties.
Reviewed by the Court.
Decision will be entered under Rule 50.