Case v. Commissioner , 34 B.T.A. 1229 ( 1936 )

MONTGOMERY B. CASE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

PHILIP L. GERHARDT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

E. MORGAN BARRADALE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

BILLINGS WILSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

%John j. mulcahy, petitioner, v. commissioner of internal/ REVENUE, RESPONDENT.

Case v. Commissioner

Docket Nos. 75816, 77375, 77376, 77377, 80769.

United States Board of Tax Appeals

34 B.T.A. 1229; 1936 BTA LEXIS 580;

October 28, 1936, Promulgated

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">*580 The compensation of officers and employees of the Port of New York Authority held immune from Federal income tax.

Julius Henry Cohen, Esq., Austin J. Tobin, Esq., and Wilbur La Roe, Jr., Esq., for the petitioners.

George D. Brabson, Esq., Francis H. Uriell, Esq., and John D. Kiley, Esq., for the respondent.

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STERNHAGEN

">*1230 Respondent determined the following deficiencies and penalties in petitioners' income taxes:

	Year	Deficiency	Penalty
Montgomery B. Case	1931	$551.99
Philip L. Gerhardt	1933	232.74
E. Morgan Barradale	1933	439.57	$109.89
Billings Wilson	1933	733.14	183.29
John J. Mulcahy	1932	695.00	173.75

The petitioners were employees of the Port of New York Authority, and assail the inclusion in their income of the compensation paid to them by the Port Authority.

FINDINGS OF FACT.

Montgomery B. Case is a resident of Englewood, New Jersey; Philip L. Gerhardt, of Brooklyn, New York; E. Morgan Barradale, of South Orange, New Jersey; Billings Wilson, of New York, New York; and John J. Mulcahy, of New York, New York. All were employees of the Port of New York Authority in the">*581 respective taxable years.

The Port of New York Authority (herein called the Port Authority) is a corporate body organized pursuant to a compact entered into between the States of New York and New Jersey on April 30, 1921, ¹ to which Congress consented by a resolution approved August 23, 1921. ² After reciting the great growth of commerce in the port of New York, and the benefit of cordial cooperation between the States of New York and New Jersey in the encouragement of capital investment and the formulation and execution of necessary physical plans through a joint agency, the compact created and defined the limits of a port district, and provided for the creation of the Port Authority as a body, corporate and politic, consisting of 12 commissioners:

* * * with full power and authority to purchase, construct, lease and/or operate any terminals or transportation facility within said district; and to make charges for the use thereof; and for any of such purposes to own, hold, lease and/or operate real or personal property, to borrow money and secure the same by bonds or by mortgages upon any property held or to be held by it. * * *

Under the terms of the compact, the Port Authority">*582 was not empowered to pledge the credit of either state except by legislative permission; facilities owned or operated by it were made subject to regulatory laws and regulating commissions as if owned or operated by a ">*1231 private corporation, and the powers of any municipality to develop or improve port and terminal facilities were left unimparied. A plan for comprehensive port development was to be adopted by the legislatures of the two states, and the Port Authority was directed to make plans from time to time, supplementary or amendatory thereto; to make recommendations to the legislatures or to Congress for the better conduct of the port's commerce and for the increase and improvement of its transportation and terminal facilities, and to institute or intervenue in proceedings before the Interstate Commerce Commission and like bodies to further such improvements. It was authorized to make suitable rules and regulations, subject to constitutional limitations and the exercise of the power of Congress, for the conduct of navigation and commerce, to be effective upon the concurrence or authorization of the state legislatures. It was authorized to provide penalties for violations">*583 thereof, and they have been provided and incorporated into the states' criminal laws. It was given power to fix tolls and charges for the use of all its facilities. Salaries and other expenses incurred by it were to be appropriated by the state legislatures until its operating revenues were adequate to meet them, and power to incur obligations prior to such appropriations was denied.

This compact, which amended and supplemented a former one entered into between New York and New Jersey in 1834, was induced by the necessity, widely recognized, for joint state action in the development as a whole of the Port of New York, which lies partly within the jurisdiction of each state. It was evolved after a series of efforts by the two states. Between 1911 and 1914 New Jersey appointed several successive commissions to study the port problem in cooperation with a New York commission. After reports by these commissions, New Jersey made efforts to secure a readjustment of freight rates to the port district, which led to a proceeding before the Interstate">*584 Commerce Commission, New York Harbor Case,47 I.C.C. 643, and aroused considerable opposition from the State and City of New York and various civic and commercial organizations. As a result of discussion of the desirability of unifying the port's transportation system, the New York-New Jersey Port and Harbor Development Commission was created by the legislative action of each state in 1917, and $450,000 was appropriated for its study of port and harbor conditions. After a thorough survey the Commission made a report to the legislatures in 1918, recommending a bistate corporate agency to carry out a comprehensive plan of port development, and a bistate legislative commission was appointed to cooperate with the former commission in a revision of its tentative proposals. This joint commission submitted a voluminous report in 1919, which, after reviewing the growing commerce of the port, the ">*1232 inefficiency of its terminal facilities, and the resulting hardship on its eight million inhabitants, described the port problem as primarily a railroad problem, and urged the adoption of an improvement plan comprising a complete reorganization of railroad terminal">*585 facilities, a joint operation and connection of railway belt lines, pier improvements, the establishment of food distribution stations, warehouses, highways, etc. The adoption of this program was urged by two successive governors of New York as a public necessity, and the requisite acts for the compact creating the Port Authority were finally passed by the legislatures of both states in April 1921.

Pursuant to the mandate of the compact, the Port Authority investigated conditions within the port district, and recommended to the governors of the two states a comprehensive plan of port improvement in a report dated December 21, 1921. This comprehensive plan was adopted by acts of the legislatures of each state passed and approved in 1922. ³ It embraced nine "principles to govern development", as follows: (1) Unification of terminal operations within the port district; (2) consolidation of shipments to eliminate duplication of effort and inefficient loading; (3) routing of commodities to avoid centers of congestion; (4) establishment of union terminal stations; (5) coordination of port and terminal facilities; (6) tunnels and bridges for freight; (7) Federal improvement of channels; ">*586 (8) highways for distribution by trucks; and (9) methods for prompt relief pending future development. More specifically, the plan called for tunnels and bridges connecting New York and New Jersey, suitable markets, union inland terminal stations and warehouses in Manhattan, numerous belt railway lines and connections within the port district, an automatic electric system connecting Manhattan with the middle belt line and railroads, and union terminal stations in Manhattan to contain storage space and space for other facilities.

The Port Authority was further directed by the acts to proceed in accordance with the plan as rapidly as might be economically possible, with all necessary constitutional powers except that of levying taxes or assessments, to request Congress to make appropriations for deepening and widening channels, to apply to all Federal agencies for assistance, to cooperate with state highway commissioners so that state trunk highways might fit into the plan, to render such advice, suggestions, and assistance to municipal officials as would permit local and municipal port improvements to fit">*587 into the plan. Section 8 provides further:

* * * The bonds or other securities issued by the port authority shall at all times be free from taxation by either state. The port authority shall be regarded as the municipal corporate instrumentality of the two states for the ">*1233 purpose of developing the port and effectuating the pledge of the states in the said compact, but it shall have no power to pledge the credit of either state or to impose any obligation upon either state or upon any municipality, except as and when such power is expressly granted by statute, or the consent by any such municipality is given.

Congress approved the plan by Joint Resolution of July 1, 1922, expressly reserving Federal rights and jurisdiction over the region affected.

Thereafter the governors of the two states advised the Port Authority that they favored the construction at the earliest possible moment of bridges and tunnels between New York and New Jersey. The Port Authority proceeded to make preliminary studies of traffic conditions, building costs, and other pertinent questions for various bridges and tunnels, and in its consideration of the several proposed projects, held public">*588 hearings after published notice, which were attended by the public and representatives of various interested organizations, who frequently had conflicting views. It conferred and cooperated with commissions and agencies which had studied or were interested in the particular project. It considered prior studies and reports of individuals and commissions related thereto, and made full reports to the governors and legislatures of its findings and recommendations.

After these studies and reports, the state legislatures in 1924 passed acts authorizing the Port Authority to construct, operate, maintain, and own two bridges with the necessary approaches across the Arthur Kill, one between Perth Amboy, New Jersey, and Tottenville, New York, ⁴ and one between Elizabeth, New Jersey, and Howland Hook, New York, ⁵ and appropriated $200,000 therefor. The Port Authority thereupon made borings, surveys, and engineering studies as to the character and location of the bridges, thoroughly canvassed local sentiment, attended meetings of local interests and meetings with committees appointed by the mayors of the three municipalities concerned, made counts of the vehicular traffic crossing all">*589 ferries on the Arthur Kill and Kill van Kull, investigated the records of the ferry companies, and made other pertinent studies. In 1925 construction of the proposed bridges was approved by the War Department, and in 1926 commenced. The bridges, known as the Outer-bridge Crossing Bridge and the Goethals Bridge, respectively, were completed on June 29, 1928, at a cost of over $17,000,000, financed by advances of $4,000,000 to the Port Authority by the two states and the sale of "New York - New Jersey Interstate Bridge Bonds - Series A" in the amount of $14,000,000. The bridge approaches were designed in cooperation with the state highway commissions to fit into ">*1234 the highway system and allow a circular flow of traffic at full capacity. In March 1931 the Port Authority engaged in the operation of a bus service across the Goethals Bridge to maintain traffic formerly attracted by private companies which had failed.

In 1925 the legislatures of the two states similarly authorized the Port Authority to construct, operate, ">*590 maintain, and own a bridge, with the necessary approaches, across the Hudson River from Manhattan to Fort Lee, New Jersey, and each appropriated $100,000 for the preliminary studies. ⁶ After reports to the governors, the Port Authority commenced construction in 1927, and on October 25, 1931, this bridge, known as the George Washington Bridge, was opened to traffic, having been completed at a cost of over $57,000,000, financed by state advances of $9,800,000 and the sale of "New York-New Jersey Interstate Bridge Bonds - Series B" in the amount of $50,000,000.

In the construction of this bridge, the Port Authority acquired four blocks in Manhattan between 178th and 179th Streets, over which it built an elaborate system of approach ramps to Riverside Drive. It is now completing a tunnel, carrying the approaches to the east side of Manhattan, which will be dedicated to the city and used by local traffic. On the New Jersey side the approaches were arranged to merge highway routes 1, 4, and 6 into a junction, running back to forkings a mile from the bridge head. The bridge has a traffic capacity for 30,000,000">*591 vehicles annually. Its center section was left unpaved because unnecessary for present demands.

By similar legislation in 1925 the Port Authority was authorized to construct, operate, maintain, and own a bridge with the necessary approaches across the Kill van Kull from Bayonne, New Jersey, to Staten Island, New York, ⁷ which, after studies and reports, was begun in 1928 and completed in 1931, at a cost of over $13,000,000, financed by state advances of $4,100,000 and the sale of "New York-New Jersey Interstate Bridge Bonds, Series C" in the amount of $12,000,000. This is known as the Bayonne Bridge. Its approach in Bayonne was carried across railroad yards and waterfront streets to a less congested section of the city, and in Staten Island was laid over a filled-in quarry and arranged to permit a circular flow of traffic.

The Port Authority has continuously owned, maintained, and operated these four bridges, charging tolls to defray their maintenance, operation, and general expenses and to meet interest charges and pay off the bonds, state advances and debt service on general and refunding bonds">*592 (which, however, under existing statutes can not be issued for any new facilities except four terminals), and, through its general reserve fund, debt service on its other bonds now outstanding.

">*1235 In 1934, the Outerbridge Crossing and Goethals Bridges produced tolls exceeding $400,000, paid by over 800,000 vehicles; the George Washington Bridge, $3,300,000, paid by over 6,150,000 vehicles; and the Bayonne Bridge, $210,000, paid by over 450,000 vehicles. The rate of toll was determined by the estimated annual amount necessary to meet operating expenses and interest and to provide a net amount for application against outstanding bonds. Since the Port Authority can raise money only by the sale of its securities or state advances, these estimates were made available to bankers interested in bidding for its bonds. Income or deficits from operation have been as follows:

Year	Goethals and Outerbridge Crossing Bridges	Washington Bridge	Bayonne Bridge
1928	1 $272,676.75
1929	76,683.54
1930	40,673.37
1931	-23,340.21	$504,264.08	1 $25,400.29
1932	-187,272.17	1,473,363.61	-101,466.11
1933	-295,534.46	1,142,770.42	-240,890.18
1934	-298,851.29	1,356,476.67	-163,848.67

">*593

Deficits were met from a general reserve fund of the Port Authority, and, in its annual reports, were attributed to a decline in traffic caused by the depression.

In the operation of these bridges, the Port Authority maintains a uniformed police force who are designated by statute ⁸ as regular peace and police officers of both states with the usual police power to make arrests and issue summons. Between 1928 and 1935 the Port Authority, in connection with its development of bridge and tunnel approaches, acquired apartment houses and store buildings which it rented to minimize its loss of capital investment before their demolition. These operations resulted in a net income of $36,115.61 in 1931 and losses of $47,356.91 and $61,482.63 in 1932 and 1933, respectively. On December 31, 1933, it also had investments, aggregating $10,000, in the stock of 10 wholly owned subsidiary corporations, organized to acquire property for its projects or to manage the properties acquired for bridge and tunnel approaches before their utilization as such.

">*594 After studies begun in 1906 and culminating in legislation by New York and New Jersey for the construction of an interstate vehicular tunnel under the Hudson River, the Holland Tunnel was constructed between Manhattan and New Jersey pursuant to a bistate compact of December 30, 1919, and plans evolved by the New Jersey Interstate Bridge and Tunnel Commission and the New York Interstate Bridge ">*1236 and Tunnel Commission. The cost of this tunnel was met by direct appropriations of New York and a bond issue of New Jersey, which has since been refunded by a bond issue of the Port Authority. It was operated by the two commissions until 1930, when each state passed an act ⁹ merging the commissions with the Port Authority, which was thereby vested with the control, operation, and maintenance of the tunnel. In 1931 additional acts ¹⁰ were passed in which, in the interest of the general public, the states agreed:

* * * that the construction, maintenance, operation and control of all such bridges and tunnels, heretofore or hereafter authorized by the two states, shall be unified under the port of New York authority * * *, to the end that the tolls and other revenues therefrom">*595 shall be applied so far as practicable to the costs of the construction, maintenance and operation of said bridges and tunnels as a group and economies in operation effected, it being the policy of the two states that such bridges and tunnels shall as a group be in all respects self-sustaining.

The Holland Tunnel is producing a surplus of revenue which goes into the Port Authority's general reserve fund for application to deficits of other projects.

The state legislatures further authorized the Port Authority to make plans for and construct a second tunnel to be known as the Midtown Hudson Tunnel, a project for the study of which each had appropriated $200,000 in 1930. ¹¹ After studies and reports covering several years the Port Authority began construction in 1934, and expects to complete the work by 1938 at an estimated cost of $37,500,000 for the southern tube. It has acquired a 100-foot strip of land one-half mile long for the tunnel's Manhattan approach at 39th Street and 10th Avenue, and property in Weehawken for an elaborate">*596 New Jersey approach connecting with the state's highway system. The cost of construction is being met by a loan arrangement from the Federal Emergency Administration of Public Works, by virtue of which $2,500,000 of Midtown Hudson Tunnel notes were issued to refund prior bank loans for the project and the Government purchased installments of notes aggregating $12,300,000. In entering into this agreement, the Public Works Administration required and received the opinion of the Port Authority's general counsel that its notes were exempt from state and Federal taxation.

The Port Authority has extensively studied the port district's system of transportation, highway, and terminal facilities and methods of handling freight used by the railways, ferry companies, and other transportation agencies, and has sought methods of remedying street, highway, and waterfront congestion within the district. In its reports, which are made annually or more often, it advised the ">*1237 governors and legislatures of both states that it was taking steps to remedy the congestion by an integrated and coordinated system">*597 of union inland freight terminals at various points in the port district, and it has been assisted in these projects by state appropriations and requisite legislation. It referred in its 1927 report to eight inland terminals in Manhattan already operated by railroads.

The location and character of the first unit of this system, Inland Terminal No. 1, was determined after exhaustive research and studies and a public hearing at which the views of representatives of municipalities, railroads, shippers, consignees, warehousemen, civic and trade associations, property owners, and others interested were given. The Port Authority finally resolved to acquire a city block in Manhattan bounded by 15th and 16th Streets and 8th and 9th Avenues, and to erect upon it a terminal building of basements and upper stories, the basements and ground floor of which should be leased to trunk line carriers for receipt and delivery of freight and the upper floors leased for office, loft, and manufacturing purposes. The project received the approval of the governors and legislatures, and on December 31, 1930, the Port Authority entered into an agreement with the eight trunk line railroads entering the">*598 port district, after some initial reluctance on their part, to lease to them substantially all of the street and basement floors of the projected building for five years, with renewal options for nine successive five-year periods, to be used as a terminal station for the transportation, assemblage, and distribution of less than carload freight.

The Port Authority acquired the proposed site by condemnation, and erected on it a building of 15 floors, 800 feet long and 200 feet wide, covering the entire block, and known as the Port Authority Commerce Building. The basement and 95 percent of the street floor are devoted to terminal purpose under the lease as a union station, without subdivision among the carriers, and the 13 upper floors are rented for manufacturing, office, loft, and industrial business purposes. The Port Authority maintains the portion of the building used for terminal purposes, but its facilities have been operated by the lessee railways since October 1932 through a joint agent, who is not an employee of the Port Authority. Under the system adopted by the railroads, shippers deliver less than carload freight, usually in the afternoon, by truck to the terminal">*599 on a street level platform; the freight is there received by the railroads' joint labor force and conveyed to the other side of the building where shipments for each railroad are assembled and conveyed to their respective rail heads. In the morning, incoming freight is similarly delivered to the consignee's truck from the street level platform. Formerly, shippers were obliged to deliver packages for different railroads to their separate pier stations and likewise to collect in-bound ">*1238 freight from these widely separated points. The union terminal has lightened traffic congestion and effected substantial savings to merchants in time and trucking costs, attracting deliveries even from New Jersey, Brooklyn, and Queens. Its facilities have been planned to take care of increased business in the future, only 10 percent of its capacity being utilized at present. The first year of operation it handled 40,000 tons of freight, and it is now handling between 60,000 and 70,000 tons a year.

The railroads' pier terminals have not been eliminated because of this single union terminal, however, although some have been closed or transferred, but the Port Authority's program contemplates">*600 a gradual elimination of the use of the piers for terminal purposes by the construction of a total of 12 union terminals in equal zones as found practicable; the erection of a second in New Jersey is now contemplated. A large percentage of these piers is owned and leased by New York City. Besides the less than carload freight, the piers also handle carload consignments and perishables, which the union terminal does not receive. The Port Authority plans to induce the roads eventually to transfer carloads to trucks on the Jersey shore, and convey them for store-door delivery in New York. Perishables and dairy products are confined by an extensive underground refrigeration system to a district in lower west Manhattan, and their handling through the inland terminal is not contemplated.

Tenants for the upper floors of the Commerce Building are solicited by real estate agents and advertising, and occupy the premises under leases, sometimes with a sliding rental scale. Its rates are somewhat higher than commercial rates for new leases, but 95 percent of available space is now rented. Offices of the Port Authority are located on the fifteenth floor. The nonterminal portion of the">*601 building is operated for the Port Authority by a superintendent and 92 men; 8 percent is rented for stores and offices and 92 percent as loft space. Its construction and rental were deemed necessary to provide sufficient revenue to make the terminal facility economically practical, for the Port Authority received no subsidy for the terminal from the states, and had to raise its $16,000,000 cost by bonds. To sell the bonds it was necesary to show sufficient prospective revenue from the project to make them attractive.

As the keystone of its objective to simplify traffic, the Port Authority has made studies and plans to connect the railroads entering the district by a series of belt lines running through tunnels and other proposed connections. Water traffic in the port suffers interference from fog about 5 percent of the time, and from ice or ice drifts during January, February, and March. Before the opening of the Holland Tunnel there were six tubes of the Pennsylvania and the Hudson and Manhattan railroads under the Hudson River, but no vehicular highway ">*1239 between Manhattan and New Jersey, and ferries were taxed to capacity. Freight from New Jersey was brought by">*602 ferries to Manhattan, where it was impossible to expand the approaches, and the long lines of vehicles awaiting service caused great congestion in the adjoining streets. Of the 45 railroad terminal piers clustered around the south rim of Manhattan, 38 are still in use, and while the Holland Tunnel now draws off a great number of vehicles from this section, traffic in the port district has doubled in each of the past two decades, and the congestion remains very great. The separate operation of watercraft, moreover, by the several railroads for freight delivery entails overlappings and waste of efforts by the movement of partially loaded boats, which a consolidation of marine activities would eliminate, and the Port Authority has made unsuccessful efforts to work out a coordinating scheme with the roads.

In furtherance of the proposed belt lines connecting the railroads, the Port Authority investigated the possibility of an automatic electric railway system, but abandoned it as too expensive. It next proposed the construction of a Greenville-Bayridge Tunnel to connect the roads on the two sides of the port, but after the accumulation of data and drafting of plans, the railroads">*603 declined to contract to use the tunnel, and the Port Authority then devoted its attention to the inland terminal system.

In order to improve transportation conditions, reduce living costs, and enable the Port of New York to meet the competition of other ports, the Port Authority has cooperated with the state Dock Commission in its study of long piers to accommodate large liners; and in matters of harbor modifications, such as channel widening and deepening, subject to the approval of army engineers, it has made suggestions, surveys and taken part in hearings. It has made studies and suggestions for the coordination of railway marine activities embodied in reports submitted to the road's coordinating agents. It has complied with requests of outlying points to clear the harbor of ice by getting the use of coast guard ice-breakers and has vainly sought Federal legislation to supply more breakers. It has studied the transportation of cargoes of explosives, gasoline, and chemicals, and induced the Federal Government to make regulations for their control, which its staff assisted in framing. At the request of municipalities it has prepared reports on the location of free ports or">*604 tariff zones, and gratuitously cooperates with and advises district municipalities on port development. It has promulgated regulations concerning the storage period of freight on the railroads' piers, designed to relieve the congestion caused by a consignee's failure to remove for long periods, about which complaints had been made by shippers, inconvenienced and delayed by the accumulations. It has opposed efforts of outports before the Shipping Board to secure New York ">*1240 shipping. It has participated and given evidence in actions before the Interstate Commerce Commission brought by competitive ports to obtain rates favorable to them in relation to New York rates, where the principle involved affected many commodities or a large rate adjustment.

It coordinates and assists in litigation affecting commerce, but does not supplant the efforts of the states, municipalities, and such agencies as the Chamber of Commerce, Produce Exchange, and Maritime Exchange. It has cooperated in the issuance of rules affecting navigation and commerce and commerce and has prescribed rules for the regulation of its own facilities, and further protected them by the erection of navigation">*605 lights and buoys. It has attempted to fix rates for harbor lighterage through negotiation with the railroads. It neither owns nor operates piers, ferries, tugs, ships, or dredges, but its facilities are in competition with the ferry companies and have reduced their traffic and earnings, and one company has gone out of business. These companies either are privately owned or are operated by railroads, and in either case are subject to state and Federal taxation. The Port Authority seeks to increase the traffic over its bridges and tunnels by advertisements in journals and public places. In 1933 it actively and successfully opposed a private company's application to the War Department for a permit to construct another bridge across the Hudson.

The Port Authority's projects have been financed by state appropriations, by state advances repayable from the projects' revenue, and by issues of bonds and notes. Of the latter, series A, B, and C are each secured by a first lien upon the revenue of a particular project, subject to suspension as to current revenue when an amount equal to 20 percent of the issue is accumulated in sinking or special reserve funds over and above current interest">*606 and maturities. Repayment of state advances from a bridge's revenue is subject to the prior lien of the bridge bonds. All the bonds have by contract been issued as exempt from state and Federal tax on advice of counsel that they were so exempt.

Upon issuance of its bonds, series D and E, secured by revenues of the Holland Tunnel and Inland Terminal No. 1, respectively, the Port Authority pledged its general reserve fund as security for all its outstanding issues, including prior bridge issues, and in 1935 it adopted a program for the refunding of its then outstanding obligations, aggregating $152,000,000 (series A to E, inclusive, and Midtown Hudson Tunnel notes) through the medium of its general and refunding bonds, which are supported by a pledge of its general reserve fund and (subject to prior liens and to the repayment of state advances) by a pledge of revenues of projects now in operation or under construction. In addition, all bonds acquired pursuant to the ">*1241 refunding program with the proceeds of general and refunding bonds are pledged as collateral security for the latter. Each issus so pledged is to be fully retired and canceled when the entire issue has">*607 been acquired, except that no bridge issue is to be fully retired and canceled until the advances made by the state for the particular project have been liquidated or amortized.

The Port Authority has refnded and retired its entire issue of Midtown Hudson Tunnel notes, and is seeking to have the Public Works Administration cancel the existing loan agreement and make a grant not to exceed $4,780,000 in aid of the tunnel's construction. Pursuant to its refunding program, the Port Authority has also refunded the following bonds, acquired for retirement, which, with the three other issues below mentioned, constituted its funded debt as of November 30, 1935, adjusted to reflect the cancellation of $14,800,000 Midtown Hudson Tunnel notes on December 20, 1935, and the sale of $16,500,000 general and refunding bonds on December 11:

	Outstanding	Acquired and pledged
Series A (Arthur Kill Bridge)	$12,200,000	$5,643,000
Series B (Washington Bridge)	48,420,000	1,580,000
Series C (Bayonne Bridge)	8,861,000	3,139,000
Series D (Inland Terminal)	14,820,000	1,180,000
Series E (Holland Tunnel)	46,008.000	992,000

On the same date there were outstanding general">*608 and refunding bonds, first series, 4 percent, due 1975, of $45,331,000, and of second series, 3 3/4 percent, due 1965, of $16,500,000 and series F bonds (Washington Bridge) of $2,500,000.

By appropriate legislation enacted in 1934 and 1935, claims between New Jersey and the Port Authority were adjusted and liquidated by the latter's payment of $500,000 to the former. These claims arose from advances for the George Washington Bridge, the Port Authority's undertaking to bear the cost of certain highway construction, and other item.

The annual reports of the Port Authority, submitted to the governors and legislatures of New York and New Jersey, contain statements of its progress, plans, activities, and financial conditions. As there shown, all its income, revenues, and receipts are derived from the following sources: (a) Toll charges from all of its bridges and tunnels; (b) rentals of Inland Terminal No. 1 paid by railroad carriers; (c) rentals from tenants of the upper floors; (d) rentals from real estate pending its use in connection with the comprehensive plan; (e) interest from securities in which sinking, reserve, and other funds are invested; (f) revenue from operation of">*609 a bus line over the Goethals Bridge; (g) interest on bank balances; (h) miscellaneous ">*1242 income such as rental of telephone ducts, sales of gasoline, towing, and tire-changing charges; (i) state advances. The securities in which its several funds are invested are bonds of New York and New Jersey municipalities; it also holds bonds issued by itself. Its gross income and net income, as so shown, were as follows:

Year	Gross income	Net income
1931	$7,367,288.39	$3,602,325.63
1932	10,270,699.82	3,659.006.26
1933	10,134,638.21	3,112,953.78

The functions of the Port Authority, as prescribed by the states' compact and statutes, are exercised by twelve commissioners, half of whom are appointed from among the resident voters of each state as their respective legislatures determine. The Commissioners take an oath of office and may be removed only upon charges and after a hearing - in the case of New York, by the governor; in the case of New Jersey, by the state senate. Their actions are binding only after approval by a majority and the lapse of a specified period after the minutes of each meeting have been transmitted to the two governors, who have">*610 a veto power over the acts of the commissioners from their respective states. The commissioners constitute a board for the purpose of doing business and may adopt suitable bylaws for its management.

The Port Authority's facilities are subject to the jurisdiction of public service, utiity, and similar state commissions in the same manner as those of a private corporation. Its bonds and certain obligations are legal investments for fiduciaries in both states, and for the protection of public funds deposited by it; the statutes of both states authorize financial institutions to give it undertakings with sureties of its approval or securities as collateral.

The Port Authority has power to make investigations in connection with its planning for port improvement, and to issue subpoenas to residents and property owners of New York, failure to comply being punishable upon the Port Authority's application to the Supreme Court. Its authorized rules for the regulation of port affairs are enforceable by mandamus, injunction, or other appropriate relief, which actions are entitled to a preference over all New York civil cases. It may institute or intervene in proceedings before the Interstate">*611 Commerce Commission, state public utility commissions, and like bodies or any other Federal, state, municipal, or local authority for the adoption and execution of physical improvements, changes in methods or rates of transportation, warehousing, docking, and lightering. It may condemn and take property through legal proceedings.

">*1243 The Port Authority has no stock and no stockholders, and is not owned by any private persons or corporations. Its projects are all operated in the interest of the public, and no profits inure to the benefit of private persons. Its properties and bonds or other securities issued by it are exempt by statute from state taxation. In Public Resolution 66, 67th Congress - H. J. Resolution 337 - Congress declared that its activities under the comprehensive plan

* * * will the better promote and facilitate commerce between the States and between the States and foreign nations and provide better and cheaper transportation of property and aid in providing better postal, military and other services of value to the Nation.

Certain statutes of New York and New Jersey relating to the various projects of the Port Authority recite that they are:

">*612 * * * in all respects for the benefit of the people of the two states, for the increase of their commerce and prosperity and for the improvement of their health and living conditions, and the Port Authority shall be regarded as performing a governmental function in undertaking the said construction, maintenance and operation and in carrying out the provisions of law relating to the said [bridges and tunnels] and shall be required to pay no taxes or assessments upon any of the property acquired by it for the construction, operation and maintenance of such * * *.

The States of New York and New Jersey obligated themselves to the payment of the Port Authority's administrative expenses each in the amount of $100,000 a year until its revenues were adequate to meet them, and prohibited the incurring of obligation for salaries, office, and other administrative expenses prior to the making of such appropriations. Since 1928 employees of the Port Authority who were transferred from New York state service and were members of the state retirement system, might continue in that system. Since 1935 all employees are permitted to join it.

Montgomery B. Case was employed by the Port Authority">*613 from April 1, 1927, to December 31, 1932, as a construction engineer. He took an oath of office, was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra time to his duties when necessary without extra compensation. During 1931 he was executive head of the Port Authority's construction division under the supervision of its chief engineer, and had direct charge of all construction forces working on the Washington and Bayonne Bridges and the Holland and Midtown Hudson Tunnels, making frequent reports to the chief engineer. He had no outside office or business connection and did no engineering work for anyone else. His name was on the pay roll of the Port Authority, which he was required to sign with other employees. In 1931 he received a salary of $16,000, which the Commissioner included in his taxable income for that year.

">*1244 Philip J. Gerhardt has been employed by the Port Authority since May 7, 1931, as industrial consultant. He took an oath of office, was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra">*614 time to his duties when necessary without extra compensation. During 1933 his duties comprised the designing of the Inland Terminal No. 1, from an operations standpoint, and its operation and rental under the supervision of the Port Authority's general manager, to whom he submitted monthly time reports of his work. He had no outside office or business connection. His name was on the pay roll of the Port Authority, which he was required to sign with other employees. In 1933 he received a salary of $8,137.50, which the Commissioner included in his taxable income for that year.

E. Morgan Barradale was a member of the staff of the New YorkNew Jersey Interstate Bridge and Tunnel Commission from its organization in 1919 until its merger with the Port Authority on May 8, 1930, and has since been employed by the Port Authority as superintendent of tunnel operations. He took an oath of office at the time of his employment by the Commission, was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra time to his duties when necessary without extra compensation. During 1933 he had charge of the operation and">*615 maintenance of the Holland Tunnel and of the Port Authority employees operating it under the supervision of the assistant general manager in charge of operations, to whom he made reports of his work and time. He had no outside office or business connection except his office and position as director and president of a building and loan association. His name was on the pay roll of the Port Authority, which he was required to sign with other employees. In 1933 he received a salary of $10,174.97, which the Commissioner included in his taxable income for that year.

Billings Wilson has been employed by the Port Authority since July 1, 1922, as assistant general manager. He took an oath of office, was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra time to his duties when necessary without extra compensation. His duties comprise administrative work in the office and inspection work in the field under the supervision of the general mannager, to whom he submitted reports on various matters as required. He had no outside office or business connection. His name was on the pay roll of the Port Authority, ">*616 which he was required to sign with other employees. In 1933 he received a salary of $14,625 from the Port Authority, which the Commissioner included in his taxable income for that year.

John J. Mulcahy has been employed by the Port Authority since June 1, 1928, as assistant general manager. He took an oath of office. ">*1245 was provided with a place of business and staff by the Port Authority, and had regular office hours, agreeing, however, to devote extra time to his duties when necessary without extra compensation. During 1932 he supervised the Port Authority's entire personnel and acted as administrative assistant to the general manager under supervision of the latter, to whom he submitted reports on various matters as required. He had no outside office or business connection. His name was on the Port Authority's pay roll, which he was required to sign with the other employees. In 1932 he received as salary of $10,950, which the Commissioner included in his taxable income for that year.

OPINION.

STERNHAGEN: The question raised by this proceeding is whether the compensation received by an officer or employee of the Port Authority for services regularly rendered">*617 is subject to Federal income tax. The compensation was held constitutionally immune in Leon Moisseiff,21 B.T.A. 515">21 B.T.A. 515, and Robert Carey,31 B.T.A. 839">31 B.T.A. 839. Modjeski, an engineer of the Port Authority, was held taxable as an independent contractor. Commissioner v. Modjeski, 75 Fed.(2d) 468; certiorari denied, 295 U.S. 764">295 U.S. 764. Commissioner v. Ten Eyck, 76 Fed.(2d) 515, involved directly the Albany Port District, but the court expressly dealt with the Port Authority as of the same character. Commissioner v. Harlan, 80 Fed.(2d) 660, held immune the pay of an attorney of the Golden Gate Bridge & Highway District at San Francisco. Thus the question might be regarded as fairly well closed for this Board. But the Government says that for one reason or another each of those decisions lacks authoritative force to control the general question. It now presents these cases as complete both in facts and argument to serve as a definitive test. The evidence has been stipulated at length and also given in the testimony of Port Authority employees.

The Port Authority is organized for and operating">*618 in the traditionally sovereign function of protecting, improving, and developing the Port of New York; and all its activities are directed to and are incident to that end. The dual nature of our government requires that the state and Federal governments shall be adjusted to each other to produce the greatest power for each with the least friction. The prvoblem is not one of logical or legal absolutes, but of the promotion of a smooth practical interrelation of the two in recognition of their several sovereign necessities. Neither may so exercise its powers as to encroach upon the necessary or traditional sovereign functions of the other; and, since this doctrine is firmly established, it is not to be supposed that either is attempting to do so. The revenue act and its broad definition of income may not be regarded as an attempt to tax the salary of the state executive although it may be ">*1246 literally within its terms. The Attorney General expressed this opinion in 1919, 31 Op. A.G. 441. The immunity of such salary from Federal tax is inherent in the sovereignty of the state. If it inures to the benefit of the individual, this is but collatoral to the effect">*619 upon the state. To him, it is not a matter of independent personal right, but of perquisite of his office.

We are bound, when the Circuit Court of Appeals has held, in affirmance of our own earlier decisions, that the Port Authority and other organizations similarly engaged are performing a traditionally sovereign function, to apply the doctrine and hold the pay of its employees to be exempt from Federal tax. Commissioner v. Ten Eyck, supra;21 B.T.A. 515">Leon Moisseiff, supra;31 B.T.A. 839">Robert Carey, supra;Commissioner v. Harlan, supra. That the Ten Eyck case is regarded by the court as a holding that port development is a traditionally sovereign function is fortified by its more recent opinion in Brush v. Commissioner, 85 Fed.(2d) 32.

The argument is pressed that the immunity is lost when the activity of the state is one involving interstate commerce or navigation or is carried on under an interstate compact requiring Congressional consent. The argument is not new. It was considered and rejected in ">*620 Commissioner v. Harlan, supra, and there is enough in the opinion and briefs in the Ten Eyck case to show that the Federal power over interstate commerce and navigation were not overlooked. But to deal with the issue squarely, we are of opinion that the development of the port may not be interfered with by Federal tax even though the interstate and foreign commerce passing through the port and upon its highways, bridges, and tunnels is subject to Federal regulation, even though the navigable waters under its bridges and over its tunnels are under Federal control, and even though the underlying interstate compact required the consent of Congress. To this may be added that there is no reason to regard the revenue act as a means used by Congress to regulate interstate commerce, to control navigation, or as an implied condition of its consent to the interstate compact. Cf. United States v. Butler,297 U.S. 1">297 U.S. 1. Such a view, if accepted, might go so far, for example, as to subject the employees of a state highway department or public service commission to Federal tax under the present law. It would mean that in making an interstate compact">*621 the states would be surrendering the very sovereignty which the Constitution takes for granted and upon which the compact is founded - and this, not directly by an express condition in the resolution of consent, but by an implied relation between the general terms of the consent and the broad terms of the revenue act. Is it to be supposed that in the blanket consent to interstate compacts for crime prevention (U.S.C.A., title 18, § 420) ">*1247 lurks a power to tax the state police officers who are employed under the compact?

Relying upon Commissioner v. Powers, 68 Fed.(2d) 634, the argument is made that the Port Authority is engaged in proprietary functions for profit with the effect of withdrawing sources of revenue from the Federal taxing power. This is said in respect of the rents from the Inland Terminal Building, more particularly the upper stories privately occupied; of the tolls from the bridges and tunnels; and of the destruction of private ferry competition. If these were independent profit-making ends in themselves, the argument would be more engaging. But these several operations, even though the revenues produced are substantial, are but">*622 incidental to the great and comprehensive sovereign project of improving the port and terminal facilities of the port district. Bush Terminal Co. v. City of New York,152 N.Y.Misc. 144. The Inland Terminal Building was not constructed to produce rent as a profit on investment, but to provide a more efficient terminal and thus expedite traffic and relieve highway congestion. The bridge and tunnel tolls and the reduction of traffic on the private ferries were incidental to the governmental project of providing highways to facilitate traffic and reduce port and harbor congestion in the common public interest. It has not heretofore been suggested that the maintenance of a free state highway was a proprietary function subject to Federal tax because it diminished or destroyed the traffic on an existing private toll road. State public school teachers are not regarded as taxable because a new public school may reduce the taxable profits of an existing private school. The essential question of the preservation of the state's sovereign powers in the interplay of our dual government may not be lost sight of by a pursuit of each detail of the method of exercising it as">*623 if it stood alone with a different history and a different purpose. Burnet v. Coronado Oil & Gas Co.,285 U.S. 393">285 U.S. 393; University v. People,99 U.S. 309">99 U.S. 309; G.C.M. 13745, XIII-2 C.B. 76. Cf. Trinidad v. Sagrada Orden de Predicadores,263 U.S. 578">263 U.S. 578. It may be doubted whether the Port Authority has any right to engage in business for the sole or primary purpose of making profit; but not until it does so will the effect upon its tax immunity require consideration.

We hold that the Port Authority is engaged in the performance of a sovereign function of each of the states of New York and New Jersey and that the compensation received by its employees is exempt from the Federal income tax. This is primarily because of the constitutional right of the state to be free from Federal interference in the exercise of its sovereign powers. We hold further that even if the Port Authority's functions are not constitutionally immune from ">*1248 interference by Federal taxation, the power of the Federal Government to regulate commerce and control navigable waters has not been exercised by Congress through the imposition">*624 of tax in the general provisions of the revenue act, nor has such tax been provided for as an implied condition of consent to the interstate compact.

Reviewed by the Board.

Judgment will be entered for the petitioners.

MELLOTT dissents.

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Footnotes

• 1. Ch. 154, Laws of New York, 1921; ch. 151, Laws of New Jersey, 1921. ↩

• 2. Public Resolution No. 17, 67th Cong. (S.J. Res. 88). ↩

• 3. Ch. 43, Laws of New York, 1922; ch. 9, Laws of New Jersey, 1922. ↩

• 4. Ch. 230, Laws of New York, 1924; Ch. 125, Laws of New Jersey, 1924. ↩

• 5. Ch. 186, Laws of New York, 1924; ch. 149, Laws of New Jersey, 1924. ↩

• 6. Ch. 211, Laws of New York, 1925; ch. 41, Laws of New Jersey, 1925. ↩

• 7. Ch. 279, Laws of New York, 1926; ch. 97, Laws of New Jersey, 1925. ↩

• 1. Interest for this year was charged to investment account. ↩

• 8. Ch. 388, Laws of New York, 1928; ch. 113, Laws of New Jersey, 1932. ↩

• 9. Ch. 421, Laws of New York, 1930; ch. 247, Laws of New Jersey, 1930. ↩

• 10. Ch. 47, Laws of New York, 1931; ch. 4, Laws of New Jersey, 1931. ↩

• 11. Ch. 426, Laws of New York, 1930; ch. 248, Laws of New Jersey, 1930. ↩