Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-77

1972-1 C.B. 28

Sec. 103

IRS Headnote

Interest received from a State as part of a condemnation award is not exempt from income tax as interest on an "obligation" of a State or political subdivision thereof; G.C.M. 10043 superseded.

Full Text

Rev. Rul. 72-77 /1/

Certain property owned by a taxpayer was, in 1966, listed by a State to be condemned for public purposes. The property was not taken by the State until 1970. In 1970, a State court awarded the taxpayer an amount for the property, with interest from the date the property was listed for condemnation.

The Supreme Court of the United States has held that Congress is precluded from imposing a tax on obligations of a State or political subdivision thereof only if the tax so levied imposes a real and substantial burden on the State's borrowing power. See Willcuts v. Bunn, 282 U.S. 216 (1931), Ct. D. 280, C.B. X-1, 309 (1931). The obligation of a State to pay compensation for property taken for public purposes arises as a result of the exercise of a State's power of eminent domain, not as a result of, or in the course of, the exercise of a State's borrowing power. Therefore, a tax upon the interest paid on such an obligation does not adversely affect the State's power to borrow money.

Held, the interest received by the taxpayer from the State as a result of an award for property condemned for public purposes is not exempt from income tax as interest on an "obligation" of a State or political subdivision thereof.

G.C.M. 10043, C.B. X-2, 124 (1931), is hereby superseded, since the position stated therein is set forth under the current statute and regulations in this Revenue Ruling.

/1/ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.