Spencer D. Stewart, Et Ux. v. Commissioner of Internal Revenue

(Retired):

The Commissioner determined that the petitioners, Spencer D. and Mary Jane Stewart (referred to hereinafter as Stewart or the taxpayer ), owed federal income taxes in the amounts of $210,751.13 for 1966 and $45,444.21 for 1967. On the taxpayer’s petition for review, the Tax Court ruled: 1) that interest paid to Stewart by the City of Phoenix, Arizona (the City), pursuant to an agreement under which the City acquired immediate possession of Stewart’s water utility for a price to be determined in condemnation proceedings was not exempt from taxation under I.R.C. § 103(a); and 2) that capital gain resulting from the sale of securities contributed by Stewart to a corporation controlled by him should properly be attributed to him. 43 T.C.M. (CCH) 1119 (1982).

I

A

In 1943 or 1944, the taxpayer became the sole owner of the Consolidated Water Company (Consolidated), an unincorporated business which owned and operated utilities that supplied water to households then outside the boundaries of the City of Phoenix. During the 1950’s, the City grew rapidly and annexed some of its environs, including parcels in which Consolidated operated the water utility.

Under Arizona law, a…