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Department of Taxation and Finance

Volume 1 - Opinions of Counsel SBEA No. 98

Opinions of Counsel index

Aged exemption (income) (interest on U.S. savings bonds) - Real Property Tax Law, § 467:

For purposes of an application for the aged exemption, accrued interest on U.S. Government savings bonds is computed as income in the year in which the bonds are redeemed since the interest becomes available only at the time of redemption. Interest earned on a bank savings account, on the other hand, is computed as income annually since the taxpayer is free to withdraw the interest annually or at any time he chooses.

We have received an inquiry concerning the income requirements of section 467 of the Real Property Tax Law. The specific question concerns interest earned on U.S. savings bonds.

In the question presented, a taxpayer, otherwise qualified for the aged exemption, cashed in U.S. savings bonds that he had owned for over 20 years on which there was an accumulation of $431 in interest for the entire 20-year period. Our attention is called to the federal income tax law which allows a taxpayer to treat the taxable increment or interest on U.S. savings bonds as income received in the year of redemption or maturity, or the taxpayer may elect in his federal income tax return to report the taxable increment for each year as income for that year. The taxpayer in question chose to treat the taxable increment as income received in the year of redemption. The local assessor took the position that the full interest payment of $431 was income for the year when the bonds were cashed and, when this amount was added to other income of the taxpayer for the 12-month period preceding the date of application for the exemption, the $3,000 statutory income limit of section 467 was exceeded resulting in a denial of the exemption for that year. By the use of such logic, our correspondent states that interest earned on a bank savings account should not be computed as income annually but, rather should be computed as income only at such time as it is withdrawn. He contends that the assessor should have considered only the interest earned in the year of redemption which would amount to about $20 or 5% of the 20 years' accumulation of interest. Our opinion is sought on this matter.

Paragraph 3(a) of section 467 of the Real Property Tax Law provides that no exemption shall be granted if the income of the property owner exceeds the sum of $3,000 for the 12 consecutive months immediately preceding the date of making application for exemption. This section further provides that such income shall include social security and retirement benefits, interest, dividends, rental income, salary or earnings, and income from self-employment, but shall not include gifts or inheritances.

The apparent intent of the Legislature in enacting the income requirement of section 467 was to exclude anyone who had over $3,000 in cash accruing to him with which to meet expenses during the preceding 12 months. It was apparently felt that certain aged persons meeting the other requirements of the statute but whose cash inflow was less than $3,000 during the 12 months preceding the date of application should receive the benefit of the partial exemption from real property taxes. It would appear to be clear that the Legislature did not intend that the income tax rules and regulations be strictly adhered to when computing income for the aged exemption since the standard set by the Legislature is cash inflow from all sources, and the income period is not for the calendar year, as is the case with most income tax returns, but rather for the 12 months preceding date of application. Thus an income tax return itself when filed with an application for exemption is only a guide.

As noted above, the exemption statute enumerates several items of income to be included for its purposes, but which are not included as income for federal or state income tax purposes. In applying the cash inflow principle we have, for instance, held in a prior opinion that depreciation, one of the items commonly deducted from gross rents for income tax purposes, is not a deductible item when computing income under section 467. Depreciation is a bookkeeping item authorized to be used to reflect an annual loss of value of a particular asset during its useful life. This is important under the income averaging philosophy of the income tax laws. However, it does not represent a necessary cash expenditure for the production of rental income and has little or no relationship to the amount of cash available to the taxpayer with which to meet current expenses. As is the case of other income tax deductions, allowances for depreciation are matters of legislative grace and may only be taken as permitted by statute. Section 467 of the Real Property Tax Law does not provide for any such deduction from gross income of any amounts permitted to be deducted under the Internal Revenue Code or the State Income Tax Law.

We are of the opinion that the position taken by the local assessor in this situation is correct. The taxpayer in the year of redemption had a taxable increment for income tax purposes of $431, and for the purpose of section 467, his cash inflow was increased by the same amount in the 12-month period prior to application for exemption. The same conclusion would apply if the taxpayer elected, under the Federal Income Tax Law, to report the taxable increment for each year as income for that year. In such case there would be no change in his cash inflow from that source until such time as he had redeemed the bonds. Here again, as with depreciation, in applying the federal income tax rule we are dealing with a bookkeeping item which is a matter of legislative grace under the income tax provisions but not under section 467. It is our opinion that the purpose of the Legislature in helping certain aged persons to meet rising real property taxes would not be served by the use of a bookkeeping device in determining income. It is well established that exemption statutes are to be strictly construed against the persons seeking exemption from taxation and such statutes must be interpreted literally.

The annual increment in value of U.S. savings bonds can readily be distinguished from the amount of annual interest earned on a bank savings account. Interest earned on a bank savings account must be reported as income on the taxpayer's return for the year in which it accrues, and it must also be computed annually as income under section 467. Such interest income does affect the annual cash inflow of the taxpayer in that he is free to withdraw the amount of interest annually, or at any time he chooses, leaving the principal intact on deposit. With U.S. savings bonds there is no such choice. In order to avail himself of the annual increment the taxpayer must redeem the bond, both principal and interest. Thus, the annual increment in value of U.S. savings bonds will affect the taxpayer's cash inflow only at the time of redemption.

May 23, 1968