The Niagara Falls Bridge Commission plans to issue bonds to finance improvements to and maintenance of the highway bridges it operates across the Niagara River. Will interest paid to individual bondholders be subject to New York State and New York City personal income tax?

Plain-English summary

The Niagara Falls Bridge Commission operates the highway bridges spanning the Niagara River between Niagara Falls, New York, and Niagara Falls, Ontario - including the Rainbow Bridge. The Commission traces its origin to a genuine emergency: in early 1938, an ice jam destroyed the original Niagara Falls Bridge, cutting off the only crossing at that location. Because the collapsed bridge spanned an international, navigable waterway, only Congress could authorize a replacement, even though the practical impact was overwhelmingly local. Congress responded in June 1938 with a joint resolution (Pub. L. No. 117, 52 Stat. 767, 75th Congress) that both authorized a new bridge and created the Commission to build and run it - but deliberately placed the Commission under local, not federal, control.

Under Section 7 of that resolution, the Commission has eight members: four appointed by the Governor of New York and four by Ontario authorities. Members must post a performance bond set by the New York State Comptroller. All of the Commission's revenue must go toward operating and maintaining its bridges (including paying debt service) and toward improvements; if the Commission is ever dissolved, its U.S. and Canadian properties revert to their respective home jurisdictions. Critically, the federal government has never funded the Commission, exercises no financial oversight over it, does not guarantee its debt, and has no role in appointing its members. Major statutes that govern federal entities - the Freedom of Information Act, the Civil Service Laws, the Merit Protection Board, and the Hatch Act - don't apply to the Commission at all. Instead, the Commission complies with New York State public-agency laws, including the Taylor Act (Civil Service Law § 200 et seq.), and its U.S.-citizen employees belong to the Civil Service Employees Association, a New York state-employee union. The founding resolution has been amended six times since 1938 (for example, to let the Commission acquire two other Niagara River bridges and to expand its borrowing powers), and none of those amendments ever shifted governance away from local officials or gave the federal government a voice. The most recent amendment, Pub. L. 102-240, § 1070(c), 105 Stat. 914 (1991), went further and explicitly declared that the Commission is "deemed for purposes of all Federal law to be a public agency or public authority of the State of New York, notwithstanding any other provision of law."

Facing rising traffic across its bridges, the Commission planned a new bond issue to fund capacity improvements, and asked the Department whether interest paid to individual bondholders would be taxable. The starting point was easy: under IRC § 103(a) and § 103(c)(1), interest on an obligation of a "State or political subdivision thereof" is excluded from federal gross income, and because federal law treats the Commission as a New York public agency or authority, its bond interest was already federally tax-exempt. The harder question was whether New York State and New York City personal income tax would nonetheless apply, since New York's tax base starts from federal adjusted gross income under Tax Law § 612(a) and then requires certain interest income to be added back even though it escaped federal tax.

Two add-back modifications were potentially in play. Tax Law § 612(b)(1) requires adding back interest on obligations of any state other than New York (or a political subdivision of such other state) not created by an interstate compact to which New York is a party. Tax Law § 612(b)(2) requires adding back interest on obligations of a federal authority, commission, or instrumentality that federal law exempts from federal tax but not from state tax. The Department held that neither applied. Section 612(b)(1) didn't apply because the Commission has no connection to any state other than New York - its only U.S.-side appointing authority is the Governor of New York, and Congress has affirmatively declared it a New York, not a foreign-state, public agency. Section 612(b)(2) didn't apply either, because the Commission isn't a federal authority, commission, or instrumentality in the first place: the federal government created it through the 1938 resolution but has never funded it, doesn't oversee its finances, doesn't guarantee its debt, doesn't appoint any of its members, and Congress has expressly legislated that it is a New York public agency rather than a federal one. The Department also noted that the Commission performs an essential government function comparable to other New York bridge agencies, such as the Buffalo and Fort Erie Public Bridge Authority and the New York State Bridge Authority. Since neither add-back modification was triggered, and Tax Law § 1302(a) and § 1303 make the New York City personal income tax base fully conform to the New York State personal income tax base, the interest on the Commission's bonds is exempt from both New York State and New York City personal income tax, just as it is exempt from federal income tax.

What this means for you

Individuals considering bonds issued by bi-national or interstate bridge/port authorities

Not every bond issued by an authority with an unusual federal history is automatically state-and-city tax-exempt. The key questions this opinion asks are: (1) is the interest already exempt from federal tax under IRC § 103, and (2) does the issuer have a genuine tie to a state other than New York, or to the federal government itself, that would trigger one of New York's Tax Law § 612(b) add-back modifications? Here, even though Congress created the Commission by federal resolution because an international waterway was involved, the actual governance, funding, and control were purely local (New York and Ontario, Canada - not another U.S. state, and not the federal government), so both add-backs were avoided. Bondholders should look for similar clear declarations of a purely local governance and funding structure before assuming tax-exempt treatment on a bond from an authority with cross-border or federally-chartered origins.

Accountants and tax professionals advising clients who hold bonds from public authorities with unusual histories

When a client holds bonds from an authority that isn't a garden-variety state or municipal issuer, don't stop at whether interest is federally tax-exempt under IRC § 103. Check whether Tax Law § 612(b)(1) or § 612(b)(2) requires an add-back for New York purposes - the former if the issuer has ties to another state, the latter if the issuer is genuinely a federal authority, commission, or instrumentality that Congress has exempted from federal but not state tax. This opinion is a useful precedent for authorities that are congressionally created but functionally and financially local: absent federal funding, federal oversight, federal debt guarantees, or federal appointment power over the entity's board, the federal-instrumentality add-back in § 612(b)(2) should not apply, and since Tax Law § 1303 makes NYC tax conform to NY State tax, the same exemption carries through to city tax.

Public authorities structured similarly to the Commission (bi-state or bi-national bridge/port commissions)

If your authority was created by federal statute or resolution because of an interstate or international waterway, but is actually funded, governed, and controlled at the state/local level - with no federal funding, no federal financial oversight, no federal debt guarantee, and no federal role in appointing members - this opinion supports treating your bond interest as exempt from both New York State and New York City personal income tax, in the same way as other New York bridge authorities like the Buffalo and Fort Erie Public Bridge Authority and the New York State Bridge Authority. A congressional declaration that the entity is "deemed" a state public agency or authority "for purposes of all Federal law" - as Congress did for the Commission in 1991 - strengthens that position considerably.

Common questions

Q: Why did Congress need to get involved at all if the Commission was meant to be a purely local, New York-controlled body?
A: Because the original Niagara Falls Bridge spanned an international, navigable waterway between the United States and Canada, only Congress had the authority to authorize construction of a replacement. Congress used that authority in 1938 to both authorize the new bridge and create the Commission to operate it, but it deliberately structured the Commission's governance - eight members, four appointed by New York's Governor and four by Ontario authorities - to keep control local rather than retaining any federal role.

Q: Does the fact that the Commission was created by an act of the U.S. Congress make its bonds "obligations of a federal authority, commission, or instrumentality" under Tax Law § 612(b)(2)?
A: No. The Department held that creation by Congress is not enough by itself. What matters is whether the federal government actually funds, oversees, guarantees, or controls the entity. Here, the federal government has never funded the Commission, conducts no financial oversight, does not guarantee its debt, and has no role in appointing its members - and Congress expressly declared by statute (Pub. L. 102-240, § 1070(c)) that the Commission is a New York public agency, not a federal one. So § 612(b)(2)'s add-back for federal-instrumentality interest does not apply.

Q: Does the fact that four of the Commission's eight members are appointed by Ontario authorities make it "another state[']s" political subdivision under Tax Law § 612(b)(1)?
A: No. Tax Law § 612(b)(1) is aimed at obligations of a state other than New York (or a political subdivision of such other U.S. state). Ontario is a Canadian province, not a U.S. state, and the Department found no connection between the Commission and any U.S. state other than New York - the only U.S.-side appointing authority is the Governor of New York. So the add-back for other-state obligations does not apply.

Q: If interest on the Commission's bonds is exempt from New York State personal income tax, is it automatically exempt from New York City personal income tax too?
A: Yes. Under Tax Law § 1302(a) and § 1303, the New York City personal income tax base is defined to be the same as New York taxable income under section 611. Because the interest is not added back in computing New York taxable income at the state level, it is likewise excluded from city taxable income, so it is exempt from New York City personal income tax as well.

Q: Is this exemption limited to the Niagara Falls Bridge Commission, or would it apply to similar authorities?
A: The opinion is technically limited to the facts presented by this Petitioner, but the Department explicitly compared the Commission's function to other New York bridge authorities, such as the Buffalo and Fort Erie Public Bridge Authority and the New York State Bridge Authority, suggesting the same analysis - federally created but locally funded, governed, and controlled, with no federal financial ties - would apply to similarly structured bi-state or bi-national bridge authorities.

Citations and references

• IRC § 103(a) - excludes interest on a "State or local bond" from federal gross income
• IRC § 103(c)(1) - defines "State or local bond" as an obligation of a State or a political subdivision thereof
• Tax Law § 611(a) - defines New York taxable income of a resident individual as New York adjusted gross income less deductions and exemptions
• Tax Law § 612(a) - defines New York adjusted gross income as federal adjusted gross income with the modifications specified in section 612
• Tax Law § 612(b)(1) - requires adding back interest on obligations of any state other than New York, or a political subdivision of such other state, not created by an interstate compact to which New York is a party
• Tax Law § 612(b)(2) - requires adding back interest on obligations of a federal authority, commission, or instrumentality that federal law exempts from federal tax but not from state tax
• Tax Law § 1302(a) - imposes the New York City personal income tax on the city taxable income of city resident individuals
• Tax Law § 1303 - defines city taxable income to be the same as New York taxable income under section 611, conforming the NYC tax base to the NY State tax base
• Pub. L. No. 117, 52 Stat. 767 (75th Congress, June 16, 1938) - the Congressional resolution creating the Niagara Falls Bridge Commission and placing it under local governance
• Pub. L. 102-240, § 1070(c), 105 Stat. 914 (1991) - the most recent amendment, declaring the Commission "deemed for purposes of all Federal law to be a public agency or public authority of the State of New York"

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a92_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-92(1) I
Income Tax
April 20, 1992

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I920403A

On April 3, 1992, a Petition for Advisory Opinion was received from Niagara
Falls Bridge Commission, The Rainbow Bridge, 5781 Falls Avenue, Niagara Falls,
Ontario L2G 3K9.
The issue raised by Petitioner, Niagara Falls Bridge Commission, is whether
interest paid to individual holders of certain bonds to be issued by Petitioner
to finance improvements to and the maintenance of various highway bridges
spanning the Niagara River will be subject to New York State and New York City
personal income tax.
Petitioner was first established in 1938 by resolution1 of the United
States Congress to respond to the catastrophic destruction earlier that year of
the Niagara Falls Bridge, connecting Niagara Falls, New York, with Niagara Falls,
Ontario, by an ice jam. At the time no alternative crossing existed.
Faced with serious local economic impact, various business leaders from the
Niagara Falls, New York, community sought government assistance.
Because the
collapsed bridge had spanned an international, navigable waterway, a
Congressional response was required, even though the impact was principally a
local concern.
In June 1938 Congress passed the Resolution authorizing
construction of a replacement bridge.
In addition to authorizing construction of a replacement bridge, the
Resolution also organized Petitioner to oversee the project in order to expedite
the response to the emergency.
In doing so, Congress recognized the local
character of the project by placing it under local control.
Under Section 7 of the Resolution, Petitioner is composed of eight members,
four chosen by the Governor of New York State and four by Ontario authorities.
Members of Petitioner are required to post a performance bond determined by the
New York State Comptroller.
The Resolution requires that all revenues of Petitioner be used solely to pay the
costs of operations and maintenance (including debt service on its obligations)
and the costs of budget improvements. The Resolution provides that Canadian and
U.S. properties of Petitioner will be distributed to their respective home
jurisdictions upon dissolution of Petitioner.
Since the formation of Petitioner the federal government has not
participated in, and pursuant to the Resolution, has no legal authority to
participate in, the affairs or assets of Petitioner. Petitioner is not federally

1
pub. L. No. 117, 52 Stat. 767 (75th Congress, June 16, 1938), as amended
(hereinafter referred to as the "Resolution").

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TSB-A-92(1) I
Income Tax
April 20, 1992

funded, nor is there any federal financial oversight of Petitioner's activities.
Similarly, indebtedness of Petitioner is not indebtedness of the United States
(Resolution, Section 9), and the indebtedness is not guaranteed by the federal
government.
Reflecting its local character, significant federal laws governing federal
entities such as the federal Freedom of Information Act (5 U.S.C. Section 552 et
seq.), the Civil Service Laws (5 U.S.C. Section 2101 et seq.), the Merit
Protection Board (5 U.S.C. Section 1201 et seq.) and the Hatch Act (18 U.S.C.
Section 595) do not apply to Petitioner.
In contrast, Petitioner complies with certain New York State laws
applicable to New York State public agencies.
For example, Petitioner operates
under New York State's Taylor Act (Civil Service Law Section 200 et. seq.), and
Petitioner employees who are United States Citizens belong to a union
representing State employees, the Civil Service Employees Association.
Subsequent to 1938, the Resolution has been amended six times (e.g., to
permit the purchase of two other bridges across the Niagara River, to enhance the
Commission's borrowing powers). None of these amendments altered the governance
of Petitioner by local public officials or gave the federal government any voice
in Petitioner's affairs.
The most recent amendment to the Resolution underscores Petitioner's non­
federal nature. Under the amendment, Petitioner is "deemed for purposes of all
Federal law to be a public agency or public authority of the State of New York,
notwithstanding any other provision of law." Pub. L. 102-240, § 1070(c), 105
Stat. 914(1991).
As a result of rapidly increasing traffic flows across the Niagara River
bridge crossings, Petitioner has determined that significant bridge improvements
are and will be needed to afford adequate vehicular capacity, with direct public
benefit to communities in the immediate vicinity of Niagara Falls, New York, as
well as to all traffic crossing the Niagara River from or to New York State.
Therefore, a new bond issue is contemplated.
Section 103(a) of the Internal Revenue Code of 1986, as amended ("IRC"),
states that "gross income does not include interest on any State or local bond."
Section 103(c)(1) of the IRC provides, in turn, that the phrase "State or local
bond" means "an obligation of a State or political subdivision thereof."
Since Petitioner's obligations are treated as obligations of a New York
State public agency or New York State public authority, holders of obligations
issued by Petitioner are not subject to federal personal income tax on interest
paid by Petitioner.
With respect to residents of New York State, section 611(a) of the Tax Law
provides that the New York taxable income of a resident individual is the
individual's "New York adjusted gross income less his New York deduction and New
York exemptions .... "

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Income Tax
April 20, 1992

Section 612(a) of the Tax Law, provides that the "New York adjusted gross
income of a resident individual" means the individuals's "federal adjusted gross
income as defined in the laws of the United States for the taxable year, with the
modifications specified in this section."
There are two relevant add
modifications contained in section 612(b) of the Tax Law.
First, section 612(b)(1) of the Tax Law prescribes an addition modification
described as follows:
"[i]nterest income on obligations of any state other than
this state, or of a political subdivision of any such other
state unless created by a compact or agreement to which
this state is a party, to the extent not properly
includible in federal adjusted gross income."
Second, section 612(b)(2) of the Tax Law prescribes an addition
modification described as follows: "[i]nterest...income on obligations or
securities of any authority, commission, or instrumentality of the United States,
which the laws of the United States exempt from federal income tax but not from
state income taxes."
Accordingly, interest income that is exempt for federal income tax purposes
that is not required to be added to federal adjusted gross income pursuant to
section 612(b)(1) and (2) of the Tax Law would also be exempt for New York State
personal income tax purposes.
Section 1302(a) of the Tax Law provides that the New York City Personal
Income Tax is imposed on the "city taxable income of every city resident
individual". Pursuant to Section 1303 of the Tax Law, "The City taxable income
of a city resident individual shall mean and be the same as his New York taxable
income as defined in section [611] of this chapter..." In effect, under section
1303 of the Tax Law, the income base for the New York City Personal Income-Tax
fully conforms to the New York State Personal Income tax.
Where interest
payments are exempt from the State tax, the interest payments are exempt from the
City tax as well.
As described herein, Petitioner has been charged with the responsibility of
improving and maintaining various bridges located in the immediate vicinity of
Niagara Falls, New York. In this role, Petitioner carries out an essential
government function similar to other New York bridge agencies, e.g. the Buffalo
and Fort Erie Public Bridge Authority and the New York State Bridge Authority.
Members of Petitioner comprise appointees of the Governor of New York State,
but no other State.
As a matter of federal law, Petitioner has been deemed a New York State
public authority or public agency.

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Income Tax
April 20, 1992

Because of the clear absence of any direct relationship to any State other
than New York State, the addition modification required by section 612(b)(1) of
the Tax Law for interest paid on obligations of states other than New York State,
or their political subdivisions, does not apply.
In addition, except for its creation, the federal government has played no
role in the activities of Petitioner.
The federal government does not
participate in the appointment of members of Petitioner. The federal government
does not fund petitioner, nor does it conduct financial oversight over the
operations of Petitioner. The indebtedness of Petitioner is neither indebtedness
of the federal government nor guaranteed by the federal government. Significant
federal statutes applicable to the federal government do not apply to Petitioner.
Moreover, the federal government has explicitly declared in legislation
that Petitioner is a New York State public agency or public authority, and has
disclaimed any relationship to Petitioner.
In conclusion, because Petitioner is neither another State or political
subdivision thereof within the meaning of section 612(b)(1) of the Tax Law, nor
a federal authority, commission, or instrumentality within the meaning of section
612(b)(2) of the Tax Law, interest paid on obligations of Petitioner, which is
exempt from federal income tax, also is exempt from the New York State and New
York City Personal Income Taxes.

DATED:

April 20, 1992

NOTE:

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.