City of Woodway, McLennan County, Texas v. United States

GOLDBERG, Circuit Judge:

In this tax refund suit, we are asked whether a corporation may escape tax liability for depreciation recapture by virtue of an Internal Revenue Code provision 1 which creates an exemption for income which is derived from a public utility and which accrues to a municipality.

Appellant, the City of Woodway, became the sole shareholder of a private water-supply company. Appellant’s argument that the company’s income is exempt from taxation is based on a complex series of transactions which includes purchase of the water-supply company’s stock, amendment of the…