Southern Pac. Co. v. Lowe

Citation238 F. 847
Decision Date06 January 1917
Docket Number23.
PartiesSOUTHERN PAC. CO. v. LOWE, Collector of Internal Revenue.
CourtU.S. District Court — Southern District of New York

Gordon M. Buck, of New York City, for plaintiff.

H Snowden Marshall, U.S. Atty., of New York City (Ben A Matthews, Asst. U.S. atty., of New York City, of counsel) for defendant.

MANTON District Judge.

The plaintiff has instituted this action alleging two causes of action, seeking to recover in the first $131,563.80 and in the second $183,882.64, taxes paid under the income tax law. By stipulation between the parties only the second cause of action was litigated, the first cause to await the outcome of the trial of the second.

This income tax was assessed against dividends received by the plaintiff during the first six months of 1914. During this period, the Central Pacific Railway Company, whose entire corporate stock was held by the plaintiff, paid to the plaintiff four several dividends aggregating $18,361,597.48. These dividends were paid as follows:

Jan. 10, 1914, 20% on preferred stock $ 3,480,000.00
Jan. 10, 1914, 20% on common stock ............................. 13,455,100.00
Jan. 2, 1914, special dividend distributing proceeds of sale of land at Rockaway Beach sold in December, 1913 ..... 514,000.00
Jan. 13, 1914, regular 6% dividend ................................ 912,497.48
--------------
Making a total of ....................................... $18,361,597.48

This last item represents only the portion of the dividend paid on January 13, 1914, which the plaintiff claims exceeded the net earnings of the company during the period. The plaintiff is the holder of all or the large majority of stock of a number of railroad corporations, including the Central Pacific Railway Company, and forms a unified transportation system. The earnings of the companies are kept together with the plaintiff as the banker of the system. The Central Pacific Railway Company kept no bank account, but its earnings were deposited with the bank accounts of the plaintiff. If the railway company needed money during this period for additions and betterments, the necessary funds were advanced by the plaintiff. This system was in practice prior to the declaration of the four dividends in question. In fact, the plaintiff has owned the entire capital stock of the Central Pacific Railway Company ever since the latter's incorporation, and from this it is claimed by the plaintiff that it became neither richer nor poorer by the declaration and payment of these dividends. Plaintiff further claims that the dividends in question were not earned during the period of taxation, to wit, the first six months of 1914.

It also claims that the proof warrants a finding that these dividends were paid from surplus resulting from the operations of the railway company prior to July 1, 1909, and that the net credits or debits to surplus for each of the fiscal years from 1910 to 1914, inclusive, shows no such earnings from which the dividends in question might be paid. The testimony of the plaintiff's accountants, together with its books, would indicate that the claim of the plaintiff was well founded, so that it may be assumed that the two extraordinary dividends of 20 per cent. each on the preferred and common stock of the railway company, paid in January, 1914, and the extraordinary dividends of $514,000 likewise paid on the preferred and common stock in January, 1914, must have been paid wholly out of the surplus accruing prior to July 1, 1909, and that at least $2,313,234.20 of the 6 per cent. dividend paid on the common stock in June, 1914, must have been paid out of the surplus accruing prior to July 1, 1909.

Exhibit H shows the surplus on June 30, 1909, and the surplus at the close of each fiscal year up to and including June 30, 1914. On June 30, 1909, the railroad company had a surplus of $25,250,361. Dividends paid during the next five fiscal years, according to the plaintiff's books of account, indicate no such amount in the profit and loss account as would permit of the payment of the dividends in question. It is therefore reasoned by the plaintiff that these moneys paid in dividends must have been paid out of the surplus which accrued prior to July 1, 1909; but how this surplus is made up, whether from earnings of the company or increase in value of land, does not appear. The learned counsel for the plaintiff claims:

'It follows therefore that all three of the extraordinary dividends must have been paid from surplus, and that all of the four dividends must have been paid from surplus except $1,727,295.80; the difference between the sum last mentioned and the amount of the dividend, or $2,313,234 is the amount which must have been paid from surplus.'

The burden of proof was upon the plaintiff to establish a payment from the capital, not from income as dividends. This burden it has failed to sustain.

When this tax was levied, a protest was made and a hearing had before the Treasury Department, a brief was submitted in behalf of the plaintiff, and, after an adverse ruling before the department, the plaintiff, under protest, paid the tax, and now brings this action to recover the moneys so paid.

The Act of October 3, 1913 (Act Oct. 3, 1913, c. 16, Sec. II G (a-c), 38 Stat. 172, 173 (Comp. St. 1913, Secs. 6327-6329)), provides:

'G. (a) That the normal tax hereinbefore imposed upon individuals likewise shall be levied, assessed, and paid annually upon the entire net income arising or accruing from all sources during the preceding calendar year to every corporation. * * *
'(b) Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, * * * received within the year from all sources, (first) all * * * ordinary and necessary expenses paid within the year; * * * (second) all losses actually sustained within the year; * * * (third) the amount of interest accrued and paid within the year; * * * (fourth) all sums paid by it within the year for taxes. * * *
'(c) The tax herein imposed shall be computed upon its entire net income accrued within each preceding calendar year ending December 31st. * * * '

The sixteenth amendment of the Constitution gave Congress the power to lay and collect taxes on income from whatever source derived, without apportionment among the several states, without regard to any census or enumeration. This has been held to be constitutional. Brushaber v. Union Pacific, 240 U.S. 1, 36 Sup.Ct. 236, 60 L.Ed. 493; Stanton v. Baltic Mining Co., 240 U.S. 103, 36 Sup.Ct. 278, 60 L.Ed. 546. The application of this statute presents two questions: First, whether the dividends in question may properly be considered a part of the gross income of the plaintiff; and, second, whether such dividends were received within the year.

The plaintiff advances the claim that these moneys paid in dividends came from surplus earnings, and because they were surplus they were, in fact, an addition to and a part of the capital of the railway company, and that they were in no sense income.

The defendant contends that they constitute income received within the year. The plaintiff says that because of the method of bookkeeping and the manner of handling the moneys of the Central Pacific Railway Company, in truth and in fact, the money was in the actual possession of the plaintiff at all times. Be this as it may, if it was money earned by the railway company's capital, because the physical possession and books of account represented it as the plaintiff's property by reason of possession, nevertheless it does not change the ownership of the property, for legally it was the property of the railway company and that company was entitled to all the rights of ownership. Therefore, when its board of directors permitted the income to accumulate into a surplus so large that at a later day it was justified in declaring special dividends, I think it was still income for the stockholders to which they could only become entitled when the dividends were declared.

I do not think that 'income,' as used in the statute should be given a meaning so as to include everything that comes in. The true function of the words 'gains' and 'profits' is to limit the meaning of the word 'income' and to show its use only in the sense of receipts which constituted an accretion to capital. So the function of the...

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5 cases
  • Tax Commissioner v. Putnam
    • United States
    • United States State Supreme Judicial Court of Massachusetts
    • June 27, 1917
    ......653; 149 C. C. A. 649, we are constrained not. to follow it. See in this connection Southern Pacific Co. v. Lowe, 238 F. 847. . .        Therefore, in this. particular the income ......
  • Malley v. Walter Baker & Co.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (1st Circuit)
    • May 17, 1922
    ...... Fed. Cases, Sec. 547; Schafer v. Craft, Collector. (D.C.) 144 F. 907, 909; South Pacific v. Lowe,. Collector (D.C.) 238 F. 847, 849; Cohen v. Lowe,. Collector (D.C.) 234 F. 474, 476. . . ......
  • Towne v. Eisner
    • United States
    • U.S. District Court — Southern District of New York
    • June 15, 1917
    ...... were subject to the Act, or the recent case of Southern. Pacific Co. v. Lowe (D.C.) 238 F. 847. . . It is. not important whether in any given ......
  • Meischke-Smith v. Wardell
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • February 12, 1923
    ...... line of the St. Louis, Iron Mountain & Southern Company in. the transportation of passengers; from refusing to haul such. cars on passenger ... . . The. plaintiffs in error cite the case of Southern Pacific Co. v. Lowe, 247 U.S. 330, 38 Sup.Ct. 540, 62 L.Ed. 1142,. and the case of Gulf Oil Corporation v. Lewellyn, ......
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