Joliet & CR Co. v. United States

• Decision Date: 10 March 1941
• Docket Number: No. 7458.,7458.
• Citation: 118 F.2d 174
• Parties: JOLIET & C. R. CO. v. UNITED STATES.
• Court: U.S. Court of Appeals — Seventh Circuit

118 F.2d 174 (1941)

JOLIET & C. R. CO. v. UNITED STATES.

No. 7458.

Circuit Court of Appeals, Seventh Circuit.

March 10, 1941.

Silas H. Strawn, Frank H. Towner, and Arthur D. Welton, Jr., all of Chicago, Ill., for appellant.

J. Albert Woll, U. S. Atty., of Chicago, Ill., and Samuel O. Clark, Jr., Asst. Atty. Gen., for appellee.

Before SPARKS, MAJOR, and KERNER, Circuit Judges.

MAJOR, Circuit Judge.

This is an appeal from a judgment, entered May 13, 1940, disallowing a claim to recover income taxes paid for the years 1931 to 1934, inclusive, in the aggregate amount of $50,799.98, plus interest.

On January 1, 1864, the plaintiff, being the owner of thirty-seven miles of railroad between the cities of Joliet and Chicago, Illinois, entered into an indenture, under which it granted, demised and leased the railroad, together with all the appurtenances thereof, to the Chicago & Alton Railroad Company, its successors and assigns, without reservation, forever. The indenture contained no provision under which the tenure of the grantee therein could be terminated for failure to perform any of the covenants thereof, nor did it contain any provision for the payment of rent to the grantor. In consideration therefor, the Chicago & Alton Railroad Company obligated itself to guarantee and pay to the plaintiff's stockholders forever, in quarterly installments, an annual dividend of seven per cent per share on the par value of all outstanding capital stock. For the purpose of paying such dividend it further obligated itself to deposit with the United. Trust Company of New York, funds sufficient therefor. In addition to these payments, the Chicago & Alton was required to pay any and all Federal taxes that might arise because of the payment of the dividend. A statement of these guaranteed payments was printed on all stock certificates issued by the plaintiff company. The number of outstanding shares was limited to fifteen thousand, having a par value of $100 per share, so that the annual payment required was $7 per share, or a total of $105,000 per year. This amount, beginning in 1864, was paid every year, including the years 1931 to 1934, inclusive. In addition to that, the Chicago & Alton Railroad Company and its successor, the Alton Railroad Company, paid the income taxes of the plaintiff in the amount of approximately $16,000 for each of the years involved. During these years, no resolutions declaring dividends were adopted by plaintiff's Board of Directors.

It is the contention of plaintiff that the indenture of 1864, being a lease in perpetuity and containing no defeasance clause, effectively conveyed to the grantee therein, its successors and assigns, all right, title and interest in the property. Therefore, the plaintiff, having divested itself of all of its property absolutely and, also, all control over and right to the payments made to the stockholders by the grantee, is not, and can not be, in receipt of income, actually or constructively.

The defendant, on the other hand, without conceding that the agreement was a conveyance in fee, argues that such a construction is immaterial inasmuch as the payments were received by the plaintiff's stockholders by virtue of their stock rights, and, consequently, such money is income constructively received by the plaintiff.

The indenture of 1864 is what is commonly called a lease in perpetuity. Such an instrument, however, can effectively convey a fee, if its terms are sufficiently broad to warrant such an interpretation. The interest conveyed will be determined by the habendum, for it is the purpose of this part of the instrument to define the nature and quality of the estate taken by the grantee. Jamaica Pond Aqueduct Corp. v. Chandler, 9 Allen 159, 91 Mass. 159. The habendum in the present instrument is as follows: "To have and to hold, the said above demised and leased premises, together with all the appurtenances thereof without reservation, * * * Forever, * * *". The grantor in this instrument has parted without reservation with all interest in the property. A reading of the instrument discloses that while it is called a lease, it has none of the characteristics thereof. There is no termination of the length of time the grantee is to hold the estate, no reservation of rent, no defeasance, and no right to reenter on default by the grantee. The importance of the lack of the defeasance clause is noted in State ex rel. Glenn v. Mississippi River Bridge Co., 134 Mo. 321, 35 S.W. 592, 596: "* * * Since the bridge company, as against the defendant railroad company, under the ruling in the case of State v. Mississippi River Bridge Co., 109 Mo. 253, 19 S.W. 421, is held to be the owner of the bridge, by reason of the defeasance clause in the lease from the bridge company to the defendant railroad company, by reason of a lack of a similar clause in the contract entered into between the Louisiana & Missouri River Railway Company and the bridge company, the defendant railroad company, as the assignee of the Louisiana & Missouri River Railway Company, cannot now be considered to be the owner of the bridge * * *."

The indenture in the instant case was considered in Huck et al. v. Chicago & Alton Railroad Co., 86 Ill. 352, at page 354, where the court, said: "We think it very clear, from the corporate powers conferred by its charter, the terms of the leases, and the provisions of the revenue law referred to, that the Chicago and Alton Railroad Company is, for all purposes of taxation, at least, if not for all other purposes, to be regarded as the owner of all the leased property. * * *" Thus, there is little, if any, question that the indenture of 1864 divested the plaintiff of all right, title and interest in the property, and vested a full and indefeasible title in the grantee, its successors and assigns. Chicago, Burlington & Quincy Railroad Co. v. Boyd, 118 Ill. 73, 7 N.E. 487.

The defendant does not seriously contend to the contrary, but points out that the parties treated the situation as one of a lessor-lessee relationship in that they entered the payments in question on the books as "income from lease of road" in one case, and "rent for lease of road" in the other. Such entries, however, can not be termed a voluntary admission on the part of the parties because made in accord with a classification established by the Interstate Commerce Commission. Sec. 20 of the Act to Regulate Commerce, 49 U.S.C.A. § 20. Under such circumstances it can not be said that their acts in this respect amount to an interpretation by the parties. The defendant further contends that the requirement that the grantee should, at its own cost and expense, keep the road in good repair and working order, is inconsistent with a fee conveyance. In view of what we have said, we are of the opinion that this isolated provision does not amount to a defeasance clause, and that it is not inconsistent with a fee grant.

Defendant further contends that it is immaterial if the indenture be construed as an outright conveyance of the property; that the payments made to the stockholders, whatever they be termed, are still income to the plaintiff because the payments are the consideration for the conveyance, and, consequently, are earned by the corporation. This contention, in our judgment, presents the real issue in controversy. The authorities relied upon by the defendant in substantiation of this position are the so-called "constructive receipt" cases. In Gold & Stock Telegraph Co. v. Commissioner, 2 Cir., 83 F.2d 465, the agreement was for a term of 99 years, and the taxpayer, in case of default in payment, had the option to terminate the agreement and to resume possession of the property. The property was to be surrendered in good condition at the end of the term, and the lessee agreed to pay, as an annual rental, six per cent on the capital stock of the taxpayer direct to the stockholders of the taxpayer. The court, on page 467 of 83 F.2d said: "* * * Had all future rentals been assigned by the lessor to the stockholders, the case would have been different from that before us. * * *"

The situation in United States v. Northwestern Telegraph Co., 2 Cir., 83 F.2d 468, and Pacific & Atlantic Telegraph Co. v. Commissioner, 2 Cir., 83 F.2d 469, is substantially similar, the leases being for terms of 99 years and 999 years, respectively. In the former case, the court, on page 469 of 83 F.2d, said: "* * * The liability is because the property, which belongs to whoever may be the stockholders as associates in corporate form, produces...