Railway & Express Co. v. United States
| Decision Date | 07 March 1932 |
| Docket Number | No. K-158.,K-158. |
| Citation | 56 F.2d 687 |
| Parties | RAILWAY & EXPRESS CO. v. UNITED STATES. |
| Court | U.S. Claims Court |
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Lyle T. Alverson, of New York City (Wayne Johnson, of New York City, on the brief), for plaintiff.
James A. Cosgrove, of Washington, D. C., and Charles B. Rugg, Asst. Atty. Gen. (Lionel A. Norman, of Washington, D. C., on the brief), for the United States.
Before BOOTH, Chief Justice, and LITTLETON, WILLIAMS, WHALEY, and GREEN, Judges.
The first question is whether the plaintiff is entitled under section 236 of the Revenue Acts of 1918 and 1921 (40 Stat. 1080, 42 Stat. 257) to a credit for 1920 and 1921 in computing the income subject to the normal income tax of 10 per cent. of the amount of interest received on obligations of the United States which interest was included in income for these years.
The Commissioner of Internal Revenue denied the plaintiff a credit in the amount of $802,906.40 for 1920 and $228,426.94 for 1921, and the defendant here contends that this action should be approved on the ground that the legal relationship between the plaintiff and the Director General of Railroads was that of fiduciary and beneficiary; that the funds which the plaintiff invested in the obligations of the United States producing this interest belonged to the United States. The defendant now agrees that, if it should be held that the securities in question were purchased with funds belonging to the Director General or the United States, the income received thereon should not be included in gross income. It further agrees that, if the relationship of the Director General and plaintiff was that of creditor and debtor, the plaintiff is entitled to the credits claimed, and properly treated them on its returns. The history and purpose of plaintiff's organization are shown by the agreement of June 10 of the old express companies, the contract of June 21, 1918, between the Director General of Railroads and the old express companies, and the contract of June 26, 1918, between the Director General and the plaintiff. The legal relationship of the Director General and the plaintiff and the plaintiff's rights and responsibilities are to be determined from these agreements and the practical construction thereof by the parties concerned.
We are of the opinion that the obligations of the United States which produced the interest in question for 1920 and 1921 were not the property of the Director General of Railroads or of the Treasury Department, but were plaintiff's property and that the interest therefrom was properly treated by it on its returns. The relationship of the Director General of Railroads and the plaintiff was contractual and was that of debtor and creditor, and not fiduciary. A fiduciary relationship connotes a relation of trust as the basis of obligation of the one and of security for the protection of the right of the other, rather than a basis of contractual provisions. It requires an element of confidence reposed by one in another without that limitation upon authority or accountability that contract terms impose, or without those exact limitations that are applicable in determining the rights and responsibilities of a creditor and debtor. Fiduciary relationship cannot exist in those instances where the contract provisions are mandatory, because of the nature of the work, or where the contract is resorted to in order that the exact rights and responsibilities may be definitely defined.
There is no similarity between the operations of the plaintiff company and those of the railroads under federal control. Plaintiff took over the properties of all of the express companies and carried on the express business in its corporate capacity with its own properties subject to the terms of the contract with the Director General of Railroads. Although the President in November, 1918, issued a proclamation assuming control of the system of transportation called the American Railway Express Company and directed that the possession, control, operation, and utilization of said express transportation system by him undertaken should be exercised by the Director General of Railroads, the Director General did not assume direction, control, and operation of the express transportation system, but by a further contract with the plaintiff of November 21, 1918, after the President's proclamation, adopted, ratified, and confirmed the contract with plaintiff of June 26, 1918, and agreed that the express transportation business was to be managed and conducted during the period of federal control, under the terms of said contract, by the board of directors, officers, and employees of the plaintiff company, and that the contract of June 26, 1918, should fix, according to law, the compensation to which the plaintiff should be entitled so long as the said agreement remained in force. The Director General had assumed direction, control, and operation of railroads, and the contract with plaintiff was for the purpose of centralizing the management and control of the express transportation business in one company and providing for certain payments by that company to the Director General in lieu of express-privilege payments formerly made to the railroads, prior to federal control, by the various express companies carrying on express business over their lines. The properties of the express companies and the express business carried on in the United States might have been taken over and directly managed and operated by the Director General, as was done in respect to the properties of the business of railroads. This however, was not done; the contractual arrangement being used instead. There was no supervision or control of the details of operations. Neither the Director General nor the Treasury Department evidenced any control over or interest in the investment affairs of the plaintiff. The government assumed no responsibility for the payment of current operating expenses or claims against the corporation. For all of these matters the plaintiff was liable in its corporate capacity, and, having executed the contract which left the management of the affairs of the express companies in the hands of the plaintiff subject to the provisions covering operations, payment of expenses, claims, taxes, and disposition of profits, etc., the respective rights and obligations with reference to the operation of the express business, as and when funds accumulated, of necessity became one of debtor and creditor.
The contract of June 26, 1918, was similar in many respects to contracts between express companies and railroads free of government control. The business was to be "conducted under such rates, charges, classifications, regulations, and practices as are now or may hereafter be lawfully established." The Director General was required, as had been the railroads, to "furnish adequate and suitable space in cars properly equipped, lighted, and lettered, `American Railway Express Company,' of the kind customarily furnished by railroad companies for the use of express companies on such passenger, mail, and express trains as may be designated from time to time by the Director General" and to permit the use of "a portion of station buildings on the lines covered by this agreement without charge therefor." The plaintiff was required to "use its teams, property, offices, and other facilities, and its agents and employees in operating an express transportation business on all the lines of railroad under Federal control." It was liable for all loss or damage to the facilities furnished by the Director General and for "all claims on account of loss, damage, or delay." It was precluded from making a defense in any action at law or equity "that it is by virtue of this contract an instrumentality or agency of the Federal Government," except with the approval of the Director General.
Under the revenue provisions, article 8 of the contract, the Director General was to receive 50.25 per cent. of the gross receipts from the express business over the roads under federal control for express privileges, but article 27, under which the plaintiff was protected against operating losses in any year, authorized plaintiff, in the event of such losses, to reduce the amount of 50.25 per cent. of the gross income, otherwise payable to the Director General for express privileges in a subsequent year. The balance of 49.75 per cent. plus the revenues from the express business over other railroads, after payments of the amounts due under operating contracts, plus all other income, was to be paid into a "Gross contract income," and from the latter the operating expenses were to be paid by plaintiff. Provision was also made with reference to the use and manner of disposition of the remainder of the fund to be identified as the "Contract income for division," in connection with which it was provided in part that "it is the understanding and agreement of the parties that the `contract income for division' is not the income or property of the express company but is a fund resulting from the terms of this agreement in which the Director General and the express company have a mutual interest." The last-mentioned provision with reference to the "contract income for division" is immaterial to a consideration of this question, since there was no "contract income for division" and no portion of such a fund produced any interest for which plaintiff claims credit.
There were other provisions in the contract with reference to the keeping of accounts, the payment of salaries,...
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