Atlantic Coast Line R. Co. v. Commonwealth

• Decision Date: 16 April 1946
• Citation: Atlantic Coast Line R. Co. v. Commonwealth, 302 Ky. 36, 193 S.W.2d 749 (Ky. 1946)
• Parties: Atlantic Coast Line R. Co. v. Commonwealth.
• Court: Supreme Court of Kentucky

302 Ky. 36

Atlantic Coast Line R. Co. v.Commonwealth.

Court of Appeals of Kentucky.

February 22, 1946.

As Modified on Denial of Rehearing April 16, 1946.

1. Statutes.— The meaning of statute subjecting to tax income derived from business done, property located or sources in state is to be ascertained from rational consideration of whole chapter relating to income taxes in correlation with general taxing system.KRS 141.040.

2. Statutes.— In construing statute, court would indulge presumption that Legislature acted with knowledge that traditional methods would be used to determine its will and intention.

3.Statutes; Taxation.— The obligation to pay taxes rests solely on legislation and legislative intent to tax must clearly appear.

4.Statutes; Taxation.— Except as respects exemption, tax laws are to be strictly construed against the state and in favor of taxpayer, especially with respect to penalties or harsh enforcement.

5. Statutes.— Taxing statutes are framed to produce revenue and must be given a reasonable construction.

6. Taxation.— Under the doctrine of ejusdem generis and the related rule of noscitur a sociis, the generic word "sources" in statute imposing tax on income derived from business done, property located, or sources in state, must be presumed to be restricted in some degree by the specific clauses or to embrace origins of similar character or of a nature analogous to those expressly enumerated.KRS 141.040.

7. Taxation.— The provision of income tax statute requiring a report of dividends paid to residents of state, but not requiring report of dividends paid to nonresidents, reveals legislative intent to tax dividends received by residents of state and none other.KRS 141.010(3), 141.150(1, 3).

8. Taxation.— Equality and uniformity are presumed and discrimination and irregularity rejected, where a tax statute, or any portion of it, must be construed or applied by implication.

9. Taxation.— Uniformity required of an income tax is uniformity within a reasonable classfication.

10. Statutes.— Statutes levying taxes will not be extended by implication beyond clear import of language used and their operation will not be enlarged so as to embrace matters not specially pointed out.

11.Constitutional Law; Statutes.— The department of revenue may not by regulation broaden or narrow a tax base established by statute, but, where tax statute has been put into operation and construction contemporaneously placed on it by agency responsible for its administration and enforcement, that construction, especially if followed for a considerable period, is entitled to great respect as being very probably a true expression of legislative purpose.

12. Statutes.— Administrative construction placed on statute will not be adopted unless statute is ambiguous in its terms and its true meaning is difficult to ascertain.

13. Taxation.— The pyramiding of taxes on original earnings is opposed by public policy unless clearly manifested by a statute, and is never to be imposed by presumption.

14.Constitutional Law.— The wisdom or expediency of legislation is no concern of the court.

15. Statutes.— In interpreting a doubtful word of controlling importance or in construing an ambiguous taxing statute, the consequences of one or another conception may be considered.

16. Statutes.— If one construction of taxing statute reconciles ambiguity with other provisions of statute clearly expressed, produces uniformity and equality, and results in equitable treatment, economic stability, practical administration, and gives recognition to principles of reciprocity between states, that construction should be adopted.

17.Constitutional Law; Statutes.— If one construction of ambiguous taxing statute threatens constitutionality, puts particular provision out of line with rest of statute, results in discrimination and causes pyramiding of taxes, unsettles administrative policy, reverses contemporaneous construction of statute, and violates principles of reciprocity between states, such construction should be denied.

18. Taxation.— Under statute imposing tax on income derived from business done, property located, or "sources in this state", the quoted phrase does not include receipt of dividends by a foreign corporation, authorized to do business in state, on stock of domestic corporation, where stock is held solely as an investment or otherwise, and has no fair relationship to business done by corporation or its property located in state.KRS 141.040, 141.120.

Appeal from Franklin Circuit Court.

Woodward, Dawson, Hobson & Fulton and Carl H. Davis for appellant.

Eldon S. Dummit, Attorney General, Roy W. House, Assistant Attorney General, and Henry S. Chesnut for appellee.

Before W.B. Ardery, Judge.

OPINION OF THE COURT BY STANLEY, COMMISSIONER.

Reversing.

The judgment is for $2,358,332 against the appellant, Atlantic Coast Line Railroad Company, for income taxes for eight years, 1936 to 1943.Penalties and interest to the amount of $1,212,668 are included in the judgment, the tax itself being $1,145,664.

The section of the statutes upon which the judgment principally rests, and on the construction of which our decision depends, is Section 4281b-14(3), Kentucky Statutes, and, since 1942, Kentucky Revised Statutes 141.040, the applicable portions of which are quoted for ready reference:

"Every corporation organized under the laws of this state and every foreign corporation doing business in this state * * * shall pay for each taxable year a tax to be computed by the Department of Revenue upon the entire net income of the corporation derived from business done, property located or sources in this state.This tax shall be at the rate of four percent of the entire net income of the corporation, or the portion thereof taxable within this state, determined as provided in this chapter."

The appellant is a Virginia corporation, but has its principal place of business in North Carolina.Solely as an investment it owned (subject to a trust indenture) during the taxable period 596,700 shares of the capital stock of the Louisville & Nashville Railroad Company, a Kentucky corporation, with its principal place of business in Louisville.The investment was originally made in 1902 and the number of shares owned has increased proportionately as the capital stock of the company was increased, the proportion of the holding always being 51% of the whole.The certificates have been in New York and pledged to secure bonds issued initially for the purchase of the stock.The dividends have been paid to the Atlantic Coast Line Railroad Company.The aggregate is $28,641,600 for the period covered by the suit.The stock has been held solely as an investment, apart from the appellant's regular business as a common carrier, and the dividends thereon were not received in connection with the transaction of the railroad business.

We are not concerned with any question of constitutional power, but only with one of statutory construction.

The adjudged liability is predicated upon the ruling of the trial court that (I)the appellant, a foreign corporation, was "doing business in this state"; and (II) the dividends were derived from "sources in this state."

I.In the year 1924 all of the property of a line of railroad of 276 miles, extending from a point 2.8 miles in Kentucky to Spartanburg, S.C., where connection is made with a line to the seaboard, was leased to the Atlantic Coast Line Railroad Company and the Louisville & Nashville Railroad Company, jointly, for 999 years.These two companies were not permitted to operate the line as a part of the Atlantic Coast Line system, but were required to establish a separate operating organization, known as the Clinchfield Railroad Company, which is not incorporated.This is a "separate operating unit, having a responsible management directly in charge of the operations of such properties."90 I.C.C. 113, Finance Docket 3131.It is a "neutral line not operated in conjunction or under common management or control" with the Atlantic Coast Line Railroad Company. Georgia & Florida Railroad v. Atlantic Coast Line Railroad Company, 191 I.C.C. 489;Rates on Chert, Clay, Sand and Gravel in Georgia, 197 I.C.C. 215;Atlantic Coast Line R. Co. v. United States, 284 U.S. 288, 52 S. Ct. 171, 76 L. Ed. 298.

Returns for the computation of franchise taxes were duly made by the operating entity, the Clinchfield Railroad, and they were specifically accepted by the Department of Revenue of the State as being in fact the returns of the Atlantic Coast Line Railroad Company covering the operation of the leased properties.Although having full information of the status, it appears that the Department has not heretofore regarded the Atlantic Coast Line Railroad Company as otherwise doing business in Kentucky within the income tax statutes.It has not required the company to render a report of its payments of dividends to residents of this state as is required by KRS 141.150, of "every corporation subject to the jurisdiction of this state, unless excused by the Department of Revenue."

Apparently in anticipation of being permitted to operate the Clinchfield line, the appellant, in 1924, filed with the Secretary of State of Kentucky, in conformity with section 841, Kentucky Statutes(now KRS 277.020), proper instruments by which it became qualified to operate a railroad in Kentucky.At the same time it designated and has continuously maintained a Kentucky process agent.It has had no office or other officer in the state.These proceedings, however, would not of themselves be controlling or constitute the doing of business if in fact the right to operate a railroad in Kentucky was never exercised.

It is doubtful whether the status of the appellant constitutes doing business in Kentucky.It might be said, however, that it is doing so through the unincorporated Clinchfield Railroad as a mere operating...