Atlantic Coast Line R. Co. v. Com.

• Decision Date: 22 February 1946
• Citation: 302 Ky. 36,193 S.W.2d 749
• Parties: ATLANTIC COAST LINE R. CO. v. COMMONWEALTH.
• Court: Kentucky Court of Appeals

193 S.W.2d 749

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.

Appeal from Circuit Court, Franklin County; W. B. Ardery, Judge.

Action by the Commonwealth of Kentucky against the Atlantic Coast Line Railroad Company to recover income taxes. Judgment for plaintiff, and defendant appeals.

Reversed.

Woodward, Dawson, Hobson & Fulton, of Louisville, and Carl H. Davis, of Wilmington, N. C., for appellant.

Eldon S. Dummit, Atty. Gen., Roy W. House, Asst. Atty. Gen., and Henry S. Chesnut, of Louisville, for appellee.

STANLEY Commissioner.

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 The investment was originally made in 1902 and the number of shares owned has increased proportionately as the capital stock of the company was increased, the proportion of the holding always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 agency. Commonwealth v. Southern R. Co., 193 Ky. 474, 237 S.W. 11. However important the question may be, we bypass a decision of it and shall assume for the purpose of this case that the appellant is a foreign corporation doing business in Kentucky within the contemplation of the income tax statute.

II. The income subject to the tax is that 'derived from business done, property located or sources in this state.' KRS 141.040, above quoted. The decision turns on the interpretation to be given the word 'sources.' Its use and meaning are uncertain. It is to be ascertained and given from the rational consideration of the whole chapter of the statutes relating to income taxes in correlation with our general taxing system. All relevant rules for the interpretation of statutes are brought to bear in resolving the doubtful meaning. We indulge the presumption that the Legislature acted with the knowledge that these traditional methods would be used to determine its will and intention.

Since the obligation to pay taxes rests solely on legislation, the legislative intent to tax must clearly appear. It is an established rule that, except as respects exemption, tax laws are to be strictly construed against the state and in favor of the taxpayer, especially with respect to penalties or harsh enforcement. Kentucky Tax Commission v. Fourth Avenue Amusement Co., 293 Ky. 668, 170 S.W.2d 42. The broad statement is, of course, subject to qualifications according to differing elements and factors. It is always to be borne in mind that the taxing statutes are framed to produce revenue, and must be given a reasonable construction--not one that 'squeezes everything out of the statute which unyielding words do not perforce retain,' nor one to expand the law and bring within its terms what was omitted. Cooley, Taxation, Sec. 505; Sutherland, Sec. 2115; Martin v. F. H. Bee Shows, 271 Ky. 822, 113 S.W.2d 448.

1. Is the word 'sources' to be set apart to itself as independent and as having no relationship to the preceding clauses 'business done' and 'property located'? If it is, then for what use were those clauses intended? The word 'sources' standing alone is all inclusive; and standing alone would cover income from business done and property located in the state. This creates ambiguity. The broadness of the language does not permit us to tear these clauses out of the context, nor to isolate the word 'sources.' Left in and given effect, under the doctrine of ejusdem generis and the related rule of noscitur a sociis, the generic word 'sources' must be presumed to be restricted in some degree, at least, by those specific clauses, or to embrace origins of similar character or of a nature analogous to those expressly enumerated. It cannot be said that the two clauses exhaust the classes of income so that there is nothing ejusdem generis left for the rule to operate on hence that a meaning must be given to the general word different from that indicated by them. Burke v. Oates, 293 Ky. 563, 169 S.W.2d 608; 50 Am.Jur. Statutes, secs. 249, 250. It seems to us, therefore, that 'sources' was intended to mean income having some origin that is at least related to 'business done,' i. e., some thing done or action taken, or to 'property located,' i. e., used, in Kentucky.

The conclusion does not rest alone upon this rationalization or the mere application of these general rules of construction. It is supported, we think, by several reasons, some of which are very specific and cogent. Other provisions of the income tax statute have made objective footprints in the trail leading to the discovery of the legislative intent.

2. 'Dividend' is defined in the income tax statute, KRS 141.010(3), to mean 'any distribution made by a corporation * * * to its shareholders or members.' Such distribution 'constitutes income to its recipient.' KRS 141.150(1) is as follows:

'Every corporation subject to the jurisdiction of this state, unless excused by the Department of Revenue, shall...