Baltimore & O.S.W.R. Co. v. Commonwealth

Decision Date08 November 1917
Citation177 Ky. 566,198 S.W. 35
CourtKentucky Court of Appeals

Appeal from Circuit Court, Jefferson County, Chancery Branch, First Division.

Suit by the Commonwealth against the Baltimore & Ohio Southwestern Railroad Company. Judgment for plaintiff and defendant appeals. Reversed with directions.

William W. Crawford, of Louisville, for appellant.

A Scott Bullitt, Co. Atty., J. L. Sullivan, Asst. Co. Atty and Matt J. Holt, all of Louisville, for appellee.


This suit was brought in the name of the Commonwealth by a revenue agent to have assessed as omitted property for the years 1905 to 1913, inclusive, the intangible property, commonly called the franchise, and the tangible property, consisting of office furniture and rolling stock of the Baltimore & Ohio Southwestern Railroad Company.

Upon hearing the case the lower court fixed the value of the omitted tangible personal property, consisting of office furniture, at $700, and the value of the omitted rolling stock at $85,583, or a total of $86,283, for each of the years mentioned, and the value of the intangible property omitted for these years as follows: 1905, $393,566; 1906 $415,573; 1907, $406,592; 1908, $464,950; 1909, $423,174; 1910, $344,465; 1911, $469,010; 1912, $460,430; 1913, $475,717. The value of this intangible property, as will hereafter appear, was ascertained by the court by capitalizing at 6 per cent. the gross earnings received by the Louisville offices of the company, and then deducting from the amount so found the assessed value of the real property of the company in this state reported by the company to the assessing authorities, and the value fixed by the court on the omitted tangible personal property, consisting of rolling stock and office furniture. There was no dispute as to the value of the office furniture, and the record does not disclose the method adopted by the lower court in arriving at the value of the rolling stock.

The facts of the case, about which there is really no substantial dispute, may be stated as follows: The Baltimore & Ohio Southwestern Railroad Company is a foreign corporation organized under the laws of the states of Ohio, Indiana, and Illinois. It has 926 miles of main line in other states, but no main line or tracks in this state. About 130 miles of this main line is between Cincinnati, Ohio, and New Albany, Ind., and about 300 miles between St. Louis, Mo., and New Albany, Ind., the remainder of it extending in other directions from different places. Its trains come into Louisville and Kentucky from New Albany, Ind., across the Ohio river over the tracks of the Kentucky & Indiana Terminal Railway Company, a Kentucky corporation, and the distance its trains run over the tracks of this terminal company, all of which are in Kentucky, is a little over three miles. It maintains freight and passenger depots in the city of Louisville, Ky. into which its trains run, and owns in the city about a mile of side track adjacent to its freight depots. It carries passengers and freight from and to its Louisville depots to and from all points on its lines of road outside of this state as well as to all points on lines of its connecting carriers outside of this state.

It does no intrastate business in Kentucky. Every passenger that it carries on its trains in Kentucky is either a passenger going out of or coming into this state; and so all its passengers carried in Kentucky are interstate passengers. Likewise all the freight that it carries on its trains in Kentucky is carried in interstate commerce. It has no trains running between points in Kentucky, and no cars or engines, either passenger or freight, permanently located in Kentucky, although, as stated, its passengers and freight cars, and passenger and freight engines, come into Kentucky to its depots in Kentucky over the tracks of the terminal railway company. It does, however, solicit passengers and business in different parts of Kentucky to be carried out of the state, and operates five regular passenger trains in and out of Louisville daily, as well as two freight trains into Louisville and two freight trains out of Louisville daily.

The gross receipts received by its Louisville passenger and freight agents during the years 1904 to 1912, inclusive, averaged approximately $835,000 each year, while its total gross receipts received by all its agents averaged for each of these years approximately $12,557,000; its gross earnings from business in Kentucky being approximately $37,000, and its net earnings $12,000. It filed each year with the State Auditor of Public Accounts partial reports required by section 4096 of the Kentucky Statutes, but these reports showed only its track mileage in Kentucky and the estimated value thereof, and the value of certain real property which was owned by it, and located in the state, but it did not report any rolling stock or office furniture, nor did it in any of these years make any report to the State Auditor concerning its intangible property, as required by sections 4078-4081 of the Kentucky Statutes.

On the facts as we have set them out the lower court, as we have seen, fixed at quite a large sum each year the value of the "franchise" of the company assessable in this state, and its counsel contends that it was error to assess any sum against it on account of this "franchise" or intangible property tax, because, as it is argued, it was engaged wholly in interstate business and therefore the imposition of a tax other than on its property permanently located in this state would be a tax on interstate commerce, which is prohibited by the provisions of the Constitution of the United States.

Authority for the imposition of what is called a franchise tax is found in section 4077 of the Kentucky Statutes reading:

"Every railway company or corporation * * * shall, in addition to the other taxes imposed on it by law, annually pay a tax on its franchise to the state, and a local tax thereon to the county, incorporated city, town or taxing district, where its franchise may be exercised. * * *"

In sections 4078-4081, inclusive, to be later noticed in detail, provision is made for reports by corporations subject to this tax, and general rules are laid down by which the value of the franchise may be determined from the information furnished in these reports.

It will be observed that the statute describes the tax mentioned in section 4077 as a tax on the franchise of the corporation, but the word "franchise" in this section, and in other connected sections of the statute, is not used in its strict or technical sense. The Legislature did not undertake by these statutory provisions to tax the right of either domestic or foreign corporations to engage in business in this state or to levy a tribute upon the right of foreign corporations to engage in interstate commerce in this state.

In the case of Henderson Bridge Co. v. Commonwealth, 99 Ky. 623, 31 S.W. 486, 17 Ky. Law Rep. 389, 29 L.R.A. 73, this court considered for the first time the nature of the franchise tax provided for by these sections, and in the course of the opinion said that the value of the franchise subject to tax was to be found by ascertaining the value of all the property, real and personal, tangible, and intangible, having a taxable situs in this state and which made up the value of its capital stock, and then deducting from the value of the capital stock so found the assessed value of the tangible property located in this state, leaving the balance as property subject to the franchise tax. In other words, the court treated the word "franchise" as synonymous with the words "intangible property," and determined that it was the intangible property of the corporation which was represented by the difference between the value of its capital stock and the assessed value of its tangible property that was subject to this so-called franchise tax. This case was taken by appeal to the Supreme Court of the United States, and in Henderson Bridge Co. v. Commonwealth of Kentucky, 166 U.S. 150, 17 S.Ct. 532, 41 L.Ed. 953, the court, in speaking of this tax, said:

"The tax in controversy was nothing more than a tax on the intangible property of the company in Kentucky, and was sustained as such by the Court of Appeals, as consistent with the provisions of the Constitution of Kentucky in reference to taxation."

Again, in the case of Adams Express Co. v. Kentucky, 166 U.S. 171, 17 S.Ct. 527, 41 L.Ed. 960, the Supreme Court said:

"We agree with the circuit court that it is evident that the word 'franchise' was not employed in a technical sense, and that the legislative intention is plain that the entire property, tangible and intangible, of all foreign and domestic corporations, and all foreign and domestic companies possessing no franchise, should be valued as an entirety, the value of the tangible property be deducted, and the value of the intangible property thus ascertained be taxed under these provisions; and as to railroad, telegraph, telephone, express, sleeping car, etc., companies, whose lines extend beyond the limits of the state, that their intangible property should be assessed on the basis of the mileage of their lines within and without the state. But from the valuation on the mileage basis the value of all tangible property is deducted before the taxation is applied."

To the same effect is Louisville & Nashville R. Co. v. Greene, 244 U.S. 522, 37 S.Ct. 683, 61 L.Ed. 1309.

This court has also, in a number of cases, consistently followed the definition of a franchise tax laid down in the Henderson Bridge Co. Case, and so now it may be regarded as thoroughly well settled not only by the Supreme Court of...

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