Boston & M. R. R. v. Wilton R. Co.

• Decision Date: 05 November 1935
• Citation: 181 A. 545
• Parties: BOSTON & M. R. R. v. WILTON R. CO.
• Court: New Hampshire Supreme Court

181 A. 545

BOSTON & M. R. R.

v. WILTON R. CO.

Supreme Court of New Hampshire. Hillsborough.

Nov. 5, 1935.

Transferred from Superior Court, Hillsborough County; Page, Judge.

Petition of the Boston & Maine Railroad for a declaratory judgment against the Wilton Railroad Company. Reserved without ruling and transferred from Superior Court.

Judgment for plaintiff.

Petition for a declaratory judgment to determine whether the Boston & Maine Railroad, as lessee of the property of the Wilton Railroad Company, is legally obligated to pay the federal corporate income tax annually assessed against said Wilton Railroad Company. Upon an agreed statement of facts, the superior court transferred without ruling "the question whether the plaintiff is legally obligated to pay the federal income taxes assessed against the defendant, to the extent that the net income by which they are measured is derived from the rental under" two indentures which define the reciprocal rights and obligations of the parties.

Under date of February 1, 1884, the Wilton Railroad Company leased to the Boston & Lowell Railroad Corporation its railroad, appurtenances, and rights of easement. This lease was assigned by the Boston & Lowell Railroad Corporation to the Boston & Maine Railroad by a blanket assignment dated June 22, 1887. To this assignment the Wilton Railroad assented by a supplementary indenture dated December 19, 1890.

The paragraph in the lease of 1884, here specifically involved, reads as follows:

"And said second party hereby covenants and agrees with said first party that it will pay to said first party as rent the sum of eight thousand four hundred dollars semiannually upon the first days of April and October in each year during the term of this agreement, the first payment of said rent to be made on the first day of April, A. D. 1884, (or such sum as may on the day on which said payment becomes due be equal to three and one half per cent》 upon the then existing capital stock of said Wilton Railroad;) and it is hereby agreed that the present capital stock of said Wilton Railroad shall for all purposes of this agreement be assumed to be two hundred and forty thousand dollars; and said second party hereby covenants and agrees with said first party that it will pay all public taxes, assessments and charges whatsoever that shall be placed upon said first party on account of its property, franchise or capital stock."

The lessee further agreed to fulfill all duties and liabilities of the lessor in relation to operation of the railroad and to protect and save harmless the lessor against possible claims for personal injury or property damage and to "comply in all respects with the requirements of law in the same manner as if said second party (the lessee) was itself the proprietor of said Railroad." The lessee further agreed to pay to the lessor the sum of $75 semiannually for the purpose of preserving its organization. The lease further provided that the lessee should have the right to make additions and improvements to be paid for by the lessor in capital stock. The lessor agreed not to increase its stock or indebtedness beyond $240,000 without the lessee's consent.

By the supplementary indenture of December 19, 1890, between the Wilton Railroad Company and the Boston & Maine Railroad, the Wilton Railroad assented to the assignment to the Boston & Maine Railroad of its lease to the Boston & Lowell Railroad Corporation on various conditions, including the conditions "that the said Boston and Maine Railroad shall pay the said Wilton Railroad Company as rental under said lease semi-annually * * * the sum of Ten Thousand Two Hundred Dollars ($10,200), the same to be in full of the semiannual payments (including organization expenses) stipulated for in said lease," and "shall perform and abide by all the agreements and covenants of the said Boston & Lowell Railroad Corporation contained in said lease," except as modified by the indenture.

The first corporate income tax to be assessed against the defendant lessor was for the year 1913. The plaintiff paid the income tax for the years 1913, 1914, 1915, 1919, and 1920, and the first three quarterly installments of the 1923 tax without raising any question as to liability. From August 29, 1916, to March 1, 1920, the plaintiff was successively operated by a temporary receiver and by the Director General of Railroads, both of whom paid the taxes accruing during that period without objection. For the years 1921 and 1922, the plaintiff made a consolidated return which included the defendant as an "affiliated" corporation, but this claim was ultimately disallowed and the income taxes for those years were paid by the plaintiff after the present controversy arose.

October 27, 1924, acting upon an opinion of counsel, the plaintiff wrote the defendant's president a letter denying its liability for and refusing to pay the federal income taxes assessed against the defendant. The taxes accruing between the date of this letter and the filing of this petition were paid by the plaintiff in accordance with a conditional reimbursement agreement dated May 31, 1928, and for the aggregate amount of taxes so paid, plaintiff seeks a money judgment in addition to a declaratory judgment defining its obligations.

Other facts are stated in the opinion.

Demond, Woodworth, Sulloway, Piper & Jones and F. C. Demond, all of Concord, for plaintiff.

Ivory C. Eaton, of Nashua, and Robert W. Upton and Laurence I. Duncan, both of Concord, for defendant.

BRANCH, Justice.

In the case of Boston & Maine Railroad v. Peterborough Railroad, 86 N. H. 217, 166 A. 275, this court dealt with a situation obviously similar in most of its important aspects to that here presented, and the answers to many of the defendant's arguments are to be found in the conclusions there reached.

The first proposition advanced by the defendant is that "the rent stipulated in the lease was intended to be available for dividends and cannot be reduced without defeating the primary purpose of the lease." We are told that "the covenant of the lessee to pay 'all public taxes whatsoever that shall be placed upon (the lessor) on account of its property, franchise or capital stock' was plainly included as one of a series of provisions calculated to preserve the rental of the lessor for dividend purposes." It is also argued that "the lease as a whole shows a constant intention to keep the rental wholly available for the payment of dividends to the lessor's stockholders." Similar arguments were advanced in the Peterborough Case above referred to and were rejected for reasons equally applicable to the facts now before us.

The suggestion that "the primary purpose of the lease" was to make the full amount of the agreed rental "available for dividends" to the defendant's stockholders throughout the entire term of the lease is a bit of hyperbole ascribable to the zeal of counsel. The claim that this was the primary purpose of the lease necessarily implies that it was the primary purpose of both parties, and the idea that the plaintiff was primarily concerned in securing the payment of a net amount as dividends to the defendant's stockholders is, of course, absurd. The primary purposes of the lease in regard to which the minds of the parties met were, to secure to the plaintiff control of the defendant's railroad, and to the defendant, the payment of the stipulated rental. To the acomplishment of these two purposes, all the terms and conditions of the lease were subservient. The collateral and unexpressed benefits which each of the contracting parties may have hoped to obtain for itself as a result of the subordinate conditions of the agreement cannot be included within the purposes of the lease, either primary or subsidiary. Even though the end result which the defendant planned to attain from the operation of the lease may have been the payment to it of a stipulated sum which might be passed on, undiminished by any charges, to its stockholders in the form of dividends, the accomplishment of this result cannot be regarded in any proper sense as one of the purposes of the lease.

"The argument that there is implicit throughout the lease the idea that the money paid to the lessor semiannually was to be available for dividends at once suggests the inquiry: If there had been such an agreement, why was it not expressed?" Boston & Maine Railroad v. Peterborough Railroad, supra, 86 N. H. 217, 221, 166 A. 275, 277. An examination of authorities cited by the defendant lends added force to this inquiry, for in Schlafly v. D'Arcy (C. C. A.) 1 F.(2d) 297, 299, and Republic Building v. Gaertner, 201 Ky. 509, 256 S. W. 1111, 30 A. L. R. 982, cited by the defendant, there were express agreements specifically designed to accomplish similar results. When pressed for an answer to the above query, counsel at the argument conceded that the plaintiff was evidently unwilling to assume the payment of all taxes against the lessor which the ingenuity of man might devise. This admission was, of course, fatal to his contention that the primary purpose of the lease was to secure to the defendant a certain sum which might be paid out undiminished as dividends.

If it had been the intention of the parties to include federal income taxes assessed against the defendant in the obligations assumed by the plaintiff as lessee, it is fair to assume that such intention would have been stated. "An obligation of this kind would not have been left to doubtful inference." Boston & Maine Railroad v. Peterborough Railroad, supra, 86 N. H. 217, 220, 166 A. 275, 277. Here again the answer to the defendant's argument is strengthened by the authority upon which the defendant relies, for the lease which was construed in Whitlock v. Boston &...