Boston & M. R. R. v. Peterborough R. R.

• Decision Date: 02 May 1933
• Citation: 166 A. 275
• Parties: BOSTON & M. R. R. v. PETERBOROUGH R. R.
• Court: New Hampshire Supreme Court

166 A. 275

BOSTON & M. R. R.

v. PETERBOROUGH R. R.

Supreme Court of New Hampshire. Hillsborough.

May 2, 1933.

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

Petition by the Boston & Maine Railroad for declaratory judgment against the Peterborough Railroad. Reserved without ruling, and transferred by single justice.

Case discharged.

Petition for a declaratory judgment. The Issue is whether the Boston & Maine is obligated to pay the Federal corporate income tax assessed against the Peterborough under a lease made by the Peterborough to the Boston & Lowell April 1, 1893, for a term of ninety-three years, and assigned to the Boston & Maine.

The Peterborough constructed a section of 10.5 miles of road from Wilton to Greenfield. In 1873 it leased this road to the Nashua & Lowell. The lease provided: "And the second party (lessee) further agrees to assume and pay all taxes that may become due or be legally assessed on said section of road from the time the same comes into its possession, and during the continuance of this indenture, and also all government taxes upon the rental or dividends as aforesaid."

The Nashua & Lowell and its assignee, the Boston & Lowell, operated the road until April 1, 1893, when the lease expired and the present lease was executed. The provisions of this lease relating to taxes and rent are as follows:

"1. The lessee shall pay the operating expenses of the lessor there being included therein as part thereof all repairs and renewals; all expenditures arising out of any contract, obligation, business, negligence or misfeasance or however arising from and after the inception of this lease and in any way connected with the use and operation of the demised premises, and including damages to persons or property, insurance, all taxes of every description, Federal, State or Municipal upon property, business, franchises or capital stock; any expenditures hereinafter declared to be operating expenses; and the organization expenses of the lessor, for which there shall be paid to the lessor at the end of each successive six months, during the term of this lease the sum of one hundred and fifty dollars ($150).

"2. The lessee shall pay to the lessor on the first day of October A. D. 1893, the sum of seven thousand and seven hundred dollars ($7,700) being two per cent (2%) upon three hundred and eighty-five thousand dollars ($385,000) its capital stock now outstanding; shall thereafter pay to the lessor on the first days of April and October in each year during the term of this lease the sum of seven thousand seven hundred dollars ($7,700) and for any portion of any half year the rent for which remains unpaid at any termination of this lease earlier than April 1st, 1986, shall pay the lessor rent pro rata at the rate hereinbefore stipulated."

The lease authorizes the lessee to make permanent additions and improvements at the expense of the lessor, and provides for the issue of stocks or bonds by the lessor whenever requested by the lessee to meet the cost of such additions and improvements.

The compensation provision is as follows: "Stock so issued as herein provided after the inception of this lease shall from the time of such issue be deemed part of the lessor's capital stock within the provisions of Article I, Clause 2, above, and shall receive dividends at the rate of two per cent (2%) semi-annually."

The first corporate income tax to be assessed against the defendant was for the year 1913. The plaintiff paid the 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 Boston & Maine system was operated either by a temporary receiver or by the Director General of Railroads, and they paid the taxes accruing during this period without objection. For the years 1921 and 1922, the plaintiff made a consolidated return including the defendant as an "affiliated" corporation, but this claim to affiliation was disallowed, and the taxes for those years were finally paid after the present controversy arose. Since October 27, 1924, the income taxes have been paid by the plaintiff under defendant's agreement to reimburse it if and when it should be determined that the lease does not obligate the plaintiff to pay the income tax.

The question whether the plaintiff is legally obligated to pay the federal income taxes assessed against the defendant on account of the rental received by the latter under the lease was reserved without ruling, and transferred by Sawyer, C. J.

Demond, Woodworth, Sulloway & Rogers, of Concord (F. C. Demond, of Concord, orally), for plaintiff.

Frank B. Clancy, of Nashua, and Robert W. Upton, and Laurence I. Duncan, both of Concord, for defendant.

PEASLEE, Chief Justice.

By the plan adopted in drafting the lease, the rent to be paid was divided into two distinct parts, specified in two separate paragraphs numbered 1 and 2. Paragraph 1 stated the obligations to be paid for the lessor. These were all included under the general description, "the operating expenses of the lessor." Following this general phrase is a specification of what it includes. The catalogue is rather minute, and what were apparently deemed different classes of obligations were separated by semicolons. These classes are four in number. The first covers maintenance of the physical property described as "repairs and renewals." The second includes obligations to others incurred in the course of operating the road. It describes them as "any contract, obligation, business, negligence or misfeasance * * * in any way connected with the use and operation of the demised premises." It is as a part of this class that the provision as to taxes is found. The language used is, "including damages to person or property, insurance, all taxes of every description, Federal, State or Municipal upon property, business, franchises or capital stock." That is, the lessee agreed to pay all taxes of the specified classes which were "in any way connected with the use and operation of the demised premises." To come within this limitation, taxes upon property must have been assessed upon "the demised premises," those upon business must be upon that carried on by virtue of the lease, and the franchise tax must have been laid upon the franchise to operate the leased road. The tax upon capital stock would be in substance one on the property represented by the stock. Conner v. State, 82 N. H. 126, 130, 130 A. 357, and cases cited. The fourth division in the paragraph provides for the payment of the organization expenses of the lessor at a fixed rate.

There is in this paragraph nothing indicative of an agreement to pay taxes assessed against the lessor for some reason other than the ownership or use of its railroad property and franchise. Taxes assessed upon other property and because of other incidents were not assumed by the lessee. The provisions upon this subject, whether looked at generally as a whole, or considered in itemized detail, afford no ground for a claim that taxes foreign to the operation of the road were intended to be included.

The only connection that the tax here in question sustains to the leased premises or the lessee is the fact it was levied upon the purchase price received for the use of the property. It was not levied because that price was paid, but because it was received by the lessor, and became income when received. Taxability did not depend upon the fact that the income was received from this source.

If there had been any intention to include it in the obligations assumed by the lessee, it is fair to assume that it would have been stated. An obligation of this kind would not have been left to doubtful inference. This view is strengthened by the fact that in the lease which preceded the present one there was an express agreement to "pay all taxes * * * on said section of road * * * and also all government taxes upon the rental or dividends aforesaid."

The second paragraph provides for the payment to the lessor, semi-annually, "the sum of seven thousand seven hundred dollars ($7,700) being two per cent (2%) upon three hundred and eighty-five thousand dollars ($385,000) its capital stock now outstanding." This payment is there denominated "rent." There is nothing in this paragraph which can be construed into a promise or guaranty that the rent so paid will not be taxed in the hands of the lessor, or that it shall all be available for distribution as dividends to stockholders.

Undoubtedly the two paragraphs, taken together, indicate that the lessor sought to relieve itself of certain charges against its gross income. But there is no promise by the lessee to pay all charges. The obligations assumed were specific, and of course include only that which was specified.

It is in answer to this claim that there was an agreement to make the rent net income to the lessor that the third division of the first paragraph is of importance. It reads, "any expenditures hereinafter declared to be operating expenses." This plainly implies that the lessor might be...