Brainard v. New York Cent. R. Co.
| Decision Date | 24 February 1926 |
| Parties | BRAINARD et al. v. NEW YORK CENT. R. CO. et al. |
| Court | New York Court of Appeals Court of Appeals |
OPINION TEXT STARTS HERE
Action by John M. Brainard and others against the New York Central Railroad Company and others. From a judgment of the Appellate Division (209 N. Y. S. 800, 214 App. Div. 705) unanimously affirming a judgment for plaintiffs entered on trial at Special Term, defendants appeal by permission.
Reversed.
Appeal from Supreme Court, Appellate Division, First Department.
Nathan L. Miller, Frederick L. Wheeler, Crosby J. Beakes, Alexander S. Lyman, and Charles C. Paulding, all of New York City, for appellants.
Charles I. Taylor and Thomas H. Beardsley, both of New York City, for respondents.
Minority stockholders of the Mahoning Coal Railroad Company bring this derivative action to recover on behalf of their company from the New York Central Railroad Company, as successor of the Lake Shore Company, an installment of federal income and excess profits taxes assessed against and paid by Mahoning Company for the year 1920, amounting to $480,425.20.
The Mahoning Company is a railroad corporation of Ohio with an outstanding capital stock of $2,161,367, consisting of $1,500,000 par value of common, and $661,367 par value of preferred, of which capital stock the Central Company is the owner of $894,650 par value of the common, and $419,150 par value of the preferred.
On December 4, 1871, the Mahoning Company being about to construct its road, entered into a traffic agreement with the Lake Shore Company providing for trackagerights by the Mahoning Company over the Ashtabula branch of the Lake Shore Company, for fair treatment by each road in handling the traffic to or from the road of the other, for the divisions between the parties as to the joint traffic, and for the assistance by the Lake Shore Company in the marketing of the bonds of the Mahoning Company by annual application of 40 per cent. of the revenues of the Lake Shore Company from the joint traffic to the purchase of such bonds if obtainable at par or less.
having completed its road, and being without equipment to operate it, entered into a supplemental agreement with the Lake Shore Company, under which the Lake Shore Company was to manage, maintain, and operate the road of the Mahoning Company for 25 years (subject to the right of the Mahoning Company to terminate after five years) and share the gross earnings with the Mahoning Company on the basis of 40 per cent. to the Mahoning Company and 60 per cent. to the Lake Shore Company.
On July 1, 1884, a further agreement (the one here involved) was entered into between the Mahoning Company and the Lake Shore Company, under which the prior agreements were canceled and the Lake Shore Company was to continue to work, maintain and operate the road and property of the Mahoning Company, of which it was in possession under the prior agreement in perpetuity, and share the gross earnings with the Mahoning Company on the basis of 40 per cent. to the Mahoning Company and 60 per cent. to the Lake Shore Company. The Central took over the agreement as a part of the consolidation agreement with the Lake Shore in 1914.
[1] The question is as to the construction of the covenant as to taxes contained in this agreement of July 1, 1884, which reads as follows:
‘That it [Lake Shore Company] will in due season pay all taxes and assessments which may be levied or become chargeable on the said road or property, or upon the said Mahoning Company, by reason of its ownership thereof.’
Prior to the tax in suit, the New York Central had been paying these taxes.
As under the agreement of 1884 the Central Company bears the cost of maintenance and operation and of taxes on the road and property, the 40 per cent. share of the gross income received by the Mahoning Company is free of all such charges, and the plaintiffs now contend that in addition to the charges so paid, the Central Company should also so pay the personal income taxes of the Mahoning Company both on its shares of the gross income so received and on its other income as well.
The Appellate Division, First Department, affirmed the judgment of the Special Term without opinion. The court at Special Term was of the opinion that it was the intent of the parties to the agreement of 1884 that the ‘lessee’ should pay every tax of every name and description and that as the ‘lessor’ derives its entire income from the 40 per cent. of the gross earnings of its road and from certain interest returns upon such earnings and the investment thereof, all its taxes result directly or indirectly by reason of its ownership of its road, and whether or not as an original question the federal income tax would be technically chargeable upon the ‘lessor’ company by reason of its ownership of its road and property that every doubt as to the intent and meaning of the parties had been entirely dispelled and the proper interpretation of the ‘lease’ conclusively established by the practical, uniform, and continuous construction placed upon the ‘lease’ by the parties themselves.
The defendant Central Company contends that the court at Special Term was in error in its conclusions for the reason that: (1) The tax clause in question does not admit of the construction placed upon it by the lower courts; but, on the contrary, it is clear and definite in its meaning and is so limited as to negative the intent that the operating company should pay the personal income taxes of the owning company. (2) The tax clause being clear and definite, there is no ground for applying the rule of practical construction.
In actions based on leases and working agreements like the one in question (which for convenience may be called a lease), where the lessee agrees to pay all taxes levied and assessed on or in respect to the property, the distinction between taxes on the income of property and taxes on the property itself has been repeatedly pointed out. With monotonous frequency the courts have held in this connection that a tax on the rents or income of real property is not considered a tax on the property itself. When the lessee is to pay all taxes, ordinary and extraordinary, which shall be imposed on the demised premises or ‘in respect thereof,’ the tax on rents is a tax not in relation to the property demised, but in relation to the income thereof. Woodruff v. Oswego Starch Factory, 68 N. E. 994, 177 N. Y. 23.
[2] The literal words used in the contract before us have not been the subject of judicial construction, and it is urged that they have some weighty and special significance indicative of the foresight of...
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