City of Galveston, Tex. v. United States, 42543.

• Decision Date: 08 April 1935
• Docket Number: No. 42543.,42543.
• Citation: 10 F. Supp. 810
• Parties: CITY OF GALVESTON, TEX., v. UNITED STATES.
• Court: U.S. Claims Court

10 F. Supp. 810

CITY OF GALVESTON, TEX., v. UNITED STATES.

No. 42543.

Court of Claims.

April 8, 1935.

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Thomas W. Lain and Bryan F. Williams, both of Galveston, Tex., for plaintiff.

George H. Foster, of Washington, D. C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.

Before BOOTH, Chief Justice, and GREEN, WHALEY, WILLIAMS, and LITTLETON, Judges.

GREEN, Judge.

The plaintiff is a municipal corporation and during the period involved in this case was the owner of one-third of a water front property which by agreement was operated by the Galveston Wharf Company as a public wharf. During the years involved, namely, 1920, 1921, 1923, 1924, 1926, 1927, 1928, 1929, and 1930, the defendant assessed and collected from the wharf company income taxes on all of the profits resulting from the operation of the property. Beginning with the year 1924, part of the taxes so collected was refunded to plaintiff as will be more specifically stated hereinafter. Plaintiff now brings this suit claiming that it was entitled to have refunded one-third of all of the taxes so collected and that it should recover judgment for the difference between the amount paid and this one-third.

Without reciting the voluminous details set out in the findings, it is sufficient to say that after much controversy in the Legislature of Texas and more or less litigation in the courts between the wharf company and the plaintiff as to the rights of plaintiff in this property, the matter was settled by an agreement between the disputing parties which was approved by the Legislature of the state of Texas on April 15, 1905. Prior to this time the wharf company had issued to the city of Galveston 6,222 shares of its outstanding stock which totaled 26,266 shares. The agreement approved by the Legislature confirmed in the city an undivided one-third interest in the water front property and stated that such interest "shall be represented by said city's 6,222 shares of the stock"; and also that "said city shall be entitled to and shall receive dividends from the said Galveston Wharf Company in the same manner in which such dividends have heretofore been paid; that is, said city shall be entitled to and shall receive upon each of the 6,222 shares of stock the same amount of dividends as shall be paid by the said Galveston Wharf Company on any other share of stock."

Thereafter the wharf company continued to use the property in the conduct of the business as a wharfinger. The current earnings returned a profit and the wharf company has since that time paid to the city the same percentage of dividends as has been paid to other stockholders.

During all of the period involved in the case, taxes were duly assessed against the wharf company and paid by it on profits made in the operation of the property. For the years 1920, 1921, and 1923, the wharf company unsuccessfully took an appeal to the Board of Tax Appeals as to the amount which had been so assessed for these years. For the years prior to 1929, no deduction was taken or claimed by the wharf company because of the city's interest in the property. For 1929 and 1930, the wharf company claimed a deduction of one-third of its income "on account of the city's interest." The Commissioner disallowed the claim so made.

Plaintiff filed claims for refund for the years 1920, 1921, and 1923, which were denied by the Commissioner, and also filed claims for refund for the remaining years in controversy. In acting upon the claims beginning with the year 1924, the Commissioner paid to the city 6222/26266ths of the fourth installment for the year 1924 (holding that prior payments for 1924 were barred) and the same percentage of the subsequently paid deficiency for that year. The Commissioner also paid to the city the same percentage of the taxes paid by the wharf company for the years 1926 to 1930, inclusive.

The plaintiff claims that profits made through the use of its property were exempt from taxation under the Constitution and also under the federal statutes, that for this reason during all the period involved the government should have refunded to it one-third of the taxes paid by the wharf company on the property so operated, and that it is now entitled to recover the total amount thereof less any sums that were paid to it by the Commissioner. The defendant contends that the provisions of the law with reference to the recovery of taxes paid bar any action on the part of the plaintiff for the period prior to the time when the Commissioner commenced making refunds, and that no recovery can be had with reference to the remainder for the reason that the plaintiff is not a taxpayer. Defendant also claims that nothing is due plaintiff under the terms of section 213 (b) (7) of the Revenue Act of 1924, 26 USCA § 954 (b) (7), re-enacted in the Revenue Acts of 1926 and 1928, upon which plaintiff in part relies. Lastly, the defendant insists that under the facts in the case the law granted no exemption to plaintiff's share of the profits obtained from the operation of the wharf.

The Revenue Act of 1921 provided in section 213 (42 Stat. 237):

"Sec. 213. That for the purposes of this title (except as otherwise provided in section 233) the term `gross income' — * * *

"(b) Does not include the following items, which shall be exempt from taxation under this title: * * *

"(7) Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof.

"Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and purpose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, District of Columbia, or political subdivision; but this provision is not intended and shall not be construed to confer upon such person any financial gain or exemption or to relieve such person from the payment of a tax as provided for in this title upon the part or portion of such income to which such person is entitled under such contract."

The Revenue Act of 1924 provided in section 213:

"Sec. 213. For the purposes of this title chapter, except as otherwise provided in section 233 section 985 — * * *

"(b) The term `gross income' does not include the following items, which shall be exempt from taxation under this title: * * *

"(7) Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof.

"Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and purpose of which is to acquire, construct, operate, or maintain a public utility —

"(A) If by the terms of such contract the tax imposed by this title chapter is to be paid out of the proceeds from the operation of such public utility, prior to any division of such proceeds between the person and the State, Territory, political subdivision, or the District of Columbia, and if, but for the imposition of the tax imposed by this title chapter, a part of such proceeds for the taxable year would accrue directly to or for the use of such State, Territory, political subdivision, or the District of Columbia, then a tax upon the net income from the operation of such public utility shall be levied, assessed, collected, and paid in the manner and at the rates prescribed in this title chapter, but there shall be refunded to such State, Territory, political subdivision, or the District of Columbia (under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary), an amount which bears the same relation to the amount of the tax as the amount which (but for the imposition of the tax imposed by this title chapter) would have accrued directly to or for the use of such State, Territory, political subdivision, or the District of Columbia, bears to the amount of the net income from the operation of such public utility for such taxable year."

The plaintiff contends that any income which it received or was entitled to receive from or through its interest in the water front property was exempted from taxation under the Constitution; that although it paid no taxes it is the proper party to seek recovery of the taxes paid by the wharf company, and is entitled to bring action therefor.

The defendant contends (first) that plaintiff's suit is based upon a payment of taxes, is in fact an action to recover taxes, and that the plaintiff having paid no taxes is not the proper party to bring an action to recover the taxes involved and has no right to bring a suit on account of the alleged wrongful payment of taxes; (second) that even if plaintiff is a proper party to bring the suit, it has not complied with the statutory requirements for bringing suits to recover taxes; (third) that under the facts in this case, the income involved was not exempted under the Constitution and plaintiff did not acquire any rights under section 213 (b) (7) of the Revenue Act of...