Commonwealth v. Ledman

• Decision Date: 18 December 1907
• Citation: 127 Ky. 603,106 S.W. 247
• Parties: COMMONWEALTH v. LEDMAN.
• Court: Kentucky Court of Appeals

106 S.W. 247

127 Ky. 603

COMMONWEALTH v. LEDMAN.

Court of Appeals of Kentucky.

December 18, 1907

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

"To be officially reported."

Action by the commonwealth, by George H. Alexander, revenue agent against S.E. Ledman. From a judgment dismissing the petition plaintiff appeals. Affirmed.

M. J Holt (B. F. Washer, of counsel), for appellant.

Humphrey & Humphrey and L. R. Yeaman, for appellee.

LASSING J.

The question involved in this appeal is the right of the state, under existing laws, to tax the shares of the Louisville Traction Company in the hands of their owner. Proceedings were instituted in the Jefferson county court, under section 4241 of the Kentucky Statutes of 1903, to assess for the purpose of taxation in the hands of appellee certain shares of stock which he owned in the Louisville Traction Company as of September 15, 1903, September 1, 1904, and September 1, 1905. Appellee denied the right of the state to have said stock assessed on the ground that it was fully tax-paid. The county court having decided in favor of appellee, the commonwealth appealed to the circuit court; and, the circuit court having likewise ruled against the commonwealth, it has appealed to this court.

It appears that appellee's stock was not issued until April 1, 1904, and that on September 15, 1903, appellee owned merely the right to have this stock issued to him at a later date; but, inasmuch as he owned the property which was surrendered up to the Louisville Traction Company in consideration for its issuing the shares in question, the case may be treated as though the shares of stock were on September 15, 1903, in actual existence. This brings us, then, to the consideration of the question: Was this stock of the Louisville Traction Company in the hands of appellee subject to taxation on September 15, 1903, September 1, 1904, and September 1, 1905? or was it tax-paid, and therefore not subject to further assessment and taxation under existing laws? In order to arrive at a proper determination of this question, it is necessary to go somewhat into the history of the organization and formation of the Louisville Traction Company.

Some time prior to the year 1903 all of the street railway lines in the city of Louisville were merged into one corporation, known as the "Louisville Railway Company." At that time, owing to the growth and development of the city of Louisville, it became necessary for the Louisville Railway Company to extend its lines and make certain betterments and improvements in its properties. In order to do this it either had to issue bonds or increase the issue of its stock and sell same for the purpose of raising the necessary money. It was deemed advisable at that time to raise $1,750,000 for the purposes which have been designated. The Louisville Railway Company had issued both preferred and common stock. By reason of the growth of the city and the steadily growing business, the value of the common stock very much exceeded that of the preferred, and in 1903 the common stock was selling in the open market for about $175 per share. The company did not deem it wise to further increase its bonded indebtedness, and elected to raise the desired money by issuing and selling common stock. A dispute arose between the holders of the preferred and the holders of the common stock as to who had the right to receive and pay for this common stock when issued; it being the contention of the common stock holders that, as the dividend on the preferred stock was guaranteed and secured to the preferred stock holders before any dividend could be paid on the common stock, they should have no voice in the sale of the common stock, and that the common stock holders alone should have the right to receive and pay for such common stock as was issued. To this proposition the preferred stock holders refused to agree. As a result of this disagreement it was finally determined that a "holding company" should be formed, and that this "holding company" should issue certificates of preferred and common stock, in exchange for the stock of the Louisville Railway Company, and that a fair and equitable adjustment of the differences existing between the preferred and the common stock holders would be to have the "holding company" issue one share of preferred stock in the "holding company" and one-fifth of a share of common stock in the "holding company" to the preferred share holders in the railway company in exchange for each share of preferred stock in the railway company, and to issue to the share holders of common stock in the railway company three shares of common stock of the "holding company" in exchange for one share of common stock in the railway company and a "bonus" of $55; or, in other words, each share of preferred stock in the railway company was entitled to receive one share of preferred stock and one-fifth of a share of common stock in the "holding company," and each share of common stock in the railway company was, when surrendered up, together with $55 in cash, entitled to receive three shares of common stock in the "holding company." It was further agreed that, if any additional issues of common stock became necessary, the preferred stock holders should have no voice in determining the amount of stock that should be issued or the disposition that should be made thereof. Upon investigation it was found that the laws in this state would not permit of this discrimination against the preferred stock holders in the conduct of the affairs of the company, and it was therefore found necessary that the "holding company" should be incorporated in some state where this provision of the agreement would not be in conflict with the general laws. For this reason, and for this reason only, the Louisville Traction Company, which was organized for the sole purpose of acting as a "holding company" for the share holders of the Louisville Railway Company, was organized under the laws of the state of New Jersey.

Notice of the plan agreed upon for the settlement and adjustment of the differences between the common and preferred share holders was sent to each of the stock holders of the Louisville Railway Company, with the request that, if they approved of the plan of settlement and adjustment and desired to participate therein, they would deposit their stock at the place designated by the officers of the Louisville Traction Company, for the purpose of having the plan of adjustment carried into effect. That this proposed settlement was acceptable to the stock holders of the Louisville Railway Company is evidenced by the fact that more than 99 per cent. of all of the stock of the Louisville Railway Company accepted the proposition and deposited its stock (the common stock holders paying the necessary amount of money), and all so doing were issued certificates of stock, according to the terms of the agreement, in the Louisville Traction Company, in exchange for their stock in the Louisville Railway Company. In order to perfect and carry out this arrangement, some considerable time was necessary, and between September, 1903, and April, 1904, the transfer was made. The stock of the Louisville Traction Company was not issued to holders of shares in the Louisville Railway Company until some time in April, 1904, although the shares were surrendered up by them along during the fall and winter of 1903 and 1904. During the formative period above referred to the traction company received large sums of money from the holders of common stock in the Louisville Railway Company under the terms of the agreement. This money was from time to time turned over by the Louisville Traction Company to the Louisville Railway Company, to be used for the purpose of making extensions and betterments. The record discloses that upon one assessment period there was a large sum of this money in the hands of the traction company. This, in another proceeding, the traction company was required to list and pay taxes on. On the other assessment periods covered by this litigation there was no fund in the hands of the Louisville Traction Company. All of the stock holders of the Louisville Railway Company not having accepted this proposition, it became necessary for the company to retain its corporate existence. This it has done, and annually, as required by law, the officers of the Louisville Railway Company have made out and filed the reports that the proper taxing authority, which is the board of valuation and assessment, desired, and it has at all times been amenable to the orders and directions of the board of valuation and assessment, in so far as furnishing any desired information relative to the conduct of its business is concerned. These reports, as made and furnished by the railway company, have been received by the board of valuation and assessment, and based upon them the property, including the tangible property, as well as the value of the franchise of the Louisville Railway Company, has been annually assessed and the taxes paid thereon by the Louisville Railway Company, as fixed and determined in said assessment.

There is no complaint on the part of the commonwealth that any part of the tangible property of the Louisville Railway Company has escaped taxation, or that its franchise has not been fully and fairly valued for taxation. The contention of the commonwealth is that inasmuch as the Louisville Traction Company is a foreign corporation, a separate and distinct organization, holding a charter giving it many rights and privileges which, if not now enjoying and exercising, it may later exercise and enjoy, and for which it pays to the state of New Jersey an annual license tax of $4,000 or more therefore...