Duluth, S.S. & A.R. Co. v. Michigan Corp. and Securities Commission
| Decision Date | 10 September 1958 |
| Docket Number | No. 45,45 |
| Parties | DULUTH, SOUTH SHORE & ATLANTIC RAILROAD COMPANY, a Minnesota corporation, Petitioner and Appellant, v. MICHIGAN CORPORATION & SECURITIES COMMISSION and Michigan Corporation Tax Appeal Board, Defendants and Appellees. |
| Court | Michigan Supreme Court |
Bodman, Longley, Bogle, Armstrong & Dahling, Henry I. Armstrong, Jr., Detroit, Thomas M. Beckley, Minneapolis, Minn., of counsel, for appellant.
Thomas M. Kavanagh, Atty. Gen., Samuel J. Torina, Sol. Gen., Lansing, T. Carl Holbrook, William D. Dexter, Assts. Atty. Gen., for appellee.
Before the Entire Bench, except KAVANAGH, J.
The Duluth, South Shore & Attlantic Railroad Company is a Minnesota corporation engaged primarily in hauling iron ore and freight to and from Minnesota and Wisconsin and Michigan's upper peninsula. Five hundred and fifty-eight miles of its tracks, 81% of the total, are within the borders of Michigan. Of all net ton miles of revenue freight hauled in 1951, 532,709,000 miles, or 78%, were hauled in Michigan. Most of this freight moved between States with only 61,031,000 miles of it, or 9% of the total, representing freight miles between loading and unloading points located in Michigan.
In 1952 the Michigan legislature sought to include railroads under then-existing legislation (C.L.1948, § 450.301 et seq. [Stat.Ann. § 21.201 et seq.]) requiring the payment of a franchise and privilege fee by each domestic and foreign corporation. These amendments which are applicable to railroad corporations were P.A.1952, Nos. 183 and 270 (C.L.S.1952, §§ 450.304, 450.305b, 450.82 [Stat.Ann.1953 Cum.Supp. §§ 21.205, 21.208(2), 21.82]). These amendments were given immediate effect as of April 29 and June 12, 1952.
On August 28, 1952, appellant filed a report and paid under protest the sum of $5,908.45 which it claimed to be the amount due under P.A.1952, No. 183, if such was constitutional.
On April 13, 1953, the corporation and securities commission issued a determination rejecting the railroad's computation and computing the tax as follows:
'April 13, 1953
'Duluth, South Shore & Atlantic Railroad Company
1824 First Natl. Soo Line Bldg.
Minneapolis 2, Minnesota
'Gentlemen:
'On September 2 we received your 1952 Michigan Annual Report with $5,908.45.
'The privilege fee is computed on the paid in capital and surplus as shown by the books of a corporation as of close of its fiscal or calendar year next preceding the time for filing. U. S. Government securities and paid in capital surplus are not allowable deductions from surplus in computing the fee.
'We find the average ratio to be 798943. Applying this to paid in capital of $10,500,000 and surplus of $1,693,500 at rate of 4 mills on the dollar results in $38,696.64 including $2 filing fee. Kindly remit balance due of $33,061.19.
'Director, Annual Reports'
The railroad then appealed this determination to the Michigan corporation tax appeal board which, after hearing, approved the fee as computed by the commission; and from this decision the railroad brings this appeal to this Court.
Before we detail and deal with the issues presented on appeal, some additional facts must be stated:
The appellant railroad was incorporated under the laws of Minnesota on October 19, 1949, and on November 1, 1949, it acquired the assets of Duluth, South Shore & Atlantic Railway Company and of Mineral Range Railroad Company. This acquisition was pursuant to a reorganization of these 2 railroads under section 77 of the United States bankruptcy act, as amended, 11 U.S.C.A. § 205, by virtue of which appellant purchased these assets. It paid for them by the issue of 210,000 shares of stock of no par value but with a stated value of $50 a share, and $5,000,000 in face value of 4% bonds. It has issued no additional stock so that at the time of filing its annual report for 1952 its outstanding paid-in capital consisted of these 210,000 shares. All of this stock was issued to and is owned by the Canadian Pacific Railway Company. None of it has ever been sold. This reorganization, appellant's issue of stock and its purchase of the assets of the old railroads, was subject to the approval and authorization of the interstate commerce commission and the district court of the United States for the district of Minnesota, fourth division.
Judge Gunnar Nordbye's opinion approving the reorganization plan recited certain other relevant facts:
'The debtor operates lines of railroad extending from Sault Ste. Marie, Michigan, and from St. Ignace, Michigan, westward to Soo Junction, Michigan, where they join, thence westward through Marquette, Michigan, to Nestoria, Michigan, thence northward from Nestoria to Houghton, Michigan, and westward from Nestoria to Marengo, Wisconsin, thence westward through Ashland, Wisconsin, and Superior, Wisconsin, to Duluth, Minnesota, comprising 425 miles of main line, 21 miles of branch line, and 102 miles of leased line, a total of approximately 548 miles. The cost of reproduction of the principal debtor's property less depreciation plus value of land and rights amounted to $15,717,941, as of December 31, 1944, according to the report of the interstate commerce commission's bureau of valuations.
'The portion of the lines extending from Marquette through Nestoria to Houghton was formerly owned and operated by the Marquette, Houghton & Ontonagon Railroad Company, and is known as MH&O mortgage district. The remaining portions of the debtor's railroad, extending westward from Nestoria and eastward from Marquette, are collectively known as the DSS&A mortgage district.
'The debtor also operates in connection with the above railroads, the railroad of the Mineral Range, 26 miles long, extending from Houghton, Michigan, through Hancock to Calumet, Michigan. The cost of reproduction of the Mineral Range Railroad, less depreciation plus value of land and rights, was $797,917 as of December 31, 1944, according to the report of the commission's bureau of valuations. This railroad has value principally as a feeder to the debtor's lines.
'On January 2, 1937, the debtor began this proceeding by filing in this court a petition showing that it was unable to meet its debts as they matured and that it desired to effect a plan of reorganization pursuant to section 77 of the bankruptcy act. The debtor's obligations at that time included, in addition to large amounts of unsecured debt, the following amounts of debt secured by outstanding mortgages of its properties:
"Bonds secured by the MH&O 6% Mortgage of 1885
(hereinafter called Sixes) assumed by the
principal debtor ................................... $1,400,000
"Bonds secured by the DSS&A 5% First Mortgage of
1887 (hereinafter called Fives) ..................... 4,000,000
"Bonds secured by the DSS&A Consolidated Mortgage
of 1890 (hereinafter called Fours) ................. 15,107,000
"Unpaid interest on Fours ........................... 21,599,315
-----------
"Total ....................... $42,106,315
'On January 30, 1937, the court appointed 2 trustees in bankruptcy: Mr. James L. Homire who was nominated by counsel for the Prudential Insurance Company which owned $416,000 of the Fives, and Mr. E. A. Whitman who was nominated by counsel for the Canadian Pacific Railway Company. Mr. Homire has since resigned, and Mr. Whitman is deceased. Mr. P. L. Solether is now the sole trustee.
'On July 1, 1937, the Mineral Range filed in this court a petition showing that it was unable to meet its debts as they matured, and praying that it be allowed to effect a plan of reorganization in connection with the plan to be effected for the debtor. The outstanding obligations of the Mineral Range at that time included, in addition to large amounts of unsecured debt and equipment trust obligations $1,598,675 of principal and $231,912 of unpaid interest owing on bonds secured by mortgages of its properties.
'Persons other than the Canadian Pacific held $3,199,000 of the debtor's Fives; an individual bondholder held $4,000 (reduced to $2,800 by subsequent payment) of Mineral Range bonds; and the Canadian Pacific owned directly or indirectly all of the other outstanding bonds of both the debtor and the Mineral Range.'
As indicated above, the great majority of bonded indebtedness was due the Canadian Pacific Railway, with $3,203,000 held by other persons or insurance companies.
After lengthy discussion of various proposed plans for reorganization, the Federal court approved a new capitalization plan proposed by the interstate commerce commission, as follows:
'Turning now to the plan approved by the commission, it contemplates that all properties of the principal and subsidiary debtors be vested in the reorganized company, which will then issue $5,000,000 of new 4% contingent interest bonds secured by a first mortgage on all properties of the reorganized company, and $10,500,000 of new capital stock consisting of 210,000 shares of common stock without par value but having a stated value of $50 per share. $500,000 of this stock is to be issued on the basis of the reorganized company's acquisition of the properties of the Mineral Range.
'In support of such capitalization, the commission's report referred inter alia, to the evidence establishing the following facts. The debtor's average net income available for fixed charges as adjusted, for the years 1928 to 1945 (excluding the so-called depression years of 1930 to 1933, inclusive, and the so-called boom years of 1942 to 1945, inclusive was $312,468. On the basis of studies made by the officers and staff of the trustees and debtors, it was estimated that net earnings of the future normal year would amount to $312,468. Deducting from the anticipated normal year's net earnings of $312,468, $200,000 of interest on new bonds, Federal income...
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