European & N. Am. Ry. v. Maine Cent. R. Co.

• Decision Date: 28 January 1938
• Citation: 196 A. 642
• Parties: EUROPEAN & NORTH AMERICAN RY. v. MAINE CENT. R. CO.
• Court: Maine Supreme Court

196 A. 642

EUROPEAN & NORTH AMERICAN RY.

v. MAINE CENT. R. CO.

Supreme Judicial Court of Maine.

Jan. 28, 1938.

Report from Superior Court, Cumberland County.

Action by the European & North American Railway against the Maine Central Railroad Company, wherein the issue was whether defendant as lessee was obligated to pay to plaintiff as lessor the income tax assessed upon rental received by plaintiff, which case came to the Supreme Judicial Court on a report.

Judgment ordered in accordance with opinion.

Argued before DUNN, C. J., and STURGIS, BARNES, THAXTER, HUDSON, and MANSER, JJ.

George F. Eaton, of Bangor, and Cook, Hutchinson, Pierce & Connell, of Portland, for plaintiff. Skelton & Mahon, of Lewiston, for defendant.

DUNN, Chief Justice.

What is in issue in this case is whether or not the terms of a lease of a railroad obligate the defendant as lessee, to pay the plaintiff as lessor, the federal income tax assessed upon rental received by it.

In 1882, the European & North American Railway, a Maine corporation owning and then operating a line of railroad about 114 miles long, from Bangor to the easterly boundary of the State, in the town of Vanceboro, demised, for 999 years, beginning with April 1, in the aforesaid year, its entire system, to the Maine Central Railroad Company, also a corporation under local laws, and a common carrier by rail, this company's line coming into Bangor from the westward.

The lease was inclusive, not only of the lessor's road, its engines, cars, equipment, apparatus, and supplies, without exception, but as well of all its other property and assets, real, personal, and mixed, wheresoever, cash and causes of action falling into the category, together with all its rights, except only its right to be and maintain its organization.

The rent, set down in words, was $125,000 a year, payable in equal semi-annual installments, the first on October 1, in the year of 1882. Such rent was, so the clause reserving it recites, fixed at exactly 5 per cent. at the par value of the outstanding capital stock of the lessor. That the lessee should render accordingly, and compensate the lessor, in addition, as, to illustrate, for taxes, then in being, or not, laid against the demised property, or assessed on franchise, or earnings, is not in dispute. The controversy between these litigants, at the expense of repetition, solely relates to whether federal income tax, as applied to the rental, is for the lessee to defray.

The lease is, in itself, complete and perfect.

On taking possession, the lessee assumed, as the lease provided that it should, the lessor's obligations of any and every kind, and their performance, discharge, and satisfaction; the lessee proceeded to fulfill the lessor's duties as a public utility.

In effect, the lines of the two corporations were, for the purpose of operation, united as one. They so continue.

Certain provisions in the lease are of the tenor following:

"Fourth. The said lessee further covenants, that it will pay the rent herein reserved, at the times, and in the manner herein provided, without demand of the same, and that it will pay all assessments, duties, charges and taxes, that have been or may hereafter be lawfully assessed, laid or imposed, on said European and North American Railway, or the stockholders thereof, by the United States, said State, or towns and cities, or by any power or authority whatever, or on the earnings, franchise, traffic, business, real estate, property, capital stock or shares of the capital stock of said European and North American Railway; * * * the intention being that the stockholders of said European and North American Railway shall, during the term of this lease, have from said lessee five per cent. per annum on the par value of the shares in the capital stock of said corporation, as hereinbefore provided, free from all taxes on said shares, and without any deduction whatever. * * * And it is further agreed that the rights of the stockholders and every one of the stockholders of said European and North American Railway to the said rental and income of five per centum annually on the par value of the said shares, and without any deduction as above, shall never be changed, diminished or abridged; the Maine Central Railroad Company, however, not assuming any questions, or suits, between said European and North American Railway and its stockholders as to the disposition or distribution of the rental received from said lessee, nor any liability to account to individual stockholders for said rent, after the same has been paid, as above provided, by said lessee to said European and North American Railway. * * *"

There is, it should not escape notice, in the obligations of the defendant, as lessee, no express mention of income taxes; there is no explicit reference to the possibility of the enactment by any taxing authority of an income tax law; nor, in the event of the enactment of a law of the kind, that a tax might be assessed against the plaintiff lessor.

No federal income tax was in force when the lease was made. Acts taxing incomes had, beginning in 1861, been enacted by the United States Congress. These acts lasted through the Civil War period. They were classed under the head of excises, duties, and imposts. Brushaber v. Union Pacific Railroad Co., 240 U.S. 1, 15, 36 S.Ct. 236, 60 L.Ed. 493, L.R.A.1917D, 414, Ann.Cas. 1917B, 713.

Under the Civil War Act, 13 Stat. 223, as amended, the tax on corporations was based on gross...