L. & W.R. Co. v. Div. Of Tax Appeals

• Decision Date: 17 October 1949
• Docket Number: Nos. A-1, A-2.,s. A-1, A-2.
• Citation: 68 A.2d 749
• Parties: DELAWARE, L. & W.R. CO. v. DIVISION OF TAX APPEALS, NEW JERSEY STATE DEPARTMENT OF TAXATION & FINANCE, et al. GARDNER v. DIVISION OF TAX APPEALS, NEW JERSEY STATE DEPARTMENT OF TAXATION & FINANCE, et al.
• Court: New Jersey Supreme Court

68 A.2d 749

DELAWARE, L. & W.R. CO. v. DIVISION OF TAX APPEALS, NEW JERSEY STATE DEPARTMENT OF TAXATION & FINANCE, et al.

GARDNER v. DIVISION OF TAX APPEALS, NEW JERSEY STATE DEPARTMENT OF TAXATION & FINANCE, et al.

Nos. A-1, A-2.

Supreme Court of New Jersey.

Argued Sept. 19, 1949.

Decided Oct. 17, 1949.

Proceeding in the matter of the appeals of the Delaware, Lackawanna & Western Railroad Company and of Walter P. Gardner, Trustee of the Property of the Central Railroad Company of New Jersey, from assessments of excise taxes.

Judgments of the Division of Tax Appeals, 57 A.2d 32, 26 N.J.Misc. 76, sustaining the excise taxes were affirmed by the Superior Court, Appellate Division, John O. Bigelow, J., 2 N.J.Super. 93, 64 A.2d 881, and the Delaware, Lackawanna & Western Railroad Company and Walter P. Gardner, as trustee, appealed.

The Supreme Court, Oliphant, J., affirmed the judgments on the basis of a holding that, in computing operating net income of a railroad for purpose of imposing railroad franchise excise tax, certain back taxes, interest payments, and amount of tax refunds were not proper deductions.

David I. Mackie, New York City, argued the cause for appellant Delaware, Lackawanna & Western Railroad Company (Carpenter, Gilmour & Dwyer, Jersey City, attorneys).

James D. Carpenter, Jersey City, argued the cause for appellant Walter P. Gardner, trustee of the Property of the Central Railroad Company of New Jersey.

Benjamin C. Van Tine, Trenton, argued the causes for respondents (Theodore D. Parsons, Attorney General of New Jersey, attorney).

Frank P. McCarthy, Jersey City, argued the cause for respondent, City of Jersey City, John B. Graf and Jacob J. Levey, Jersey City, on the brief.

The opinion of the court was delivered by

OLIPHANT, J.

These are appeals from judgments of the Appellate Division of the Superior Court affirming judgments of the Division of Tax Appeals, Department of Taxation & Finance, against the Delaware, Lackawanna and Western Railroad Company for the tax years 1942 to 1946 inclusive and againstthe Central Railroad Company of New Jersey for the tax year 1946.

The former company will be referred to as the Lackawanna and the latter as the Central.

The Lackawanna appeal involves (1) items of back taxes claimed to be proper deductions in years other than the years in which the taxes were due and payable; (2) items of interest paid on account of default in payment of principal taxes and claimed to be proper charges to the railroad tax accrual accounts in the years in which they were paid; and (3) an item representing an amount paid under protest and later refunded, which the Lackawanna claims to be a proper accrual against its 1946 operating income.

The Central appeal involves the last two items referred to in the Lackawanna appeal, interest payment and the payment of an amount ultimately found not to be due. Central makes no claim for deductions for items of back taxes it having charged all its taxes to current accounts as such taxes became due and payable, notwithstanding it was contesting its liability for a substantial portion of such taxes. The several items will be discussed in the order set forth above.

The Back Taxes.

As was pointed out in Norton v. State Board of Tax Appeals, 134 N.J.L. 57, 45 A.2d 799 (E. & A. 1946), the tax levied on railroad property had for years been continuously in litigation and large amounts of these taxes were in default. In 1941 a new method of taxing such property was enacted, P.L.1941, Ch. 291. This act was amended the following year by P.L.1942, Ch. 169, N.J.S.A. 54:29A-1 et seq. These laws in substance provided for a combination property tax and franchise excise tax computed in a given year on the basis of the net operating income of a railroad system for the preceding calendar year. The tax was not a property tax upon the net income itself but rather an excise tax measured by the net operating income of the preceding year and we are here concerned with whether items of back taxes are properly chargeable as deductions from the operating revenue of years other than that against which such taxes were levied and during which they became due and payable.

Clearly net operating income for a given year cannot be determined by deducting unpaid taxes of prior years or the accrued interest upon such unpaid taxes. The excise being measured by the net operating income for the prior year, this necessarily excludes all items of debit not related to that year's operation.

The argument of appellants proceeds on the hypothesis that the Act of 1941 required the State Tax Commissioner to allow as deductions in determining the next preceding year's net operating income any amounts of back taxes permitted by the Interstate Commerce Commission to be included in current operating income accounts. This interpretation would defeat the legislative purpose. It would put a premium on defaults in the payment of taxes by thereby decreasing the tax burden.

Lackawanna defaulted in payment of its 1933 taxes. In 1939 the litigation concerning these taxes was ended and payment in an amount equal to unpaid principal only was made. Lackawanna also defaulted in payment of taxes for the years 1934 to 1940 inclusive. The determination of the tax litigation for these years was finally determined in 1941 when the United States Supreme Court denied certiorari. Delaware, L. & W.R. Co. v. Martin, 313 U.S. 568, 61 S.Ct. 943, 944, 945, 85 L.Ed. 1527. From 1933 to 1940 Lackawanna paid a portion of the tax levied in each year but charged to current accounts an amount in excess of that which it paid although the whole of the unpaid amount was in litigation. As was pointed out in Norton v. State Board of Tax Appeals, supra, and as again disclosed by the instant record, during all the period from 1932 to 1940 in which railroad taxes were being contested and litigated certain railroad companies accrued all of their current taxes in the years in which they were levied, while others accrued only the uncontested portion thereof. That Lackawanna's treatment of such items was not orthodox is disclosed by the variouscertificates covering the audits for the years in question.

When in 1941 the litigation concerning the 1934-1936 taxes terminated Lackawanna began to charge back taxes in the amount of approximately $5,900,000 to current accounts at the rate of $100,000 per month. An examiner for the Interstate Commerce Commission questioned this method of charging such items but in August, 1942, that body gave special permission for such treatment of the item of back taxes.

The letter of Lackawanna requesting such permission is informative. The letter states that such an unusual item should not be placed in the 1941 operating accounts as this would distort them. That such was still the opinion of Lackawanna's comptroller and its auditor several years later is disclosed by the record.

We might well inquire, from the Interstate Commerce Commission's viewpoint, what does distort an account and whether since the State is concerned with determining the net operating income of a railroad for tax purposes, anything not properly a charge against a given year would not distort the account as far as the State of New Jersey is concerned? We do not have to answer that question. In the definition of income accounts contained in the Interstate Commerce Commission's regulations will be found the answer. The income accounts are designed to show as nearly as possible the earning experience of a railroad for the fiscal year covered by the annual report. As a matter of expediency, because there is no method for amending the reports, items for past years are of necessity permitted to be charged to accounts of later years. But such accounts are tagged by the regulations as ‘delayed items' and are covered by special instructions.

That Lackawanna charged the back taxes as ‘delayed items' is clearly shown by its own testimony. Obviously ‘delayed items', items covering the back years' taxes, are not current items. It is idle to contend the Legislature intended the inclusion of such back taxes in computing next preceding year's net railway operating income.

We re-affirm what was said in Norton v. State Board of Tax Appeals, supra, 134 N.J.L. at page 63, 45 A.2d at page 802, ‘When the Legislature used the words ‘railway tax accruals' it meant something more than mere Interstate Commerce Commission permission to include an item in a bookkeeping account or a report. It meant something specific. It meant the type of item that on the date of the passage of the act went into such account as a matter of course. It meant current taxes. In re Reduced Rates, 68 I.C.C. 676, (at page 683), we find,

“Under our system of accounts all charges to the account ‘railway tax accruals' are deducted from railway operating revenues before arriving at railway operating income, and all State and Federal taxes, income or other, relating to carriers' railway property, operations and privileges, are charged to that account. This method of accounting was recently sanctioned by the Supreme Court of the United States in Galveston Electric Co. v. City of Galveston, 258 U.S. 388 (42 S.Ct. 351, 66 L.Ed. 678)”, and 134 N.J.L. at page 62, 45 A.2d at page 802, that “tax accruals' means the current taxes for the particular year which have been assessed in conformity with law, e.g., the amount certified by the tax assessor.’

Appellants assert the action of the Director of the Division of Tax Appeals was, in effect, an arbitrary increase of the operating income, and constituted an assessment not only attributable to New Jersey, but actually upon the earnings of the railroad realized in other states in which the system operates. It is claimed such action constituted an unreasonable burden upon interstate commerce and operates as a denial of due process. The point is not well taken.

Where operating income is taken as the franchise base, it...