State ex rel. McCanless v. Cincinnati Southern Ry.

• Decision Date: 17 January 1942
• Parties: STATE ex rel. McCANLESS, Com'r, et al. v. CINCINNATI SOUTHERN RY. et al.
• Court: Tennessee Supreme Court

157 S.W.2d 833

178 Tenn. 328

STATE ex rel. McCANLESS, Com'r, et al. v. CINCINNATI SOUTHERN RY. et al.

Supreme Court of Tennessee.

January 17, 1942

Appeal from Chancery Court, Hamilton County; J. Lon Foust Chancellor.

Proceeding by the State of Tennessee, on the relation of George F McCanless, Commissioner, and others, against the Cincinnati Southern Railway and others, to recover excise and franchise taxes alleged to be due and unpaid. From the decree, the State and the City of Cincinnati appeal.

Decree affirmed.

Henry M. Johnson and Lucian L. Johnson, both of Louisville, Ky and John Heiskell, Asst. Atty. Gen., for appellants.

Edwin F. Hunt, of Nashville, and Whitaker, Hall, Haynes & Allison, of Chattanooga (John D. Ellis, City Sol., of Cincinnati, Ohio, of counsel), for appellee.

CHAMBLISS Justice.

The State of Tennessee sues to recover of the defendant owners of a line of railroad extending from Cincinnati, Ohio, to Chattanooga, Tennessee, something more than three hundred miles, Excise and Franchise taxes alleged to be due and unpaid under Williams' Code Sections 1316 et seq., and 1248.143, respectively, for the years 1934 to 1939, inclusive. The railroad is alleged to be beneficially owned by defendant City of Cincinnati, with the title in a Board of Trustees of five, also named as defendants.

Under the provisions of the Code Sections cited, Excise taxes are measured by the net earnings of the corporations and other entities made liable therefor from business done within the State, and Franchise taxes are measured by the value of the properties owned or used in Tennessee.

A motion to dismiss was interposed for the City of Cincinnati, challenging the jurisdiction on the ground that this defendant is a municipality existing under the laws of the State of Ohio and located therein, and is, therefore, subject to suit in that State only.

The Trustees filed a demurrer, coupled with an answer, challenging the claim of liability for these taxes, on the ground that the bill shows that they, the legal title holders of the railroad, are not doing business in Tennessee and, particularly, that they did no business in this State during the years for which the taxes are claimed in this suit, it appearing from the allegations of the bill, with its amendments and exhibits, that the railroad, and all properties connected therewith, is held and exclusively operated under a long term lease entered into many years ago, immediately upon its construction, by the C., N. O. & T. P. Railway; the defendant Trustees of the City of Cincinnati, being the lessors only, residing in the State of Ohio, where the rents are paid and received and the proceeds disbursed to the beneficial owner, the City of Cincinnati.

The Chancellor overruled the motion to dismiss, being of opinion that the generally recognized limitation upon the right to sue a municipal corporation beyond the confines of the State of its organization and existence did not apply to a suit against the City acting in its proprietary capacity. For the general rule see Piercy v. Johnson City, 130 Tenn. 231, 169 S.W. 765, L.R.A.1915F, 1029; Nashville v. Webb, 114 Tenn. 432, 85 S.W. 404, 4 Ann.Cas. 1169; 93 A.L.R. 500; 19 R.C.L., 1049; 44 C.J., 1471. However, he sustained the demurrer, holding, first, that no suit could be maintained against the "Cincinnati Southern Railway," named as a defendant, since this was merely a name by which the railroad property was described, and that it was not a corporate entity subject to suit; and, second, that neither the Trustees, nor the City of Cincinnati, were doing business in Tennessee during the years for which the claim was asserted and, therefore, were not liable for the taxes claimed.

The State has appealed from the decree of the Chancellor and the defendant City of Cincinnati complains of so much of the decree as overruled its motion to dismiss on the grounds heretofore stated. The State assigns as error (1) that the Chancellor erred in not holding the case at bar to be controlled by the decision of this Court in Memphis Dock & Forwarding Co. v. Fort, 170 Tenn. 109, 92 S.W.2d 408; (2) in not holding that the City of Cincinnati, "in its proprietary capacity, in regard to its Cincinnati Southern Railway in Tennessee, is, to all intents and purposes, a domestic corporation of Tennessee, and is thus liable for the Tennessee Excise and Franchise Taxes, for the privilege of exercising corporate powers in Tennessee"; and (3) in not holding that, "If the 'doing of business in Tennessee' by the City of Cincinnati, in its proprietary capacity, is necessary to make it liable for Tennessee's Excise and Franchise Taxes, the learned Chancellor erred in holding, on demurrer, that the City of Cincinnati, in its proprietary capacity, was not doing business in Tennessee, in the light of the State's allegations of specific acts of doing business in Tennessee."

Elaborate and able briefs have been filed and the questions and issues above indicated fully discussed. A brief historical statement is appropriate.

In the year 1869, under legislative authority, the City of Cincinnati undertook the building of a railroad from Cincinnati, Ohio, to Chattanooga, Tennessee. In appropriate court proceedings five trustees were appointed to act for the City of Cincinnati in the carrying out of this enterprise. Bonds were provided for and issued to provide money for the building of the railroad, in the sum of ten million dollars, secured by mortgage upon the Railroad, as constructed, and also guaranteed by the City of Cincinnati.

In 1870 the Tennessee Legislature, Chapter 43, Private Acts, authorized the construction of this railroad into this State by this Board of Trustees, created in Ohio, the Board of Trustees being made subject to suit and to service of process upon its agents in this State. Authority was conferred to lease for operation sections of the Railroad as constructed, and the whole when completed. Work was begun about 1873 and the railroad completed to Chattanooga, the southern terminus, in 1881, at which time a twenty-five year lease was made to the Cincinnati, New Orleans & Texas Pacific Railway, a railroad corporation. This lease passed to the Railway all rolling stock (which was purchased by the Railway) and equipment of every kind and description owned by the Board of Trustees and the exclusive possession and control of the tracks, roadbed and right-of-way, subject to the mortgage securing the outstanding bonds, for a stipulated rental. Subsequent agreements were entered into renewing and extending this lease, so that it now runs to the year 1966. Thus the relationship of the Board of Trustees to this railroad property became and has continued to be that of a lessor only, collecting the stipulated rentals periodically in Cincinnati, Ohio, and there disbursing these funds to the bondholders and the beneficiary, City of Cincinnati. Consistently with this relationship of lessor and lessee, the right of inspection was retained and has been from time to time exercised by the Board of Trustees; and, pursuant to legislative authority, and in conformity to lease agreements, the Board of Trustees has exercised the power of eminent domain in securing changes and additions from time to time to the Railroad right-of-way, Court proceedings, where necessary, having been conducted in the name of the Board of Trustees. However, we find no showing on the pleadings of the conduct of any such condemnation proceedings during the years for which taxes are claimed in this suit.

Now, summarizing the issues argued before us, these questions appear to be presented:

1. Is the defendant City of Cincinnati, a municipal corporation, subject to suit in the Courts of this State?

2. Is either the defendant Board of Trustees of the Railway, or the City of Cincinnati, a "corporation," or other entity, "organized for profit," within the terms of the Acts invoked in this suit?

3. Does it appear from the pleadings that either the defendant Board of Trustees, or the City of Cincinnati, was doing business in Tennessee in the years for which the claim for taxes is made?

The first two of these questions relate rather to procedure and form; the third to the substance and merits of the claim asserted by the State. If the learned Chancellor is right in holding that the defendants were not doing business in Tennessee, thus deciding the third of these issues, then this is determinative, and discussion of the other questions is unnecessary. We consider then first this question. An examination of the statutes invoked by the State is called for.

The Excise tax, Code Sections 1316 et seq., applies to (1) "corporations," etc., "organized under the laws of the State of Tennessee" for profit, and (2) "all such entities organized under the laws of any other State *** doing business in Tennessee," with the limitation applicable to both classes that the earnings made taxable shall be "from business done within the State."

The Franchise tax applies to (1) "all corporations organized under the laws of the State of Tennessee *** and (2) "all corporations organized under the laws of any other State *** doing business in Tennessee." (Business trusts of the Massachusetts type are within the definition of "corporation," by a provision of the Act.) It is expressly provided that, "The tax hereby imposed shall be paid for the privilege of engaging in business in corporate form in this State." In other words, liability for the Franchise tax does not arise, unless business is done in corporate form in this State.

In Memphis Dock & Forwarding Co. v. Fort, supra [170 Tenn. 109 92 S.W.2d 409], confidently relied on for the State, dealing with a corporation in the first classification, that is, ...