United States v. Chicago & E.I. Ry. Co.

Decision Date12 April 1924
Docket Number3408.
Citation298 F. 779
CourtU.S. District Court — Northern District of Illinois

S Duffield Mitchell, Asst. Sol. Internal Revenue, of Washington, D.C. (Edwin A. Olson, U.S. Atty., and Geo. N Murdock, Sp. Atty. Internal Revenue, both of Chicago, Ill and Nelson T. Hartson, Sol. Internal Revenue, of Washington D.C., on the brief), for the United States.

Homer T. Dick, of Chicago, Ill., and Edward C. Craig, and Donald B. Craig, both of Mattoon, Ill., for defendant.

EVAN A EVANS, Circuit Judge (after stating the facts as above).

The very able oral argument, supplemented by the exhaustive briefs that have since been filed, makes it imperative for the court to briefly set forth its views and conclusions respecting the issues determinative of the controversy. I had at first concluded to merely announce my conclusions and hasten the case to the appellate court. The painstaking effort of counsel, however, would not justify such a summary disposition of the motion.

There is at least one argument made by counsel for defendant which must be disposed of without considering its merits. It is predicated upon facts which do not appear in the bill. Upon this motion to dismiss, the facts set forth in the complaint must be accepted as true. I cannot consider any statement made outside of the record or not properly inferable from the bill. It may be that the amount claimed exceeds the sum ultimately recoverable, and in fact it may even be conceded that the surtax cannot properly be assessed against a receiver. Nevertheless the bill should not be dismissed if, under any view of the facts alleged, a right to some recovery is shown. Likewise complainants may not be entitled to a lien upon defendant's property, yet if entitled to other equitable relief the bill cannot be dismissed merely upon the ground that all of the relief sought should not be granted.

This view of the bill disposes of certain very serious questions presented by defendant's counsel, and also makes it impossible for me at this time to express my opinion concerning their merits. Two questions of vital importance, however, are fairly presented upon this motion to dismiss. The first deals with the statute of limitations, and the second with the Revenue Act, by the terms of which alone the court must determine whether income of a railroad operated by the court through a receiver is subject to an income tax.

The contention that the government's bill is barred by the statute of limitations, which on the oral argument appeared to be a very serious one, has finally been resolved against the defendant. Briefly stated, the defendant contends that the Revenue Act of 1916 fixed a three-year limitation period which, if it had remained in effect, would have barred the recovery sought in this suit. The act of 1919 (40 Stat. 1057) did not aid the government, because it was not retroactive. Shwab v. Doyle, 258 U.S. 529, 42 Sup.Ct. 391, 66 L.Ed. 747, 26 A.L.R. 1454.

The government, however, contends that the act of 1921 (42 Stat. 227), extending the limitation to five years, was retroactive, and this extension was an authorized act of Congress. In Campbell v. Holt, 115 U.S. 620, 6 Sup.Ct. 209, 29 L.Ed. 483, the court said:

'We can see no right which the promisor has in the law which permits him to plead lapse of time instead of payment, which shall prevent the Legislature from repealing that law, because its effect is to make him fulfill his honest obligations.'

Likewise it was held in that case:

'It may therefore very well be held that, in an action to recover real or personal property, where the question is as to the removal of the bar of the statute of limitations by a legislative act * * * deprives the party of his property without due process of law.'

The two foregoing statements unquestionably set forth the law, and we are merely confronted with a question of their application. The act of 1921 was not enacted until more than three years after the receiver filed his income tax return. Defendant contends that, inasmuch as complainant seeks to have its claim for $145,000 declared a lien upon property acquired by defendant subsequent to the making of the income tax return, it is violative of its vested rights to thus extend the time. The decision in McEldowney v. Wyatt, 44 W.Va. 711, 30 S.E. 239, 45 L.R.A. 609, seems to give some support to government's contention that the rule applicable to debtor and creditor applies to the government and a taxpayer, and that the statute of limitations may be enlarged by congressional enactment, notwithstanding the tax had been barred by lapse of time.

But it is unnecessary to determine the precise question presented by defendant so far as the lien is concerned. For plaintiff may be denied its lien and still be entitled to recover the amount of its tax, and such relief may be granted in this equitable suit, in view of the allegations respecting the relation of defendant and the railroad company that owned and operated the railroads prior to the foreclosure sale. It further appears that the act of 1916 above referred to was merely a time limitation upon the government's right to levy and collect taxes by summary proceeding, and was not intended to and did not limit the time in which it could proceed, in an action at law or a suit in equity (the necessary facts appearing), to collect the amount of its tax. United States v. Nashville, C. & St. L. Ry. Co., 249 F. 678, 161 C.C.A. 588; New York Life Ins. Co. v. Anderson (D.C.) 257 F. 576; United States v. Grand Rapids & I. Ry. Co. (D.C.) 239 F. 153; United States v. Minneapolis Threshing Mach. Co. (D.C.) 229 F. 1019; King v. United States, 99 U.S. 229, 25 L.Ed. 373; United States v. Chamberlin, 219 U.S. 250, 31 Sup.Ct. 155, 55 L.Ed. 204; Clement Nat'l Bank v. Vermont, 231 U.S. 120, 34 Sup.Ct. 31, 58 L.Ed. 147. Furthermore, the time limitation of section 9a of the act of 1916 (Comp. St. Sec. 6336i) contains the exception:

'In cases of refusal or neglect to make return, and in cases of * * * false or fraudulent returns.'

Section 250(d) of the act of 1921 (Comp. St. Ann. Supp. 1923, Sec. 6336 1/8tt) contains a similar exception. Without referring specifically to the exhibits and reports attached to the complaint, it is sufficient to say that, on this motion to dismiss, the government has asserted facts which bring the case within the exception above noted. Sigman v. Reinecke et al., 297 F. 1005.

Was the income of a railroad operated by a receiver appointed in a foreclosure proceeding (here sought to be taxed) subject to the income tax law? To better determine the proper construction to be given to the effective act, it is necessary to first examine and compare the acts of 1909 (36 Stat. 11), 1913 (38 Stat. 166), 1916, 1917, 1918, and 1921.

Doubtless the most enlightening sections of these various acts are section 38 of the act of 1909, section 2 of the act of 1913, sections 10 and 13 of the act of 1916 (Comp. St. Secs. 6336j, 6336m), section 4 and section 1206(1), (2), of the act of 1917 (Comp. St. 1918, Secs. 6336jj, 6336j), sections 230 and 239 of the act of 1918 (Comp. St. Ann. Supp. 1919, Secs. 6336 1/8nn, 6336 1/8s), and the same sections of the act of 1921 (Comp. St. Ann. Supp. 1923, Secs. 6336 1/8nn, 6336 1/8s).

Defendant contends (1) that the income earned during the receivership could not be subjected to the income tax; and (2) it was not subjected to any income tax by the acts under consideration. The first contention is rejected upon the authority of Union Trust Co. v. Ill., etc., R.R. Co., 117 U.S 434, 6 Sup.Ct. 809, 29 L.Ed. 963; Amer. Cas. Ins. Co.'s Case, 82 Md. 535, 34 A. 778, 38 L.R.A. 97; McFarland v. Hurley (C.C.A.) 286 F. 365; Liberty Central...

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