United States v. Maryland Jockey Club, 6712.

• Decision Date: 03 February 1954
• Docket Number: No. 6712.,6712.
• Citation: 210 F.2d 367
• Parties: UNITED STATES v. MARYLAND JOCKEY CLUB OF BALTIMORE CITY.
• Court: U.S. Court of Appeals — Fourth Circuit

210 F.2d 367 (1954)

UNITED STATES v. MARYLAND JOCKEY CLUB OF BALTIMORE CITY.

No. 6712.

United States Court of Appeals, Fourth Circuit.

Argued January 11, 1954.

Decided February 3, 1954.

Homer R. Miller, Sp. Asst. to Atty. Gen., and Paul C. Wolman, Jr., Asst. U. S. Atty., Baltimore, Md. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack and Robert N. Anderson, Sp. Assts. to Atty. Gen., and George Cochran Doub, U. S. Atty., Baltimore, Md., on the brief), for appellant.

Richard W. Case, Baltimore, Md. (Lawrence Perin and Semmes, Bowen & Semmes, Baltimore, Md., on the brief), for appellee.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

In its income tax return for the fiscal year ending November 30, 1948, The Maryland Jockey Club of Baltimore City (hereinafter called taxpayer) included an item of $75,608.66 as income and paid income taxes of $28,731.29 thereon. This item represented moneys paid by taxpayer into the Maryland Racing Fund and subsequently refunded during the fiscal year in question by the Maryland Racing Commission to the taxpayer. The Commissioner of Internal Revenue denied taxpayer's application for refund. This civil action was then filed to recover the sum of $28,731.29, alleged to have been erroneously paid by taxpayer. The District Judge, sitting without a jury, decided in favor of taxpayer, and there is an appeal to us by the United States. We think the decision below was erroneous. It must, therefore, be reversed.

The taxpayer, which operated a race track (Pimlico) under the supervision of the Maryland State Racing Commission, was required under Maryland law to deduct ½ of 1% from the gross amounts taken in from pari-mutuel betting at its track, which it was required to pay over to the State Racing Commission. These moneys were deposited in a special account known as the "Racing Fund" and, with the permission of the Commission, the taxpayer was entitled to expend them "for any substantial alterations, additions, changes, improvements or repairs to and upon the property owned or leased by such licensee, and by it used for the conduct of racing." If such moneys were not expended, with the approval of the Commission, within three (3) years, the unspent portion reverted to the State "as part of its general funds, and shall be paid over promptly by the Commission to the Comptroller." Section 11A, Chapter 502, Laws of Maryland, 1947; Section 12, Article 78B of the Annotated Code of Maryland, 1951.

After the spring meeting of 1948 held by taxpayer on its race track, which had been damaged by heavy rains, its officers decided to rebuild the racing strip as a substantial addition and improvement to its racing property. On July 28, 1948, taxpayer notified the Maryland Racing Commission that it proposed to rebuild the racing strip and thereafter and during the fiscal year ended November 30, 1948, was given written and express permission to rebuild the strip. Work on the project was begun and completed before the end of the fiscal year ended November 30, 1948, at a cost of $75,608.66, which was paid by the taxpayer during the fiscal year.

On November 24, 1948, taxpayer forwarded to the Maryland Racing Commission its bills and invoices showing the performance of the work and the furnishing of materials together with the cost thereof in connection with the rebuilding of the strip and the payments made therefor. On November 29, 1948, taxpayer received from the Commission a check for $75,608.66, as reimbursement for the expenditures made in rebuilding the strip. This reimbursement was made out of the funds deducted and deposited by the taxpayer in accordance with the authorization contained in Section 12 of Article 78(B) of the Annotated Code of Maryland, as repealed and reenacted by Chapter 502 of the Acts of 1947.

We are thus called upon to decide whether this $75,608.66 constituted income taxable to taxpayer during the fiscal year in which taxpayer received it from the Racing Commission. Our answer is in the affirmative.

From the opinion of the District Judge in this case, we quote 118 F. Supp. 349, 351:

"There appears to be no reported decision on facts closely akin to those in the present case. However, we believe that the situation presented in the case of Edwards v. Cuba Railroad Company, 268 U.S. 628, 45 S.Ct. 614, 69 L.Ed. 1124, is sufficiently similar to make that decision controlling here. There, money subsidies were granted by the Cuban Government to a railroad company to promote construction of railroads in Cuba; in consideration also of reduced rates to the public as well as reduced rates and other privileges for the Government, these subsidies being fixed and paid proportionately to mileage actually constructed, and were used for capital expenditures by the Company, though not entered on its books as in reduction of cost of construction. This subsidy payment, the Supreme Court held, did not constitute taxable income under the Sixteenth Amendment.

"The gist of the Court\'s opinion, by Justice Butler, is embodied in the following part of it, 268 U.S. at pages 632-633, 45 S.Ct. 614, at page 615, 69 L.Ed. 1124: `The subsidy payments were proportionate to mileage completed; and this indicates a purpose to reimburse plaintiff for capital expenditures. All — the physical properties and the money subsidies — were given for the same purposes. It cannot reasonably be held that one was contribution to capital assets, and that the other was profit, gain or income. Neither the laws nor the contracts indicate that the money subsidies were to be used for the payment of dividends, interest or anything else properly chargeable to or payable out of earnings or income. The subsidy payments taxed were not made for services rendered or to be rendered. They were not profits or gains from the use or operation of the railroad, and do not constitute income within the meaning of the Sixteenth Amendment.\'"

Prior to the decision in the Cuba Railroad case, the Supreme Court had given its classic definition of income under the Sixteenth Amendment in the case of Eisner v. Macomber, 252 U.S. 189, 207, 40 S. Ct. 189, 64 L.Ed. 521, as being the gain derived from capital or labor or both combined provided it be understood to include profit gained through a sale or conversion of capital assets. See Stratton's Independence v. Howbert, 231 U.S. 399, 34 S.Ct. 136, 58 L.Ed. 285; Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185, 38 S.Ct. 467, 62 L.Ed. 1054.

To us, the Cuba Railroad case seems clearly distinguishable from the case before us. In the Cuba Railroad case, the taxpayer operated a railroad in Cuba. Under an Act passed by the Congress of the Republic of Cuba in 1906, the President of the Republic was authorized to contract with one or more companies for the construction and operation of lines of railroad in Cuba, and a subsidy was granted from the Cuban Treasury up to $6,000 per kilometer payable in annual installments to companies constructing and maintaining in use the specified lines. The railroad agreed to reduce by one-third, tariffs in force for the transportation of permanent employees and troops of the Government and in case of war or any disturbance of the public order to transport troops at a certain rate per kilometer and it also agreed to reduce fares for all first class passengers.

In our case, the sum involved was received by taxpayer through the operations of its pari-mutuel betting at its race track. It was allowed to collect the sum, but was required to deposit it in a State Racing Fund to be held for a three year period during which the State could not acquire absolute title, use or enjoyment of the fund. If the fund was needed for permanent capital improvements it could, with the permission of the Racing Commission, be drawn upon...