West End St. Ry. Co. v. Malley

• Decision Date: 10 December 1917
• Docket Number: 1249.,1248
• Parties: WEST END ST. RY. CO. v. MALLEY, Collector. MALLEY, Collector, v. WEST END ST. RY. CO.
• Court: U.S. Court of Appeals — First Circuit

246 F. 625

WEST END ST. RY. CO. v. MALLEY, Collector.

MALLEY, Collector, v. WEST END ST. RY. CO.

Nos. 1248, 1249.

United States Court of Appeals, First Circuit.

December 10, 1917

Thomas Hunt, of Boston, Mass. (Gaston, Snow & Saltonstall, of Boston, Mass., on the brief), for West End St. Ry. Co.

George W. Anderson, U.S. Atty., of Boston, Mass., for John F Malley, Collector.

Before DODGE, Circuit Judge, and ALDRICH and BROWN, District Judges.

DODGE Circuit Judge.

These two writs of error, brought by the plaintiff and defendant respectively, in a suit to recover back taxes paid under protest to the internal revenue collector, seek the reversal of a judgment below in the plaintiff's favor for $2,608.17. The District Court, having heard the case by consent without a jury, on agreed facts, found for the plaintiff in the above amount under the first count of its declaration, but found for the defendant collector under the remaining second count thereof.

The plaintiff, a street railway corporation, having leased its lines and property to the Boston Elevated Railway Company in 1897, has not since operated them itself. They have been operated by the lessee, which has regularly made rental payments called for by the lease, for the right to operate said road thereunder. This lease is before us in full, as part of the agreed facts. It was made years before the enactment of either statute hereinafter considered.

1. The taxes in question under the first count were assessed under section 38 of the Corporation Tax Law of 1909 (36 Stats. 112), for the period January 1-- February 28, 1913. The District Court held that the plaintiff was not 'a corporation engaged in business' during said period, within the meaning of that statute, and therefore not subject to the tax imposed by it. The question thus presented we regard as controlled against the government's view by the reasoning and result in New York Central, etc., Co. v. Gill, 219 F. 184, 134 C.C.A. 558, decided by this court in 1915, the subsequent decisions cited by the District Court in its opinion in the present case, and the following still later decisions: McCoach v. Continental, etc., Co., 233 F. 976, 47 C.C.A. 650; Jasper, etc., Co. v. Walker, 238 F. 533, 151 C.C.A. 469. We find nothing in the agreed facts now before us which we can regard as sufficiently distinguishing this case from those dealt with in said decisions to warrant us in holding the District Court's conclusion erroneous.

2. The taxes in question under the second count were assessed under the later Income Tax Statute of 1913 (38 Stats. 166, 172) for the period March 1-- December 31, 1913. In accordance with provisions in the lease, the lessee company paid, on stipulated dates in each year, to the persons holding shares of the plaintiff's stock and certified by it as then entitled to dividends, certain stipulated sums per share held. The District Court held that the total amount so paid by the lessee during the above period was income of the plaintiff corporation as lessor, and did not cease to be such because not paid directly to it. The plaintiff contends that said amount was not properly taxable as its income under the statute.

The payments made to stockholders as above were made by the lessee for its use of the corporation's property, not of the stockholders' property. Though they have each an interest in said property, they have no direct interest such as makes them its owners.

The property has been put into the lessee's hands by the lessor corporation, and the payments to be made by the lessee for its use have been agreed on, not between the lessee and the lessor's stockholders, but between it and the lessor corporation to which the property belongs.

That agreement expressly refers to and treats these payments to stockholders as part of the agreed rent for the property. Under it no stockholder could assert rights as lessor, for want of any such interest in the leased property as would have enabled him to lease it or agree upon a rent for it.

No benefit to the lessee, beyond that which would result to it from the lease if all the rental payments called for were thereby made payable directly to the lessor, is secured to it by the provisions of the lease that it shall divide this part of the rent among those who may be the lessor's stockholders from time to time. Those agreements are effective only to spare the lessor the trouble and expense of making the division itself. The lessee's assumption of this trouble and expense is part of the consideration to the lessor agreed upon for the use of its property.

That the lessor railroad could recover the agreed payments to its stockholders by suit in its own name is undisputed. Whether the individual stockholders have rights of action therefor in their own names is at least uncertain. If they have such rights, they are not founded upon any title of the stockholders' own, but upon that of their corporation only. We agree with the opinion of the District Court that the total of these so-called dividends was, within the meaning of the statute, 'income arising or accruing' to the corporation. The District Court's conclusion is supported by a Court of Appeals decision. Anderson v. Morris, etc., Co., 216 F. 83, 90, 132 C.C.A. 327. Though it was the Corporation Tax Act of 1909 which was there under consideration, a question passed upon was whether or not such dividends paid to stockholders by the lessee were part of the lessor's 'entire net income * * * received by it from all sources' during the year; and the court in effect held that it was. The inquiry in this case is whether such dividends are part of the lessor's 'entire net income * * * arising or accruing from all sources' to it during the year. So far as the difference in phraseology is of any significance, it favors a more, rather than a less, inclusive construction. This decision having been followed by Judge Ray in the same circuit, since the decision here appealed from, Rensselaer, etc., Co. v. Irwin (D.C.) 239 F. 739, in a case arising, like this, under the Income Tax Statute of 1913, we are unable to find sufficient reason for a refusal to follow it in this circuit.

3. The District Court ordered that costs should not be allowed to either party, and this ruling is assigned as error by the plaintiff West End Company. Having prevailed on its first count, though unsuccessful on its second count, we think it was entitled to its costs, according to the usual rule in cases where the prevailing party recovers less than he claims, in a suit at law, but not less than the $500 necessary to carry costs under Rev. Stats. Sec. 968 (Comp. St. 1916, Sec. 1609). No question as to items of the taxation is before us.

The judgment of the District Court is affirmed, except so far as it denies costs to the plaintiff, to which extent it is reversed, and the case is remanded to that court for further proceedings in accordance with this opinion. Each defendant in error recovers its costs in this court.

ALDRICH District Judge (dissenting).

There are several questions, but I disagree with the majority opinion only upon the single question raised by the West End Railroad which relates to a tax assessed upon supposed income under the Income Tax Statute of October 3, 1913 (38 Stat. 172).

Under the power conferred upon Congress by the Sixteenth Amendment of the Constitution of the United States to lay and collect taxes on incomes, from whatever source, the corporation income tax of 1913 was enacted without the limitation phrase of the statute of 1909, 'organized for profit,' and, so far as domestic corporations are concerned, omitting the other phrase of limitation, 'engaged in business.'

It is, of course, manifest that Congress, by virtue of the power conferred by the constitutional amendment, intended to create the right to lay an income tax, not only upon individuals, but to broaden the provisions of the statute of 1909, at least in respect to domestic corporations, no matter how created or organized. This case, however, does not require a discussion of the general question as to what kind of corporations are touched by the act of 1913 which were not within the operation of the act of 1909, because it is clear, regardless of the question whether it is engaged in business, that the West End is a corporation subject to the income tax, provided it is receiving an income within the meaning of the statute of 1913. Thus it would follow that the tax was properly levied and is enforceable, provided the income in question arose and accrued to the corporation; in other words, provided it was the income of the West End Railroad.

The West End strongly contends that the income in question was not its income, but was the income of its shareholders, arising or accruing to them under the business operations of the Elevated Railroad and by virtue of the provisions of the lease or contract between the West End and the Elevated.

No one now questions the general and familiar rule that, when controversies arise as to whether particular statutes were directed against property upon which the tax is levied, the provisions will not be extended beyond the clear import of the language used, and, as taxes are a burden imposed by a government, that it must be clear that they apply to the situation in question. Gould v. Gould (November 19, 1917) 38 Sup.Ct. 53.

There are a number of cases which discuss the question whether the remaining activities of corporations which had leased or transferred their business to others were sufficient to bring them within the meaning of the statutory provision in respect to corporations carrying on business. But, after all, as said by the Supreme Court in Von Baumbach, Collector, v. Sargent Land Co....