Source: https://supreme.justia.com/cases/federal/us/315/44/
Timestamp: 2019-04-25 14:21:03+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 315 › United States v. Joliet & Chicago R. Co.
United States v. Joliet & Chicago Railroad Co.
1. Sum paid as dividends by a transferee corporation to the stockholders of a transferor corporation, and amounts paid by the transferee corporation as income taxes on the sums so distributed as dividends held, under the Revenue Act of 1928, taxable income of the transferor corporation, although the transfer was of all the transferor's property, by a "lease" in perpetuity without a defeasance clause, and although the dividends were paid, pursuant to the "lease," by the transferee directly to the stockholders of the transferor. Pp. 315 U. S. 46, 315 U. S. 49.
2. Article 70 of Treasury Regulations 74, promulgated under the Revenue Act of 1928, authorizing such construction of the Act, held valid. P. 315 U. S. 47.
Certiorari, 314 U.S. 591, to review the reversal of a judgment disallowing a claim for refund of income taxes.
By an indenture denominated a "lease," respondent, in 1864 granted, demised, and leased to Chicago & Alton Railroad Co. all of its railroad property, real and personal.
The "lease" was in perpetuity upon specified terms and conditions. The Chicago & Alton Railroad Co. covenanted and agreed, inter alia, to guarantee and pay quarterly to the holders of the fifteen thousand shares of capital stock of respondent an annual dividend of seven percent on the par value of the shares; to deposit with a designated depository specified monthly sums to be placed to the credit of the stockholders and to be held as a fund for the purpose of paying the dividends; to pay the dividends without any deduction for any federal tax whatsoever; to pay all taxes which may be due to the United States "on account of said dividend so paid from time to time;" and to pledge to respondent thirty-seven parts out of two hundred and fifty-seven parts of the gross receipts of the line between the cities of Alton and Chicago for the purpose of securing the performance of its various covenants. The "lease" contained no defeasance clause.
on the theory that the income on which those taxes were paid was not realized by it. On rejection of those claims by the Commissioner, respondent instituted suit in the District Court. That court rendered judgment for the petitioner. The Circuit Court of Appeals reversed, one judge dissenting. 118 F.2d 174. We granted the petition for certiorari, 314 U.S. 591, because of the conflict between that decision and the governing principles of Gold & Stock Telegraph Co. v. Commissioner, 83 F.2d 465, United States v. Northwestern Telegraph Co., 83 F.2d 468, and Pacific & Atlantic Telegraph Co. v. Commissioner, 83 F.2d 469, decided by the Circuit Court of Appeals for the Second Circuit.
Respondent urges, and the court below held, that this so-called lease in perpetuity without a defeasance clause divested respondent of all right, title, and interest in the property, and vested a full and indefeasible title in the grantee. See Huck v. Chicago & Alton R. Co., 86 Ill. 352, 354, 355; Chicago, B. & Q. R. Co. v. Boyd, 118 Ill. 73, 7 N.E. 487. Respondent also argues that the indenture of 1864 vested all rights to payment of dividends in its stockholders, and divested it of any right to, or control over, such payments. Respondent therefore contends that a corporation which does not own or control property and has no right to, or control over, any income from the property cannot be in receipt of income, constructively or otherwise.
devised, to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us, and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew."
"Where a corporation has leased its property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a certain rate of dividend on the lessor's capital stock or the interest on the lessor's outstanding indebtedness, together with taxes, insurance, or other fixed charges, such payments shall be considered rental payments, and shall be returned by the lessor corporation as income, notwithstanding the fact that the dividends and interest are paid by the lessee directly to the shareholders and bondholders of the lessor. The fact that a corporation has conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for which it was originally organized, will not relieve it from liability to the tax."
one item of gross income [Footnote 2] under § 22(a) of the Revenue Act of 1928, 45 Stat. 791, 797. Payments made directly to shareholders by the lessee or transferee of corporate property are properly recognized as income to the corporation by reason of the relationship of a corporation to its shareholders. The fact that there is an anticipatory arrangement whereby the taxpayer is not even a conduit of the payments is no more significant in this type of case than it was in Lucas v. Earl, supra.
"Income is not any the less taxable income of the taxpayer because, by his command, it is paid directly to another in performance of the taxpayer's obligation to that other."
Raybestos-Manhattan, Inc. v. United States, supra, p. 296 U. S. 64, and cases cited. The reach of the income tax law is not to be delimited by technical refinements or mere formalism. Helvering v. Clifford, 309 U. S. 331.
Since the dividend payments made to respondent's stockholders were income realized by it, the federal income tax on those sums which was paid by the Alton Railroad Co. was likewise income taxable to respondent. Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine R. Co., 279 U. S. 732.
This regulation dates from Art. 80, Treasury Regulations 33 (1914 ed.). And see Art. 102, Treasury Regulations 33 (1918 ed.). Provisions similar to those quoted in the text are contained in Art. 70, Treasury Regulations 77, promulgated under the Revenue Act of 1932 and in Art. 22(a)-20 of Treasury Regulations 86, promulgated under the Revenue Act of 1934.
Like definitions of gross income are contained in § 22(a) of the Revenue Act of 1932, 47 Stat. 169, 178, and in § 22(a) of the Revenue Act of 1934, 48 Stat. 680, 686.

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